Examination of Witnesses (Questions 180-199)
MR JOHN
SMITH, MR
ETIENNE DE
VILLIERS, MS
ZARIN PATEL
AND MS
CAROLINE THOMSON
18 NOVEMBER 2008
Q180 Chairman: The Four C's you think
have been satisfied by the Lonely Planet magazine.
Ms Thomson: Yes.
Mr De Villiers: Yes.
Q181 Chairman: Including the one
that is stopping it distort the market.
Mr De Villiers: Yes.
Q182 Chairman: Despite the fact that
we have publishers of trade travel magazines who are saying they
will go out of business if it goes ahead.
Mr Smith: Caroline has said that
the Four C's process has been gone through and we have satisfied
that process—that it complies and therefore does not distort
the market. I think the trouble in the commercial world is that
if you enter any market space it is easier to say that entering
the space itself is going to distort the market. If you take magazines
as a specific sub-set of the things that BBC Worldwide does, indeed
it is where Worldwide began. You will recall the whole company
began in 1923 with the publishing of Radio Times. That
was a magazine which, by the way, does not carry the BBC's brand
on it. It started its life as a magazine publisher all those years
ago—we have been doing it for 80 years—and now publishes
about 60 magazines in various sub-sections of the magazine market;
for example, food, cars, and so on. If you take a sample of those
sub-sections—and recently we have launched a Match of
the Day magazine into the football market for the football
magazine market, and we have magazines in food and those other
sectors—what tends to happen—and we can provide the
evidence for this—is that the overall market in that sector
grows as a result of our arrival, rather than shrinking. Whereas
people fear that we are going to stifle competition, that does
not happen at all. More magazines occur as a result of the magazine
growing, because more people have an interest in it. I will add,
if I may, Chairman, that when we watched the evidence being given
a couple of weeks ago to you, we were surprised by and did not
know that Wanderlust magazine—which I must say is
a great magazine and I read it regularly—was having its
tenth anniversary on the day that we were proposing to launch
the Lonely Planet magazine. We just did not know that.
In deference to Wanderlust—and I have contacted the
lady since the day of the evidence—we have put back our
launch because we absolutely do not want to stifle competition.
It is not in our interests at all to stifle competition. We want
the competition to be healthy and fair and cause the market to
grow and not to find companies like that suffering as a result.
We have moved our own launch. If there are more things we can
do to help Wanderlust in its mission, bearing in mind its
values are similar to our own in the travel space, we will do
it.
Q183 Chairman: We are going to return
to this in greater detail but I cannot resist pointing out that
Wanderlust's concern was not that you were launching on
the same day as its tenth anniversary but that you were launching
at all.
Mr Smith: I sought to answer both—
Chairman: If you really want to help
them I think they would say that the best thing you could do is
not to go ahead. We are going to come back to that in more detail.
But I will bring in Helen Southworth first.
Q184 Helen Southworth: How do you
ensure that when you are purchasing the rights to BBC programmes
that you are paying a fair market price?
Mr Smith: Chairman, I think there
are two angles to that answer. There is what we do as BBC Worldwide
to bid the right amount, and then what the BBC does to make sure
it is receiving the right amount. Let me deal with the first and
maybe Caroline will deal with the second. We have a process which
by the way is identical whether this is a BBC programme or a programme
coming from the independent sector. It is absolutely the same.
We essentially ask our sales force who are out in the field around
the world, in lots of offices in lots of countries, selling programmes
all the time, and our other businesses who may well benefit from
buying a right (for example, DVD or selling the programme on to
UKTV in the UK or our channels around the world or our magazines
or whatever bit of the business is likely to benefit from buying
the programme) what they think they can make from this particular
programme in the market. Often we have not seen the finished product,
so we are exercising that judgment before we have even seen it,
but on the basis of our understanding of the talent, the director,
dah-de-dah, we take a view about how much money we think we are
going to be able make from it. When we have done that, we then
discount it, take a view about how much money we think we need
to make by way of profit from it and then make a bid. Sometimes
we get it wrong, sometimes we get it right, but we try to do it
exactly fairly across independent and in-house, across all genres,
in exactly the same way. The net effect, as I have already mentioned,
is that overall our portfolio of activities we are earning a 13%
return on sales.
Ms Thomson: Obviously the mirror
of that is how does the BBC make sure it is getting the right
money from Worldwide or indeed from the other distributors. Worldwide
is our preferred partner, but, as we were saying earlier, some
15-20% of our output goes out to other distributors as part of
this process. The crucial thing is that the process at the public
service end is run by something called the Commercial Agency,
which is part of BBC Vision. It is part of the public service
side. It has no managerial relationship with Worldwide at all.
It is run entirely independently. It is a team of some 28/30 people.
They are employed for their expertise in understanding the markets.
They are run by a former Managing Director of NBC in Northern
Europe and they employ people who are experts in certain markets.
When they get a programme and they want to sell it, they make
an assessment of what they think is the correct market price.
They analyse the returns from previous exploitation of similar
programmes by Worldwide, they look at what they have got in the
market from selling similar programmes to other distributors,
and they make an assessment. Worldwide have the first right to
bid for that programme. If they bid the same sort of level as
the Commercial Agency has made the assessment, then they get the
programme. If they do not, then the programme is put on the market
and it will go to the distributor who bids more.
Q185 Helen Southworth: There is a
little series of questions that I want to ask which moves from
place to place, I am afraid. How do you ensure that you do not
have any form of cross-subsidy, perhaps from something on which
you have made more money through the BBC or on which you have
made a better bargain through the BBC, to enable you to overbid
for other programmes that that you are buying on the open market?
The allegation could be that you are using licence fee payers'
funding in order to allow you to overbid in the market.
Mr Smith: On a point of clarification,
taking the very last point first: there is no licence fee payers'
money involved in this at all. That is very, very important. All
of this is commercial money that is being invested to buy the
rights in order to then exploit them around the world. That is
very, very important.
Q186 Helen Southworth: This is why
I say there is a little sequence of things. If you were to buy
from the BBC when you have a preferential bidding process at a
reduced rate, that would be a subsidy.
Mr Smith: That would be.
Ms Thomson: The first check is
at the BBC end, the public service end, at my end and at Zarin's
end of it. We make sure that they are not able to underbid because
we benchmark and market test the prices they pay. That is the
first level of security, that you are not able to make an unreasonable
profit.
Q187 Helen Southworth: The second
one would be that you would use your commercial weight or the
fact that you have a preferential buy-in from a huge supplier
to distort the market by overbidding.
Mr Smith: If we were overbidding,
we would not be able to earn a 13% return across everything that
we do. If we were overbidding, we would not make any money.
Q188 Helen Southworth: If you were
cross-subsidising, you could still overbid, and that would have
the effect of distorting the market for those people who did not
have that huge supply. That would enable them to bid above what
they thought might be the market price for a specific programme
they particularly wanted to get because it would give them market
share when they were selling it.
Mr Smith: We are just one of the
distributors in the market-place. We are a big distributor. By
UK standards we are the biggest. But, as Mr Thompson said earlier
on, if you ask the independents from whom we buy a good proportion
of our total catalogue how they feel about having us as their
distributor, whenever they are asked voluntarily—and I am
not talking about Pact, the trade body, I am talking about the
companies themselves and we deal with 210 of them—they regularly
vote us as the company they would most like to have distributing
their programmes. That has been the case in three out of the last
four surveys carried out each year. So we are a big distributor
and they like dealing with us, but we are not big by, let us say
US media company standards. In the context of any of the big US
giants, we are absolutely tiny. We are bigger than other distributors
in the UK but we are not big on a global scale by any means. We
have ambitions to be bigger, of course, but we are relatively
small in the context of the world media stage. But we are judged,
I am judged, based on the financial performance of BBC Worldwide;
that is, the amount of profits I am making. For me to overbid
would depress my profits and that would mean that I would not
get the success that I am judged on, and my success is judged
based on the amount of profitability I am producing. Do not forget
that all of this is done for the TV licence fee payer, every single
penny. Every single penny of profit that is made here goes back
ultimately to the BBC. You have seen the calculation: we are generating
about £9 for every TV licence in Britain from what Worldwide
makes out of its activities.
Mr De Villiers: It is important
to understand that although I am not part of that process—it
is done at a level below that at which I am involved—this
is a process which I am familiar with. You bid on programmes by
establishing your ultimates: how much you believe that particular
programme will earn in its various levels of exploitation. You
never know upfront. Nobody knows anything in the film and television
system until after the event, and then we are all geniuses. But
you try to do your very best, and you make a programme. Some work,
some do not. It is humbling to most. You need to have a system
that measures against that, so that if you are consistently overestimating
certain tracts of revenues you need to learn from that. This is
done on a case-by-case basis. I know, because John and I talk
about this and he gets annoyed with me, that we keep pushing to
see whether we can do it better. Can we bid more effectively?
Can we acquire more effectively? Within that process it is very
hard to see how a systemic overbidding can occur when each one
is looked at on a case-by-case basis, because it just would not
happen.
Q189 Helen Southworth: We have had
representation—I think that is probably the best way to
put it—during these hearings from people who suggested that
it would be far fairer if the BBC were to allow tenders for the
process of sales rather than having a direct and automatic process
for BBC Worldwide should it wish to have its stuff. Why do you
not do that?
Mr Smith: The relationship between
BBC and BBC Worldwide, bearing in mind the companies have the
same brand, is underpinned by an output agreement, by a supply
agreement, if you like, which is called the first-look agreement.
The first-look agreement is a typical feature of the media industry.
If you went to see any of the majors—and maybe Etienne could
speak from the Disney experience—you would expect to have
that. All it says is: We give you the chance as Worldwide to bid.
That is it. It is a first look. It is not any advantage in terms
of price and there is no guarantee you are going to get it either.
As I have already mentioned, we lose about 20% of the stuff because
we are not bidding the right amount. The reason why you have a
first-look agreement is because, by having a preferred distributor,
that preferred distributor is given the incentive and the means
to make the big investments necessary to build brands over a long
period of time; for example, launching a suite of BBC branded
TV channels around the world. Mark Thompson mentioned BBC America.
In America, indeed in America tomorrow, CBeebies in the Hispanic
language will launch a BBC branded channel for pre-school children
in the American market-place—the first time that has happened.
You only make investments like that knowing that it is going to
be several years before they reach profitability. Because you
believe that, you can continue to replenish the product supply.
You can continue to have great programmes—in the case of
CBeebies programmes like Teletubbies and In the Night
Garden and so on—because you are going to be in a situation
where you can bid for the rights, and if you bid the right amount,
you will win them, and then the channels are continuously refreshed
and eventually the channels make money. The first-look agreement
is designed to create a distributor, where the distributor is
given the incentive and the means to make the big investments
necessary in order to do that kind of long-term, big branded thing
that you would not do if, instead, you just fragmented your rights
around the market-place. Perhaps I might say one other thing.
I know you have had representations. People complain about the
fact that we have built some of these brands. I am going to mention,
briefly, Dancing with the Stars - which in the UK is known
as Strictly Come Dancing but everywhere else in the world
as Dancing with the Stars. TBI magazine rated it as probably
the world's greatest entertainment brand.[25]
It has only got to that place because we have invested an enormous
amount of money into building it into a hot property in many,
many countries, including in the USA where it is still a ratings
winner in its fifth or sixth season. We have put the investment
into that brand to make it into a global hit because that is what
BBC Worldwide does, and it is a hit not just on television but
there is merchandising, books, DVDs, dah-de-dah-de-dah, live events
and so on. If, instead, those rights had been fragmented around
a whole series of individual distributors who had bid for individual
amounts, would any of them have been willing to make the huge
investment necessary to build that into a global brand? Indeed,
would they have had the capability of building it into a huge
global brand? In the end, would that be better or worse for the
licence fee payer?
Q190 Helen Southworth: That was a very
interesting answer but it did raise with me the question about
the BBC's role in generating children's television. For example,
it is the BBC which commissions In the Night Garden - a
wonderful programme which raises my spirits very often—for
the British public—not, with all due respect, for the Americans
or wherever else, but for our interest.
Ms Thomson: Yes. It is very, very
important that the BBC carries on making programmes for British
audiences and that that is the imperative, serving licence fee
payers. It is what we are all here for. We get £3 billion
a year from licence fee payers. That is what we are here to do.
If we can, having done that successfully, make money out of it
which helps offset the licence fee by selling them overseas or
exploiting in other ways, then that we are also charged to do.
It is very important that the primary motive in the BBC is to
make sure that we make programmes which delight British audiences
first, and then John's activities come second. When we look at
how we are going to exploit these programmes, having made them,
we have a number of considerations we make in pursuing the strategy
of having Worldwide as our preferred supplier. The first is obviously
we want to maximise revenue, so we have to be convinced that that
is happening. I have explained how we feel that we get the benefits
of the market by doing this benchmarking process and by having
the Commercial Agency, which means that we would not get more
benefits from simply fragmenting the sales, but it is very important
to the BBC that in addition to that we have a number of other
things. One of the key things is control of the brand and how
it is exploited, so that if we are going to have CBeebies channels
in Poland and this Spanish channel and whatever and they are branded
BBC, that they live within our values. It is very important as
well in the context of printed media and magazines and so on.
Also, of course, the other benefit to us longer term—apart
from those John was talking about in relation to how he does the
exploitation—is that in Worldwide we are creating an asset
with value. That has an additional benefit to us. We would have
to be convinced that we could do all those things better by going
out to the market and we are not.
Q191 Helen Southworth: One of the
suggestions that you[26]
have made to us was that it would be at no cost to the BBC if
we were to put out all these programmes to the highest bidder
and that would then guarantee that you were getting the highest
price. Can you explore that a little bit with us? The evidence
we were given at one point was that all the BBC would need to
do was to send an email out.
Ms Thomson: Yes, I saw that.
Q192 Helen Southworth: That was something
that I found a little surprising.
Ms Thomson: Obviously it is an
issue for us to make sure that we have a system which is commercially
efficient in how we do this. We do not want to have to have an
enormously elaborate infrastructure. As I have said, we have about
28 people running our Commercial Agency. Within that, we feel
we can effectively benchmark. We do not think we could get better
commercial returns. 20% of our output is already distributed by
other people. We are able to benchmark what Worldwide pays us
against that. We do not feel we would get significant commercial
advantage from doing it any other way and we think we would lose
significantly on the asset creation and the brand support that
we get under this system.
Q193 Chairman: Caroline, you have
suggested that occasionally the BBC in-house production, BBC Worldwide,
would come to you for first refusal and say, "We wish to
have distribution rights for this BBC production" and you
would say to BBC Worldwide, "No, we do not think you are
paying sufficient for them. We are going to put it out to the
market."
Ms Thomson: Yes.
Q194 Chairman: Can you give us some
examples?
Ms Thomson: It happens in about
20% of programmes. Mitchell and Webb is one of the recent
ones.
Q195 Chairman: These are distribution
rights.
Ms Thomson: Distribution rights.
We could send you a complete list. Merlin is a recent one,
but that is an indie one but we had the rights to it. Vanity
Fair. We can give you a longer list.
Q196 Chairman: It was also suggested
to us in the evidence we received that there had been reports
that producers were threatened by the loss of a commission if
they did not agree to give distribution rights to BBC Worldwide.
Ms Thomson: If there are reports
of that, I would like to see them. That would be wrong. We run
the system on the basis that that should not happen. Any individual
examples of that, send them to us and we will investigate them.
Q197 Chairman: You do not believe
that could possibly happen?
Ms Thomson: I would very much
hope it cannot possibly happen. It should not happen.
Q198 Janet Anderson: Is it fair to
say that UKTV has first right of refusal and sometimes less right
of refusal? So that if they said they did not want a programme
and then it went to a third party broadcaster, who made a bid,
would UKTV get another chance to match that bid?
Mr Smith: You meant UKTV presumably?
Q199 Janet Anderson: Yes.
Mr Smith: UKTV is a 50% owned
subsidiary of BBC Worldwide, where the other 50% is owned by Virgin
Media. The discussion we have just been having is about how the
rights arrive in Worldwide in the first place. We have bought
the rights, or, indeed, we may have bought them from an indie
or in some cases they may have been self-made. Having got the
rights, we then supply them to UKTV under a completely separate
agreement—it has nothing to do with the relationship with
the BBC at that point, because we already have them—and
from that point on it is an entirely commercial transaction; in
other words, there is no public service angle on that trade at
all.
25 Television Business International Magazine. Back
26
Note by witness: Others suggested this, not the BBC. Back
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