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The government has just landed the second of two massive blows on the BBC in the last five years. By 2020/21, the BBC will have taken over completely the government subsidy of the over-75s and seen, according to our estimates, a fall in total PSB funding of at least 20% since 2010/2011, the year of the first government intervention (see Figure 1).
Things could get still worse, only this time not just for the BBC, but also for the commercial TV broadcast distribution, subscription, advertising and content creation sectors should the government pursue its vision of mixed voluntary and compulsory funding, as laid out in the Green Paper published by the DCMS on 16 July.
This note looks at the government vision and why it is so dangerous for all concerned.
2020/21 is the rock bottom year for total BBC net income in real terms. Our latest forecasts in Figure 1 take into account the strong growth in BBC Worldwide revenue as published in the 2014/15 Annual Report.
The actual projections for 2020/21 could be worse, since our forecasts assume that the licence fee rises or falls in line with the CPI, which is the best possible outcome of the Charter Review. The only possible upside is the closure of the iPlayer loophole, by which a growing number of households can avoid paying the licence because they have no TV set, but still access BBC video content via online connections. However, as we discuss later in this note, we think the annual incremental payments are unlikely to amount to more than £100 million and the implementation is not straightforward.
Yet, will we have the licence fee in its current shape and form in 2021/22, once all government obligations have disappeared, as we assumed in our analysis of the settlement “agreed” between the government and the BBC?
The answer looks increasingly in doubt based on what is contained in the Green Paper. Though not explicitly stated, the government appears to be keen on introducing some form of hybrid publicly funded and voluntary, in other words subscription, payment solution into selected areas of BBC funding. This would allow it to hive off the BBC into separate components, be they BBC Television, BBC Radio, BBC online, BBC Nations or BBC genres such as children’s or local news; or what is tantamount to the de-scaling and end of the BBC as we know it.
In considering which areas will get what treatment, we see BBC Television as the most obvious candidate for voluntary subscription payment and much less BBC Radio, which we think the government will want to preserve within the public purse. Hence the main focus of this note is on the implications of the Green Paper for the TV sector, while online is covered more extensively in a separate note relating to news coverage.
Green Paper – Key points
The Green Paper lists four main areas for consultation across a 12 week-period lasting from 16 July to 8 October:
1) Mission and purpose – Why do we still want/need the BBC and does the concept of universality still hold water in an age of so much choice?
2) Scale and scope – How big should the BBC be and what should it cover, having grown so big in recent years, bearing in mind too its impact on the commercial sector as well as the variable needs and interests of its public?
3) Funding – How should we fund the BBC in the modern-day connected world, given the licence fee has an on-demand loophole and is regressive, being levied at a flat rate across all payers?
4) Governance – How should we reform the governance of the BBC?
To understand where the government is coming from, the two core sections are 'Scale and scope' and 'Funding'. Before looking at these sections more closely, we make a few general observations. In particular, two disturbing features of the Green Paper are:
- Its emphasis on online as the driver of change
- Its failure to consider the implications of change in BBC funding on the UK creative economy.
For more than quarter of a century, we have been told by new age evangelists, such as George Gilder and Nicholas Negraponte, how old world linear TV will vanish in no time at all (say, five years) as the internet world allows people to watch anything on any device, anywhere, anytime.
The Green Paper may not go that far. Nevertheless, the present government comes across as a strong believer in the online on-demand future, as the Green Paper underlines the significance of “the explosion in the use of the internet and mobile devices” from the Secretary of State’s Foreword onwards. And when it comes to examining the rationale for the BBC, it states that “the ten years of the Charter have arguably seen the most dramatic period of change in broadcasting and telecommunications since the BBC came into existence.” In addition we learn that superfast broadband will be available to 95% of UK homes and businesses by 2017, even if no mention is made of what percentage of households will subscribe or can afford it. Meanwhile “new services such as Netflix, Amazon Prime, Spotify and Deezer have already begun transforming peoples’ media habits and expectations, and we would expect this to continue in the years ahead.”
However, what is missing in the Green Paper is any kind of evidence to back the government’s assertion about the transforming impact of online access to on-demand content. Nor does it supply any factual detail about the timescale of change from a broadcast to online world, which the government appears to have in mind as it looks to the future of the television ecosystem and possible introduction of subscription funding. As it states in the Executive Summary, the government is seeking views “on the nature and extent to which the BBC should be migrating away from traditional broadcast platforms towards more of an online presence”.
In our view the shift from a broadcast to pure online delivery ecosystem has a long term horizon of beyond 2030 when we consider not only the bandwidth demands and costs of delivering long form broadcast quality over the internet during peak viewing, but also the viewing habits of the UK population. Here we observe that we have so far encountered very little change during the last five years in the viewing habits of the over-55s who now make up 36% of the UK adult 16+ population in TV homes (see Figure 2), and likely to exceed 40% by 2026, based on projections by the Office of National Statistics for the total UK population.
Not only do the over-55s account for a large section of the adult population, they also watch a lot more TV than the under-55s, accounting for a 48.5% share of total adult 16+ viewing in 2014. Quite simply, a large chunk of TV viewing is coming from older persons, who are more entrenched in their viewing habits. As for radio, online growth has so far had almost no discernible effect on listening to radio stations.
This is not to say that online growth has not made an important contribution by widening the field of content, above all via YouTube. Yet, important though YouTube has been in developing the market for short form content, a wide range of survey data points to low levels of long form content viewing on other screens (i.e. less than 5%). Indeed, the BBC’s own iPlayer accounts for less than 4% of viewing to BBC television content, whether on other screens or the TV set itself, while Netflix, Amazon Prime and Now TV are currently subscribed to by no more than 25% of UK households.
In short, online has a long way to go before it transforms the UK TV landscape. We are currently updating our long term forecasts of viewing to video content across all platforms and will present our latest thoughts on the pace of change upon completion. What we can say now is that data from several sources, such as Ofcom’s Digital Day 2014, indicate that the TV set accounts for 90-95% of all viewing of video content, whether long or short form. At the same time, broadcast sources account for about 95% of all video content viewing on TV sets (including PVR timeshift and online catch-up). Although Netflix and others have added to the broadcasting mix, we would contend that the most significant change during the current Charter is the expansion of the multichannel sector, whose share of total TV viewing has risen from 33% to 46% during the last ten years.
Finally, the emphasis placed on online by the Green Paper is reminiscent of the Peacock days in the mid-eighties when politicians mistakenly set high hopes on the ability of the burgeoning cable and satellite economy to generate UK content. In fact, it is only in relatively recent times that the non-PSB multichannel sector has begun to make a material contribution. Even as recently as 2010, the total Sky annual budget for its own news and entertainment channels, excluding sports and movies, amounted to little over £200 million, and with practically no in-house contribution apart from Sky News. Why should we expect anything more from the new online brigade of American companies – the Netflixes, Amazons and Googles? This now takes us to the UK creative economy, the second big area of concern.
UK creative economy
The Green Paper acknowledges the importance of the contribution made by the BBC to the UK creative economy. But, when it comes to discussing the UK creative economy in any detail, the Green Paper focuses entirely upon the terms under which the BBC now operates and whether they should be reformed in the new Charter. In this respect, the two key areas for discussion are:
1) The existing independent quota contributions in television, radio and online and the associated terms of trade
2) The size and role of BBC in-house productions, including the proposition put forward by the BBC of setting up BBC Studios as a commercial subsidiary of the BBC that has to compete with other independents for all BBC commissions, but may also compete for external commissions, which it cannot do at the moment
What is completely lacking from the Green Paper is any discussion of wider trends in the UK creative economy, including the consumption at home and abroad of UK-originated television content; or how this relates to the new online players like Netflix who are allegedly transforming the nation’s viewing habits.
Instead, the sole focus of the government seems to be on how to rein in the BBC rather than to consider at a more general level the value of the UK creative economy and the role of the PSB sector in sustaining it.
In the case of television, Ofcom’s PSB Annual 2015 Report reports total PSB national (i.e. excluding nations and regions) spend on UK first-run contributions in 2014 of £2.5 billion, 50% of it coming from the BBC. This covers all the national BBC channels (though not BBC HD) and the three main commercial PSBs. Ofcom does not break out the other commercial PSB portfolio and non-PSB channels. But, were we to add them in we are still looking at a BBC share of around 40%, in other words a major contribution towards UK TV content production, which needs to be considered carefully in the Charter Review.
Finally, by way of side observation about the overall value contribution of the BBC to the UK population, the latest BBC Annual Report for 2014/15 shows total spend on television content of £1,786 million. This delivered a total TV viewing share across all individuals aged 4+ of 32.9%, and average weekly reach of 85%. The BBC spend is only marginally higher than the annual payments, never mind the extra production costs, that Sky and BT will be paying for live televised football in 2016/17, with a weekly reach of around 5% when the season is in progress and all for an annual viewing share of 0.6% (see Figure 3).
The public value of the BBC is indeed broad and the bulk of its spend is on UK originated content, which the likes of Google, Netflix and Amazon show no signs of wishing to invest in to any significant extent even if they do greatly expand the viewing options. In our view, the UK creative economy needs to be a core topic of the Charter Review, the more so in view of mounting concerns about the future of Channel 4, which makes the second largest annual contribution to the UK independent production sector, as a publicly owned national broadcaster.
One final observation is that a key factor in allowing strong investment in long form domestic content origination is scale. This is what has always set the PSB system in the UK apart from the rest of the world. We tamper with it at our peril.
Scale and scope
The Green Paper chapter on scale and scope is all about what the BBC does: which services it provides; how well is it serving different audiences; whether it is providing the right mix in terms of quality; and how its content should be produced.
From the funding perspective the core topic is the scale of the BBC and the range of services that it provides. In this respect, a constant theme is the sheer size of the BBC, its great breadth of coverage, and the desirability of splitting it into variable parts, from which members of the public can take what they want according to their tastes. Reflecting the government mission to change the BBC:
- The Green Paper states at the very outset how “The range of services that the BBC provides has increased dramatically over the last two Charter periods”. It is a period which has seen an increase in the number of BBC television channels from two to nine along with the doubling of national radio stations from five to ten and creation of three online services, making the BBC the biggest PSB in the world
- The Green Paper invariably starts each section by heaping praise on the BBC’s record, followed by heavy criticism, with constant use of the word “reform” and suggestions for how it can do less
- As highlighted in the previous section, the views expressed in the Green Paper are almost entirely opinion- and not evidence-based, especially where it concerns the impact of the BBC on the commercial sector
Although the Green Paper later recognizes the role of other factors, such as the switch from analogue to digital, in shaping the growth in number of BBC television and radio services, there is much it also omits to mention. For example, in asserting the dramatic growth of the BBC services, the Green Paper leaves out mentioning that:
- Even in 1995, the BBC was the largest PSB in the world; ditto in 1975 and 1955
- The nine BBC TV channels occupy seven transmission feeds
- The TV channels include two channels with practically no audience – BBC Parliament and BBC Alba (in Gaelic) – as well as two children’s channels, which the commercial PSBs have shown no interest in matching…
- … while the launch of BBC3 and 4 had much to do with the BBC stepping up to the Freeview plate upon the closure of ITV Digital
- The increase in the number of BBC TV channels has to be judged in the context of the switch from analogue to digital. In 1995, there were fewer than 30 TV channels. Today, there are over 300
- The BBC Executive did try five years ago to close two of its national digital radio channels (BBC Radio 6 Music and Asian Network (to be replaced by a network of part-time local services in areas with large British-Asian communities)), but later had to withdraw after running into a public backlash
Overall, the government appears bent on trimming the BBC, whether this be a case of closing some services, increasing the participation of the commercial sector and/or awarding some public funding on a contestable basis. This approach is underlined by the choice of representatives on the Charter Review advisory group appointed by the Secretary of State, with its emphasis on individuals with rival commercial interests.
Universality is a core concept of the BBC television and radio broadcast services and their funding by the television licence fee charged for all households with one or more TV sets. Under the classic public service model the licence fee covers several universal attributes, which include:
- Universally available national, regional and local television and radio services within the defined reception areas
- Universal charge (including any subsidies), but with free access at the point of use
- Universal access to a wide selection of programming that includes listed events deemed to be in the national interest for all members of the public
However, the classic model has come under increasing pressure in the last few years. We may single out four main streams of criticism within political circles:
- The licence is a “regressive” tax that takes no account of individual household circumstances (over-75s subsidy apart)
- Non-paying households are liable to criminal prosecution if detected
- An increasing number of homes without TV sets can access BBC content online via the iPlayer on other screens, hence enabling them to avoid licence fee payment
- As the Green Paper has laboured at length to put across, the considerable increase in content options raises the question of whether we still need public funding to cover such a wide range of content
In considering how the licence fee model may be brought more in line in with these modern times, the government lists three most viable looking options in the short to medium term:
- A reformed licence fee that covers the iPlayer loophole, by which homes without a TV can still get BBC TV output via online access to the iPlayer
- A universal public funding model on the lines of the German ‘media levy’
- A mixed model of public and subscription funding
But, there is also a fourth fully subscription funded model, which the government has placed to one side for the time being on account of the very high costs and time required to introduce encryption funding across all terrestrial DTT as well as satellite and cable households. Though not on the table now, its introduction at some point in the coming Charter period post 2020/21 cannot be altogether ruled out.
In looking at the options, two general points which need to be made clear from the outset are:
- Modernisation of the current system to cover the iPlayer loophole is a feature of all four options; however, we cannot take it as a given. First, the technical solution is as yet unclear unless public funding were to switch from the current licence fee to a household levy. Second, it raises the question of whether not just the BBC iPlayer, but also the other PSB online catch-up services should be behind the paywall. And third, the financial benefits are unlikely to be that great. True, the non-TV household population has risen by roughly 750,000 between 2010 and 2014, which would yield a little over £100 million in extra annual revenues were they all paying the charge. But, (a) it is by no means certain that the BBC could extract payments from all these homes and (b) we may expect the decline to smooth out rapidly now that the smartphone and tablet markets have achieved mass adoption, and with televisions being preferred by all age groups as the best available screen for watching long form content
- Decriminalisation is a major concern under the present or revised licence fee models. The government appears to have accepted the advice from The TV Licence Fee Enforcement Review that criminalisation is “broadly fair and proportionate under the current regime”, though it is up for consideration under the other options, especially if the BBC were to move to some form of voluntary/subscription funding system
What comes across from reading the Green Paper is that the government has in mind some form of hybrid structure (i.e. option 3) as a preferred solution from the start. This is because it enables it to:
- Hive off areas not directly related to BBC services in the UK, such as the S4C levy, broadband roll-out or BBC World Service, where it is decided that the funds must be protected at all costs
- Decide which other areas should be publicly funded such as BBC Radio (say, by a household levy of £30 on the Council Tax), and separate them completely from areas that in this world of boundless choice could be covered by subscription (in particular television, the iPlayer, and even BBC online)
- Open the doors to contestable funding for some public services, be they children’s, Scottish or local or whatever else the Charter Renewal advisory group, replete with commercial interests, sees fit to put on the shelf
Of course, the present government does acknowledge in the Green Paper that switching to a full subscription model sets many practical challenges for the current broadcast system, especially to do with the roll-out of conditional access technology system, which it could take several years to surmount. However, it also contends that things stand to move much quicker for online services using existing paywall technology; hence we believe the listing of mixed public and subscription funding is a feasible option.
Red alert: subscription and online funding
Now the alarm bells ring. As long as the BBC continues with just the licence fee or other form of public funding, such as the household levy, there is limited cause for concern.
However, there are three areas that do raise major concerns from the outset:
- Contestable funding
- Voluntary subscription payment
- Move towards online
The first of these, contestable funding, arguably matters least to the wider television industry, although it implies further top-slicing at the expense of the BBC to other parties from the commercial sector.
This leaves voluntary subscription payment, whether on its own or as part of a hybrid model, and the possible move away from broadcast towards more online distribution models, as the two areas where government decisions could have far-reaching and possibly unintended consequences on the whole television ecosystem and not just the BBC.
With regard to some form of voluntary subscription payment, this will undoubtedly present concerns to the existing pay-TV platforms, as it implies potentially significant change to the current balance between the existing free-to-air and pay-TV platforms and services. At the same time, it raises a whole series of issues for the BBC concerning such items as:
- Extra costs of payment collection
- Undermining of the concept of the BBC as a universal public service to which all parties have full access
- Less predictable and more variable income streams
- Distortion of programming budgets towards content that yields more favourable ROIs, along with the possible ghettoising of some content areas where there is less public appetite for voluntary payment
Among the many consequences, we must also expect concurrent reappraisal of PSB rules relating to such items as EPG prominence, retransmission fees and listed events that are in the national interest.
Consequently, the immediate impact of the introduction of subscription payments may most directly affect the pay-TV platforms and mixed advertising and subscription channels that they carry; however, it risks major repercussions across the entire commercial sector, advertising as well as subscription. In the context of advertising, we should stress, in case of any misapprehension, that loss of BBC audience share in no way implies an increase in TV net advertising revenues. Indeed, recent UK trends suggest quite the reverse when we consider the supply and demand dynamics of the UK TV advertising market.
Then there is the move towards online, on which the government seems to have its eyes fixed, not simply because it could facilitate the introduction of subscription funding in TV households without set-top boxes, but also in so far as the Treasury may see it as a way of potentially freeing up the DTT spectrum for auction to the mobile operators in the next decade. Should that happen, it raises many issues and the effects could be very damaging to the broadcast free-to-air sector.
In short, the TV industry needs to think through carefully the implications of the different courses of action being put forward by the Green Paper and be ready with its response by 8 October when the consultation closes. It is not just on the BBC, but on the entire television industry – pay-TV, advertising, free-to-air broadcasting and content production – that the government axe is poised to fall.
This note is published with thanks to Enders Analysis
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