The following text is an edited version of David's speech at OurBeeb's day forum which took place at King's College London on the 31st October. 

There are two ways of approaching the issue of the licence fee: what is the best way of funding the BBC in principle, and what is the best way in practice?

There are four possible main sources of revenue for the BBC – the licence fee, a government grant, advertising and subscription. These are all combinable with each other.

In addition, all public broadcasters attempt to emulate the BBC’s success in generating revenue through the sale of rights and of content, and from operating commercial businesses alongside its public service offering.

In point of fact, the BBC is not currently purely financed by the licence fee. 30% of its total income is earned by BBC Worldwide, though the net benefit of that £1.5bn after expenses is only about £150 million. BBC Worldwide’s income includes the BBC’s share of subscription and advertising revenue from commercial channels, of which the largest proportion comes from the UK (where the BBC half owns UKTV).

20% of BBC income currently comes from government payments – £600 million for the over-75s who are granted free licence fees, and £270 million from the Foreign Office for World Service radio (though that will be paid for by the licence fee from 2015).

There are actually very few public broadcasters who rely almost exclusively on a licence fee - just the Czech Republic’s and those in Scandinavia - and even that situation is about to change.

Sweden is mulling over a recommendation from an expert committee that, on grounds of social fairness and efficiency, a surcharge on income tax should replace the licence fee. Finland is implementing just that approach in 2013.

The fee has been abandoned by Australia, New Zealand, the Netherlands, Hungary, Flemish Belgium, Portugal, Singapore, Malta, Cyprus, Gibraltar, India, Malaysia and Bulgaria. Countries which never had a licence fee include Spain, Luxembourg, Latvia, Lithuania, Estonia, Liechtenstein, Andorra, Monaco and, of course, the USA.

For many of these countries, it was the disproportionate cost of collection which led to dropping the licence fee. For others, it was the scale of evasion. Countries which still have the licence fee include Italy (with a 40% evasion rate), Poland (65%) and Serbia (45%).

Licence fee levels vary greatly. The Scandinavians, Switzerland, Austria, Wallonia in Belgium and Germany charge more – in some cases, much more – than the UK’s annual £145-50. France and Italy are well below our level, but allow their public broadcasters to take advertisements.

All the smaller countries in Europe apart from Slovenia charge on average £40 a year. To control costs and limit evasion, collection is through electricity or phone bills in Greece, Turkey and Bosnia.

Why does this matter? Because one of the arguments offered in support of the BBC licence fee is one of principle: that there is a purity to licence fee funding that cannot apply to other mechanisms.

What is that purity? At least in the UK, there are no advertisements on BBC public service channels: just on the commercial channels it part-owns and fully controls in operating terms.

However, many BBC programmes, even if they are not co-productions, like Blue Planet, which had to be made to a commercial length of 50 minutes, even though broadcast by the BBC in a 60-minute slot, are made with “natural breaks” and shorter lengths than would be needed to fill BBC slots, so as to allow for subsequent deployment on commercial channels.

When it broadcasts these programmes, the BBC fills the gaps with advertisements for itself: promotions.

The second argument in terms of purity is that the licence fee allows the BBC to concentrate on quality, not ratings. Sadly, the overwhelming evidence is that the opposite applies. The BBC monitors audience share and reach very closely, not least because it feels that any weakening of performance would put the licence fee in jeopardy: a paradoxical result of licence fee funding.

In parallel – the obverse side of that coin – the BBC concentrates on populist output, most of which is indistinguishable from that of the commercial sector. I estimate that 50% of radio output, and 90% of TV output lacks real distinctiveness, let alone the independence of market share measures that the purity of licence fee funding is meant to allow.

Of course, the BBC continues to provide many excellent programmes – with £3.6 billion of annual licence fee revenue guaranteed, anything less would be unforgiveable. But as even Mark Thompson, the most recent Director-General, has observed, for the highest quality drama and comedy available on UK screens, one has to rely upon US imports.

The driving force of that higher quality has been the surge of spending by subscription-funded US channels – some of which take no advertisements.

As it happens, this has forced the advertising-funded networks in turn to raise their game, but overall, the message from the US is very clear: writers, producers and performers hugely value the true independence they are offered by broadcasters who have no obligations to advertisers, or government-approved levies, but are entirely answerable to their subscribers. Audience share is not an issue for HBO or its many cable rivals.

The other argument for licence fee purity is in terms of political independence. To be any more dependent on government grants than it already is might undermine the BBC’s ability to stand up to government.

Yet we saw only two years ago that the licence fee offered no defence for the BBC as a determined government forced the BBC to use the licence fee to fund a range of government projects: the completion of digital switchover (including a subsidy to Channel 4), World Service radio, S4C, BBC monitoring, broadband rollout and local TV provided by third parties.

Does the licence fee allow the BBC to ignore government pressure editorially? Not long ago, the Director-General himself turned up at Downing Street to explain to ministers and spin doctors the BBC’s plans for programmes on health service. Can anyone imagine the boss of ITN doing such a thing?

The truth is that the track record of UK commercial broadcasters in terms of political independence is at least as strong as that of the BBC.

Channel 4 – almost entirely funded by advertising – is further evidence that public ownership, public service output and editorial forthrightness are not dependent on licence fee funding.

The other argument of principle that attaches to the licence fee is that it gives the BBC a moral purpose. In theory, that might be true, but in practice that moral purpose is often very hard to find.

The BBC prides itself on its six public purposes, but the truth is that the vast majority of its TV output fulfils those purposes in the most nominal of fashion. Yes, The Weakest Link is informative, as a former BBC executive notoriously argued, but it is also a formulaic quiz – a schedule-filler that is poor justification for a compulsory levy.

The final two arguments of principle are two sides of the same coin. We all benefit from the BBC, so we should all pay for it. Moreover, because the BBC – thanks to the licence fee – is free at the point of use, the BBC can fulfil the objective of universal availability.

Some people may find these arguments persuasive, but I am afraid they strike me as sophistic at best. As it happens, most people do indeed consume BBC output. However, you do not have to pay for a licence to listen to BBC radio or click onto BBC online. Moreover, the 1.5 million households that evade the licence fee also have full access to BBC TV, just like the law-abiding households that pay up.

As for universality, ITV and Channel 4 are also free at the point of use: does that give them a high moral purpose? And, of course, the BBC is absolutely no different from Sky Television: once you have paid your licence fee or subscription, you can consume as much as you like. Free at the point of use is just a weasel phrase.

Another weasel phrase is “good value for money”, as if anything can be so described where you have absolutely no choice as to what you are paying (other than to pay nothing and do without all television, not just BBC television).

In any case, as I have demonstrated elsewhere on openDemocracy, the cost per hour for viewing non-BBC programmes on Sky is lower than the cost of viewing BBC programmes per hour, once you measure actual hours consumed and actual payments made. And, of course, you cannot watch Sky until you have paid for the BBC.

Indeed, the only universality is the compulsion to pay. The BBC is the only organisation allowed to convert a civil debt into a criminal conviction, as over 150,000 people find every year. The vast majority of these – as we know from the magistrates who rubber-stamp their convictions – are too poor or disorganised to manage full-year or even staged payments of the licence fee.

By the way, the BBC is the only organisation that feels able to charge an extra £5 a year for payments by quarterly direct debit. Another BBC scam is to allow new annual licences only to run to the last day of the month previous to the date of the licence. If you took out a new licence on the 30th of the month, you would pay for 12 months, but be legally covered for only eleven.

These 150,000 prosecutions constitute 30% of the non-indictable offences that crowd our magistrates’ courts – a cost borne by the taxpayer, not the BBC. There is no defence to a charge of non-payment if you have any equipment that can be used to receive live television pictures.

That definition includes laptops, tablets and mobile phones; though the BBC has not yet steeled itself to prosecute anyone other than the owner of a television for this offence.

The money raised by these heartless prosecutions is trivial: it is just a policy of punishing the vulnerable “pour encourager les autres” (though in point of fact, 18% of all households not paying by direct debit, and not having their licence paid by the government, successfully evade paying the licence fee every year). 

I now understand that, to avoid the unwelcome burden of these prosecutions on the court system, ministers are contemplating allowing the BBC to obtain a conviction simply by presenting evidence of evasion, without any actual hearing. Astonishing.

TV Licensing – a wholly owned subsidiary of the BBC – sends out 23 million warning letters a year to homes without a TV licence: letters of increasingly threatening nature, which have been denounced as unacceptable by successive chairmen of the Commons CMS Committee.

TV Licensing also makes 3.5 million unannounced home visits every year, most of which have no outcome other than to frighten or anger law-abiding people. I find it hard to spot the high moral purpose in the machinery underpinning this funding mechanism.

But is there any alternative? This is the practical question. Advertising, except at the margin, has been rejected by virtually every committee of inquiry, on the grounds that any benefit to the BBC would severely damage commercially-funded broadcasters, and eliminate any public service content they currently provide. Nor is there any expectation of replacing the current level of BBC income by that means.

Of course, a government grant could easily fulfil that function, and would certainly be more equitable than a flat-rate, regressive household tax. Moreover, there has never been any doubt about the editorial independence of the World Service, despite being wholly financed by the Foreign Office.

My own view is that it would be preferable to replace the licence fee with Treasury funding only to the extent that a pure public service broadcasting fund be established, which would be contestable, in the sense of allowing all broadcasters and producers to apply, including the BBC.

I calculate that the VAT derived from switching the BBC to subscription funding - an entirely new revenue stream for the Treasury – would be sufficient to fund a wide range of public service content, from a wide range of suppliers, including no doubt the BBC for such offerings as Radio 3 and Radio 4.

It is crucial not to lose sight of this key element in any proposal to replace the licence fee: we need to fund directly the public service content the BBC actually does produce, encourage others to enter this arena, and ensure that the output is freely available.

Subscription has been opposed by supporters of the licence fee for two reasons. The first is that it allows people to avoid paying for the BBC altogether, if they so choose. That way, they might end up losing out on valuable content.

Yet the time when the man in Whitehall is assumed to know best is surely long past: why should people be forced to pay for something that might be good for them, when there is no mechanism to force them to view it?

In any case, the bulk of what “might be good for them” will – under the subscription mechanism I advocate – still be available for free, including all BBC radio, as public service content will always be unencrypted, as will radio for the foreseeable future.

The second reason takes us back to practicality. Many studies have been provided – some even funded by the BBC – to show that subscription would either leave the BBC with lower income (implying a loss in consumer welfare amongst subscribers compared with the present situation) or that prices would have to be set at a level above the present licence fee (implying that subscribers would have to pay more for the same, as well as excluding some who would have been happy to continue at the level of the licence fee, but would now drop out – evidence, it is claimed, of further welfare loss).

Sadly, all these exercises were fruitless, either because they failed to reflect the way in which subscription systems worked – with different options for viewers at different prices – or because they missed the most important driver for subscription revenues: the fact that the average number of TV sets per home is nearly 3, and that under a subscription system each set that the householder wanted enabled to receive BBC channels would need its own smart-card.

This means that even though many households might choose – at least initially – to do without BBC TV channels, the total number of subscriptions would almost certainly exceed the current number of TV licences. This means that the cost to a single-set household of keeping BBC1 and BBC2 could be as little as a half of the current licence fee, that the full array of BBC channels could be provided for about two-thirds of the current licence fee, and the BBC could even offer premium channels – such as arts, sport and documentaries – to specialist audiences, in addition to its existing generalist channels.

As both Greg Dyke and John Birt have said in the past, the likelihood is that the BBC would thrive under a subscription system, which would also have the major side benefit of ending the prosecution of evaders (non-payers would simply not be able to see BBC channels, unless these were showing unencrypted public service content).

A huge benefit of switching to subscription would be to end government involvement in the way the BBC was funded, and create a basic model of accountability – to consumers – to replace the artificial and unconvincing structures that currently prevail.

The prospect of joining the most dynamic of revenue mechanisms is all the more important for the BBC, in that it otherwise faces, not just steady decline in real-terms spending power as a result of its acquiescence in the coalition’s licence fee policy, but even greater relative decline, as Sky ratchets up its budget for UK origination – already out-running Channel 4, about to overtake BBC2, and with both ITV and BBC1 in its sights.

The truth about the licence fee’s success is little understood. Essentially, the BBC has benefited from two extraordinary bursts of revenue dynamism – colour TV and household growth – which have either completely or largely run out of steam.

The original radio BBC licence in 1922 had been ten shillings, which remained unchanged for many years, with rapid take-up of wireless sets allowing the BBC greatly to expand its income. Twenty five years later, the fee was still only £1. In 1946, a television licence was introduced, at £2.

Both fees were, of course, subscriptions – if you paid for a service, you could legally receive it. There was no notion of universality; indeed, in many parts of the UK, TV was not even available.

At first, the costs of TV exceeded the revenues – BBC TV had to “borrow” money from radio. But the launch of ITV in 1955 led to a surge in TV licence revenues, relegating radio to junior status. By 1971, the costs of collecting a separate radio licence were such that it was abandoned. Thereafter, radio would be free, funded out of the TV licences that well over 90% of homes by then had taken out.

Of course, the deal whereby the BBC monopoly was broken also broke the subscription link between the BBC and its customers. Now, the licence fee was required to watch any TV, not just the BBC.

In 1968 came a huge advance: colour television. The colour TV premium was set at £5, over and above the monochrome £6. That £11 total is roughly equivalent to the current £145-50: index-linking has protected the value of the fee, but the massive take-up of colour has generated revenue far exceeding the marginal additional cost of broadcasting in colour.

In the early 1970s, the combined revenues of ITV and Channel 4 had been double those of the BBC. Today, the licence fee provides the BBC with twice as much income as ITV and Channel 4 combined. This has enabled a huge expansion in TV, radio and online services.

A much less obvious contributor to the BBC’s remarkable growth has been a change in the UK’s demographic structure. Natural population increase and immigration have pushed the UK’s population to above the 60 million mark. But what has helped the BBC has been the surge in single person households.

In 1961, there were 16.3 million households, with an average size of 3.1 persons. By 2001, there were over 22 million, and the current figure is 25.5 million households, with an average size of 2.4 persons.

The proportion of single person households – all requiring a TV licence – has soared from 12% to 29%: and this increase is almost entirely accounted for by the 40-65 age range. The 50% rise in the number of households since 1961, with the licence fee essentially index-linked, and no additional costs required to reach the extra households, has been an enormous bonanza for the BBC.

But that phenomenon has almost run its course. Average household size is unchanged in a decade. At the same time, colour penetration is nearly 100%. There are only 20,000 monochrome licences in issue, and the monochrome licence was allowed to drop to one-third of a colour licence decades ago.

What makes all this of even greater concern is that the coalition’s licence fee settlement has carved 16% of spending power out of the BBC. The freeze on the licence fee level until 2017 will further erode that spending power – for the first time in the BBC’s 90-year life.

By clinging to the licence fee, the BBC is not only shutting itself off from the dynamism of the subscription market, but also from that market’s ability to add on new products that imitate the colour and household phenomena of the past. Sky and Virgin Media vigorously market high definition, 3-D, premium services, video on demand and multi-room, all requiring additional fees.

Crucially, converting to subscription would also allow the BBC to break free of the inexorable dumbing-down effect of the licence fee, as audience fragmentation forces a greater reliance on soaps in drama and so-called reality in factual programmes.

The essence of the subscription model – as HBO has shown – is the opposite of the licence fee: emphasising the very highest quality, so as to command subscriber loyalty.

For HBO, it doesn’t matter how much or little time a subscriber spends watching its service, as long as there is at least one programme which triggers a renewal of the monthly fee.

In the final analysis, the point of subscription funding is not just to end the persecution of the poorest, let alone to introduce some market mechanism just for the sake of it. The essential objective is to stimulate creativity and excellence, to appeal strongly to audiences rather than weakly, to motivate writers and performers and producers to aim high, and supplying the necessary budgets to achieve their objectives.

A funding mechanism that encourages the production of better and better programmes from the BBC; one which attaches itself to dynamic revenue streams; freedom from government interference in setting the BBC’s income; restoration of choice for that minority which either cannot afford the licence fee, or prefers to do without BBC TV; a guaranteed public service fund to which a full range of broadcasters and producers can apply; continued availability of all the BBC’s actual public service content, without any individual obligation to pay for it: that is the prospect opened up by subscription.

Keeping a mechanism which is crude, which provides flat (if not declining) revenue, which is unfair and meanly enforced, and which incentivizes the BBC progressively to dumb down its output, seems a poor alternative.