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Licence to change: BBC future funding Contents

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Chapter 3: Strategic challenges

52.In this chapter we set out the challenges facing the BBC over the next decade and why a review of the licence fee system is both a necessity and a positive opportunity for the BBC to catalyse change. Without change, the BBC will be increasingly constrained in its ability to fulfil its purpose and deliver the benefits we set out in Chapter 2. We focus on two main strategic issues. First is the pace of developments across a rapidly evolving media landscape, and the impact this has on audience behaviours. The second is the need to deliver a valued service for all sectors of society in the context of social and political change. We then examine the BBC’s response to these challenges.

Future media environment

53.Consumption of television and radio remains relatively strong in the UK: over 17 million homes access digital terrestrial television via an aerial, 8.4 million households subscribe to satellite television and 3.9 million have a cable TV subscription.93 But technologies and audience habits are changing rapidly. Consumers are increasingly watching content on mobile phones, tablets, smart TVs, games consoles and streaming sticks. Almost half of UK adults now use online video services as their main way of accessing TV and film.94 The rollout of 5G networks and full-fibre broadband will further enable streaming on internet-connected devices.

54.Linear TV looks set for long-term decline. According to Ofcom data, nearly three-quarters of households use a broadcast video on demand service such as BBC iPlayer or All 4, and a similar proportion use subscription video on demand (SVOD) services.95 By contrast, linear TV’s overall viewing share in the UK fell from 67 per cent in 2019 to 61 per cent in 2020, despite a pandemic-driven increase in the number of viewing hours.96 These figures are in line with wider trends across the world.97

55.Traditional broadcasters like the BBC face increasing competition for audience attention, particularly from large, well-funded international SVOD providers. Slower rates of SVOD growth can be expected following a 2020 boom brought on by the covid-19 pandemic.98 But competition in the media landscape is nevertheless likely to continue to rise,99 putting pressure on the whole of the UK’s public broadcasting system.100 Dr Jeremy Silver, Chief Executive Officer of Digital Catapult, highlighted that these issues are compounded by competition for attention from a variety of other areas,101 notably the gaming market which is worth around £7 billion in the UK.102

56.Growing production costs are another challenge. The BBC told us that it provides the UK’s “largest diet of British creativity across drama, entertainment, and factual TV. BBC Bitesize provides a critical service for children”.103 Serving audiences through attractive content is one of the core justifications for continued public funding. But paying for it will become more difficult. High inflation is straining budgets across the UK, but the BBC’s production cost challenges pre-date this and are likely to outlast it.104 New streaming platforms—often loss-leading, loss-making or debt-funded—are investing heavily in content production, particularly drama. This has driven up costs.105 The BBC’s costs of non-continuing drama production have reportedly increased by nearly two-thirds over five years.106 Andrew Neil, broadcaster and journalist, told us that while the BBC’s £5 billion annual income was substantial, it was simultaneously restrictive given its aims and rising costs in the media world:

“Not that long ago it was inconceivable that an hour of BBC drama would cost more than £1 million per episode; it is now pretty inconceivable that it would cost less than that. Netflix is spending $10 million per hour … Even £5 billion is nowhere near enough to run a full television network with international ambitions these days.”107

In 2021, the BBC’s content expenditure was £2.5 billion108 and ITV’s was £1.2 billion.109 In 2019 Channel 4’s content expenditure was £660 million.110 By comparison, in 2021 Netflix spent $14 billion, and Disney $18.6 billion (roughly equivalent to £10.4 billion and £13.8 billion respectively).111

Figure 3: Estimated cumulative content expenditure by major SVOD platforms

Source: Supplementary written evidence from Enders Analysis (BFF0067)
*Includes Netflix, Amazon Prime Video, Hulu, Disney+, Apple TV+, Warner Media (HBO Max), Discovery+, Paramount+ and Peacock**BBC’s expenditure on TV content excluding BBC News and BBC Parliament

57.With the huge scale of SVOD budgets comes significant power to influence what consumers want. Enders Analysis described Netflix’s impact on the UK video market as “transformative”:

“In just a decade, the way people view programmes, their expectations around quality and availability, and how they value TV content, has irrevocably changed. Driven by Netflix … this shift has placed pressure onto legacy operators, overturning business models and accelerating a transition of power from localised networks to international platforms.”112

58.Engagement with public service broadcasters’ content is therefore decreasing in a range of areas.113 Traditional broadcasters’ share of total UK video consumption fell from around 97 per cent in 2010 to around 70 per cent in 2021, according to Enders Analysis. Forecasts suggests a further decline to around 60 per cent by 2027.114 The pronounced decline in linear broadcast TV viewing has been only partially offset by increased viewing of BBC iPlayer. Between 2020 and 2021, the average viewing time of BBC TV fell by 6 minutes, whereas the average viewing time of iPlayer rose by 4 minutes. This was despite a pandemic-induced boost to linear TV viewing—Ofcom noted that in previous years linear decline was more severe, and it expects this trend to continue. Though time spent using the broadcaster is decreasing, the BBC still reaches large audiences, with 87 per cent of UK adults consuming some form of BBC content each week.115

Figure 4: Breakdown of total UK video viewing age 4+

Source: Written evidence from Enders Analysis (BFF0047)

Figure 5: Online video service used in UK households to watch programmes or films

Source: Ofcom, Media nations UK (August 2021), p 16: https://www.ofcom.org.uk/__data/assets/pdf_file/0023/222890/media-nations-report-2021.pdf [accessed 8 June 2022]

59.In terms of the means to access content, there is a widening gap between older viewers, who are likely to account for the majority of future broadcast consumption, and younger viewers preferring SVOD and other online services accessed through a range of devices.

Figure 6: Breakdown of total UK video viewing, by age group

Source: Written evidence from Enders Analysis (BFF0047)

60.Radio provides a partial exception to such trends, where the BBC remains pre-eminent.116 BBC Radio 1, 2 and 4 account for over a third of all radio listening. An estimated 62 per cent of all adults are exposed to BBC radio each week.117 While audiences tend to be older, there remains a broad spread of engagement across age groups.118 As in other areas, the future of radio is gradually moving towards digital consumption. Smart speakers already account for six per cent of all audio consumption. Online podcasts are becoming increasingly popular, particularly among younger viewers. A 2021 Government report projected that live radio (both analogue and digital) will still account for over 50 per cent of UK audio listening in the mid-2030s.119

Figure 7: Adults (15+) share of audio consumption

Source: HM Government, Digital Radio and Audio Review (October 2021), p 27

61.We heard that the industry-wide shift towards online consumption was part of an ongoing trend that the BBC was working to embrace.120 But it will become more difficult for broadcasters to be noticed in a crowded online marketplace. Audience engagement is likely to be influenced heavily by how easy it is to find and use public service broadcasters’ content on future digital platforms, and how attractive the offer appears.121 Characteristics that draw viewers to online platforms—such as new content, large libraries and free or low-cost access—are likely to become more important, but often favour large international firms that enjoy economies of scale, technological advantages and deep pockets.122

62.Responding to this suite of challenges will be difficult in the context of long-term financial constraints. In February 2017 the BBC introduced a £800 million savings programme up to 2022 following the 2015 licence fee settlement. By 2019–20, the BBC had increased its savings target to £1 billion. Following the 2022 licence fee settlement the BBC said it faced a £285 million annual funding gap up to 2027–28 and announced £500 million of additional savings and reinvestment.123 The BBC’s licence fee income was reportedly 30 per cent lower in real terms in 2020 than in 2010.124

63.Mark Oliver, Chairman and Co-founder of the media strategy consultancy Oliver & Ohlbaum Associates, observed that restricted licence fee levels were not a short term issue: “the political will to allow for an increase in the licence fee is not there, it has not been there [for decades] and it might not be there for another 15 years”.125

64.On its current trajectory the BBC will likely find it increasingly challenging, though not impossible, to deliver productivity savings without affecting audience satisfaction. The National Audit Office found that the BBC’s early savings targeted productivity and overheads,126 whereas later savings were likely to target audience-facing areas. It warned that the BBC “must now balance the need to proceed at pace in delivering savings and reform with taking care that its decisions about how to achieve this do not further erode its position with audiences.”127 Gareth Davies, Comptroller and Auditor General at the National Audit Office, thought however that it was “very unlikely that an organisation the size of the BBC has run out of opportunities to make productivity gains” and that identifying further savings that would not affect programming would be an ongoing task.128

Figure 8: Annual delivery of savings by category

Source: National Audit Office, ‘BBC savings and reform’ (17 December 2021), p 19: https://www.nao.org.uk/report/bbc-savings-and-reform/ [accessed 8 June 2022]

65.Challenges to audience engagement matter for the BBC.129 As we set out in Chapter 2, the broadcaster’s central mission is to deliver a valued service for the whole of the UK. Declining relevance to audiences affects the legitimacy of, and support for, future public funding. And fewer viewers mean lower licence fee income. Between 2017–18 and 2019–20 the number of non-over-75 households buying TV licences fell by 450,000.130 Archie Norman, former Chairman of ITV, worried that the BBC did not feel a sufficient degree of urgency to act when “time is passing, and the world is moving on dramatically”.131

Serving the whole of the UK

66.The other main challenge we found was representation of all UK audiences. We heard that the legitimacy of the BBC’s public funding is underpinned by its ability to deliver valued content that reflects and represents the spread of UK society.132 Our evidence suggested that this task is becoming both more important and more complex in the face of societal change and political realignments. The BBC must improve on two core interrelated areas.

67.The first is due impartiality. Ofcom’s 2020–21 annual report on the BBC found that achieving due impartiality remained a “complex challenge”.133 Their data show that audiences scored BBC TV news highly for accuracy (71 per cent) and trust (68 per cent), but consistently rated it less favourably for impartiality, with just 55 per cent giving it a high score. The BBC website, app and BBC radio all perform better, with 65 per cent of BBC website and app users and 61 per cent of radio listeners rating these services highly for impartiality.134 Research published by Ofcom in June 2022 found that audience perceptions of the BBC’s impartiality were not only influenced by the content itself but that other factors—such as relationships with news brands, personal views, cultural climate and the effect of other stories in the media landscape—played a “pivotal role in shaping perceptions of due impartiality”.135 Ofcom also note that “BBC TV has a much greater number of regular news viewers than other TV channels, and therefore more people who consider it impartial”.136

68.Several witnesses said that the BBC did not fairly reflect the spread of legitimate perspectives in the UK.137 Dr Adrian Wooldridge said that the BBC had a “tendency to think about the classical political divisions of left and right” which did not necessarily capture the complexity of issues which it must take account.138 He argued there were specific areas that merited particular improvement, such as BBC News’s business coverage, which he told us was “local, parochial and treats business as a boring embarrassment.”139 David Goodhart, Head of Demography, Immigration and Integration at Policy Exchange, argued that the BBC needed to address criticism of insufficiently representative coverage “so that more of the country feel that their voices are there, as well as the completely legitimate liberal metropolitan one.”140 Mercy Muroki, a researcher and journalist, said there was a “perception that the BBC looks down on some of the opinions … whether that is in relation to politics, Brexit, concerns around immigration”, and believed the BBC needed to represent better audiences to ensure they felt it was worth paying for.141

69.We received mixed evidence on the prospects for improvement. David Goodhart believed the BBC had become more aware of these criticisms since the 2016 EU referendum.142 Andrew Neil thought the issue was more intractable, saying the BBC “reflects the biases of the metropolitan world, which are different from the biases of the red wall—or in some areas even the blue wall … you will reflect these biases from the people you recruit.”143 We also noted the complexity around discussions on impartiality. As Professor Richard Sambrook told us in a previous evidence session on BBC impartiality, “Impartiality is often subjective. What you think is impartial may not be what I think is impartial. Even the Ofcom code has a degree of subjectivity in it”.144

70.Second, and relatedly, was the need to appeal to an increasingly diverse UK society. Jasmine Dotiwala, a broadcaster and producer, told us that “we have an increasingly diverse population and a healthy mix of worldviews”, and emphasised the need to “reflect honestly the wider society that we live in.”145 Polly Mackenzie, then Chief Executive Officer of Demos, similarly noted the need to cater for “increasing diversity of cultural taste, religious background and media consumption.”146

71.Data from Ofcom suggest that audiences with disabilities, those in Scotland and those from lower socio-economic backgrounds typically express lower satisfaction with the BBC.147 Previous studies have shown that the BBC could improve on its ethnic and socio-economic diversity.148 Ofcom data show that audiences rate the BBC poorly for representation and portrayal compared with its other purposes.149

72.These themes were echoed by witnesses. Deborah Williams, Executive Director of the Creative Diversity Network, told us that as someone “young, black and disabled, I do not think that is a part of how the BBC sees its core demographic.” She also argued that more nuanced and relevant coverage was needed to avoid alienating underrepresented communities by portraying them as a “homogenous group”.150 We heard the BBC needed to better cater for different needs, perspectives and interests, give a stronger voice to local and regional issues151 and reflect underrepresented communities sensitively.152

Figure 9: Audience satisfaction distribution

Source: Ofcom, Annual report on the BBC 2020–21, p 54

73.As media and technology choices expand it will become increasingly important to reach all audiences, particularly underserved groups, across a variety of platforms, content formats and languages when catering for their varied preferences and expectations.153 This requires the data to understand consumer interests and needs, the investment and technologies to engage them in the most appropriate ways, and the strategies to determine which areas to prioritise.154 We noted the difficulties in achieving this given the significant reduction in the BBC’s budget in real terms over the past decade.155 We also heard that the BBC risked falling behind other providers in this area. Paul Lee, Global Head of Research for Technology, Media, and Telecommunications at Deloitte, noted that SVODs generally outperformed the BBC in tailoring content to non-white audiences, for example.156

Responses from the BBC and Government

74.The BBC faces tough choices in responding to these challenges. It must deliver a strategy and vision that answers the BBC’s commercial challenges while addressing its cultural and public service obligations.157 The dilemmas include:

• appealing to younger tech-savvy audiences while supporting those who will rely on linear services for at least the next decade;
• competing for audience attention against international rivals that are vastly better funded;
• have strategic advantages in procuring new content, on-screen talent, data and technical know-how; and are unencumbered by public service obligations and expenditure rules;
• balancing its finances to deliver savings and plan for an uncertain future while investing more in innovation and development;
• broadening its appeal to diverse audiences, representing more of the UK; and
• balancing its international and domestic roles, where it must respond to pressures in the global marketplace without creating distortions through an overbearing presence in the UK market.

75.The then Minister of State for Media, Data, and Digital Infrastructure Julia Lopez MP emphasised the need for speed and said the Government was launching an independent review to examine which funding approach would best enable the BBC to thrive in a fast-changing landscape. She said the Government had “not run any numbers” on alternative models and would be led by the results of its independent review, which is expected to last around 12 months.158

76.Tim Davie told us “the scale of change in the market is extreme” and emphasised the challenge in retaining linear services while increasingly catering to digital consumption habits. He warned of “jeopardy if we do not make that transition”,159 but said the BBC continued to innovate and explore new formats160—for example using iPlayer, Sounds and social media channels such as Instagram161 and TikTok.162 He thought the BBC could “self-flagellate a bit too much”, noting that youth engagement remained at reasonable levels and older audiences stayed loyal.163

77.In May 2022 the BBC published a plan to deliver a “digital-first BBC”
involving £500 million of annual savings and reinvestment, 1,000 job reductions and £50 million of annual investment in product development.164 This built on its earlier Annual Plan 2022–23, which focused on strengthening impartiality, creating distinctive content, transforming the BBC’s digital offer, accelerating commercial and global growth and delivering organisational reforms.165

78.We heard that the BBC needed support from a more effective and nimble regulatory framework. There are 148 different regulatory quotas and targets across TV, radio and online services with which public service broadcasters must comply.166 Clare Sumner CBE, Director of Policy at the BBC, said it took over a year to change the rules to extend the timeframe for which iPlayer content remains available, whereas “Netflix, Amazon and others are changing almost by the second.”167 We noted initial progress in this regard. The Government confirmed that regulatory reform would be considered in both the Mid-Term Charter Review and the forthcoming Media Bill.168 In June 2022 Ofcom published proposals to update the BBC’s Operating Licence to incorporate better the BBC’s online services and give the BBC greater flexibility in how it meets audience needs.169

79.The BBC addressed some of its representation challenges in its response to the Serota Review into editorial standards,170 its accompanying action plan171 and also the BBC Across the UK strategy.172 When asked how it would better represent all sectors of society given ongoing criticism, Richard Sharp, Chairman of the BBC, contended that the corporation had changed “dramatically” in recent years but acknowledged that socio-economic diversity and minority languages warranted further improvement.173

80.On whether the licence fee was the best option for helping the BBC address its challenges, Mr Sharp said the BBC Board was starting to consider “what the strategy of the BBC should be in delivering its public purposes as a public service broadcaster. What are the potential funding options? What are the implications of those options?”174

81.We explored what would be needed to turn these reflections into action. Archie Norman, former Chairman of ITV, told us that “Nobody has a divine right to exist, just because they are publicly funded”. He argued that the BBC leadership needed encouragement and space to:

“speak truth to the organisation and to say, ‘If we don’t change, we aren’t going to exist in our current form’, [because] it releases the energy in the whole organisation. You are saying what everybody already knows. But at the moment the Director-General cannot say that, because he would be seen to be criticising his own organisation and his own funding, and putting in peril the future funding and support for the BBC. It will not happen without a combination of strong political and governmental support, together with a leadership in the BBC with an appetite to take it on.”175

82.We explored whether the BBC could be more open and dynamic in addressing its problems, and whether changes to the funding model would help address its challenges. Mr Sharp noted the “desire for pace in change” but cautioned that a considered approach was needed to understand the possibility of unintended—and potentially irreversible—consequences of new funding models that could jeopardise the BBC’s existing position as the “world’s leading public service broadcaster”.176 Mr Davie acknowledged that there were “typical behaviours of successful legacy operations that are 100 years old that continue to do pretty well” but insisted “the idea that the BBC is just digging its heels in is wrong.”177 In a subsequent speech he said “we all see a changing media landscape, and a need to listen, to evolve, and fast.”178

83.The BBC faces major challenges. The decade ahead will be characterised by rising competition and costs, and constrained funding. It will need to adapt to a digital future while serving those who will continue to rely on linear services for at least the next decade. It must deliver programming and news that matter, and balance the growing expectation for personalised content against its enduring unifying mission. It must compete with vastly better funded international streaming giants and respond to growing questions about its value in the face of expanding consumer choice and failure properly to represent all sectors of the UK. And it will need to explain more clearly to audiences the relationship between what it is for and how it should be funded. Achieving this will require a more clearly articulated strategic vision that goes beyond its existing published strategies.

84.The BBC should publish a comprehensive long-term vision that sets out its role, and how it will deliver value and distinctiveness in a rapidly changing world. This vision must include costed options for future funding mechanisms, and how these would affect the BBC’s ability to deliver on its mission in the next decade and beyond. This vision must be driven by a positive approach from the leadership. It will require fresh thinking and a more open-minded approach than has been shown in the past. It should include what the BBC will stop doing, what it needs to do differently and what it will start doing. This would provide clarity to the commercial sector, and greater structure and transparency to help Ofcom, Parliament and the public hold the BBC to account. The BBC should submit this work to the Government’s independent review.

85.The BBC cannot provide content that pleases everyone all the time. Yet we continue to hear that the BBC is not representing widely held perspectives in the UK, which often do not divide neatly along party political lines. The legitimacy of a future funding model risks being undermined by dissatisfied audiences and declining viewing share. We note the BBC’s diversity initiatives and encourage it to continue to improve its on- and off-screen representation. The BBC should also embrace this opportunity to show more overtly that it respects, understands and reflects all sectors of UK society.

86.The BBC will need to operate in a more flexible and nimble regulatory framework in future. It currently takes too long for sensible changes to be introduced. We welcome Ofcom’s recent proposals to update the BBC’s Operating Licence better to incorporate the BBC’s online services and give the BBC greater flexibility in how it meets audience needs. In response to this report, Ofcom should set out how it intends to provide a swifter approach to regulatory changes. The Government should likewise outline its plans for introducing regulatory updates.

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