Follow-up questions submitted to the BBC
1. What steps were
taken by BBC Worldwide; by BBC Management; and by the BBC Trust
to ensure that a fair commercial price was paid for Lonely Planet
and what advice was sought to ensure that those calculations were
valid?
BBC Worldwide
When analysing a case for the acquisition or
merger of a business, BBC Worldwide follows typical commercial
best practice in terms of valuation assessment. Internal corporate
and divisional finance teams make the initial assessments and
secure all the supporting expert advice necessary to ensure that
the appropriate level of external validation is applied to the
internal valuation assessment. In the case of the Lonely Planet
acquisition, BBC Worldwide's assessment of value was underpinned
with financial and commercial due diligence work conducted by
a range of professional advisors with specific and extensive valuation
advice from Deloittes in Australia, the UK and US and Lehman Brothers.
In both cases the external advice strongly supported the price
paid. BBC Worldwide also employed independent advisors to undertake
legal, IT and forensic accounting due diligence in order to ensure
that there was no unforeseen liability within the target business
which would negatively impact its estimate of value so as to ensure
that the underlying business supported the price. This exercise
was extensive and was completed satisfactorily.
The overall case for the acquisition of Lonely
Planet was discussed at eight meetings of the BBC Worldwide Executive
Board and by five meetings of the BBC Worldwide Board (which includes
six Non-Executive Directors). Detailed information on the valuation
and the intended price, using a basket of commonly used measures
including multiple analysis, payback period, return on investment,
return on net assets, measures of profitability, internal rate
of return and net present value calculations were included at
each relevant stage and were extensively reviewed by Directors.
This analysis, the external professional advice received and the
positive outcome of an extensive due diligence exercise led to
and validated the Directors' positive endorsement of the acquisition.
BBC Executive
Prior to submission to the Trust the proposals
were scrutinised and approved by the BBC Executive Board which,
as the Committee will be aware, includes a number of non-executive
directors with a range of commercial experience. As part of this
approval relevant senior management independently reviewed each
of the four commercial criteria and confirmed that, from the BBC
Executive's perspective, the proposals satisfied each of the criteria.
The proposals were then subject to an overall assessment by the
BBC Executive's Controller, Fair Trading who provided confirmation
that the proposals satisfied the four commercial criteria. The
BBC Executive, as shareholder, also received the independent valuation
advice supplied to BBCW by Lehman Brothers.
BBC Trust
The role of the Trust in such cases is to scrutinise
proposals submitted to it by the BBC Executive. The Trust is served
by a unit with a range of specialist skills which accounts directly
to the Trust and not to the BBC Executive. The unit provides independent
analysis to the Trust on a wide range of issues.
By the time a proposal reaches the Trust it
has already been through detailed scrutiny by both the Worldwide
and BBC Executive Boards. The Trust does not as a matter of course
commission any further detailed assessment of the business case
for new commercial propositions. It takes a view on the adequacy
and robustness of the assessment processes that both BBC Worldwide
and the BBC Executive have been through including the information
they have considered and advice they have taken before making
their own recommendations to the Trust. If the Trust is not satisfied
with the adequacy or robustness of the processes used by or the
advice taken by BBC Worldwide or the Executive Board then it would
be open to it to commission its own independent assessments.
In the case of the Lonely Planet acquisition
the Trust Unit reviewed the BBC Executive's proposals and gave
guidance to the Trust throughout the approval process. The Trust
was satisfied that the processes followed and advice commissioned
by BBC Worldwide and the BBC Executive were both adequate and
robust. Detailed information on the valuation, using a basket
of commonly used measures including multiple analysis, payback
period, return on investment, return on net assets, measures of
profitability, internal rate of return and net present value calculations
was included in the documentation of the case that the Trust considered.
The Trust was also aware that this analysis was based on independent
expert advice commissioned by BBC Worldwide and the BBC Executive,
noting in particular that the financial assessments made by BBC
Worldwide's internal teams were underpinned and validated with
financial and commercial due diligence work conducted by a range
of professional advisors with specific and extensive valuation
advice from Deloittes in Australia, the UK and US and Lehman Brothers.
In reaching its decision the Trust took account of this advice.
In terms of the commercial case it noted that both the "conservative"
base case as well as the "upside" financial case were
comfortably above the required rate of return for the business.
The Trust also took its own independent legal advice to ensure
that the procedures it followed and the issues it considered in
reaching its decision were consistent with its regulatory obligations.
The Trust's consideration of the price paid
formed part of its broader assessment of the proposals against
the four commercial criteria (the commercial efficiency criterion
in particular). We have given a full account, in our answer to
question 2 below, of the procedures used by the Trust in this
case.
2. What steps were then taken by the Trust
to confirm that the acquisition met the four commercial criteria
("the four Cs") for BBC Worldwide activities, including
market distortion and the relationship to BBC programming given
that the prima facie position was that the acquisition failed
on both those counts?
The Trust sets out here the basis for its decision
and explains how the approval process worked in this case. The
detailed account of process below demonstrates how the Trust tested
the proposition before being satisfied that the acquisition of
Lonely Planet was appropriate. The Trust does not agree that "the
prima facie position was that the acquisition failed".
The Trust set a series of conditions and called for a considerable
amount of additional information in order to satisfy itself that
the acquisition was consistent both with the strategy in place
and with the four commercial criteria framework.
At the end of this process the Trust was satisfied
that the acquisition was consistent with the BBC Worldwide growth
strategy it had approved for the business in March 2007. This
strategy called for annual double-digit profit growth. International
expansion was a key element of the strategy. The plan was to increase
the proportion of BBC Worldwide's revenues generated overseas
from 40% to 60% by 2012. Australia was one of four priority markets
for growth. The plan provided for growth through exploitation
of BBC intellectual property but also included acquiring rights
from third parties across a broad range of geographies and products
and services where there was a good fit with BBC activity. It
also sought to exploit the BBC's unique archive of 750,000 hours
of high quality content in the new digital environment.
The Trust was also satisfied that the acquisition
was consistent with the four commercial criteria framework intended
to set the boundaries for the BBC's commercial activities. The
Trust agreed with the BBC and BBC Worldwide's assessment that
BBC and Lonely Planet's brand values were consistent. It could
see clear potential for BBC Worldwide to draw together and promote
the BBC's strong travel and natural history content using the
Lonely Planet brand. Crucially, the Lonely Planet brand was associated
with audience segments that the BBC had found hard to reach and
the Trust agreed with the BBC and BBC Worldwide that there was
potential to use the brand to draw these difficult-to-reach audiences
to BBC content through links on the Lonely Planet website and
through references in Lonely Planet's publications and promotional
activities. The Trust was also satisfied that the acquisition
could help to enrich the experience for audiences for BBC programmes
in those genres associated with travel (including natural history
and educational genres).
The Trust was also satisfied that the proposals
complied with the BBC's fair trading requirements and would not
distort the market.
Approval process
The approval process used by the Trust in this
case was its procedure for assessing new commercial service proposals.
These arrangements were developed at the Trust's inception to
ensure that its regulatory duties relating to commercial activities,
as set out in the BBC Agreement, are consistently and effectively
applied. They are set out formally in a Trust Protocol which is
attached at Appendix 1.
July 2007
The Trust's Finance and Strategy Committee,
and then the full Trust, considered an application from the BBC
Executive for BBC Worldwide to acquire a 75% controlling stake
in the Lonely Planet business. The application was referred to
the Trust because the value of the proposed investment exceeded
£50m. (The proposal had of course been thoroughly scrutinized
by the BBCWW Board and the BBC Executive Board prior to its submission
by the BBC to the BBC Trust.)
The Trust's frame of reference for such an application
requires it to assess proposals against the four commercial criteria.
The proposal submitted to the Trust set out the strategic rationale
for the acquisition, the commercial terms for deal and an initial
assessment, carried out by BBC Worldwide and the BBC Executive,
of compliance with each of the four commercial criteria. These
require that the BBC's commercial services should:
(i) fit with the BBC's Public Purpose activities;
(ii) exhibit commercial efficiency;
(iii) not jeopardise the good reputation of the
BBC or the value of the BBC brand; and
(iv) comply with the principles set out in the
Fair Trading Policy and with the Fair Trading Guidelines, and
in particular, avoid distorting the market.
Based on all the evidence submitted to it, including
the detailed commercial assessment of deal terms made by the BBC
Worldwide Board and the BBC Executive, the Trust took an initial
view that the proposal was likely to comply with the four commercial
criteria, including the assessment of commercial efficiency. The
Trust noted that further work was needed to finalise the proposition
and approved the proposed acquisition subject to four conditions
being met:
(i) the Trust asked for a further assessment
of the proposal against the four commercial criteria, including
additional evidence to demonstrate the proposal's fit with the
BBC's public purposes—and particularly to show how the proposal
would help to leverage extra value from the BBC's intellectual
property that BBC Worldwide exists to exploit (and so fit with
the BBC's public purposes);
(ii) confirmation that the due diligence work
being undertaken was completed and that it provided assurance
regarding the commercial case;
(iii) confirmation that external counsel had
given final clearance on merger control issues;
(iv) confirmation that the BBC Executive's Controller
of Fair Trading had given final clearance on compliance with the
BBC's Fair Trading Guidelines.
August/September 2007
The Trust received the requested information
offline from BBC Worldwide and the BBC Executive, including their
final assessment against the ffour commercial criteria. On the
basis of the further information provided, the Trust was satisfied
that the conditions set in July had been met. There were two areas
where the Trust wished to monitor progress after the acquisition
in order to remain satisfied that BBC Worldwide:
(i) was clear about the ways in which it could
make use of synergies with its existing activities to develop
and build the Lonely Planet business, and in the process enrich
the experience for audiences for BBC programmes in those genres
associated with travel (including natural history and educational
genres); and
(ii) could show that the acquisition would enable
BBC Worldwide to leverage extra value from its existing assets.
The Trust recognised that while the intentions
for the business in these respects were clear, the basis on which
they would be achieved in practice was not. It was also clear
that the level of detailed information and assurance required
could only reasonably be provided after the acquisition. The Trust
therefore called for a further report from BBC Worldwide following
the acquisition (as part of its formal annual reporting to the
Trust on the compliance of its activities with the commercial
criteria) on the extent to which the acquisition of Lonely Planet
was fulfilling the expectations set out in the checklist in practice.
May/June 2008
Worldwide submitted their initial follow-up
report to the Trust in May 2008.
Following the report in May, in order to further
meet the specific request of Trustees to demonstrate how the acquisition
was in practice enabling BBC Worldwide to leverage extra value
from its existing assets and attract new audiences to BBC content,
a further report was submitted in June 2008. Trustees considered
that this update demonstrated sufficient progress over the first
8 months, but noted that the plans had not yet been fully implemented.
In particular a fundamental redesign of the Lonely Planet website
and the launch of a Lonely Planet magazine, each of which was
key to drawing new audiences to BBC content, were substantial
initiatives still being developed. The Trust agreed that the actions
being taken would satisfy the conditions of approval set out by
the Trust.
The Trust is continuing to monitor whether Lonely
Planet is fulfilling the BBC's expectations through its ongoing
oversight of the BBC's commercial activities.
3. What BBC programming can BBC Worldwide
show is relevant to the publication of Girl Talk magazine, publicised
on the BBC website as: "Fancy some fabulous girly fun? Then
check out Girl Talk each fortnight, it's the most gorgeous girls'
magazine ever! Fascinating features, brilliant posters, stunning
fashion, top pop stars and tricky puzzles, along with a fantastic
free gift every issue, means it's got everything a girl could
wish for and more!" Other than the loose overlap between
the BBC's children's programming, what is the specific justification
for publishing a magazine in an area with a good deal of commercial
provision?
The BBCs view is that the majority of sectors
and interest areas already enjoy a good deal of commercial provision,
and often these are areas—eg food, gardening, television
listings—where a multitude of magazines have long flourished
alongside titles published by BBC Magazines. As such, justification
for entering a market cannot be based on whether or not commercial
provision already exists—such a premise belies the notion
of free and fair competition. Additional demonstrable justifications
must exist for BBC Magazines to enter a market—they include
offering the market a differentiated product, which extends familiarity
with and connectivity to BBC programmes and which clearly applies
BBC editorial standards and values. The BBC considers that Girl
Talk meets these criteria, as set out below.
BBC Girl Talk
BBC Girl Talk is a fortnightly magazine for
girls aged 7-12 years. Like all magazines aimed to appeal to girls
of this age, it features bright colours, and a friendly informal
writing style. However, it aims to offer a distinctive "BBC
voice" in the girls' magazine market. Girl Talk does this
in two ways. Firstly, by demonstrating a close connection with
BBC programming (both children's programming and appropriate family
viewing) and secondly, by applying rigorous BBC editorial standards
to all content. This is particularly important for parents, who
rely on the magazine to deliver responsible material for this
particularly impressionable and vulnerable age group. Like all
BBC magazines, the magazine is supervised by an Editorial Advisory
Board (EAB) consisting of BBC magazine publishers, representatives
of the BBC public service, and external experts. In a 2008 review
of BBC content, EAB members agreed that Girl Talk reflected and
promoted BBC activities, seasons and campaigns; that it reflected
the ethos, tone and values of BBC programming; and included editorial
featuring on-air talent. Clearly, to be balanced and relevant
to the age group, the editorial will also reflect current topics,
celebrities and programming from non-BBC sources (for example
Disney's High School Musical or ITV's Britannia High). However,
these will be covered in an appropriate manner consistent with
BBC editorial values.
Connectivity to BBC Programming
Connectivity to BBC content is far more than
a "loose overlap". BBC Magazines monitor the level of
connectivity of their magazines to BBC content. A review of the
last 12 issues of Girl Talk demonstrates that the proportion of
content with a direct connection to BBC programming consistently
exceeded the minimum target of 20%, with a clear trend towards
even greater connectivity during 2008.
To take a very recent issue, Issue 364 (31 December-14
January 2008-09) included articles, quizzes or posters linked
to the following BBC programmes:
— Dr Who (family drama programme)—time
travel quiz;
— Strictly Come Dancing (family
entertainment programme)—feature on the show's styling,
and a general age-appropriate guide to the programme's "best
bits";
— SMart (art programme for children)—SMart
colour search puzzle;
— Sam and Mark's Guide to Dodging Disaster
(CBBC entertainment programme)—Sam and Mark's super sudoku
quiz; and
— Roar (CBBC animal programme)—photos
of readers pets.
There were also links to the CBBC news website,
and to the recycling section of the CBBC website. A review of
any recent issue would demonstrate a similar level of connectivity
to relevant programming.
These articles serve to build familiarity with
the BBC programmes, adding value to their favourite shows, drive
loyalty and affiliation to the BBC, and give young girls fun and
informative content within a safe BBC space.
Product differentiation
The combination of the link to BBC content,
and the application of BBC Editorial Guidelines to all content,
makes Girl Talk a highly differentiated product in the market.
Girl Talk's stories have included sensitive discussions of why
some girls might not be able to afford some leisure activities,
why not everybody celebrates Christmas or receives Christmas presents,
and why some people prefer activities such as playing the piano
which might be perceived as `boring'. Such views are certainly
underserved in a magazine market which focuses on prettiness,
popularity and the ability to consume.
The BBC brand is a valuable signpost to the
parent, trusting Girl Talk to replicate the quality, and share
the values, of the BBC. They expect Girl Talk to provide a safe
environment and consistently produce content that they would be
happy for their daughter to read—trusting it to be appropriate
for the age group.
As well as the positive values it espouses,
a children's magazine can be judged by what it will not do. Girl
Talk:
— does not give away make up;
— does not feature models with revealing
clothes, highlights, pierced ears or wearing brands;
— does not encourage readers to have
boyfriends or crushes;
— believes that girls should have appropriate
role models; therefore it does not feature celebrities smoking,
drinking, or wearing revealing clothes; and
— does not feature editorial pieces
on movies, games or DVDs that are rated 12 or 12+, believing that
readers should not be exposed to potentially provocative content,
or content that a parent would feel uncomfortable that their daughter
was exposed to.
Examples of all the above can be found in competitor
titles. In summary, while the tone and appearance of Girl Talk
might, at a cursory glance, look similar to its competitor titles,
the BBC is confident that its ethos and editorial standards deliver
a very different message to seven to 12-year old girls.
4. When will the BBC Trust's review of BBC
Worldwide be published? Are you able to give an indication at
this stage about what it will say?
The Trust's review of strategy and governance
for the BBC's commercial activities will be completed shortly.
Although the Trust will not publish a detailed report, it will
make public its findings once the review is complete. The Trust
expects to do this in the early part of this year.
5. On the face of it, the best return to the
licence-fee payer would appear to be an open auction system in
which all BBC productions were offered to the market. If the issues
concerning the protection of the BBC brand were satisfied in other
ways (ie through contractual stipulations) what would prevent
the BBC from moving to such a system, either completely, or over
time, or for a defined percentage of its output?
The nature of the link between the BBC and BBC
Worldwide, including the "first look" arrangements,
fall within the scope of the Trust's current review.
The BBC believes its relationship with BBC Worldwide
delivers value for licence fee payers, ensures the protection
and promotion of the BBC brand, creates a global platform for
UK talent and is broadly reflective of the market norm.
The operating model permits the BBC to accept
attractive offers from third parties, whilst also accepting offers
from a distributor (ie BBC Worldwide) with incentives to invest
for the longer term and with interests more closely aligned with
the BBC. BBC Worldwide can invest in a critical mass of BBC rights
by spreading the risk of acquiring individual rights across a
broad portfolio.
Furthermore, the ownership link between the
BBC and BBC Worldwide means that the BBC receives the entirety
of the proceeds generated by rights exploited via BBC Worldwide,
whether in the form of up-front investment, profit shares and/or
dividend payments. When the BBC licenses to third parties, it
loses the profit margin on the exploitation of rights that other
distributors are able to achieve. The BBC also benefits from the
growth in asset value of its wholly-owned commercial subsidiary.
Importantly, the BBC's arrangements with BBC
Worldwide are consistent with market practice. Vertically-integrated
and/or first look agreements are a prevalent feature of the industry
(eg ITV/Granada International, Time Warner/Warner Bros Distribution,
RDF/RDF International and so on). Producers generally value these
arrangements for, inter alia, the ability to develop a long-term
relationship with a distributor, offering greater certainty of
investment, as well as encouraging the distributor to be more
focused on the particular producer—both commercially and
culturally. For these reasons, the BBC believes that open spot-auctions
are in fact rarely used by its (shareholder-value maximising)
competitors.
The BBC believes that a system of offering all
BBC productions to the market would lead to unacceptably high
risks in terms of potential failure to protect and/or promote
the BBC brand. The BBC's ownership of BBC Worldwide provides a
degree of control which can cater for any circumstance that may
not have been foreseen at the time the contractual commitments
were agreed. This level of control cannot be replicated fully
in contractual agreements with third parties. Indeed, no other
commercial distributor can mirror the extent of brand alignment
between the BBC and BBC Worldwide. The requirement to enhance
and not adversely impact the BBC brand is a key obligation of
the Fair Trading regime and the C's specifically. These obligations
apply explicitly to BBC Worldwide in a way that they would not
to third parties. Further information on this critical issue is
provided in our response to Q9.
The BBC must strike a balance between offering
an appropriate amount of programming to the marketplace whilst
ensuring that the pecuniary and non-pecuniary benefits of its
vertically-integrated distribution model are fully realised. The
BBC believes that the current arrangements (resulting in approximately
20% of rights per annum being acquired by third parties) represents
the optimal outcome for licence-fee payers. This balance is monitored
closely by the BBC.
The BBC's Commercial Agency generates a significant
amount of benchmark data from its dealings with third parties.
In addition, key individuals attend the main rights markets (eg
Mip, Mipcom, Showcase, Licensing Fair, London Book Fair etc) to
keep across market trends. They have regular meetings with distributors
and co-producers to assess their needs and the state of the market.
The Commercial Agency also receives regular financial reports
from BBC Worldwide and third parties. It is wrong to assume that
the Commercial Agency overly relies on past prices paid by BBC
Worldwide and a "limited" amount of benchmark data.
The Commercial Agency is adequately-resourced and staffed by experienced
industry experts, many of whom have worked for third party distributors
and/or commercial broadcasters.
6. The Committee would welcome a more detailed
breakdown of how the 15-20% estimate was arrived at. What percentage
would be arrived at if the calculation was done purely on distribution
rights alone?
The 15-20% figure holds broadly true for both
volume of programming and value of rights made available commercially[30]
but an accurate split is only really possible using a value metric.
This is because there are often a number of deals attached to
a particular programme or series, covering different media (eg
DVD, book publishing or TV distribution) and different territories
(eg North America or Rest of World.)
Over the last five years, an average of 18%
of all pre-production investment in BBC programming has come directly
from third party distributors, co-producers or a combination of
both.[31]
In the last financial year (2007-08), the figures were exactly
in line with the five year average and there is no substantive
trend over time.
If you consider volume simply by monitoring
the number of rights transactions that the BBC has entered into
with third parties as opposed to with BBC Worldwide, the five-year
average is approximately 21% to third parties (with the remainder
to BBC Worldwide).
It is also worth noting that in some areas the
BBC (as a group) has negotiated long-term strategic relationships
with third party partners. One of the most successful of these—creatively
and commercially—has been an arrangement with Discovery
Communications International ("Discovery") which grants
a `First Look' over certain programming, for certain rights, to
Discovery in North America via a joint venture with BBC Worldwide.
In the figures quoted, the investment generated
by those partnerships is counted within the BBC Worldwide `split'
of rights because, BBC Worldwide is a party to these deals. However,
the pre-production investment resulting from this JV does not
come from BBC Worldwide, and neither does BBC Worldwide earn any
commission on the arrangement. In some years, these partnerships
have represented up to a third of the BBC's total pre-production
investment. If these figures were excluded, the share of rights
value granted to BBC Worldwide in recent years would be lower.
7. Could the BBC provide some recent examples
of BBC-produced programmes where the BBC Worldwide bid has been
rejected in favour of a commercial bid (for distribution rights).
Are there any general patterns or characteristics which apply
in such cases. For example, are the properties typically smaller
scale, or less attractive to overseas audiences, or is there some
other factor?
There are, broadly, two scenarios in which rights
are licensed to third parties.
In some instances, BBC Worldwide chooses not
to bid This is usually because BBC Worldwide does not see sufficient
commercial value. In these cases the BBC will endeavour to secure
investment from a relevant alternative (and sometimes specialist)
distributor.
In other instances, BBC Worldwide is simply
outbid by a competitor having decided to make an offer.
Owing to commercial sensitivity (and in particular
the need to maintain investment levels from third parties who
may not be aware that BBC Worldwide is not among their bidding
competition) we have not separated out the two scenarios (a breakdown
of which scenario is relevant to each example can be provided—on
a strictly confidential basis—if necessary). A selection
of titles within these categories in the current financial year
(rights licensed and distributor are in brackets) includes:
— Criminal Justice (World TV Distribution
ex UK—Portman, UK/Eire DVD—Acorn);
— Francesco's Mediterranean (World
TV Distribution ex UK—RDF);
— House of Saddam (World All Rights
ex UK television—HBO);
— The Passion (World All Rights ex
UK television—HBO);
— Serious Ocean (World TV, Non-theatric
and format ex UK television—All3 Media);
— That Mitchell and Webb Look (UK/Eire
DVD—Fremantle); and
— Caribbean Food Made Easy (World book
publishing—Mitchell Beasley).
These titles cover a range of genres (Drama,
Factual, Children's, and Comedy) and all deal values (investment
levels on this list range from mid-five figures to mid-seven figures)
and a range of rights (by both territory and media). They also
include both one-off projects and returning series.
8. In what sense is the BBC brand protected
when minority investments are taken in production companies which
are not under BBC control? Should the reference to public purposes
be used to justify such activities?
The acquisition of stakes in independent production
companies by the BBC falls within the scope of the Trust's current
review.
The BBC's current arrangements for ensuring
that its brand and reputation is adequately protected when minority
investments are taken in production companies that are not under
BBC control are set out here:
Partner Selection
A rigorous selection and due diligence process
is undertaken to ensure that investments are only made in respected
production companies with robust management systems, whose key
talent have a proven track record of delivering high quality productions.
This process relates both to the business practices of the producer,
and crucially to the editorial quality of the productions.
Contractual Protections
By a standard contractual provision included
in all BBCW acquisitions of minority stakes in production companies,
the production company is prohibited through the shareholder agreement
from engaging in any activity "which might reasonably be
considered to bring the BBC into disrepute". There are in
addition specific prohibitions regarding any activity which promotes
a political purpose, or any association with pornography. Where
there has been a breach of these requirements BBC Worldwide can
terminate its relationship with the production company. There
has never been an instance where this has been required.
The shareholder agreement also allows BBC Worldwide
at any time to choose to "distance" or ring-fence itself
from those exceptional projects which it either considers may
bring the BBC into disrepute, or which might for some other reason
be of concern to the BBC. In such circumstances BBC Worldwide
will not receive a share of the profits. This safeguard ensures
that there is a mechanism available that allows reputational damage
to be avoided where termination of the shareholder agreement is
not necessary. It exists primarily for circumstances where subsequent
events make the production unsuitable for the BBC to have any
involvement. Such circumstances would be very rare.
Editorial Guardians
A senior figure from BBC Worldwide is appointed
to the production company board and acts as Editorial Guardian
(EG). The EG monitors the activity of the production company and
ensures that its activities do not jeopardize the BBC's reputation
and brand value. If the production company is producing programmes
for the BBC, then these programmes must in any case meet BBC Editorial
Guidelines. If a producer is producing a show based on a BBC format,
then extensive provisions in the format licence will give protection
to the BBC's brand and reputation. The Editorial Guardian would
add an additional level of assurance in these cases, and would
be available to advise the production company
Where the production company produces programmes
for third party channels, then those channels will have their
own editorial requirements. Although the producers in which we
invest are quality producers who make most of their programmes
for large, heavily-regulated broadcasters which themselves impose
high editorial standards, the primary protection for the BBC is
the Editorial Guardian, The Editorial Guardian will be aware of
these projects and it is their responsibility to ensure that they
could not, even by a relatively remote association, jeopardise
the BBC's reputation..
Should the reference to public purposes be used
to justify minority investments taken in production companies?
All of BBC Worldwide's commercial services (which
includes minority investments in production companies) must comply
with the four commercial criteria which includes the requirement
that the investment in the production company fits with BBC's
Public Purposes. A four commercial criteria compliance assessment
is undertaken to ensure that before any investment is approved
that it complies with the four commercial criteria. Four commercial
criteria assessments have shown that BBC Worldwide's investments
in UK production companies directly support the BBC's public purpose
of stimulating creativity and cultural excellence in the UK creative
industry by supporting top UK talent. Investments in foreign production
companies have demonstrated fit with the BBC's Public Purposes
because they will amongst other things help bring the UK to the
world by exporting BBC and other British (eg ITV/Channel 4) programme
formats.
9. Could not the reputation of the BBC be
protected through contractual or licensing arrangements?
The Agreement requires that the BBC's commercial
services must not jeopardise the good reputation of the BBC or
the value of the BBC brand. It also builds in governance and control
mechanisms involving the BBC Executive and in some cases the Trust
to ensure that the BBC can control and co-ordinate the means of
exploitation of the BBC's assets and brand effectively. The BBC's
view is that it would be extremely difficult to duplicate such
controls contractually through third party organisations which
would not have the protection of reputation and value of the BBC
brand as a central part of their corporate remit.
The BBC makes two allied points:
— taking a coordinated approach to
the BBC brand and portfolio of title brands helps to build value.
Developing the BBC brand globally requires an understanding and
appreciation of the unique values of the BBC. It would be difficult
to ensure this across a large number of licensee agreements, with
the risk that the core values associated with the BBC brand could
be diluted and fragmented. Such a co-ordinated approach is not
unique to the BBC—other organisations with valuable brands
are also unlikely to consider the fragmentation and loss of direct
control of their brand; and
— a clear understanding of the unique
BBC brand is important. The relationship between BBC Worldwide
and the BBC public service enables this understanding and allows
the brand to be marketed around the world with the same care and
attention as in the UK. It is more difficult for contractual terms
to control behaviour or motivation, or indeed cover every eventuality—particularly
in a fast moving market place where decisions need to be taken
rapidly and from a strongly-informed base on the brand's values.
10. Does the matching right exist, and if
so what is the justification for it, given that the return to
the licence-fee payer would be identical were it not to exist?
There is no "matching right" associated
with the BBC's preferred partnership with BBC Worldwide. The `First
Look' obliges the BBC to offer BBC Worldwide, in effect, a first
look and a period of exclusive negotiations to invest in the content
that it develops. At the end of this period, the BBC is free—at
its sole discretion—to accept or reject any bid made by
BBC Worldwide. If it chooses not to accept a BBC Worldwide bid,
the BBC will then conduct a form of auction. The BBC may or may
not (in its sole discretion) choose to invite BBC Worldwide to
participate in this new bidding process and, in either case, treats
all distributors (including BBC Worldwide) fairly and provides
them with the same information throughout the auction process.
On occasion, BBC Worldwide may "win"
such a bidding process. Where this is the case, it is on the basis
of having submitted the optimal bid through the revised process.
11. Does the BBC wish to argue that BBC Worldwide
derives no commercial advantage whatsoever from being represented
on the BBC Executive Board?
The Trust's current review of the BBC's commercial
operations, which is still underway, has within its scope the
governance arrangements for BBC Worldwide. The specific question
posed by the Committee concerning the position of the BBCW Chief
Executive on the Executive Board of the BBC also falls within
the scope of the review.
BBC Executive's view is that BBC Worldwide representation
on the Executive Board does not make it privy to information which
gives, or would give, it an unfair commercial advantage over its
competitors. They consider that as CEO of BBCW, John Smith plays
an important contributory role on the Executive Board. First,
he represents BBCW in their role contributing towards the BBC's
delivery of its Public Purposes, in particular the fifth purpose,
"bringing the UK to the world and the world to the UK."
Further, he is accountable to the Board for BBCW's management
of BBC content and brand in BBCW's capacity as the main distributor,
and for the performance of BBCW in the BBC's capacity as shareholder.
The Committee have raised the Network Supply
Review discussion in February and July 2008 with concerns that
detailed planning and modelling, and thinking about production
and commissioning may provide BBCW with advantageous information.
The Papers relate to the required share of production by nation
and region and the operational structures/support necessary to
deliver "creative sustainability" and thereby the required
production levels. This includes, for example, the location of
commissioners and funding for strand moves. Neither location information
nor the operational support strategies provide a commercial advantage
to BBCW.
The BBC does have effective conflicts of interest
procedures in place to deal with potential conflicts in the event
that they might arise from time to time. These cover all aspects
of the BBC's business activities and are not limited to the interface
between the BBC Public Service and BBC Worldwide. These governance
arrangements are treated seriously, are regularly reviewed and
seek at all times to ensure that the separation of governance
responsibilities is properly maintained.
12. Does the BBC believe that the fourth of
the "four Cs" has any value? How is it measured and
what effect should it have on new product launches, especially
in the magazine sector?
Unlike the public service activities of the
BBC, the BBC's commercial activities do not constitute a "market
intervention". It is both inevitable and intended that BBC
Worldwide should have market impact. It could not fulfill its
obligation to exploit the BBC's assets for the benefit of licence
fee payers without doing so and it has been encouraged to do so
by successive UK Governments to reduce upward pressure on the
licence fee. However, BBC Worldwide is not permitted under the
Charter and Agreement, or by law, to receive any unfair advantage
as a consequence of its ownership or status within the BBC. There
is a crucial distinction to be made between market impact—which
is acceptable, and market distortion—which is not.
The Trust's position is that BBC commercial
activities should not be regarded as distorting the market where
they are in compliance with competition law and have not been
given an unfair commercial advantage which could unduly and negatively
influence the market.
In terms of magazines, BBC Worldwide's data
suggests it has had a positive impact in terms of growing markets
for magazines when it enters a sector or, as in the case with
Food magazines, starting a new sector.
We have attached a note from BBC Worldwide which
looks at the performance of individual magazine genres, before
and after the launch of BBC Worldwide publications.
13. Why has the Trust encouraged the BBC Executive
to present fresh proposals in such a sensitive area after the
exhaustive process of the last few months, including a very clear
Ofcom Market Impact Assessment that BBC local video services would
have "significant negative impact on future innovation in
online local news, sports, and weather services by the commercial
sector, particularly newspapers"? Would it not be prudent
for this area to be left for commercial services to develop in
the future?
The Trust's Public Value Test (PVT) into the
BBC Executive's proposals for local video is still underway. The
Trust's provisional conclusion, published in November 2008, is
not to approve the Executive's proposals.
Representing the UK, its nations, regions and
communities is one of the six purposes laid down in the Charter.
In meeting its obligations, the BBC should provide a range of
output to meet the needs of different audience groups. Audiences
attach a high value to national and regional news and see it as
an important part of the BBC's remit. But in a fast-changing media
environment, the effective fulfilment of the public purposes is
under strain. Research commissioned by the Trust in 2007 revealed
gaps between the importance audiences attach to this purpose and
their view of current performance.[32]
Whilst licence fee payers may put less weight
on this purpose relative to some others, it remains an important
part of the BBC remit with a considerable performance gap.[33]
The perception of underperformance is common to all age and socio-economic
groups but this masks regional and demographic differences. Groups
in Northern Ireland and Scotland are among those with the lowest
approval rating. Age and social grade are also factors; lower
income groups aged 35-54 tend to rate the BBC poorly.
The PVT reinforced the fact that audiences expect
better regional representation, and those in underserved areas
express frustration with poor local coverage. In theory, there
is considerable demand for local news. The concept of a local
video, on-demand service has attracted support from a wide range
of people. Local news drawn together in an innovative, interactive
portal is potentially a powerful proposition. Relevant local news
has valuable social currency and may, according to some, allow
the BBC to reconnect with underserved groups who currently regard
it as too remote.
The Trust found, however, that local is a flexible
concept for listeners and viewers and opinions differ widely.
Convenience of access to the service is also a critical factor,
so too is editorial agenda. Audiences are interested in a wide
range of information of which news is only a part; local events,
entertainment and listings are all considered part of a well-rounded
service with appeal to a broad spectrum of users.[34]
For these reasons, and despite the Trust's provisional
conclusion not to approve the local proposition, the Trust still
believes the BBC has a duty to ensure that audiences see a better
reflection of their communities on BBC services as a gap in BBC
performance remains in this area.
It is important to note that the Trust has not
encouraged the BBC Executive to present fresh broadband-only local
video news proposals. The Trust came to its provisional decision
on the basis of the evidence presented to it during the PVT process.
The Trust has instead suggested a number of ways in which the
Executive might improve the BBC's performance.
This will require a range of measures, some
of which have already been undertaken, including moving a greater
proportion of BBC production closer to the audiences it serves
and looking closely at how network news represents the nations
of the UK.
In the Trust's view a series of smaller, targeted
interventions, that take account of the BBC's current regional
provision and are focused particularly on improving the quality
and depth of the BBC's television offering, could increase public
value and contribute to the relevant public purposes. There could
also be scope, through meaningful partnerships, for the BBC to
contribute more widely to existing regional news providers and
potential new entrants.
Once the Trust's final conclusions are published
we will expect the BBC Executive to consider carefully what we
have recommended and provide a considered response.
14. Is the BBC able inform the Committee how
much has been spent, both by the Trust and the Executive, in money
and time on the local video proposals?
As the PVT process is ongoing we are unable
to provide final figures. To date the Trust has spent £195,000
on its part of the PVT process and it has been charged £814,604
by Ofcom. These figures are not directly comparable since the
Trust's expenditure covers external spend and does not include
costs for its own staff who worked on the PVT application, but
the Ofcom figure includes all staff costs and overheads. The figures
are not representative of the cost of a typical PVT. Due to the
complexity introduced by the need to assess multiple markets,
this particular PVT was longer and more complex than usual, resulting
in higher costs compared to previous PVTs.
There has been no expenditure to date on actual
roll-out of the project as the proposal was subject to approval
by the BBC Trust. On November 21st the BBC Trust announced that
its provisional conclusion was not to approve the Executive's
application to provide a local video service.
BBC Executive expenditure on the BBC's Local
Video PVT proposal falls into the following categories:
— expenditure on internal resource
to support the Local Video project; and
— expenditure on external consultancy
to support the Local Video project.
In relation to expenditure on internal resource,
the BBC has employed no staff specifically to run the Local Video
PVT project. As such, in the main work on this project has been
carried out by individuals already employed by the BBC who have
temporarily dedicated a proportion of their time to the project.
It is not possible to provide an accurate figure for the cost
to the BBC of man hours of internal staff to support this project.
In relation to expenditure on external consultancy
used to support the BBC Executive on the Local Video PVT project,
£209,674 was spent with three suppliers on research in relation
to the public value of the local video proposal.
15. Does the BBC Trust feel that it is appropriate
for BBC management to submit changes to Trust reports which go
well beyond the correction of factual errors? Is this a routine
occurrence? Will this process continue?
There is no question of BBC Trust reports being
vetted before publication by Corporation Executives. The Trust
takes great care over how it engages with the BBC Executive when
conducting reviews. The object of such interaction is to ensure
that the factual basis for the Trust's decisions and conclusions
is accurate. Of course the principle of fact checking reports
is not a Trust invention; it is best practice used widely by auditors,
regulators and review bodies to ensure that reports are fair and
accurate before they are published.
The Trust's review of the WoCC was an independent
evidence-based report informed by an extensive programme of interviews,
conducted on behalf of the Trust by independent consultants, with
over 80 stakeholders. The fact checking process—a standard
part of our procedure—improved the accuracy and clarity
of the Trust's report but did not alter its findings.
Most of the inaccuracies were quite trivial.
In a few instances there was slightly more to it. To take the
example in the Telegraph piece, the original draft suggested that
BBC staff found the commissioning system "an obstacle course".
When the Executive queried whether this was a representative view,
the author went back to the evidence and concluded that it was
not, as it represented the views of only one individual, and therefore
removed the suggestion. The decision to do so was entirely his
and made no material difference to any of the report's conclusions.
The BBC's governance model is explicitly intended
to provide for interaction between the two sides of the BBC as
the Trust discharges its role as strategic authority and its regulatory
functions, but this does not prejudice the Trust's independence
of thought or action.
APPENDIX
1. What steps were taken by BBCW to ensure
that a fair commercial price was paid for Lonely Planet and what
advice was sought to ensure that those calculations were valid
The valuation of Lonely Planet was undertaken
as a collaborative effort between Deloitte and BBCW Corporate
Finance. The offer price was validated in a fairness opinion by
Lehman Brothers.
The primary means of determining the value of
Lonely Planet was through the calculation of discounted cash flows
("DCF"). The various business activities were modelled
separately and then aggregated to determine the overall value
of the company. The book publishing activities accounted for 87%
of the value attributed to Lonely Planet with the balance represented
by the online activities.
The DCF was cross checked to valuations of other
media companies by comparing trading and acquisition multiples.
The key multiples used for the comparative analysis valuation
were Revenue and EBITDA (Earnings Before Interest, Tax, Depreciation
and Amortisation). To be consistent, these comparable company
valuations also valued the books and online activities independently
and multiples were separated into Australian or international
companies.
Due diligence was undertaken by a number of
professional service firms and independent consultants. Each area
of due diligence was managed by a senior BBCW executive with experience
in the area being reviewed. Findings from the due diligence exercises
were shared within BBC Worldwide and informed the valuation exercise.
Due diligence was undertaken by the following
advisors:
Financial due diligence—Deloitte;
Legal due diligence—Blake Dawson
Waldron;
Operational due diligence—Deloitte;
Information Technology—Cap Gemini;
Books—Independent Contractor; and
Online—Independent Contractor.
Due to the potential for a conflict of interest
in using Deloitte for both Corporate Finance advice and due diligence,
PwC reviewed the scope of due diligence work and confirmed that
all material areas of the business had been properly investigated.
Response to question raised by Paul Farrelly MP
during the 18 November oral session concerning BBC Worldwide's
financial disclosures of the Lonely Planet acquisition compared
to the disclosures required of a company listed on the London
Stock Exchange
The London Stock Exchange listing rules identify
four "Class" tests which determine how a proposed transaction
is classified. If a proposed transaction is deemed to meet the
criteria of Class 1 for example, it must be approved by shareholders
at an extra-ordinary general meeting. The four Class tests are:
(i) The Gross Assets Test;
(iii) The Consideration Test; and
(iv) The Gross Capital Test.
BBCW has calculated each of the class tests
for the Lonely Planet transaction assuming BBC Worldwide was a
company listed on the London Stock Exchange. If, at the time of
acquiring Lonely Planet, BBC Worldwide had been a public company
listed on the London Stock Exchange, the transaction would have
met the criteria of a Class 2 transaction. Class 2 transactions
are those where the Class test ratio calculations are less than
25% but at least one is greater than 5%. A Class 2 transaction
requires the acquiring company to issue a press announcement and
the Company Announcements Office of the London Stock Exchange
must be notified.
A press release was issued by BBC Worldwide
on 1 October 2007, announcing the acquisition of a 75% stake in
Lonely Planet. The level of disclosure provided by BBCW was therefore
no less than would have been required if BBCW was a plc given
that the size of the acquisition was equivalent to that of a class
2 transaction.
Note on Reporting of Financial Information re
Acquisition and Performance of Lonely Planet (in response to queries
raised by Paul Farrelly MP in the 18 November oral session).
BBC Worldwide prepares its financial statements
under UK GAAP, in line with the accounts of its ultimate parent
company, the BBC. BBC Worldwide is not required to publish its
consolidated results under the Companies Act 1985 as BBC Worldwide
is an intermediate parent owned by a UK company but voluntarily
prepares and files such accounts annually.
As a result, BBC Worldwide provides all disclosures
required by FRS 6 Acquisitions and Mergers in relation to acquisitions
made both as a Group and as a parent company. These disclosures
are also replicated in the BBC Group accounts. These disclosures
are not limited to FRS 6 requirements but also include a significant
amount of qualitative information on the performance, strategy
and risks associated with the Lonely Planet acquisition.
Lonely Planet Turnover 1 April 2007—31 March
2008
During the oral evidence session on 18 November
Paul Farrelly asked what the turnover of Lonely Planet was and
was informed that it was around £50 million. This figure
was given from memory and in fact for 2007-08 the correct figure
was £45.7 million.
Nine months of turnover was reported in the
BBC Worldwide and BBC accounts under UK GAAP as follows:
| £m
| BBCW 2007-08
Annual Report
and Accounts
| BBC 2007-08
Annual Report
and Accounts
|
July 2007-September 2007
(period from Lonely Planet's previous financial year end to the date of acquisition)
| 10.6 | p 71 | p 130
|
October 2007-March 2008
(period from the date of acquisition to the end of the BBCW/BBC's financial year)
| 23.1 | p 49 | p 83
|
| Total July 2007-March 2008 | 33.7
| | |
| |
| |
The first three months of the year (April-June) were not
reported as this is not required under GAAP. The turnover for
this period was £12 million.
NOTE FROM
BBC WORLDWIDE ON
BBC MAGAZINES' IMPACT
ON THE
UK MAGAZINE MARKET
(1986 TO 2007)
Introduction
During the recent DCMS Select Committee Inquiry into the
commercial activities of the BBC, a number of issues were raised
concerning the impact of BBC Worldwide magazines on the overall
magazine market. This document shows the changes in total magazine
circulation of a number of key sectors.
Core Food Market
Prior to the launch of BBC Good Food there were no specialist
cookery titles available in the UK—the sector did not exist.
Once BBC Good Food had created the core food market, the presence
of the title did not block other entrants. Just three years after
launch the market had grown by 86% and had increased to three
titles. In 2004 there were three further launches and total market
volumes continued to show strong growth three years later.
Homes Market
With the launch of BBC Good Homes in 1998 the number of titles
in the Homes Market increased from 10 to 15. By 2003 total market
volume was up 21% on 1997 levels and with 16 titles then in the
market. By 2007 there were a total of 18 titles in the market
with circulation at about 27.7m copies—slightly below the
peak of 1999 but consistent with previous years.
Motoring Market
In the year prior to the launch of BBC Top Gear, the motoring
market was showing a YoY decline of 26% with the number of titles
reducing from 8 to 6. In 1994 when BBC Top Gear launched, total
market volume then increased by 3% with other titles in the market
showing YoY growth. A range of titles launched (and closed) over
subsequent years. Five years after the launch of BBC Top Gear,
market volume was up 34% on pre-launch levels and comprised 12
titles. In recent years the circulation of motoring titles has
fallen (as consumers are increasingly using the Internet for news,
reviews and classified sales) but there are still more titles
available now than when Top Gear launched.
Gardening Market
In the year prior to the launch of BBC Gardeners World in
1991 total market volume was falling. In the year following its
launch, the sector volume increased 50% year on year. A range
of new titles entered the market between 1995 and 1999, long after
the BBC titles had launched. Five years after the launch of BBC
Gardener's World, the market remained 31% up on pre-launch levels
Children's Market
In the early 1990's the children's magazine sector comprised
of a few titles with low circulation. However by 1995—and
following the launch of the first BBC titles—the children's
market had grown to 12 titles with a total annual circulation
of 8.2 million (a growth of 350% compared to 1989). At the peak
of Teletubbies-mania the sector grew rapidly to the heights of
46m copies. Although circulation is now down on these highs, the
market is still 17 times larger than before the BBC titles were
launched.
The BBC's positive impact of the children's magazine sector
was recently widely reported in the press. Mintel has calculated
that the children's magazine sector has grown by 72% in five years.
Other sectors. Across other niche sectors similar patterns
are also identifiable:
— History: Prior to the launch of BBC History,
History Today magazine, (the market leader), was selling an average
of 29,269 copies per issue (ABC, 1999). In 2000 BBC History magazine
launched with an ABC of 50,082 copies whilst History Today magazine's
ABC remained stable at 29,282, showing that the BBC's entry into
the market had actually increased the total number of magazines
sold in the category by an average of 50,000 copies per issue,
or 275%.
— Genealogy: Prior to the BBC launch of Who
Do You Think You Are in September 2007, the family history
category was declining by 7% year on year. Subsequently the launch
has gone on to grow the category by 8% year on year between September
2007 and May 2008.
— Youth football: BBC Match of the Day magazine
is still in its launch phase but has so far grown the youth football
category by 89.5%.
CONCLUSION
BBC Magazines has been instrumental in creating entirely
new magazine sectors (such as cooking/food) that benefit the magazine
industry as a whole. Across all magazine sectors where the BBC
is active, the BBC's entry into a market sector is a positive
stimulus prompting rival publishers to bring out new titles or
to reinvent existing ones. The BBC's presence does not block out
other publishers or lead to an overall decline in the number of
titles. The data shows that the clear net result in the period
following launch is both an increase in the number of magazines
sold and also an increase in the number of titles available in
any given sector.
30
The Committee should note that the majority of BBC programming
does not receive pre-production commercial investment. Of approximately
1500 hours annually originated by the BBC (ie excluding acquisitions
and repeats, and also excluding genres such as News and Sport),
slightly more than 50% are made available commercially. Back
31
Co-producers are broadcast partners who make an editorial contribution
to a programme and take defined broadcast rights as well as, in
some circumstances, taking some distribution rights. Back
32
BBC Trust purpose remit research, 2007. Back
33
It is among the largest for any of the BBC's public purposes.
Audience perception of the BBC varies around the UK; in general,
approval declines with distance from London. In 2008, the Trust
published its impartiality report which revealed shortcomings
in the BBC's coverage of the UK's nations and regions. It called
for the BBC to improve the range, clarity and precision of its
network news coverage and to make it more relevant and interesting
to audiences. Separately, in April 2008, the Trust approved a
supply strategy for network television in order to ensure better
cultural representation and appropriate investment in the nations
and regions. Back
34
Rosenblatt research for the BBC Trust, 2008. Back
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