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Sharper vision

The BBC and the communications revolution


Ian Hargreaves

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First published in 1993 by Demos 9 Bridewell Place London EC4V 6AP tel: 071 353 4479 fax: 071 353 4481 Demos 1993 All rights reserved Paper No. 5 ISBN 1 898309 25 6 Cover design by PENTAGRAM Printed in Great Britain by White Dove Press Aviation Way Southend on Sea Essex SS2 6UN Typesetting by Bailey & Bartle Associates

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Contents

Foreword Behind the broadcasting consensus New broadcasters and the BBC Old broadcasters and the BBC The policy dichotomy Two objectives of broadcasting policy Objective one: keep the customer satisfied The best television in the world The BBC and national culture Objective two: build a strong industry The multimedia revolution Satellite and cable Terrestrial television A regulatory muddle How the BBC fits in Extending choice: the BBCs plan Five problems in search of a solution

vii 1 4 7 9 10 11 12 14 16 17 18 19 20 21 24 28

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Sharper vision: the BBC and the communications revolution

How to stop worrying and love the broadcasting revolution Alternative options for the BBC The licence fee prison: an escape plan Alternatives to the licence fee Who should own the BBC? Free to compete

33 36 38 39 44 47

Appendix: outline of new ownership options for the BBC 50 by Jeffrey Gates Assets into ownership Governing a reformed BBC An antidote to decline Acknowledgements Notes 52 55 56 58 59

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Foreword

The BBCs royal charter expires in 1996. In considering the corporations future beyond that date the government published, in November 1992, a green paper, to be followed by a white paper early in 1994. So far, the debate has been conducted along predictable lines, largely because there is such an extensive consensus within broadcasting and politics that the BBC should continue more or less in its existing form, funded by a licence fee. This pamphlet takes a different view. It argues that this consensus is, for most of the broadcasting industry, one of short-term commercial convenience and that the current direction of policy will weaken the BBC, damage the quality of British television and radio and lead to a further serious decline in the British broadcasting industry at a time when it could be one of the more dynamic sectors in the British economy. The paper places the debate about the future of the BBC in the context of the global multimedia revolution and points to the incoherence of UK industrial and broadcasting policy as a significant impediment to British success in an important growth industry.

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Behind the broadcasting consensus

Since the government published its green paper on the BBC, we have had a voluminous but dull debate. The Department of National Heritage has counted over 8,000 responses to its discussion document, but there has been no sense that the stakes are high. Although the BBC is an institution of great importance, its future is not truly at issue. The government shows no sign of favouring radical change and it is not being pushed in that direction by any important force in the broadcasting industry. It thus appears more or less certain that the BBC will be granted a renewed royal charter from 1996, probably for ten years, that it will continue to be funded at something like its current level by a licence fee on television set ownership and that it will be allowed to retain virtually all its existing services. Even if there were to be a token rightwing revolt against this outcome, Labour would ensure that this new consensus in favour of the status quo prevailed. Before rejoicing in this harmony of opinion, it is important to examine how it arose, to question its objectives and to identify its blind spots. Those who subscribe to the consensus need to ask exactly why former adversaries are now standing shoulder to shoulder. The heyday of intellectual disharmony, in broadcasting as in so much else, was the 1980s, when Lady Thatcher was at the height of her powers. Her government had promoted a vigorous attack upon the comforts of the commercial television broadcasters and the prime
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Sharper vision: the BBC and the communications revolution

minister made no secret of the fact that she regarded the dismemberment of the BBC as an agenda item for a fourth term in office. Like Mr Rupert Murdoch, the chairman of News Corporation and arguably the most powerful publisherbroadcaster in the world, she regarded British broadcasting as a bastion of the establishment left. Mr Murdoch himself took the opportunity, at the Edinburgh Television Festival in 1989, to redefine the public service broadcasting principle upon which the BBC was founded, in his own terms and in his own interest, proclaiming:
my own view is that anybody who, within the law of the land, provides a service which the public wants at a price it can afford is providing a public service. So if in the years ahead we can make a success of Sky Television, that will be as much a public service as ITV.

In the same lecture, Murdoch boldly declared the USs lightly regulated, commerce-driven broadcasting system to be better than Britains BBC-ITV duopoly in delivering a wide range of quality and popular programmes. He said:
Much of what passes for quality on British television really is no more than a reflection of the values of the narrow elite which controls it and which has always thought that its tastes are synonymous with quality.

What became of this assault? In the first place and most plainly, British politics changed with the departure of Lady Thatcher. Her more conservative successor, pre-occupied with preserving unity in his party, is not likely to take on an institution as powerful as the BBC. One of Mr Majors earliest parliamentary acts as prime minister was to offer handsome praise for the corporations coverage of the Gulf War, his own first test in the foreign policy arena. Such words would have been unimaginable from Lady Thatcher.
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Behind the broadcasting consensus

Secondly, by the time Mr Major assumed office the BBC had, in response to the Thatcher charge-sheet, made concessions to its critics. It opened up its schedules to independent producers and made sweeping managerial changes, the nature of which has been made to seem more draconian by the unremitting wail of objection they have occasioned from some parts of the BBC. Under the bruising chairmanship of Mr Marmaduke Hussey, who is now on his third director general since assuming office in 1986, the BBC embarked upon an internal re-structuring, aimed at curbing inefficiencies, and an external public relations offensive, in which it argued in a new managerial tongue the old case: that its funding base should not be touched and that it should be allowed to continue in all essentials as before, namely as a publicly owned, vertically integrated organisation, easily the largest single force in UK broadcasting. A third, less noticed but no less critical factor in drawing the sting from the BBC debate has been a shift in the politics of the broadcasting industry itself, a shift which has brought together both the traditional and the new broadcasters on the issue of the BBC. Since it was never the case that Lady Thatcher drove the momentum for change in British broadcasting by some one-woman act of ideological willpower, this switch of positions within the broadcasting industry is of great significance.

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New broadcasters and the BBC

With hindsight, it can be seen that Mr Murdochs 1989 Edinburgh lecture was something of a higher water mark in the new broadcasters attacks on the BBC and the broadcasting establishment more generally. It was a characteristic Murdoch ploy using a political attack as air cover for a business plan. At that point, Mr Murdoch had no stake in a functioning UK television station. Now that he has become a broadcasting insider, rather than an outsider clamouring to get in, he has, unsurprisingly, adopted a much more soothing attitude towards the establishment of which he is a leading member. This membership was achieved, not as Mr Murdoch imagined at the time of his Edinburgh lecture, by a solo blitzkrieg upon the UK broadcasting industry, but through BSkyB, the company formed in 1990 from the shotgun marriage of his own Sky Television and British Satellite Broadcasting when neither of the new broadcasters could sustain their huge losses and when Mr Murdochs empire was briefly in danger of destruction in the cross-winds of rising interest rates and weakening economies in the US and the UK. The merged BSkyB, although half-owned and managerially dominated by Murdoch, is a somewhat different creature from Sky, containing as it does an array of shareholders from the mainstream of the UK media industry. BSkyBs shareholders include Pearson (owner of the Financial Times, Thames and a minority stake in Yorkshire Television) and Granada, one of the leading ITV companies. BSkyB has thus
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New broadcasters and the BBC

become a more respectable player on the UK television scene. The same can be said of other new broadcasters, such as Ted Turners CNN, which is today emerging as a significant player in UK satellite television. It is in this changed atmosphere that Mr Murdoch has stepped up his drive to sell satellite dishes and to turn Sky into a mainly subscription-funded service, a process which requires alliances with other members of the broadcasting establishment he once held in such open contempt. For example, one of the most effective drivers of dish sales and subscriptions is the big sporting event, but at a time when Sky was available in only a small minority of homes, it would have been politically impossible for sporting authorities to sell exclusive coverage rights to Sky, even at an attractive price. Hence Skys successful joint bid with the BBC on league soccer, which allows Sky to show matches live and the BBC to show recorded highlights. Equally, where the BBC may once have baulked at dealing with a Sky system owned wholly by its one-time tormentor, Mr Murdoch, it feels less constrained in treating with BSkyB. This is bound to be an uneasy, and no doubt temporary, alliance, as witnessed by the recent exchange of legal hostilities between Murdoch and BBC World Service Television over rival plans for the Arab world, but Mr Murdoch has worked hard to get the BBC exactly where he wants it excluded from competing for advertising or subscription revenue, but available as a partner as he himself gains a dominant position in subscription and starts to eat into the terrestrial broadcasters monopoly of UK television advertising. It now seems likely that BSkyB will turn into a prodigious generator of profits and cash, fuelling Murdochs renewed appetite for expansion in the booming Asia-Pacific region, continental Europe, Latin America and South Africa. No-one should be surprised in these circumstances that the Murdoch press has turned friendly towards the BBC. Last Novembers green paper was greeted by the Times as a document of great wisdom, securing the future of the best all-round broadcasting organisation in the world. The Sunday Timess media correspondent, at one time a particularly raucous critic of the BBC, opined in the same week that the
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Sharper vision: the BBC and the communications revolution

BBCs position has rarely looked stronger. Even The Sun and Today refrained from attacking the proposals. A curiosity of the last year is that the press voices most critical of the BBC, or at least of its current leadership and strategy, have come from left of centre, most notably the Independent on Sunday and The Observer.

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Old broadcasters and the BBC

Small wonder then that ITV is worried. Its own official response to the BBC green paper is shot through with alarm at the combined threat from BSkyB, the new giant in space, and a BBC, the old terrestrial gaint, ever more determined to stray into alliances with the private sector. It is not lost on ITV that the BBC now has commercial interests in common not only with BSkyB, but also with the disenfranchised Thames (in UK Gold, a satellite service transmitted on Sky) and through BBC World Service Television with Star Television of Hong Kong, which since July this year has also been controlled by none other than Mr Murdoch. Another recent development is a BBC alliance with Reuters Television, to develop a Spanish language television news service. ITVs submission to the government makes it clear that it will contest at every stage the BBCs desire to break out into more commercial activities. An early sign of success was the commercial sectors campaign to prevent the BBC using its taxpayer-funded airwaves to promote the wares of its growing publishing division, a practice which resulted in an adverse ruling from the Monopolies and Mergers Commission. As part of its green paper response, ITV commissioned a report from consultants Booz Allen & Hamilton, which sets out for its client a blood-chilling scenario for the 1990s in which the power base is shifting away from ITV and advertising-funded television to BSkyB and pay television. It forecasts that by 1996, BSkyBs revenues will almost equal those of all 14 ITV companies put together and that by 2000 it will have
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Sharper vision: the BBC and the communications revolution

revenues of 1.7 bn, against ITVs 1.5 bn. If this were to happen, as is by no means implausible, the UK television industry would within less than three years have three main units of roughly equal size: BSkyB, the BBC and the combined ITV companies. Since BSkyB is itself a carrier for more than a dozen channels not owned by Sky, this represents a massive shift in the competitive position in UK broadcasting. The larger, more ambitious ITV companies are thus starting to see themselves as minnows in an ocean of killer sharks, confined by the comforts of their regional advertising monopolies. This explains the urgency of their pleas to government to be allowed to merge with each other and their desire to build the financial muscle to pursue the international alliances which they think represent their only defence against acquisition or domination by European media conglomerates. They scarcely even dream of competing effectively in the world of Rupert Murdoch, Time-Warner and the mighty media machines of the US. If they are to break these chains and expand the ITV companies, which have mostly taken a sleepy or contemptuous view of satellite and cable television, believe they require a quiescent BBC, safely confined to making high quality domestic programmes, competing as little as possible for bought-in American material and, above all, excluded from the market for sponsorship, advertising or subscription television. The ITV submission also proposes that the satellite broadcasters be brought within the same regulatory framework as the terrestrial television stations, so imposing identical taste and programme origin requirements, which are a crucial determinant in overall programme acquisition costs. This, however, will be fiercely resisted by the satellite broadcasters. These are matters which it now appears likely the government will be obliged to address in the BBC white paper to be published next year, although they were more or less ignored in the green paper only one year ago.

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The policy dichotomy

So there is a dichotomy running through the heart of British broadcasting policy. On the one hand, there is a more or less unbroken agreement about the BBCs future arising from a politics of convenience among the commercial broadcasters; on the other, all the broadcasters are jostling for position in the highly uneven regulatory environment which the government itself has shaped around the series of monopolies and quasi-monopolies which characterises British broadcasting. And all of this is taking place against the background of the multimedia revolution, which is powering a remarkable fusion of the telecommunications, entertainment, publishing and television industries across the world. The governments green paper fails to address with conviction any of these issues, confining itself instead to a predictable survey of those questions which conventionally arise in the BBC debate and dismissing out of hand the case for alternative approaches to funding or ownership. The BBC, the paper makes clear, is to remain a major broadcasting organisation dedicated to a form of public service broadcasting, of which the hallmarks are said to include focus on the audience, quality, diversity and choice, accessibility, editorial independence and so on. It is as if the task of setting a strategic framework for the next decade of one of Britains most important social, cultural and industrial institutions is akin to that of cleaning and repairing the Albert Memorial, a task requiring no understanding of, or reference to, a turbulent and dangerous world beyond the shadow of the monument.
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Two objectives of broadcasting policy

One reason that governments write poor analyses of the broadcasting sector is that they lack clarity about the aims of broadcasting policy. It could perhaps be agreed that there should be two: 1. To secure for the consumer an array of radio and television programmes as excellent and diverse as possible at the lowest possible cost. To nurture as strong a domestic broadcasting industry as possible, so that Britain can hope to play a respectable role in this still rapidly developing and employment-intensive industry.

2.

It is evident that almost all policy thinking since the BBC was created over 60 years ago has been devoted to the first of these objectives. With the world broadcasting industry in the throes of a revolution, it is perhaps time that some serious attention was also paid to the second.

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Objective one: keep the customer satisfied

Although this paper will press the claims of industrial policy in the area of broadcasting, it cannot be denied that to most British people, the broadcasting debate means a debate about what appears on radio and television. It is wholly reasonable that this should be so, but it does make the policy debate, by definition, slippery. If one policy is claimed to offer a wider array of programmes, whilst a rival claims to offer better quality, the judgement to be made between the two policies is bound to be subjective. Debates of this kind are thus prone to stalemate. The only purpose in grappling with these matters here is to resist the argument, normally made without fear of contradiction, that from the point of view of programme quality, there is an overwhelming argument against changing the BBC. A related argument advanced in favour of the status quo states that the corporation is an irreplaceable cultural artefact, which we cannot risk damaging in any process of radical change. This leave well alone school of thought in the broadcasting debate is complacent but powerful. Its saloon bar catchphrase is that Britain has the best television in the world. Although the leave well alone lobby often felt itself challenged by Lady Thatchers style and personal pronouncements, it had no reason to quarrel with the policy language that her civil servants enshrined in the 1988 broadcasting white paper, which preceded the 1990 Broadcasting Act. This stated that the government places the viewer and the listener at the centre of broadcasting policy, a heroically vague form of
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Sharper vision: the BBC and the communications revolution

words which has persisted in more recent statements. Presumably at a minimum this can be taken as signifying that the government regards its interventions in broadcasting policy as seeking to identify the interest of the citizen as consumer of radio and television services, rather than, for example, as citizen with an economic stake in the growth of a large and internationally dynamic British broadcasting industry. In other words, reflecting its whitehall history, broadcasting policy has been a matter for the Home Office and, more recently, the Department of National Heritage, rather than for the Department of Trade and Industry. The objective of placing the viewer and the listener at the centre of broadcasting policy was no doubt intended, inter alia, to be acceptable to those who hold conflicting views on broadcasting policy. For example, Mr Murdoch and some leading figures in ITV, can flourish such a text on behalf of a nakedly commercial approach, which may be summarised as: sell the people what they want. Traditionally, the BBC has stood for a more ambitious, if paternalistic, notion of what it thinks the public should receive from its own mission to inform, to entertain and to educate. This consumer-focused approach to policy has also been used to justify a number of moral and political interventions in broadcasting in recent years, ranging from the creation of the Broadcasting Standards Council (to increase pressure on broadcasters about the portrayal of sex and violence), to the restrictions introduced in 1988 on the reporting of the views of certain political groups in Northern Ireland. This unresolved tension between a taste for liberal industrial and economic policies and a social and moral authoritarianism was a hallmark of the Thatcher years and one easily accommodated in the broadcasting policy framework of the day.
The best television in the world

From the governments point of view, there is considerable practical advantage in insisting that policy is exclusively concerned with the needs of the British viewer and listener, since it implies a sole criterion for judging success or failure, namely the popularity and perceived
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Objective one: keep the customer satisfied

quality of programmes. To the UK consumer of television, this introverted policy debate made sense so long as the UK television industry remained in a cocoon, separated from international competition and therefore comparison with other approaches to television. In the current, official debate about the BBC since the green paper, it has been difficult to get beyond this anachronistic contest of views between those who maintain that British television is the best in the world and those who challenge this proposition. There is certainly much to admire in British broadcasting, which has a justly high international reputation. But it has also to be pointed out that such empirical evidence as exists in the form of opinion surveys does not paint a wholly flattering picture of the publics view of the BBC. A recent crop of surveys was included in the BBCs own response to the green paper and shows, for example, that only just over half (53%) of those sampled are proud of the BBC and the service it provides and not many more (56%) think that if the BBC ceased to exist in its present form, the quality of television broadcasting would begin to deteriorate, a conclusion which comes close to damning with faint praise, given the loaded nature of the question. The results on specific programme areas are also patchy, with a mere 36% rating the BBC excellent or very good as a source of original entertainment (a result indistinguishable from ITV), although at the other end of the spectrum, 66% think the BBC excellent or very good on news and current events, compared with 54% for ITV and 37% for Channel 4. This does not sound like a service so revered that reform would be an act of sacrilege. Nor can policymakers glean much from the fact, trumpeted in the BBCs policy documents, that British people watch television and listen to the radio more (40 hours a week on average) than do other Europeans, since they also watch and listen less than Americans, who have a broadcasting system which involves only a tiny amount of publicly funded programming and which is the polar opposite of Britains highly regulated, state-dominated industry. In comparing British broadcasting with that in other European countries, it is not easy to justify claims that quality in the UK is greatly superior to that on the continent. Also, those who do maintain that
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Sharper vision: the BBC and the communications revolution

BBC television is better than, say, French, German or Italian television, must also concede that in most European countries, consumers were allowed much earlier and fuller access to the wider choice of satellite and cable television, with their huge volumes of entertainment, sport, news, films and arts programmes. The only meaningful test of public regard for broadcasting services arises when viewers and listeners are presented with choice. In television, therefore, the only truly useful measure of public response to the new broadcasters occurs in satellite and cable homes, where BBC share of viewing is running at less than 30% and still falling. Even allowing for the fact that satellite dish owners are a self-selecting group, this surely is a mighty fact to set alongside the scorn with which many television critics continue to view satellites programming efforts. The fact that no single satellite channel can approach the richness of quality of BBC 1 or BBC 2 does not mean that the public will not prefer in aggregate a self-made selection from satellite services rather than, say, loyal adherence to BBC 1. The BBC itself forecasts that its share of the total television audience will fall from just under half to about one third by the end of this decade; the fact that it also insists consumers be required to continue to pay as much in real terms then as they now do to receive a relatively less valued service is a core weakness of the corporations pitch. This is not to make an exaggerated claim for the quality of satellite and cable television A lot of the material broadcast is both foreign and old although so it is on the BBC and ITV, where top Hollywood films have long been regarded as a schedulers banker. But given that satellite broadcasting in Britain is barely four years old, it must be premature to write it off as garbage from outer space. Satellite and cable in the UK are both in their infancy as originators of programmes, especially of high-cost genres like television drama.
The BBC and national culture

There is also another, more far-reaching dimension to placing the viewer and listener so squarely at the centre of policy, of which much
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Objective one: keep the customer satisfied

has been made in the BBC debate this year. This sees the BBC delivering a contribution to and a contact with the countrys heritage, culture, values and polity which is unique and irreplaceable. As Mr Peter Brooke, the Heritage Secretary, puts it in the foreword to the green paper, the BBC has both embodied and communicated our national heritage. It is necessary to attempt greater precision than this. Just what exactly does the BBC embody and communicate that we wish to preserve? One prime asset, certainly, is its role as a purveyor of news and current affairs not controlled by highly politicised business interests, although it has to be acknowledged that an almost equally impressive role has been played in this regard over the years by ITN and Channel 4, by dint of regulation rather than state-ownership. A second might be the corporations involvement in serious music, although again it is not difficult to conceive of alternative institutional channels for the disbursement of funds directed to this purpose. More philosophically, those of a more liberal disposition, or indeed anyone who mistrusts the state, may think that Mr Brookes cultural heritage view betrays an intellectual paternalism long ago rejected in other spheres of cultural life. It is not the approach we take towards the theatre, music, books or education. The idea that the BBC is a cultural hearth rug, on which the family can sit to enjoy shared experiences, like some 1950s family listening to the radio and pictured the Radio Times cover, smacks of nostalgia and self-deception. Moreover, even if it were viable for the BBC to conceive itself as balm to the countrys sense of self, it would have to be recognised that Britains national culture has grown so multifaceted, in terms of nationality, ethnicity and lifestyle, that it is not necessarily best addressed by a huge, London-based cultural institution whose primary political challenge is to win the approval of those inside the governmental machine with the power to determine its income and its right to exist. The simple question which arises is this: to the extent that a national broadcasting institution like the BBC remains important in a cultural and social sense did it is not disputed here that it does what is the best way of adapting that institution so that it can continue to play such a role, but in a way which is more keenly attuned to contemporary realities?
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Objective two: build a strong industry

When it comes to the impact of policy upon broadcasting as an industry, it is not so much a case of subjectivity and vagueness as of a vacuum. Although in the 1980s the Department of Trade and Industry repeatedly attempted to intervene in broadcasting policy issues, the results were fitful and no-one could claim a sustained vision or approach was the outcome. In part, this reflects the political ethos of the period. Until Mrs Thatchers downfall and Mr Michael Heseltines arrival at the DTI in 1991, industrial policy was out of favour. That does not mean, of course, that government did not take actions which had a bearing on the broadcasting industry, rather that those actions were never thought through or their self-contradictions resolved. As a result, the impact of policy was an unpredictable mix of the deliberate, the accidental and the random. In the early decades of broadcasting, the industrial side of policy was simple. Britain had an interest in staying at the forefront of a new technology and the BBC was the chosen vehicle: centralised, publiclyowned, a creature of its time. In terms of policy towards broadcasting services, there was scarce a debate since it appeared self-evident that a scarce resource like the broadcasting spectrum would be both apportioned and heavily regulated by the state. Most other governments took the same view. National broadcasters saw little need to interact with each other, apart from in broadcasting international events, and there
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Objective two: build a strong industry

was no commercial sector. When state monopoly gave way to a regulated BBC-ITV duopoly, there was still little reason to debate the industrial framework: television and radio were domestic industries, trading programmes internationally only as a marginal activity. Much the same process has been at work in industries like telecommunications and aviation.
The multimedia revolution

In the last five years, this situation has been turned upside down. Today, the broadcasting spectrum is practically without boundaries and the technological entry barriers have dissolved. High-performance cable and satellite systems have combined with the promise of digital technology to compress more information into any broadcasting signal, including the conventional airwaves used by terrestrial broadcasters. Advanced encryption technology, itself a proprietary asset of great potential value, has made possible new forms of charging for television, as well as raising new concerns about competition, piracy and intellectual property rights. At the same time, telecommunications companies are discovering the potential for combining their traditional voice and data transmission services with activities that were once the preserve of the broadcasters, providing dial-up video services and breaking into the new ground of interactive television. We have entered an era when the television screen is being used for new forms of entertainment, for home shopping and home banking, for the electronic recording of votes, for access to data bases and electronic job markets. This multi-media convergence of the entertainment, information, telecommunications, broadcasting and consumer electronics industries has powered an extraordinary surge of investment and corporate position-taking in the course of this year alone. Apart from Mr Murdochs global moves to link his television, news and Hollywood interests in a global news and entertainment service, we have seen in the US the $20 bn-plus merger plan between Bell Atlantic, a telecommunications company, and TCI, a cable television company. The same forces have propelled two suitors, Viacom and
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Sharper vision: the BBC and the communications revolution

QVC, the television home-shopping company, to compete for control of Paramount, one of the big Hollywood studios. That deal is worth $10 bn. Anyone who imagines that these are developments unconnected to the UK broadcasting industry need only reflect that TCI is itself an important player in the UK cable industry and a partner with the BBC in UK Gold, the satellite repeats channel. Viacom owns, among many other television properties, the MTV music channel, which like QVCs home-shopping service is available on Sky. Although these are recent and dramatic developments, the trends which lay behind them have been evident for many years, even though the timing of change has proved difficult to predict. Next years White Paper on the BBC will thus be drafted in the context of the most radical and rapid change in the industrial and competitive marketplace which the BBC has ever experienced.
Satellite and cable

It is to be hoped that policy makers will respond to these forces more perceptively in the 1990s than they did in the 1980s. Then, they shifted policy on satellite broadcasting from favouring a role for the BBC, to backing the monopoly of a single private sector UK-only consortium (the original British Satellite Broadcasting, BSB, which was intended to be a sort of BBC-in-space), to tolerating the force majeure encroachment of Mr Murdochs Sky from an unregulated Luxembourg base on the Astra satellite, and finally to permitting the BSkyB merger when it became clear that both satellite services were in financial crisis. In cable, there has been a messy hiatus, involving long delays in awarding and developing franchises, caused in part by the governments failure to see the connections between different parts of the television and communications industries. As a result, the British cable television industry is dominated by North American interests and Britain lacks a strong industrial presence. One of the more striking inudustrial policy ironies is the fact that UK regulations exclude from participation in cable television the countrys likeliest successful big player in this area, British Telecom.
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Objective two: build a strong industry

Although this restriction was imposed with the sound intention of preventing BT from abusing its already formidable market power in telephony, it is an indication of the complexity of the task facing government and regulators in balancing the interests of consumers and suppliers in sectors where monopolists hold sway. The broad policy objective of introducing the maximum level of competition, in order to minimise the need for regulation, is being successfully pursued in the telecommunications industry, where Britain has established a model now being successfully pursued in the telecommunications industry, where Britain has established a model now being copied by others. Technology has now made possible a similar drive towards a competitive broadcasting marketplace, with a single, coherent point of regulation, but government shows no sign of grasping the point.
Terrestrial television

In the heavily regulated terrestrial commercial television system, policy has historically favoured a highly fragmented ITV system, based upon regional advertising monopolies, while creating pressures further to fragment the television production base by requiring the BBC and ITV to take minimum quotas of programmes from independent producers. This latter policy may have been justified from the point of view of a national government seeking to weaken the power of local ITV monopolies and the BBC, made to diversify their sources of creative input, but it has also had the effect of further splintering an industry which, by global standards, is already fragmented. Of the 1,300 officially registered independent television production companies in Britain, almost half are companies with only one employee. It is a failure of UK broadcasting industry policy that it should have mandated a further fragmentation, rather than seeking to encourage competition between the monopolists at the heart of the system. The 1990 Broadcasting Act failed to make sense of any of these forces. Its tone was set by the Treasurys desire to maximise its returns from the ITV companies monopolies and by an ill-tempered assault aganist the ITV companies, one of which, Thames, had been reprimanded for
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Sharper vision: the BBC and the communications revolution

a documentary critical of the government and subsequently lost its franchise. No-one was pleased with the outcome and the franchise auction was especially criticised for producing unnecessarily inequitable outcomes between the successful bidders then required to co-operate to run the ITV network. The side-effects of this unhappy process included a constitutional and financial crisis at Independent Television News, which checked that organisations capacity to participate in the global development of round-the-clock television news services. Now that the new ITV network is at last in place, it is clear that several companies are already chafing at the interpretation of the rules on programme quality and scheduling advanced by the regulator, the Independent Television Commission. The sharpest tension within the ITV system, however, concerns the uncertainty surrounding the issue of ownership rules and thus the likelihood and timing of any potential assault on UK television companies by European media owners. Given that the Broadcasting Act is only three years old, it can scarcely be said to have stood the test of time.
A regulatory muddle

Britain thus finds itself with a regulatory system which at present bars all foreign investment in the ITV system, but which has allowed Mr Murdoch, an American citizen, to amass a half interest in a 20-plus channel satellite broadcaster, which will soon be bigger than the entire ITV system, on top of newpapers which account for 35% of national newspaper sales. None of this has been subject to any involvement by the UK competition authorities or the broadcasting regulator.And yet under the terms of the 1990 Broadcasting Act, no national newspaper owner is allowed to own more than 20% of a terrestrial ITV or radio station. As one illogicality has piled upon another, ITV is surely also right to protest that BSkyB faces no restrictions on the level of British or European programmes it must screen, thus allowing it a dramatically lower cost base from bought-in American programmes than its terrestrial competitors. The problem, however, is much more serious than one of inequity between participants in the broadcasting industry. From a public interest
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Objective two: build a strong industry

point of view, the question is: what has been the aim and effect of policy in terms of developing a strong UK broadcasting industry? Here is a sector in which an advanced economy like Britains needs to prosper and where it starts with two large natural advantages: the English language and the international reputation of the BBC.Yet it is a sector in which the biggest commercial broadcaster, Central, with annual sales of 330 m, can scarcely be considered in the same breath as the gaints of continental Europe and the US. News Corporation, for example, is 15 times larger than Central in terms of revenues. The broadcasting trade figures also point unmistakeably to policy failure. Although concealed somewhat in the public mind by the high profile self-congratulation which accompanies success in winning international programme-making awards, Britains broadcasting trade account has plunged deep into the red.According to ITVs own response to the BBC green paper comments, a trade surplus of 24 m in 1985 had become a deficit of 100 m by 1991 and is forecast by consultants Booz Allen to reach 600 m in 2000. This is in part a result of the arrival of new broadcasters selling cheaper, foreign programming, but it illustrates the reality that the British television industry has come face to face with cable and satellite and the multimedia explosion in lamentably weak condition. The bottom line is that broadcasting policy in the Thatcher-Major years has delivered an ITV system characterised by small regional monopolies, an unsustainable regulatory muddle in the satellite sector and a cable sector dominated by non-UK interests. It is difficult to avoid the conclusion that policy to date has failed.
How the BBC fits in

Is it sensible in these circumstances for Britains dominant broadcaster, the globally renowned BBC, to be confined to the public sector, where it is certain to be increasingly hamstrung in terms of its potential involvement in international broadcasting and in other commercial developments? The BBC, is, after all, the only exception to the enfeebling fragmentation to which broadcasting policy has led. As Mr John Birt, the BBC director general, recently pointed out, following a survey
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Sharper vision: the BBC and the communications revolution

of the top 20 providers of broadcasting facilities in the UK, the BBC came out as twice the size of the next 19 added together. Although a number of British media companies hold small stakes in television, legal restrictions have ensured that none has become a significant force; as a result, none could be said to be well-prepared for the multimedia convergence now gaining speed. The biggest UK media company, Reed-Elsevier (an Anglo-Dutch enterprise) has been into and out of UK television, while medium-sized players such as Pearson have dabbled, within the limits of the law, and Reuters has picked away at the edges. Meanwhile other English-speaking countries, Australia and the US, one much smaller, one much larger than the UK, have managed to produce global players in the broadcasting industry when Britain has not. In recent years, there has been plenty of evidence that the BBC has the appetite to develop new activities, whether in publishing, global television, subscription television, rolling news services or in video. Yet it is also true that the corporation has lacked sureness of touch, which is hardly surprising given the political pressures on the corporation in the Thatcher years and the self-contradictions raised by any sign of commercial aggression by a broadcaster funded from the public purse. These factors explain false steps like the aborted plan to float BBC Enterprises on the stock market and the vacillation over Visnews, the leading international television news agency, in which the BBC at first built up a stake, only to sell out to Reuters. When it came to developing a television version of its highly esteemed World Service radio activities in the late 1980s, the corporations natural inclination was thus to seek grant in aid from the Foreign Office, which pays for World Service radio. The government refused and the BBC has since made good progress in building up World Service Television, using its domestic television infrastructure and with the help of some private sector alliances. But it is by no means clear that the domestic licence fee payer should be required to cross-subsidise such developments, as is certainly the case at present. The BBCs place in the framework of Britains international industrial policy is thus all part of the muddle, scarcely concealed beneath
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Objective two: build a strong industry

a veneer of pretence that the BBC continues to exist in the British body politic only as a cost and a service, part of an advanced welfare state, subject to occasional vilification over its wastefulness, but tidily confined behind boundaries policed by commercial rivals. This fragmentary approach has been aggravated by a tendency over the years for government to consider the various parts of the industry in isolation from each other. Thus a review of the BBC, such as the one now in train, is a separate matter from the shape of ITV, which was settled in the 1990 Broadcasting Act. Policies towards satellite broadcasting and cable have been placed in yet another category, with some judgements made as a result of lengthy consultation and consultants report and others (like approval for the BSkyB merger) a fait accompli agreed on the run. It is time to conceive something more coherent.

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23

Extending choice: the BBCs plan

The BBCs response to the conditions outlined so far in this paper has been to act to improve its image, especially with regard to efficiency, in order to argue the case for a licence fee indexed to inflation. What is confusing to the general public is that almost all the public debate about Mr Birts plans treats him as a dangerous radical, threatening all that is best in the BBCs long and glorious tradition. A typical example was the splashily reported exchange in July between Mr Birt and Mr Mark Tulley, a long-serving BBC foreign correspondent. Mr Tulley argued, essentially, that the BBC is an internationally esteemed organisation of such value and creative power that it can only be reduced or even traduced by the brutal managerial methods, bureaucracy and financial disciplines now being employed. Mr Birt replied with a catalogue of horrors about the Soviet-style command economy he had found at the BBC, where one new radio studio had been used for a mere 3% of its available time, where rules existed about the replacement criteria for foreign correspondents watch straps and where (although he didnt mention this) the television service failed for some months in 1992 to detect a 54 m overspend. The last two Edinburgh television festivals have been dominated by mud-slinging between Messrs Birt and Hussey and their opponents. In 1992, Mr Michael Grade, chief executive of Channel 4 and also an ex-BBC man, accused the Birt-Hussey regime of pseudo-Leninist management methods and Mr Hussey called Mr Grade and Bourbon
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Extending choice: the BBCs plan

in red braces. This year, it was the turn of Mr Dennis Potter, one of the leading dramatists of the television age, who branded both the BBC bosses as croak-voiced Daleks in a speech which amounted to an inchoate scream against the combined crimes of Mr Murdoch and the BBCs leaders. Although Mr Potters speech was hardly a reasoned piece of work, it did conclude with the thought that the BBC should be broken up in order to diversify the base of public service broadcasting. It is interesting that Potter, who has worked both for ITV and the BBC, should bring to the BBC debate a taste for futher broadcasting industry fragmentation, a form of retribution he would certainly consider too mild for Mr Murdoch. Much of the current momentum against Mr Birt and Mr Hussey derives from resistance to the system called producer choice which has been introduced to reduce overheads, decentralise financial decisions and to market test some BBC services against their equivalents in the private sector. What Mr Birts legion of critics fails to notice is that these new methods are very much at the service of the old ethos: the defence of the existing broadcasting base, its judicious extension when opportunity arises (for example Radio 5, the proposed new radio news and sport channel, UK Gold, World Service Television and scrambled night-time services for professional groups, to name a few) and the proclamation that the BBC is a marvel, one of the twentieth centurys greatest creations, in this or any other country, to quote a favourite piece of hyperbole from current speeches by the director general.
Unanswered questions

The public policy question which should be asked about Mr Birt is not whether he is justified in doing his best to bring elementary managerial disciplines to the BBC, but whether, as the government considers a charter to govern the organisation from 1996, probably until at least 2006, he is envisaging a BBC best capable of contributing to the two aims of broadcasting policy set out above. At its most basic, does the government have any idea how the BBC should fit into the overall structure of a broadcasting industry characterised in the short term by the arrival of a new third force, BSkyB, but
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Sharper vision: the BBC and the communications revolution

certain to change much further and more rapidly as cable television and telephony merge? Not surprisingly, most of the argument advanced by the BBC during the green paper debate speaks to the alleged interests of the domestic consumer, since the BBC has never been asked to concern itself with its own place in Britains industrial and service economy. Indeed, the BBCs core argument for retaining the licence fee has required it to strike a purist, anti-commercial note of which its founding director general, John Reith the man who bitterly opposed the creation of commercial television in the 1950s would have been proud. As Mr Birt puts it in this years annual report, the case is a simple one. In the face of increasing competition from commercial broadcasters the BBC should use its public funding to provide programmes that would be at risk in a purely commercial market: authoritative news and information; ambitious and original entertainment; and programmes to meet the complex learning needs of a modern society. The price, the BBC argues, should be todays price: a licence fee maintained in real terms at 83 per television set, yielding an income of about 1.5 bn a year, equivalent to a penny on the standard rate of income tax or 0.5% on the general rate of VAT. It is a case, which, argued without reference to the powerful international forces reshaping the industry, has genuine merit. There is widespread agreement that broadcasting markets can be usefully supplemented by non-commercial funds to increase the range and quality of programmes and to pursue other policy objectives, such as to maintain a given level of indigenous material. Public subventions are made, on a modest scale, even in the US. The debate therefore revolves around the scale of taxpayer subsidy and the manner in which it is to be provided. Viewed in isolation, it certainly cannot be argued that 23 pence a day is an unreasonable price to pay for two television channels and a comprehensive service of local and national radio. The most seductive aspect of the BBCs case, however, is that it appears to offer an oasis of calm in the broadcasting storm: everything else is changing, so let us at least keep the BBC as it is. The problem is that an unchanged BBC will, the corporation itself acknowledges, be on a steep path of relative decline. A loss of share in
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Extending choice: the BBCs plan

the television market from almost 50% to about 30% within a decade, which the BBC itself forecasts, is a precipitate drop, especially if accompanied by the increased restrictions the commercial broadcasters wish to see imposed upon the BBC. Without any reprieve from cost-cutting and loss of market share, without the possibility of sustained new directions, it will become ever more difficult to maintain morale and quality and even more difficult to nurture that creative energy which leads to the most brilliant programming ideas. The generals of the BBC are proposing that it become an army in indefinite retreat; it must be asked how, in these circumstances, a fighting spirit is to be maintained.

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27

Five problems in search of a solution

Instead of accepting this managed, genteel decline and confinement within a publicly-financed, public service remit, surely it would be better to pursue an approach in tune with the new broadcasting age and one which offers the BBC the chance of a long-term future, well into the 21st century; better to acknowledge, frankly, the weaknesses of the status quo, however well it has served Britain during the period of monopoly and duopoly, and think more boldly. It is entirely possible to design a strategy which both avoids this path of inevitable decline, and which addresses some of the more obvious problems which have been identified with the BBCs own plan, of which five are set out below. 1. The BBC is too easily subject to political influence. In a centralised state like Britain, it is especially undesirable to have the leading, serious broadcaster dependent upon government for its funding, its senior appointments and all other regulatory conditions. Governments have varied in the blatancy of their bullying of the BBC, but the experience since 1979 has not been encouraging. Although the current multiyear funding arrangement linking the licence fee to the retail price index is an improvement, the BBC remains yoked to a devils bargain, which has the effect of damaging the quality of its work, tending to marginalise or undermine the risky, the unusual and perhaps too often the truly original. Although it

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Five problems in search of a solution

2.

3.

would be wrong to characterise this as amounting to political control, it is equally wrong to imagine that the influence can be diminished so long as the BBC is a publicly funded corporation, whose income and top appointments are determined by the government of the day. At its worst, the future of Britains broadcasting service has been shaped in private negotiation between a highly centralised broadcasting elite and an equally centralised political elite. This may have been either necessary or desirable once; today, it is indefensible. The BBC is unsatisfactorily governed and doomed, on the present course, to remain so. So long as the BBC is a large, public sector organisation, its governance presents extremely difficult problems. There has been much valid criticism of the governors in recent years for their heavy handed and sometimes counter-productive involvement in day to day affairs of the BBC, to the point that even the BBC itself has advanced some ideas for reform, involving a greater separation of powers between the governors and the management board and clearer performance criteria. Others think that parliament should play a more direct, supervisory role, although this excites legitimate fears of party political control. This is not a problem which can be dealt with by tinkering, since it raises the most fundamental of questions: who owns the BBC and to whom is its management answerable? The licence fee may be sustainable now, but it cannot remain so. As the BBCs share of the television market falls to under one third by the end of the decade, common sense and experience from other countries suggests that a legitimacy threshold will be passed and that alternative funding will have to be sought. There may even be legal challenges from those who can demonstrate they are being required to pay a fee for services they choose not to consume. That would mean the BBC seeking an alternative financial base in, say, 2005, when it
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Sharper vision: the BBC and the communications revolution

4.

will be in a much weaker position, with at the very least over half of all households connected to a much expanded and more sophisticated multi-channel television system. Staying with a pure licence fee solution is a way of handing the future to the new broadcasters. The BBC in its present form is difficult to run well. As a centrally funded and directed organisation, with over 20,000 employees, a budget of over 1.5bn and many of the characteristics of a nationalised industry, it is not surprising that the BBC has encountered hideous management problems, as its current leadership acknowledges. These problems are not of recent origin, nor have they been caused by the incompetence of individuals. They are endemic in an institution like the BBC, which is a paradigm of inefficiency: it has, essentially, a single paymaster, which implies a centralised process of fund allocation and answerability, but the BBC has simultaneously constructed a honeycomb of operational units or empires to foster creative independence and originality in what might otherwise have degenerated into an east European style state broadcasting organisation. The fact that this structure is prodigiously wasteful was not controversial, or at least not resisted, so long as the BBC was a monopoly or near-monopoly supplier and there was felt to be no alternative to a BBC-dominated broadcasting system. It is the change in the competitive environment which has precipitated the BBCs current managerial crisis. Those who resist the argument that the BBC is too monolithic should ask themselves whether they can imagine any circumstances in which they would create it from scratch today. A creative enterprise as large and structurally rigid as the BBC, run without market disciplines, will naturally tend either to be under insufficient managerial and financial control, or to be so checked by managerial system and restraints that its creative edge is blunted.

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Five problems in search of a solution

5.

Against this, the BBC argues that the combination of greater transparency, devolution of managerial responsibility and the producer choice system of artificial internal markets will galvanise the BBC into dramatically improved levels of efficiency. It is, however, also possible that real limits will quickly be reached in these artificial market processes. The reason that true markets work is that individuals are propelled by a mixture of prospective reward and fear of failure to maximise their effectiveness. Within an organisation which has, essentially, a single source of finance, it is not possible to achieve the degree of delegation of managerial and financial responsibility which is normal in companies of the BBCs size. There is a danger too that as the rules of the artificial producer choice market are found to be defective, they will spawn yet more rules to correct errors, generating a system of such complexity that in the end it becomes unworkable. When artifical markets are proposed, it should always be asked why genuine markets are not an available alternative. Most British citizens would agree that in the case of, say, the health industry, the principle of equality of access to a life and death service is of such weight that market forces should be sharply constrained. It is not at all clear that most people think this about the broadcasting industry, which is increasingly dominated worldwide by the private sector and gradually subject to diminishing regulation as technology fosters more diversity. This is a problem for state broadcasters all over the world, as they increasingly find themselves encircled by competition from broadcasters from space, who are difficult if not impossible to regulate. These matters have not been examined with sufficient rigour in the context of the BBC debate. So long as the UKs dominant broadcaster remains a public sector corporation, the British broadcasting industry will remain weak in international terms. It will be impossible to
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Sharper vision: the BBC and the communications revolution

generate the alliances and critical mass in UK broadcasting until there is an end to the fierce separation between its parts: a heavily regulated public sector (the BBC), a partially regulated ITV and cable television sector and a largely unregulated satellite broadcasting industry. There is a strong case for avoiding concentrations of ownership in any industry, and an especially strong case for doing so in the media, but there is no visible rationale in the present arrangements. It is the fragmentation of the regulatory regime and the failure by government to see the shape of the broadcasting industry as a whole which has made Mr Murdochs expansion so impervious to policy. The same forces risk blinding us to the possibility of workable and dynamic alternatives for the future of the BBC. Consideration of a new BBC charter offers the right moment to address this problem. If it remains unaddressed, the British broadcasting industry will be weaker than it need be, and the outdated regulatory system will surely buckle under the forces now ranged against it.

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How to stop worrying and love the broadcasting revolution

The implication of this analysis is by now clear: Britain is facing a highspeed broadcasting revolution with a muddled system of regulation, a commercial broadcasting system which policy has deliberately fragmented, a satellite and cable sector dominated by non-UK interests and a policy towards the BBC which is fixated upon past glories and designed to avoid risk. As a result, policy has become anxious and unimaginative, rather than a process in which policy makers address the task of establishing a framework to release the vibrant opportunities offered by new technology. It is not possible for civil servants and politicians to predict the pace of change, but if anything has been learned in the three years since the Broadcasting Act, it must surely be that the developments we can foresee will be surpassed by those we cannot. And even the most visible and obvious list of likely developments in the next 5 years represents a significant shift in the BBCs landscape. The list includes: Merger and alliance in the ITV sector. Although this will be resisted by smaller ITV companies, arguing in favour of regional identity in broadcasting, they are unlikely to succeed. Eventually, the appetite for regional and local television services will be met by cable systems. An increased UK market for pay television, with more than half of UK homes able to receive satellite and/or cable by
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Sharper vision: the BBC and the communications revolution

the turn of the century. Although there may be consumer resistance to subscription television prices (at three times the BBC licence fee for the current Sky package), these will be cut if that is what is needed to prevent the market from stagnating. Booz Allens study for ITV estimates that the number of available television channels in the UK will rise from 59 in 1992 (including local and thematic services) to approximately 130 by 2002. This already looks like a conservative estimate. Rapid further investment in cable television, mainly by North American telephone utilities, encouraged by the demand for alternative telephony services, as well as the market for additional television services. Channel 5, rapidly followed by digital television, enabling four times as many channels to be broadcast on existing terrestrial frequencies. The ITV companies are already lobbying that this extra spectrum should be used not for new channels, but for existing broadcasters to simulcast existing programmes in high definition form. Thus have the manoeuvres already begun to ensure that producer monopolies are not disturbed by yet another new technology. Commercial radio will continue to burgeon, in spite of the many obstacles thrown in its path over the years, not least by the BBC. Commercial stations, with successes like Classic FM, now have around 40% of the national audience and almost 60% in London. Above all, it is evident that broadcasting has become an international industry, with prime movers in Los Angeles, Wall Street, Milan, Paris, Hong Kong and Tokyo, as well as in London. The technology of communications satellites has broken the stranglehold of national governments over broadcasting policy, but much of the British debate continues as if this were not so. The spectrum shortage factor, which underlay the careful parcelling out of broadcasting rights in all British
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How to stop worrying and love the broadcasting revolution

broadcasting policy from the 1920s until 1990, and which defined the concept of public service broadcasting in Britain, is redundant. In the short term, there is more spectrum than there are hungry capitalists wishing to invest in broadcasting services.

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35

Alternative options for the BBC

In these circumstances, there are a number of directions in which the BBC can move. Most of the models canvassed in the last year have been variants on the BBCs own proposal and may be summarised as follows: 1. A licence superfee. Instead of the index-linked licence fee it has requested, the BBC would be given a large increase in its income, in order to allow it to fund more impressive programmes and so lose less market share than assumed in BBC forecasts. This is not thought likely to commend itself to a government committed to a more diverse broadcasting industry, lower public expenditure and to low inflation. It may be attractive to the Labour Party, although Labour has also half pledged itself to the expensive idea of making the licence fee free for old age pensioners. A public service broadcasting council. This would be a device to create greater distance between the government and the BBC. A new arts council style body would collect a licence fee and distribute it to deserving broadcasters. The BBC would get the lions share, but not all of it. One idea is that the council could be used to fund cable or satellite start-ups of minority broadcasting services, such as those for ethnic minorities.

2.

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Alternative options for the BBC

3.

4.

5.

A federal BBC. If the BBC is to remain the sole recipient of public funds for broadcasting and if Britain is to ignore the claims of industrial policy and persist with a series of fragmented monopolies in ITV, the case is made for seeking further to reduce the dominance of the industry by a Londondominated BBC. One possible model would be to give the BBC a federal structure, passing the ownership, funding and governance of a series of public sector broadcasting corporations to Scotland, Wales, Northern Ireland and the English regions, whilst enabling them to combine, much as ITV now does, for national scheduling purposes. This would have the merit of using public funds to help generate regional and political diversity, at a time when there are strong pressures on ITV Channel 3 companies to become less regional in character. A federal BBC would also overcome some of the problems about the governance of the BBC, where too much power is placed in the hands of a small number of individuals appointed by the government of the day. A dismembered BBC. This would break up the BBC into a series of functional entities, such as television, national radio, local radio, transmission and education services. These could all remain in the public sector, in which case the main advantage would be to produce a series of smaller, more manageable units, and to broaden out the responsibility for governance. Alternatively, some elements could be privatised and allowed to take advertising Radio One, for example. Turn the BBC into a publisher-broadcaster. This would separate the BBCs programme-making activities from its broadcasting side. Its possible merits would be a more manageable BBC, allowing the corporation to concentrate upon commissioning and broadcasting programmes which fit its public service remit from a wider variety of sources. But it would also, like options three and four above, further fragment the industry. This concept could be combined with that of a public service broadcasting council.
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37

The licence fee prison: an escape plan

None of the courses outlined above, however, addresses both aims of broadcasting policy as defined in this paper: to improve services for consumers whilst creating the conditions in which the broadcasting industry can flourish in an international context. The proposals listed, essentially, fall into two categories: those which insist that the BBC should remain little changed: publicly funded, set apart, a beacon to a commercial sector likely to tumble down market; and those which envisage a more diverse set of arrangements for public service broadcasting. None of these proposals seriously considers that the BBC might itself have a significant part to play in the international broadcasting scene. The reason for this is obvious enough: none of the ideas proposed considers the possibility that the BBC might move towards a different funding base. And it is assumed that a publicly-funded BBC is unlikely either to be capable or to be allowed to compete on the international stage against private sector competitors. Not least, there is the issue of the European Commission, which has the task of policing unfair use of state aids to industry. The BBC has already in recent months run into controversy with commercial rivals over a number of non-core ventures: its joint football contract with BSkyB, its 20% participation in the UK Gold advertising-funded satellite channel, the spread of World Service Television, and its cross-promotion of BBC magazines on television. In presenting its case for a new charter based upon the licence fee and the existing institutional framework, the BBC plays down
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The licence fee prison: an escape plan

the significance of these ventures, but it must know that in the changing broadcasting world, deals with commercial players on programme and rights acquisition, joint production and programme sales will be as attractive and necessary as they will prove be controversial. But it is now asked, why should the BBC, with all its funding privileges, be able to attack parts of the ITV systems advertising base? Why should domestic licence payers pay for a service provided for the Indian subcontinent? Are the BBC accounts sufficiently transparent to reveal whether such an advertising-backed service is profitable? These questions will become more pressing as the BBC flexes its muscles in ventures like World Service Television. The government has in recent years encouraged the BBC to seek ancillary money-making activities to supplement the licence fee, but it seems likely that as life becomes tougher for the BBCs commercial competitors, they will insist upon further restrictions on the corporation. Already, there is an unwritten guideline that the corporation must restrict itself to no more than 20% of any satellite channel broadcasting to the UK, which has been an impediment to the BBC agreeing terms to set up for UK viewers a round-the-clock television news service, to compete with CNN and Sky News. This is something the BBC is in a strong position to create, since it already has a very large television news operation confined to broadcasting in the limited slots scheduled on two general channels: hardly an efficient use of a public investment in resources. All of these arguments point to the same conclusion: that a purely public sector corporation faces mounting self-contradictions in the international marketplace of modern broadcasting. Logic demands that we address the licence fee taboo and as a necessary corollary devise a plan to transfer the BBC to the private sector, so enabling it to compete vigorously, not only with the commercial broadcasters, but also against Mr Murdoch and the international media conglomerates.
Alternatives to the licence fee

It has become axiomatic in the broadcasting debate that there is no ready alternative to the licence fee. In 1986, the Peacock Report on
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Sharper vision: the BBC and the communications revolution

the financing of the BBC concluded that subscription would become an option in due course, but that advertising was unlikely to prove an attractive option at any stage, both because of the limits to the size of the advertising pool and because the need to sell audiences to advertisers would tend to force programming down market and into mimicry of ITV. Given the pace of change in broadcasting technology and the competitive environment, coupled with the downhill future the BBC faces even under its own projections, it is time to re-examine these questions. The key is not to imagine that it will be possible instantly to replace one form of funding wholly with another, but to devise the most attractive blend of funding alternatives for the BBC, which could easily vary by activity and be introduced in a phased way. It has often been pointed out that parts of the BBC, like Radios One and Two, would fit relatively easily into an advertising-funded mould, although care would be needed to avoid unfair damage to existing franchises of commercial radio stations. In principle, there appears to be no shortage of advertisers interested in reaching its type of audience and the market continues to support new arrivals in popular music radio. A case can also be made for some advertising on BBC1 and even BBC2, although there are probably greater attractions in exploring the possibilities of a subscription format for a relatively specialised channel like BBC2. There is no reason why a BBC of the future should not run a general entertainment channel, funded by advertising, a more specialised channel like BBC 2 on subscription or with an advertising/public subsidy mix, along with a wide range of other services. With the spread of satellite and cable infrastructure, the BBC is in a uniquely strong position to offer new, revenue-raising services, many of which would enable it to use its existing resources much more efficiently. An obvious example would be to create a BBC television news channel, making better use of an expensive and unique resource whose output is currently jammed into the congested 30 minute news programme format. Given the cheapness and availability of satellite and eventually cable capacity, the BBC could also easily offer events channels a Wimbledon Channel, a Proms Channel, an Olympics Channel, a cricket channel; the
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The licence fee prison: an escape plan

possibilities are endless. The task would be to define core services with core funding and to encourage the BBC to innovate at the periphery by giving it the freedom to raise finance to do so. The BBC, with its reputation for fairness and integrity and its desire to maintain a public service mission, could also play a unique role in developing services like an electronic jobs centre in the UK, or in exploring interactive educational video. It would be both feasible and desirable to maintain public funding for BBC services with a defined public service, non-commercial character, as well as for other broadcasters public service activities, adjusting these over time. Radio 4 and Radio 3 might be defined as public service and funded accordingly. A mixed funding base is familiar and successful in a number of European countries and, even in the UK, there is the precedent of S4C, the Welsh fourth channel, which is funded partly by advertising and partly by government grant. A public service broadcasting council could be an attractive channel for these new funding arrangements, which might be based on a smaller licence fee, or which might come from general taxation. In terms of international competition and the rules of the European Community, the important point would be that any subsidies were transparent and not used to create unfair advantage in international markets. It is beyond the scope of this paper to offer fresh calculations on the depth of the potential advertising and subscription pool, but it is worth pointing out that when commercial broadcasters deny there is room for additional players (as they always have and always no doubt will) the broadcasters claims on one side are matched with equal and opposite force by those of advertisers. A move from licence fee to advertising and subscription for the bulk of BBC revenue would allow the ITV companies time to adjust to extra competition and for the Treasury to gauge the right pace at which to wind down its levy on ITV profits. The fact that commercial broadcasters would fight tooth and nail against such a proposal does not make it wrong; the ITV companies tend to take a different view of the size of the advertising pot during debates about the BBC than they do when they are building optimistic scenarios to try to secure franchises
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Sharper vision: the BBC and the communications revolution

from the Independent Television Commission. Since some ITV companies also argue that organised differently the system could be run much more cheaply, it suggests that there is scope for reapportioning advertising revenue within the system. It will also be argued that access to advertising will turn the BBC into an ITV lookalike, but this is not convincing if we are looking to a mix of funding which includes advertising, subscription, public subventions and income from other activities. Even with a funding base drawn wholly from advertising, Channel 4 is able to achieve a distinctive style. Indeed, one of the most striking things about the British duopoly in television is the way that Channel 3 and BBC 1 on the one hand and Channel 4 and BBC 2 on the other have imitated each other for years in spite of having entirely distinct funding bases. Another argument used by the BBC against mixed public and commercial funding is that foreign public service broadcasters funded in this way have found themselves in difficulties attracting advertising as their audience share has slipped in the face of competition from new channels. This again points to the core weakness in the BBC argument, that it foresees its own audience share sliding dramatically, but expects to be spared any reduction in its income. This would not be the reality: if the BBC becomes a licence fee funded broadcaster watched regularly only by a minority of the public, it will first suffer a reduction in the licence fee and eventually will lose it altogether. Some people, of course, oppose advertising on the grounds that they do not like their programmes to be interrupted, or even to suffer commercial breaks between programmes (as might be the case in the advertising-funded element of a mixed funding regime). But the BBCs own research has revealed that its own viewers and listeners are by no means united in their opposition to advertising. Against 58% of those who consider the licence fee a very good or quite good way of paying for the BBC, 51% favour a mix of licence and advertising and 47% would welcome a purely advertising funded service. Asked which was the best way of funding the BBC, opinion more or less tied, with 32% favouring the licence fee and 31% a mix of funding.

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The licence fee prison: an escape plan

It is also worth noting that the licence fee, apart from being a highly regressive impost, hitting the poorest hardest, is also an inefficient one. Approaching 20% of potential revenue is lost through a mixture of evasion and collection costs. The evasion problem is bound to become more difficult as more people make little or no use of BBC television.

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Who should own the BBC?

Once it is accepted that there are realistic funding alternatives, it is possible to address in a new way the most fundamental question of all: who owns the BBC and what is it for? It is also not so difficult to conceive answers to some of the problems with the BBCs own strategy identified above namely the continuation of excessive political influence and the difficulty of devising appropriate managerial methods and corporate structures. One possibility is for the BBC simply to be floated on the stock exchange, like British Telecom, British Gas or British Airways. This would unquestionably bring advantages in terms of access to capital, freedom to manage, efficiency and innovation, as has been the experience in other privatisations. A straightforward float, however, would turn the BBC into a profit-maximising corporation, answerable to its institutional shareholders. There would be some risk that the unique qualities and character of the BBC would be lost, placing in jeopardy its traditions of even-handedness, its commitment to patient development of new programming strands, its educational role and its role as a trainer for the broadcasting industry. With the BBC, the challenge is to devise a form of financing and ownership which allows it at one and the same time to respond to the challenges arising in the international broadcasting industry, while preserving the best of its traditional values. Rather than transfer ownership to institutional shareholders, it would be better to privatise it as
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Who should own the BBC?

a company substantially owned by its employees, viewers, listeners and business allies. At present, the BBC is funded by the general public, but the publics expression of its will is channelled exclusively, in practice, through the government of the day, which makes all key decisions about the corporations future. As has already been argued, this political conduit is singularly unsatisfactory in the case of a broadcaster which supplies the single most important service of news in the UK and which is an important cultural influence. Privatised in the right way, the publics sense of owning the BBC could be enhanced rather than diminished. Conceivably, the form of privatisation could be as a non-profit distributing trust, a kind of mutual association, constituted to execute the wishes of its members and granted certain fiscal and other privileges consistent with the public good it provides. In the world of the media, the experience of Reuters prior to its floation on the stock exchange offers one possible model Reuters was owned by a consortium of newspaper companies. Another example worthy of study is the Scott Trust, which owns the Guardian and which manages to combine within one media group activities with a variety of commercial and financial remits. In television, Channel 4 has made the transition from a form of trust funded by advertising on the ITV network to a free-standing seller of its own advertising. It would be preferable, however, to introduce the disciplines and incentives of the profit motive, devising a form of employee and consumer share ownership for a new private sector BBC, which could still be subject to a degree of regulation, to reflect both its importance and any remaining privileges. A golden share held by government would be one familiar device, which could be used, for example, to prevent undesirable takeover attempts. Although there has been relatively little experience in Britain of using privatisation in order to stimulate new forms of ownership, there has been one successful privatisation based upon an employee and management buy-out that of the National Freight Consortium, a large road haulage company. In the US, employee share ownership is a familiar aspect of financial structure and Jeffrey Gates, a leading
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Sharper vision: the BBC and the communications revolution

US expert, has contributed an appendix to this paper, setting out how US experience might be relevant to the case of the BBC. It is inevitable that new approaches of the sort canvassed in this paper will arouse in many people a fear of the unknown and of prolonged instability and uncertainly, in which a cherished institution like the BBC would suffer serious damage or even perish. Such fears are understandable, but it is notable that in earlier privatisations, whatever their flaws, widespread predictions of similar disruption have turned out to be unfounded, especially from the point of view of the consumer. In industries like broadcasting, telecommunications, energy or transportation, the turbulence of the institutional change associated with privatisation is modest compared with the daily tempest of market conditions. Keeping a corporation securely locked up in the public sector is no insulation against turbulence when an international industry is in the throes of change, as events at the BBC in the last decade have amply demonstrated.

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Free to compete

Here then is a sharper vision of the BBCs future: a BBC liberated from political control, free to invest, to expand, to make alliances and to develop new services. Such a BBC would have a first rate chance to emerge as a major UK player in the international media marketplace. Either as a normal stock market company or one owned by its employees, customers, partners and other stakeholders, there would no longer be any question of the government appointing the entire board of governors, although it would be an option for government to retain an equity stake and therefore representation on the board. This new BBC could be structurally much more flexible, with subsidiaries accountable for their own income, expenditure and performance, but within the framework of the enduring values of the organisation. There would be no need for either the centralised financial or editorial control which is so damaging to the BBC as it is organised today. Before proceeding to place the BBC in the private sector in this way, however, it would be necessary to ask whether the BBC, as an entity, would be too large and powerful in terms of its potential threat to other competitors. Prior to the existence of BSkyB the answer to that question would have been obvious; today it is no longer so. The clear implication of the analysis of this paper is that British broadcasting policy has mostly erred in favour of monopoly on the one hand and excessive fragmentation on the other, making the BBC seem a greater giant than it looks in a global perspective. In a broadcasting scene so
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Sharper vision: the BBC and the communications revolution

disfigured by monopoly it would be desirable for the Monopolies and Mergers Commission to undertake its first industry-wide study of the broadcasting industry. Such a study would also be valuable in establishing the shape of regulation for the new broadcasting age. With the BBC in the private sector it would at last be possible to envisage a single point of regulation for UK broadcasting, an Office of Broadcasting, which could impose any restriction or requirement judged desirable in the public interest. In practice, there would be sufficient competition to avoid the need for an onerous regime, although in the new communications technologies, there is always the danger of re-monopolisation, as local cable systems develop, or globally through exclusive encryption systems. A regulator would also need to respond to public standards on matters such as sex and violence and in the case of the BBC, there will remain for the foreseeable future a case for continuing to require due impartiality on matters of party politics. It would also be possible to use the regulator to mandate fixed percentages of UK or EC programming, if that were thought desirable, although protection against the international distribution of programmes is, in the era of satellite broadcasting, unlikely to be effective. It would be better for concerns about the volume and quality of indigenous programming to be expressed as policies to back British or EC programme-makers, rather than through restrictions on material to which consumers desire access.With a single regulator, it would also be possible for the first time to tackle vexing questions of concentration of ownership in the media, which are at present fragmented into rules for ITV (onerous), for the press (light) and for satellite broadcasting (nonexistent). Given the convergence of broadcasting and telecommunications technologies, this new arrangement would also make it possible for the broadcasting regulator to work closely with Oftel, the telecommunications regulator. Who will accept the challenge to liberate the BBC in this way, to grant ownership to those who now pay for it, use it and work for it? In theory, the idea should attract Conservatives, keen to extend the private sector and to reinforce the idea of individual ownership and responsibility.
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Free to compete

It ought to appeal to Liberal Democrats, concerned at an overcentralised state and suspicious of monopolies. And it ought to appeal to Labour, which is deeply anxious about the influence of the international media moguls and which might be expected to see value in a socially progressive form of private ownership for the BBC, capable of adapting its traditional values to new circumstances. Of course, it is true that to liberate the BBC in this way would be risky. In exposing the BBC directly to competition for audiences and funds, the BBC might lose out; it might be shown not to be good enough. But there is no reason to believe that would happen, since the BBC is an organisation rich in talent and enterprise. If it did fail, at least the matter would have been decided by the viewing and listening public in the marketplace, rather than as a result of a Whitehall political fix. What is much more likely is that the new BBC would succeed. It would develop new services on satellite and cable perhaps an arts channel, a childrens channel, a news channel, a music channel. It would form alliances. It would market its programmes more effectively, selling them to others where it judged fit. It would again become a driving force in the UK broadcasting industry and would be free to seek investment in international ventures. With a structure, constitution and funding base appropriate for the hurly burly of the new broadcasting age, the BBC would have a real chance of moving into the next century as a growing, dynamic organisation. The alternative is bleak: for the BBC, a long, morale-sapping march on an indefinitely declining path; for the UK broadcasting industry, yet another missed opportunity.

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Appendix: outline of new ownership options for the BBC


Jeffrey Gates

When the BBC was established employee or listener ownership was not seriously considered as an alternative. The only available options were either pure private ownership as had been the case for the firms which were consolidated into the BBC or ownership by the state. 70 years later there are many more ownership alternatives available. Various forms of employee share participation have been embraced by a wide variety of successful UK companies, including National Freight Consortium and the John Lewis Partnership. The Finance Acts in 1989 and 1990 included tax reliefs intended to speed the take up of employee share ownership plans (ESOPs). In the USA, the ESOP concept has received government encouragement for some 20 years. As a result more than 10,000 US corporations now have share participation plans covering 12% of the US workforce (about the same number as the current trade union membership). At least 100 large US companies, each with more than 1,000 employees, have 33% or more of their shares owned by employees.1 More than 50% of these large companies are majority employee owned. In short, worker ownership is no longer indicative of an alternative life style. The ESOP concept has also caught the imagination and interest of policy makers worldwide, with 79 countries now actively interested in crafting an adaptation particularly in the context of privatization where employee share participation has proven popular both as a way to solicit political support and as a means to improve economic
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Appendix

performance. When used as a technique of corporate finance, ESOPs also offer a mechanism for promoting politically popular ownership patterns by encouraging companies to use their credit capacity to buy company shares for employee-stakeholders and then applying company earnings to repay that debt. The notion of a companys customers also sharing in ownership resonates both with economic reality and with notions of fundamental fairness. For example, financial markets value a company based on the cash flows it is expected to generate. In the case of a public service provider, the primary source of its cash flow is fees paid by captive consumers. Thus, the idea of consumer share ownership plans (CSOPs) suggests that a companys customers, as the primary source of the companys capital value, should have an opportunity to retain some of the capital value rather than see it captured solely by the government or by absentee investors (as is often the case for investor-owned utilities). Financing the transition to a new ownership structure In the case of the BBC there is a case for using both CSOPs and ESOPs: the former to strengthen the link with viewers and listeners, the latter to signal that the BBCs base is the creativity and commitment of its staff. To finance these new shareholder constituencies, the government, as owner of the BBC, could agree to accept payment for BBC share over time. For example, the licence fee could be maintained for the next 10 years at a level linked, as now, to the retail price index, but with a portion of those payments credited toward the purchase of shares for BBC viewers (perhaps via a VSOP, a viewer share ownership plan). Viewers could opt to pre-pay their licence fees, providing the company with cash flow for the BBC to expand into other profit-making, licence fee-displacing activities while also allowing viewers to share in any future increase in company value.2 A share offering to employees could generate a strong response, particularly if BBC staff are confident that the company will be allowed the flexibility to pursue activities that the managers and employees know
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will add value to the enterprise. Such an employee targeted share offering could include a substantial discount (as in many previous privatisations). However, only the inclusion of genuine ESOP self-financing can convert this preferred class of stakeholders into significant shareholders. Substantial employee ownership is an impossibility if full-price cash purchases are the full extent of the share participation offered to employees. The best strategy would combine several approaches. Because the BBC is largely free of long-term debt, the company could provide the collateral (and the needed cash flow) for a commercial loan for an ESOP-financed share acquisition.3 BBC employees could be encouraged to contribute to this ESOP loan repayment.4 Experience elsewhere suggests that where employees gain a substantial stake in their employer, they are willing to take less cash out of the company, leaving more cash in the company to enhance share value (and secure their jobs). Other means could supplement this core strategy. For example the fixed assets of the company (valued at 883.9 million) are barely a third the value of the BBCs pension scheme assets (valued at 2782 million). Approximately 25% of those funds (700 million) are known surplus. Some portion of that surplus could be transferred to a nonpension plan and used to buy BBC shares for BBC employees.5 To parry the inevitable claims of pension raiding, each BBC employee could be given an option to continue to earn benefits under the current scheme or to invest a portion of future pension contributions in BBC shares.6 Other adjustments could also be sought to the BBCs historically paternalistic compensation culture.7 None of these employee compensation changes need be permanent. The financing of a block of shares for employees is not an event that continues in perpetuity. Once the agreed-upon tranche is fully paid for (for example over a 5-year period) employees could choose to switch back to earning a conventional pension via a fully diversified low-risk fixed annuity form of retirement scheme.
Assets into ownership

The company could also generate cash in other ways. The BBC has substantial assets in the form of land and buildings, some of which are
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Appendix

quite valuable. The company could sell its nonessential real estate and contribute a portion of the proceeds to the ESOP to buy BBC shares, using the balance to make value-enhancing investments. Other buildings could be sold and then leased by the company, with proceeds similarly earmarked. Other stakeholder-inclusive financing techniques could also be offered. For example, the implementation of Producer Choice has thus far cost over 100 million due to redundancy and other restructuring costs. Should the BBC be allowed to operate in a more market-oriented, competitive environment, additional redundancy restructuring costs can be expected. To cover those costs, the government could allow the BBC to sell bonds (with a partial government guarantee), with those bonds convertible to BBC shares. Employees and consumers could be granted preemptive rights to participate in any future offerings of BBC securities, whether debt or equity, helping solidify these long-term stakeholder relationships while also granting priority in the sharing of any increase in share value to those most closely associated with creating that value. Close consideration should also be given to including as shareholders others with whom the company has a significant long-term commercial relationship such as independent producers. For example, for those production companies for whom the BBC represents at least 25% of annual revenues, the BBC could offer a tranche of non-voting preference shares.10 Adding performance-based management share options would complete the participatory architecture of this relationship-building capital structure. As compared to traditional financial investors, such a stakeholder constituency would reflect a more complex agenda, undoubtedly being more oriented toward optimizing a range of long-term returns rather than simply maximizing short-term financial returns. That would bode well for the BBC as it begins a difficult transition process. The flexibility and patience of such shareholders could emerge as a much-needed source of competitive strength. Alternatively, the government could sell BBC bonds directly, with a sweetener in the form of a warrant allowing purchasers both
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a conversion to equity and an option to acquire additional shares at a fixed price. French investors who subscribed to the Balladur bond, a government borrowing scheme launched earlier this year, have the right to a buy an additional 40 shares in the privatization of Banque Nationale de Paris provided they convert some of their 6% bonds into privatisation equity. The BBCs pension plan could also take an active interest in investing in such related companies. Other means could also be sought to formalise and contractualise this network of ongoing relationships. For example, these companies could be encouraged to buy BBC securities via their pension plans creating a relatively permanent class of shareholding stakeholders. The capital structure proposed is intended to ensure that the bulk of the BBCs shares circulate largely among a preferred class of shareholders: long-term proprietors and genuine value-adding, effort-relevant owners rather than passive spectators and/or short-term profit-taking speculators. The BBC could help sustain this ownership pattern by creating an internal market for its shares. For example, the ESOP could be obliged to buy shares from departing employees.11 The company could also coordinate a periodic market in BBC shares by, for example, matching VSOP participants who wish to sell with viewers and listeners wanting to buy. This need not constitute the sole market for BBC shares but, rather, a parallel market designed to ensure that the BBC remains privately owned by a broad base of British citizens.12 Where the company has a need for financial capital in excess of what can be met via retained earnings,13 the BBC could first structure an offering of Class A common voting shares to BBC employees and viewers.14 Once these stakeholder investment capacities are fully subscribed, the offering could be opened to traditional capital markets by selling Class B preference shares, with no voting power but with an attractive dividend rate. However, rather than selling conventional perpetual preference shares, the BBC could offer those shares with a buyback option returning ownership to stakeholder shareholders as the outside equity providers approach an agreed-to investment horizon (typically 57 years).15 Thus, rather than relying on conventional outside equity with its perpetual draw on company earnings, this
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Appendix

boomerang equity would enable the BBC, over time, to transform such outside capital into inside stakeholder capitalism.
Governing a reformed BBC

The proposed hybrid nature of the BBCs ownership structure calls for a correspondingly hybrid and modernized structure of governance and accountability. That structure may well determine whether, as a subsequent royal charter renewal date approaches, the BBC transforms itself into a genuinely private sector entity or whether it keeps a foot in both camps, engaging both in public service broadcasting and in an array of commercial activities. Given the range of constituencies that would gain a stake in the enterprise under this proposal, the challenge lies in constructing a modernised and more direct governance mechanism that meets appropriate criteria for accountability without being overly cumbersome and slow to respond. For that purpose, part of the governance structure could be built into the capital structure. For example, because the government retains an interest in the company (including both the right to levy a mandatory licence fee and the responsibility to encourage certain types of programming), the government could aptly retain a golden share to exercise its representation regarding certain key issues. For example, that golden share could grant government the right to force the sale of shares where any shareholder gains control of more than 20% of the BBCs shares. The most interesting accountability challenge for such an intransition, stakeholder-oriented company is how best to structure a board (or boards) of directors. Although constituency-oriented boards present their own sets of problems (a seat for the churches, a seat for labour, etc.), the unique nature and purpose of this proposed new ownership structure implies a certain attention to ensure that the concerns of these carefully crafted constituencies are represented in setting company policy. To achieve that ambitious goal, the board could be comprised of a mix of executive directors and non-executive directors. Within the non-executive ranks, the stakeholder-shareholder constituency
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should be represented in some fashion. For example, the VSOP constituency could be represented by the chairperson of the Public Service Broadcasting Council or by an appointee from viewers groups. A representative of the employee shareholders could be chosen by the employees. The board could endorse the code of best practices recommended by the Cadbury Committee, including certain higher standards such as mandating a majority of non-executive directors. In addition to the managing board the BBC could also establish an Advisory Council comprised of representatives of key stakeholder constituencies (employees, viewers and listeners, independent procedures and the government). Its role would be to advise the managing board on the BBCs performance, to consult on nominees for the managing board and to offer a forum for the airing of disputes among the various stakeholder constituencies. This would also provide the public with a more direct mechanism for expressing its views. The Advisory Council could also be given genuine powers (although this would make its composition far more contentious). It could be granted the right to approve major decisions of the managing board such as liquidation, merger, sale of substantial assets, recapitalization, plus acquisitions and divestments of a certain magnitude. In addition, it could be granted the right to determine when a range of certain issues should be referred to a vote of the Class A shareholders. Similarly, although shareholder voting would generally be based on one-share-one-vote, certain issue with an unusually strong impact on stakeholders interests could require approval by a vote of the shareholders based on one-person-one-vote.
An antidote to decline

The BBCs capital structure must be one that strikes a practical balance between the need to create and sustain a high-performance corporate culture and the demands of maintaining access to capital markets. That, in turn, will require of BBC employees an understanding that the market little cares whether a company is run like a democracy. Accountability implies appropriate mechanisms for both oversight and feedback but it
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Appendix

also implies a sufficiently strong and responsive management system that decisions can be made with confidence they will not be undone. Every company has special needs at different stages of development. What the BBC needs at this stage is an opportunity to make a difficult transition in a difficult environment. That transition will not be easy. But it may not be possible without a corporate architecture that focuses the talents and the commitment of all concerned while also building on the BBCs heritage and achievements.
Jeffrey Gates is a leading designer of innovative ownership structures. He has worked as counsel to the US Senate Finance Committee for seven years (198087), and has assisted in the design of ESOPs legislation in the US, the UK and Australia. Countries with which he is working include Argentina, Australia, China, Cote dIvoire, Hungary, Jamaica, Morocco, Nicaragua, Poland, Russia, South Africa and Tunisia.

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Acknowledgements

The views contained in this paper are the result of much debate over a period of years with friends and former colleagues in the BBC and elsewhere in broadcasting. Many will disagree with its conclusions; all share the authors belief in the importance of the subject. Jeffrey Gates extends a special thanks to those who have generously provided their comments and insights in the production of the appendix on ownership options, including Herbert Oakes of Oakes and Fitzsimmons, John ONeil, President of the California School of Professional Psychology, David Reid of Clifford Chance, Ian Taylor MP, James Cornford of IPPR and David Youlton, Chairman of Snell and Wilcox. For their pioneering work he is particularly indebted to the late Louis O. Kelso and to Dr Mortimer Adler.

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Notes

The Employee Ownership 100. Employee Ownership Report, July/August 1993 published by the National Centre for Employee Ownership (Oakland, California). As an inducement, the company could offer early buyers an option to purchase additional shares in the future at the current price. To include an element of ESOP-like self-financing, preference shares could be utilized for VSOP shares, with dividends used to help repay any personal debt incurred to make the licence fee pre-payments. Present UK law would allow the company to claim a tax deduction for the expense of repaying such a long (both interest and principal payments). For Inland Revenue purposes, ESOP financing expenses are viewed as a reasonable business expense incurred to provide an employee benefit (in the form of shares). Unlike US law, broad-based employee participation is not presently required as a precondition to claiming ESOP-related tax reliefs under UK law. US legislation also allows lenders a tax reliefs,

permitting an exclusion from their taxable income of 50% of the interest earned on ESOP loans, with the result that banks compete for ESOP loans with lower interest rates. A similar incentive could be allowed on a pilot basis in support of this model. This contribution could be paid either directly via periodic deductions from employees paycheques or indirectly by employees agreeing to a smaller package of pay and benefits. Under current law a 40% levy would apply to any surplus funds recovered by the company or transferred to an ESOP. However this amount could be transferred tax-free to a defined contribution-type employee scheme (with individual employee accounts) and used to invest in be transferred tax-free to a defined contributiontype employee scheme (with individual employee accounts) and used to invest in BBC shares. An exception would be required to the recently-enacted Robert Maxwell rule limiting investments in employer securities to 5% of scheme

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Sharper vision: the BBC and the communications revolution assets. To provide additional peace of mind for retirees (and those nearing retirement) the company could set up a separate pension scheme and split off assets sufficient to fund pensions for this select group. Under US law surplus pension funds could be transferred tax-free to an ESOP. As a result, the $270 million of equity required in the 1988 leverged buyout of American Standard Inc (Ideal Standard in the UK) included $50 million in surplus pension funds transferred to an ESOP providing the funds to enable US ESOP participants to again a 19% equity stake in this $3.2 billion multinational company. Legislative support could facilitate a similar component of leveraged ESOP financing for the BBC. Presently the company and the employees each contribute 4.5% of pay each year to the pension scheme. To protect the tax deductibility of these contributions they could be redefined as solely employer contributions. For example, some portion of the assets remaining in the pension plan for active employees could be sold and the proceeds used to acquire BBC shares (up to the 5% limit). Employees could also agree to freeze future increases in pension benefits thereby enabling the pension actuaries to project a larger surplus available for acquiring BBC shares. Experience suggests that allowing employees such an optional personally customized form of total compensation packaging can itself be an immensely popular and motivating change in a companys culture. 9 To increase viewer investment interest, some portion of the sale proceeds could be paid out as a firstyear dividend to those viewers willing to buy shares by prepaying their licence fees. 10 The BBCs pension plan could also take an active interest in investing in such related companies. Other means could also be sought to formalize and contractualise this network of ongoing relationships. For example, these companies could be encouraged to buy BBC securities via their pension plans creating a relatively permanent class of shareholding stakeholders. 11 Such a put option would ensure employees of a liquid market for their shares. BBC pensioners could have priority in the redemption queue, including having their BBC stake repurchased over time, much like an annuity. In return for helping salvage the BBC (and to partly compensate pensioners for their risk), the government could forego the payment of any capital gain tax on BBC shares held for some minimum period providing another inducement to buy. In addition, an employer call option could require former employees to sell all or a portion of their shares back to the company. The company could also be given a right of first refusal requiring that employees first offer their shares for sale to the company (or to the ESOP) before selling them elsewhere. In combination, puts and sells and a right of first refusal would also provide a supply of recycled BBC

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Notes shares for acquisition by newlyhired employees. 12 Such a market would also provide a means for employees to diversify their holdings and to create liquidity while also providing all shareholders with an indication of share value. The company (along with the VSOP and the ESOP) could function as market makers in this stakeholders exchange serving as buyers or sellers when a mismatch arises in this marketplace for BBC shares. This parallel market could be quite large and liquid, with potentially more than 20 million participating shareholders (comprising over 20,000 employees and approximately 19,970,000 licence fee payers plus assorted shareholders in related enterprises). Very few UK companies would be so widely held. 13 This need for outside capital could be substantial and several newlyemerging technologies (such as high definition television and digital transmission) will require significant capital investment. 14 Such a capital expansion financing could also include a component of leveraged ESOP financing, with company secured ESOP debt repaid, at least in part, with company earnings. 15 Similarly, needed physical capital could be provided on a build-owntransfer basis, with a contractor agreeing to provide facilities and equipment in return for a similar ownership interest that includes a buyout agreement financially transforming that outside investor capital into inside stakeholder capital by utilising the ESOP/VSO.

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