House of Commons - Future of the BBC - Culture, Media and Sport

Future of the BBC - Culture, Media and Sport Contents

5 "Compete or compare"

130. In the previous chapter we considered the scope and scale of the BBC and ways in which it might reduce its scale and get "more for less" in the next Charter period, including through engaging others in its work and partnership arrangements, and through stepping back from areas that were already well catered for by others. In this chapter, we consider further issues that impact on the size of the BBC and areas where it could also increase engagement with others in the pursuit of the best content, in local journalism, in the sale and distribution of content, and in the development of technology. There is often an uncertain balance to be struck in all of these areas and even where the BBC has a good record of doing things itself, there may be opportunities for obtaining better value for money through commissioning, or greater creativity achieved where it willingly collaborates with others in meeting its public purposes.

BBC Production

131. A few days before giving evidence to our inquiry, the BBC announced plans for a fundamental change to its production supply arrangements. As part of the next Charter Review, Lord Hall has proposed that the BBC should remove its in-house production guarantees, establish BBC Production as a standalone subsidiary operating on a commercial footing, and allow it to make shows for rival broadcasters in the UK and others abroad for the first time in the BBC's history. However, news, sports and children's programming are not expected to be open to competitive tender.[180]The BBC explained that increasing competition in this way would ensure it always commissioned the very best ideas wherever they came from.[181]Lord Hall also saw increasing competition in supply of content as being an important element of contestability of the BBC's funding.[182]

The BBC content supply quotas

·  Currently, 25% of BBC television commissioning hours is guaranteed to independent producers, 50% is guaranteed to BBC in-house producers, and 25% is available to both in open competition under the Window of Creative Competition (WoCC), first introduced in 2007 as part of the last charter review.

·  For radio, under separate requirements, at least 10% of hours must be commissioned from independent suppliers, with a further ten per cent open to competition between the BBC and independent sector.

·  For online, 25% of content spend must be commissioned from independent suppliers.

·  The radio and online quotas are not statutory requirements, unlike the 25% independent production quota for television. The latter applies to all UK public service broadcasters.

132. Over the last few decades the growth of the UK's independent TV production sector has been impressive; in 2013 the industry contributed over £3 billion to the British economy.[183] The establishment of independent commissioning quotas in the 1990s and the agreement of terms of trade between PSBs and independent producers contributed to this success. The aim of the independent productions quota was threefold: to promote cultural diversity, opening up the production system to new energies and voices; to stimulate the growth of small and medium-sized enterprises; and to tackle vertical integration within the UK programme supplier market.[184]

133. The sector has almost doubled in size since new terms of trade were agreed in 2004.[185] Another contributory factor to the industry's growth has been the diverse mix of funding in the UK television industry: a combination of the licence fee, advertising and subscription revenue supports UK production.[186] In the case of the BBC, in 2013, it spent £476 million on commissioning content from external producers, making it the biggest buyer of content in the UK market.[187]

2004 'Terms of Trade'

Among other things, the terms of trade between PSBs and indies, has allowed independent producers an equitable production fee and control of distribution of their shows after first transmission, including international rights, format rights, video and DVD royalties and merchandising, although PSBs take a 15% share of net profits. The rationale for the agreement was to counter-balance the PSB's power as broadcasters.

WINDOW OF CREATIVE COMPETITION

134. Patrick Younge, a former chief creative director of BBC Production, told us that without the in-house guarantee, the BBC would not have been able to build a strong network of production bases in Bristol, Cardiff, Glasgow and Salford, and would not have made a meaningful contribution in Belfast.[188]In the last few years there has been significant acquisition and consolidation activity in the UK production sector, with several independent producers having been taken over by other production companies or by global studio groups, to create what have become known as "super indies". According to Ofcom, seven of the biggest 12 UK independent production companies are now vertically integrated with broadcaster-owned companies that have significant global scale.[189] This consolidation in the industry has led to some companies losing their qualifying indie status: this has occurred where a parent company has a greater than 25% share interest in a UK broadcaster or a UK broadcaster has more than 25% shareholding in the production company. Where this has happened, and the producer has been a supplier of a returning show or series to the BBC, the commissioned hours have had to be attributed to the Window of Creative Competition (WoCC), despite there being no competition.[190]Mr Younge explained the position as being less about creative competition and more about accounting.[191]Danny Cohen, BBC Director of Television, told us there was now less and less room for small indies, and for BBC Production itself, to win commissions in the WoCC.[192]

Summary of BBC television production supply
	2012/13	2013/14
Proportion of all hours produced by:
BBC in-house	56%	55%
External supplier	44%	45%
Percentage of WoCC won by:
BBC in-house	26%	22%
External producers	74%	78%
Hours of qualifying programmes produced by independent producers
Independent producers	36%	36%
Source: BBC Performance against public commitments 2013/14

135. Against that background, the BBC Trust remains open-minded over the make-up of the BBC's supply arrangements. The Trust told us that its overriding concern was for audiences and the BBC providing them the highest quality and creative output.[193]The Trust has announced a wide-ranging review looking at the way programmes and content are made and supplied to the BBC by either independent production companies or BBC in-house production.[194]The review will consider the changes to the BBC's approach to content supply proposed by the BBC Executive and the potential impact on quotas and targets. Following a full consultation, the Trust plans to publish a final report by summer 2015, with the conclusions forming proposals to Government ahead of Charter Review. In its consultation on its third review of public service broadcasting, Ofcom has also identified key areas for further consideration including "rebalancing the relationship between PSBs and the production sector".[195] It notes that any change in regulatory intervention that influences the relations between the PSBs and the independent production sector will need to be tested against a number of questions including: "will it increase investment in UK content, how might it improve the delivery of the [public service] purposes and characteristics, and can it be achieved without undermining the current success of the UK production sector?".

PUBLISHER-BROADCASTER MODEL

136. Some are calling for change. According to the Producers Alliance for Cinema and Television (Pact), the BBC should become a publisher-broadcaster like Channel 4.[196] In their opinion, all BBC demand for programmes could be filled and supplied by the market, which would drive efficiency savings in the BBC, releasing more funds for new content. Prior to Lord Hall's 'compete or compare' speech, the Radio Independent Group, who represent radio production companies, told us they would like parity with the television indie quotas, where there is a minimum 25% quota and a 25% WoCC. In 2010, following a review of radio independent supply, the BBC Trust concluded that it had not been provided with a convincing case that increasing the 10% supply quota for radio would deliver greater public value to listeners of the BBC's radio services. The basis of its conclusion rested on a case that the fixed costs of the BBC's radio studio provision and technology meant a reduction in internal provision was unlikely to make BBC radio any less expensive. Instead, the Trust recommended the creation of a 10% WoCC for radio on top of the 10% (voluntary) independent supply quota that was already in place.[197]

137. A report prepared for Pact has projected that a move of television production outside the BBC could involve a reduction in BBC staff of between 3,000 to 4,000, along with a decrease in the BBC's corporate overheads and support services.[198]Oliver & Ohlbaum estimate that through a combination of winding down BBC in-house production, contracting out, transferring some genres to BBC Worldwide, and management buyouts of some long-running, existing BBC Production strands, the policy could realise £575 million in benefits for the creative sector and £30 million a year of savings for the BBC licence fee payer, as well as dealing with the BBC's major competitive and PSB concerns.[199]

138. Lord Grade shares Pact's stance on the BBC going to the market for content and other ancillary services. He has suggested that all BBC production processes and facilities could be outsourced to "a private sector more capable of absorbing the work".[200] This could release the BBC's "capital expenditure, resource management, headcount, investment capital and much more besides". He explained:

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OPEN AND FAIR COMPETITION

139. At present BBC producers are able to pitch ideas for programmes only to BBC channel.[202] BBC Production operating commercially could open up a variety of opportunities and profit potential which could be to the BBC's benefit. Nonetheless, there are potential risks associated with the BBC adopting a publisher-broadcaster model, or indeed with BBC Production becoming a commercial entity, in that its PSB programme-making values could diminish. If the BBC did not have control over its own production departments (or companies), then over time a shortage of external suppliers of key PSB genres, such as children's programming, could occur. On the other hand, if public funding were made available for others for the production of children's programmes this could grow the supply of such content.

140. In a similar way, if BBC Production became commercially focused, it might concentrate on producing material which had export potential rather than catering for the needs of licence fee payers. A problem in the medium-term could be the BBC's ability to achieve its out of London production quotas, and its commitments to the Nations, if there were insufficient content producers spread around the country, and it was obliged to wind down its own regional production centres.

141. If BBC Production were permitted to compete for commissions from other broadcasters then there would have to be a transparency in costs and fairness of commissioning decisions as well as robust safeguards against licence fee revenue cross-subsidising BBC's commercial supply activity. Lord Hall reassured us that the BBC understood that it had to demonstrate that there would be an absolute level playing field in commissioning processes and the BBC was working through the fair trading guidelines to make sure that this would be clear to everyone.[203] Despite this, Pact told us that so far they had been unable to obtain information from the BBC on its programmes' cost per hour. Although we accept that there is a case for commercial confidentiality on some specific costs, benchmarking and transparency of decision making processes will be essential if the BBC is to take an even-handed approach to commissioning.

142. Pact's inclusion on a working group looking at the BBC's plans for its new supply model should afford them opportunity to engage with the BBC over such matters. For a commercial BBC Production subsidiary to be successful, the BBC would have to overcome any suspicions that old ties between its commissioners and producers could lead to preferential treatment, even if arms-length arrangements were established. This could only be achieved with wholly transparent trading arrangements which were open to independent audit and scrutiny. We discuss the BBC's auditing arrangements in a later chapter.

143. ITV predicted that an end to the BBC in-house guarantee could deliver something akin to a 'big bang' for the UK creative economy, liberating talented BBC programme makers, driving value for money and maximising the opportunity for the UK to exploit programming in secondary markets.[204]Channel 4 believed that the BBC needed to retain a strong in-house production presence so that there would continue to be a healthy mix of both in-house production and externally produced content. They also pointed out that the BBC's in-house production departments were the training and development hub for the wider industry.[205]

LOSS OF TRAINING GROUND?

144. A switch to a publisher-broadcaster model could put at risk the BBC's longer-term investment in people and shift its training role to the commercial sector. As we have set out above, there is wide support for the BBC's training function.[206]Yet if the BBC had no significant production capacity of its own, it is hard to see how it could offer apprenticeships in production and on-the-job training for the industry. In addition, the BBC Academy would lose a training ground. A report by Deloitte's estimated that the value BBC training offered to other media organisations in 2008/09 benefited the creative industries by £59 million a year through improved productivity.[207] Yet, the BBC's own investment in training has been declining as result of its Delivering Quality First savings programme: a 35% cut was imposed to the activities of the BBC Academy over three years.[208] Nonetheless, in 2014/15 the BBC will increase its apprenticeships to 170 placements.[209]

145. In theory, the licence fee could be used to fund training bursaries across the BBC's supplier base. In Lord Grade's opinion, the key thing was the funding, not the institution doing the training.[210] It has been suggested that indies are already spending approximately £40 million a year on training.[211]

TERMS OF TRADE

146. The BBC has indicated that the terms of trade need looking at again, given the changes that have taken place in industry players since 2003.[212] While the BBC owns all the rights to content produced in-house, the current terms of trade prevent the BBC and other PSBs from owning secondary rights on acquired content from qualifying indies. When purchasing from a qualifying indie, the downside is that the potential earnings of the BBC reduce from 100% of revenues post the 30-day broadcast window to 15% under the terms of trade.[213] So while the BBC and PSBs carry most of the production cost they have only a small stake in the potential for royalties from the material purchased from qualifying indies. Lord Grade considered that the terms of trade were now uncommercial and that they had been designed to encourage a fledgling sector. He remarked:

214

147. Nonetheless, the BBC and other PSBs are free to negotiate better commercial terms with external producers who do not qualify as an indie under the statutory provision. Despite this, Pact told us that the BBC, ITV and Channel 5 choose not to do so as they had worked out that the terms of trade did not necessarily damage them and were an attractive proposition for their suppliers.[215] Pact has led several renegotiations of the terms of trade since 2003. The last had allowed the BBC extended rights for content to be shown via the iPlayer for up to 30 days after transmission and in Channel 4's case for its re-run channel, 4Seven.

148. Pact also explained how independent production financing worked. Producers generally did not get fully paid for the cost of a programme they were making for a broadcaster; instead they had to pre-sell the rights of content to the international market in order to secure their budget, as under a deficit-financing arrangement. As a result, a production company would not recoup all its costs until after a show had been broadcast and sales revenues came in.[216]Ofcom has noted that even though the independent production sector has been consistently profitable since 2003, the overall margins are not particularly high and have fallen in recent years.[217]

149. A significant change since 2003, of course, has been the increase in channel supply with the growth of multi-channel services and digital switchover, and other content delivery platforms and services including iTunes, Netflix and Amazon Prime Instant Video. This increased competition has meant that power has transferred from the broadcasters and channel owners to the content providers, who are able to exploit the rights to content, generating in some cases significant earnings in global sales.

150. In respect of indie production companies, seven of the biggest 12 are now vertically integrated with broadcaster-owning groups that have significant global scale. According to Ofcom, there are only four remaining "super indies" whose commissions qualify for the terms of trade, although many smaller and medium sized companies continue to qualify.

Qualifying and non-qualifying super indies

Super indie Parent company Parent's UK channel Parent's EU channel Qualifying indie?

All3Media Discovery, Liberty Global Discovery Discovery No

Avalon Entertainment n/a None n/a Yes

Endemol Apollo Management/
21^st Century Fox
Sky channels Fox International Channels No (if acquired by 21^st Century Fox)

Fremantle Media RTL Group None RTL channels Yes

Hat Trick n/a None None Yes

Hartwood Films n/a None None Yes

IMG Productions n/a None None Yes

Nutopia n/a None None Yes

Shed Time Warner Turner, CNN etc Turner, CNN etc No

Shine 21^st Century Fox Sky and Fox channels Sky and Fox channels No

TwoFour Group n/a None None Yes

Zodiak Media De Agostini None Antena 3 (Spain) Yes

Note:
Disqualification is where a production group or company is connected to a UK broadcaster. Qualification allows a company to qualify for the "terms of trade" and to count towards indie quotas.

151. In a speech to the Royal Television Society last autumn, the Rt Hon. Sajid Javid, the Secretary of State for Culture, Media and Sport, indicated that the terms of trade and the related legislation on qualifying indies needed to be reviewed ahead of Charter Review.[218] Ed Richards, as chief executive of Ofcom, also believed the time was right for a review. He explained:

219

152. Whilst we welcome the concept of removing the BBC's in-house production guarantees and opening up the majority of BBC commissioning to competition, it is important that commissioning decisions are not simply made on the basis of cost but also on quality. Clearly there would be a benefit to licence fee payers in the BBC producing content for others on a commercial basis given the financial return it could make. However, we believe there is a risk that such commercial motives could over time distract BBC producers from their principal role in meeting the BBC's public purposes. The BBC must remember the concerns expressed and previous overreach of BBC Worldwide. It must not allow commercial gain to trump the BBC's main purpose as a public service broadcaster.

153. We are sceptical of the suggestion that the BBC should become solely a publisher-broadcaster and retreat from producing any content itself. Given the BBC's long successful tradition of making high-quality television programmes, it should continue to produce content itself where its output is distinctive from the market and where it makes economic sense to do so. In future, when the BBC is commissioning content it will have to give careful consideration to the value of long-term ownership of intellectual property, as well as initial production costs. Where particular types of content can be provided by the market more easily and cheaply, and have less long-term value, the BBC must be willing to withdraw from these areas.

154. If BBC production is opened further and the BBC were to be permitted to compete for commissions from other broadcasters then it must be able to demonstrate a transparency of costs and a fairness in its commissioning decisions and processes with robust safeguards against licence fee revenue cross-subsidising BBC's commercial supply activity. This will not be easily achieved.

155. In taking on production work for others, BBC Production would become one of the largest production companies trading in the UK market. As such, the Government would need to consider what impact its commercial endeavours would have on smaller and medium-sized production companies operating in the UK market and consider what, if any, bearing this should have on any review of the terms of trade and other legislation in respect of independent content production.

156. While the terms of trade have successfully achieved their original aims of supporting and growing a diverse supply of content production in the UK, we recognise claims that there is now too much of an imbalance in the industry in respect of the size and influence of production groups following the recent consolidation and growth in foreign ownership of providers. As well as there being a need for continued support for small and medium-sized independent production companies, we recognise the increasing importance that ownership of content is playing for broadcasters given the rise in on-demand viewing and download-to-own services. Such change means the traditional public service broadcasters' business models are changing. We recommend that the terms of trade should be reviewed as part of the Charter Review process. Among other things, consideration must be given as to how the terms of trade might have to change in respect of the BBC if it became a commercial provider of content to others. As the terms of trade apply to all PSBs, Ofcom should have a lead role in this review. However, any changes to the terms of trade must not introduce any unintended consequences. For example, limiting the retention of rights to content to only smaller production companies could create incentives for broadcasters to deal with larger producers where preferential terms could be applied.

Provision of local news and online content

157. There has been a running debate about whether the BBC's share of news output and its online presence is too dominant and whether it is posing too much of a competitive threat to regional journalism, as well as if the BBC potentially could have a key position in helping to sustain local media organisations through a more collaborative approach to the industry. The BBC's local output is provided through regional news on television, local and nations' radio services, and local websites. The service licence for BBC Online stipulates that it should provide content for licence fee payers in the different nations and local communities across the UK and that at the core of the offering there should be:

news, sports, weather and travel, alongside content in other areas which reflects the particular characteristics of each nation or locality and supports broader BBC initiatives, programmes and services.

It explains:

and that

220

158. Local newspapers are a vital component of our democracy as are their community-based journalists who keep a watchful eye over local government and other agencies and provide coverage of events that would otherwise go unreported. As of 1 January 2014, the regional and local press provided local news and information across 1,100 daily and weekly titles and 1,700 websites.[221] However, in the last decade the sector has suffered a steady decline in traditional paper circulations, owing to people moving online. Since the financial crisis of 2008, 150 local newspaper titles have closed with many more reducing the frequency of publication or the range of locally-specific news coverage.[222] In an effort to counter this, many regional newspaper groups have diversified by growing their own web audiences to allow them to compete with new media organisations online.

159. A decade ago, Philip Graf CBE, a former Trinity Mirror chief executive and later Ofcom Deputy Chair, conducted a review of the BBC's online services on behalf of the then Government.[223] At that time, he called for a "precautionary approach" to BBC Online investment and for at least 25% of the BBC's online content (excluding news) to be supplied by external suppliers. He also recommended that BBC Online must include "more consistent and transparent links" to all relevant commercial and public sources, and not only link to BBC pages. These recommendations were incorporated as conditions in the Trust's service licence for BBC Online.[224] The licence specifies that the service should:

· Commission at least 25% (by value) of eligible content and services from external suppliers; and

· aim to increase the volume of click-throughs to external sites from all parts of BBC Online year-on-year.

160. With local newspaper businesses now running their own websites, we were told that they were much more sensitive to coverage of local news by BBC Online, as they were now competing for the same audiences. Nevertheless, Geraldine Allinson, Chairman of the KM Group, told us that she was sure there was a way for the BBC to provide local services in a manner where the local press and the BBC could coexist:

225

226

Nonetheless, there was concern that an unconstrained BBC through its non-commercial expenditure could wipe out the local press and eliminate all competition.[227] Yet Ian Murray, President of the Society of Editors, told us:

228

161. The regional press have two principal concerns in relation to BBC's online activity which impacts on their businesses and ability to compete fairly. First, they find that the scale of BBC investment in its regional websites is too high and that this is thwarting their efforts to build digital audiences.[229] Second that the BBC takes stories from them without properly attributing the content or linking a news item to the media website from where the story originated. While there is recognition that the BBC is starting to improve in this regard, in terms of referrals, we were surprised when the KM Group and Archant told us that only a tiny percentage of traffic to their sites came from the BBC's.[230]

162. The chief executive of Johnston Press, Mr Ashley Highfield (the BBC's former Director of New Media and Technology from 2000 to 2008), has called upon the BBC to introduce quotas on web traffic sharing, and asked for a more general commitment from the BBC to supporting regional papers. He has argued that the regional press should be allowed to take content, such as video, from the BBC and republish it on their websites, in effect reversing the traditional content flow, so long as local sites properly attributed the material to the BBC and were mindful of not juxtaposing inappropriate advertising. He explained:

231

163. Some see a paradox in the BBC Trust being there both to cheerlead the BBC and to constrain it. Ms Allinson told us despite attempts to contain the BBC, the Trust had encouraged BBC management to make BBC online services more local.[232] In 2013, the Trust's review of BBC Online had recommended that the BBC should develop and implement initiatives to improve its local online offer, particularly news, alongside broader actions to improve navigation and personalisation of the BBC's local sites.[233] In light of this, Mr Adrian Jeakings, President of the Newspaper Society, remarked that the industry was "girding its loins" for the same battle all over again.[234]

164. Several representatives of the local press see potential for a mechanism whereby local and regional press are appropriately rewarded for creating content which is shared with the BBC. The previous Government developed policy to introduce Independently Funded News Consortia (IFNCs), which could have been funded through a share of the licence fee, to fill any gap due to reductions in regional news coverage by Channel 3 licensees.[235] However, these plans were dropped by the incoming coalition Government, which instead proposed new commercial local TV in towns and cities, with funding for the IFNC pilots used to support the rollout of superfast broadband.

165. In line with this ambition for local TV, as part of the 2010 licence fee settlement, the BBC is obliged to earmark up to £5 million of funding per year (for three years) for the acquisition of local news content from the new local television stations.[236] However, so far only a few local TV services have been launched, of which London Live is probably the best known. It appears this channel has got off to a slow start since launch, as it has only attracted small audiences. Another new TV station for Birmingham went into administration before it had launched; its licence has been passed to another media group.[237] In the last two years, Ofcom has awarded 30 licences for local TV services and 15 stations have gone live. So far these services do not appear to have had any significant impact among audiences nor have they made a meaningful contribution to the provision of local news and content and as such their viability remains in doubt.

166. The BBC's funding of local TV prompts questions of whether a similar model could be adopted to support regional news. Ms Allinson believed it could be possible for the BBC to support local journalism by commissioning content from third parties on a commercial basis where independent journalists and media groups bid for work. She envisaged local BBC newsrooms potentially identifying subjects that their local audience would be interested in, and possibly investigative journalism that might be unaffordable for local media to do by themselves, and pay them for doing this work. There could be framework agreements put in place to facilitate the sub-contracting of such work. However, Ms Allinson was at pains to stress to us that regional media groups, such as the Kent Messenger, were very much independent organisations and wanted to remain as such. She remarked: "any idea of any sort of subsidy I think would fill all of us with horror".[238]

167. A similar idea was expressed by SWNS (South West News Service), who pointed out that very little news content is bought-in by the BBC, as opposed to areas such as drama.[239] SWNS explained that local news agencies should be treated like "qualifying" independent producers where the BBC allocated 25% of its budget to buying content from local media organisations. In their opinion such outsourcing arrangements could gain better value for money as well as acting as an economic stimulus in local communities. SWNS highlighted that the BBC already had such arrangements in place with an independent news agency in Wales, which established a proof of concept.

168. Moreover, SWNS believed that the BBC should not expect to receive content or leads from services like its own free of charge. Support in this way could help keep journalists 'on the ground' in communities. Against this background, SWNS proposed setting up public service reporting schemes where a percentage of the BBC's regional budgets could be made available for court reporting, but where the BBC did not control the process. They suggested that such public funding could be open to bidders via an independent source on a non-profit basis for "qualified independent providers". Providers would be expected to maintain high journalistic standards. Such work could help train new journalists in local communities.

169. The BBC has recently sounded receptive and encouraging to proposals being put forward by the industry to foster partnerships between the BBC and local news groups. In November 2014, James Harding, BBC director of news and current affairs, told the Newspaper Society that he believed there was a revival underway in local journalism and that the BBC wanted to be a part of it.[240] He explained that the BBC would look to see what it could do with local organisations of all kinds to make it happen. The BBC has agreed to pilot BBC syndication of content to other local news providers in the north-east of England where the BBC would share its most popular pieces of content with local news providers. There were mixed views on the BBC paying others for content. However, the BBC was examining activity in the regions to see how many new stories were sourced by the BBC and what kind of funding streams might be made. In addition, the BBC had also discussed the idea of a fund to ensure local courts were covered in a more comprehensive way. Conversations have also been underway between the BBC, the Press Association and the Ministry of Justice.

170. Introducing competitive funding for local journalism would be challenging. A disadvantage of such public funding could be that it had the perverse consequence of discouraging investment by local media in their newsgathering. At present, there appears to be considerable variation across the country in both the quantity of local news provision and the quality of local journalism. Whilst some areas are well-served, others are devoid of proper local coverage and it is not at all clear how a fair and effective allocation of funding could be made. We look at the case for contestable funding of the licence fee for public service content in our next chapter.

171. We believe there must be a more symbiotic relationship between local media and the BBC, where each benefits from the other. The BBC as the dominant partner must always be mindful of the effect of its activities on regional media groups and their ability to turn a profit, given the greater certainty resulting from its publicly-funded position. The BBC Trust's conclusions from its 2013 review of BBC Online, where it called on the BBC management to make sites more local, demonstrated a disregard for the health of local journalism.

172. Whilst the BBC appears to make the right gestures in supporting local and regional media organisations in the run-up to Charter Reviews, we believe more definite commitments in respect of its interactions with the press must be codified into any future Charter framework.

173. The BBC must not expect to receive others' news content without providing something in return. We are attracted by the idea of exchanges of content and information, where the BBC local websites link to the source of local material they have used, and in return the BBC allows others to use its content and embed BBC clips on their sites, where these would be of local interest, under a licence agreement. There need not be a financial transaction. However, we also see the case for the BBC outsourcing the supply of some local content on a commercial basis, where there is an ongoing requirement for such material, and it is a more cost-effective way of meeting this need. We recommend this be ensured by extending the BBC's independent production quota to cover local news.

BBC Worldwide

174. Over the past couple of decades successive Governments have encouraged the BBC to engage in commercial activity, in part to relieve pressure on the licence fee. This is achieved principally through BBC Worldwide, a wholly-owned subsidiary and the main commercial arm of the BBC. Worldwide exists to support the BBC's public service mission and to maximise profits on its behalf. It does so through investing in programmes and commercialising and showing content from the BBC around the world, in a way expected to be consistent with BBC standards and values. The business also builds the reach and reputation of the BBC brand overseas and champions British creativity.

175. Worldwide is the largest programme distributor in the world outside the US major studios, selling programmes and formats produced by the BBC and by over 200 UK independent producers.[241] In addition, it generates advertising and subscription income through running channels, some part-owned, on a commercial basis both at home and overseas.[242] In order to supplement traditional DVD sales, Worldwide will soon launch BBC Store, an online commercial service for audiences to buy and keep BBC programmes from its archive. Profits and commercial income from these activities are returned to the BBC through dividends to the BBC's public service arm, as well as Worldwide's own direct investments in BBC co-productions.

Worldwide's financial performance in 2013/14

Last year, Worldwide generated headline profits of £157.4 million, through (headline) sales of £1,042.3 million. It returned £173.8 million to the BBC, of which it invested £88.9 million in BBC commissioned productions. Worldwide's net profit, after tax and other adjustments, was £98.1 million.[243]

176. The BBC Executive told us that, despite limited access to capital, BBC Worldwide had delivered a strong financial performance, and that it now provided up to 75% of the funding for some of the BBC programmes to which it contributed.[244] Since 2007 Worldwide has returned nearly £1.2 billion to the BBC, including £467 million in dividend payments and £650 million of content investment. Looking beyond 2016, the BBC Trust has, however, forecast that sustaining the level of returns generated for the BBC by Worldwide over recent years will be challenging, and that it expects these returns will continue to represent only a small part of the BBC's overall funding.[245]

177. Some have argued that Worldwide should be privatised to allow it more operational independence. In 2004, a report by the Broadcast Policy Group, chaired by David Elstein, recommended that divestment of Worldwide from the BBC would allow it greater efficiency and access to capital markets to finance its activities.[246] The Group argued that separation from the BBC would give independent producers greater confidence in its distribution skills and independence of function. They believed that a divested business could flourish as organisations with "social objectives" were rarely "the best parents" for commercial ventures.[247]

178. The Charter sets a framework for the BBC's commercial activities; they must comply with all the following criteria:[248]

· Fit with the BBC's public purposes;

· Exhibit commercial efficiency;

· Not jeopardise the BBC's good reputation or the value of the BBC brand; and

· Comply with the BBC's fair trading guidelines, in particular avoiding market distortion.

To enable transparency, the BBC is required to report publicly each year on compliance with these requirements.[249]

179. A very costly mistake by the BBC was the purchase of the Lonely Planet publishing business in 2007: a transaction that led to a loss of £100 million when it was sold in 2013. It was the BBC's diversification into areas that were not closely aligned to its public remit and core programme making, and which risked an adverse impact on other market players, that troubled our predecessor Committee and led them to hold an inquiry into the BBC's commercial operations.[250] In 2008, the Committee strongly disagreed with BBC's management and the Trust in their persistence in claiming that the purchase of the travel guide publishing business was in accordance with the BBC's commercial criteria.[251] It was the Committee's view that the acquisition represented the "most egregious example" of BBC Worldwide's expansion into areas where the BBC had no, or limited, interests. Furthermore, the Committee was especially critical of BBC's management and the Trust's "apparent arrogance" in its dealings with them with both at the time appearing to believe they had no case to answer.[252]

180. There are major benefits from the BBC undertaking commercial activities as the profits generated by the exploitation of the BBC's intellectual property can be reinvested in the BBC's public services, to the benefit of licence fee payers. However, BBC Worldwide's activities must not risk jeopardising the reputation of the BBC or be allowed to have an adverse impact on its commercial competitors. We continue to believe that the approach of BBC's commercial activities should be limited to those closely linked to its programmes and its public service remit.

181. There is a potential risk that BBC dependence on returns from BBC Worldwide to fund UK public service content, as a co-producer of new content or through dividends to bolster the finance of the BBC's PSB operations, could lead to UK PSB content focused more on global commercial appeal and return rather than primarily aimed at serving domestic audiences in the first instance. We believe that investing in public service content for UK audiences must remain the priority for BBC Worldwide beyond 2016.

182. BBC Worldwide has an important role in marketing the BBC brand and the UK's creativity overseas, even if its financial contribution to domestic PSB remains reasonably modest. We recommend that the independent panel and Charter Review process consider whether changes are needed to existing oversight provisions in the Charter and Framework Agreement for BBC Worldwide and for the BBC's other commercial activities.

BBC's technology development, standard setting and championing role

183. In setting out his vision for the BBC, Lord Hall identified innovation as being a part of the BBC from its very foundation.[253]Since its formation in 1920s, the BBC has had a role in developing technology and promoting its use. The BBC was the first broadcaster in Europe to transmit programmes in colour on television and arguably it was the BBC in the UK that popularised home computing in the 1970s and more recently catch-up TV through its development of the iPlayer. In its early days the BBC had little choice but to develop its own equipment by itself as there were no others to turn to. The question today is whether the BBC still needs to be taking a key role in research and development on behalf of the industry or whether this work could now be left largely or wholly to others. Fiona Philpott, Director of Exhibitions & Design, National Museums of Liverpool, argued:

254

184. The BBC was widely credited in 2002 for leading a coalition of industry participants in rebuilding a free-to-air digital terrestrial television platform and launching Freeview following the collapse of ITV Digital and its predecessor ONdigital. Freeview is now watched in almost 20 million homes (75 per cent of all TV homes) and is the sole television platform in almost 11 million homes.[255] Yet there have been failures, too. The Digital Media Initiative (DMI), an IT project that attempted to develop a fully digital, tapeless in-house production workflow system for BBC staff, was cancelled having delivered very few tangible benefits at a cost of £100 million. In the case of DMI, it has been suggested that while the BBC insisted on developing its own system there were existing industry-standard options that could have met the BBC's needs.[256] During a visit to the BT Sports studios at Queen Elizabeth Olympic Park, we were told that BT had acquired an off-the-shelf production system which was similar to the one the BBC had been seeking to develop and which had met its needs well.[257]

185. The 'sixth public purpose' of the BBC is "Delivering to the public the benefit of emerging communications technologies and services". In the box below are the priorities the Trust aligned with this purpose.

Purpose priorities as set by the Trust:

·  Make engaging digital content and services available on a wide range of digital platforms and devices.

·  Work with the industry to deliver a UK-wide network of digital television.

·  Increase coverage of DAB (Digital Audio Broadcasting).

·  Support Digital UK's communications activity to build awareness of, and readiness for, digital switchover.

·  Work in partnership with other organisations to help all audiences understand and adopt emerging communications technologies and services.

·  Support the Government's targeted help scheme to help the most vulnerable during digital switchover.

In line with this purpose, the Framework Agreement with the Secretary of State requires the BBC to aim to maintain the BBC's position as a centre of excellence for research and development in broadcasting and distribution.[258] Wherever the BBC is involved in the development of new technologies, the Agreement requires it to consider doing so on the basis of 'open standards'. This means balancing the commercial exploitation of new intellectual property with the value that might be delivered to licence fee payers and the UK economy by making new developments widely and openly available. The BBC explained that its research activity provided value to the broadcast industry by:

· Providing risk capital for technological development as it could work on technology concepts well before they are commercially viable;

· Providing a strong voice for the broadcast industry; and

· Providing a training ground for broadcast technologists.[259]

186. Most industry players support a continuation of the BBC's research and development activity, as part of its remit. Nonetheless, there was general agreement, even among those more tentative about its role and record, that its public funding meant it had to work collaboratively and openly with the industry. Phil Redmond, a television producer and screenwriter, believed that, while much of what the BBC needed technically was probably available commercially; innovation always required a move away from the norm when the acquisition of custom-built technology could be both commercially and creatively sensitive, as well as more costly.[260] In his opinion, the BBC should be allowed to continue its traditional role of technological innovation arising from its role as a public service provider. He saw potential revenue opportunities through licensing such technology. Shed Media believed that if the BBC did invest in new technologies, such as in devices like the iPlayer, then they should be commercialised as fully as possible.

187. During the present Charter period the BBC developed YouView, an internet TV service, as a joint venture with ITV, Channel 4 and Channel 5, BT, TalkTalk and Arqiva. YouView allows TV sets to access television services through a broadband connection. The development started as Project Canvas in December 2008 as a partnership between the BBC, BT and ITV plc, with further partner joining later. Despite several delays, the consortium released a set-top box just in time for the London Olympic Games in July 2012. The YouView service is now mainly used by customers of telecom companies offering TV services which include access to the PSB channels.

188. Channel 4 explained that if the BBC were to partner with other PSBs and share technology it would doubtless save PSBs significant amounts of time and money which could be reinvested back into content budgets, benefiting viewers, the production sector and the PSBs.[261] Yet Global believed that the evolution of the internet services market had matured in the past decade and the need for a publicly-funded intervention from the BBC had been reduced.[262] They noted that even though the iPlayer was first of its kind, there were now many versions of catch-up television and for that reason the BBC no longer needed to keep financing such innovation.

189. It is vital that BBC works in partnership when developing technology and broadcasting platforms, through joint ventures such as Freeview and Freesat, and through working with standards organisations and equipment manufacturers to sustain and improve the availability of its services. Wherever possible the BBC must turn to the market for its technology needs rather than attempting to do things itself if it is to avoid future costly mistakes, as was the case with the Digital Media Initiative. Where solutions are not available to meet the BBC's future needs, then it should take the lead in developing new solutions but in conjunction with others so that the BBC's counterparts contribute and to ensure their needs may also be met.

190. We recommend that the BBC's sixth public purpose on communications technologies should be retained, but the means to achieve it should be clarified. The remit and priorities of the purpose should be revised and updated. They should, for instance, strengthen the requirement on the BBC to look first to the market for technology solutions and to ensure any development it undertakes is done in partnership with others, but where the market is not yet delivering innovation, the BBC should be required to take a leading role in pushing development in line with people's expectations.

180 Q631 Back

181 Q619 (Danny Cohen) Back

182 Q167 Back

183 Independent Production Sector Financial Census and Survey 2014, published July 2014 Back

184 See: First Delegated Legislation Committee, Draft Broadcasting (Independent Productions) (Amendment) Order 2014, 30 October 2014, col. 3 Back

185 A New Age of UK TV Content Creation and a New Role for the BBC, a report prepared for Pact by Oliver & Ohlbaum Ltd, August 2014, page 9 Back

186 Q130 (Lord Birt) Back

187 Independent Production Sector Financial Census and Survey 2014, published July 2014 Back

188 Patrick Younge, former Chief Creative Officer, BBC Production 2010-2014 (FBB0130), para 2 Back

189 Ofcom consultation paper on its third review of public service broadcasting. Back

190 For example, So Television, makers of the Graham Norton Show for the BBC, no longer qualify for the terms of trade since the company was bought by ITV Studios. Back

191 Q452 Back