Memorandum submitted by Guardian Media
Group (GMG)
ABOUT GMG
Guardian Media Group (GMG) is a leading UK multimedia
business. In addition to our flagships—the Guardian, Observer
and guardian.co.uk—we have a wide portfolio of companies
in areas such as regional press, online, radio and B2B media.
We are strong and long-standing supporters of the BBC as a champion
of public service broadcasting and a hugely important fixed point
in today's shifting media landscape. We have, however, become
increasingly concerned about certain of the BBC's expansionary
commercial activities.
BACKGROUND
Until recently, BBC Worldwide (WW) had succeeded
in mitigating, to a considerable degree, the negative impacts
of its activity and, as a result, the commercial sector was largely
willing to accept the BBC's right to generate revenues from its
content. In recent years, however, this balance has been undermined:
WW has become more aggressive and its activities are extending
into previously unconsidered areas (eg the launch of "passion
sites" such as BBC Green, the acquisition of Lonely Planet).
Increasingly, public funds are being exposed to risk, WW's market
effects are being increased and a plural media sector is being
jeopardised.
This expansion of WW is the result of three
factors: increased opportunities in areas such as online, multichannel
TV and international format sales; a significant loosening of
the regulations governing WW's activity; and a re-orientation
of WW towards profit maximisation.
To illustrate the reduced regulatory oversight:
the BBC's pre-2006 Fair Trading Commitment had general but explicit
conditions covering what its commercial arm could do, including
the requirement that activities should "plainly arise from
and support BBC programmes". The 2007 BBC Trust redrafting
of policy on fair trading, however, states that activities "must
link clearly with the way in which the BBC promotes its Public
Purposes". This allows for a vastly increased range of activity,
and can be used to justify almost any "media-flavoured"
investment. In addition, the current governance arrangement also
sets out that WW's executive board need only refer for review
to the Trust those investments it wishes to make that are in excess
of £50 million. This is an extremely high figure in the context
of the commercial media industry, and it widens hugely the field
of potential investment for WW that requires no oversight by the
Trust.
NEGATIVE IMPACTS
The unfettered use of the brand on non-core
BBC output must at some stage begin to damage the BBC's image
as a producer of high-quality content. In addition, by expanding
into areas that are unrelated to BBC core programming, WW is effectively
leveraging the BBC's public service brand in a potentially endless
number of markets. The "passion sites", for example,
take "eyeballs" and advertising income away from existing
commercial sites: private investment is crowded out by an expanded
public service. And acquisitions like Lonely Planet not only distort
the acquisition market, but also unacceptably risk public funds.
WHAT GMG WOULD
LIKE TO
SEE IN
FUTURE
— The relationship between WW, the
BBC and the Trust needs to be more transparent. There needs to
be an improved oversight framework governing WW's behaviour.
— While the BBC must be able to benefit
from its assets, how it can do this needs to be more tightly defined:
restrictions need to be placed on WW's activities returning them
to previously established limits.
RECOMMENDED STEPS
— The BBC Trust must be shown to be
impartial, transparent and independent. The Trust, more than ever,
needs to be a truly credible regulator of the BBC. It must bring
much more openness to its decisions and processes; it must provide
clear separation between its roles as BBC champion and regulator;
and it must build industry confidence of its impartiality.
— The BBC's commercial activity should
be brought back under proper control. All commercial activity
should be linked directly to core BBC programming to restore certainty
to the market and a sense of proportion to the use of the BBC
brand. In addition, the monetary threshold for referring activities
for Trust oversight should be lowered from the current minimum
of £50 million.
— Non-current programming assets (eg
archive) should only be exploited through licensing. Value for
the BBC's assets would be realised, but without intervention of
the scale of current market activities.
GMG SUBMISSION TO
CMS COMMITTEE INQUIRY
INTO BBC COMMERCIAL
ACTIVITY
About GMG
1. Guardian Media Group ("GMG")
is a leading UK multimedia business. Our operations span national,
regional and local press, online businesses, regional radio stations,
magazines and business-to-business media:
— Guardian News and Media: the
Guardian and Observer newspapers and guardian.co.uk.
— GMG Regional Media: the Manchester
Evening News and its website, other regional newspapers in
the North West and South of England, and the Channel M TV station
for Greater Manchester.
— GMG Radio: regional radio
stations across the UK under the Real, Smooth, Century and Rock
brands.
— GMG Property Services: providers
of software to independent estate agents.
— Trader Media Group: publisher
of the Auto Trader magazine and website.
— Emap: the B2B publishing,
events and information business.
2. We are wholly owned by the Scott Trust,
which was created in 1936 and has the core purpose of safeguarding
the financial position and editorial independence of the Guardian
in perpetuity.
GMG and the BBC
3. As we have consistently made clear in
our public statements and submissions to recent consultations
and inquiries, GMG is a strong and long-standing supporter of
the BBC as a champion of public service broadcasting and a hugely
important fixed point in today's shifting media landscape. The
BBC's public service principles and objectives are very similar
to those enshrined in the constitution of our owner the Scott
Trust and expressed through the Guardian's journalism. Our aim
is not in any way to damage, undermine or unduly restrict the
BBC. We have, however, become increasingly concerned about certain
expansionary activities and their effect on commercial media players—and
on the reputation of the BBC. We welcome the opportunity to restate
our support for the BBC, and to outline our concerns and potential
remedies.
Introduction
4. One of the main benefits of the BBC's
licence fee funding is that it allows the broadcaster freedom
from commercial (and, in principle, political) pressure to produce
high-quality, innovative, educational and trustworthy content.
However, the BBC simply broadcasting its licence fee funded programming
to its UK audience does not extract all the value from this content.
The BBC has, therefore, long had the practice of selling its output
in other markets and adding these earnings to its licence fee
funds.
5. In principle, there are two ways in which
the BBC can make money from its content: by exploiting it commercially
itself, or by licensing it to a third party. Historically, in
order to protect its brand and reputation and to ensure maximisation
of profits, the BBC has opted to exploit the content itself through
a wholly owned commercial subsidiary, now known as BBC Worldwide
(WW). The creation of WW posed a challenge for the BBC, as it
was important to ensure that it generated revenue without excessively
stifling private interests, jeopardising public money or damaging
the BBC's valuable brand.
6. Until recently, WW had succeeded in mitigating,
to a considerable degree, the negative impacts of its activity
and, as a result, the commercial sector was largely willing to
accept the BBC's right to generate revenues from its content.
In recent years, however, this balance has been undermined: WW
has become commercially aggressive and its activities are extending
into previously unconsidered areas. Increasingly, public funds
are being exposed to risk, the market effects of WW's activity
are being increased and a plural media sector is being jeopardised.
For example, BBC Magazines has moved from extending existing programming
brands to creating entirely new, often multiplatform media brands.
These include Olive Magazine and single-issue "passion sites"
such as BBC Green. Neither of these has a direct link to existing
programming brands and both have a significant negative impact
on existing operators in their respective markets.
7. In addition, the link between the BBC's
public service content and its brand has been cut, increasing
the risks to the value of that brand through over-exploitation.
WW should re-establish the previously accepted equilibrium by
limiting its activity to core programming areas and reducing the
risk taken with public money.
DEVELOPMENT OF
WW'S CURRENT
FORM AND
DIRECTION
Opportunities expanded in multichannel TV, worldwide
format sales and online business
8. With the growth of international format
markets and the explosion of communications technology, greater
opportunities arose not only further to exploit catalogues and
programming ideas, but also for strategic investments, acquisitions
and partnerships. This was explicitly recognised in the process
to renew the BBC's Charter, with the Corporation being encouraged
to bolster its state funding further with commercial income.
The BBC guidelines covering WW's activities and
their relationship with PSB content were loosened
9. The BBC's relationship with WW has long
been ruled by guidelines covering what activities are deemed permissible
for the latter to undertake. These guidelines were principally
put in place to protect the BBC brand and to minimise the impact
of its commercial activity on markets. With the process for renewal
of the Charter in 2006, however, the BBC and the BBC Trust redrew
these guidelines with a much broader remit for WW. For example,
the BBC's pre-2006 Fair Trading Commitment had general but explicit
conditions covering what its commercial arm could do, including
the requirement that activities should "plainly arise from
and support BBC programmes". The 2007 BBC Trust redrafting
of policy on fair trading, however, states that activities "must
link clearly with the way in which the BBC promotes its Public
Purposes". This second formulation is far broader: virtually
any activity that returns money to the PSB core of the BBC can
be said to be promoting purposes such as "bringing the UK
to the world and the world to the UK", "stimulating
creativity" or "delivering to the public the benefit
of emerging communications technologies".[123]
WW was re-orientated towards expanded commercial
horizons and given the target of increasing its returns
10. While the scope for WW to expand its
activities into new markets was furthered by the Charter renewal
process, the organisation itself was given a much clearer steer
towards commercial activity. The subsidiary's aim was clearly
set as straightforward profitability—for example, it was
publicly announced in 2007 that it was aiming to double its profits
within five years.
11. This combination of market opportunity,
effective de-regulation and re-orientation has resulted in a radical
alteration in WW's behaviour, from limited intervention to unrestrained
commercialism.
Implications of these changes for WW's activity
12. The main result of this sequence of
developments has been a shift in WW's orientation beyond the original
purpose of obtaining full value for the BBC's licence fee funded
output. WW's objective now involves the use of BBC assets and
retained cash as investment resources with the simple goal of
maximising returns: the link to PSB assets has been broken. Furthermore,
this has been done increasingly at the expense of WW's previous
aims to protect the BBC brand and to minimise the commercial impact
of its activity.
13. This unfettered use of the brand on
non-core BBC output must at some stage begin to damage the BBC's
image as a producer of high-quality content. Indeed, a glance
at the advertising carried on some of the BBC's commercial websites
shows the fall-back BBC argument of "brand protection"
for setting up its own services to be less than convincing: McDonald's
advertise on BBC Good Food; domestic electrical appliances on
BBC Green; and artificial grass on BBC Gardens Illustrated. These
are hardly indicative of a policy of careful and selective commercial
association. It is also worth noting that, while clearly recognising
the value of the BBC brand, WW as yet does not include the value
of its exclusive right to use it in its accounts.
14. GMG and other media organisations have
been willing to accept the existence of the BBC's commercial activities
in media markets, because measures existed to limit possible negative
effects, and mitigating circumstances existed. WW's activity was
characterised by certainty, limits and predictability: the fact
that WW could only exploit product/content that emerged directly
from its core programming efforts meant that commercial competitors
could plan their strategies and minimise their exposure to crowding
out from the better resourced BBC by avoiding those areas where
they might invest and launch products.
15. In the past, when WW's activity has
not been directly related to BBC programming, the BBC has ordered
a withdrawal from this activity. For example, the BBC took the
decision to sell Eve magazine on the basis that it did
not arise from BBC output. In the UK Parliament's 2005 Select
Committee Review of the BBC Charter, WW CEO John Smith referred
to the BBC's divestment of Eve as evidence of the BBC's
commitment to engage only in commercial activity that is related
to BBC's public remit and purpose. He stated: "There were
some things which the BBC did commercially which, to be honest,
did not spring naturally out of the BBC's public service programmes.
Let me give you an example: a magazine known as Eve Magazine,
a women's glossy, did not really reflect any of the BBC's programming
output so we took a decision to fit with these criteria that it
was not really appropriate and we sold the magazine to Haymarket."[124]
16. This situation has now changed significantly.
While previously the BBC's commercial activity was limited to
its core programming, the key criteria of the Corporation's Charter
have been changed. Commercial activities now need to demonstrate,
among other requirements, that they: fit with BBC's public purposes;
do not distort the market; and do not risk public funds.[125]
17. The first issue here is that commercial
ventures now need only fit with the BBC's "public purposes".
These purposes are very broadly couched and can generally be made
to accommodate any "media-flavoured" investment. In
addition, the current governance arrangement also sets out that
WW's executive board need only refer for review to the Trust those
investments it wishes to make that are in excess of £50 million.[126]
This is an extremely high figure in the context of the commercial
media industry—one that is far in excess of the investment
required for a major consumer magazine launch, for example, let
alone a website launch. This has widened hugely the field of potential
investment for WW that requires no oversight by the Trust.
18. The second issue lies in the way in
which the other criteria for commercial activities are enforced.
The Trust's credibility in ensuring that WW's ventures neither
distort the markets in which they operate, nor risk licence fee
payers' money, has come into question following the £90 million
acquisition in 2007 of a 75% share in travel publisher Lonely
Planet and its minority investments in production companies. It
is, of course, essential that the BBC does not overpay, as this
would waste licence payers' money. Conversely, one can see why
dealing with the BBC—rather than commercial players—might
be more attractive to the acquired party given the content, resources
and brand value the BBC brings. This could allow for an acquisition
price that is below market rates, which would clearly be anti-competitive
and unfair to rival commercial bidders. In this regard it is clear
that the very presence of WW in the acquisition market is problematic.
19. Thirdly, while the BBC and WW would
both point out that their requirement is not to risk public funds,
and that this is regarded as referring to licence fee funds themselves
(which the BBC are disallowed from using for commercial purposes),
it cannot be denied that the profits retained by WW for re-investment
nonetheless belong ultimately to the BBC and therefore the licence
fee payers. The distinction between the licence fee fund itself
and the broader category of money that has come to the BBC essentially
through use of licence fee funds seems somewhat arbitrary: both
are ultimately intended to be used for the production of public
service content, and to risk the latter doesn't seem any less
desirable or more justifiable than risking the former.
In summary, WW now seems to have carte blanche
for commercial activity, and insufficient regard for the consequences
for competitors and public funds, facilitated by minimal and unconvincing
oversight.
20. These changes are all the more important
given the changing—and challenging—nature of the media
landscape: the proliferation of online media means that the possibilities
for offering services on a broader international scale are greater
and the ability for the BBC to expand into "areas that fit
with their core purposes" are similarly great. The growth
of online media and the opportunities it holds, not just for WW
but the commercial media sector, mean that now is the time when
limits and boundaries should be drawn.
The effects of WW's activities on markets
21. WW's more aggressive strategy is having
both short- and long-term negative effects on private sector commercial
initiatives, citizens and licence fee payers. There are three
main actions which are tipping the balance against the interests
of a plural media sector:
— the extension of its brand-exploitation
into areas not related to BBC content;
— the increasing risk to licence payers'
money; and
— the inclusion of advertising on licence
fee funded services.
Extension of its brand exploitation
22. WW is aggressively pursuing a BBC brand
expansion strategy into areas that are unrelated to the BBC's
core programming, seemingly believing that the Trust has no desire
to limit its activities. This may be seen, for example, in the
BBC "passion sites" mentioned above. While sites like
BBC Green are not related to BBC's core programming, and therefore
would not have been a permissible activity under the old regime,
they are argued to fit with BBC's newer public purposes. The acquisition
of Lonely Planet raises similar issues—it is not related
to BBC content but it arguably fits with BBC's public purpose
of informing and educating.
23. By expanding into areas that are unrelated
to BBC core programming, WW is effectively leveraging the BBC's
public service brand in a potentially endless number of markets.
The use of this brand can be extremely effective: for example,
the BBC's content related to environmental issues on BBC Green
will have a strong pull on interested audiences. Because of this,
such sites take "eyeballs" and advertising income away
from existing commercial sites: private investment is crowded
out by an expanded public service.
Risking licence fee money
24. WW is increasingly risking licence payers'
money through its aggressive expansion strategy. As noted above,
while WW is not allowed to use the licence fee itself, it nonetheless
uses funds that have resulted through the use of licence fee funded
assets: this money still ultimately accrues to the licence fee
payers. The recent acquisition of Lonely Planet (which, in its
first year under WW ownership, made a £2.1 million loss)
suggests that licence fee payers are far from being guaranteed
returns from WW's investment. The BBC's new taste for speculation
calls into question the Trust's interpretation of the key criteria
which must be satisfied in order to launch a production commercially.
The Trust has clearly taken a very loose interpretation of "risking
public funds".
The inclusion of adverts with licence fee funded
services
25. In 2007, the BBC decided to take advertising
on bbc.com with the justification that it would be on non-UK sites
and that it believed there were sufficient controls for this not
to affect the quality or integrity of the website. The site itself
is run by WW but uses core PSB BBC news content. No adequate justification
(other than monetary) was given either for the use of BBC branding
on a commercial site, or for the use of licence fee funded content
in a commercially funded context. This move is also likely to
have a negative effect on other ad-funded operators, such as the
Guardian's nascent US online commercial activity. While market
impact is hard to assess in such cases, this decision is another
example of how the BBC has moved beyond its original remit and
boundaries, and how commercial players find that, in an extremely
challenging environment, wherever they turn for new audiences
and revenues the BBC has placed a roadblock in their path.
26. The net effect of the Trust's inability
or unwillingness to limit WW's aggressive expansion is the undermining
of the BBC's commitment to a plural media society and the risking
of licence fee money.
WHAT THIS
MEANS FOR
THE FUTURE
What is a desirable position for the BBC, the
Trust and WW in the future?
27. GMG would like to see a well and independently
funded, responsible BBC, free to generate returns from its licence
fee funded assets in a manner consistent with PSB principles and
editorial standards. This would require several changes:
— The relationship between WW, the
BBC and the Trust needs to be more transparent. There needs to
be an improved oversight framework to ensure that any guidelines
for WW's behaviour are interpreted correctly and that a sufficiently
narrow interpretation of "public purposes" and "risk
to licence fee" is made.
— While the BBC must be able to benefit
from its assets, how it can do this needs to be much more tightly
defined: restrictions need to be placed on WW's activities returning
them to previously established limits.
28. These remedies will become all the more
important if, as Ofcom has suggested, WW takes an active interest
in exploiting C4's content overseas as well as the BBC's. Such
a move would increase the potential distortion in media markets
if WW's activities were not scaled back to exploiting PSB-funded
assets. Even this would still result in a concentration of quality
PSB content in the hands of one commercial distributor, and transparency
of activity would become even more important.
Steps that could be taken to effect these changes
29. The BBC Trust must be shown to be impartial,
transparent and independent. With expanding opportunities, technologies
and markets, and with the BBC's commercial activities becoming
more deeply involved in these, the Trust, more than ever, needs
to be a truly credible regulator of the BBC. It must bring much
more openness to its decisions and processes; it must provide
clear separation between its roles as BBC champion and regulator;
and it must build industry confidence of its impartiality. In
conjunction with this, the management of the BBC, WW and the BBC
Trust should be made totally separate and mutually exclusive.
30. The BBC's commercial activity should
be brought back under proper control. All commercial activity
undertaken by BBC subsidiaries should be linked directly to current
core BBC programming to restore certainty to the market and a
sense of proportion to the use of the BBC brand. In addition,
the monetary threshold for referring activities for Trust oversight
should be lowered from the current minimum of £50 million
to a more appropriate industry level. Furthermore, the relationship
between the BBC and WW must be made completely transparent. This
would mean openly justified pricing for the transfer of assets
between the two organisations, or an end to the "preferred
partner" status of WW altogether. As such, the BBC could
continue to sell WW its latest comedy series for re-transmission
on UKTV Gold, for example, but this would have to involve an open-market
bidding process for the content.
31. This would still allow the BBC to exploit
fully the value of its current licence fee funded assets—such
as comedy series—through international sales, format franchising
etc, but would prevent it from the large-scale media investment
that it has undertaken in recent years—such as the acquisition
of Lonely Planet.
32. These first two measures would bring
WW and the BBC properly within necessary regulatory control. However,
on their own, they could limit the ability of the BBC to obtain
full returns on BBC assets, including those unrelated to current
programming. For example, BBC DG Mark Thompson justified the acquisition
of Lonely Planet by revealing that the BBC had 3,000 hours of
archive footage that it could integrate into the publisher's website
offering. While uncontrolled exploitation of these—eg buying
a travel publisher to use the footage, in this case—can
damage markets, there are ways in which they can still be exploited
acceptably. These involve giving use of these other assets over
to third parties, in the form of licensing, where the BBC would
hand over full use its assets with brand protection conditions.
33. Non-current core BBC programming assets
should only be exploited through licensing. As with programme
related material, this should involve an open market for licence
fee funded content, which would generate the best possible return
on licence fee funded content. The purpose of the Lonely Planet
deal, for example, could still be achieved—through licensing
of the BBC content and expertise concerned to the other party,
rather than through acquisition. In combination with the first
two recommendations, this would reduce further the market uncertainty
and distortion caused by the BBC's expansionary behaviour. Value
for the BBC's assets would be realised, but without an intervention
of the scale of the BBC's current market activities.
34. The BBC might protest that having to
licence its assets could cause damage to the BBC's brand. However,
effective third party use of brands is currently achieved by many
large media organisations, and in any case, as we have seen, the
BBC's current policy on advertisers, for example, doesn't seem
to reflect such concerns.
35. We believe that, with the correct level
of effective regulation, the measures described above would allow
the BBC to return significant value for all its assets to the
licence fee payer, and protect the BBC brand, without unnecessarily
distorting markets and affecting UK media businesses.
BBC Local Video
36. Although outside the formal remit of
this inquiry, as they are not commercial activities, the BBC's
plans for local video are another good example of how the Corporation
is affecting commercial markets, and how the BBC's governance
can lack transparency. GMG has serious concerns about the BBC's
plans to invest £68 million in local video content. At a
time when the plurality of local and regional news provision is
under threat as ITV reduces its PSB commitments, the BBC's plans
threaten to stifle online innovation by commercial players, and
snuff out fledgling markets. Along with the rest of the regional
press industry, GMG has been closely involved in the BBC Trust/Ofcom
public value test of these proposed services.
37. This consultation has highlighted the
problems concerning the Trust and its relationship with the BBC
Executive. During the consultation process, information about
the proposed new service has not been fully supplied to local
media; the BBC has not reciprocated in providing important market
information that, in contrast, local media have given when asked;
and the timings involved in the process have appeared to be arranged
with the BBC's interests in mind. This has been to the detriment
of the industry's confidence in the consultation process.
October 2008
123 For the full list, see http://www.bbc.co.uk/info/purpose/public_purposes/index.shtml Back
124
See http://www.publications.parliament.uk Back
125
This condition is included in the more general requirement that
commercial activities respect the BBC's Fair Trading Guidelines. Back
126
See BBC Protocol D6-The BBC's Commercial Services. Back
| 
