Conclusions and recommendations
1. We
recognise that significant benefits are realised from the BBC
undertaking commercial activities. Clearly, the profits generated
by the exploitation of its intellectual property allows the BBC
to invest more in its public service remit than would otherwise
be the case. We also note the positive sentiments expressed by
significant sections of the creative economy in relation to the
business practices of BBC Worldwide, although we are conscious
that the industry is unlikely to bite the hand that feeds it.
The principle that the BBC should be able to maximise the value
of its brand by exploiting its intellectual property, subject
to appropriate safeguards, in order to relieve pressure on the
licence fee is clearly sensible. We share the view of the public
and the Government in this respect. In the chapters which follow
in this report, however, it is the manner in which some of the
BBC's commercial revenue is generated, and the governance arrangements
within which Worldwide operates, which give rise to legitimate
concern. (Paragraph 16)
2. We recommend that
the commercial criteria and fair trading guidelines should be
returned to the pre-2007 position, whereby all commercial activity
must have a clear link with core BBC programming. The provisional
comments by the Chairman of the Trust, and the Trust's interim
statement, suggest a degree of support for our position, and we
encourage the Trust to act on this commitment. (Paragraph 22)
3. We believe that
the £50 million threshold at which a commercial transaction
is referred to the Trust is too high. The BBC's claim that it
is low is based on a misleading comparison with the shareholder
consent requirements of publicly listed companies. We note that
in the past "novel" activities have been automatically
considered by the Trust and any threshold should, of course, not
be a substitute for discretion. Nevertheless, it is alarming that,
in theory, a commercial transaction equivalent in value to almost
half of Worldwide's net assets or its shareholders' funds could
escape the need for the Trust's approval. We believe the threshold
should be lowered considerably, to allow the Trust more scrutiny
and a greater say in the BBC's commercial decisions. We have suggested
that £30 million may be more appropriate, based on 25% of
Worldwide's net assets. To recognise the Trust's unique regulatory
role (and cater for the arbitrariness often found in balance sheet
valuations), we would be more conservative still. We would urge
the Trust to consider a level where the value of the investment
exceeded 25% of Worldwide's pre-tax profits (before exceptional
items) in the previous year. Currently, this too would approximate
to £30 million. We recommend that the Trust should, as a
matter of priority, review the threshold level and report back
to us on its findings. (Paragraph 41)
4. The BBC has also
been less than transparent about its commercial investments, notably
Lonely Planet. In evidence to us, the Trust Chairman Sir Michael
Lyons said: "I can offer a willingness […] to test that
proposition about whether the levels of disclosure are less than
you would expect of a plc in this setting. If you have a point,
then that is something that the Trust will want to take on board".
(Paragraph 42)
5. We recommend,
therefore, that the Trust also considers and reports back on the
Committee's and the industry's concerns about disclosure and transparency.
(Paragraph 42)
6. With respect to
directorships too, BBC Worldwide is less transparent than publicly
quoted companies. The remuneration, including bonuses and benefits,
of its Chief Executive is disclosed in the BBC's main accounts
by virtue of his being an Executive Director of the main board,
as is that of two of Worldwide's non-executive directors who also
sit on the main BBC board. Worldwide's Annual Review, however,
makes no comparable disclosure with respect to its remaining executive
and non-executive directors. Instead, it simply describes Worldwide's
approach and policy in two brief notes in the Review. In order
to better understand the incentives within Worldwide, and whether
remuneration is in line with comparable media companies, we believe
full disclosure should be made for all its directors. (Paragraph
43)
7. We accept that
the BBC's representation on the Worldwide Board, especially at
Finance Director level, permits financial oversight and helps
ensure coordination between the two organisations. However, we
find it impossible to accept the justification for the presence
of the Chief Executive of BBC Worldwide on the BBC Executive Board.
We disagree with the BBC's assertion that this does not give Worldwide
a significant, unfair advantage over its competitors. Even if
the BBC's claim that Board level discussions are purely strategic
and of little benefit to Worldwide has some credence, it still
creates an unwelcome perception of special favours. It appears
from the comments by the Chairman of the Trust that a revision
of this arrangement is already being considered. We accept that
the Executive and Worldwide may derive some operational benefits
from the presence of the Worldwide Chief Executive on the BBC
Executive Board, but believe that the BBC should seek to achieve
these via other means which do not contravene its fair trading
guidelines. We therefore recommend the removal of Worldwide's
representation on the BBC Executive Board. This would represent
one practical step towards a more transparent, regularised and
arms-length commercial relationship between the BBC and Worldwide.
(Paragraph 51)
8. The BBC must aim
to obtain as much value as possible from its programme sales in
order to benefit the licence-fee payer. Yet it is difficult to
judge whether it is generally obtaining the maximum value. The
benchmarking process it uses is inadequate in comparison to competitive
auctions which can drive up the value of programme rights. At
the same time, Ofcom has raised serious doubts over the fairness
of a system which grants BBC Worldwide preferred distributor status.
We believe the solution to both these issues is to make the BBC's
process for programme sales more transparent, and increasingly
open up the market for the BBC's programmes to competitive bidding.
We reject the BBC's suggestion that a competitive bidding process
would be commercially inefficient. The BBC already has in place
a Commercial Agency which must surely have the capability successfully
to oversee such a process. The same Agency could also arrange
licensing and contractual arrangements with successful bidders,
so as to mitigate any possible damage to the BBC brand. What we
propose here would not spell the end for BBC Worldwide's sales
and distribution business. Clearly, given its background and track
record, it would still stand a good chance of acquiring many programmes.
However, it would ensure that Worldwide always paid the full market
value to the BBC and hence the licence fee payer. We accept that
the BBC will not be able to effect this transformation overnight,
but we recommend that it now begins a steady migration away from
the "first look" arrangement by opening up an increasing
number of programmes to competitive bidding. We urge the BBC Trust
to reconsider its interim judgement on the "first look"
arrangement. (Paragraph 63)
9. The Committee has
insufficient information available to determine the truth of the
claims that Worldwide may be overpaying for programme rights from
independent producers. However, we do recommend that the Trust
satisfies itself that Worldwide is not overbidding and, to balance
things out, potentially undervaluing rights to the BBC's in-house
productions. (Paragraph 67)
10. 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. (Paragraph 77)
11. 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. (Paragraph
78)
12. It is right that
the BBC should exploit its intellectual property, including by
allowing the publication of magazines using the BBC brand, in
order to generate returns for the licence fee payer. However,
the BBC must take due care not to distort the market, and it should
not buy new brands—as it did with Lonely Planet—to
enter new markets. The BBC's assertion that its presence in the
magazine market has grown sectors and benefited commercial rivals
is highly counter-intuitive. If that were the case, we should
expect commercial rivals to welcome BBC innovations in their markets.
They do not. Rather than benefiting commercial competitors, the
inherent advantages that BBC Magazines has over its rivals means
that it can dominate markets at the expense of others. The closure
of the long-established Shoot! magazine shortly after the launch
of BBC Match of the Day magazine was perhaps an example of this.
(Paragraph 91)
13. There is no reason
in principle why the BBC should produce its own magazines in-house,
and there is certainly no justification for its stakes in overseas
publications. New BBC magazines should only be launched if there
is a clear link with core BBC programming, and where the public
value of launching a magazine outweighs any adverse impact on
the existing marketplace. This could be assessed using a public
value test similar to that applied to other BBC services. (Paragraph
92)
14. This Report is
critical of the acquisition of the Lonely Planet brand, its exploitation
through the recent launch of Lonely Planet magazine and the market-distorting
effects of those initiatives. We recognise, however, that a forced
sale of the business may well lead to a substantial loss to Worldwide,
the BBC and ultimately, therefore, the licence fee payer. We do
not, therefore, recommend such a step, but urge the Trust to take
account of the criticisms in this Report and moderate Worldwide's
behaviour accordingly in the future. Given the relative size of
the acquisition—and its considerable effects on Worldwide's
balance sheet—we also ask the BBC to disclose further details
of the deal and of the performance of the Lonely Planet business,
both before and since the acquisition. (Paragraph 93)
15. We believe that
there is little justification for Worldwide to launch commercial
websites in markets that are already well served by commercial
competitors, or where a clear link to BBC programming is absent.
We therefore welcome the closure of the BBC Green website, which
was clearly operating in a crowded marketplace and was not directly
linked to a specific BBC programme. We hope that this sets a precedent
and represents an end to such online expansion by Worldwide, although
we note the BBC's insistence that this decision was taken purely
for commercial reasons, rather than due to any adverse impact
on competitor sites. We believe the BBC should exhibit extreme
caution before launching any further commercial websites. In particular,
we recommend that it undertakes thorough market impact assessments
prior to launching new websites or services on existing sites.
(Paragraph 97)
16. We recognise the
financial pressure Channel 4 is experiencing and we restate our
view that it is essential to retain plurality in the provision
of UK-produced public service content. We appreciate that a partnership
between Channel 4 and BBC Worldwide could deliver financial benefits
that may go some way towards closing Channel 4's funding gap.
However, we are sceptical as to whether a wide-ranging partnership
or even merger with BBC Worldwide would be the best solution for
Channel 4, for the licence fee payer, or for the media industry
as a whole. While we do see some value in the direct transfer
of assets—particularly Worldwide's UKTV channels—to
Channel 4, we believe that a broader and more complex arrangement
would have a number of drawbacks. The extra businesses in which
Worldwide would have a stake in would be likely to make Worldwide
an even more aggressively commercial organisation. Furthermore,
we see no obvious synergy between Channel 4, which produces no
content of its own, and Worldwide, which is primarily a content
distributor. It is also apparent that any partnership, however
great the scope, would still only account for a proportion of
Channel 4's £150 million annual funding gap. (Paragraph 103)
17. While a partnership
between Channel 4 and BBC Worldwide would be likely to increase
funding for Channel 4, at the same time it would also reduce the
revenue returned to the BBC by Worldwide, thereby putting more
pressure on the licence fee. We believe it would be far cleaner
and simpler to effect this funding change directly. We therefore
reiterate our previous recommendation that, instead of the proposed
partnership, a proportion of the licence fee should be made available
to Channel 4, in order for it to sustain its public service programming.
(Paragraph 104)
18. We believe that
the issues we have identified in relation to Worldwide's activities
and governance will still need to be addressed even if a partnership
with Channel 4 is established. Whatever the decision on any proposed
partnership, we believe that the rest of our recommendations in
this report continue to stand. (Paragraph 105)
19. We recognise the
benefits that the proposed local online video service could have
brought to consumers, but agree with the Trust's conclusion that
these were insufficient to warrant the very significant adverse
impact on commercial competitors. At a time when local commercial
media services are under extreme pressure, the BBC should be looking
to help rather than hinder local newspapers and radio stations.
We therefore welcome the Trust's decision to reject the plans,
and we hope that this example sets a precedent whereby the BBC
gives necessary consideration to its impact on the rest of the
marketplace. Indeed, it is apparent that this decision does not
necessarily spell the end of the BBC's ambitions in this area,
and the Trust must continue to exercise caution when reviewing
any revised plans. At the same time, we encourage the commercial
media sector to continue to seek to raise its game in spite of
the difficult economic circumstances, and continually improve
the products aimed at local audiences. (Paragraph 111)
20. There are major
benefits from the BBC undertaking commercial activities. Most
importantly, the profits generated by the exploitation of the
BBC's intellectual property can be reinvested in the BBC's public
services, to the benefit of licence fee payers. We fully support
this principle. However, the manner in which some of the BBC's
commercial revenue is generated, and the governance arrangements
within which the BBC's commercial arm—BBC Worldwide—operates,
cause us and others increasing concern. Worldwide has proved successful
in recent years in exploiting new commercial opportunities. Its
expansion was largely made possible by a loosening of the rules
that govern the limits to its operations. However, there is clearly
a balance to be drawn, between Worldwide generating a return for
the BBC, and limiting Worldwide's operations in order to ensure
it upholds the BBC's reputation and does not damage its commercial
competitors. (Paragraph 112)
21. The new businesses
in which Worldwide has become involved, particularly its minority
stakes in overseas production companies, its controversial acquisition
of Lonely Planet, and its growing portfolio of magazines, suggest
that the balance has been tipped too far in favour of Worldwide's
unrestricted expansion. Worldwide's new activities risk jeopardising
the reputation of the BBC and have had an adverse impact on its
commercial competitors. Furthermore, it seems likely that the
BBC could gain a better return for the licence fee payer if it
sold more of its rights on the open market rather than offering
them exclusively to Worldwide. We believe it is in the interests
of the UK's creative economy as a whole that BBC Worldwide's activities
are reined back. Among our other recommendations, we therefore
recommend that the BBC Trust reinstates the rule that all BBC
commercial activity must have a clear link with core BBC programming.
(Paragraph 113)
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