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

Future of the BBC - Culture, Media and Sport Contents

6 Funding

191. Probably the most distinctive aspect of the BBC is the way it is funded through a compulsory television licence, which some now see as anachronistic given the changes in communications and media technology and services over the last decade, and changing audience needs and behaviours. There is now a wide availability and choice of delivery platforms and mobile receiving devices, content (linear and non-linear) and services, social media, interactivity and connectivity. As a result, consumer behaviour is changing, such as the growing tendency for many now to use multiple devices at the same time. However, as noted earlier, many people's television viewing habits have not changed as much as the experts and commentators had anticipated at the last Charter Review; Lord Burns, for instance, told us that the PSBs had held on well to their audiences, beyond expectations, and that even though viewing of their main channels had declined, they had maintained their overall share of audiences as these were spread across their new digital and repeat channels.[263]

192. Alternative mechanisms for funding the BBC include advertising and sponsorship, subscription, and general taxation, or a mix of some or all of these. Many other countries' public broadcasters are funded by a combination of licence fee or taxation and advertising, for example in France, Germany and the Netherlands. Up to now in the UK, the public service broadcasters, both publicly-owned (BBC and Channel 4) and privately-owned (ITV and Channel 5), were granted privileged access to scarce spectrum in return for various content obligations; this has ensured the provision of free-to-air broadcasting in the UK.

193. As we have set out above, there remains a greater expectation on the BBC, given its public funding, to be more willing to innovate, take a long-term view, and invest in training, which benefits the whole industry, than there is on its private sector counterparts. Provided a household has a television set and has paid for a TV licence, the UK system has ensured the provision of certain types of welfare-enhancing programming that the market alone would not provide. However, the Secretary of State thought that £145 for a licence was for some families a lot of money.[264]

Licence fee

194. As it stands, a television licence is required for each household where television programmes are watched or recorded as they are broadcast, irrespective of the signal method (terrestrial, satellite, cable or online) or the receiving device (TV, computer, mobile phone, tablet, set top box, DVR or games console). A licence is not required, however, if a television is only used to watch DVDs or play video games, or programmes are watched via catch-up services such as the BBC iPlayer or 4oD on a computer or connected TV after they have been shown on television.

195. The last settlement of the licence fee in 2010 froze the licence fee at £145.50 for six years until the end of March 2017. In 2013/14, the fee raised £3.722 billion. As the BBC stated, the fee represented a cost of 40p a day to each household paying the licence. There are of course advantages and disadvantages to the licence fee. We have summarised some of the points put forward below.

Television licence fee
Advantages:	Disadvantages:
Simple and straightforward	It is regressive—all pay the same regardless of income or size of household
Secure and more predictable source of income which allows for long-term planning	No choice: it is compulsory for TV homes that do not use BBC services
Meant in theory to maintain the BBC's independence from commercial and political considerations	Homes that watch only catch-up TV online, listen to radio and/or use BBC online get a free ride.
Allows the BBC sufficient income to benefit from economies of scale	Expensive to collect[265]
Universality—where BBC's services are available on a free-at-the-point-of-use basis The charge is associated in people's minds with paying for BBC services	5.5% evasion rate[266]

196. In this chapter we consider the arguments for and against the continued existence of the licence fee, and its size and structure. The licence fee remains an area of concern for some members of the public, who dislike paying for a service they use seldom or not at all. According to an ICM poll conducted for The Sunday Telegraph in November 2013, 70 per cent of voters believed that the licence fee should be abolished or cut.[267] A more recent poll conducted by ComRes showed that four in 10 people opposed the existing licence fee model and an equal number supported it.[268] The BBC's latest annual report cites an Ipsos Mori poll conducted in 2014 which found that 53% of the public support the licence fee as the means of funding the BBC, compared with 26% for advertising and 17% for subscription.[269] Accordingly, the BBC claims that support for the licence fee is higher now than it was in 2004, when 31% backed it, and also higher than 20 years ago.

197. As can been seen there is no definitive data on what support exists for the licence fee. Opinion polls conducted by different bodies pose different questions which deliver varying results and there is no certainty as to whether support for the licence fee is overstated by the BBC or understated by others. Given this is the case, there needs to be robust independent research carried out to test people's attitude to the licence fee and their willingness to pay for the provision of BBC services, with a range of propositions put to them. For instance, Lord Burns told us that the notion of people not wanting to watch the BBC, despite its enormous reach, was an option that has to be recognised to a greater extent now than has been the case before. He also pointed to the challenge of people beginning to watch television content on other devices, on the iPlayer and other catch-up services, which he thought would make the concept of the need for a licence to watch television more and more cloudy.[270]

198. The BBC explains that alternative methods of funding the BBC appear to have significant drawbacks. In its opinion, subscription risks turning the BBC into a commercial operator with an incentive to provide services that maximise revenues and profits.[271] It also believes there is evidence that a subscription model would be likely to reduce its payment base, increasing costs for consumers who remain and therefore excluding many in society who could not afford to pay. Similarly, an advertiser-funded BBC could change its priorities and would have significant consequences for commercial broadcasters and the revenue available for investment in content. However, it has been pointed out that the BBC's incentives would change only if the BBC decided to change them.[272]

199. According to Professor Barnett there was "no convincing argument in logic, public interest or consumer interest" for changing the BBC's funding mechanism.[273] He believed it is now accepted that an advertising-funded BBC would significantly prejudice other advertising-funded media organisations and that subscription would immediately undermine the public benefits of universality.

200. We received a number of submissions from individuals sent in a personal capacity in response to our call for evidence. There was a mixture of people who really valued the BBC and its output and supported the TV licence and those who thought the fee should be abolished.[274] Those opposing the licence fee either did so because they did not value the BBC or found its reporting unbalanced, were critical of the way the BBC was run, or disagreed with the licence fee being compulsory and it being a flat fee which was a bad form of taxation. Those who disliked the BBC mainly called for it to be funded via subscription and some also for the BBC to be privatised. Some who disagreed with the licence fee on fairness grounds believed the BBC should either be funded through general taxation, advertising, or subscription, or a mixture of these. In respect of younger people's views, support for continuation of the licence fee was favoured by the largest proportion of respondents to our consultation on the Student Room website but this did not comprise a majority: 41% supported the TV licence, 28% supported advertising, 19.5% supported subscription and just under 10% supported general taxation.[275]

201. The advantages of funding the BBC directly from taxation would be that it would be a more progressive system relieving the burden on poorer homes, and eliminating collection and enforcement costs of the licence fee. A disadvantage, of course, could be that the BBC would be constantly subject to the whims of the government of the day for its income and as such its editorial and operational independence could be threatened. During the course of our inquiry we visited the Netherlands to compare the Dutch broadcasting system with our own. We were warned by most of those whom we met that since 2001, when the Dutch had moved to financing their public service broadcasting system mainly through general taxation, successive Governments had made significant cuts to the budget and further cuts were planned, despite assurances given that this would not happen. There has been a similar situation in Australia and Canada.[276]

202. While taking oral evidence, none of our witnesses recommended that the BBC be funded principally through general taxation. Greg Dyke explained he had reservations as to whether the licence fee would continue to be sustainable given the changes to people's consumption of content. Previously, he suggested a move to a fairer tax basis, but preferably not one where the BBC was funded through general taxation and the Treasury. He envisaged the level of funding raised via a hypothecated tax which would be protected from political interference. He told us:

277

David Elstein also considered that an income-related tax would be a better option than the licence fee, although not the best option for the BBC.[278] For instance, under an income-related tax there would be no collection costs, no prosecutions for evasion, it would be socially fairer, economically fairer, and more efficient.

203. Some have argued that subscription could be a viable option in the future. Professor Beckett cautioned against Charter renewal rushing "profound changes such as the abolition of the licence fee" but thought that the BBC should prepare the ground for that possibility in the 2020s.[279] Although it was too early for the BBC to move to subscription now, in a more mutualised BBC model, where more people had a real stake in the BBC and where consumption was more personalised, he believed this might make sense. This could be based on a household subscription with additional levels to access different content or services. He noted that channel subscription was already happening to a degree with BBC Worldwide's channels for non-UK audiences.

204. Mr Elstein was our only principal witness arguing for a more immediate move to a direct funding mechanism for the BBC in the shape of voluntary subscription, the adoption of which, he believes, would have a major impact on the way the BBC operates.[280] His main objection to the licence fee is its compulsory nature and the lack of any choice people have about paying for BBC television services. The changes he foresees would lead to the BBC television offer becoming more varied, with viewers offered a choice of channels and packages. This would create an incentive for the BBC to offer a more "premium" product, such as high-cost drama, sport, arts and documentaries. Subscribing would be entirely voluntary but subscribers would need to set up each television set they owned or purchase a multi-set package.

205. We heard four main objections to the BBC moving to a subscription model. The first is that it would fundamentally change the nature of BBC programming, second that it would no longer be a universal service, third that it might reduce the overall investment in UK-originated content, and fourth that the majority of the population could be worse off.[281] It has also been pointed out that broadcasting funded through subscription on the whole only caters to pre-existing tastes and encourages people to pay only for things they like. In addition, it would not be possible to introduce subscription for radio and currently over one-sixth of licence fee income went to fund BBC radio services.[282]

206. If the BBC were to adopt subscription it is uncertain how this would affect the volume and variety of programmes currently shown on BBC TV channels. Rona Fairhead told us that alternative funding models to the licence fee could potentially change the nature of the BBC's programming and its approach to satisfying its public purposes in an unwelcome way.[283] Mr Elstein envisaged the nature of the BBC changing under subscription, too. He suggested the BBC could withdraw from its current broad provision approach and instead produce fewer but higher quality programmes. He explained:

284

207. Many consider 'universality' a defining characteristic of public service broadcasting, by which is meant content being accessible to everyone on all platforms and free at the point of consumption. Gavyn Davies saw universality as being at the heart of the BBC. He told us:

285

According to Lord Hall, starting to put BBC services behind pay-walls would begin diminishing the huge democratic focus that was universality, which was the essence of what the BBC stood for.[286]Others, however, predicted that the position could change in the years ahead: Richard Hooper CBE, a former Deputy Chairman of Ofcom, explained:

287

208. According to BSkyB, the BBC was in many ways already under a subscription model—a "compulsory subscription".[288] Professor Barwise thought the licence fee was no more regressive than subscriptions. Analysis by him suggested that subscription for the BBC could mean its television services would be more expensive for low-income households than under the licence fee and would not offer better value for money, with a consequence that the majority of the population could end up paying more for less total, and original, content. Nonetheless, Professor Barwise has said there could be some value in modelling a range of subscriptions scenarios but that he remained highly sceptical about the feasibility of finding a model that led to a better outcome than an inflation-adjusted licence fee.[289]

209. Gavyn Davies and others have advocated that the compass of the licence fee, if it is to remain, will need to be tweaked to account for online, catch-up viewing.[290] The BBC has said that currently fewer than two per cent of households watch only catch-up TV. However, the BBC pointed out that the definition of online viewing could itself start to create perverse incentives, with a fee payable for some ways of consuming BBC TV but not others.[291] James Purnell, Director of Strategy and Digital at the BBC, explained:

292

210. One possibility for the BBC in the next Charter period could be to introduce a degree of subscription, where some core services and channels were publicly funded and others were on an opt-in basis for an additional fee. For example, a subscription channel might premier BBC films and programmes or cater for more niche tastes, such as specialist shows with an arts theme. Lis Howell, Deputy Head of Journalism, City University, thought a hybrid system should be considered.

293

211. A drawback of a system funded partly by the licence fee and partly by subscriptions is that it would not avoid the high costs of collection of the fee. A way around this could be to fund the core service through a more general broadcasting levy which we consider below. In addition, the BBC suggested that if it were to go down the road of "top-up services" for offerings like BBC Four, so that they became commercially funded, it would be hard to raise the revenue to support such services through subscriptions without advertising.[294] A potential advantage of course would be that subscription could reduce the level of the licence fee (or broadcasting levy).

212. There currently appears to be no better alternative for funding the BBC in the near term other than a hypothecated tax or the licence fee. However, the principle of the licence fee in its current form is becoming harder and harder to sustain given changes in communications and media technology and services, and changing audience needs and behaviours. Given this is the case, we do not see a long-term future for the licence fee in its current form.

213. We believe that the forthcoming round of Charter Review should not rush profound changes such as the abolition of the licence fee model but the BBC must prepare for the possibility of a change in the 2020s. We recommend that as a minimum the licence fee must be amended to cover catch-up television as soon as possible.

214. We conclude that a degree of subscription could be a possibility in the future if the BBC moved to a more personalised service and this could be in accordance with Lord Hall's vision for personalisation of BBC content consumption. However, careful thought would need to be given as to what content should remain universally available and free-to-air, and how this should be funded, protected from inappropriate influence and delivered to the public.

215. We recommend that the independent panel and Charter Review process ensure there is robust comprehensive research, taking into account generational differences, of people's attitudes towards the licence fee and their willingness to pay for BBC and public service broadcasting more widely, and in particular their openness to the idea of subscribing for certain services.

Decriminalisation

216. Section 363 of the Communications Act 2003 makes it a criminal offence for a person to install or use a television receiver without a television licence. A person guilty of an offence under this section is liable, on summary conviction, to a fine not exceeding level 3 on the standard scale, which is in line with other criminal offences such as using a vehicle untaxed or without insurance. A common misapprehension is that people are imprisoned for non-payment of the licence fee. Currently, members of the public cannot be imprisoned for licence fee evasion, only for subsequent non-payment of fines imposed for evasion.

217. We received several submissions complaining about the way TV Licensing collects the licence fee, especially in terms of the nuisance they can cause householders who do not watch live television and who do not hold a licence. The majority of the administration of TV Licensing is contracted to Capita Business Services Ltd. In the course of its collection, TV Licensing routinely writes to all addresses where there is no record of a licence or where the current licensing requirements are unknown. In 2012/13, TV Licensing sent approximately 56 million items of mail and 7.3 million electronic communications.[295] Approximately 1.3 million letters were sent to addresses where the occupier had informed TV Licensing that they did not require a TV licence.

218. In 2012, TV Licensing proceeded against approximately 182,000 people in magistrates' courts.[296] Of those prosecuted in 2012, about 155,000 people were convicted and fined for non-payment of the licence fee.[297] In the same year, the number imprisoned for non-payment of the fine was 51. The BBC has confirmed to us that unlicensed viewers have been prosecuted who have watched live TV programmes on devices other than televisions but has not disclosed the number of such prosecutions or whether any have resulted in imprisonment for non-payment of a fine.[298] Whilst licence fee evasion cases make up around 10% of magistrate court criminal cases, the BBC has stated that the vast majority are heard uncontested and in bulk and that the average presentation time is only three minutes and 13 seconds.[299] Therefore, these cases account for a significantly smaller proportion of court time than their numbers might suggest.

219. On 4 March 2014, Andrew Bridgen MP tabled an amendment to the Deregulation Bill which would have had the effect of amending the Communications Act to decriminalise non-payment of the licence fee, making persons installing or using a TV without a licence liable to a civil penalty instead. By mid-March the amendment had been signed by over 150 Members of the House of Commons. Although his proposed amendment did not provide detail on how a civil penalty for the licence fee would work, based on analogous offences, it would be likely that the BBC or its agents would issue a penalty notice to households believed to be evading the licence fee and, if the penalty was not paid, apply to the County Court for enforcement. Any County Court judgements granted would then be recorded against the individuals concerned and attempts could be made to recover unpaid sums. This is similar to the way local authorities deal with non-payment of Council Tax and in the case of parking enforcement, through penalty charge notices.

220. The BBC has said that a system of civil penalties would be likely to lead to a material increase in evasion and collection costs for the BBC. The BBC also say that as it is not presently possible to turn off people's ability to use BBC services if they do not pay the licence fee, they are more vulnerable to payment-evasion than pay-TV broadcasters who can disconnect non-payers, or some utility companies who can install pre-payment meters. The BBC believe that the criminal deterrent of non-payment has kept the estimated evasion rate to around 5.5%. Research conducted for TV Licensing has indicated that 93% of people considered the prospect of a court appearance was an effective deterrent to non-payment of the licence fee.[300]

221. According to the BBC, if decriminalisation led to a doubling of the evasion rate to around 10%, the Corporation would lose an estimated £200 million per annum, an amount equivalent to the combined budgets of BBC Four and its two children's channels. The BBC has also suggested that enforcement would be much more difficult under a civil penalties system, as it would be harder to justify the use of detection equipment—rarely used for offences attracting civil penalties. James Purnell told us that since Japan's TV licence system was decriminalised about 25 per cent of people did not pay. He explained:

301

Nonetheless, it has been reported that one reason for the number of Japanese households not willing to pay the licence fee was the spate of high profile scandals over the last decade at NHK, Japan's national public service broadcaster.[302] Others have stopped paying because they have been angered by the revelation that so many were not contributing.

222. Following the tabling of Mr Bridgen's original amendment, the BBC sent a note to all Members of the House, in which it said that the licence fee enforcement system should be considered further as part of the review of the BBC's Charter and funding, and it proposed a working group be set up with the BBC, DCMS and Ministry of Justice to do this. Mr Bridgen accepted that time should be allowed for such a review to take place. To allow this to happen, he and the Solicitor General tabled revised amendments calling for such a review of the appropriate sanctions for non-payment of TV licences. The Commons Bill Committee voted in favour of their amendments.

223. In line with the Bill Committee's wishes, last October the Secretary of State announced the terms of the Government's review of TV licence enforcement.[303]The review team has been asked to report by the end of June 2015, setting out an assessment of the current and proposed enforcement regimes, and making recommendations for Government.

224. We note the Government's review, which is looking at the possibility of the decriminalisation of non-payment of the licence fee. Our view is that criminal penalties for the non-payment of the licence fee and the way enforcement is carried out is anachronistic and out of proportion with the responses to non-payment for other services. We believe there is a strong case for making non-payment a civil matter pursued through the civil courts in the same way as non-payment of Council Tax, parking fines and utility bills. We also acknowledge the possibility, based on the evidence presented and international experience, that decriminalisation could lead to an increase in evasion and potentially, therefore, a reduction in the BBC's income. Below, we discuss two possible ways this could be addressed. In paragraphs 228 to 233 we discuss Germany's recent transition from an appliance based "licence fee" to a household broadcasting levy. This has made household investigations unnecessary. And in paragraphs 237 to 244 we discuss the potential for introducing conditional access technologies, which would obviate the need for criminal penalties.

Alternative models for funding PSB

225. During the course of inquiry, we considered how other countries fund their public broadcasters. Below is a table setting out a selection of countries and their method of funding and the domestic level of their licence fee or equivalent.[304] Two systems that stood out are the Finnish and German systems. Both have recently changed.

Source: FCO Posts

FINNISH SYSTEM

226. Since the beginning of 2013, Finland's national public service broadcasting company (YLE) has been funded by a public broadcasting tax (also called YLE). This replaced Finland's television licence. The YLE is a personal tax that must be paid by individuals regardless of whether they own television sets or whether or not they watch TV. Consequently, there can be several eligible YLE taxpayers in the same household. However, all under 18s are exempt. The present rate of the YLE for individuals is 0.68% of their income but with an upper maximum contribution of €143. If a person's contribution is calculated at below €51 then that individual does not have to pay. Organisations and foundations are also expected to pay the tax.

227. The progressive nature of the YLE tax and the lower limit (€51) mean that all individuals on low incomes (e.g. the unemployed) pay a smaller amount or no contribution at all: for example, students with no or little income apart from study grants are exempt. According to official estimates, most people were expected to pay less under the new individual tax than what they would have paid under the licence fee system. The main losers have been those on reasonable incomes who do not own a TV set. Given that the system was only introduced in 2013, it is probably too early to judge its success.

GERMAN SYSTEM

228. During our visit to Germany we considered the introduction of Germany's new household broadcasting levy (called the "Rundfunkbeitrag"). The German system of financing public sector broadcasting was reformed as of January 2013. In place of the previous system where the fee was based on the number and types of broadcasting receiving devices (TVs, radio sets, computers) in a property, there is now a universal flat fee per household and so it is now immaterial how many adults live in the household or how many receiving devices they own or use. All households are subject to the charge regardless of television usage. Recipients of certain welfare benefits (such as unemployment benefit) can apply for exemption from the fee, as can students living away from home.[305]

229. Germany's change to the fee regime was prompted, in part, by the realisation that it was increasingly difficult—and impractical—to distinguish between device categories in a multimedia environment. Another factor, we were told, was the previous inspection regime had been heavily criticised and expensive to administer. The winners under the new German system are flat-sharers, cohabiting couples and young adults with an independent income who are still living with their parents, adults who have hitherto been liable to pay individual licences. An advantage of the new system is that there is no longer any need for the extensive investigatory measures used by the revenue collection service to determine people's living circumstances or to check the number of receiving devices in use in a property. Since it is a blanket fee charged to all households, the principal losers are households with no equipment of any sort capable of receiving broadcasts. Making everybody pay in effect has turned the old 'fee' into a 'tax'. However, when Germany introduced the new system, it discovered that the number of households previously evading the old licence fee was significantly higher than thought. This has led to the new broadcasting levy being set at a lower level than the old licence fee while maintaining funding levels for the public service broadcasters.

230. It is arguable that a broadcasting charge levied on all households in the UK to fund principally the BBC could be justified on the basis that the BBC reaches over 96% of the population. In addition, industry statistics from the Broadcasters Audience Research Board (BARB) show that around 96% of homes have a television set.[306] However, the BARB figure does not capture TV viewing on other devices such as laptops, tablets or mobile phones. Nonetheless, introducing a broadcasting levy on all households in the UK would be likely to be very unpopular for those who do not currently watch live television, but it would mean that those people currently consuming BBC radio and online services for free would now pay for these services. It would also obviate the need for, and cost of, TV Licensing's investigatory work in catching evaders of the licence fee.

231. Some may see the introduction of a broadcasting levy in the UK giving a stronger justification that a proportion of its revenue be made available on a competitive basis to support public service content by others and more plurality in PSB provision. In addition, a broadcasting levy would also be more in line with media convergence, i.e. people watching television content on a variety of devices, meaning it was no longer a "television licence".

232. The German model of a broadcasting levy on all households is our preferred alternative to the TV licence. Such a levy on all households would obviate the need to identify evaders and would be a fairer way of ensuring those people who use only BBC radio and online services contribute to their costs. A broadcasting levy which applied to all households regardless of whether or not householders watched live television would help support the use of a small proportion of the revenue raised for funding public service content and services by others, enhancing plurality.

233. We recommend that the independent panel and Charter Review process should investigate the advantages and disadvantages of a household broadcasting levy as an alternative to the licence fee and on how the broadcasting levy could be made more affordable for low income groups in the UK. We also believe that the new Finnish system, of a hypothecated tax specifically for broadcasting, based on an individual's income, although still its infancy, would still be worth consideration during Charter Review.

Collection costs

234. A criticism of the licence fee system is the high cost of its collection. Last year, it cost £102 million to collect the fee.[307] Nonetheless, in recent years the BBC has been successful in reducing this cost. Since the BBC has taken over collection from the Home Office, the collection costs have fallen from 6% to under 3% and the level of evasion has fallen from around 10% to just around 5%.[308] While the licence fee annual collection cost appears extremely high, BSkyB told us that £100 million was nothing compared to what the BBC would need to spend on marketing in order to retain subscribers.[309]

235. In France, the television licence is collected with the French equivalent of their council tax (taxe d'habitation). One advantage of collecting a licence fee with another tax or through a utility bill is that the collection costs can be shared with another body and reduced. If the licence fee were collected through the Council Tax or with a utility bill, non-payment could be pursued through the civil courts. Additionally, to a limited extent, if it were collected via the Council Tax there could be some way of applying simple means tests for certain demographic groups, for example pensioners in receipt of the Pensioner Credit, for whom concessions might be considered desirable. At present, all pensioners over 75 years of age receive a free TV licence, which costs £600 million a year, whatever their own income or the household's income.[310] Arguably, this is a badly targeted benefit and the money could be better used to support those for whom 40 pence per day represented a genuine burden. As this cost is met through the Department for Work and Pensions, and not through the BBC or the DCMS, it is not a matter that falls within our remit.

236. We recommend that the independent panel and Charter Review look at what options might be available for sharing collection costs of the licence fee or a broadcasting levy with local authorities or utility providers.

Conditional access

237. Currently, access to the BBC's television services is not denied to anyone in the UK. Viewers can receive the BBC's television services by terrestrial, cable and satellite distribution as well as via fixed and mobile broadband. There is no technical obstacle preventing non-licence payers receiving the BBC's channels despite the illegality of doing so. One of the arguments made for maintaining criminal penalties for non-payment of the licence fee is that, unlike suppliers of other services such as utilities and pay TV, it is not possible to cut-off non-payers and that lesser penalties could tempt many more not to pay, maintaining their ability to receive the services illegally. Some form of "conditional access" could allow non-payers of the licence fee to be cut off from television, as well as the technical capability for offering different levels of BBC service, on an opt-in or opt-out basis, in future.

238. Estimates have suggested that about 35 million TV sets in the UK are not connected to a device with conditional access capability.[311] If encryption were introduced, the users of those TV sets would have to be equipped with an add-on device in order to access BBC television services or upgrade to televisions with that capability built in. Industry experts have suggested that each device would cost about £15, which would mean an overall cost of about £500 million. It is likely that it would take several years to roll these devices out. The Government would need to decide whether the basis of such a conditional access system was for all TV services, for example for BBC, ITV and Sky, or whether such a conditional system would be just put in place for receiving BBC television and BBC on-demand services. The BBC would also need to consider blocking viewers on the internet, such as those who watch the iPlayer.

239. Already 60 per cent of homes receive BBC television on at least one household set through a cable or satellite platform which can control access to channel packages and premium channels. Restricting access to BBC television services on the internet to authorised users (e.g. licence fee payers) does not require any additional technology; online services can limit access to only registered users, even for free services, or subscribers (e.g. Netflix).

240. The longer timescales and significant costs that would be involved in equipping all UK homes with technology capable of allowing the opt-in or opt-out of receiving the BBC's television services in whole or in part, or some element of payment, are in any event a result of the BBC's own earlier strategy to deter alternatives to the licence fee. As reported nearly a decade ago, Greg Dyke admitted that part of the rationale behind the launch of the digital terrestrial service Freeview when he was Director General was to introduce set-top boxes incapable of turning the BBC's channels into 'pay as you go' services at a later date.[312]

241. Lord Burns has suggested that the BBC should make iPlayer available on a conditional access basis for licence fee payers so that only people who were part of a household who could prove they had paid the fee could watch programmes via catch-up.[313] Alternatively, Lord Burns indicated that the iPlayer could be accessible to those who paid a subscription charge if they did not already have a TV licence.

242. Introducing conditional access for BBC services, however, would need to be considered in conjunction with arguments for the maintenance of universal access to BBC services, even for licence fee evaders. Professor Barwise has identified that if the Government were to move to introducing a conditional access system, the cost could be much reduced by mandating it for all new television sets and devices so that it was spread over the replacement cycle.[314] There could then be a judgment to make about the trade-off between the speed and cost of the transition to universal conditional access or to the point where the penetration was high enough to justify stopping unencrypted BBC-TV broadcasts.

243. We believe that conditional access offers opportunities to ensure that only those households who have paid a licence fee or its equivalent would be able to access BBC or television services. Introducing a means of authorising access to television services would solve the criminalisation issue associated with non-payment of the television licence. However, as there would be significant costs attached with the widespread introduction of conditional access technology, the Government would need to decide over what timescale it should be introduced.

244. The independent panel and Charter Review should consider the desirability and feasibility of the BBC using conditional access to ensure its television services are available only to licence fee payers and authorised users in future. We recommend that Ofcom's advice is sought on current availability of conditional access technology and devices, market adoption trends and potential timescale for widespread adoption. Ofcom could also advise on the implications of requiring manufacturers to include conditional access technology in all receiving devices from a future date.

245. We recommend the BBC should look at the practicality of introducing controls for authorising access to the iPlayer as soon as is possible, as has been suggested by Lord Burns.

Setting the level of PSB funding

246. Earlier on in this Parliament we reported on the unsatisfactory nature of the 2010 licence fee settlement.[315] The BBC appeared to be put under pressure by the Government to take on new funding commitments for local TV, S4C, rural broadband, BBC Monitoring and the World Service, with no increase in funding, and the BBC accepted these new obligations. What was more concerning was that the settlement was agreed behind closed doors in just a few days and without any consultation with licence fee payers or Parliament.

247. We were surprised in 2010 that the BBC Trust did not hold its ground and insist on more time and some consultation about the settlement instead of agreeing to the Government's demands, even when threatened with a lower licence fee if they did not accede then. The duties set out in the Charter are unequivocal. In exercising all its functions the Trust must act in the public interest and, in particular, it must:

a) represent the interests of licence fee payers;

b) ensure that the independence of the BBC is maintained;

c) carefully and appropriately assess the views of licence fee payers;

d) exercise rigorous stewardship of public money;

e) have regard to the competitive impact of the BBC's activities on the wider market; and

f) ensure that the BBC observes high standards of openness and transparency.[316]

248. It is unarguable that the BBC Trust did not carefully and appropriately assess licence fee payers' views or observe high standards of openness and transparency in this instance. As a result, the Trust's representation of licence fee payers' interests, its exercise of rigorous stewardship of public money, and its independence, are all subject to question. Had the Government attempted to force through a lower licence fee in short order, in the face of the Trust exercising its fundamental Charter duties, we believe it would have faced adverse public reaction, especially if the Trust resigned, or threatened to resign, in protest.

249. Moreover, the Government could not have unilaterally required the BBC to take on new responsibilities and funding commitments, the cost of which, according to the BBC, built up to £500 million a year (13 per cent of the licence fee) by April 2014 and, in conjunction with a frozen licence fee, will have reduced the BBC's budget by 26% in real terms by the end of the licence fee period.[317] These new commitments required the BBC's agreement and amendment of the Framework Agreement between the BBC and Secretary of State, a foundation document in which the parties "affirm their commitment to the independence of the BBC" and in which the BBC has "voluntarily assumed obligations which restrict, to some extent, its future freedom of action".[318]

250. As it turned out, the BBC would not have been worse off if the Government had in fact lowered the licence fee by 10% since this would have had less financial impact than taking on new obligations accounting for 13% of a frozen licence fee.

251. Determining the level of PSB funding is handled differently in other countries. For instance, in Denmark up until 10 years ago, the level of the licence fee had been agreed annually: however, it is now set over a slightly longer period in line with objectives set for PSB by the Danish Parliament. A new political agreement on broadcasting was agreed last year for 2015 to 2018, where new provisions were approved for online and catch-up services for Danish Radio, its national broadcaster.

252. Whilst in Germany we learnt that the individual State governments, i.e. the Länder, were responsible for defining the function and purpose of PSB. Despite this, in 1994, the German Constitutional Court ruled that the evaluation of the licence fee should be a technical task and not a political one. Consequently, the level of the licence fee has been determined by the State governments and parliaments on the basis of recommendations of the KEF (the Commission for the Review and Determination of the Funding Requirements of Broadcasting Corporations). The KEF is an independent panel of experts which periodically examines PSB requirements and recommends an appropriate level of funding. The 16 Länder parliaments then set the level of the levy accordingly, usually for a period of five years.

253. In the UK towards the end of 2016 there will have to be a decision on the level of the next TV licence (the present six-year settlement ends in March 2017) and for how long the next settlement should be. At present, Parliament is only involved in the process in so far as it has an opportunity to reject the regulations which set the actual licence fee each year. A debate in the House of Commons last took place on a regulation at the instigation of the then Opposition in 2009.[319]

254. As things stand, several witnesses considered that the current licence fee was pretty much at the upper limits of what people could afford. Former BBC Chairman, Lord Grade thought that the BBC ought to face a challenge when the level of its future licence is set but that it should be a decision for the Government of the day without a vote in Parliament. Lord Grade explained:

I absolutely believe in the licence fee. It is pretty much at the upper limits of what is affordable. I would dearly like to see, in the next settlement, [the licence] set at a level with a programme of reduction of the BBC's costs through structural change—not just through salami-slicing more and more redundancies—and still trying to cover the same amount of turf.

320

Conversely, Professor Barnett believed the BBC should have a more secure settlement next time:

321

Greg Dyke held a similar view:

322

255. We believe that the current means of setting the licence fee is unsatisfactory. The 2010 settlement demonstrated that the BBC's independence can be compromised by negotiations with the government of the day that lack transparency and public consultation. Irrespective of any Government pressure, the BBC Trust breached its Charter duties and often-stated commitments to reflect the interests of licence fee payers first and foremost, in agreeing the settlement in the manner it did.

256. No future licence fee negotiations must be conducted in the way of the 2010 settlement: the process must be open and transparent, licence fee payers must be consulted and Parliament should have an opportunity to debate the level of funding being set and any significant changes to funding responsibilities. We recommend that the independent panel and Charter Review process consider the appropriate length of licence fee settlements and the period in which they should be reviewed and changes made.

Sharing the licence fee

257. The use of the licence fee to fund services and activities other than the BBC's is a contentious topic. Dame Tessa Jowell MP told us that the licence fee was for the BBC and was critical of the way the present Government had used it for other purposes.

323

The position of using the licence fee for purposes other than the BBC, however, is not new. Previously, £600 million of the licence fee revenue was earmarked to support digital switchover, and the BBC also provided substantial licence fee funding to S4C for its use in programme production before the 2010 agreement.

258. A predecessor Committee discussed the question of whether the licence fee was the preserve of the BBC.[324] It noted the then Government's position that the television licence fee is not the "BBC" licence fee and that in principle the BBC has no exclusive right to it, with the device levy paid into the Consolidated Fund like any other tax, for the government of the day to determine how it is used. The Committee further noted historical information regarding retention of a proportion of the licence fee by the Treasury as an excise duty. It agreed that the licence fee is not of right the "BBC" licence fee but said it was important that there is clarity about the pros and cons of the licence fee being exclusively used for the BBC or shared with others. As noted earlier, the Framework Agreement also clearly states that the Secretary of State shall pay to the BBC "sums equal to the whole of the net licence fee revenue or such lesser sums as the Secretary of State may, with the consent of the Treasury, determine".[325]

259. The 2010 settlement involved a significant extension of the use of licence fee revenue beyond the BBC than has happened before. Consequently, the debate has been on the appropriateness and legitimacy of funding these new purposes and on how broadcasting-related they are. Some are more directly BBC broadcasting related (World Service) or related to third-party broadcasters (S4C and local TV). In the case of BBC Monitoring, its work involves reviewing news and information from media sources around the world. The service was set up in 1939 to assess the use being made of radio by the Axis powers during WWII; since then, the closeness of Monitoring's work to intelligence gathering meant that it was funded by grant-in-aid via the Cabinet Office. However, the information it collects is now provided to the BBC and a range of others including commercial media organisations, foreign governments, NGOs and universities, as well as the UK government. Similarly, BBC World Service until 2014 was funded through the Foreign Office given that its language services, although independent of Government, were widely seen to benefit UK diplomacy rather than provide a direct benefit to licence fee payers.

260. A less direct linkage to broadcasting is the Government's decision to fund the rollout of the rural broadband infrastructure via the licence fee. Arguably there is a tangential link in that improving rural communities' digital provision will allow people better connections to online media services but it seems to us this expenditure would more appropriately be met through general taxation. However, as part of the 2010 licence fee settlement, £150 million per year is being taken from licence fee revenue to support the rural broadband programme over four years.

261. In the run-up to the 2006 Charter Review, Ofcom had suggested that £300 million of new funding should be used to establish a "public service publisher" providing additional innovation and plurality in public service content provision. Ofcom had proposed a single not-for-profit creative organisation that would have been responsible for the whole process of commissioning, overseeing and distributing public service content from end to end.[326]

262. At the same time, Lord Burns, as independent adviser to the Secretary of State on Charter Review, recommended that wider distribution of licence fee funds, via competition, would help sustain plurality in public service content. Lord Burns envisaged the creation of an independent Public Service Broadcasting Commission, which would be able to award part of the licence fee revenue for public service provision by others than the BBC. Earlier in 2004, a panel chaired by David Elstein also advocated a similar entity, which would be independent of government, and would distribute "contestable funding".[327] Under the latter proposal the BBC would have had to bid for all its public funding. Evidently, none of these proposals came to fruition.

263. ITV told us that it was inevitable that a debate about the future of the BBC would include a discussion about "top-slicing" the licence fee for other providers or users, with familiar arguments about the potential benefits and downsides. They suggested that the "increasingly challenging" market economics of news reflected in the declining newsgathering resources of the press both regionally and nationally and the power of the BBC's editorial voice in a fully digital environment could mean this particular debate was now more pertinent and important than ever before.[328]

264. Conversely, the Voice of the Listener and Viewer (VLV) were against distribution of the licence fee for public content beyond the BBC. They saw this as undermining the clarity of the direct relationship between the licence fee and the BBC. Moreover, VLV did not support the 2010 licence fee settlement because it effectively diverted money from BBC programme-making budgets.[329] Similarly, Professor Barnett believed that it was vital that the "top-slicing", introduced as part of the 2010 settlement, was removed.[330]He thought there was a real danger of licence fee revenue being treated as a communal source of public income from which Government departments could bid for any remotely relevant under-funded or unfunded scheme. Accordingly, he called for the money made available for local TV, for broadband rollout and for S4C to revert to departmental funding should a future Government wish to preserve them.

265. Last year, Dr Colette Bowe, the then Chairman of Ofcom, said she thought some BBC licence fee funding should be "contestable", with other media companies allowed to bid to make public service broadcasting programming:

"I am an economist. There is a lot to be said for contestable funding on competition grounds ... The counter argument is that once you start stripping away great chunks of funding you weaken the stability [of the BBC],"

331

266. While some believe that sharing the licence fee further would muddy the accountability of what the licence fee delivers, a degree of contestability of part of its revenue could keep the BBC alive to the privilege of its receipt. Lord Grade proposed that Channel 4 could be funded through the licence fee and be put in head-to-head competition with the BBC if Channel 4's future commercial survival was under threat.[332] Contestability could also be a means of ensuring plurality of supply in key PSB genres such as children's programming and regional news. Nonetheless, there is a risk that some funding could transfer under these circumstances from licence fee payers to the benefit of shareholders of commercial companies. However, this would not be the case for non-private sector providers.

267. Although there is nothing that states the licence fee revenue is the sole preserve of the BBC, we find the case for the licence fee as a source of funding for rural broadband and BBC Monitoring unconvincing.

268. It was wholly wrong that 2010 licence fee settlement, which permitted the licence fee revenue to be used for new purposes, was not subject to any public or parliamentary consultation. We recommend that income from the licence fee (or the broadcasting levy) be used only for the purpose of broadcasting or the production of public service content on television, radio and online. As a result, we believe that the Government must be prepared to remedy any existing spending commitments agreed in 2010 so that those not deemed appropriate for funding through the licence fee are met by other means such as general taxation.

269. The BBC should be the principal recipient of the licence fee (or broadcasting levy) but a small proportion should be made available for other public service content priorities such as supporting local and regional journalism, and children's broadcasting. We recommend that the independent panel and Charter Review consider how such contestable funds might operate and what types of public service areas they might support.

263 Q280 Back

264 Q767 Back

265 In 2013/14, licence fee collection costs were £102 million Back

266 BBC-Television Licence Fee Trust Statement for the Year Ending 31 March 2014, 21 July 2014 Back

267 http://www.icmresearch.com/data/media/pdf/OlOm-Licence-Fee.pdf Back

268 http://www.whitehouseconsulting.co.uk/comment-opinion/whitehouse-bbc-license-fee-poll-reported-across-uk-media/ Back

269 BBC Annual Report and Accounts 2013/14, BBC Executive section, page 5 Back

270 Q307 (Lord Burns) Back

271 BBC (FBB0097), para 51 Back

272 "The 40 lies the BBC tells about subscription", OurBeeB, Open Democracy website, by David Elstein, 30 July 2014 Back

273 Professor Barnett (FBB0078), para 23 Back

274 For example see-Proponents: Rory Hegarty (FBB0008); Steven Norris-Tari (FBB0143); Peter Weitzel (FBB0058); Miriam Hall (FBB0064); Frances Christian Balfour (FBB0081). Opponents: Lee Taylor (FBB0004); Kenneth MacLean (FBB0019); Alan Morton (FBB0023); Andrew Reid (FBB0039); Mr. C. D. Lee-Koo (FBB0049). Back