BBC Commercial Operations - Culture, Media and Sport Committee Contents


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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