BBC Commercial Operations - Culture, Media and Sport Committee Contents

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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Prepared 7 April 2009