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Memorandum submitted by RadioCentre
Background1. RadioCentre is the industry body for Commercial Radio. Formed in July 2006 from the merger of the Radio Advertising Bureau (RAB) and the Commercial Radio Companies Association (CRCA), its members consist of the overwhelming majority of UK Commercial Radio stations, who fund the organisation. 2. The role of RadioCentre is to maintain and build a strong and successful Commercial Radio industry - in terms of both listening hours and revenues. As such, RadioCentre operates in a number of areas including working with advertisers and their agencies, representing Commercial Radio companies to Government, Ofcom, copyright societies and other organisations concerned with radio, and working with stations themselves. RadioCentre also provides a forum for industry discussion, is a source of advice to members on all aspects of radio, jointly owns Radio Joint Audience Research Ltd (RAJAR) with the BBC, and includes copy clearance services for the industry through the Radio Advertising Clearance Centre (RACC).
Executive Summary 3. We recognise that the inquiry will focus on the BBC's Commercial Services but urge the committee to examine any BBC Public Service activities which exhibit commercial characteristics, including 'commercial trading activities'. 4. This broader perspective is important because of inherent weaknesses in the current governance framework for the BBC's commercial activities, which blur the distinction between Public and Commercial Services. 5. A key way of addressing this would be to introduce genuine operational separation between Public and Commercial Services. At present, the BBC Executive has considerable influence over BBC Worldwide's strategy, which we believe is inappropriate. There is also insufficient transparency as to the approvals process for BBC Worldwide activities, which could be addressed with clearer external oversight. 6. The major area of competition between the BBC's Commercial Services and RadioCentre's members arises from BBC Worldwide's activity as a publisher of live and on-demand audio, video and music content. We believe that this area justifies careful scrutiny, particularly as technological change alters the structure of the music industry. 7. In addition, there is also insufficient clarity as to the terms on which the BBC is able to undertake commercial activity through its Public Services. Specifically, we believe that the category of permissible 'commercial trading activities' is insufficiently well-defined, leading to risks of unfair market impact arising from practices such as giving on-air exposure to event sponsors. 8. RadioCentre also believes that the BBC effectively sells its airtime if it allows a rights holder to factor the value of promoting a sponsor, product or service in BBC programming whilst negotiating a rights deal. We suggest a number of means of restricting negative commercial activity of this kind.
The scope of the committee's inquiry 9. We have inferred that the Select Committee's inquiry focuses on the BBC's 'Commercial Services', as defined by the BBC Charter and Agreement, but that it will also investigate activity with commercial characteristics undertaken by the BBC's Public Service arm. The division between each of these areas is laid out in the BBC Charter and Agreement 2006 and is, in our view, ambiguous. The Agreement states that "Any commercial services must be provided through one or more commercial subsidiaries" but also that "The BBC as a corporation shall not directly provide any commercial services, but it may carry out other trading activities"[1]. 10. The existence of the latter category, 'other trading activities', or 'commercial trading activities' as they are called in the BBC's Fair Trading Guidelines, permits the BBC to undertake a range of commercial activity which does not require operational and financial separation through a subsidiary. 11. The scope of this category of activity is defined only by the BBC's own Fair Trading Guidelines, which state that 'commercial trading activities' are undertaken directly by the BBC's Public Services "to promote the BBC's Public Purposes but may - as a secondary consideration - also generate a profit"[2]. Elsewhere, the Guidelines state that that "Commercial Trading Activities ... are not operated with the intention of earning a profit - although they may do so in some circumstances"[3]. It is unclear how "intent" to earn a profit would be identified, or what quantity of unlooked-for profit would be acceptable. 12. Therefore, while we recognise that the inquiry will focus on the BBC's Commercial Services, we urge the committee to examine any BBC Public Service activities which exhibit commercial characteristics, including 'commercial trading activities', and to investigate whether there is sufficient definition around such activity. 13. We believe that it would also be valuable for the committee to investigate the BBC's involvement in developing distribution platforms, including online platforms such as the iPlayer (Public Service) and Kangaroo (Commercial Service). Although this issue is outside the scope of this inquiry, we would welcome an opportunity to discuss with committee the impact that BBC-supported closed platforms have in terms of market foreclosure, either now or in the context of a future inquiry.
The benefits and
opportunities offered by the BBC undertaking a range of commercial activities
in the 14. We do not have any comment to offer on the benefit of the BBC Public Services undertaking commercial trading activities. 15. The operation of the BBC's Commercial Services has a number of potential public benefits. These may include: · Ensuring that the BBC is recompensed for consumption of content by overseas audiences which do not pay the licence fee; · Allowing · In theory at least, allowing the level of the licence fee to be lower; and · Showcasing British culture and perspectives internationally. 16. A somewhat more subtle benefit, but one which is of potentially greater significance to commercial operators, is the role which the BBC's Commercial Services play in placing natural limitations on the scope of its Public Services. 17. For instance, by selectively monetising archive content rather than making it widely available in perpetuity for nothing, the BBC avoids flooding markets with content and undermining business models for distributing equivalent non-BBC content. A good example is audio and video from archive live sessions and concerts. If the BBC's strategy was to distribute every piece of content of this kind in its archive via free-to-air public service platforms, it would undermine consumers' interest in purchasing CDs, downloads or subscriptions offered by Commercial Radio broadcasters, or in accessing ad-funded websites which offer videos of live performances. 18. With appropriate safeguards, such as ensuring that the BBC's commercial subsidiaries do not participate in anti-competitive closed platforms or retail content at below market prices, the BBC's Commercial Services can have the effect of maintaining appropriate limits on the scope of the BBC's Public Service activities. To return to the archive audio content example, the BBC's ability to distribute content which is more than seven days old through BBC Worldwide was a helpful justification for restricting the age of content available on BBC iPlayer. 19. We do not rule out the possibility that BBC Commercial Services could help to build new markets which commercial operators can exploit. However, there are not any obvious examples of this in the area that our members operate in - principally audio and music content.
The potential risks to the BBC, licence fee payers and other stakeholders 20. RadioCentre has interests in both the BBC's Commercial Services (particularly BBC Worldwide) as well as its commercial trading activities (i.e. those activities undertaken by the BBC's public service operations). The risks of the BBC undertaking either category of activity include that this might: · Set price expectations amongst consumers; · Lead to the BBC taking revenue directly from commercial operators; · Shape the terms of licences available to third parties from copyright holders for the distribution of music or other types of content; · Lead to the creation of dominant closed platforms, to the exclusion of commercial operators; or · Influence the BBC's strategy for meeting its public purposes through its public service arm. Commercial Services 21. In the case of the BBC's commercial services, these potential risks ought to be minimised by the natural incentive to achieve optimal profitability and commercial efficiency, within the limits imposed by standard business and competition law. However, the privileged access which the BBC's commercial operations have to BBC content and services acts as an implicit state subsidy, which heightens the risk of market distortion. 22. The major area of competition between BBC Worldwide and RadioCentre's members is in publishing live and on-demand audio, video and music content. Commercial Radio stations such as Classic FM, Jazz FM, XFM and Absolute Radio are pursuing a strategy based on monetising audio and music content outside of a broadcast environment. This can be through podcasts, physical CD sales or online ad-funded on-demand video and audio clips of music (either recorded themselves, or licensed from record labels). 23. According to BBC Worldwide's latest Annual Report, the Audio and Music department of its Home Entertainment division generated profits of £6.0million on sales of £26.7million in 2007/08. The Annual Report states that "the established BBC Worldwide music businesses had a strong year, with the licensing team celebrating a number of hit CDs including Live Lounge 1 and 2" and also mentions the agreement of a commercial deal with the record label EMI in May 2008 to "unlock the BBC archive of TV and radio material relating to the EMI stable of artists". BBC Worldwide Audio and Music's current five year plan lists the following objectives: - unlock the BBC archive and make more content available; - develop live music events; and - extend investment in new output. 24. Competition between BBC Worldwide and Commercial Radio is not new in this area, and indeed BBC Worldwide and Commercial Radio stations are themselves only part of a wider audio and music retail market. We believe that this area justifies careful scrutiny, particularly as technological change alters the structure of the music industry. 25. The internet has a number of effects on business models, and we are concerned that BBC Worldwide's privileged scale, technology resources and access to BBC content means that it is unfairly well placed to capitalise upon these changes: 1) Domestic and international markets blur, meaning that the rewards for success are potentially even greater, in so far as participants are able to secure international agreements for the use of content; 2) The opportunity for the BBC to include web-links between its Public Services and Commercial Services creates the potential for cross-promotion between the two, unless careful safeguards are put in place; 3) BBC Worldwide gains the opportunity to become a platform provider as well as a content publisher (meaning it could bar third party content providers from accessing a web-based platform on equivalent terms); and 4) The internet makes it cheaper to increase the volume of content made available and so harness the 'long tail effect'. This has the potential to flood the market with BBC content. 26. We believe that the
risks of Commercial Trading Activities 27. As outlined above, we believe that 'commercial trading activities' (that is commercial activity undertaken directly by the BBC's public service arm), are insufficiently well-defined, leading to risks of unfair market impact. 28. The BBC's Fair Trading Guidelines include a non-exhaustive list of potential commercial trading activities, including licensing of content rights, securing investment by third parties in BBC productions and trading between different parts of the BBC. A further area is listed which we believe lacks adequate restrictions as to its scope: "The provision of facilities, services and goods which are ancillary to the BBC's Public Service Activities and in respect of which any charge is imposed primarily for the purpose of recovering costs/expenses. For example, the provision by the BBC's Public Services of programme support material (e.g. booklets) or tickets for events."[4] 29. RadioCentre's concern about the ambiguity in the way that this area of activity is defined arose in the context of our complaint to the BBC and appeal to the BBC Trust about the presence in editorial of on-air credits for sponsors of BBC radio and television events programmes. 30. On-air sponsorship credits: Between December 2007 and July 2008, RadioCentre complained to the BBC and BBC Trust about the BBC's practice of entering into agreements with sponsors to provide on-air credits on the basis that such activity was inappropriate and breached the BBC's editorial and fair trading guidelines. One of our arguments was that seeking sponsors for events which feature in programmes should have been classified as a "commercial service", meaning that it should be subject to operational and financial separation from the BBC's public service activities. 31. The BBC Trust ultimately upheld our complaint on editorial grounds only, although the BBC Executive subsequently decided of its own volition to stop broadcasting sponsor credits in events programmes. We therefore assume that providing on-air credits to event sponsors remains legally permissible, presumably under the ambiguously defined category of 'commercial trading activities' quoted above. The BBC's justification for classifying the activity in this way is indeed that "any charge is imposed primarily for the purpose of recovering costs/expenses", however we contend that this definition could be applied, albeit on a larger scale, to any of the BBC's commercial services. Other BBC Public Service Commercial Activities 32. RadioCentre would like to flag up a further area of activity which is effectively commercial in nature, and which we believe lacks proper treatment under the current framework governing the BBC and its services. We have concerns that the BBC uses the ad-free environment of its programmes to obtain an advantage in commercial negotiations for content rights. 33. BBC content rights deals and on-air promotion of third party products and services: RadioCentre believes that the BBC effectively sells its airtime if it allows a rights holder to factor the value of promoting a sponsor, product or service in BBC programming into a rights deal negotiation. This is regardless of whether there is an explicit reference to this in a written agreement, or whether any charge is involved, since payment may be implicit and in kind. Examples of programming affected may include sports commentary rights on Radio Five Live or BBC Local Radio or an appearance by a leading chart-topping artist at a Radio 1 concert. 34. Particular risks arise as a result of the unbranded nature of BBC output, coupled with its sometimes very high audience figures. These factors mean that even very incidental references to brands, products or services in BBC programming can carry a high value. For instance, the BBC gains a tangible advantage in securing rights for Premier League matches due to its ability to showcase the Barclays brand in Radio Five Live output which is free of commercial references. This is even more the case in radio than television, since the BBC can control what listeners hear but cannot entirely obscure visual references to a sponsor at a televised event. 35. In a similar way, we also have concerns that BBC radio stations may promise to give on-air exposure to tracks by certain artists in exchange for their appearance at a concert associated with and broadcast on that radio station. 36. We therefore suggest that: · The BBC's editorial guidelines should be revised to prevent any references to brands, products or services which are sponsors of content to which the BBC carries broadcast rights. This will ensure a level playing field in rights negotiations between the BBC and commercial broadcasters; · The BBC should be prevented from making any promises regarding product exposure to artists in exchange for access for concerts, live sessions, interviews or any other on- or off-air context; and · The BBC should avoid signing any exclusive agreements for content rights, in order to avoid securing privileged access to content rights on account of offering implicit payment in kind or other benefits. 37. On the latter point, RadioCentre's view is that the BBC should avoid signing any exclusive rights deals unless it is unavoidable to do so, on account of the risk of unfair market impact arising from such an approach and the loss of public value. However we recognise that this broader point may lie outside of the scope of this inquiry.
The extent to which the BBC's commercial activities meet the criteria required of them 38. We understand that the BBC's Commercial Services are required to comply with the following principles: - Fit the BBC's Public Purposes; - Exhibit commercial efficiency; - Not jeopardise the good reputation of the BBC or the value of the BBC brand; and - Comply with fair trading guidelines and avoid distorting the market. 39. RadioCentre does not have any major complaints about any of the BBC's current Commercial Services under the above criteria. However, we have identified risks of negative market impact in the area of online distribution in the area of online audio, music and video, as outlined above. If such activity is not subject to adequate scrutiny, it risks compromising the third and fourth criteria. We are also concerned that the BBC is able to undertake commercial activity through its Public Services which is not subject to equivalent criteria and governance arrangements, and believe that this should be subject to greater definition.
The appropriateness and effectiveness of the governance framework for the BBC's commercial activities 40. We have two major concerns about the governance framework for the BBC's Commercial Services, as laid out in BBC Protocol D6 - The BBC's Commercial Services. These are over and above the concerns we outline above about the lack of definition regarding commercial trading activities and other commercial practices undertaken by the BBC's Public Services. 41. Firstly, we believe
that the BBC Executive's oversight of BBC Worldwide undermines the operational
separation between Public and Commercial Services. This creates the risk that
the BBC's strategy for meeting its public purposes may be influenced by
commercial considerations. For instance, the BBC may be encouraged to increase
its investment in 42. Secondly, we believe that there is insufficient transparency as to the approvals process for BBC Worldwide activities, which could be addressed with clearer external oversight. In so far as the BBC Trust does have a role in approving more significant BBC Worldwide services, such as the video on-demand service Project Kangaroo, the details of this scrutiny process are opaque. We believe that they should be subject to far greater transparency.
The future of BBC Worldwide and other BBC commercial subsidiaries 43. The role of BBC Worldwide played a key part in the recent debate surrounding the level of the BBC Licence Fee. As part of the 2007 settlement, the BBC's Commercial Services are expected to provide an increasing share of the BBC's Public Service operating costs. As BBC Worldwide's importance grows, and as it expands into new areas and exploits the internet, we believe that there is a clear rationale for greater operational independence from the BBC Executive, allied with tighter external scrutiny. 44. We do not rule out a future privatisation as a means to ensure that BBC Worldwide does not gain an unfair advantage from its relationship with the BBC, although RadioCentre is not calling for this at present. 45. Another area of debate which the inquiry is likely to cover is the extent to which BBC Worldwide should enter into exclusive partnerships with other non-BBC organisations, either through joint ventures or other revenue sharing arrangements. We have concerns about any instance in which a particular broadcaster or organisation receives preferential assistance from the state which is not available to other operators within that market and are therefore opposed to significant activity of this kind. This is due to the likelihood that this will distort markets.
How the money returned to the BBC by its commercial operations is invested 46. Any profit generated by the BBC's commercial operations should be used to reduce the amount of licence fee funding required by the BBC. If the level of profit exceeds expectations, the BBC should return money to licence fee payers, to ensure that it is not overcompensated. This also has the effect of promoting efficiency. 47. We are concerned that the current BBC governance structure acts as a disincentive to licence fee revenue being refunded. The BBC Trust's duties to ensure that BBC content is of a high quality may take precedence over such considerations, highlighting potential tensions in its responsibilities. We suggest that this would merit investigation by the committee.
October 2008
[1] BBC Agreement, (68) 1-2. [2] BBC Fair Trading Guidelines, (2.7) [3] BBC Fair Trading Guidelines, (2.28) [4] BBC Fair Trading Guidelines, (2.7) |