by GRANT GODDARD February 2007

The government’s settlement of the Licence Fee fell £2bn short of the BBC’s bid for the 2007-2013 period, but is unlikely to herald substantial cuts to the Corporation’s proposals. The settlement guarantees the BBC an income less than half a per cent below the anticipated Retail Price Index, while revenues of its commercial competitors are forecast to fall more significantly for at least the next two years. The competitive position of commercial television, radio and local newspapers in relation to BBC offerings is likely to be eroded further. During the remainder of the decade, the widening disparity between resources available to the BBC and to its commercial rivals is likely to precipitate a re-evaluation of the Licence Fee as the suitable funding mechanism.

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January 2007 has been a momentous month for the BBC with regard to its future funding and public service role in the digital age. Developments include the licence fee settlement for the six-year digital switchover period running from April 2007 to March 2013 and the publication of the two key determinants of future on demand strategy; Ofcom’s Market Impact Assessment (MIA) and the BBC Trust’s Public Value Assessment (PVA) of the BBC iPlayer. These last two items will jointly feed into the BBC Trust’s Public Value Test, due for publication in three months time. And, as if nothing more were needed, Ofcom has also published in January 2007 its PSP (Public Service Provider) review, which addresses the shape of public service media contributions in the post digital switchover era. Although the BBC is the organisation most directly affected, recent developments will also profoundly influence the outlook for the commercial media: newspapers as well as television and radio. In this, the first of two emails, we consider the impact on other, commercial media of the licence fee settlement. The BBC originally pitched for an increase of 1.8% per annum above the RPI, instead of which it has been granted annual increases averaging 2-2.5% against the current baseline value of £131.50 for a colour TV licence. On a like for like basis, the net average annual increase works out at 1-1.5%, taking into account the £1.2 billion in extra commitments associated with the Salford studios and digital switchover aid and offsetting them against the extra £0.6 billion or so in net licence fee revenues accruing from population growth. The BBC has expressed “real disappointment” with the settlement, which it says leaves it with a six-year funding gap of £2 billion for delivering its vision of the future. Yet, if the BBC feels hard done by, the question for the commercial sector is whether the settlement has been anything like tough enough, given the bleakness of the present advertising climate. Quite simply, the issue is the potential growing disparity of funding between the public service and
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commercial media. On the one hand, the BBC is being guaranteed increases. On the other hand, not only did television, radio and newspapers experience substantial declines in advertising spend of several percentage points or more in 2006, but also significant further declines appear likely in 2007 and possibly beyond, partly as a result of specific factors to each medium and partly due to the growth of internet budgets at the expense of the traditional display media. In the case of television, the lower than asked for settlement may well compromise the BBC’s commitment to bolster its peak time schedule with more original drama productions and fewer repeats. If that is indeed the case, the main beneficiary is likely to be BBC1’s main competitor ITV1, which still holds on to a precarious lead in peak time viewing. However, lest anyone at ITV get carried away, we must observe:  ITV1 is substantially underperforming the rest of the TV advertising market in terms of advertising outlay. In a neutral or slightly negative advertising climate, this may be expected to place an acute strain on its ability to maintain programming budgets at current levels  It is widely accepted that the BBC bid was well padded out  In a depressed TV advertising market, it is doubtful whether the upward pressures on talent costs will be nearly as high as the £1.4 million anticipated “super-inflation” that the BBC projected in its settlement bid  The BBC plans also contained a significant “self help” component, whereby part of the peak time revamp was to be funded out of 15% efficiency savings. Taking these factors into account, Michael Grade looks to be in for a very testing time in the run up to digital switchover if he is to prevent further net audience drift from his ITV channels over and above the losses due to digital platform growth. Perhaps the scale of the net loss to the BBC over the next three to four years will not be as great as in the period 2000-2002, which saw a dramatic increase in BBC1 entertainment budgets. But, it looks a real risk nonetheless after a four-year stint in which the Channel 4 group has appeared the main net beneficiary at ITV1’s expense. In our view, the divergent fortunes of the BBC and its commercial counterparts are likely to have moved so far apart by the arrival of digital switchover as to precipitate a fundamental shift in thinking about the future funding of the BBC. It is no coincidence that 2012 is the year that Ofcom chief executive Ed Richards would like to launch a new Public Service Publisher to develop video and audio content for new media distribution. For the radio sector, the impact of the settlement will be similar, in that BBC radio is now guaranteed a level of income almost at par with inflation, whereas commercial radio is facing the prospect of revenues continuing to decline in real terms. Our opinion is that the Licence Fee settlement is unlikely to have a significant impact on the BBC’s plans. Network radio consumes only 11% of Licence Fee revenue, compared to network television’s 57%, and the BBC has already completed the greater part of its investment in the national digital multiplex and its portfolio of new digital stations.

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Although the commercial radio industry has complained bitterly that the BBC distorts the market and proffers unfair competition to its services, our opinion is that much of the blame for commercial radio’s ailing performance can be laid at the door of the sector itself. For example, commercial radio’s inability to offer presenter salaries of comparable size to the BBC’s Terry Wogan appears to be more a product of the relative lack of success of its three national stations (share of listening 4.2%, 1.8% and 1.5% for Classic FM, TalkSport and Virgin Radio respectively) compared to the BBC (15.8%, 11.1% and 9.7% for Radios Two, Four and One) than it is related to the Licence Fee. Similarly, we believe that the BBC’s greater share of radio listening (54.4%, compared to commercial radio’s 43.2%) can be attributed more to the commercial sector’s recent lack of innovation and lack of investment in content than to the BBC’s funding by Licence Fee. The settlement is likely to create some casualties. In the past, local radio has often borne the brunt of contractions and expansions in BBC radio budgets, making it likely that plans to use part of the settlement to launch new local radio services in Cheshire, Bradford, Dorset and Somerset will be postponed. Similarly, a proposal to distribute each BBC local radio station by satellite will easily be scrapped. In reality, how many people in Edinburgh really want to listen to BBC Radio Jersey, and why can they not use the existing internet simulcast? On the other hand, the plan to add 160 new transmitters to extend Digital Audio Broadcasting [DAB] reception from 85% to 95% of the population will go ahead, given the BBC’s commitment to universality and the imperative to keep pace with commercial radio’s greater coverage achieved with its own national multiplex. The shortfall provides the BBC with a perfect excuse to scrap its plans to develop “ultra-local” TV services in 66 cities and counties, but more from political expediency than from economic necessity. Ever since the idea was included in the BBC’s 2004 manifesto “Building Public Value”, it has attracted a barrage of criticism from local newspapers and local commercial radio stations alike, whose readership/listeners (and hence revenues) are already under considerable pressure. There followed considerable back-peddling by BBC mandarins (“We are not setting out to create TV versions of local newspapers”) that culminated in a conciliatory speech last November by director general Mark Thompson to the Society of Editors, in which he even suggested the Corporation might be willing to pay local newspapers for their content. Thankfully, the settlement offers the BBC a graceful way to extricate itself from a misconceived idea that has drawn fire from politicians and business interests in equal amounts. BBC plans to launch on-demand TV and radio services have proven just as controversial for the commercial sector. Despite the reduced outcome of the settlement, the BBC is certain to pursue its stated plan to implement the iPlayer service at an annual cost of £226m, which will help it achieve its objective of transforming “radio” into on-demand “audio” content over the next six years. We believe that this activity, more than any other to be funded by the Licence Fee, will substantially impact the commercial radio sector which, without a coherent competitive strategy, will lose listening to the iPlayer’s
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ability to offer a diverse range of BBC content as and when it is desired by increasingly demanding consumers.
Grant Goddard is a media analyst / radio specialist / radio consultant with thirty years of experience in the broadcasting industry, having held senior management and consultancy roles within the commercial media sector in the United Kingdom, Europe and Asia. Details at

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