Why Does PSB Matter?

Public Service Broadcasting (PSB) aims to provide programmes that are in the interests of the public and society as a whole. Consumers do not always act in their best interests, especially if they don’t see a short-term benefit.They are more likely to buy fast food, cheap holidays and chocolate than invest in education, pensions and health. It is the same with TV.

TV programmes influence people’s behaviour and have an impact on society. Too much sex and violence for instance has a negative impact, while current affairs and documentaries give us a better understanding of other cultures and the world around us, leading to greater cultural cohesion, and a positive benefit for society.

PSB also fills in the gaps left by market-driven TV. Commercial channels focus more on popular entertainment, lifestyle and sports programmes that boost ratings and reap more in advertising revenue.While ITV is keen to keep Simon Cowell’s talent contest in its schedules, it is dropping its interest in coverage of the arts, shown by the demise of the acclaimed South Bank Show. To fill the gap left by the market, PSB would invest in ambitious high cost UK drama, comedy, and factual programming. Intervention is needed to ensure commercial broadcasters produce programmes that have public value, rather than ones that simply chase ratings.

Public service broadcasting systems are also expected to lead to large scale investment in indigenous UK creative output that promotes cultural identity. A strong output of British produced programmes can be exported, which is good for trade and protects us from being swamped by imported US programmes, which are readily available.The UK has been more successful than most European countries in this instance because its protected and supported domestic content sector has emerged as an important second player behind the US across the globe.

However, the current UK broadcasting system which was set up in the 1950s is struggling to keep up with the extraordinary changes of the digital age. It is clear that the 20th century analogue institutions that were created are now worryingly out of date. We need a dramatic rethink if we are to continue to deliver public service broadcasting in an entirely new age. Strains in the Current PSB System

The BBC has done well recently out of PSB.The commercial PSB channels have not fared so well.TV advertising revenue has seen growth slow significantly since the internet began to gain critical mass in 2002.Whereas in the early 1990s the leading commercial networks had most of the TV advertising market to themselves, new cable and satellite channels now take more than 20% of the revenue.

ITV1 has seen its audience share fall from 40% in 1992 to 20% in 2009. Even though ITV plc has managed to claw back some market share through the launch of new free to air spin-off channels like ITV2 and ITV3, its broadcasting revenues have been flat and its margins squeezed for most of the last 8 years. To make matters worse ITV has not been allowed to increase its ad prices to compensate for falling audiences (as many leading networks in the US and Europe have done), due to the Contract Rights Renewal (CRR) system imposed in 2003. CRR was put in place to reassure the advertisers when Carlton merged with Granada and involves strict rules about how much ITV can charge for advertising.

A beleaguered ITV has already dropped some of the public service obligations with the highest opportunity costs: namely UK children’s programming and smaller regional news opt outs. Going forward it is seriously considering walking away from most of its remaining specific PSB requirements or handing back its PSB licence.

Meanwhile, Channel 4 has seen its high margins on key acquisitions and popular programme formats like Big Brother being eroded while the opportunity costs of its more heavily public service programming have risen.While the launch of free to air spin-off channels such as E4 and More 4 have helped it maintain its share of audience over the last 5 years, and its young audience demographics and the imposition of the CRR on ITV1 have helped it maintain its advertising yields, the core PSB network is no longer profitable.

While Channel 4 can survive in the short term by cutting costs and drawing on its financial reserves, it needs to find a new economic model if it is to survive and prosper in the medium to long term. Its recently departed Chief Executive pinned his hopes on a Government sponsored bail out – either from gaining a slice of the licence fee or merging with some of the BBC’s profitable commercial operations, but neither has yet been forthcoming, leaving its new Chairman – Lord Burns – and its new Chief Executive with the task of finding a viable alternative future.

Five – the much heralded third commercial network in the UK whose launch was recommended by the Peacock Committee in 1985 but which took a further 10 years to licence and launch, has only been profitable in three of its thirteen years of trading and has been hit very hard by the recent downturn as it lacks the “must have” status of Channel 4 and ITV in advertisers’ budgets. It is generally recognised that Five’s only sustainable long term future is a merger with either Channel 4 or ITV and it too is cutting its programming budget and its overheads and biding its time.

All this pressure on the main commercial PSB networks has led to a 17% reduction in their spending on originated UK programming from 2006 to 2009 (a 25% reduction in real terms).While there has been some programming investment by the new spin-off channels, it has not been sufficient to bridge this gap. In practical terms, this has meant more entertainment programming and global format reality and lifestyle programming and less originated drama, comedy and documentaries across commercial network TV.

Reforming the BBC

The BBC is still a highly regarded public institution in the UK. A recent poll found that 76% of respondents felt the BBC was a UK institution “to be proud of”, while 62% said the BBC was “trustworthy” (which puts the BBC well ahead of many other UK institutions). However, 60% of those polled agreed the BBC was “dumbing down”, while only 56% thought it provided value for money (the poll was conducted in the wake of the debate over senior BBC executive and talent pay).1 A Policy Exchange poll on tax and spending in September 2009 backed this up, showing that 67% of people would support a decrease in funding for the BBC.2

Despite the increasingly fragmented nature of the market, the BBC still occupies an incredibly privileged and important position. It accounts for 34% of all TV viewing in the UK (compared to 40% 10 years ago), and 54% of all radio listening in the UK (similar to 10 years ago). Across its services it reaches a staggering 90% of people in every week. The BBC website, www.bbc.co.uk, is the UK’s leading web content site and accounts for about 30% of online news consumption in the UK, similar to the combined share of all UK national newspaper sites.

There is an elaborate and superficially open process to ensure the BBC maximises public value from the licence fee while minimising any unnecessarily negative market impact. But the public value test framework is not really working. There are four main reasons for this.

1. A lack of contestability

The processes of licence fee setting every 3 to 7 years and the system of on-going public value testing of all existing and new services involve little actual contestability. BBC management come up with a broad plan – in the case of the licence fee settlement – or specific proposed services – in the case of the public value tests – and this is either accepted, accepted with amendments or rejected by the BBC Trust. At no stage are non BBC providers allowed to make proposals as to what they could do with similar levels of funding, nor are rival BBC departmental proposals truly assessed against each other by the Trust for their comparative impact on public value.

The main input from industry rivals to the BBC funding processes is on the commercial market impact of the proposals. While this is a necessary part of the process it actually focuses the whole approval process on negative market impact not on maximising public value from any given level of licence fee.

2. Regulatory capture

There has been a general recognition in UK regulation over the last 20 years that single body or sub-sector regulators are less effective than more generic regulators. Separate energy regulators were replaced with a general body – Ofgem – while separate broadcasting and telecom regulators were replaced with Ofcom. Most recently, the government has proposed Postcom’s role in holding the mail services to account be subsumed into Ofcom.

This consolidation of regulators may be driven in part by a need to save money, but it is also a recognition that where regulators end up regulating just one organisation or one sub-sector of a converged market, they end up being ineffectual. Such a body either ends up at loggerheads with the institution they are regulating, or 1 Comres Poll for BBC Newsnight, 26th November 2009. For polling on Trust of different UK institutions see Ipsos Mori annual trust survey, which often puts the BBC near the top of the most trusted UK institutions. 2 Yougov poll for Policy Exchange, September 2009, see http://www.policyexchange.org.uk/ more likely, being captured by the management of the organisation, ending up protecting it from outside criticism.

This has become the case with the BBC Trust where it has ended up making joint submissions and responses to Government with BBC management. This “regulatory capture” when combined with the lack of contestability on decisions about new BBC services and funds allocation means that there is little effective testing of the BBC’s ability to maximise public value in between licence fee settlements.

3. A bias towards reach

The BBC universal licence fee places upon it an implicit obligation for the BBC to provide something for all households in the UK. This means the BBC has to provide not just for BBC loyal groups in the population – generally over 40 ABC1s - but also for the 16 to 35 age group, and the mid-market C1C2DE groups, which are generally the focus of commercial broadcasters across TV and radio.

BBC management obtain ratings on a daily basis, while monthly and weekly reach are the focus of management resource allocation decisions. Worst still, BBC value for money exercises often focus on cost per viewer or listener hour rather than comparing cost with quality and distinctiveness delivered.

This all tends to make the BBC an organisation that tries to maximise reach first and quality/distinctiveness second. It should, instead, be an organisation that seeks to maximise quality and distinctiveness, subject to a certain realistic minimum requirement for reach and share of overall consumption.

The problems arising from the BBC’s bias towards reach are shown by its strategy in sport, where it still chooses to pay significant sums for events such as the FA Cup and Formula 1, both events which would end up on ITV or Five in much the same form if the BBC were not to bid. Meanwhile, it has failed to bid for domestic test match cricket on TV since 1998. Formula 1 and FA Cup matches attract an under 40, C1C2 male audience to the BBC, an audience it finds difficult to attract with its home grown programming, while Test Match cricket tends to attract a largely over 40 male ABC1 audience.

Perhaps the most high profile case in peak time entertainment was the BBC’s claimed £5.6 million a year contract with Jonathan Ross in competition with Channel 4 and ITV. The problem is not so much what the BBC paid, but rather what the BBC was doing in the bidding ring in the first place.

In programme imports, Sky and Channel Four have complained that the BBC pays huge amounts for US drama series like The Wire, Heroes and Mad Men. Channel Four claim this has forced up the price for them for other popular US imports like Desperate Housewives. Sky argue that the £400,000 an episode the BBC pay US giant, NBC, for the series Heroes could be spent on home-grown UKproduced drama.

4. A lack of independent Market Impact Assessment in key areas

The current public value test requires Ofcom to conduct the market impact assessment on new services but not on existing services or new platform/delivery plans (such as Project Canvas). In addition, market impact complaints against BBC Worldwide are handled in the first instance by the Fair Trading Unit of the BBC, which is part of the BBC management structure not the BBC Trust.

This might not be an issue were it not for the problems of regulatory capture, lack of contestability and obsession with reach highlighted above, but given these problems it is fairly clear that independent assessment of market impact should be extended to all BBC activities.

Recommendation – Quality First, Reach Second - a new vision for the BBC

The BBC needs to focus its assessment of new and existing services on quality and differentiation rather than reach. It needs to stop expending significant resources on sports rights, 16 to 35 targeted services, popular entertainment talent, and acquisitions with the sole or main purpose of extending reach. Instead it should concentrate its resources on maximising the quality and distinctiveness of what it provides to all groups.

Recommendation – Abolish the BBC Trust and replace it with a BBC Joint Board

The BBC Trust has not held the BBC to sufficient account and has taken a narrow institutional approach to the delivery of PSB in the UK. This is not the fault of any individuals but rather a result of the position the BBC Trust found itself in. Whatever the history, it is clearly unsuitable for the 21st century.The BBC management should be accountable on day to day matters and the delivery of their objectives to a BBC Board, with a BBC Chairman and non executive directors.

Recommendation – Introduce a level of contestability to BBC resource allocation

First, there should be more internal contestability with a list of BBC in house proposals for achieving given reach, quality and distinctiveness being shared with regulatory bodies. Second, there needs to some third party contestability with external channels and content providers able to put a rival case for public funding or public co-funding to the body charged with determining the size and shape of the BBC.

Such external contestability would focus on areas where BBC plans were most in danger of crowding out commercial schemes rather than helping to raise standards and ambition across the sector. Children’s programming, arts programming and local news might all be candidates.

In the first instance, any funding for third party services and output would still be channeled through BBC management and operations, but the management would be separately accountable to regulators for the effective use of these funds. BBC senior management would have their performance judged not just on the reach and performance of the BBC’s wholly owned services but also on the performance of BBC sponsored partnerships and co-funded output.

This “bottom slicing” of the BBC licence fee funding has a precedent – the funding of 520 hours of output on S4C with an attributable value of £24 million a year. An example of the way this would work is that the BBC could decide that investing £20 million to £30 million in programming first shown on Channel 4 or E4 might be a better way to reach the 16 to 35 year old audience with programming of public value than spending £100 million a year on BBC Three.

In the next licence fee settlement, likely to run from 2013 to 2018 or 2020, the BBC management should be set a target level of third party output and service funding of 5% of total licence fee income by 2018 (about £175 million at 2009 levels).

Recommendation – Establish a Public Service Content Trust to promote PSB across all TV, radio and broadband

The PSC Trust will be the lead body for monitoring the delivery of BBC services in line with its licence fee settlements, Charter and Agreement. It will also review the effectiveness of the BBC’s co-funding obligations which have been set out in Chapter 2. At key times in the BBC role and scope setting process – Charter, Agreement, licence fee settlements etc, the PSC will advise Government on the best way to promote public value across the BBC and other activities, but the BBC Board will make its own case to Government on the level of funding they need to carry out their remit.

The PSC Trust would be the first body in the UK to oversee the funding and delivery of all PSB intervention. It would in effect become the champion of public service programming.

Recommendation – Shift the responsibility for delivering public access The BBC has played an important role in helping to drive platforms towards analogue switch off and, in particular, of ensuring that that all public service providers – the BBC and commercial providers, gain widespread access to consumers in the digital age. However, it is clear that while BBC distribution interests largely coincide with those of commercial PSB providers they are not identical. In addition, the BBC’s recent preoccupation with access and distribution issues has probably helped divert management’s focus away from their core purpose – providing quality content on compelling services. Responsibility for promoting universal access distribution and high levels of discoverability in the web 2.0 age should, therefore, pass to the regulatory body overseeing the BBC and commercial PSB (the PSC Trust) which would execute these duties through a special division – the Public Access Division (PAD).

The PAD would be charged with ensuring PSB services and content gained the widest possible distribution. This distribution would be free of any incremental charges. It would take direct control of allocating digital transmission capacity between public service broadcasters and content providers. It would take over any remaining need to promote 2Mbit/sec roll out to more than 95% of the UK. Given its focus on distributing content, the PAD would take over lead responsibility for Freeview, Freesat and Project Canvas from BBC management. It would work with all PSB providers to ensure their content is widely distributed. They would also have the right to require the BBC to link non BBC PSB providers to the BBC’s main Web 2.0 services in the UK.

Reforming Commercial PSB

Trying to prop up public service broadcasting across all of the commercial networks is increasingly unsustainable and unenforceable. We need a more focused system which would concentrate access privileges mainly on one of the commercial network operators and provide financial support to specific programming areas where either an alternative to the BBC is needed (such as regional news provision) or where the commercial operator is perhaps better placed to achieve reach and impact than the BBC (such as public service programming for younger and ethnic audiences).

Recommendation – Allow ITV1 and Five to opt out of the PSB system after 2012

ITV1 and Five should be allowed to opt out of the PSB system in 2012 – two years prior to the end of their licences but after digital switchover. If they did opt out they would no longer have to keep any of their specific PSB commitments, they would keep their high reach digital terrestrial access but they would have to pay for the digital terrestrial frequency they had previously been gifted. Prices for this capacity would be set by regulators with regard to its opportunity cost. The proceeds would be reallocated by a new Public Service Content Trust (PSC Trust). Both ITV1 and Five would retain their right to remain on top slots in all electronic programme guides.

However, if ITV1 and Five did opt out of the PSB system they would lose some currently gifted digital terrestrial capacity which would be handed back to the PSC Trust to be reallocated to the remaining commercial public service broadcasters.

Recommendation – Relax ownership and competition constraints in return for programme investment commitments

A new competition regime should be applied to TV in the UK which allows individual owners to control large shares of the advertising market. This would allow the merger of Five and Channel 4, or ITV and Five for instance but subject to new programme investment conditions. Such conditions already exist in France. These programme investment conditions would be set as a share of revenue and be based on the previous level of investment by the main commercial broadcasters over the last 5 years. In particular, the CRR mechanism should be removed from ITV1 in return for a programme investment commitment from ITV. This should be achieved by changing the remit of the competition authorities over broadcasting and requiring them to weigh consumer (viewer) and public value issues when determining advertiser funded broadcasting mergers and acquisitions rather than only the interests of advertisers.

Recommendation – Channel 4 should retain its PSB status, be allocated more access privileges and be privatised

Channel 4 should be privatised in 2012 but retain a PSB licence for at least 10 years. The majority of any proceeds of this privatisation would remain with Channel 4 to strengthen its balance sheet. It should receive extra digital capacity, reallocated from ITV and perhaps some from the BBC. It could choose to use or sublease this but retain the income from it. Channel 4 should also be granted cross promotional and linked access to BBC new media services such as www.bbc.co.uk, the iPlayer and Project Canvas.

Channel 4 would be allowed to merge with Five under a more relaxed ownership and competition regime, but should it do so, the combined entity must be required to make a minimum level of investment in new programming in order to prevent consolidation leading to less UK programming investment.

Channel 4’s PSB licence and allocation of frequencies would be administered by the PSC Trust which through its Public Access Division would control all the currently gifted digital terrestrial spectrum. As a PSB broadcaster, Channel 4 programming would also have a “most favoured nation” status for BBC Co- Funding and PSC Trust public funding. Such funds would still have to be bid for on a contestable basis, but Channel 4’s high reach, PSB licence and access privileges would make it a favoured outlet.

Channel 4 has a strong brand and valuable audience demographics so the combination of access to risk capital, access to contestable public programme related funds and BBC co-funding would leave Channel Four in a strong position. Given the huge uncertainties of the Web 2.0 age it is far better for Channel 4 to be privatised than to remain in the public sector, but with a more sustainable and enforceable commitment to PSB.

Implementation and Timing

The UK needs to prepare for the new system now, not wait until 2014. This is especially the case if the proposals for Digital Britain go ahead.

The review of the current BBC licence settlement in 2013/2014 coincides with the ending of the current broadcast licences of ITV1, Channel 4 and FIVE (in 2014), by which time digital switchover will have been completed for approaching two years and true on demand TV will have been around for 8 years.

This period provides the UK with an ideal opportunity for the first time to address the PSB system as a whole and to put in place structures, systems and institutions that will make it appropriate to the challenges of the on demand digital age.

The new structure described in this report would need to be in place by mid 2012. This would suggest legislation in 2011 and a White Paper in the autumn of 2010. The BBC’s Charter and Agreement review date would have to be brought forward to meet this deadline, as it currently runs to 2017.

Other Recommendations

These are just a sample of the key recommendations in a very detailed report. We tackle a number of other issues in detail, including broadband, protecting content in the digital age and regulating PSB. We present a comprehensive new vision for PSB broadcasting in the UK, with 32 recommendations in total. These are listed in full in the conclusion.

Read on or download the report from the Policy Exchange website