BBC Commercial Operations - Culture, Media and Sport Committee Contents

5  Production Houses

68. Part of the agreed strategy of BBC Worldwide is to create a global production business.[136] This has included in practice opening production facilities in the USA, India and Australia, taking stakes in overseas-based companies (such as Freehand in Australia, Mir Reality in Russia and Temple Street in Canada), as well as taking stakes in UK independent producers, such as Left Bank Pictures Ltd, Cliffhanger Productions, Baby Cow and others.[137]

69. The BBC argued that these investments were important for BBC Worldwide in a variety of ways. In the UK, they were a means of supporting domestic production capacity and ensuring that the BBC had a source of quality programming that met public purposes and was based on a close working relationship with individual creative talents.[138] Internationally, the BBC summarised its approach as follows: "In some limited cases, BBC Worldwide has sought to build the BBC's reputation internationally by partnering local companies as a means of securing both value and market presence in key markets. In all cases BBC Worldwide retains full control over the BBC Brand".[139] The advantages of this approach, the BBC argued, were that taking control over production moved the BBC up the value chain and generated revenues that merely licensing formats would not secure.[140] The BBC added that this was an approach which was followed by international competitors such as Disney-ABC, Fremantle and ITV Worldwide.[141] According to the BBC, the investment supported the BBC's public purpose of "bringing the UK to the world".[142]

70. The BBC also justified the investments which it had made in small UK production companies as being both good business and good for the UK creative industries: "the case for BBC Worldwide's investment has been driven by the excellence of the production talent, the modest sums involved in BBC Worldwide's investment and the resulting prospect of considerable financial and "cultural" returns for the licence fee payer at manageable levels of risk".[143] Although no precise figure was given, the BBC said that its investment in UK production was "tiny" compared to the total sum of £350-400 million invested in the sector.[144]

71. The companies which have received inward investments from Worldwide were understandably in favour of the BBC's continued presence in this market. As a representative example, Left Bank Pictures[145] said that they had received a £1 million investment from the BBC in exchange for a 25% stake in the business in 2007.[146] The Chief Executive said that BBC Worldwide had provided "brilliant support".[147] The result had been that the company had been helped to move quickly to a forecast turnover of £20 million, without, Left Bank Pictures claimed, undue risk to BBC Worldwide. A similar stake has been taken by BBC Worldwide in Baby Cow Productions Ltd, with comparably positive feedback coming from that company too.[148]

72. The Chairman of the BBC Trust said to us that: "the primary purpose of BBC Worldwide existing at all is to exploit the rights generated by the BBC's work in the United Kingdom".[149] Building on that characterisation, other witnesses questioned whether there was a justification for the international aspects of these activities. These critics included Pact, who stated that "we cannot see how several of BBC Worldwide's current activities including […] its acquisition of ownership stakes in production companies overseas, bear any meaningful relation to its public purposes".[150] Pact was also highly critical of the way in which Worldwide's investment in Freehand Group (an Australian production company) had led to the appearance of the BBC logo next to a still for an Australian comedy gambling game called Joker Poker displaying the logo of a casino company.[151] In reply, BBC Worldwide said that the programme in question, although misleadingly named, was in fact a charitable comedy production.[152] Nonetheless, this example does serve to demonstrate the issues that may arise through such investments, and the potential damage to the BBC's reputation which might occur.

73. Pact also questioned the rationale behind investments of this nature in overseas companies. Such equity investments might (as we understand is the case in Australia) require BBC Worldwide to offer a "first look" arrangement to its overseas partner, rather than selling its programme rights on the open market with the possibility of a higher return. As the Chief Executive of Fremantle put it to us: "It is not necessary for the BBC to take stakes in production companies in order to get the best commercial return from its programming and its formats".[153] That is particularly the case with high-value popular formats such as Strictly Come Dancing, which has been remade in many countries. Pact disagreed with the argument that such investments allowed the BBC to protect its brand, suggesting that brand protection could easily be done through contractual conditions rather than by minority stakes.[154]

74. Other critics, particularly Fremantle, also argued that the BBC Worldwide policy exposed the UK licence fee-payer to unacceptable levels of risk. They noted that the independent television production sector is highly volatile. Whether these investments were made from debt financing or from profits, the ultimate cost in both cases would be carried by the licence fee-payer in the form of a poorer return to the BBC.[155]

75. Fremantle also pointed out that, in its view, the analogy made by the BBC between Worldwide creating an international network and those of commercial companies was flawed. It told us that international production companies expand across territories in order to develop and sell internationally attractive formats: that was their purpose. The task of the BBC, as Fremantle asserted, was not to produce programming which would be internationally attractive: it was to serve the interests of the British viewer.[156] As the Director General of the BBC put it in his evidence to us: "We must not be in a position where, through lack of co-ordination or an understanding of what commercial operations are, you end up with the commercial interests of BBC Worldwide becoming more important now or overtaking or becoming divergent from the absolute clarity of our central mission, which is to do with serving the British public with the right services and the right programmes".[157]

76. In our view, the idea that the BBC should take responsibility for promoting the UK creative industries, including supporting independent UK production, is clear and unarguable. It is however debatable whether that is best achieved by a series of selective equity investments in UK independent production companies. As an overall strategy it seems to us to be deficient in five respects:

  • It distorts the investment market. BBC commercial activities should avoid such distortion, according to the 'four Cs';
  • The most efficient method of supporting independent production is not by equity investment but by commissioning programmes from a wide range of independent companies, to spread the impact of the BBC's money much more widely and act as a financial support enabling independent producers to build a track record and therefore attract commissions from other programme commissioners and channels;
  • Taking minority stakes in production companies in the UK by its very nature has to be a highly-selective process. The BBC cannot invest in anything other than a tiny proportion of companies in the market and is in the position of acting as a venture capitalist with licence-fee payers' money;
  • Minority stakes do not by definition give the BBC control. Indeed, it is difficult to see what advantage they do give to a public sector investor, particularly given the levels of risk in the sector.
  • It exposes the BBC, by virtue of being highly selective, to potential reputational risk. For instance, none of the independent companies—as far as we are aware—has yet been sold. Were such sales to occur, they may leave the BBC open to questioning about the balance of risk and reward accruing to the outside shareholders and licence fee payer.

77. It is true that the BBC's investments do boost parts of the UK creative sector. In today's economic climate that might be an important source of funding to keep companies afloat and prevent the loss of creative resources (although that is not the justification argued by BBC Worldwide itself, which views these largely as normal commercial investments). We therefore recognise that, in the short-term, there may a case for Worldwide to retain some of its minority equity stakes in UK production companies. However, we believe that in the medium term it is in the interests of the UK creative industries as a whole that this practice is discontinued. We recommend that Worldwide should exit existing investments as soon as is feasible, and without damage to the viability of the production companies concerned.

78. Whatever the arguments for UK investment, it is very difficult to make a case for BBC Worldwide's investments in overseas production houses. We were convinced by the arguments of those who demonstrated that the risks, both financial and reputational, far outweighed the possible return to the BBC. More importantly, the attempt to create an international BBC Worldwide business creates the clear risk that it is this business, rather than the core public service remit, that will increasingly drive BBC programming. That is not a risk that licence fee payers should have to bear. We therefore recommend that the strategy of overseas investment is brought to an end. Investments already made should be disposed of when market conditions permit a profitable (or at least loss-minimising) exit.

136   BBC Worldwide, Annual Review 2007-08, July 2008, p 10 Back

137   BBC Worldwide, Annual Review 2007-08, July 2008, pp 12-13; Ev 5, 82, 171 Back

138   Ev 81-82 Back

139   Ev 83 Back

140   Ev 87, 135-136 Back

141   Ev 82 Back

142   Ev 135 Back

143   Ev 82 Back

144   Ev 82 Back

145   The producers of television programmes such as Wallander, and films such as The Damned United Back

146   Ev 171 Back

147   Ev 172 Back

148   Ev 159-160 Back

149   Q 155 Back

150   Ev 11 Back

151   Ev 11; Q 4 Back

152   Letter from the BBC to the Chairman of the Committee, John Whittingdale MP, 11 November 2008 Back

153   Q 30 Back

154   Q 4 Back

155   Ev 6 Back

156   Ev 8, 203 Back

157   Q 134 Back

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Prepared 7 April 2009