BBC commercial activities Contents

1Performance

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the BBC Director-General and two senior BBC executives.1 The BBC’s Charter permits it to undertake commercial activities provided these activities fit with its mission and Public Purposes, are not funded through licence fee income, and are undertaken with a view to generating a profit. In 2016–17, the BBC’s total commercial revenue was £1.2 billion, compared to licence fee income of £3.8 billion.2

2.The BBC cannot undertake commercial activities directly, but must do so through subsidiaries. In 2017–18, the BBC had four main subsidiaries of varying size and complexity, contained within an umbrella subsidiary, BBC Commercial Holdings:

BBC Worldwide, which generated revenue mainly from the sale and distribution of TV content and formats internationally and in the UK;
BBC Studios, established as a commercial company in April 2017, which created and produced content, principally TV programmes, for the BBC and other clients;
BBC Global News, which provided English–language news services overseas via the BBC World News TV channel and the international website BBC.com;
BBC Studioworks, which sold TV production facilities, equipment and crews, and post–production services to the BBC and other clients in London and the South East.3

3.In April 2018, the BBC merged Worldwide and Studios, creating a new commercial entity, also known as BBC Studios, which united the BBC’s commercial production, sales and distribution arms. Prior to this, the BBC had introduced new governance arrangements, both at the level of the BBC Board, which is accountable for all the BBC’s activities including the publicly funded services in the UK and around the world, as well as its commercial activities, and of BBC Commercial Holdings. There has also been a significant change to the regulation of the commercial activities, with Ofcom becoming the BBC’s regulator. From April 2017, the 2016 Royal Charter granted the NAO audit access to the commercial activities for the first time. This was therefore the Committee’s first opportunity to scrutinise the performance of the BBC’s commercial activities.4

Judging success

4.The BBC’s total revenue from its commercial subsidiaries was broadly stable at over £1.1 billion in each of the five years from 2012–13 to 2016–17. Meanwhile, only Worldwide made profits throughout these five years, and its profit after tax was 68% lower in 2016–17 than in 2012–13, mainly due to two large one-off costs.5 According to the BBC, this represented a good level of performance, given the changes the subsidiaries had gone through in recent years and market conditions. In particular, both Studioworks and Global News had undergone restructuring: Studioworks had closed its loss-making digital repurposing business and now had fewer studios, while Global News had reduced its costs and restructured its advertising sales operations. Global News had also invested in an “editorial uplift” to improve its service but then had difficulty generating additional advertising and subscription income off the back of this, as the advertising market for news was not good.6

5.We probed the BBC about whether the flat performance was really good enough. The BBC confirmed that it considered performance to be good, although it said it was not complacent and wanted to do even better in future. To this end it had, for example, set growth targets for Worldwide’s margins and a stretching target of £1.2 billion for Worldwide’s financial returns. It also said that BBC Studios rigorously assessed the predicted return on investments.7 In respect of the financial year just ended, 2017–18, the BBC explained that it expected the accounts to show that Studios, Studioworks and Global News had all made a profit. It also expected there to have been significant growth in Worldwide’s profits.8

6.However, we remained concerned about the ability of the BBC Board to scrutinise the performance of the commercial activities, and especially its ability to know whether or not their reported performance was in line with the broader markets in which they operated. The BBC had not, as a matter of course, shared the results of its benchmarking of commercial activities with the Board.9 It explained that it aimed to benchmark or market-test a large proportion (“pretty much all”) of its activities, but that there needed to be a balance between the amount of strategic and operational information that was provided to Board members. The BBC said it now intended to include in Board reporting a reference to any significant benchmarking it undertakes and to provide the Board with this benchmarking if that would be helpful. The BBC also noted that the Board was required to undertake its own review of the commercial operations by the end of this calendar year. The BBC, therefore, thought it likely that the Board would be carrying out its own extensive benchmarking during the year.10

7.The BBC disagreed with the suggestion that its Board was light on commercial experience. The BBC said its Board members came from very diverse backgrounds and included directors with experience in retail, the media, and financial and other commercial areas. The BBC felt the capability of its main Board had grown immensely and rapidly since its establishment in April 2017 and that the Board was now actively challenging the BBC to make sure its decisions were made properly and in a well thought through way.11 Similarly, the two non-executive directors on the Commercial Holdings Board had commercial backgrounds. They had previously fulfilled the same role on the BBC’s Executive Board under the old governance structure, where the Executive Board was answerable to the BBC Trust. They therefore brought some experience of the BBC to the new corporate governance arrangements. The BBC assured us that it applied the normal rotation rules to appointments to refresh board membership.12

Reporting performance

8.A further area of concern for us was the confusing approach the BBC had taken to reporting on the profitability of commercial subsidiaries to the Board, employing a number of different measures that varied from subsidiary to subsidiary: for example, Profit Before Tax for Studios but Earnings Before Interest, Tax, Depreciation and Acquisition (EBITDA) for Worldwide. The BBC explained that it had done this because its four main subsidiaries were different businesses operating in distinct markets and on different scales. However, from the beginning of this financial year, in response to the NAO report, it said it had been using the same profit measures for all its main subsidiaries in Board reports.13

9.We asked the BBC about its use of other common measures of commercial performance in its Board reporting, such as Return on Capital Employed and profit margin. The BBC told us that, although it was good to take a shareholder’s perspective from time to time when assessing the performance of its commercial activities, it could not act as a full-blooded commercial company, but instead needed to strike a balance between delivering commercial returns and using the commercial activities to contribute to the wider BBC Public Purposes. Thus, for example, Worldwide had not concerned itself with delivering earnings per share or an increase in asset value with a view to the possible sale of the company. Instead, it sought to deliver cash returns and a supply of programmes and intellectual property (IP) to the BBC, at times choosing to invest more in programming, potentially at the expense of profits.14

10.From 2012–13 to 2016–17, BBC Worldwide delivered financial returns to the BBC of £989 million and it has a target to deliver further returns of £1.2 billion from 2017–18 to 2021–22. The BBC intended the £1.2 billion target to be very stretching, given a tough market with lots of new competitors. However, it acknowledged that it now needed to revisit the figure in light of possible cost synergies and other benefits and changes arising from the merger of Studios and Worldwide.15 In particular, in 2017–18, some of Worldwide’s programme investment took the form of payments to Studios, but such transfers would in future take place entirely within the new Studios subsidiary, potentially making it harder to justify classing them as financial returns.16

11.More generally, the BBC’s definition of financial returns was an area of focus for us, since it includes both dividends paid by Worldwide and other payments that the company makes to the BBC’s public service broadcasting operations as contributions to programmes and payments for associated rights. The metric is unique to the BBC and therefore is not comparable with measures of financial performance used by other commercial companies.17

12.The BBC currently has great flexibility over the balance it strikes between dividend payments and programme contributions. The balance varied from year to year, with decisions on dividend levels influenced, for example, by how much future investment was required in the commercial subsidiaries.18 The BBC told us that the Board already approved the proposed returns figure for the year as part of its consideration of the annual budget. However, the BBC committed in future to giving the Board the opportunity to be more prescriptive about the amount that should be returned through dividends and through investment in programmes respectively.19

Balancing the tensions between commercial and public purpose objectives

13.We questioned the BBC further on the tensions that can exist between the need to deliver commercial returns and the need to comply with the BBC’s mission and contribute to its public purposes. The BBC acknowledged, among other things, that it would commission different programmes if its only aim was to maximise global returns. However, it considered that the tensions it faced could be overstated, since British content produced for British audiences could also be commercially successful. It pointed, in particular, to ‘Blue Planet’, ‘Sherlock’ and ‘Doctor Who’, and said that “we make most money when we are most BBC”.20

14.The BBC provided two examples where it seemed to us that the tensions truly were significant. First, it highlighted the balance that it needed to strike between any potential increase in licence fee payers’ access to programmes, by extending the period for which the programmes were available on the iPlayer, and the commercial returns that could be made by selling the right to air these programmes (after their first airing on a BBC channel) to either an advertising- or subscription-funded video on demand service.21

15.Second, the BBC considered that the World News TV channel, operated by BBC Global News, delivered wider tangible benefits for the British taxpayer by boosting the UK’s reputation overseas through the provision of trusted and independent news. The BBC pointed to surveys showing that, in countries where the BBC was strong through news or other programming, trade with Britain also tended to be strong.22 However, although the BBC expected Global News to be profitable in 2017–18, the advertising market for global weekly news was very difficult, and Global News’ future therefore looked challenging. As a result, the BBC had approached the Department for Digital, Culture, Media & Sport for a subsidy so that it could make some of the content it provided to Europe and Sub-Saharan Africa freely available, instead of placing it behind a paywall as at present. The subsidy would replace the subscription income lost as a result of this change.23

16.The BBC assured us that all the decisions within its commercial activities took account of the need to balance commercial returns and the public purposes, since all changes had to comply with the BBC’s four commercial criteria. This means they had to: fit with the BBC’s mission and public purposes; deliver a commercial return; be concomitant with the BBC brand; and not distort the market.24 The BBC said it had a rigorous process for reviewing the commercial and public purpose aspects of any new proposal. However, it admitted that the Board was yet to reject any commercial proposal because it conflicted with the public purposes. The BBC said it would have already rejected proposals at a lower level before this point in the process. Nonetheless, we were not convinced about the extent to which the Board gave explicit consideration to the balance between the delivery of commercial returns and the public benefit.25

1 Report by the Comptroller and Auditor General, The BBC’s commercial activities: a landscape review, Session 2017–19, HC 721, 7 March 2018

2 C&AG’s Report, paras 1, 1.4; BBC, Public Purposes (accessed 26 June 2018)

3 C&AG’s Report, para 2

4 C&AG’s Report, paras 3–4, 8–9; BBC (LBA0002)

5 C&AG’s Report, para 10

6 Qq 21, 23, 46

7 Qq 21, 23, 67

8 Qq 37–39, 46

9 C&AG’s Report, para 10

10 Qq 65, 68, 111

11 Qq 81, 88, 100, 101

12 Qq 103–107; BBC (LBA0002)