Examination of Witnesses (Questions 1448
- 1459)
WEDNESDAY 6 JULY 2005
MR ANTHONY
SALZ, MR
JOHN SMITH
AND MR
NICHOLAS ELDRED
Chairman: Good morning and thank you
very much indeed for coming. May I start with an apology on my
own behalf and I think probably on Lord King's behalf as well?
Two new peers are being introduced into the House of Lords this
afternoon. Both Lord King and I are involved in their introductions
so we will slip away at some stage and I am going to hand over
the chairmanship to Lady Howe.
In the absence of the Chairman, Baroness
Howe of Idlicote was called to the Chair
Q1448 Baroness Howe of Idlicote:
Welcome to you all and thank you very much for coming. We have
details here of your individual roles. Is there anything you particularly
want to say to start off with?
Mr Salz: If I may. I am a relatively
new governor. It is rather less than a year. That is not my main
job. My main job is as a lawyer and senior partner in Freshfields
Bruckhaus Deringer. I do have two full time people on either side.
John Smith is CEO, BBC Worldwide, and Nicholas Eldred is the BBC
general counsel. I would like, if I may, to say a few things by
way of introduction about how the governors handle market impact
issues, because it can be a fairly confusing subject. I wanted
to see if I could simplify it to some extent. In doing so, I would
like to start off with what we as governors see as the BBC's prime
responsibility which is as a public service broadcaster. We get
nearly three billion in licence fees and for that we have to deliver
outstanding programmes and services and we have to do it in a
way which confers value for money on the licence fee payer. With
that sort of scale, we could have a market impact but we do operate
in a market which is pretty competitive and which has some other
big and determined players. At the moment, we operate in an environment
which is quite challenging with the changes in technology. Aside
from the public service aspect of our business, we have the commercial
businesses which John runs and in relation to which John has recently
conducted a review which we as governors have been quite involved
in. The broad objective in these commercial businesses is to deliver
for the benefit of the licence fee payers the full value of their
investment in BBC content. It is a bit of a simplification but
that is broadly what they are about. We are challenged to do that
by successive governments as part of the licence fee settlement.
In light of John's review, we have cut back on commercial activities.
And we also have this discussion in the context of the Green Paper
which sets out criteria for assessing what we should do in this
area. In both these two different areas we as governors perform
a role in trying to ensure that our market impact is proportionate
and fair. It is indeed an important issue for us. If we look first
at the public services and we take these in the context of the
proposal we have put out in Building Public Value, we have
first a proposal that we have service licences. We are in the
process of trying to determine what should be in those service
licences. They will last for a five year period. They will be
published. They will set out the remit of the various public services.
In relation to new services or material amendments to existing
services, we plan to apply a public value test. There has been
quite a lot of comment about that and we will see it as our duty
to balance our duties to deliver excellent programmes to the licence
fee payer against the market impact. We have also said that we
will have rolling reviews of existing services, thorough reviews
from time to time, so that over a period of time we will look
at all of the existing services. We believe that this package
of proposals in Building Public Value is an appropriate
response to some concerns amongst our competitors and will give
much greater clarity about what the BBC is intending to do, more
predictability and transparency. In relation to market impact
of our commercial services, what I call John's bit, we have the
structure of a fair trading commitment and, for implementation
within the BBC to ensure compliance, the fair trading guidelines.
Those are basically about avoiding cross-subsidies from the public
funds to the commercial activities and also compliance with competition
law. We are subject to competition law so if there is a complaint
about the way we are behaving that complaint may be made to the
OFT, Ofcom or Europe. There are quite a lot of areas in which
we can be brought to task.
Q1449 Baroness Howe of Idlicote:
Thank you for that overview. Do you think the Green Paper will
ensure that the boundaries between the commercial and the public
services activities are going to be clearly defined? I accept
what you say about changes that can happen. Some selling off has
gone on and you are cutting down on some commercial activities
but is this going to satisfy your competitors that there is a
clear boundary?
Mr Salz: Taking the last point, to satisfy
our competitors is probably impossible in one sense. They are
good, effective competitors and this is one of the ways they can
get at the BBC, by making a noise about what the BBC is doing.
The governors will take the market impact very seriously but in
separate ways. The distinction between the public service, the
duty to the licence fee payer which is such a core responsibility
for the trustees that has to be dealt with in that rather distinctive
way, and the commercial activities, will be governed in a different
way.
Mr Smith: If you accept the proposals
in the Green Paper for assessing whether or not it is okay for
the BBC to run a commercial service, those proposals are really
sensible. Provided we fulfil the four criteria we will not find
the BBC running commercial activities that seem to be completely
inappropriate. In addition, provided the proposed systems for
fair trading compliance between the commercial services and the
public service work properly so that there can be no sense that
in some way the commercial businesses are getting an unfair advantage
or some unfair subsidy coming from the licence fee, hopefully
everything will work.
Q1450 Baroness Howe of Idlicote:
Could you remind us of the four criteria?
Mr Smith: In our submission to the DCMS
for the Green Paper we said we thought it would be a good idea
to have a clear rationale for where the BBC should engage in commercial
activities. In a nutshell, the purpose of the commercial businesses
is to exploit assets which are being paid for by the licence fee
payer anyway, programmes made for the licence fee payer and transmitted
back to the licence fee payer, and to exploit those assets in
secondary markets in the UK and overseas in order to generate
extra profits which can then go back into the BBC to supplement
the licence fee. That produces more programmes. There are other
reasons. Commercial exploitation can extend audiences' appreciation
of any particular topic. That is true, for example, in the case
of magazines. If people have a particular interest in history,
they will buy BBC History Magazine to extend their enjoyment.
Thirdly, they help to raise awareness around the world of the
UK's general, cultural values. They build international audiences
for UK content. They provide a shop window for UK talent and they
raise awareness generally around the world of what the BBC's brand
stands for. We have already arrived at the situation where the
BBC's position in the world as a global media player is something
quite impressive. The proposals and criteria in the Green Paper
for assessing whether or not the scope of these services is okay
are fourfold. One is that all commercial services must fit with
the BBC's basic public service purposes. It is very important
that we do not start getting into fish farming or industrial machinery
or things which are patently nothing whatsoever to do with programme
making for the BBC. The second criterion is about commercial efficiency.
The BBC should only do it commercially if it offers the best value
alternative to the licence fee payer. If other people could exploit
the BBC assets more effectively, we should let other people do
it. The third criterion is about brand protection. Do not do anything
commercially which in any way might undermine the brand values
that the BBC public service has built up. Finally and fourthly,
market distortion, ensuring that the BBC's commercial services
are not being structured in any way that might give them an unfair
advantage.
Q1451 Baroness Howe of Idlicote:
Would it be fair to say that all the BBC's commercial activities
do relate, certainly from what you have said, to their public
service remit?
Mr Smith: That is absolutely the intention.
We carried out the review that Anthony has described last year.
There were some things which the BBC did commercially which, to
be honest, did not spring naturally out of the BBC's public service
programmes. Let me give you an example: a magazine known as Eve
Magazine, a women's glossy, did not really reflect any of
the BBC's programming output so we took a decision to fit with
these criteria that it was not really appropriate and we sold
the magazine to Haymarket. There are some other magazines, Cross
Stitch Magazine and so on, which do not fit with these criteria
so they are being disposed of.
Q1452 Lord Maxton: I do not know
where you draw lines. I am more interested in the BBC as a public
broadcaster owned by the licence fee payer who is entitled to
get a return, rather than a vague idea of a public service broadcaster
which is a slightly different thing. It seems to me that oddly
enough it is not your activities that most of the commercial companies
complain about. It is the free services that the BBC has which
they complain about: the website which is provided free, which
is innovative and has all sorts of things on it which they do
not provide. In a sense, they are not so worried about you so
why do you get so sensitive about it?
Mr Smith: I certainly take that in the
spirit in which it is meant. Obviously commercial competitors
worry as well, particularly about the activities in the UK, but
I take the point you make about the activities of a public service
being something which impact a market. That is the most important
thing. £3 billion of public money is being spent in the UK
market place providing services of television, radio and online.
That is going to have an effect on the market place and people
who are otherwise in the market place will complain about it.
That is why the proposal for a public value test which assesses
that the public interest in the BBC producing public services
outweighs the downside of the impact on competition is very important.
Q1453 Lord Maxton: Is that not a
very narrow view? Ultimately, your major role is not going to
be national as a BBC commercial operation; it is going to be international.
There are some of us who would argue that the future of the BBC
lies in selling its high quality television to the rest of the
world. If you at this point start putting too much restriction
on the commercial activities of the BBC, you are in danger of
putting that whole future operation at some risk.
Mr Smith: There is no doubt that future
growth opportunities commercially are international. At the moment,
about 40 per cent of total turnover of BBC Worldwide comes from
outside the UK. It is important to remember that inside the UK
there are several television channels under the banner of UKTV
so there is quite a bit going on here. Then there are 33 magazines.
It is the third biggest magazine publisher in Britain and there
are books and videos and so on. There is plenty going on in the
UK but you are quite right that a lot of the future growth comes
from international expansion and the opportunities are very great.
Q1454 Lord King of Bridgwater: You
made the point that as a trust you saw the role that you play
as in public value. Can you confirm that that is what you do as
a governor at the present time as part of your responsibilities?
Mr Salz: The public value test reflects
quite a lot more work on how we achieve some apparent objectivity
and reviewable objectivity in the way we go about measuring the
balance.
Q1455 Lord King of Bridgwater: That
is part of your duty?
Mr Salz: Yes.
Q1456 Lord King of Bridgwater: How
much time as a governor do you spend on the responsibility?
Mr Salz: Too much time because I have
another job. I think my time is said to be two days a week.
Q1457 Baroness Howe of Idlicote:
Does that mean that is what it is or what it is said to be?
Mr Salz: That is a rather personal observation
because I recognise that in two respects the time and commitment
might be rather greater now with the Charter review and my getting
up to speed as a governor, being a relatively new one. I dread
to think how much time it actually takes because I spend most
of my weekends thinking about how to get through the BBC stuff,
so it would be more probably, although my partners will not appreciate
my saying that.
Q1458 Baroness Bonham-Carter of Yarnbury:
It is not just your competitors that express concern about Worldwide.
The Office of Fair Trading submitted that they think Worldwide
is potentially distorting markets. Should the BBC Trust, if it
comes into existence, have the power to review significant expansions
of existing commercial services against the public value, rather
than just merely new commercial services?
Mr Smith: The whole idea, as proposed
in the Green Paper, is that all commercial services have to pass
the four criteria that we were talking about before. Assuming
everything does pass those criteria—and it would be essential
that we are able to prove that they do—there would not be
any commercial activity that did not spring from the BBC's basic
public purpose. There would be no unfair advantage and there would
be no activity which in any way might undermine the BBC's brand
and we would have worked out that it was right for the BBC to
own it rather than somebody else because it was in the interest
of the licence fee payer to offer the best value. Provided those
four criteria are tested, checked and everything that is going
on commercially complies with them, it should be possible to be
satisfied that the BBC is doing the right thing in its commercial
activities.
Q1459 Baroness Bonham-Carter of Yarnbury:
It would be retrospective?
Mr Smith: Yes. The review I carried out
last year was about a retrospective look at these criteria against
what was going on then and, as a result, massive changes are currently
going on in commercial activity. To give you a couple of examples,
two years ago there were six subsidiaries employing about 6,000
staff and turning over almost £1 billion which, taken together,
produced a yield for the BBC of less than 3 per cent. Through
all the reviews and changes brought about by this criterion, we
are going to end up with two subsidiaries only employing about
2,000 staff with a turnover of about 750 million. The yield will
be north of 7 per cent. Already we have published results which
show that the profit performance has gone up by 50 per cent in
the last year. All that has been done by selling off and/or closing
down activities which either did not fit with this criterion or
it just was not sensible for the BBC to do it.
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