Abi Watson [email protected] BBC licence fee settlement Tom Harrington [email protected] Further cuts will wound the Gill Hind [email protected] sector +44 (0)20 7851 0900

30 November 2020 • The BBC’s licence fee settlement process for 2022 to 2027 is now underway. This time there seems to be

greater transparency than the previous negotiations in 2010 and 2015 which led to outcomes that effectively

reduced licence fee income by c. 30%

• It comes at a pivotal time for the BBC, and by extension the creative community across the UK which it

supports. Recovery of this important sector relies

heavily on the ability of the BBC to operate in the way that its remit requires: with investment, skills,

intellectual property and talent flowing to the wider environment

Related reports: • But with £1.6 billion falling due over the next decade on The BBC - Benefiting the UK creative its pension obligations and its Nations & Regions economy [2020-016] footprint alone, there is little room for manoeuvre if Subscription BBC [2020-008] there are further reductions in revenues or top-slicing. The result will be less investment on the screen and a How could the BBC ever fund the over-75s [2019-063] wound to a struggling sector

On 10 November, Oliver Dowden, Secretary of State (SoS) for the Department for Digital, Culture, Media and Sport (DCMS) wrote to the BBC to confirm the scope and the timing of the next licence fee settlement , which will cover the period from 2022 to 2027. Previous settlements, conducted without public pressure or scrutiny, have left the BBC with more obligations and less to spend on them, at a time when licence fee income is already around 30% lower than it would have been had it kept pace with inflation and not been given additional spending obligations.

In response, the Corporation has undergone extensive programmes of cost-cutting and rationalisation of resources.

While this has made the BBC leaner in an operational sense, there is now little fat to absorb further cuts to income. With the commitment to fixed long-term obligations such as its pension deficit, the threat remains that there will be less to spend on local and quality content, tech, regionality, and diversity, and as such, it cannot be expected that the BBC will continue to return the same kinds and volumes of value to the wider creative economy, as it is structured for.

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Related reports: The BBC’s revenue streams: less flowing to PSB

The BBC’s UK public services and the BBC World Service are funded by the licence fee, along with some government grants and income in the form of dividends from the activities of its commercial operations, predominantly BBC Studios,1 which incorporates television production, distribution and the broadcaster UKTV.

The vast majority (over 92%) of the income that the Public Service Broadcasting (PSB) Group (which is responsible for the BBC’s public service broadcasting activities) receives comes from the licence fee. The amount the BBC receives through this mechanism and its obligations on what to spend it on has repeatedly been altered to the broadcaster’s detriment. The latest intervention was the withdrawal of the over-75s concession—which granted this group free licences, the value of which was instead paid to the BBC by the government—this financial year. Outside of the licence fee, in fiscal 2020, BBC Studios remitted its highest ever income to the BBC, returning £276 million, including investment in programming and its declared dividend, off the back of its best ever year for content sales. This increase, however, is largely attributable to the consolidation of UKTV (after the full-acquisition in June 2019), a feat that will be impossible to replicate in 2021 (the first full year of consolidated results).

These revenue streams must now provide for more than in the past. The obligation on the Corporation to fund the BBC World Service is relatively new; up until April 2014, it had been funded by the Foreign and Commonwealth Office (FCO), but the BBC is presently obliged to spend at least £254 million per annum on the service, at least up to the end of March 2022 (actual spend in 2019/20 was £261 million). While the BBC received a grant from the FCO of £291 million between 2016/17 and 2019/20, this was to fund the World Service expansion,2 so the net impact of this grant was relatively neutral. The BBC cannot cross-subsidise its commercial activities through its PSB Group or grant-funded activities.

Figure 1: BBC PSB income (£m)

4,500 4,034 4,145 4,017 3,927 3,925 3,823 4,000 3,500 613 622 630 655 468 253 3,000 2,500 2,000 1,500 3,122 3,121 3,157 3,175 3,222 3,267 1,000 500 0 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Licence fee payments Over-75s concession Government grants Commercial content Intra-group income Commercial other Commercial dividend*

*Commercial dividends excluded from total PSB income disclosed in the acounts as they are eliminated on consolidation. These were downgraded for 2019/20, following the COVID-19 outbreak in order to retain cash in the commercial entities. [Source: company reports, Enders Analysis]

The licence fee will exist until at least the end of the current Charter, which expires in 2027. The current financial settlement runs to the end of March 2022, and while the core mechanism and operation of the

1 Other commercial activities include Global News, BBC Studioworks and BBC Children’s Productions. 2 The World Service expansion introduced 11 new language services and the expansion of existing services. For details of the World Service Expansion, see: BBC World Service announces biggest expansion 'since the 1940s'

BBC Licence Fee settlement: Further cuts will wound the sector [2020-114] 2 | 9 licence fee cannot be changed, the level of funding must be set for the period from April 2022 to the end of 2027. On 10 November, the SoS for the DCMS, Oliver Dowden, wrote to the BBC to confirm the scope and the timing of the next licence fee settlement, which will commence on 1 April 2022 and run for at least five years. This in itself is a step forward for transparency given that the last two settlements were reached without any consultation and with little to no transparency.

In 2010, the government initially intervened in the licence fee settlement, firstly freezing the licence fee for the remainder of that Charter period ending in December 2016, and secondly through top-slicing, ensuring the BBC had set obligations to financially support local TV, rural broadband rollout, BBC Monitoring, the BBC World Service and S4C. The 2015 licence fee settlement was negotiated by the newly-elected Conservative government and the BBC in less than a week, with no public debate. This led to the BBC agreeing that the responsibility for the over-75s licence fee concession would be transferred to it from the Department for Work and Pensions, a burden that would not be compensated by the government’s agreement to increase the licence fee in line with the CPI and closing the "iPlayer loophole".3 As can be seen in Figure 2, the BBC would have c. £1.3 billion more to spend on its PSB services in the current year if the government hadn’t intervened in 2010 and 2015.

Figure 2: BBC licence fee income with/without interventions (£m)

5,000 4,500 4,000 £1,3bn 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Actual licence fee income Note: CPI average 12 months to September. Additional spending requirement for BBC Monitoring, Local TV, S4C, Licence fee - no government interference BBC World Service, broadband rollout. Licence fee less additional spend requirements [Source: Enders Anaysis based on BBC annual reports}

Over the ensuing years the BBC has implemented many cost-saving measures, including its Delivering Quality First cost-cutting initiative, which commenced in 2012 and reaped £712 million of sustainable (i.e. yearly, ongoing) savings as it looked to cut 20% of the Corporation's cost base after the licence fee freeze. Since 2016/17, the BBC has made a further £618 million of cumulative savings to date, including £199 million of additional savings made in 2019/20 with £99 million saved in 2019/20 on the BBC’s major strategic contracts and further savings of £66 million on the purchase of goods and services. However, while cost savings go some way to mitigate the impact of the removal of the over-75s concession, these were in motion prior to the 2015 licence fee settlement and, as we noted in How could the BBC ever fund the over-75s? [2019-063], the shortfall in licence fee income would still have to be partly funded by cuts in programming expenditure. We note here that a further £125 million of further savings are required to offset lost income and additional expenditure incurred as the result of COVID-19.

3 After 1 September 2016, people who watch BBC programmes only on iPlayer were required to buy a TV licence to view the content. Previously a licence was only needed to watch live broadcasts, so catch-up content was technically exempt from the £145.50 annual fee.

BBC Licence Fee settlement: Further cuts will wound the sector [2020-114] 3 | 9

The preparations for the 2022 licence fee Settlement are taking place at the same time as Ofcom’s latest Review of Public Service Broadcasting. Simultaneously, the DCMS has appointed a PSB Advisory Panel, which will provide independent expertise and advice as part of the government’s strategic review of PSB. The intention is that the panel will also aide the government to consider the issues raised and the recommendations from Ofcom’s PSB Review, but it is outside its remit to consider the funding of the BBC. This review is totally separate, although announced on the same day that the SoS’s letter outlining the Licence Fee Settlement process was sent to the BBC.

This is a pivotal time for the BBC, with certainty required over revenues and the costs that these must support. The world is a different place as a result of the coronavirus pandemic, but while the PSBs, and especially the BBC, became the first port of call for the UK public seeking news and information, the production industry virtually came to a standstill, advertiser demand plummeted, and the transition to online viewing accelerated. The UK economy will take years to recover, and the BBC has a vital role to play in supporting the wider creative economy throughout all parts of the UK (see The BBC: Benefiting the UK creative economy [2020-016] for details of how the BBC is a leader of investment in local and quality content, tech, regionality and diversity, while allowing the wider environment to flourish). Although the BBC’s funding is more stable than its commercial competitors, retrenchment in its investment in UK content, or in the Nations & Regions, will not only hamper the BBC but will severely impact the wider UK creative economy.

This is the context for the review.

The BBC’s cost base: no fat left to trim

Balancing the BBC’s books while maintaining its output and fulfilling its remit is in no way an easy task. In 2019/20, the BBC’s PSB Group (i.e. excluding the commercial entities) delivered a year-end operating deficit of £172 million. While this was significantly worse relative to previous years (2019: £59 million deficit), the BBC had always planned for a deficit in fiscal 2020, albeit a slightly smaller one of £133 million, thanks to the phasing out of payments from the government for over-75 households.

In fact, we understand the level of licence fee uptake among over-75s is running ahead of expectations, with 2.34 million households having purchased a licence, and 700,000 households in receipt of Pension Credit,4 which the BBC Board has decided will be exempt. In further welcome news on the income front, the decision on whether or not to decriminalise non-payment of the licence fee has been postponed until a new chairman has been appointed—a move that the BBC estimated would cost it c. £300 million, around 6% of its total income.5

Fundamental to the way the BBC has been able to maintain quality and reach, while dealing with new funding obligations over the past few years, has been through an extensive programme of cost management. But, as we demonstrate below, much of the low-hanging fruit is long gone. The BBC divides its PSB expenditure into four main cost buckets: • Content costs—incurred to acquire and create content across the BBC’s TV, radio and digital services • Distribution • Content and distribution support e.g. divisional finance functions which manage production and distribution of content • And general support—shared corporate functions e.g. HR and IT, Corporate Finance and Legal.

4 The Times, Millions of over-75s yet to pay TV licence, November 2020. 5 BBC, Television Licence Fee Trust Statement for the Year Ending 31 March 2020.

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Considering costs by type is slightly trickier, as these are allocated or assigned to each cost bucket depending on their nature—for instance, a production assistant would be assigned to “Content Spend”, whereas property running costs may be allocated out by a share of square metre.

At a top line level the BBC has already substantially shrunk its cost base over the last five years—its expenditure in fiscal 2020 was £4.049 billion, down £227 million since 2015, which in real terms is c. 15%. While the costs relating to content and content distribution support have been broadly maintained (in absolute terms) over the last five years, general support costs have been slashed by 37% thanks to a decrease in headcount of its central and divisional finance functions, property exits and disposals, and savings delivered through a new contractual arrangement with Atos for technology services.

As Figure 3 below shows, the vast majority of expenditure (70%), is spent on acquiring and creating content, of which well over a third relates to content expenditure on BBC One.

Figure 3: PSB expenditure, 2015 vs 2020 (£m)

2020 2015 Change % Change

Content spend 2,777 2,728 49 2%

TV 1,609 2181 (572) -26%

BBC One 1,037 1,100 (63) -6%

Radio 494 610 (116) -19%

BBC Online 238 188 50 27%

Distribution 192 210 (18) -9%

Content and distribution support 436 409 27 7%

General support 173 274 (101) -37%

Other expenditure* 417 601 (184) -31%

Total PSB expenditure 3,995 4,222 (227) -5%

*Other expenditure includes licence fee collection costs, “other” obligations (e.g.S4C and Broadband roll-out), Monitoring, the pension deficit payment, costs incurred to generate non-licence fee income and restructuring costs. Finance lease interest has been excluded as it is not included within Group operating expenditure. [Source: company reports, Enders Analysis]

For every £1 in licence fee income, 53p is spent on television services, 17p on radio and 10p on both BBC World Service and BBC Online respectively. Just over half of all content expenditure is spent outside of London, more than double the proportion of network TV programmes produced in Scotland, Wales and Northern Ireland a decade ago. The remaining 10p per £1 is spent on the BBC’s running costs and servicing the BBC’s long-term financial obligations, some of which are substantial, long-term fixed costs—including its pension fund.

The BBC, like many other companies, has a sizeable pension deficit to the tune of £1.1 billion, thanks to the rock-bottom interest rate environment and resultant low bond yields since the financial crash of 2007-2008 that have inflated the value of future liabilities, leaving a yawning black hole in company pension schemes. Having closed to new joiners in 2010, the BBC has agreed to make additional contributions totalling £764 million up to 2028 to reduce its pension funding shortfall for its 50,000+ members. These agreed repayments are considerable, starting at £48 million in 2021 and leaping to £75

BBC Licence Fee settlement: Further cuts will wound the sector [2020-114] 5 | 9 million in the year ending 31 March 2023, and increasing c. 8-9% each year thereafter to 2028 (Figure 4). Funding for the deficit payments must be found, regardless of licence fee income. To illustrate the scale of the repayments, by 2024 the pension deficit payment will be roughly equal to the BBC’s spend on Children’s TV services in 2020.

Figure 4: Pension deficit payments schedule, 2021-2029 (£m)

140

118 120 110 102 100 94 87 83 80 75

60 48 47

40

20

0 2021 2022 2023 2024 2025 2026 2027 2028 2029 [Source: company reports, Enders Analysis]

Another significant fixed cost is the running cost of its property portfolio, which is valued at c. £2.2 billion.6 Its core running costs in 2014 were £230 million, c. 6.2% of licence fee income,7 a figure that will now be somewhat lower as the BBC has rationalised its property portfolio to reduce costs. Its footprint is 40% smaller than in 1998, and it has aimed to further reduce its estate size of 355,000m2 by 2020—a reduction of 20% since 2014 (457,500m2).8

The BBC’s four largest leases contributed to the majority of these costs, including White City Place in West London, Media City in Salford, and Pacific Quay in Glasgow—fixing a large proportion of its gross estate costs for the foreseeable future, ~60% of property costs.

6 This increase was driven by the adoption of IFRS 16, whereby operating leases are recognised on the balance sheet. The BBC continues to rationalise its portfolio to reduce costs—the BBC does not break out any detail of its property portfolio in its latest annual report. 7 National Audit Office, ‘Managing the BBC estate’, December 2014. 8 Per the 2018/19 annual report. The BBC has further aspirations, with plans to close a number of satellite London properties, move the curations team of BBC Sounds to Salford, expand the Natural History Unit in Bristol and relocate its BBC Wales teams to Cardiff Central Square—reducing its Welsh property footprint by 50%.

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Figure 5: Annual running cost of the BBC’s largest leasehold sites, 2013/14 (£m) Property Annual running cost Date leasehold expires Broadcasting House, London* 79 Jul-33 White City Place London** 6 Mar-35 Media City Salford 21 Sep-29 Pacific Quay Glasgow 15 Jul-34 *Running cost lowered by entering into a cash flow swap facilitated by Morgan Stanley and Sennen Finance in 2017, by fixing rental payments (previously included inflationary increases), reducing rental costs by 15% by 2033. Rental costs immediately dropping £10m, increasing to £34m by 2033, with a final fixed payment to acquire the headlease in 2045. **The gross running cost of the Media Village was £47m, which was offset by income received from third parties who sublet areas of the site, reducing the net cost to £39m. Media Village was sold and leased in 2015 in 2015 for £87m. with the BBC only continuing to occupy three of the buildings, saving £33m in annual running costs, therefore we estimate the ongoing continued cost to be c. £6m [Source: National Audit Office, BBC]

Reducing its footprint further is not the answer—the BBC (and other PSBs) has come under increasing pressure ‘to reflect all of the UK’—in that context, reducing its footprint outside of London would hardly be conducive to fulfilling this commitment. Roughly 60% of the BBC’s property is based outside of London. As of 2013/14 about a quarter of its operations were based in Wales and Scotland, a move that the BBC has since consolidated, completing the move to its new broadcast centre in Cardiff’s central square this year and the launch of BBC Scotland last year. Regional hubs contribute to a growing creative cluster as other businesses migrate over—as evidenced by the BBC’s relocation to Salford. Paul Dennett, Salford City Mayor, said MediaCityUK had resulted in the clustering of 250 digital companies, producing 7,000 jobs, and had more than doubled the BBC’s spend in the north.9

Looking forward

Bluntly speaking, for some time the BBC has been doing more with less; in real terms it costs a UK consumer 18% less to buy a licence than it did in 2010. As a result, licence fee income is already around 24% lower than it would have been had it kept pace with inflation. This is before government intervention that required the BBC to fund broadband rollout, the World Service, Monitoring, local TV and S4C, or the escalation in some essential costs, especially scripted content, is considered.

The BBC already runs a relatively lean operation—currently, 73% of PSB expenditure goes towards the direct costs of producing and delivering content, compared to 66% in 2010. Although the BBC has made £800 million of cumulative ongoing savings, almost half of these will be required to offset the c. £332 million shortfall in licence fee income, now that the BBC is fully responsible for the provision of licence fees for those over-75s on Pension Credit, and the £80 million cost of delayed implementation.10

As we have noted earlier, the BBC has a number of long-term liabilities that are beyond its ability to mitigate, at least in the short-to-medium term, including a pension deficit repayment schedule with costs of repayments that are scheduled to rise exponentially over the next 10 years, peaking at £118 million in 2028. Likewise, its property portfolio has already been substantially pruned. It is difficult to identify further property cuts that could be made, without the BBC reducing its footprint in the nations and regions, an effort that would be counterproductive to the BBC’s role in the wider creative economy and this government’s agenda of ‘levelling up.’

9 Prolific North, How MediaCityUK is delivering on its ambition to create an "explosion of creativity", February 2019. 10 Includes those who have not yet taken up the licence. Figures taken from The Times, Millions of over-75s yet to pay TV licence, November 2020.

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There are some further cost savings that the BBC can make without impacting its output. The greatest operating cost to the BBC is its payroll, totalling £1.3 billion, making up c. 30% of PSB costs.11 While the total PSB wage bill has decreased by c. 9% over the last decade, the number of PSB employees has only decreased by about 1% since 2010. Although the BBC has restructured in the last decade, these headcount reductions have been offset by new hires. For instance in 2018/19 the BBC added 1,161 new positions while closing 191 roles across all divisions. However, of these, 416 were in relation to the expansion of BBC World Service News, and as we outlined earlier, were cost-neutral thanks to the FCO grant. A further 302 of these were new staff within the nations and regions, which as we have noted elsewhere, (see Channel 4: 2019, 2020 and beyond [2020-104]) increasing the number of staff employed outside of London will actually save the BBC money in the long-term, thanks to lower regional pay rates.

Reductions in headcount are already in progress. The BBC announced in June 2020 a newsroom reduction of 450 FTE, which will deliver £80 million of recurring savings. In July, it was announced that a further 70 news roles would be made redundant, with losses across the wider BBC taking the total headcount reduction to around 900. A pay freeze for senior managers was announced during the 2020/21 financial year (which has since been rolled out to all BBC staff) and a recruitment pause for all non- business critical roles and a voluntary redundancy programme has been implemented. Payroll savings do take time to deliver a return, as they must first offset any outlay on severance payments, which would likely take around two years to realise (thanks to a government cap on the BBC’s redundancy and severance pay at £95,000,12 and the BBC’s own internal redundancy policies).13

A new licence fee settlement must take all of these factors into account, and the BBC must also carefully consider what it asks for given both the pandemic and the market its commercial competitors operate within. It is often forgotten that the BBC is more than just a broadcaster, and is therefore naively judged by some almost solely on its performance on public-facing, hot-topic public purposes such as impartiality. But it is also, importantly, a malleable market intervention, a guaranteed leader in areas that commercial operators are unlikely to tackle. These benefits, made effective through market scale, are undeniable. As we noted in The BBC: Benefiting the UK creative economy [2020-016], where we outline these benefits, the BBC may not always perfectly fulfil the obligations that are set for it, however, were its influence or scale within the sector markedly reduced, others would fill the void: • None of which would be answerable to the public in the same way • None of which could be compelled to produce the type of content most think benefits the nation but may be uneconomic • None of which would be structured to return the same kinds and volume of value to the wider creative economy.

11 Calculated based on the average number of PSB employees in 2020 and the average salary across the whole group (including social security costs and pension costs), as a proportion and total PSB expenditure. 12 The previous cap was £150,000. Redundancy payments over £75k and all other severance payments are approved by the Senior Management Remuneration Committee. 13 The BBC’s redundancy policy is one month’s pay for each year of service up to a maximum of 12 months’ pay (or for joiners before January 2013, a max of 24 months’ pay) for employees with 2+ years continual service.

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