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The BBC’s deal with the Tories: and the Tories’ deal with the BBC

The BBC’s addiction to the licence fee makes it an easy target for politicians seeking to off-load expenditure. But what does the latest deal mean, for the BBC and public service broadcasting?  

David Elstein
17 July 2015
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Image: Flickr/ Stuart Pinfold

Five years ago, after the 2010 election led to the installation of a coalition government, it took George Osborne a full five months to secure ministerial agreement to a major public spending review. In the midst of it, after five days of shotgun negotiations, the BBC Trust found itself effectively forced to accept a swathe of additional spending obligations, as well as long-term freezing of the licence fee. The combined impact of those measures – as has just been confirmed by the BBC itself – was to reduce the BBC’s spending power by 26% in real terms, comparing 2015 with 2010.

There was much criticism at the time of the speed and secrecy which characterised the deal. The Trust succumbed with much reluctance, having successfully fought off the initial attempt by Osborne to force the BBC to take over the obligation (originally enacted by Labour) to provide free TV licences to households where anyone over 75 lived. We have since been told by members of the Trust that they would have resigned en bloc if the over-75s issue had been pursued: essentially on the grounds that this was a welfare policy, open-ended in its nature, and nothing to do with the BBC as such.

This year, Osborne has produced the first Tory budget for a generation, barely two months after the election: and again, the BBC has been induced to enter into a rushed negotiation, effectively between the Chancellor and BBC Director-General Tony Hall. BBC Trust chair Rona Fairhead was copied in to the formal letters, contenting herself with deploring the process, but agreeing with the outcome if Hall felt he could live with it. No talk of resignations this time: and if any further proof were needed that the Trust is on its way out, this marginalisation surely provides it. 

Critics of the deal – and there have been many such, including Lord Birt, former BBC Director-General (“shocking”), Sir Michael Lyons, former BBC Trust chair (Hall’s defence of the deal is “preposterous”), former chair Lord Patten (“disgraceful”) and Diane Coyle, former acting chair (“unconstitutional”) – have been as much enraged (unlike Fairhead) by the outcome as the process. Even Hall has conceded that there should never again be such a back-room fix with politicians that evades public and parliamentary scrutiny. Indeed, Culture Secretary John Whittingdale, only in February put his name, as chairman, to the Commons Culture Committee’s report on the future of the BBC, which was scathing about the 2010 deal and the Trust’s failure to resign over that outcome.

Yet within days of the financial settlement being announced, Whittingdale revealed the identities of the expert team that the Committee report had recommended be appointed, and has published a Green Paper which will allow for external and parliamentary input, ahead of a White Paper early in 2016, again, all as pre-figured in the report. So he clearly sees resolving the BBC’s remit, governance, structure and longer-term funding as separable from the cash deal till 2021: and he is wasting no time in pursuing that agenda.

The BBC makes the best of a difficult outcome

But George Osborne and John Whittingdale are not the only men in a hurry. Tony Hall’s major tasks before he retires from the BBC for a second time are to renew the BBC Charter and secure some version of the licence fee for the post-Hall future. He claims – in an article in the Observer (12 July) – that the licence fee is settled for the duration of the next Charter. Yet the terms of the Green Paper and the advisory panel clearly include medium-term replacement of the licence fee by a household tax or subscription. The ten years of the next Charter go well beyond the “medium-term”: the licence fee is not “safe” for the duration.

Just as then D-G Mark Thompson endorsed the 2010 deal (not least on the grounds that it cemented the government into preserving the licence fee, given it was now to cover so much expenditure previously on the Treasury’s books), so Tony Hall has praised the 2015 deal as giving the BBC control over its own financial future. His reasoning is that allowing inflation-proofing increases in the licence fee, extending the licence fee till at least 2020/1, progressively removing the obligation to fund broadband roll-out and easing the cost of supporting S4C balances the cost of funding free licences for the over-75s.

In fact, even on the most favourable calculations, the BBC concedes that it will be 10% worse off in real terms by 2021, and the Office of Budget Responsibility (OBR) calculates an even larger deficit. The numbers are a little fluid, as not all of them are fixed. For instance, the current cost to Whitehall of paying for TV licences for the over-75s is about £650 million a year. As the number of such households rises, estimates for the equivalent cost in 2021 are between £725 million (BBC version) and £745 million (OBR version). All we know for sure is that the amount payable to the BBC is fixed: the full amount this year and next, £468 million in 2018/9 and £247 million in 2019/20. Thereafter: nada.

The BBC appears to be projecting a £15 million increase annually in the total liability for free TV licences, implying a cost to it of £227 million in 2018/9, £463 million in 2019/20 and £725 million in 2020/1: a total of £1.415 billion. Offset against that is £490 million less to pay towards broadband roll-out, and possibly some £40 million less towards S4C. The BBC hopes that “modernising” the licence fee by making it payable for watching public service channels in catch-up mode will save it £100 million a year that it might otherwise have lost – but that, of course, is not the same as extra money. In a similar vein, the BBC calculates that a 2% annual rise in the Consumer Price Index (CPI) will be worth a cumulative 10.5% of additional income after 5 years, or £350 million – but unless the BBC is immune to general inflation, BBC costs will presumably also inflate at the same rate, such that the BBC ends up no better off. The BBC argues that it is still undertaking cost-cutting as a hedge against inflation: but if that is happening anyway, it cannot be double-counted.

By the time the BBC enters the second half of a projected 10-year renewal of its Charter, the OBR calculates that its annual cash income will have dropped by £400 million (from a previously projected £3.9 billion to £3.5 billion): even if the first five years are, as the BBC claims “flat cash” (but in real terms minus 10%), the second five years would be minus 20% in real terms.

Even that may not fully capture the impact of the July deal. Although CPI increases will be allowed in the licence fee (provided the BBC demonstrates that it is cutting costs in line with best Whitehall practice), the starting point is not necessarily the present £145-50 a year. The letter to Hall from Osborne and Whittingdale dated 3 July leaves that question to be resolved by a decision about the BBC’s scope, to be taken as part of the Charter review. Given the musings from Whittingdale’s predecessor, Sajid Javid, that the licence fee was painfully high for many families, nothing should be assumed. Similarly, although the government has agreed to postpone any implementation of decriminalisation of licence fee evasion until the new Charter is agreed (an overdue report published this week suggested leaving criminal penalties in place until the licence fee was changed), there is no guarantee that a decision voted for by both Houses of Parliament, and endorsed by the Commons Select Committee report, eventually to remove criminal sanctions, will not one day be implemented. The BBC concedes that this could cost it a further £200 million a year.

Even the benefits of licence fee “modernisation” – extending it to cover watching public service channels on catch-up – may be illusory. The BBC has effectively acknowledged that some 700,000 households (out of over 25 million) are dropping out of the licence fee system each year, on the basis that they no longer watch live TV (that explains the projected £100 million annual saving if they stopped dropping out). Currently, such households simply inform TV Licensing that they only watch on-demand or catch-up. If catch-up viewing of the BBC (and ITV, Channel 4 and Five) now becomes liable, people could just as easily say they are only watching on-demand (YouTube, Amazon Prime, Netflix, Facebook, non-live Sky). The BBC has no means of knowing what any student is actually watching on his or her laptop: live, catch-up or on-demand. The projected saving depends upon people volunteering to pay for something, in the absence of any compulsion to do so. The BBC is also hoping that some 10% of over-75s will buy a TV licence even if they do not have to, as a contribution to BBC costs: good luck with that.

The view from Broadcasting House

So there is a large element of wishful thinking in imagining (as in the BBC’s best-case scenario) that this deal will represent only a 10% real terms decline in spending power by 2021. If decriminalisation proceeds, if the trend towards on-demand viewing (and so dropping out of paying the licence fee) continues, even at a slower rate, if the over-75s fail in any meaningful numbers to contribute to the BBC’s coffers, then a 15% decline is likely, and 20% possible. Indeed, if such a shortfall leads to service closures rather than just service erosion, the knock-on may be to make the attractions of on-demand more enticing year by year.

One of the oddest aspects of the exchange of letters between Osborne and Whittingdale on one side, and Hall on the other is the government’s reference to Hall’s “request” to take over the over-75s obligation. Can the Trust – which has a duty to protect the licence fee payer, and which dug its heels in when asked to fund the over-75s in 2010 – have authorised such a proposal from Hall, if that is indeed what happened? Perhaps Hall pointed out to the Trust that escaping from the over-75s pledge was one of the major attractions for ministers of the BBC shifting from the licence fee to subscription. Why not shoot that fox? The evidence suggests that Whittingdale first raised the issue, at Osborne’s behest, and that Hall decided to swallow the obligation, provided he could secure some balancing concessions: hence the politically cunning reference to a “request”.

Some commentators have recoiled at the notion of the BBC taking over the financial responsibility for delivering a welfare benefit, even if ostensibly voluntarily. Yet the BBC is not compelled to continue after 2021, especially if it chooses to move away from the licence system. And in truth this boundary was crossed long ago, when the BBC accepted within the licence fee the cost of enabling digital switchover for the elderly and the disabled (no doubt in the hope that it would be allowed to keep the accompanying rise in the licence fee permanently, once switchover was complete). S4C, World Service radio, BBC Monitoring, local TV support and broadband roll-out were just as marginal to the BBC’s core licence-funded operations as providing free TV licences when the BBC accepted the obligation to fund them in 2010. This is a bad idea with a long history: subsidizing the over-75s is simply the most egregious, and expensive, instance.

There is a further irony here. In 1986, the Labour Party pledged to offer free TV licences to all pensioners – a promise conveniently forgotten when Labour finally won another election, in 1997. In 1999, the BBC, under John Birt, was pushing for substantial additional funding to support its roll-out of digital channels (as well as a raft of peculiar ambitions, such as operating a BBC citizens’ advice bureau in every large town). One of Labour’s favourite economists, Gavyn Davies, was appointed to lead a panel to advise on how best to fund the BBC’s new services. He was attracted by the idea of a digital licence fee (DLF) – a £24 annual top-up on the basic licence fee, payable by homes that received BBC digital services (a minority at the time).

The BBC was ambivalent about the DLF. It had originally planned to offer BBC Choice (later BBC3) and BBC Knowledge (later BBC4) as part of a subscription service. When it shifted to free-to-air provision for those channels (along with the BBC News Channel, BBC Parliament and two services aimed at children of different ages), it was caught between its original view that a DLF might inhibit digital take-up, and the unfairness of making all licence fee payers pay for new services that only a minority could actually view.

When Davies eventually plumped for the DLF, the BBC briefly endorsed it. But the big battalions of Sky and ITV – then in the midst of their own massive investments in digital pay channels – protested loudly to Tony Blair about what (somewhat absurdly) they saw as an obstacle to their business plans (a cost to digital households of £2 a month to start with, thereafter steadily declining). The DLF was dumped, and – to avoid disadvantaging the BBC in the digital race – a large increase in the basic licence fee agreed instead. With an election around the corner, and older voters the likeliest to turn out at the polls, Gordon Brown revived the idea of free licence fees for pensioners, but restricted the concession to over-75s, so as to keep the cost down to £300 million a year. Spokespeople for the elderly thought it a daft and indiscriminate way to hand out money – “like giving out toffee apples” – but means-testing was ruled out as demeaning and divisive.

Gavyn Davies was compensated with the chairmanship of the BBC Governors, and Tony Blair’s political advisor at the time, James Purnell, won a seat in the Commons, rose to cabinet status as Secretary of State for Culture, Media and Sport, and now occupies the £300,000 a year position of Director of Strategy and Digital at – yes, the BBC. 

Since then, the cost of the concession has more than doubled, in line with the increase in the number of over-75 households and the level of the licence fee, and its wastefulness (a significant proportion of over-75s are better placed to pay the TV licence than younger pensioners or other recipients of benefits) has become ever more evident. But even a chancellor committed to cutting the benefits bill by £12 billion a year could not overtly breach an election pledge to preserve this foolishness: so it must have been a pleasant surprise when the BBC responded positively to Whittingdale’s lightly disguised ultimatum.

But also, since then, the BBC has spent billions of pounds on its digital channels. For several years, those without access to digital were subsidizing those with access, just as the minority who regard the BBC as poor value for money, but are required to pay the licence fee if they want to watch any television, subsidize the majority who would willingly pay more for the BBC. That is the nature of the compulsory flat-fee system. The irony now is that – despite the billions spent – it is these digital channels which are most obviously threatened by the squeeze on the BBC’s income. BBC3 is likely to disappear as a broadcast service next year. Stories have already appeared that the BBC News Channel may be the next to go online-only, to save some £60 million a year. Merging BBC4 with BBC2 would seem another obvious step. All of that could have been avoided by adopting the DLF in the first place.

The threat to public service broadcasting

This July’s financial deal is punishing, and could get worse. Addicted as it is to the licence fee, the BBC feels bound to accept any terms offered, so as to avoid being forced into the cold turkey of direct accountability to subscribers – better to be subservient to politicians than actual consumers. And politicians, like street dealers, find it impossible to resist the temptation to pile over a billion pounds a year of government expenditure on to the shoulders of licence fee payers, millions of whom are too poor to pay tax, but must nonetheless subsidize the 4 million over-75s, many of whom are far better off than they are.

If this all seems a far cry from a dozen years ago, when Mark Thompson – then perched at Channel 4 but favourite to succeed Greg Dyke as Director-General – described the BBC as awash in a jacuzzi of cash, at least one thing has not significantly changed since he took over in 2004. The BBC’s delivery of actual public service content has been in steady decline for well over a decade, running not far behind the steady deterioration in supply from the commercial public service broadcasters (ITV, Channel 4 and Five), whose weakening performance their regulator, Ofcom, acknowledged as being largely inevitable, once the value of their broadcast privileges (especially gifted spectrum) had been undermined by the rapid expansion of channel capacity. The 2003 Broadcasting Act removed key obligatory quotas in the commercial sector.

Ofcom’s latest report on public service broadcasting was not just the most important document published last week, but the most depressing: you can find it on the Ofcom website. Don’t waste time on the somewhat superficial gloss offered by the report itself: instead, go straight to the data set (section 2 pages 6-26) to read the full grisly story.

The PSBs (the BBC terrestrial channels, plus ITV, Channel 4 and Five) spent £3.3bn on first-run UK origination in 2004; £3.0bn in 2008; and £2.5bn in 2014: a 24% decline since 2004, 15% since 2008. Both the commercial channels and the BBC are complicit in this: they spent £1.27bn and £1.25bn respectively in 2014. If the £500m+ spent on sport is excluded, the reduction since 2008 is 18%.

By far the biggest fall in spend has been in drama: 44%, compared with 14% for news and current affairs, 13% for factual, 5% for entertainment and comedy and just 2% for sport. Drama is easily the most expensive output genre. Meanwhile, children’s has declined by 15%, to just £88m, or 3% of all origination, nearly all attributable to the BBC (despite Channel 4, as Ofcom caustically notes, having a licence duty to serve older children).

The same is true of arts and classical music: a 25% 6-year decline, with now just £41m being spent, representing a mere 1.6% of origination and even less of total output. 90% of all the peak-time output is on BBC4 and BBC2, largely comprised of relays from the Proms. Ofcom says that “provision of religion and ethics has all but ceased”, with spend declining 26%, to £13m, .004% of total spending on output, and just 24 hours in peak time across the whole PSB system. Education suffered a 77% drop, to £7m, or .002% of total spending on output: just an hour a week survives on the entire PSB system. As Ofcom says, “this is principally driven by a virtually-complete withdrawal from the genre” by ITV, Channel 4 and Five now. Since the changes in quotas made by the 2003 Act, Ofcom has been powerless to prevent this; and equally powerless to prevent the BBC tracking the commercial sector’s withdrawal from PSB.

The big difference between the BBC and the other PSB suppliers has been in hours broadcast. The commercial stations have concentrated their spending, reducing hours faster than reducing costs; in ITV, there has been a big reduction in news output (nearly 30%) – but news is quite expensive for ITV, bought in from supplier ITN. Conversely, the BBC has such a large in-house news operation that it can expand news hours cheaply – which is what it did. Ofcom notes that the BBC accounts for “the vast majority” (77%, a 10% increase since 2008) of all news viewing (and that television remains the main source of news for adults). Ofcom also notes that the BBC website is by far the most popular source of news via the internet, and wonders – not for the first time – whether the BBC’s growing share raises questions about plurality (without being able to offer, let alone implement, any solution: again, not for the first time).

Drama spend has dropped by 46%, and output by 60% across the system since 2008: 13% on the BBC, 65% on ITV. As recently as the 1990s, it would have been unthinkable for ITV to offer less than six hours of peak-time drama every week. Now it barely manages two. As for comedy, ITV has reduced output by 83%, to just 18 hours a year. Across the PSB channels, spending on comedy has fallen by 30%.  

Ofcom also carries out research into audience attitudes towards PSB. The findings should carry a large health warning. Not long ago, Ofcom found high satisfaction with Five’s delivery of UK drama, despite it actually not broadcasting any. Here again, Ofcom reports a 12-point rise in the percentage appreciating the showing of new programmes made in the UK, despite the sharp decline in supply of such programmes (absence makes the heart grow fonder?). It notes a significant rise in audience satisfaction with delivery of children’s programming, despite the significant fall in delivery. Likewise, the collapse in drama output is rewarded with a 4% reported rise in satisfaction. Even the disappearing comedy output rates a 50% satisfaction score. These attitude surveys tell us very little about what is actually going on.

The battle for the BBC’s future must also be a battle for PSB

The truth is that the PSB system has failed us, incrementally, year by year. Ofcom measures the decline, but is powerless to stop it. The BBC is the last hold-out in areas such as children’s, arts and classical music, but its overall commitment is weakening: even Tony Hall now says that entertainment is what licence fee payers most want from the BBC, not public service output. He does not want to be pushed into “market failure mode” – ignoring the assertion by former BBC chairman Gavyn Davies, in his 1999 report, and again last year to the Commons Committee, that market failure can be the only justification for the £3.7 billion intervention in the market that the licence fee represents.

The BBC has done much better than ITV in hanging on to audience share over the last two decades. It is not difficult to see the connection between this outcome and the decline in BBC PSB delivery. The new BBC financial settlement does not guarantee the future of the licence fee, but it certainly presages a continuing fall in PSB supply. The Green Paper invites responses to the idea that the BBC concentrate more on public service content, and less on big budget entertainment shows involving expensive foreign formats, like “The Voice”: but there is only the most minimal suggestion of cutting back on BBC licence fee funding if it doesn’t show willing. In any event, such a threat would be unlikely to do the trick. After all, it is the need to buttress public support for the licence fee itself which induces the BBC to chase audience reach and share. Once the BBC retreats to what was called, in Birtist times, “the Himalayas” of public service provision, the licence fee might enjoy more political support, but much less public support.

The Green Paper picks up a thought from the Commons Committee report, recommending at least some element of contestable funding to bring UK PSB back to life. It is hard to reconcile one or two stray lines in the Green Paper with the BBC’s lurid warning that “this Green Paper would appear to herald a much diminished, less popular BBC”. What does Tony Hall think a Charter Review process should involve? No consultation? No questioning of the status quo? The recruitment of a batch of celebrities – most of whom have done very well out of BBC largesse – was a foolish move which turned into an own goal once their open letter was revealed as having been written by the BBC. In any case, those who loudly warn against what they see as a Tory agenda to cut the BBC back to size (that is, concentrate on delivering public service content) need to ask themselves: which is more important, the BBC, or the public service content from which BBC managers are incrementally moving away?

Tony Hall wants to keep ministers away from any future discussion of the licence fee level: which is completely unrealistic. Yet replacing the licence fee with subscription would instantly dislodge politicians from any say in BBC financing or output. Decriminalisation would become irrelevant: there would be no more evasion, no more prosecutions and no more imprisonment. The i-Player could be encrypted, plugging that loophole effectively, without the need for legislation. The over-75s could decide for themselves whether to subscribe or not. Single-device homes (overwhelmingly, the poorest households) could be offered a discount. The BBC could hand back to Whitehall responsibility for broadband roll-out, S4C, local TV support and BBC Monitoring; and also BBC Radio.

BBC Television financed in that way would probably (even if it did not actually need to) shed most of its remaining public service output, but at least we could then address the issue of PSB funding and supply afresh. Real public service content – that which the market cannot supply, including the likes of Radio 4 – requires real public funding, not a failing surrogate in the shape of the licence fee.

There are many people who resist subscription, passionately, inside and outside the BBC: but what is their answer to the crisis of PSB provision?

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