Red alert for the BBC: a response to Enders Analysis

The debate about the BBC's forthcoming Charter Renewal is inherently political.

David Elstein
3 August 2015
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The front-page of the government's Green Paper

As always, reports from Enders Analysis are worth reading, and we owe thanks to Claire Enders for making their publications relating to the BBC available to ourBeeb readers. By its nature, “Red Alert” is more overtly political in its approach than a typical analysis of company results. I would certainly recommend to followers of this debate that – rather than rely on second-hand accounts – they read the key documents themselves: especially the Green Paper itself, and the BBC Trust’s initial response to it.

For instance, which document says this? The BBC “needs to reform itself”; “it should have clear boundaries”; its “system of governance has, at times, led to confusion”; “the BBC can do more to improve the distinctiveness of what it offers its audiences”; the BBC needs “a clearer, simpler set of purposes and values”; “we think it may be worthwhile exploring subscription options for the BBC’s commercial services”; we need a consultation, asking people “to make trade-offs about what they would fund and what they would stop”; and questions about scale and scope “are legitimate questions to ask.”

That is all from the BBC Trust response to the Green Paper. “Red Alert” may tell you that the central theme of the Green Paper is the BBC’s scale, but actually just two of the nineteen questions the public is invited to answer relate to scale, and they do not state or even imply “heavy criticism” of the BBC. Question 4 asks whether the BBC’s expansion is “justified” and whether it has caused “crowding out”; and if so, whether that is “justified.” And question 5 asks: “where does the evidence suggest the BBC has a positive or negative wider impact on the market?” Frankly, these are questions the BBC Trust regularly asks as part of its governance function.

“Red Alert” complains that the Green Paper “underlines ‘dramatic’ expansion of BBC services in the last 20 years”, and chips away – mostly correctly – at the evidence of expansion. The problem with this is that the entire basis for the Green Paper’s references to expansion is a PR document issued by the BBC in 2013, boasting of all the different things the BBC now does compared with 20 years ago, during a period when the “real” cost of the licence fee has actually gone down (neatly eliding the fact that the number of licences had risen by 25%, whilst the extra cost of all the new services was less than 10% of licence fee income). Indeed, page 9 of the BBC Trust response reproduces the graphic the BBC distributed so assiduously two years ago. It seems a bit rich to complain about the Green Paper quoting the BBC’s own propaganda!

Another puzzle is the dismissive approach to Netflix, Amazon and Now TV (the Sky service that bypasses the monthly subscription). Yes, only 25% of households take these services – but the oldest launched less than three years ago! That is a phenomenal rate of take-up, and the annualised growth rates of those services are currently 57%, 42% and 236%. So on top of the 16.7 million households paying monthly subscriptions to Sky, Virgin Media, BT and TalkTalk (two-thirds of all households), there are 5.6 million subscribers to Netflix and Amazon (some of which, of course, may overlap with the first group, but 20 million in total does not look unreasonable). The chances are that by 2017 there will be over 10 million Netflix and Amazon subscribers, and pay-TV will have reached 80% of UK homes. Dismissing this trend (which makes front-page news in July’s monthly bulletin from another analyst firm, IHS) seems uncharacteristically conservative on EA’s part.

That said, it is perfectly true that watching TV is overwhelmingly the dominant means of consuming video today, and also that the over-55s - who consume disproportionate amounts of TV and are the slowest adopters of new technology - may well constitute some 40% of the population by 2026: so acting as a brake on the rate of growth of internet-delivered video, but also as a block against any full-scale replacement of the licence fee. After all, some 6 million of the 10.6 million over-65s live in households where no licence fee is payable! They would not welcome a change in a funding mechanism that forces everyone else, including many millions much poorer than themselves, to give them free TV.

Whether the BBC is wise to resist any change to the licence fee is more questionable. Contrary to what “Red Alert” says, spending obligations imposed by successive governments on the BBC will not all disappear by 2020/1: only broadband roll-out. The requirement to fund S4C, World Service Radio, BBC Monitoring and (if it survives) local TV – not to mention historic obligations such as the BBC Orchestras and Gaelic TV – will remain. Arguably, if the BBC gave up the licence fee in 2020 in favour of voluntary subscription, it would hand back to Whitehall the responsibility for all those obligations, along with the free licences for the over-75s and all the costs of radio. Those add up to £2 billion a year!

In fact, even today, if the BBC switched to a subscription rate of £12 a month, the entire cost of its current spend on TV content could be raised just from the net proceeds (after deducting VAT and 10% platform commission) from the present 16.7 million pay-TV households, with any DTT-dependent homes able to upgrade to receive encrypted BBC transmissions for an average cost of £20. The “very high costs and time required to introduce subscription” that “Red Alert” refers to (actually, moderate costs and 2-3 years) only applies to those DTT homes, who would have the happy choice between a simple and cheap upgrade or doing without BBC channels, or paying for them (though they would still be available online, for a fee, through the iPlayer).

“Red Alert” correctly points out that the so-called “modernisation” of the licence fee - “plugging the iPlayer loophole” - is something of a non-issue. It is likely to be difficult to enforce, and at best will raise little more than £100 million annually. It is also already subject to legal challenge from ITV if “plugging the loophole” entails forcing people to pay the licence fee to watch ITV programmes on catch-up.

However – perhaps because of compression within the argument – it is hard to follow some of the logic in the paper. The prospect of a combined basic licence fee or household tax, plus subscription top-up, is assumed to be the government’s “preferred option” (though there is nothing quite so positive in the Green Paper), but also to carry the “danger” of both de-scaling the BBC and segmenting it organisationally (rather than along lines of content).

The paper has little to say about the proposal from the BBC itself to separate TV Production from TV Broadcasting, so as to release suppressed creativity within Production by allowing it to make content for non-BBC outlets. As this would evidently serve the cause of UK origination (which “Red Alert” regards as a central, if unstated, concern in Charter review) such de-scaling would clearly be in the public interest. Of course, the BBC would like to retain ownership of its Production arm, but the benefits would accrue irrespective of ownership, and competition issues are likely to force a legal separation.

In Sweden, public radio and television are run entirely separately, for sensible reasons of maintaining plurality of decision-making, but no-one would argue that SVT is thereby “de-scaled”. Running BBC Radio as a separate division would benefit news plurality, and might increase overall efficiency by cutting out a whole layer of integrated management. Likewise, funding different genres of output by different means does not necessarily entail separating the BBC into component parts, even though that might be a good idea in itself.

Nor is “scale” necessarily a virtue. In 1982, when Channel 4 launched, it was assumed that ITV would provide the overwhelming proportion of its content, because of the scale of its operations, whereas the hopelessly sub-scale independent sector would struggle to deliver 15%. In practice, muscle-bound ITV’s cost-structure could not compete with the more nimble indies. Indeed, the entire indie sector today – which generates more original content than the BBC – has overheads which are almost certainly a fraction of the £750 million a year afflicting the BBC.

In truth, it is quite hard to make sense of the combined basic/premium concept. The BBC Trust response to the Green Paper refers to “core” public service output such as “natural history, current affairs, drama, children’s, coverage of national events and science” (but not news, arts, education, religion or regional output!), which suggests that the compulsory element in a combined funding model might fund the “core” whilst voluntary subscription would fund everything else (entertainment, sport, factual?). The Trust refers to the BBC’s “commercial services”, but what are these? Something that already exists? Or something that will have to be created?

The key concern in “Red Alert” is the threat to UK origination that might result from the government appearing “bent on trimming the BBC”. There is no recognition of the opportunity to expand BBC output that might result from tapping into the most dynamic broadcasting revenue stream – subscription. Nor is there recognition that the BBC has been steadily reducing its spend on origination (from well before the licence fee was frozen), as so unnervingly exposed by a series of reports on public service broadcasting from Ofcom (the most recent of which was published in July).

This concern also fails to differentiate within the “UK origination” category. What the Ofcom surveys clearly demonstrate is a progressive displacement of high-value productions by lower-value ones. The amount invested in non-soap drama has dropped significantly across the so-called PSB system (the channels granted public service status, and consequent benefits such as EPG prominence, to reflect their commitment – however modest – to supplying public service content, i.e. the main BBC channels, plus ITV1, Channel 4 and Five).

Within that genre, budgets have dropped 20% since 2008 – and that gap has not been filled by more co-production investment or greater efficiency. Scripted comedy is in steep decline. Everywhere in the PSB system, fly-on-the-wall factual series – schools, hospitals, police forces, bookies, GPs, hotels, debt collectors, high street banks and countless others – prevail: requiring no serious writing or creative skills, and with far lower sales potential than drama.

Of course, that “UK origination” may have already been hollowed out does not mean we should take lightly any further risk of diminishment. But the category we should really be concerned about is public service content in the narrow sense: what the Trust (and Channel 4) calls “core”. There is some overlap with the “protected spend” category (what the Green Paper euphemistically labels top-slicing) in relation to the likes of S4C. Yet one important way of protecting public service content – combining some top-slicing with contestability – is quickly rejected by “Red Alert” as supporting commercial players “at the expense of the BBC.”

This is a difficult topic, as the expectation is that any money further diverted out of licence fee proceeds to support non-BBC public service content would result in a reduction of BBC supply of such content (given the evident difficulty of forcing the BBC itself to focus more on such content, for fear of ghettoisation). However, to suggest that this is designed to benefit the BBC’s “commercial” competitors rather than the quality of public service content is surely too narrow: the likeliest beneficiary is probably Channel 4 – a publicly-owned channel, like the BBC – which might even be able to resurrect its ambitions to launch a much-needed alternative version of Radio 4.

As for contestability being favoured by the Whittingdale advisory group, “replete with commercial interests”, the only known proponent of the idea in that group is Colette Bowe, former chair of Ofcom, and former civil servant: scarcely the embodiment of “commercial interests.”

“Red Alert” is unusually forthright in identifying a universal charge as a central characteristic of universality - a key topic in the Green Paper consultation - but is then puzzling in arguing that any switch of transmission system away from terrestrial distribution would “undermine” universality (as if every launch of every BBC channel had been available to 100% of licence fee payers). Will BBC3 cease to be a “universal” service if it is transferred, as planned, to online only?

It also argues that any use of subscription would “distort” content spend, as if licence fee funding did not demonstrably “distort” spend in the direction of lowest-common-denominator programming that increases audience share and reach, even at the expense of quality. All the evidence from the US is that subscription funding “distorts” in the direction of higher quality, most notably with regard to drama, comedy and documentary (where HBO excels). Audience share and reach are irrelevant to HBO. That is probably a “distortion” many of us could live with, provided sufficient resource was also made available for content that the market (however funded) cannot provide.

This “status quo” stance on funding leaves “Red Alert” in curious company. In arguing that a shift away from the licence fee might have a negative impact on commercial broadcasters funded by subscription or advertising, it effectively traps the BBC in the very system that has allowed successive governments the room to inflict “two massive blows in five years” as “Red Alert” bluntly put it.

Yet the Green Paper explicitly rejects advertising as a means of funding the BBC, ensuring that the new Charter will forbid its use till at least 2027. Although moving some or all of the BBC to a voluntary subscription mechanism might reduce the BBC’s viewership, it is hard to judge what effect that might have on the advertising-funded sector: more viewers do not necessarily translate into higher revenue but nor do they automatically reduce advertising rates.

Even so, ITV is implacably opposed to the BBC substituting subscription for the licence fee, no doubt fearing that it might lead to having to compete with a better-funded rival. Inevitably, Sky is also – now as ever – utterly opposed to the subscription option. Initially, it could be confident that a subscription BBC would generate no more revenue than the licence fee version (and Sky might even earn subscriber management fees in excess of £100 million a year). But lurking over the horizon is the prospect of a subscription-funded BBC learning to run its own subscriber management system, possibly buying up the 50% of UKTV it does not already own, and persuading the likes of Discovery to join it in an attractive 50-channel package (perhaps by then adding Sports and Arts options) offered directly to millions of pay-TV households.

Sky earns a margin of 85% on its basic tier channels, passing on only a fraction of its customer charges to its channel suppliers. It will be pleased to have EA in its corner as it and ITV battle against any risk of the BBC adopting subscription (just as they did, successfully, in 1999, in opposing a separate £24 annual digital licence fee as the means of funding the BBC’s digital channels).

Inevitably, the requirements of time and space have led to some compression of the arguments in “Red Alert”. We will see a more substantial and fully-developed document from the authors before the 8 October deadline for responses to the Green Paper. Meanwhile, my initial caution stands: treat every such intervention (including my own!) with suitable care, read the underlying papers, and work out for yourself what you want to say about Charter review, and what you want to emerge from it. That is the point of ourBeeb.

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