Examination of Witnesses (Questions 140-159)
SIR MICHAEL
LYONS AND
MR MARK
THOMPSON
18 NOVEMBER 2008
Q140 Helen Southworth: I think you
have learned over the past few weeks that you need something beyond
not needing to be anxious. You actually need to have systems in
place to make sure—
Sir Michael Lyons: That is right.
That is exactly why, first, we have strengthened and will continue
to review the fair trading arrangements and, second, the Trust
felt back in the early months of this year that we should look
closely at Worldwide and have reached an emerging conclusion that
the boundaries need to be tightened.
Mr Thompson: There is also, it
should be said, an annual independent fair trading audit. That
is already in place. Within the public service there are very
powerful incentives for programme makers to get the maximum commercial
revenue they can. For Planet Earth, for example, the big
natural history programme, something like 70% of the budget for
that programme was raised through UK and international commercial
revenue. It is a very expensive relative to the kind of money
any UK channel would pay to be able to show the programme. In
terms of the trading relationship between programme makers and
public service commissioners on the one hand and any distributor
on the other, believe me, there is a very, very powerful incentive
on the part of those people who are trying to get their programming
made to ensure that they are getting the best possible value out
of any distribution or co-production arrangement, and so there
is a naturally appropriate kind of market operating, where the
people on the public service who are trying to get distribution
want to get as much money as possible, want to try to persuade
Worldwide distributors that the programme is worth as much as
possible, while at the same time colleagues in Worldwide and all
the other distributors are, understandably by and large, trying
to buy rights for us at a price which they think is commercially
efficient. There is a natural and healthy debate that plays out
through the market. But, as I say, a significant proportion of
the rights do not go to Worldwide.
Q141 Helen Southworth: Beyond that
market operation there is a duty on the BBC specifically as the
public broadcaster, paid for by the taxpayer through the licence
fee process, that does expect a better and more extensive form
of scrutiny and a better confidence within senior governance at
the BBC—
Sir Michael Lyons: Absolutely.
Q142 Helen Southworth: —and
that you are confident that those things are happening because
you have systems in place not because the market operates.
Sir Michael Lyons: Absolutely.
If I have failed to combine the confidence that we have in the
current arrangement with the proviso, as you have rightly established,
that one cannot know what is happening in every job in every detail
but are we confident that the processes are strong enough, then
they are working well. Might they be stronger? That is a continuing
dialogue, led by the Trust but on which the Director General and
his colleagues are focused, and it is included in this review.
I want to give you assurance on that. Again, this is something
which, when we reveal our work, you will see reflected in the
work that has been going on since June.
Mr Thompson: The topic is already
taken very seriously within the organisation.
Sir Michael Lyons: Absolutely.
Mr Thompson: Which is why we had
this annual independent audit, which is why we have a Fair Trading
Committee on the Executive Board as well as Trust oversight and
a powerful fair trading advisory function in the organisation.
We recognise that it is a very important topic.
Q143 Paul Farrelly: We are going
to get to Lonely Planet very shortly. It has, in large part, prompted
this inquiry and I am sure in your own review you are talking
about it. I want to explore the appropriateness of your £50
million threshold approval which you talked about when you were
last here. Before that, I still do not have a feel for how the
Trust exercise oversight over BBC Worldwide. Could you briefly
explain? In Trust papers—I have not seen them—is there
a standard agenda item in which some Trust activities are reported
for information? Is there a separate sub-committee of the Trust
that considers BBC Worldwide more actively? Are there any particular
actions of BBC Worldwide, apart from Lonely Planet, that you can
name that have been specifically remitted in your time there to
the Trust for approval rather than just information?
Sir Michael Lyons: Let me start
by going over the structure. The BBC Trust, of course the parent
body of the BBC, in this context is probably best seen as the
Supervisory Board. The Executive Board is the parent company for
Worldwide. Of course Worldwide has its own competent and strong
Board itself. What are the respective responsibilities? The responsibilities
of running the business, like the Board chaired by Etienne De
Villiers—and you will have a chance to speak to him later—
Q144 Paul Farrelly: We know all this.
I wonder if you could briefly address the oversight.
Sir Michael Lyons: But it is very
important that I do go into this, because if I were to concentrate
only on the things that the Trust does from week to week, from
year to year, you might miss this underpinning structure which
is very important. Of course the Executive Board is focused as
the public service owner of Worldwide and therefore manages fair
trade intentions and reputation, the four tests that need to be
applied. Where does the Trust come into this and how does that
feel on a year-by-year basis? The Trust approves annually the
annual report of Worldwide, which is detailed in terms of plans—and
of course even over a year opportunities come up, but nonetheless
that is a detailed plan for the year ahead. Any investment that
either involves an expenditure of £50 million or above, or
is in a novel area of activity, has to be referred to the Trust.
In addition to Worldwide, there have been two other cases in the
period that I have been Chairman. Perhaps the one on which I should
focus is the decision about bbc.com, the decision whether
advertising should be allowed on the worldwide website as a means
of drawing income for, amongst other things, to invest in BBC
World TV service. That gives you a sort of feel of the issue.
Q145 Paul Farrelly: What is the other
example?
Sir Michael Lyons: Kangaroo is
the other issue. Neither of those came up against the £50
million ceiling but were both matters which automatically came
to the Trust—it was not a question of being referred—because
they were matters of novel activity.
Q146 Chairman: There are not any
examples where you have said no.
Sir Michael Lyons: Yes. Let me
just mention that in those three examples there were quite different
decisions. In the case of Lonely Planet: a clear yes—always
with qualification, so in the case of Lonely Planet very clearly
that this had to demonstrate that it really did exploit BBC intellectual
property rights.
Q147 Chairman: We will come on to
that.
Sir Michael Lyons: We will come
on to that. I am sure we will. In the case of bbc.com:
after very careful deliberation and dramatic strengthening of
the editorial controls around bbc.com, an approval for
that to go forward but under close monitoring and scrutiny. In
the case of Kangaroo: not a decision to agree to this but a decision
that the Executive could conduct further discussions with partners
prior to bringing a detailed case back to the Trust. There were
two reasons for that: first, an a priori decision that
given the success of the iPlayer it was legitimate to discuss
whether there might be a commercial variant with partners, and
therefore it was legitimate for those discussions to take place,
but, second, the proposition would be shaped by the discussions
and therefore there was quite understandably a concern on the
Trust's part not to make a decision before the form of the proposition
became clear.
Chairman: We may come on to Kangaroo
in due course.
Q148 Paul Farrelly: Again, before
£50 million—
Sir Michael Lyons: I missed out
the role of our Finance & Strategy Committee as well, Chairman.
Q149 Paul Farrelly: Given that you
have this in your memo, are there examples when you have looked
more closely at what BBC Worldwide has been doing where you wish
the Trust had been given that particular decision for formal approval?
Sir Michael Lyons: Let me underline
that this work is not finished. Indeed, one of the things I am
eager to do is to make sure that your own deliberations feed into
that before we do reach a final conclusion, and so I am here,
in part, in listening mode today. But I do not start from the
presumption that the right way forward is for the Trust to introduce
a whole set of more detailed controls. I believe that it does
have the right role in terms of the strategic direction of Worldwide
and that is why a review of this nature is quite appropriate.
It should set guidelines and expectations, but frankly the future
that I aspire to is one where all of Worldwide itself has clearer
direction on the expectations of it, clearer guidelines on where
the little boundaries are, and it is therefore able to operate
as an efficient commercial operation within those rules. The notion
that this is some form of organisation where we are constantly
pulling it back will not deliver the best for licence fee payers.
Q150 Paul Farrelly: I understand
that.
Mr Thompson: The Executive Board
and its non-executive Directors play a significant role in pre-examining
and weighing up of Worldwide proposals: measuring them against
the Four C's—indeed we report against the Four C's—looking
at the financial hurdles—commercial efficiency is very important—and
looking independently and scrutinising proposals to ensure that
the financial challenges that we set (for example, for an acquisition
like Lonely Planet) are credible, have been independently
evidenced and verified, and so forth. There are plenty of occasions
of conversations about proposals that one might consider but which,
in the view of the Executive Board with its non-executive Directors,
it is decided for whatever reason does not make strategic sense,
does not fully comply with the Four C's, does not feel like the
right thing to do, and therefore should not go forward to the
Trust. Plenty of proposals fall by the wayside.
Q151 Paul Farrelly: Clearly you want
to make sure that you are not in the position of being perceived
by the broader reach of the BBC operations as the doting old granddad
who they slip things by while you are preoccupied with the likes
of Jonathan Ross. You want to have a measure of—
Sir Michael Lyons: A reason for
not being preoccupied unduly, for not making mistakes that lead
to energy being consumed by such things.
Q152 Paul Farrelly: Is the £50
million threshold too low?
Sir Michael Lyons: No, I do not
think it is, but let me again say that these matters are open
for review in this process. I can only say that because of the
other controls that are in place. Let me just come back on something.
As I was going through the different checks and balances that
are in place, I omitted the role of our Finance & Strategy
Committee which each quarter receives a report from the Executive
board outlining exactly the process that Mark has shown to you.
That has been a very searching set of discussions. If you want
to test whether the Trust is alive and awake on this role, Mr
Farrelly, the real question is that less than two years into its
life it is doing a substantial job of looking at the guidance,
boundaries and expectations of Worldwide, not because of the discussion
around Lonely Planet, but frankly much more about a more foresighted
view of the difficulties that might entail from running a very
substantial international business with the risks that we inevitably
see on our own patch magnified across the world. That is really
what the Trust has been focused on here. There is nobody asleep
on the job.
Q153 Paul Farrelly: The £50
million the BBC has claimed is "low in financial terms compared
to the equivalent `shareholder consent' requirement for publicly
listed companies." The answer to that is that it is, up to
a point, low copper, but it is not with respect to the size of
BBC Worldwide, is it?
Sir Michael Lyons: I think you
will find that it is with respect to the size of BBC Worldwide.
What we have here is not a gap between Worldwide and the Trust,
where the only things that are considered are those which are
either involved in investment for more than £50 million or
are new areas of venture. You have in the middle, as we have outlined,
the role of the Executive Board, with very close scrutiny and
engagement of Worldwide and at a much more detailed level. That
is as it should be.
Mr Thompson: In the Executive
Board we have absolute plc-calibre non-executive Directors. The
senior non-executive Director, for example, is Marcus Agius, the
Chairman of Barclays. We would expect to apply the full "plc
board level" to both financial but also strategic, and, as
it were, public service scrutiny to all of these proposals. We
are regularly tested by the Trust on that. If I may say so, in
exactly the same way we would look at a much broader range of
proposals below the £50 million and ensure that the entire
direction of travel for Worldwide both makes commercial sense
but also makes sense in terms of our obligations under the Charter
and Agreement. I would say that in some ways there is a danger
of a slight misapprehension of what is going on here and I think
you should look quite closely in terms of governance at the extent
to which the Executive Board and its controls pass muster in relation
to other plcs.
Q154 Paul Farrelly: I was just trying
to get a feel for that.
Mr Thompson: I would hope that
in relation to the Guardian Media Group the Executive Board of
the BBC would go through a very similar process. I would just
say that I would be careful of assuming that the equivalent in
our system is BBC Trust versus Guardian Media Group. The Scott
Trust I do not think looked at any investment proposals at all.
We have the Executive Board which is, inside the Charter and Agreement,
intended to operate not in all ways, but in many ways, to the
level of and with the same kind of controls in place as a plc
board and with Directors of the calibre to do that.
Q155 Rosemary McKenna: Can we briefly
cover the issue of compliance with the four commercial criteria.
What is the purpose of BBC Worldwide? Is it to bring the UK to
the world? You argue that "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'." However, the
agreement between the BBC and the Secretary of State says that
"'commercial services' means services which are provided
or other activities which are undertaken, not primarily (or at
all) in order to promote the BBC's Public Purposes, but with a
view to generating a profit ... ."
Sir Michael Lyons: I am clear
on this; the Trust is clear on this. The primary purpose for BBC
Worldwide existing at all is to exploit the rights generated by
the BBC's work in the United Kingdom. There is a dividend in two
parts from that: one literally coming out of the profits generated
by Worldwide, and the second from the monies that Worldwide is
able to invest in BBC programmes—and therefore we are able
to do more than we would do just with licence fee payers' money.
Our estimate is that the value of those two things taken together
at the moment is something like £9 for every licence fee
payer—so not insignificant. The primary function is to draw
some income back so that the BBC can do more and so that the pressure
on the licence fee payer is moderated. But we have to recognise
and welcome and celebrate that Worldwide has a bigger contribution.
It contributes to the promotion of British talent. It also enables
the BBC's programmes to be seen across the world, either directly
or in terms of local versions developed out of BBC ideas. It is
right to say that it contributes to that fifth purpose, charged
on the BBC as a whole, of taking the UK to the world and the world
to the UK. It contributes to that but its primary—primary—purpose
is to secure a financial return on the BBC's intellectual property
rights.
Mr Thompson: It is worth adding
that it is not some sort of optional extra. Since the Thatcher
Government of the 1980s put a requirement on the BBC to regard
its commercial activities as important in supplementing licence
fees, it has formed a part of successive licence fee settlements
and Charter and Agreement settlements under the present settlement.
One part of the settlement depends on a significant increase on
the commercial revenues which the BBC can derive. We are tasked
with doing this. It is interesting that one of the four criteria
is around commercial efficiency, of running the commercial businesses
in a commercially efficient way.
Sir Michael Lyons: Chairman, could
I alert you to the fact that I do have a journey to make to Cardiff,
where we are holding the Trust Board meeting tomorrow. You may
say I should give you shorter answers. Perhaps we can compromise.
Chairman: That is exactly what I am saying.
Q156 Paul Farrelly: Could we turn
to Lonely Planet. Every business in its growth is a mixture of
organic growth and acquisition. Some would say that British businesses
are too balanced, like Americans, in favour of acquisitions. When
it comes to the likes of Lonely Planet, which is a brand on its
own—it is not a brand that is unheard of that you can develop
because you think the name is good—with respect to non-related
businesses, such as Hello and Grazia with The
Times of India that we have heard about, with respect to spoiler
productions, such as other publishing houses often launch, or
with respect to independent production houses, whether in the
UK or somewhere else, that have first rights of refusal, there
is a bit of discomfort that the BBC should be behaving in that
sort of way. Sir Michael, in terms of the Trust, what assessment
have you made so far of the acquisition strategy of BBC Worldwide
and whether its returns have been reasonable? To what extent do
you believe it is part of your role to do that?
Sir Michael Lyons: You properly
capture—and I thank you for that—that any commercial
organisation will inevitably, if it has any energy, if it is encouraged
by its shareholders to maximise a return, get out and explore
the boundaries. I do not shrink from that as both inevitable and
desirable. We want a commercial wing that feels that it has the
confidence to go out and look for new opportunities and that is
what you see reflected in that summary. Do we feel that from time
to time it is necessary to review the guidelines? For a number
of reasons, particularly focused on those four principles, how
you protect the BBC's reputation, how you avoid a situation of
complicated funding arrangements that go beyond the existing capital
allocation of the BBC, yes, I do think it is appropriate to review
those. Let me turn now to your specific question on Lonely Planet.
This was considered in detail and at length by the BBC Trust and
it was approved. It was approved against the four criteria. The
primary reason for the proposition coming forward, the primary
reason on which it was approved, was that it was seen to be a
clear opportunity to explore a very considerable amount of intellectual
property the BBC holds within its archive and within current programmes
which relate to travel and international affairs. It seemed a
natural extension of the purpose of Worldwide which is to seek
to exploit the intellectual property of the BBC. Did it look as
if it was a good commercial proposition? Yes, it did—not
least because the owners had approached BBC Worldwide as their
preferred buyer. It is pretty rare, I have to say, but any company
that is approached by a strong organisation as their preferred
buyer is in a strong position as the buyer. We were satisfied
on the basis of that, and took detailed external advice as we
worked our way through those deliberations. You are right to ask
what has happened since then. We have received a number of reports
on progress. What is my judgment on those reports? Things have
developed, as we have expected, but it still remains a matter
for further reflection whether this merger will deliver all of
the benefits that we expected for this purchase. Does that surprise
me at this point in the life of the purchase? No, it does not.
But the case is still to be proved.
Q157 Paul Farrelly: The notes from
the BBC Trust Unit are hardly unequivocal as to whether it fitted
BBC Worldwide and the BBC's remit. Essentially, what was wrong
with the BBC brand? Why did you have to go out and buy an established
brand?
Sir Michael Lyons: This was not
the first time Worldwide had acquired other organisations as part
of its purpose at getting the best value from BBC IP. This was
not founded on: Do we want a travel magazine? You might want to
query with John Smith and Etienne de Villiers later on the other
things that are brought to them which they reject. This was seen
as a very interesting vehicle to promote BBC's IP and its brand.
It is not a question of independence of its brand. It is the BBC
and its intellectual property rights and its brand. That was the
test.
Mr Thompson: We have many, many
powerful international brands like BBC News, CBeebies,
TopGear, Dancing with the Stars and so forth. We did not have
a compelling category brand in travel. We did have literally thousands
and thousands of hours of BBC IP content about travel and about
other countries—their history, natural history, geography
and so forth. The commercial judgment made would be that the Lonely
Planet brand would be a very effective, potentially multimedia
vehicle, particularly with growth potential on the web, for a
large body of the catalogue which did not sell particularly well
internationally and getting it away in a much more commercially
efficient way. And the test of course will be whether we can achieve
that over the coming years.
Sir Michael Lyons: Absolutely.
Mr Thompson: That is, if you like,
the logic behind the purchase.
Q158 Paul Farrelly: It is a hard
argument to sell, given the power of the BBC brand. You mentioned
outside advice. What procedure did you go through to satisfy yourself
that the price was fair and reasonable?
Sir Michael Lyons: We took external
advice on this.
Q159 Paul Farrelly: From whom?
Sir Michael Lyons: BBC Worldwide
of course took advice on this matter. I am happy to give you the
detail of that, but I am eager to keep to the time that we have—
| 
