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Licence to change: BBC future funding Contents

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Chapter 4: Funding models

87.In this chapter we set out the principles that a future funding model would need to fulfil. We then explore 12 options for funding the BBC, ranging from the existing licence fee to full commercialisation. We summarise how each funding mechanism would work, outline their merits and drawbacks, and set out the rationale for discounting some options and recommending others for further consideration.

Principles for a funding model

88.A number of European public service broadcasters have changed from licence fee funding models to alternatives in recent years.179 Of the 56 markets that make up the European Broadcasting Union area, 20 rely mainly on a licence fee.180 Plans to abolish France’s TV licence are set to be introduced later this year.181

Table 1: Selection of European countries that have abolished
their TV licence fees in the past decade

Selected countries	New funding model	Length of transition period	Impact
Germany	Universal household levy	2010–2013	Various legal challenges to the levy resolved in 2018.
Finland	Hypothecated income tax	2011–2013	Stable funding, preserving independence and transparency. Following significant debate, achieved a general social acceptance and perception of fairness.
Switzerland	Universal household levy	2015–2018	Significant debate, leading to a referendum on public service broadcasting.
Norway	State budget	2015–2020	No direct reduction in funding or significant disruption of public service media production.
Sweden	Hypothecated income tax	2018–2019	Addressed increasing issue of non-payment of the licence fee, achieved general social acceptance.
Denmark	State budget	2018–2022	Has been subject to some criticism that the move risks reducing the broadcaster’s independence from government.

Source: NRK, ‘Ny finansiering av NRK–spørsmål og svar’–NRK–Om NRK (September 2019): https://www.nrk.no/informasjon/ny-finansiering-av-nrk-_-sporsmal-og-svar-1.14681657 [accessed 29 June 2022], Library of Congress, ‘Finland: Tax on Public Broadcasting’ (September 2012): https://www.loc.gov/item/global-legal-monitor/2012–09-07/finland-tax-on-public-broadcasting/ [accessed 29 June 2022], Government Offices of Sweden, ‘New financing of public service adopted’ (November 2019): https://www.government.se/articles/2018/11/new-financing-of-public-service-adopted/ [accessed 29 June 2022], rundfunkbeitrag.de, ‘Der Rundfunkbeitrag’: https://www.rundfunkbeitrag.de/welcome/englisch/index_ger.html [accessed 29 June 2022], Informa, ‘Sweden replaces radio and TV licence fee’ (January 2019): https://omdia.tech.informa.com/OM004110/Sweden-replaces-radio-and-TV-licence-fee [accessed 6 July 2022] and Public Media Alliance, ‘Drastic changes ahead for Danish public broadcaster’ (September 2018): https://www.publicmediaalliance.org/drastic-change-ahead-for-danish-public-broadcaster/ [accessed 6 July 2018]

89.Following these recent changes, the European Broadcasting Union promoted a set of non-binding principles to assess future models:

• stable and adequate to provide predictable funding that enables long-term planning and full coverage of the public service broadcasting remit in the digital age;
• independent from political and commercial interests;
• fair and justifiable to the public and the market; and
• transparent and accountable to ensure an open and clear funding mechanism that holds public service media accountable to its audience.182

90.Much of our evidence raised related considerations. Several witnesses emphasised that a funding model should empower the BBC to deliver on its purpose. Tim Davie emphasised independence and delivering a fair deal for the public.183 Other factors to consider included evasion rates, the efficiency of collection methods, sustainability in the context of technological change, public expectation,184 distributional impacts on different consumer groups, economic rationale and the proportional gain derived from any change.185 From these we derived six core principles against which future funding options should be judged:

• Independent: the funding model must safeguard the BBC’s editorial independence.
• Transparent: the funding model and means of fee collection must be transparent and trusted by the public.
• Legitimate: the funding model, and the way in which decisions on it are taken, must be viewed as legitimate by all parts of the population the BBC exists to serve.
• Sufficient and sustainable: the funding model should provide sufficient income to enable to BBC to plan and deliver its core mission with certainty, and provide the flexibility to adapt to future challenges and uncertainties.
• Fair: the funding model should be fair. If the funding system enables a variable fee, concessions should be made for those least able to afford it.
• Proportionate: any changes to the funding model should be proportionate to the returns gained in terms of public and financial value.

91.When responding to the results of its independent review, the Government should publish its assessment of how alternative funding options relate to the principles of independence, transparency, legitimacy, sufficiency and sustainability, fairness, and proportionality.

Existing licence fee

92.The existing licence fee is described in Box 1 in Chapter 1. We heard of three key benefits to the current system.

93.First, the licence fee provides sustainable funding which enables long-term business planning. Witnesses said the BBC’s ability to focus on market-shaping activities and invest in UK content was underpinned by the guaranteed nature of licence fee income which does not oscillate based on viewership, advertising or economic fluctuations.186

94.Second was value for money. Claire Enders, founder of Enders Analysis, told us it was “incredible” that the licence fee provided a range of TV, radio and online services for the price of “five cappuccinos … in a cheap location—and four at Starbucks—a month.”187 Professor Catherine Johnson, Professor in Media and Communication at the University of Huddersfield, highlighted that the cost of the licence fee plus an average cable/satellite subscription for UK households was still only around half what US citizens spend on cable/satellite TV alone.188 Beyond broadcast services, the BBC also provides value to audiences through its role in live music, festivals and providing support for new bands.189

95.Third was a sense of shared national ownership. As Professor Robert Picard, Fellow of the Information Society Project at Yale University Law School told us, customers view commercial subscriptions as lifestyle choice “take it or leave it” services, whereas licence fees promote a “form of ownership” which makes audiences feel “This is mine. I have a part of this.”190 Professor Steve Barnett suggested there is “something appealing” about the flat rate of the licence fee, with “every household contributing the same amount to an institution which is an integral part of British cultural and political life.”191

96.Others believed that the licence fee is poorly aligned with expectations of consumer choice. Professor Stuart Allan noted that “You can point out as many times as you wish that the BBC licence fee is a fraction of the price of a cup of coffee per day … Many [young people] will still say that is a choice, they do not have a choice where the licence fee is concerned and it is expensive.”192 Growing choice in the market increases the pressure on the BBC to meet high standards of impartiality and representation; the more that audiences have alternative choices for their media consumption, the less enthusiastic they may be about paying for something that does not reflect them or their needs. The licence fee’s link to television ownership is also increasingly anachronistic for many people who consume media on phones, tablets and computers.193 Falling numbers of licence fee payers pose a further risk to its long-term sustainability.194

97.Fairness was a further concern. Many witnesses described the licence fee as “regressive” as it does not take account of individual households’ capacity to pay.195 Andrew Neil told us it was “a poll tax, in effect, because we all pay the same regardless of circumstance.”196 This is particularly problematic given the BBC’s financial challenges and a future of rising production costs: regularly raising the BBC’s funding levels would hit the poorest hardest.

98.Insufficient independence from the Government was also an issue. The Government ultimately sets the level of the licence fee, after negotiation with the BBC. Dr Tom Mills, Senior Lecturer in Sociology at Aston University and Chair of the Media Reform Coalition, said this meant the BBC did not have “authentic” independence from Government.197 We heard calls for this system to be reformed: the Voice of the Listener and Viewer, Professor Catherine Johnson, Professor Steven Barnett and Professor Jeanette Steemers all said that any level of public funding should be based on the recommendations of an independent body, with no final decision made without parliamentary debate.198 Our Committee’s report on public service broadcasting recommended that the Government establish an independent body to oversee the process for setting the licence fee.199

Reforming the licence fee

99.We heard about options for making the licence fee more progressive without fundamentally changing the model. Richard Broughton, Research Director at Ampere Analysis, said it could be possible to link the licence fee to other sets of data, for example by charging higher fees for higher-rate taxpayers. He highlighted possible administrative burdens involved in determining eligibility, which might change frequently, and the consequent possibility of people mistakenly “getting hit with a giant bill when they can least afford it, or vice versa.”200

100.Alternatively, further exemptions could be provided for those on low incomes. Over 75s receiving, or living with a partner who receives, pension credit are already exempt.201 Around 1.5 million households could get a free TV licence under this scheme, which is estimated to cost the BBC around £250 million a year, depending on take-up.202 This initiative indicates that there is scope for the existing licence fee to be reformed to make it more progressive for others too. A discount could presumably be extended to other low income groups across all ages, for example those receiving Universal Credit.

101.Any new discounts would need further funding to make up the shortfall or they would result in lower income for the BBC. This may risk full fee-payers feeling they were unfairly subsidising others. The BBC’s remit would also need to be framed such that programming did not become skewed to higher-paying households. These issues apply to other progressive alternatives explored later in this chapter.

102.The licence fee is one option for funding the BBC. But it is not the only option. Our evidence was clear that many of the apparent advantages of the licence fee are under threat, and it has several drawbacks. Making the licence fee more progressive would be an improvement, as fees could be raised without disproportionately targeting those least able to afford them. But this should not preclude a comprehensive assessment of alternative funding options.

Alternative commercial funding

Advertising

103.Under an advertising model, the licence fee would be replaced with revenue from commercial advertising. Adverts would likely be shown on its linear broadcast and radio channels and digital services including BBC iPlayer. Under the current terms of the Charter, the BBC does not show adverts on its main UK-facing channels (though since 2007 it has shown some advertising on its international platforms). The UK’s other major public service broadcasters (ITV, Channel 4 and Channel 5) carry advertising on both their linear and on-demand services.203 The UK’s TV advertising market is worth approximately £4.3 billion to £4.4 billion per year, and the radio advertising market approximately £700 million.204

104.This model has two main advantages. First, BBC content would remain free-to-air without compromising universal access. Second, the requirement for public funding would cease, along with concerns about the licence fee’s fairness, value for money and independence from Government. The Government would have no role in setting the level of BBC funding, as it would be derived entirely from commercial sources.

105.However, we found three significant drawbacks to this model.

106.First, it fails to fulfil the principle of sufficiency: Richard Broughton told us that advertising would likely generate income of around £2.5 billion a year, creating a shortfall of around £1.2 billion compared with income from the current licence fee.205 Dr Helen Weeds highlighted that if the BBC were to enter the advertising market it may lower costs for advertisers, increasing demand and thus growing the market.206 However, in order completely to replace current licence fee income with TV advertising revenue, the market would need to be almost twice its current size, which Richard Broughton told us “is not going to happen” as the BBC’s viewing share is insufficient. Even if that were possible, increasing the level of advertising on this scale would cause significant price reductions in the market and still lead to reduced advertising income overall.207

107.This would likely necessitate significant cuts to BBC programming, which could mean refocusing more exclusively on core public service outputs. As Mark Oliver, Chairman and Co-founder of Oliver & Ohlbaum Associates, noted, public service content is typically least attractive to advertisers.208 Though broadcasting popular sport and national events may prove popular with advertisers, Enders Analysis told us that “commercially efficient content would be favoured over that which is less economically viable” such as children’s, news, arts, and minority language and regional programming.209 RadioCentre argued that an advertising model “would undermine the public service broadcasting ecology in the UK and the range and quality of output for audiences.”210

108.Second, advertising does not meet the principle of proportionality due to the likely adverse effects on other public service broadcasters. As noted above, the size of the advertising market is unlikely to increase substantially, or if it did prices would likely be significantly lowered. Therefore, the BBC’s entrance into the market would significantly affect the public service broadcasters who already rely on advertising. This in turn would reduce the public good derived from having multiple public service broadcasters. ITV, Channel 4 and Channel 5 all told us their biggest concern was to avoid a BBC funding model that undercut their share of advertising expenditure.211 We note that advertising may be unpopular with some audiences who find advertising annoying or disruptive. The BBC told us that support for advertising on the BBC has fallen since the early 2000s, with 24 per cent of UK adults favouring advertising over the licence fee in 2021, down from 31 per cent in 2004. By comparison support for the licence fee rose from 31 per cent to 46 per cent over the same period.212

109.Third, it does not meet the principle of sustainability. The advertising market can fluctuate significantly. The Government cited this as a factor in its decision to privatise Channel 4 and enable the broadcaster to diversify its revenues.213 Archie Norman echoed these concerns:

“The year I joined ITV, the company was more or less on its knees because the advertising market had dropped by 15 per cent to 20 per cent in a single year … we did not know what our income was going to be four to six months out. Part of the reason why you can have greater creativity, take more risks and make more investment in people at the BBC is that you have this flat licence fee running out into the year. It is a huge advantage”.214

110.A purely advertising-funded BBC is highly unlikely to be viable. It would likely mean a multi-billion pound reduction in income for the BBC whilst damaging the rest of the public service broadcasting sector which relies on advertising. The BBC’s programming may need to scale back to refocus on core public service programming under a significantly reduced budget, and still generate income from these genres that are typically least attractive to advertisers. Alternatively, the BBC may be incentivised to refocus on entertainment attractive to advertisers and spend the minimum amount possible to meet its public service broadcasting obligations. As the overall funding level would be significantly less, both entertainment and core public service programming would likely decline in quality. We do not recommend the BBC moves to a purely advertising-funded model.

Subscription

111.Turning the BBC entirely into a subscription service would involve putting all BBC content behind a paywall—a model comparable to commercial subscription services such as Netflix, Amazon Prime Video and Disney+. These charge fees on a monthly basis and have surged in popularity in recent years.215

112.This offers the advantage of improved choice over whether to pay for BBC content. Currently, a household must pay the licence fee even if the occupants never watch BBC content but still watch live TV on any other channel, or stream live content on any online platform. Rory Sutherland, Vice-Chairman of Ogilvy UK, an advertising agency, suggested that “Ten years ago, if you claimed never to watch the BBC, you were probably lying, as it was largely implausible. If you said such a thing now, you are probably lying still, but it is just about plausible now.”216 A subscription model would allow audiences to opt in to the BBC’s services more directly.

113.We heard significant concerns about a subscription model. Many witnesses suggested that a subscription service would be unfair and fundamentally undermine the BBC’s purpose as a national broadcaster. Dr Tom Mills said that “one of the underlying assumptions of public service broadcasting is that we all need to have access to information that allows us … to participate fully in society and in our democracy.”217 Professor Jeanette Steemers argued subscription would “destroy” the notion of a universal service.218

114.Access to BBC news would suffer. Dr Richard Fletcher told us that, while audiences who are highly interested in news would be motivated to seek it out and pay for it under any circumstances, most audiences would not.219 Dr Adrian Wooldridge told us an “essential function of the BBC is to keep us part of the reality-based community. It is to give us news that is true, objective and sensible and a reference point.”220

115.Purely subscription-derived revenue would be insufficient for the BBC. If a subscription was £15 per month, a price Richard Broughton described as “optimistic”, the BBC would need to convert almost all current licence-holders to subscribers in order to match current licence fee revenue. For comparison, if the BBC charged £15 per month and matched Netflix’s 14 million UK subscribers, it would generate £2.3 billion in subscription revenue—a shortfall of £1.4 billion relative to the licence fee. If the BBC matched Sky’s UK subscriber base (over 9 million) it would generate approximately £1.4 billion, a shortfall of £2.3 billion relative to the licence fee.221

116.Subscription revenues fluctuate, providing a less stable revenue base. As Enders Analysis highlighted, audiences expect subscription fees to be paid monthly with the option of easy cancellation. This generates variation in subscription income, both seasonally and at the conclusion of prominent programmes.222 Without access to considerable debt financing, predictably available investment would be difficult to attain. Netflix’s total debt was $14.5 billion at the end of March 2022.223

117.There are operational obstacles. An online paywall would be relatively straightforward, but BBC programming is also transmitted via FM and DAB radio signals and on Digital Terrestrial Television (DTT). These platforms are not compatible with the conditional access technology required to implement a paywall. It might be possible, though challenging, to develop this technology for DTT and DAB. It would not be viable for radio.224 We explore this in more detail in Chapter 5.

118.A subscription service would generate insufficient income whilst introducing disproportionate barriers to access. This would undermine the BBC’s ability to deliver a valued service to the UK. There would also be major technical difficulties to overcome. We do not recommend the BBC moves to a purely subscription-funded model.

119.As these fully commercial options are not viable, continued public funding must be retained to ensure the BBC can deliver on its purpose.

120.We reiterate our view set out in previous reports that an independent body should be established. This would provide recommendations to Government on the level at which the licence fee, or a new form of public funding, should be set.

Alternative public funding

Hypothecated tax on income

121.A hypothecated tax involves ring-fencing income from a tax to spend on a specific purpose. This funding model was adopted in some Scandinavian countries that abolished their licence fees. In 2019, Sweden replaced the 2,400 krona (£194) annual licence fee with a tax on all working adults, charged at one per cent of income up to a maximum of 1,300 krona per person.225

122.In the UK, a ringfenced system might involve receipts being paid into a dedicated pot for public service media. This could be done transparently to allay concerns that a tax-based model might expose the BBC to Government influence. This could be progressive, with individuals taxed relative to their income. Liam Halligan, an economist and journalist, told us this was the “most progressive” model which the public would support, particularly in light of the rising cost of living.226

123.However, a new tax appearing on payslips next to income tax, national insurance contributions and the health and social care levy could prove controversial. Richard Broughton said that if the current £3.7 billion of licence fee income were maintained, this would amount to an increase in income tax of around £115–120 per year per household. This would equate to an additional 0.7 percentage points of basic rate income tax.227 Unless adjusted for households, this tax could be applied to every individual, meaning a household with multiple occupants may end up paying substantially more than the current licence fee.

124.We heard that progressive fees gave rise to further questions about fairness. According to Richard Broughton, approximately 70 to 75 per cent of households would likely pay for the entirety of BBC funding under an income tax-linked model, with approximately 25 per cent of households effectively consuming BBC content for free. He suggested that given lower-income households tend to consume more hours of BBC content, “the demographics of who is paying for the BBC at that point become somewhat mismatched against those who are spending the most time consuming the BBC output.” He added “that is potentially okay as a policy choice if you think that it is a public service, but it is worth considering.”228

125.The level of income from a hypothecated income tax will also vary from year to year, depending on the wider economic situation. This might make planning more difficult than under the current licence fee model.

126.A hypothecated income tax could be a more progressive model of public funding which takes account of individuals’ ability to pay. However, it may be more exposed to fluctuations than the current system, may prove politically controversial, and raises questions about its fairness, particularly for households with multiple occupants.

Telecommunications levy

127.The existing television licence is levied on the device traditionally used to receive most BBC content, a TV set, alongside the use of iPlayer and watching live broadcasts on streaming services such as Amazon Prime. A more modern equivalent could involve a levy on fixed broadband, or fixed broadband connections and mobile connections.

128.In March 2020, the BBC suggested a broadband levy as an option for future BBC funding in response to the Government’s consultation on decriminalising non-payment of the licence fee. While the BBC said that “this would be a significant change for the UK and we are not, at this stage, advocating it,” the corporation noted that it raised “an interesting question as to whether the current system could be made much simpler, more efficient and more automated.”229 A telecommunications levy could be easier to collect than the licence fee, with the money automatically collected through broadband providers.

129.However, a telecommunications levy would be no more progressive than the licence fee. It may introduce further unfairness by making internet connectivity prohibitively expensive for some. Richard Broughton told us that, if the current level of the licence fee were replaced with a levy on fixed broadband alone, monthly broadband fees would likely increase by approximately 40 per cent. If the licence fee were replaced by a levy on fixed broadband and mobile connections, the costs would increase by approximately 10 per cent for fixed broadband and approximately 17 per cent for mobile connections.230 We heard that this levy would most likely be passed on to the consumer.231

130.A telecommunications levy would offer few advantages over the licence fee, and its potentially negative impact on broadband access would make it less fair.

Household levy

131.In recent years, some European countries have switched their public service broadcasting funding models from a TV licence fee to a universal household levy. Under this model, each household is required to pay a flat fee regardless of consumption.

132.A household levy could provide predictable and sustainable levels of income. If the same overall level of funding were collected, it would lead to a reduction in the level of the fee, as all households would pay rather than just those who opted in. Germany experienced this when introducing its universal household levy in 2013, and consequently reduced its fee.232 Collection could be more efficient, driving down administration costs, as there would be no need to determine which households have a TV set.233 Collection costs for the licence fee were £136 million in 2020–2021.234

133.A drawback of a flat-rate household levy is that it would be regressive. An alternative, more progressive, system would involve linking the levy to systems that already differentiate on the basis of household wealth, such as council tax. Professor Patrick Barwise, Emeritus Professor of Management and Marketing at London Business School, suggested this would be “the fairest and most efficient model.”235 Professor Catherine Johnson argued “The only viable alternative that would address the limitations of the current licence fee model, would be a household fee payable by all citizens (regardless of media use or device ownership) on a progressive basis, set and collected by an independent body.”236 This model was advocated by some in written evidence.237 Linking the fee to existing systems might better meet the test of proportionality by avoiding creating an entirely new system to assess and administer fee levels. However, we note this would be subject to existing imperfections in the council tax system’s ability to accurately measure wealth, and outdated valuations upon which it is based. Elderly people on lower incomes in larger houses are one example of this.

134.Currently households do not have to pay the TV licence if they do not view licensable content. A household levy, alongside other universal funding options outlined above, envisages every taxpayer, telecommunications user or household having to pay the fee, regardless of consumption. We noted that compelling households to pay for a service they are currently able to opt out of may prove unpopular. However, if everybody paid the fee, the costs to each household would be lower. This might help mitigate the potential unpopularity of a universal charge, particularly if it were progressively applied.238

135.A universal household levy could offer a viable alternative to the licence fee. It would need to be means-tested to make it fairer than the current model. Linking the fee to council tax offers one route to achieving this via an existing system. This could also reduce collection costs.

136.When responding to the results of its independent review, the Government should analyse the implications of retaining an opt-in approach, or changing the funding model to a universal levy which everybody has to pay, as would be the case under a household levy, communications levy, or hypothecated income tax. The BBC should undertake a similar assessment.

Grants from the Government

137.In this model, public service broadcasting would be funded directly from the Government’s budget, coming out of existing general taxation. This model is used to fund public service broadcasters in Australia, the Netherlands and Iceland. The UK Government would give the BBC a set amount of funding for the year. The BBC World Service is currently funded partially by Government grant via the Foreign, Commonwealth and Development Office.

138.We did not receive strong evidence recommending this as a funding model. It does not satisfy the principles of independence or legitimacy. The Broadcasting, Entertainment, Communications and Theatre Union (Bectu) told us funding the BBC by Government grant “would jeopardise the BBC’s editorial independence—or at least give such a perception—and likely make news programme editors think twice before running stories particularly critical of the Government.”239 When the Netherlands and Iceland moved from a licence fee to a state budget model, this reportedly led to accusations of politically motivated interference and cuts to the provision of original programming.240 Decisions on BBC funding might be influenced by wider Government budget negotiations, creating more uncertainty over long-term funding and investment planning.

139.We do not recommend that the BBC is funded by Government grant.

Contestable funding

140.Some witnesses raised the possibility of contestable funding. This would involve public funding being allocated to public service content on a programme-by-programme, rather than an institutional, basis. There are various options for such a model. It could be funded through new money, or top-sliced from the BBC’s existing budget. Andrew Neil suggested that the BBC could be partly funded by a “commission of public broadcasting”, similar to an Arts Council model, funded via taxation but at arm’s length from the Government.241 He said the commission could distribute funds to the UK’s other public service broadcasters. Others were sceptical. Dr Cento Veljanovski told us that “an Arts Council approach and contestable funding has certain attractions” but could generate perverse outcomes. He cited the experience of a Gallic television service where producers generated “not that great programming in order to get the subsidy, and then they shunt it into some late-hour slot that no one watches.”242

141.Contestable funding has been piloted to support underserved public service content.243 The Government has said it will evaluate the pilot to determine whether there is merit in implementing the approach more widely.244 Contestable funding may have the benefit of prioritising public service content over the preservation of the institutions that produce it. However, we heard contestable funding was best viewed as a supplement to BBC funding rather than a replacement.245 Others worried that the model would introduce risks of “political interference”246 and “complicated” bureaucracy.247

142.We do not recommend contestable funding as a primary alternative to the licence fee. However, the Government should consider the merits of contestable funding as an additional supplement to support underserved areas of public service content. This would need to be separate from the BBC’s existing income.

Hybrid commercial funding

143.As set out in Chapter 3, the BBC has increasingly been challenged to ‘do more with less’. Decisions on how much funding is required will need to be taken as part of the full Charter Review process, based on a clear future vision from the BBC, and costed options for delivering that under different funding models. As set out in Chapter 2, there are different views on what the BBC should deliver. Maintaining a similar scope and scale in future would require significant funding increases. A smaller BBC may require less funding, though it would still need attractive content and platforms to appeal to audiences. As Dr Helen Weeds has previously noted, beyond what is strictly necessary to fix market failure, broadcasters must also create “purely popular output” to draw viewers towards socially beneficial content.248

144.Finding new sources of revenue will be difficult, especially if there is insufficient public support for regular fee increases. Hybrid funding models offer a mechanism for supplementing public funding with commercial revenue.

145.The BBC told us that it already operates a “hybrid model”.249 The BBC’s current income is around £5 billion. Of this, around £3.75 billion is generated from the licence fee. The remainder is generated through other, non-public means. Over £1.2 billion of income in 2020 came from BBC Studios, its principal commercial arm, through a range of activities, such as selling content to international distributors.250 Although these activities generate significant annual income, its returns over that period were just £208 million—equivalent to under 6 per cent of licence fee income.251 The National Audit Office found that the BBC’s commercial activities did “not yet contribute significantly to its overall income position.”252

146.The BBC’s 2020–21 annual report announced a new financial returns target for BBC Studios of £1.5 billion over five years, starting in 2022–23. This represents a 30 per cent increase on the previous period and is ahead of forecast market growth.253 Alongside the January 2022 licence fee settlement, the Government more than doubled the borrowing limit of the BBC’s commercial arm to £750 million. The Secretary of State for Digital, Culture, Media and Sport, Nadine Dorries MP, said this would “enable the BBC to access private finance as it pursues an ambitious commercial growth strategy—boosting investment in the creative economy across the UK.”254

147.However, Julia Lopez MP acknowledged that the Government did not foresee these revenue streams offering “a substitute for a difficult debate about the right funding model for the BBC”.255 Tim Davie said the aim of the BBC’s commercial growth strategy was to enable it to maintain its current level of investment in programming in an increasingly competitive market, rather than significantly to increase them: “It does not transform our finances fundamentally for the long term and get us out of this [funding] question.”256

148.We welcome the BBC’s commercial strategy and encourage it to continue to diversify its sources of revenue. But such income is limited. Without major changes, this will not offset the BBC’s reliance on wider public funding in the near future.

Part domestic subscription

149.A hybrid model could combine free-to-air programming based on public funding, however it is collected, with a subscription streaming service for UK audiences. Some core BBC provision would remain publicly funded and free-to-air, with additional content behind a paywall.

150.Determining what remains free-to-air would be difficult. Andrew Neil suggested it could include “core” public service outputs: news, most documentaries, children’s television, arts coverage, some radio, major national events and experimental drama. The subscription service would then include “the ‘Strictly’, the drama, the ratings winners”.257 He estimated the “core” BBC service under this model might require approximately £1 billion of public funding per year, and that the subscription service could be financed by increased borrowing and international production deals.258

151.Such a model could retain universal access to the BBC’s public service programming that is most democratically and culturally important. It would increase choice for audiences about whether they pay for additional BBC content, while enabling the BBC to continue to produce high-end programming in a way that may be more commercially sustainable.259

152.The drawbacks, as with full subscription, would be around the fairness of putting content behind a paywall, the implications for the idea of a ‘universal’ service, and the fluctuating subscriber base. A model providing minimal popular entertainment on the core service would risk damaging the BBC’s brand and reduce engagement with public service programming.

153.An alternative approach would involve a ‘premium top-up’ service under which the BBC would continue to provide a broad range of free-to-air, publicly funded services in a full range of genres including entertainment and drama. Over time its more expensive content, including high-end drama, could be put behind a paywall. Future high-end content, for example immersive experiences, might also be included. Mark Oliver advocated such a system, suggesting the BBC could build on its existing strategy of putting some content exclusively on iPlayer, and gradually start charging for access.260

154.We heard criticism that this system might be unpopular if people felt they had to pay extra for something that used to be free. However, Mark Oliver argued that it might be better for the BBC not “to stretch its resources … to compete directly with the likes of Netflix, and just admit that if you want that kind of thing, you have to pay more.”261

155.We noted concerns that such a system might involve disproportionate costs. Mark Oliver suggested such a service would need upfront investment of between £1 billion and £2 billion over five years to build a content library of sufficient depth and quality to be attractive, and a well-communicated transition period of around a decade. Richard Broughton still perceived a “real risk that the product you end up with is judged by consumers to be inferior,” given that the UK market is well served by subscription and pay-TV services, and will be more so in future.262

156.It may be possible to develop a less expansive hybrid service, with experimentation in flexible payment models and ‘windowing’—for example, providing exclusive early access to a programme on BBC iPlayer for an additional fee. This may be less controversial and require less investment, and provide a basis for further future expansion and development.

157.A hybrid domestic subscription offers an opportunity for the BBC to maintain a broad range of quality programming without requiring regular rises in the licence fee or alternative method of public funding. It would give audiences choice over whether to pay for the full range of BBC output while ensuring the BBC’s core programming remains universally accessible. But there would be significant commercial risk with no guarantee of success. It may involve trade-offs with universal access, which would have to be viewed as acceptable by audiences.

158.There are a range of possible versions of such a service, with varying levels of investment and risk. For an expansive version, multi-billion upfront investment would be needed to build a sufficient content library. A less expansive version, experimenting with new payment models and content strategies, would involve less investment and risk, but could provide a basis for possible future expansion.

International subscription

159.An alternative hybrid model would focus on international rather than domestic markets. This would involve making content available to international consumers on a subscription basis, while it remains free-to-air in the UK. This approach would leverage the BBC’s international reputation and avoid compromising universal access for UK audiences.

160.The BBC’s brand already has a strong global profile. BritBox, a streaming service operated internationally by BBC Studios and ITV, is available in the US, Australia and South Africa, and a Nordic launch is planned for later this year.263 In 2020, the number of US and Canadian subscribers surpassed 1.5 million users.264 A report commissioned by Ofcom found that the BBC’s content was viewed as among the best in the world by international audiences.265 In particular, data from interviews indicate the popularity of UK nature documentaries, drama and comedy, and revealed high levels of trust in the BBC World Service’s output.266

161.Richard Broughton favoured this model over a hybrid domestic subscription.267 However, he said the BBC did not own the rights to enough high-quality output of international appeal to establish this service. He estimated significant upfront investment would be needed, with TV content expenditure needing to at least double from the current level of £1.4 billion, be refocused on internationally relevant content and a further annual marketing budget of at least £500 million would be needed.268

162.We noted the cost and complexity involved in establishing such a service. This would include acquiring the rights to the BBC’s full back catalogue alongside investment in new productions and managing the associated trade-offs. For example, investing in co-production with SVODs or other broadcasters would be cheaper but the BBC may not be able to retain international distribution rights as part of a deal. Moreover, if the BBC were to invest in acquiring and retaining a greater proportion of international rights to programmes it commissions and co-produces, this could have a detrimental impact on the revenues of the independent production sector.

163.In delivering this model the BBC would also need to balance commissioning content that appeals to international audiences against its domestic obligation to provide programming that reflects a plurality of British tastes and experiences. A 2021 Enders Analysis report found that British-produced programmes commissioned for international audiences by SVODs have comparatively fewer distinctively British terms, reference points and idioms.269

164.An international subscription service offers a further option for generating commercial income. It would avoid compromising universal access for domestic consumers. As with a hybrid domestic subscription, an international subscription service would involve commercial risk with no guarantee of success. We recommend the BBC explores and publishes costed options for hybrid domestic and international subscription models.

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