BBC Commercial Operations - Culture, Media and Sport Committee Contents

Memorandum submitted by the British Broadcasting Corporation (BBC)

EXECUTIVE SUMMARY

  Commercial activity by the BBC began as long ago as 1923 with the introduction of Radio Times. Successive Governments have encouraged the BBC to increase commercial revenues in order to relieve pressure on the licence fee. Government research has found that our commercial activities are supported by the clear majority of licence fee payers.

  The BBC's primary commercial subsidiary, BBC Worldwide (BBCW), has the size and brand recognition required to compete on an international scale, maximising the benefit to licence fee payers and opening doors for other British businesses overseas. We ensure that, as the Charter and Agreement require, all BBC commercial activities:

—  Fit with the BBC's public purposes;

—  Exhibit commercial efficiency;

—  Do not jeopardise the BBC's good reputation or the value of the BBC brand; and

—  Comply with the BBC's fair trading guidelines, in particular by avoiding market distortion.

  These rules (the four commercial criteria) are enforced through the BBC's governance framework overseeing all commercial activities (see section 5 below).

  BBCW seeks to fully realise the commercial and cultural value of the BBC's audiovisual archive, thereby maximising the financial benefit to licence fee payers and contributing directly to the BBC's public purposes. BBCW has no access whatsoever to licence fee income. However, over the last three years BBCW has provided the BBC with dividends of over £200 million and direct programme investment of over £260 million while also developing its own capacity to deliver sustainable returns to the BBC in the future. It creates value equivalent to nearly £9 for each licence fee.[4]

  The BBC's commercial operations are a key component in delivering our fifth public purpose: "bringing the UK to the world and the world to the UK" and in promoting Britain's image overseas. They also support the BBC's other public purposes. Upfront investment in BBC programming as a result of the sale of programme rights enables BBC programmes to be made which would never otherwise have got off the ground. Landmark examples include Planet Earth, Cranford, Doctor Who and In the Night Garden.

  International distribution of both BBC branded television channels and websites is increasing the reach of BBC content significantly. But BBCW cannot simply export UK content without taking account of local audiences and so the local production of proven BBC TV formats is an important enabler of this opportunity.

  The international scope of the market for UK content is widening. We continue to serve our established markets in Europe, but we are now investing to deliver revenue and profit growth in USA, India and Australia, and making initial moves to enter the emerging markets of China, Latin America, Eastern Europe and South Africa.

  The BBC's commercial activities provide the BBC and the wider UK creative community with an internationally recognised export platform—enabling us to foster and promote the best of UK talent, both from the BBC and the independent production sector. In this way we are fulfilling our aim, as described in the Charter Review Green Paper, "to showcase the widest possible array of UK talent and secure the best possible deal for UK plc". In addition, BBC commercial operations result in significant returns to the UK creative economy: over the past four years, as a result of the activities of BBCW, around £1 billion has been generated and invested back into UK creative talent (see subsections 2.7-2.20 below).

  The BBC exploits appropriate commercial opportunities through its own in-house distribution arm (BBCW). The main alternative would be to license content directly to unconnected third parties, and seek to build in the necessary safeguards into the terms of those contracts. With its unique public purposes and dependence on its reputation for high editorial standards—the BBC has judged in-house distribution to be the most effective means of safeguarding and promoting those purposes and standards while capturing the full value of BBC IP. It is worth noting that every other major media group favours in-house exploitation of commercial opportunities (see subsections 4.18-4.20 below).

  Despite its preferred supplier status, BBCW is required to bid at market rates. Its effectiveness in exploiting rights has been recognised by the wider industry: BBCW has been voted by its peers the best programme distributor in three out of the last four years in the annual Broadcast survey. BBCW must also work within a strict Fair Trading framework to ensure stewardship of the BBC brand and to protect against market distortions. Compliance and wider governance arrangements are in place to ensure these obligations are met.

  BBCW's current five year strategic plan aims to ensure that BBCW remains a significant commercial enterprise renowned for high quality, trustworthy and distinctive content that sets it apart from its major international competitors. Like all similar strategies, this is subject to periodic review. A major review of this type took place in 2004 and another review, instigated by the BBC Trust with terms of reference agreed between the Trust and Executive Board, is ongoing.

1.  INTRODUCTION

  1.1  This is the response of the British Broadcasting Corporation (BBC) to the issues set out in the 18 July 2008 announcement by the Culture, Media and Sport Select Committee (the Committee) that it was launching an inquiry into the commercial operations of the BBC (the Inquiry).

  1.2  The BBC welcomes the opportunity to respond to the questions contained in the Committee's first call for evidence and is pleased to engage with the Committee on the broader topics raised by those questions.

  1.3  The BBC recognises that the Committee's principal focus will be on BBC Worldwide (BBCW) and so this submission reflects the BBC's views as BBCW's "parent company".

  1.4  This submission is structured so as to respond directly to the various issues that the Committee has raised:

(i) Section 2 demonstrates how the BBC in practice meets the four criteria agreed with the Secretary of State (the four commercial criteria);

(ii) Section 3 gives an overview of BBCW's business and strategy and briefly explains how the BBC invests the revenues and profits from BBCW;

(iii) Section 4 sets out the BBC's view of the potential benefits and risks from the BBC engaging in commercial activities of the kind undertaken by BBCW;

(iv) Section 5 outlines the framework of checks and balances which ensure that the BBC meets the various criteria agreed with the Secretary of State; and

(v) Section 6 concludes by providing a summary of the future for BBCW over the coming decade.

  1.5  This submission also briefly addresses (at Section 7) the BBC's other commercial activities, BBC World and BBC Resources.

2.  THE BBC'S RECORD IN MEETING THE CRITERIA AGREED WITH THE SECRETARY OF STATE (THE FOUR COMMERCIAL CRITERIA)

This section demonstrates how the BBC in practice meets the four criteria agreed with the Secretary of State and also highlights how much of the BBC's success in meeting the specified criteria is attributable to BBCW's status as a controlled BBC subsidiary

  2.1  The BBC has engaged in commercial activity since the launch of Radio Times in 1923 and the Government's support for that activity also has a long history. BBCW's predecessor, BBC Enterprises, was set up in March 1979 with the support of the then Labour Government. Support for commercial activity continued under successive governments; support typified by the Rt Hon Virginia Bottomley MP when, in 1996, she wrote to the Chairman of the BBC that "The BBC must take full advantage of the new commercial opportunities which are now available." In 2000, the Rt Hon Chris Smith MP wrote to the Chairman of the BBC in 2000 arguing that "[...] faster gains in efficiency and commercial activities will be needed [...] it should be possible for the BBC to [...] increase commercial revenues." Support for BBC commercial activities continues today, with DCMS Minister, Gerry Sutcliffe MP, stating this year that "The BBC should seek to maximise commercial revenue in appropriate areas and reinvest it in programming and talent to the benefit of licence fee payers."[5]

  2.2  BBCW's core business is the commercial exploitation and export of the BBC brand and BBC content. Yet BBCW's scale and capabilities as a global media business also give rise to opportunities to distribute non-BBC content and thereby earn additional revenues for the licence payer. The most recent BBC Charter Review encouraged BBCW to develop these opportunities:

The BBC should not restrict itself to the sale of BBC programmes. It should look to work closely in partnership with other UK broadcasters in developing its programme sales strategy. It should use the scale and power of BBC Worldwide to showcase the widest possible array of UK talent and secure the best possible deal for UK plc.[6]

  2.3  Licence fee payers have also expressed their support. Government research to inform the latest BBC Charter Review gave an overwhelming endorsement for the BBC to use "all responsible methods" to offset the licence fee. In findings subsequently confirmed by the Government's Green Paper consultation, 90% of those surveyed agreed that the BBC should raise as much money as it can from selling its programmes and other products.[7] Clear support for the BBC continuing to undertake commercial activities beyond just TV sales was also confirmed by other responses. 92% of participants thought that the BBC should continue to sell programmes, and 93% said it should continue to sell other products like books, DVDs and magazines.

  2.4  But Government and the BBC have always been conscious that the BBC's commercial activities must be consistent with the BBC's public service mission. Speaking in the House of Commons in March 2005, for example, the then Secretary of State Tessa Jowell said: "We want the [BBC] to maximise its income from commercial services, but we also want to see a clear link between those services and its public purposes."[8]

  2.5  The BBC's commercial services are therefore now governed by the requirements set out in Clauses 68-74 of the BBC's Agreement with the Secretary of State (Cm 6872). Those clauses require that the BBC's commercial services must:

(i) Fit with the BBC's public purposes;

(ii) Exhibit commercial efficiency;

(iii) Not jeopardise the BBC's good reputation or the value of the BBC brand; and

(iv) Comply with the BBC's fair trading guidelines, in particular avoiding market distortion.

  2.6  A full explanation of how the BBC discharges its duty to ensure the above criteria (the four commercial criteria) is provided in Section 5 below.

Fit with BBC's Public Purposes

  2.7  The BBC's public purposes are set out in Article 4 of the BBC's Royal Charter and are as follows:

(i) Sustaining citizenship and civil society;

(ii) Promoting education and learning;

(iii) Stimulating creativity and cultural excellence;

(iv) Representing the UK, its nations, regions and communities;

(v) Bringing the UK to the world and the world to the UK; and

(vi) In promoting its other purposes, helping to deliver to the public the benefit of emerging communications technologies and services and, in addition, taking a leading role in the switchover to digital television.

  2.8  By exploiting BBC content commercially and exporting UK content around the world BBCW generates investment in the UK and takes Britain to the world. BBCW's direct contribution to the BBC's public purposes focuses on two of the purposes, as follows.

Stimulating Creativity and Cultural Excellence

  BBCW fits with the BBC's purpose of stimulating creativity and cultural excellence by: giving an international platform to other UK creative content; supporting independent production companies—in particular smaller entities who harbour significant talent yet are finding it increasingly difficult to develop and grow in this concentrated sector; and facilitating the development of creative talent.

  2.9  In the coming year, BBCW will invest around £150 million in UK produced programmes via partnerships with co-producers, dividend payments to the BBC and other acquisitions. These levels of investment enable the BBC to create the large scale or high risk projects like Planet Earth and Cranford for which we are famous. The UK production community benefits directly from this investment.

  2.10  Gaining upfront investment in programming in exchange for programme rights is standard practice among all major media players (including, for example, ITV in the UK, NBCU, Disney-ABC and TimeWarner in the US and ProSieben in Germany). It is an essential way of broadcasters spreading the considerable risks inherent in programme production, above all, the difficulty of predicting audience successes at the stage of commissioning. As well as offsetting risk to the distributor (which in BBCW's case has a carefully balanced portfolio of investments of varying degrees of commercial risk), upfront investment brings other benefits. First, it allows the distributor to maximise revenues through activity (eg. publishing a programme-related book) at the time of the programme's Public Service broadcast. Second, it commercially incentivises the distributor to work harder at monetising programmes in order to recoup the advance payments it has made. Importantly, upfront investment does not negate possible future commercial returns to the BBC; rather both the BBC (as producer) and the distributor benefit in the longer term from commercially successful programmes through profit-sharing or BBCW dividend payment arrangements.

  2.11  Since the introduction of the new Terms of Trade for Independent Production in 2004 (as a result of the Communications Act), the market for rights owned by independent producers has become increasingly competitive. BBCW competes openly for these rights (including rights in programmes commissioned by the BBC) with other distributors, including ITV Worldwide, Fremantle and RDF. All rights in independent productions which BBCW acquires are as a result of an active choice by a producer to use BBCW as a distributor.

  2.12  BBCW plays an increasingly important distribution role for the "long tail" of smaller independent producers who exist outside the group of a dozen "super-indies" such as IMG, All3Media, Endemol, Shine, Hit Entertainment, Talkback Thames/Fremantle, RDF, Shed, and Tinopolis. According to PACT figures, super-indies now generate nearly 70% of the sector's total £2.14 billion revenues, and 87% of the sector's growth. They also increasingly conduct their own distribution. Smaller players without their own distribution facilities value BBCW's role as distributor and supporter of their business, as BBCW allows them to gain international exposure that otherwise would not be open to them:

—  First, BBCW has access to an extensive network of overseas broadcasters, who like dealing with BBCW as a single selling point for a variety of high quality content. These customers recognise BBCW's ability to gather a wide range of quality content across a range of genres and respect the BBC's good name.

—  Second, BBCW acts as a "platform" for both in-house and independently produced shows. Channels (like BBC America, BBC Entertainment) carry a wide range of UK content, including programmes from "super indies". Exposure to contemporary UK programmes on BBC America has been the catalyst for programme formats to be purchased by US networks and re-made as local versions—such as The Office and Ramsay's Kitchen Nightmares. And the US networks have also subsequently gone on to purchase content directly from Indies—a "pull through" effect that is clearly of benefit to the UK's creative industry as a whole. Jeff Zucker (President and CEO, NBCU) has called BBC America "a terrific test tube for American tastes". The Times recently reported "the pace of Britcom remakes (in the US) is picking up—Pegg's Spaced, The Vicar of Dibley and Little Britain USA are in the pipeline. Life on Mars has been switched [...] to New York. Critics compare the remakes with originals on BBC America."

  2.13  More than 50 UK independent production companies (all PACT members) currently choose to have an on-going distribution and/or programme development relationship with BBCW.

  2.14  Consolidation among the independent sector has also been the motivation for BBCW providing seed investments for minority stakes in a handful of small, independent UK production companies (Left Bank, Cliffhanger, Hardy & Son, Clerkenwell and Baby Cow). The companies value not just BBCW's cash but also the other opportunities brought about by affiliation with BBCW:

"BBCW brings a wealth of commercial expertise and phenomenal global presence to the venture"—Paul Marquess, Managing Director, Cliffhanger.

"BBCW will help open doors for us."—Hardy & Sons Creative Director Justin Hardy.

"We looked at number of options to move Baby Cow forward and BBC Worldwide was head and shoulders above the rest in terms of understanding what we do and how to build upon it. I'm very excited about working closer with BBC Worldwide and bringing to Baby Cow the vast expertise and experience they can offer."—Baby Cow Joint MD, Henry Normal.

  2.15  In all these instances, the case for BBCW's investment has been driven by the excellence of the production talent, the modest sums involved in BBCW's investment and the resulting prospect of considerable financial and "cultural" returns for the licence fee payer at manageable levels of risk. The total sum invested in the independent production sector since 2006 is between £350 million and £400 million.[9] BBCW's share of this investment is tiny but consistent with Ofcom's stated aims that "diversity through a plurality of players in the market" is important in the UK production market.[10] BBCW has always been encouraged to invest in BBC programming, which carries a similar level of commercial risk.

  2.16  In Broadcast magazine's annual survey, BBCW was named "best distributor of the year" by its peers in 2005, 2006 and 2008 as well as "best development partner" by indies in 2006. This year, BBCW's DVD subsidiary, 2entertain, won a Queen's Award for export in recognition of its £150 million in export revenues (BBCW as a whole won the same award in 2002). By supporting other public service broadcasters and promoting diversity among the independent production community in these ways—especially the smaller, yet excellent, operators—BBCW's activities fit with the BBC's public purposes of stimulating creativity and cultural excellence.

Bringing the UK to the world and the world to the UK

  2.17  BBCW's international businesses, across all seven Divisions, support the BBC's public purpose of "bringing the UK to the world". BBC content is the key brand feature of BBCW's international businesses. Yet those businesses also stimulate and showcase the rest of the UK creative community. BBCW's international importance has been explicitly recognised in the industry magazine, Broadcast:

BBC Worldwide is important in exporting UK plc around the world. The success of Dancing With the Stars has been crucial in leading the (British) charge into the US. BBCW has the clout to get into markets that smaller outfits could have a tough time negotiating. Emily Booth, Editor, Broadcast, August 2008.

  2.18  More specific measures of international success are as follows:

(i) BBCW's BBC-branded and Joint Venture (JV) channels reach 285 million homes globally.

(ii) BBCW is the largest exporter of TV programmes in Europe (with turnover in excess of £213 million). BBCW's catalogue includes 30,000 hours of programming (of which 22% is made up of titles from independent producers).

(iii) BBCW's commercial websites draw 26 million[11] visitors globally per month.

(iv) BBCW has succeeded in establishing Top Gear and Planet Earth as global brands.

(v) BBC World News is now available every day in 153 million homes and for more limited periods in a further 118 million homes. Every week 78 million people watch BBC World News thereby complementing the radio and online reach of the BBC World Service.

  2.19  As part of its mission to showcase the best of British creative talent around the world—and to maximise financial value in the process—BBCW is developing a network of international production offices that can better serve international audiences. Rather than merely licensing formats such as Strictly Come Dancing, BBCW earns greater revenues and profits—and can more effectively safeguard BBC brands—by taking control over production. BBCW's move up the value chain in this way therefore secures important financial and editorial benefits. BBCW's approach is also entirely consistent with the industry model adopted by other large distributors such as Disney-ABC, Fremantle, and ITV Worldwide.

  2.20  BBCW is placing particular focus on "bringing the UK to the world" in the USA, Australia and India. These countries have potential to realise greater value for licence fee payers. BBCW has achieved significant growth in the US recently and the launch of BBCW channels in India has already resulted in a 10 fold increase in the number of hours of British content available in that market.

  2.21  In some limited cases, BBCW 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, BBCW retains full control over the BBC brand.

Commercial efficiency

  2.22  While BBCW has always sought to maximise its commercial efficiency (as it is now obliged to do under the most recent BBC Charter and Agreement), the period since the 2004 Commercial Review has been marked by significant and sustained improvements in performance.

  2.23  As a result of this renewed focus:

—  BBCW has trebled its profits since 2004;

—  BBCW's 2007-08 performance—both in terms of revenue and PBIT—exceeded both budget and its five year plan targets that had been approved by the BBC Trust; and

—  the extent of BBCW's financial upturn is such that BBCW is now recognised as performing comparably in PBIT/EBITDA terms with Fremantle, Five, Channel 4, RDF and ITV.

  2.24  In order to continue to ensure best value for licence fee payers, BBCW is:

—  Diversifying its business internationally in key identified territories—particularly the USA, Australia and India;

—  Growing its online activities and revenues, to meet growing consumer demand for these services; and

—  Recognising that its growth strategy can be delivered by means of carefully selected and structured partnership and acquisition opportunities, as well as via organic growth.

  2.25  The above factors were all reflected in the acquisition of a majority stake Lonely Planet (LP). As a profitable company which nonetheless had an under-developed online and magazine presence, LP offered BBCW a rare opportunity to significantly increase by acquisition the value it can achieve for licence fee payers. In particular, the LP website with 5 million unique users has the potential to benefit from BBCW's digital expertise and contribute towards its target of generating more than 10% of revenues from digital activity by 2012. Matching so closely BBC editorial values—such as accuracy, integrity, impartiality, quality and creativity—LP is well placed to help the BBC make much more of its archive of 3,000 hours of travel and world culture related programming. It offers a clear fit with the BBC's public purpose to take the "UK to the World and the World to the UK" with its trusted educational and cultural content, particularly among the 25-45 demographic who tend to be less familiar with the BBC brand but for whom LP is very popular.

  2.26  BBCW's commercial efficiency creates significant financial benefits for the licence fee payer. BBCW's balanced strategy of continued focus on core activities, targeted product/service growth, managed international diversification and effective cost control across the business reduces the overall level of operational and financial risk to the BBC from BBCW's activities, thereby maximising the prospects for continued strong dividend performance in years to come.

Maintaining the BBC's good reputation and the value of the BBC brand

  2.27  BBCW enhances the BBC's good reputation and the value of the BBC brand, in three respects: first, BBCW's activities by their very nature extend UK audiences' experience of BBC content; second, in the way that BBCW packages and delivers BBC content across these media, BBCW employs editorial standards that are entirely in line with the BBC brand; third BBCW builds new properties for international audiences that puts BBC content into a local voice but wholly consistent with BBC editorial values.

  2.28  BBCW's activities extend the BBC's relationship with its audience in the UK—from public service broadcasting into multichannel TV, magazines, DVDs, CDs and online. BBCW's focus on offering BBC brands in multiple formats is demand-driven: people expect to be able to experience their favourite brands beyond just TV. For example, Top Gear fans want to see the brand not just on the BBC's PSB channel but they also want to see episodes repeated on multichannel TV, to buy the magazine, DVDs, games (eg Gran Turismo via Sony PlayStation), toys (eg Scalextric) and so on. Other examples of similarly passionate fans are there for Doctor Who, Planet Earth, In The Night Garden, Teletubbies, Gardener's World and many other BBC properties.

  2.29  BBCW is developing properties that take the core Licence Fee funded content and re-format them for local audiences. For example, BBCW wholly funds BBC World News America as part of its channel BBC America; re-makes programmes such as Top Gear for Australian audiences and will be investing in BBC.com to make the service more relevant to local audiences. By offering bespoke content, BBCW can address a much wider market than simply exporting content solely in its original form and expecting international audiences to like it.

  2.30  It is a core requirement that BBCW respects and honours the integrity, reputation and value of the BBC core brand. BBCW's obligations are underpinned by an extensive set of editorial guidelines and internal quality controls which touch every aspect of BBCW's business. In the last reporting period, there were no editorial complaints upheld by the Editorial Complaints Unit. Nor were there any identified breaches of any relevant branding guidance issued by the BBC. Moreover, Section 5 outlines how the BBC and BBCW regularly review editorial processes to ensure effective brand management—in particular by conducting "deep dive" editorial reviews into sample businesses (most recently: 2entertain, BBC Magazines and BBC.com).

Compliance with Fair Trading Guidelines and avoidance of market distortion

  2.31  Section 5 below contains information on the BBC's and BBCW's structures and processes to ensure full compliance with the BBC's Fair Trading Guidelines; and BBCW's excellent track record of compliance in practice.

  2.32  As regards "avoidance of market distortion", this is assured by two factors:

—  First, BBCW bids on for BBC rights on a commercial basis. BBCW's processes in evaluating and bidding for BBC rights are exactly the same as those BBCW adopts when bidding for third party rights for commercial exploitation.

—  Second, BBCW's activities do not foreclose third party distributors from the sector as a whole. There are many other major companies distributing intellectual property rights in all relevant downstream markets. Annex 2 demonstrates BBCW's small size—both in absolute terms and compared to its commercial peers.

3.  OVERVIEW OF BBCW'S BUSINESS AND STRATEGY

Section 3 provides an overview of BBCW's business and strategy and briefly describes how the BBC invests the revenues and profits from BBCW

  3.1  BBCW is a wholly owned and controlled subsidiary of the BBC. While always meeting the commercial criteria set out in Section 2 above, BBCW's strategic vision is to optimise commercial efficiency and thereby maximise revenues for the licence fee Payer through:

—  Being a consumer-focused, brand-led, global consumer entertainment business; and

—  Being renowned for high quality, trustworthy and distinctive content that sets BBCW apart from its major international commercial competitors.

  3.2  BBCW aims—and is required—to ensure that all of its global services are consistent with the BBC's core values and editorial policies and as such are an effective representation of the BBC, globally.

  3.3  BBCW operates through the following divisions (latest financial data from 2007-08):[12]

—  Global Channels (sales £184 million, profit £13 million): operates TV channels internationally that reach 285 million homes (channels include BBC America and BBC Knowledge). In the UK, Global Channels manages the JV with Virgin Media relating to UKTV;

—  Sales and Distribution (sales £213 million, profit £47 million): wholesales television programmes to channel operators (and is currently Europe's biggest exporter of programmes). Key properties are BBC programmes covering a range of genres;

—  Magazines (sales £178 million, profit £17 million): an established UK magazine publisher. Titles include Radio Times, Top Gear, Gardener's World, BBC History and Good Food;

—  Home Entertainment (sales £228 million, profit £41 million): comprises a range of businesses offering consumer products and services. Key formats include DVDs (commercialised predominantly via 2entertain, a 60:40 joint venture with Woolworths plc), audio books and music CDs;

—  Content and Production (sales £69 million, profit £14 million): works both with the BBC and independent producers to secure new programmes and properties for BBCW. The business increasingly develops, licenses and produces TV formats (such as Top Gear and Dancing with the Stars) for broadcasters around the world;

—  Digital Media (sales £22 million, profit £(11) million): is developing a network of strong BBC-branded sites (eg TopGear.com); distributing BBCW content widely across the web to users who are unlikely to come directly to BBCW's (eg via YouTube) and managing BBC.com (an ad-funded version of BBC.co.uk for ex-UK users); and

—  Global Brands (sales £23 million, profit £(2) million): a new business area to manage properties that have global reach. Top Gear and Lonely Planet are currently managed by this division.

  3.4  The BBC's use of an in-house distribution arm—BBCW—to commercialise its content is entirely consistent with the approach taken by other major media groups such as TimeWarner, ITV, Disney-ABC and NBC. In-house distribution strikes a good balance between revenue maximisation and effective, long term stewardship of the content owner's brands and media properties. This brand protection and promotion is particularly important for the BBC with its unique public purposes and its dependence upon its trusted reputation.

  3.5  BBCW receives no funding from the licence fee. BBCW has a direct debt facility with the European Investment Bank (£50 million on normal commercial terms) and benefits from intercompany loan facilities with its parent company within the BBC commercial group. This parent company itself has a £350 million facility from a group of seven commercial banks which is on standard commercial terms and which offers no direct recourse to, or support from, the BBC. Other than these loan facilities, BBCW's other principal sources of liquidity are the funds flowing from trading operations; dividends from its joint ventures and other associated undertakings; and periodic disposals. BBCW receives no cross-subsidy from public funds or any other unfair advantage in the terms on which BBCW acquires content from the BBC; BBCW is obliged to pay market rates for BBC rights.

  3.6  The overall net debt limit for all the BBC commercial subsidiaries combined is £350 million agreed by HM Treasury. To this limit are attached several restrictive covenants designed to further ensure safety levels in all commercial investments.

  3.7  More details on BBCW's business activities are contained in BBCW's 2007-08 Annual Review (see Annex 3).

  3.8  The BBC maximises the financial benefits for licence payers from BBCW's operations, as follows:

—  requiring BBCW to pay full market rates to acquire the rights in BBC programmes; and

—  the BBC ensures that BBCW dividends are passed directly into content production and that any surplus is used by the BBC to pay for production talent retention, programme development investment (ie generating new ideas), and innovation (eg developing high definition versions of BBC programming). Annex 1 illustrates the scale of programme investment and dividends flowing to the BBC over the past four years.

4.  THE COMMERCIAL OPPORTUNITIES OPEN TO THE BBC AND ASSOCIATED BENEFITS AND RISKS

This section provides an overview of the major commercial opportunities open to the BBC as the BBC sees them over the next decade, outlines the benefits that can be realised, and provides an assessment of the risks of the alternative routes by which the BBC could seek to exploit these opportunities. It describes the potential benefits and risks from the BBC engaging in commercial activities of the kind undertaken by BBCW.

Introduction

  4.1  There are a range of potential benefits and risks from the BBC engaging in commercial activities. This section describes:

(a) The commercial opportunities open to the BBC;

(b) The benefits that can be realised from effective exploitation of those opportunities; and

(c) The potential risks of BBC commercial activity and the BBC's rationale for using an in-house distribution arm (BBCW).

  4.2  The BBC's assessment of BBCW's performance to date and its compliance with the four Commercial Criteria are discussed in Section 2 above.

Scale and Breadth of Commercial Opportunities

  4.3  The demand for high-quality BBC and wider UK intellectual property is increasingly global, which presents significant opportunities to BBCW to achieve better value for licence fee payers and further deliver on its mission in "bringing the UK to the world". A key part of BBCW's strategy is particularly to grow its activities internationally for the benefit of licence fee payers.

  4.4  Global Channels:

(i) The television channels' market is currently estimated to be worth $200 billion globally (and nearly $70 billion in the US alone).[13] This represents over 10% of the entire global media market and is the second largest media sector. The market is forecast to grow at 6% annually until 2011.

(ii) BBCW has built a strong position in the UK multichannel market via its UKTV joint venture with Virgin Media. The recent launch of BBCW's BBC-branded channels (eg BBC Knowledge) will extend BBCW's channel activities into new international markets. This strategy to build branded channels is adopted by all other major media companies (eg Disney, NBC, Discovery, News Corporation, Viacom, TimeWarner) which use their own branded channels to build their brands internationally and allow the export of their content around the world. So far, BBCW has launched (or re-launched) its new channels in North America, Latin America, Asia and Australia. Other deals are in negotiation. Crucially, these BBC-branded channels ensure maximum credit is attributed back to the BBC and the UK broadcasting sector more widely for the high-quality British programmes BBCW airs overseas.

  4.5  Sales and Distribution:

(i) According to a recent industry survey, the UK is the second largest exporter of television content (behind the US).[14] DCMS estimate that the value of this essential component of the UK creative economy was about £400 million in 2006. BBCW's exports accounted for almost one-third of this total.

(ii) There has been a significant increase in interest relating to British content from international broadcasters in recent years (either as locally re-made versions or in their original form—or both). British content and talent is—therefore—currently in high demand. BBCW plays an important role in stimulating this increased interest in British content to the benefit of the wider UK market as well as licence fee payers through BBCW sales (it already sells content directly to over 100 countries).

(iii) As emerging markets mature, they are opening up for imported television—particularly India, Asia, Latin America—and BBCW is already established in these markets (eg BBCW's annual sales event in Brazil, established office in Hong Kong and Singapore and broad presence in India) allowing a rapid increase in the volumes of content sold into these markets (eg BBCW recently signed a deal to sell 100 hours of content to Paraguay). Digitisation is also opening up new customers who want to build on-demand services around the world. And High Definition services are launching in mature markets which present further opportunities for the BBC's HD output (including Planet Earth). BBCW's activities are helping to expand the share of the growing market that is taken by British content.

  4.6  Magazines:

(i) Although magazines are a mature market in the UK, BBCW has still been able to serve increasingly well the demand for its high-quality magazines in both the UK and internationally. The magazine market is worth $100 billion in annual turnover and is growing significantly in emerging markets such as China, India and Brazil.[15] The industry is forecast to grow at an average of 3% over the next five years, with significantly higher growth rates in emerging markets.

(ii) BBCW continues to increase its magazine circulation (the latest ABC numbers show an increase of 3.2% in the first half of 2008).[16] BBCW is also offering new titles based on BBC programmes such as Who Do You Think You Are? (based on the indie production company Wall to Wall's format) Countryfile, Match of the Day and Cbeebies Art. BBCW's Radio Times still sells about one million copies each and every week as well as over two million copies every Christmas.

(iii) BBCW is well positioned to benefit from both established and emerging markets. International demand for BBCW magazines is strong with titles now launched in over 57 countries (including editions of Top Gear in Australia, China, India, Italy, Poland and Malaysia). In some key markets BBC has established joint ventures with key local partners to publish a wider range of BBCW titles (eg India and Australia). New opportunities are being pursued in Africa, North America and Asia.

  4.7  Home Entertainment:

(i) The home entertainment market is worth $90 billion annually and is forecast to grow at an average rate of 5% over the next five years.[17] BBCW produces a range of products that allow customers to buy original programmes (eg on DVD or CD) as well as a broader range of products associated with favourite programmes (eg children's toys, games, general merchandising etc).

(ii) Home entertainment products sell most successfully when they are related to programmes that reach large audiences. For example, the DVD of Planet Earth (a programme seen by millions of viewers in 180 countries) has sold three million copies around the world and was amongst the Top 10 best selling DVDs in the US in 2007. More recently, Cranford has already achieved sales of over 1.5 million units on DVD.[18]

  4.8  Content and Production:

(i) Up to 90% of the television content shown in international markets is locally made.[19] The spending on television production in the US, Germany, France and the UK alone is nearly $35 billion each year.[20] Despite its role as a significant exporter of UK programmes overseas, the domestic production of television programming is a far larger market than that of the import content. BBCW is therefore using its experience to maximise the commercial returns available to licence fee payers throughout the value chain by establishing its own production capability to produce BBC formats in a "local voice".

(ii) The results have been very successful. For example, Dancing With the Stars, which is based on the Strictly Come Dancing format has been licensed to nearly 40 countries. In the US, it is the nation's second most watched TV programme and the most watched programme on the US broadcaster ABC.[21] Top Gear is being made as a local version in Australia (with other deals currently in negotiation) as well as programmes such as Yes Minister, The Office, Weakest Link, Generation Game and Life on Mars.

  BBCW uses both licensing and its own in-house capabilities to produce its formats. However, if BBCW simply licenses out all its formats to third-parties its income would be much lower. BBCW could only charge format licence fees (which are usually lower than the income derived from production fees and any other associated revenues). The then PACT Chair Alex Graham acknowledged this point in November 2006 when he wrote: "Producers can make significantly higher margins by producing programmes themselves [rather] than by simply licensing the format for an agreed fee". This same strategy has been very successfully adopted by companies such as Endemol, Fremantle and Sony. BBCW's relatively new Content and Production division has rapidly grown to sales of £70 million. By retaining control of its productions, BBCW is able to ensure they come up to the required editorial standard (and are compatible with BBC Editorial Policy). BBCW is also able to retain more rights relating to programmes allowing it to benefit from additional revenue streams.

  4.9  Digital Media:

(i) Digital media already represents a total market of $240 billion in annual revenues (including the revenues generated by the provision of access to the Internet).[22] The market is forecast to grow at over 13% each year until 2011 (by far the fastest growing sector).

(ii) Like all media companies, BBCW is rapidly growing its internet activities in a number of ways, including the management of BBC.com (the BBC's internet pages outside the UK) and the development of a targeted range of websites to build individual brands (eg Good Food). BBCW has led in the field of online partnerships, as the first UK media player to partner with iTunes, MySpace and YouTube. These deals have resulted in tens of millions of users being able to watch and buy BBC content.

(iii) BBCW will need to embrace the opportunities offered by the growth of the Internet, not least because BBC programmes are already appearing to the disbenefit of licence fee payers on illegal sites as a result of piracy. But BBCW also faces a complex challenge to manage the transition from a "linear" environment to a fully "on demand" one. By retaining rights to all its activities, BBCW is able to judge when it should make the transition from one method of content exploitation (eg DVD) to another (eg VOD).

  4.10  Global Brands:

(i) A number of BBCW's properties, such as children's programmes and Dr Who, have global appeal across a multitude of formats. As a result, BBCW manage a number of brands (eg Top Gear and Lonely Planet so far) to ensure that the returns are maximised across both formats and territories. For example, BBCW manages the full range of products to ensure that they reflect the ethos of the brand as well as maximise the opportunities that are available.

(ii) Effective exploitation of all the opportunities outlined above can realise significant benefits to the BBC, licence fee payers, the UK creative industries and indeed the UK more widely.

Potential financial benefits

  4.11  Profits from the exploitation of the BBC's content through its commercial activities are made available for re-investment directly in new programming and/or as dividend to the BBC for wider use. BBCW's contribution to individual programme budgets can be over 70% of the total (made up of both direct investment from BBCW and the co-ordination of investment from international co-production partners). Landmark programmes such as Planet Earth, Cranford, Doctor Who and In The Night Garden simply would never have got off the ground without the support and investment provided by BBCW. This constant stream of funding can facilitate the BBC's investment in new content and, in turn, help nurture UK talent and expose it to national and international audiences.

  4.12  The potential income from effective exploitation of the emerging commercial opportunities over the coming decade is considerable. BBCW's current five Year Plan is targeting double digit annual revenue growth to over £1,200 million by 2011-12. The BBC's commercial activities, over the coming decade, will be an important source of finance for our core Public Service activities and a real opportunity for the UK media industry to succeed internationally.

Potential benefits to the BBC's reputation

  4.13  Less tangibly but equally importantly, the commercial opportunities outlined above offer the potential to enhance and extend the BBC's reputation through new markets and across a wide range of emerging new technologies and channels.

  4.14  A series of studies carried out since 2007 show that BBCW's activities have built strong awareness in key markets such as India, US and Eastern Europe. BBCW has also communicated core elements of the BBC brand to international markets as it is recognised globally as "consistent, positive, trusted, knowledgeable, intelligent, objective and quality". International media companies also recognise that BBCW—via the BBC brand—brings tangible value to customers outside the UK as it stands for quality content. The BBC has a remarkably positive profile internationally that goes beyond Britishness and taps into valuable and respected brand attributes.[23]

  4.15  As well as the indirect benefit to the nation, this can only further enhance our ability to deliver the very best to licence fee payers. The BBC competes for talent (both creative and leadership) in a global market, in competition with many other global media brands. Extension and development of the BBC's reputation across global markets and new and emerging media channels will be an increasingly important element of the BBC's ability to attract and retain top talent for the benefit of UK licence fee payers.

Potential benefits to UK creative industries

  4.16  The BBC is not the only industry stakeholder which can benefit from its commercial operations. The fruits of its commercial operation can benefit:

—  UK talent, which can not only derive financial benefit from BBCW's activities through royalty payments, but which can also gain international exposure and recognition to opportunities for UK talent across film and international television, for example:

—  Steve Coogan recently said: "At the moment the only people who recognise me in America are the cool people. People who've found me on BBC America."

—  Ricky Gervais's website states: "The Office has become an international phenomenon, with deals by BBC Worldwide in 70 territories around the world [...] The show broke new ground in the US following its hugely successful transmission on BBC America; Ricky Gervais became the first British actor ever to win a TV comedy-acting award at the Golden Globes 2004. Following its success on BBC America, the show's format has been licensed [...] to NBC for a US version that is currently in production. BBC Worldwide, in consultation with the writers, is also exploring opportunities around the world for local versions of the show".

—  John Barrowman: "The funny thing is, Doctor Who is now playing on BBC America, as Torchwood has been and that's watched by a very big audience, so I've actually been recognised more [...] when I go to the States than I was on all the network TV stuff I did over there for NBC and CBS."

—  Simon Pegg: "It used to be that you guys knew us from (Monty) Python and Benny Hill. Nowadays with BBC America and [...] increased access. We're closer than we used to be."

—  Other distributors which can license content to BBCW's global channels (eg BBC America; UK.TV in Australia) and thereby gain an international platform that would otherwise not be available.

—  Independent production companies (Indies), which either:

(i) owing to their size, do not have their own distribution capability;[24]

(ii) want to benefit from BBCW's scale and expertise in international distribution; or

(iii) simply do not have magazine, DVD, licensing or book publishing capabilities.

—  The large numbers of UK and international media companies with whom BBCW shares commercial operations, including by way of example long-standing joint ventures such as UKTV (with Virgin Media) and more recently the BBC Books venture with Random House.

—  These economic benefits can also have an impact in individual regions. BBCW's Indie Unit supports and works with regional producers (on the development, production and distribution of content), for example in:

(i) Scotland: Tern TV (which has active offices in Aberdeen, Glasgow and Belfast);

(ii) Wales: Indus Films, Fulmar TV;

(iii) North West England: Red Productions, Jelly Legs (both in Manchester); and

(iv) The Unit also works with regional film funds. For example:

—  Screen Yorkshire—recent programmes with regional funding supported by BBCW are Unforgiven, Casualty 1906 and 1907 and Spooks: Code 9.

—  Long term partner of BBCW, Baby Cow, have a subsidiary called Baby Cow North which opened in Manchester with the support of North West Vision (a regional film fund), and amongst other titles, Ideal was made out of and with support from that region.

—  2AM Films' new series PAs and Hat Trick Productions God on Trial were both wholly produced in Scotland.

Contributing to the delivery of the BBC's public purposes

  See Section 2 above.

Potential risks in BBC engaging in commercial activities

  4.17  There are three major risks which face the BBC in engaging in commercial activities:

—  failure to protect the BBC brand or operate in line with the BBC's public purposes;

—  failure to maximise returns for the licence fee payer; and

—  failure to trade fairly.

  4.18  Risk 1: Failure to protect the BBC brand or operate in line with the BBC's public purposes. The commercial opportunities open to the BBC over the coming decade must be exploited in ways which not only cause no damage to the BBC brand, but enhance it and contribute directly and positively to the BBC's public purposes. The BBC acknowledges that unduly aggressive, inappropriate or purely short-term financially-driven commercial activities could risk adverse consequences (or adverse perception) in this regard.

  4.19  The BBC has considered whether adequate protection of the BBC brand and reputation could be secured through contractual obligations if we were to adopt the third party distribution option. We believe that such controls could be effective, although they would require significant oversight to ensure compliance. However, while such controls can work effectively to prevent undue brand damage, there is a risk that they would be less effective in promoting the positive impact we seek and in encouraging proactive brand development. Promoting of the BBC's public purposes is also not at the heart of a third party distributor's business and would need again to be secured through contractual obligations and commitments which would often require the distributor to take decisions that they might see as being against their commercial interest. Nor would a third party distributor be incentivised to maximise credit attributed by audiences back to the BBC and thereby the wider UK creative sector.

  4.20  The BBC recognises the need to apply adequate controls on the activities of BBCW to ensure that the risks associated with the in-house route are carefully and rigorously managed. BBCW's performance to date against the four Commercial Criteria is described in Section 2 (above) and the full array of governance obligations, controls and compliance requirements that we apply are outlined in Section 5.

  4.21  Risk 2: Failure to maximise returns for the licence payer. One of the biggest risks is the risk of failing to maximise the value of BBC licence fee funded content. The market opportunities outlined earlier are substantial, but they require focussed development to ensure they are exploited to the full—beyond simple deployment of the BBC's most commercially attractive content. Technology is changing rapidly; new markets and channel opportunities are opening up and changing constantly. Full and effective exploitation of the opportunities will require proactive building of the BBC's market position for the long term.

  4.22  The BBC has considered carefully the extent to which this can be achieved through contract with external third parties, by effectively inducing or requiring third parties to behave in the same way that an in-house distribution arm would act. Investment obligations, long term rights deals, franchise arrangements and other contractual terms are used in other industries. While this can work well in markets where the future opportunities are sufficiently well known, we are concerned that this will be much more difficult and complex to achieve in the evolving markets in which we plan to operate. It is not an environment that is well suited to the level of detailed contractual specification that will be required if the BBC relied solely on third party distributors. It is for these reasons that almost every other major media company (for example TimeWarner, Disney-ABC, 20th Century Fox, NBCUniversal, ITV Worldwide and Bertelsmann) has elected to adopt an in-house model to exploit the commercial potential of their content. The BBC would need to see considerable additional advantage to the third party route to justify departing from the usual industry practice.

  4.23  There are, however, also risks associated with the in-house option. The BBC will not realise the full commercial potential if our chosen in-house arm proves to be operationally and/or commercially inefficient. Any such inefficiency would constitute a failure by the BBC to meet a fundamental element of its obligations deriving from the BBC Charter and Agreement. For this reason, the BBC will continue to require BBCW to pay the full market rate for content, and will continue to subject BBCW to the rigour of competitive tendering. If the BBC believes a third party is able, through greater efficiency or better evaluation of the market value, to pay more for BBC content rights, then BBCW will lose the bid. And this can and does happen for programmes as diverse as Extras; The Passion; Criminal Justice; Vanity Fair; Heston Blumenthal and Mitchell and Webb. We believe that this will exert the required discipline on BBCW to ensure continued cost efficiency.

  4.24  Risk 3: Failure to trade fairly. Section 5 below sets out the rigorous fair trading regime to which BBCW is subject.

5.  THE GOVERNANCE FRAMEWORK REGULATING THE BBC'S COMMERCIAL OPERATIONS

This section outlines the framework of checks and balances which ensure that the BBC meets the various criteria agreed with the Secretary of State. Two recent case studies are discussed

The BBC and BBCW's institutional arrangements to meet its governance obligations

BBCW's structures and procedures

  5.1  BBCW's current corporate governance framework was fashioned following the 2004 Commercial Review with a view to creating an efficient and low-risk commercial environment in which BBCW could meet the ambitious growth objectives set for it. The framework was based upon commercial models and is supplemented by BBC-specific regulatory requirements, such as compliance with the 4 Commercial Criteria (the 4CC). Key highlights include:

(i) Budgeting, reporting, forecasting and business planning procedures for BBCW's commercial activities, in line with commercial best practice;

(ii) Clear internal investment approval guidelines to ensure that all proposals deliver BBCW internal targets and are compliant with the 4CC;

(iii) A framework for transactions to be considered at every approval point, from divisional boards (eg Magazines) to the full BBCW Board, against the 4CC;

(iv) Full and effective scrutiny of all significant projects by BBCW's Board of directors comprising BBCW executives, independent non-executive BBCW directors (including Chairman) and BBC non-executive directors;

(v) The right for any non-executive director to refer a proposal to the BBC Trust where they are concerned that it may not be 4CC compliant;

(vi) Monthly reviews between the COO and the Trust Unit to discuss current and potential business proposals;

(vii) Monthly reviews between the "4CC Guardian" (BBC General Counsel and BBCW non-executive director), the BBC Controller of Fair Trading and the COO to review current developments within BBCW; and

(viii)  A range of established processes to spread the compliance culture throughout BBCW, including training, advice and regular meetings with fair trading representatives.

  5.2  As with any commercial company, the governance framework is centred around the board of directors. As part of the 2004 Commercial Review it was decided to supplement the BBCW Board to provide additional external scrutiny through the appointment of three independent non-executive directors, including an independent Chairman, and three non-executive directors from the BBC parent company.

  5.3  The BBCW Board operates under Terms of Reference set by the BBC in early 2007, which define its remit. In addition to the standard systems of approvals and controls for which it is responsible within BBCW, the BBCW Board is in particular accountable to the BBC's Executive Board for compliance with the Protocols set by the BBC Trust (in particular Protocol D6 which provides further guidance on the approvals process for commercial services) and specifically with the 4CC.

  5.4  In addition to delivering to the BBC the standard commercial business plans, reports and accounts expected of any commercial operation, the BBCW Board is also responsible for delivering BBCW's annual reports which cover 4CC compliance and Fair Trading each year for approval by the BBC and the Trust.

  5.5  BBCW's governance framework and its Board structure were set up in a manner informed by commercial models and in particular the Combined Code on good corporate governance (issued by the Financial Reporting Council for UK publicly listed companies).

  5.6  The BBCW Board has in turn developed a system of internal approvals to ensure that all decisions are taken at the appropriate level within BBCW, centred around the internal investment approval guidelines. In addition to delivering a rigorous commercial decision-making framework, this system is designed to ensure that BBCW continues to meet its 4CC compliance obligations.

The BBC's Fair Trading structures and procedures

  5.7  As set out in Section 2, the BBC Agreement (clauses 69-74) sets out the 4CC against which all BBC commercial services need to be assessed. The BBC Trust has published Protocols with guidance on the approvals process for new and significant changes to existing commercial services. The BBC has subsequently produced Executive Procedures in order to assist in the establishment of satisfactory systems for compliance with the 4CC. The framework set out above was developed in conjunction with the Protocols and Procedures.

  5.8  In addition to 4CC compliance, the BBC Executive monitors Fair Trading compliance of its commercial activities through the Executive Fair Trading Committee, a sub-committee of the BBC's Executive Board. It does this through, inter alia, the following measures led by the BBC's Controller, Fair Trading:

(a) A central compliance function which manages the Fair Trading systems and procedures, and provides systems and compliance advice.

(b) A central team of Fair Trading Advisers which support all parts of the BBC (including BBCW) with advice, approvals, information and analysis.

(c) An extensive Fair Trading awareness and training programme.

(d) A network of `Fair Trading champions' with responsibility for promoting and supporting the Fair Trading regime throughout the BBC.

  5.9  The Trust also reports annually to the Government and the licence fee payer on the effectiveness of the BBC's Fair Trading Policy. The Trust commissions an annual, independent Fair Trading audit undertaken by external auditors (currently PwC). The BBC has always achieved an unqualified Fair Trading audit opinion.

  5.10  The appropriateness and effectiveness of the BBC's and BBCW's internal structures and processes that make up the governance framework have been externally validated by the BSI Group, which has awarded an ISO 9001:2000 accreditation for the Fair Trading regime. The BBC is subject to biannual assessment by BSI Group to maintain its accreditation.

  5.11  External validation for the substance of the BBC's Fair Trading framework (as opposed to the BBC's internal processes to ensure compliance with those policies) stretches back to Professor Richard Whish's April 2001 review of the BBC's (then) "Fair Trading Commitment" and "Commercial Policy Guidelines". In his report to the Secretary of State, Professor Whish concluded that the governance framework was appropriate to ensure that the BBC does not distort competition in commercial markets. Professor Whish also commented:

"I am familiar with the compliance policies of many public and private sector undertakings, including several that occupy positions not dissimilar to that of the BBC. In my view the fair trading policies of the BBC compare favourably with those of other undertakings. Indeed, I am not aware of any organisation that is subject to as much scrutiny—internally and externally—to ensure compliance with Competition Law".

  5.12  The scope of the Fair Trading regime was widened further in 2007 to incorporate the 4 Commercial Criteria and, specifically, a test for market distortion.

  5.13  As a result of this rigour, the BBC Fair Trading framework is internationally respected and is often used as a best practice case study by overseas broadcasters and policymakers. In recent years, the BBC has given presentations on the framework to parties such as the Norwegian Broadcasting Corporation, WDR (the German PSB), the EC Director of State Aid and the EBU Finance Assembly.

A Culture of Constant Review

  5.14  BBCW is subject to considerable financial scrutiny with frequent reporting required and clear financial thresholds to ensure proper scrutiny of key investment decisions. The BBCW board (including the non-executive directors), the BBC's Group Finance Director and the BBC Executive Board jointly review and approve BBCW's annual business plan and budget. Performance against budget and quarterly forecasts is reported on a monthly basis to the BBCW Board and the BBC Executive Board (within the BBC's finance report). The BBC's finance report is also submitted to the BBC's Trust Unit and the BBC Trust receives quarterly updates on performance.

  5.15  The projected profitability, internal rates of return and payback periods of any proposed new BBCW commercial initiative are examined on a transaction by transaction basis.

  5.16  BBCW's new investment projects are subject to approval by different bodies depending on a number of factors, including transaction value. Transactions with a value of over £50 million automatically require approval by the BBC Trust. This threshold is low in financial terms compared to the equivalent "shareholder consent" requirement for publicly listed companies.

  5.17  The BBC Executive Board, acting through its non-executive directors on the BBCW Board (or otherwise) may itself refer decisions to the BBC Trust where they represent reputational issues or matters of wider significance for the BBC.

Other Governance Requirements

  BBCW is subject to the BBC Editorial Guidelines in the same way as any part of the BBC Public Service. A BBCW television programme made in the USA or India is made according to the standards laid down in the BBC Editorial Guidelines. Similarly, any programme broadcast by a BBCW commercial channel in Australia, or any book published by BBCW, must meet the appropriate standards set. They form the quality benchmark against which any creative content is judged, and they also apply to marketing, and to editing and re-versioning existing content.

  5.18  In addition to the BBC Editorial Guidelines the following guidance relates specifically to the commercial activities of BBCW:

(i) BBC Online Services Guidelines (for all online content);

(ii) BBC Magazines Commercial Guidelines (for all BBCW Magazines);

(iii) BBC Advertising and Sponsorship guidelines for BBC branded broadcast and online presence;

(iv) Advertising and Sponsorship guidelines for sale or distribution of BBC content to third parties eg International Broadcasters, YouTube, UKTV; and

(v) BBC Brand and Design Guidelines.

  5.19  Adherence with the BBC Editorial Guidelines is a core contractual obligation for all BBCW staff. Staff also attend the two-day BBC Upfront Induction course in which editorial policies are covered extensively.

  5.20  Since May 2008, over 500 staff have taken part in the BBCW's version of the Safeguarding Trust programme, which focuses on BBC editorial standards. A range of other editorial training is undertaken with business areas. For example, all staff employed by BBC Magazines complete an online Legal training course and all staff who sell advertising complete an online Advertising Policy training course.

  5.21  BBCW Commercial Policy is a department with four full-time staff devoted to advising the business about compliance with the Four Commercial Criteria including issues of editorial standards and reputation. This team includes the Editorial Standards Adviser recruited from the BBC's Public Service division to advise on a range of editorial issues and ensure compliance with the BBC Editorial Guidelines. Commercial Policy hold regular meetings with editorial leads throughout the business to ensure the BBC Editorial Guidelines are being followed. The team also liaise with the BBC's Editorial Policy department to seek further advice (as necessary).

Editorial Control within BBCW Divisions

  5.22  In the BBC Magazines division, a series of Editorial Advisory Boards provide oversight of the editorial standards of each publication. These EABs include BBCW magazine editors, and subject experts from the BBC Public Service, as well as distinguished experts from outside the BBC.

  5.23  For BBC.com an Editorial Guardian is responsible for ensuring that all advertising meets the BBC advertising standards and an Advertising Governance Committee brings together key stakeholders from the Public Service Divisions to agree the commercial policies applied for the BBC website outside the UK.

  5.24  For broadcast services, a series of Compliance Officers review all programming to ensure BBC Editorial Guidelines and, where appropriate, the Ofcom Broadcasting Code, are followed. In addition, the BBC advertising guidelines set out a number of referrals to Compliance Officers to ensure sensitive commercial areas are dealt with in line with BBC policy.

  5.25  Where significant BBC brands, such as Dr Who, are involved, BBCW has appointed a Brand Guardian who is responsible for liaising with BBC Public Service to ensure that our activities do not create the potential for brand damage.

  5.26  Partners, such as UKTV and 2E, are contractually obliged to meet the BBC Editorial Guidelines. BBCW Commercial Policy holds regular meetings with staff at JVs and provide training and advice on editorial and fair trading issues.

  5.27  For each new project launched by BBCW, the Four Commercial Criteria process requires substantial interaction with BBC Editorial Policy, Fair Trading and relevant Public Service programme makers. This helps to ensure that the project will comply with BBC Editorial Guidelines and not pose a reputational risk to the BBC brand.

BBC's views on the appropriateness and effectiveness of this governance framework

  5.28  The governance framework works and has resulted in BBCW's remit being changed and BBCW exiting from or otherwise reducing its exposure to businesses that were proving non-core or otherwise underperforming. For example, as a result of the Commercial Review in 2004 a number of non-core magazine titles were sold (eg Eve); trailing of BBCW products on BBC public service channels was stopped and under-performing activities were restructured (eg majority shareholdings in general book publishing and formal learning products were sold and BBCW high-street shops were shut down).

  5.29  It is for the BBC Trust ultimately to decide on the governance of the BBC's commercial subsidiaries but the BBC Executive acknowledges that it is appropriate that BBCW should operate under a more complex system of governance controls than its commercial counterparts. This is inevitable, given that BBCW operates within the constraints of the BBC's "public purposes" and fair trading obligations.

  5.30  BBCW's controls ensure the effective scrutiny of any proposed new projects. For example, the recent acquisition of Lonely Planet (LP), as a potential commercial activity for the BBC, underwent detailed analysis to ensure that it fitted with, and was appropriate for, the BBC's public purposes; and that LP was connected, other than merely in financial terms, with the ways in which the BBC promotes its public purposes. The acquisition was then analysed specifically both in terms of the six aspects of the BBC's public purposes and the 4CCs. Independent external advisers supplemented the internal teams to ensure that all aspects of the transaction were fully analysed, from valuation to competition law compliance, across the territories where LP operated.

  5.31  The appraisal process involved an escalation of reviews: initially, BBCW management prepared its "Commercial Criteria Assessment". This was approved by BBCW Executive Board (including external non-executive directors) and then sponsored by the BBC's COO before final approval by the BBC Executive Board (again including external non-executive directors). Additionally, the BBC Controller of Fair Trading was required to approve the Assessment.

  5.32  LP is subject to all Fair Trading procedures and will not receive Public Service promotion nor access to the BBC archive, other than on market terms and under written agreements approved under the Fair Trading regime. Further, the regime is audited annually by external auditors to ensure that the regime is functioning properly.

  5.33  Similarly, the development of BBC.com, the internationally tailored commercial version of bbc.co.uk, was approved by the BBC Trust in 2007. Concerns were raised about the financial and operational separation between the BBC's public service activities and BBCW's commercial activities, and about ensuring fair transfer pricing between the BBC's public service activities and its commercial activities. BBCW was able to resolve these issues by working closely with BBC Fair Trading, its Global News Division and Future Media & Technology along with the BBC's Editorial Policy and Regulatory Legal divisions. Additionally, the BBC commissioned external consultants to undertake a review of market practice to identify the appropriate rights payments regime between bbc.com and the BBC for access to bbc.co.uk content. This demonstrates the degree of rigour that the BBC employs in relation to assessing significant new projects by BBCW.

  5.34  The effective governance regime similarly extends to the investigation of instances of alleged non-compliance with Fair Trading Guidelines by the BBC. There were five Fair Trading complaints brought against BBCW in the last year. The Executive Fair Trading Complaints Panel, which includes three of the BBC Non-Executive Directors, investigated and rejected all of them.

  5.35  As regards "editorial standards", the protection of the BBC's reputation and brand is a prime consideration for BBCW. Accordingly:

(a) BBCW has implemented a wide-ranging and extremely detailed set of editorial policies and rules. These operate right across BBCW's divisions and in all geographies where BBCW is active to maintain day to day control over all BBCW-distributed content.

(b) BBCW undertakes internal sampling to test the effectiveness of its governance procedures as required under the Fair Trading Guidelines.

(c) BBCW has provided details of the editorial processes in place, as well as evidence of their operation, to BBC Editorial Policy.

  5.36  The BBC keeps the suite of governance and compliance controls and processes under regular review, to ensure that they remain fit-for-purpose. The BBC Executive Board, in discussion with BBCW and the Trust, are currently undertaking such a review. We will make adjustments considered necessary, in the light of changes to the commercial opportunities open to us and BBCW's activities, to enhance the control and assurance we need.

6.  THE FUTURE OF BBC WORLDWIDE

This Section provides a brief summary of the future that the BBC sees for BBCW over the coming decade

Vision

  6.1  The scale and scope of the commercial opportunities open to the UK media industry raise significant challenges for BBCW which we believe must remain a significant commercial enterprise renowned for high quality, trustworthy, and distinctive content that sets it apart from our major international commercial competitors.

Ethos and business rationale

  6.2  BBCW will be held to account by the BBC Executive and Trust against its performance, in line with the 4CC, against three objectives:

—  to maximise the long term financial contribution to the BBC's core Public Service operation, for the benefit of UK licence fee payers;

—  to contribute directly to the BBC's public purposes, in particular "bringing the UK to the world"; and

—  to enhance the BBC brand and reputation.

  6.3  The BBC is confident that these objectives are consistent and self-reinforcing—put simply, the business will only maximise the long term financial contribution it makes if it adheres closely to the BBC's values and public purpose ethos on which our reputation for quality, trustworthy and distinctive content has been built. These objectives will pervade BBCW's culture, values and decision making at every level.

BBCW's position in the wider market

—  BBCW can best promote the BBC overseas and ensure maximum attribution back to the BBC for its high-quality programming as a direct-to-consumer business, with direct relationships with mass audiences in our target markets and through our target media channels. The business will operate across a broad range of countries, products and services.

—  BBCW will operate under the BBC brand in the UK and internationally. At the heart of the commercial offering will be the BBC's audio-visual archive, supplemented both by content generated by BBCW itself and by acquired rights from third parties where needed to exploit fully the value achievable on behalf of licence fee payers.

—  Future of BBCW by division.

  6.4  The focus of the BBCW's growth plans over the next few years in its current divisions will be:

—  Global Channels—a key vehicle for "bringing the UK to the world", this is a high priority and presents a strong growth opportunity to maximise returns for licence fee payers and penetrate more deeply BBCW's target markets.

—  Sales and Distribution—in this important sector of the UK creative economy, BBCW is already Europe's biggest exporter of programmes, but there is further growth potential in newly emerging markets.

—  Magazines—an established UK business which helps extend the reach of BBC programmes and genres, this division has scope to extend internationally on the back of our planned growth of audio-visual output to a wider consumer base, particularly in target markets.

—  Home Entertainment—a similarly established UK business focussed on DVDs, audio books and music CDs and with similar growth potential internationally.

—  Content and Production—this division has the opportunity to build on recent successes in developing, licensing and producing TV formats for broadcasters around the world.

—  Digital Media—an emerging opportunity to help future-proof and generate further revenue on behalf of BBC licence payers from web-based media distribution.

—  Global Brands—a relatively new business area to manage internationally acclaimed properties that have global reach (eg Top Gear) into which we will place new brands as they emerge for focused development.

Financial targets

  6.5  BBCW's current five year strategic plan has as its base case:

—  double-digit revenue growth to over £1,200 million by 2011-12;

—  a target that overseas activities should account for around 60% of revenues by 2011-12. To this end BBCW is currently committing significant investment to achieve major revenue and profit growth in the USA, India and Australia;

—  a doubling of operating profits over the same period, from £88 million to £175 million, a CAGR of 15%; and

—  a projected annual dividend to the BBC of £77 million in 2011-12, taking the seven year cumulative total dividend to £467 million (the total direct investment in UK content production—including co-production—is forecast to be nearly £600 million over the next five years).

  6.6  These plans and targets are reviewed annually in addition to the broader periodic reviews of the BBC's commercial strategy. One such broader review, instigated by the BBC Trust with terms of reference agreed between the Trust and Executive Board, is currently underway.

Conclusion

  6.7  The BBC faces a challenging and exciting decade ahead as we seek to maximise our commercial revenues through appropriate activities in a fast-changing world, as charged by successive Governments. We have the potential to deliver substantial financial returns for the licence payer, contribute significantly to the public purposes of the BBC, and enhance the BBC brand and wider reputation of the nation and its creative industries. The BBC therefore sees BBC Worldwide as an important part of our future and expects the company to build strongly on its successes of recent years. Exploitation of the commercial opportunities open to us will be managed in a controlled, well governed and appropriate way to deliver long term and sustainable value to the licence fee payer.

  6.8  The BBC welcomes the Select Committee's review of our commercial activities, as part of the process of public scrutiny that is central to our business. We are grateful for the opportunity to provide this submission and look forward to discussing it with you.

7.  BBC WORLD NEWS AND BBC RESOURCES

This final Section provides a brief summary of the BBC's other commercial subsidiaries, BBC World News and BBC Resources

—  BBC World News: Like Worldwide, the BBC's commercially funded, international 24-hour news channel acts as an ambassador for the UK overseas. Governed separately from Worldwide as part of the BBC's Global News division (alongside the World Service), World News brings the latest English-language news and information to more than 200 countries and territories around the globe. Although BBC World News has not enjoyed the same levels of commercial success as some parts of BBC Worldwide, it is moving rapidly towards achieving profit (losses halved in last year alone and advertising revenues have increased by more than 20% annually for the past six years). Importantly, audience research also indicates that the public value delivered by BBC World News is substantial. Like all of the BBC's commercial subsidiaries, its commercial value and other contributions to the BBC's aims are the basis of periodic review.

—  BBC Resources: During 2007-08 BBC Resources was offered for sale either in whole or in part and, as a result, the Outside Broadcasts business was sold to SIS Outside Broadcasts Limited on 1 April 2008. The stock of the Costumes and Wigs facility was also sold to other suppliers. At present, both Studios and Post Production remain as commercial businesses within BBC Resources Ltd while a review of the BBC's future requirements is completed.

Annex 1

BREAKDOWN OF BBCW RETURNS FROM 2004-05 TO 2007-08

Annex 2

BBCW MARKET SHARES

Annex 3

BBCW ANNUAL REPORT 2007/08

  Available on request or see: http://www.bbcworldwide.com/annualreviews/review2008/documents/BBC_WORLDWIDE_AR_2007-08.pdf

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4   Based on 2007-08 figures. Back

5   House of Commons Official Report, 20 May 2008, Col 51WH. Back

6   March 2005 Green Paper: A strong BBC, independent of government http://www.bbccharterreview.org.uk/have_your_say/green_paper/gp_roleofbbc.pdf Back

7   What you said about the BBC, DCMS (2005). Back

8   House of Commons Official Report, 2 March 2005, Col 959. Back

9   OFCOM Communications Market Report (2008) and BBCW research. Back

10   OFCOM Review of the Television Production Sector (2006): http://www1.bsc.org.uk/consult/condocs/tpsr/tpsr/ Back

11   ComScore Worldmetrix, excluding UK-Jan-Jun 2008 average. Back

12   BBCW Annual Report 2007-08. Back

13   PWC, 2007. Back

14   Rights of Passage 2007, Television Research Partnership (July 2008). Commissioned by PACT and sponsored by UKTI, Granada International, BBCW and All3Media International. Back

15   PWC, 2007. Back

16   ABC (Audit Bureau of Circulations), 2008. Back

17   PWC, 2007. Back

18   BVA (British Video Association) data, 2008. Back

19   http://www.socialreport.msd.govt.nz/cultural-identity/local-content-nz-television.html Back

20   OFCOM, http://www.ofcom.org.uk/research/cm/icmr06/tv.pdf Back

21   Nielsen Media Research, 2008. Back

22   PWC, 2007. Back

23   Roper Global Media Brands Study 2007; Flamingo Global Consumer research Nov 2007; Henley Qualitative Research; Synovate US; Brand Driver consumer research 2008; BBC Worldwide Customer Satisfaction Survey 2008. Back

24   This can be a particular benefit for the smaller independent production companies, who are already facing strong competition from the increasingly concentrated groups of "super-Indies", which together now account for the lion's share of revenue and growth in this sector eg Annual revenue RTL (owner of Fremantle) £4,500 million; NBC Universal (owner of Carnival) £8,000 million; IMG £222 million; All3Media £203 million and Endemol UK £160 million (total Endemol revenues are c £720 million). Back

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Prepared 7 April 2009