BBC COMMERCIAL REVIEW December 2018 BBC COMMERCIAL REVIEW This report, commissioned by the BBC Board, provides a review of the BBC’s commercial activities. The Board is under a requirement to undertake this review by the Corporation’s Framework Agreement with the Department for Digital, Culture, Media and Sport by 31 December 2018. Specifically, the review assesses whether the Corporation’s commercial subsidiaries meet the four “commercial criteria” required by the Agreement. We are pleased with the finding that each of the BBC’s commercial subsidiaries meets all four of the commercial criteria. The commercial subsidiaries play a vital role in the overall BBC Group – it is through these companies that the BBC undertakes the vast majority of its content production activities; the commercial distribution of its content; the provision of international news services; and the provision of strategically important studio facilities in London. We are proud that these companies are within the BBC Group and they provide a valuable contribution to the Corporation, which support the BBC’s UK Public Services. In July, the Board commissioned EY as independent external consultants to undertake the review on its behalf and we are pleased to be able to publish their report here in full. The review has looked in detail at all of the commercial activities the BBC operates through its three main commercial subsidiaries: BBC Studios; BBC Global News; and BBC Studioworks. EY considered the current conditions in each of the markets in which these subsidiaries operate, as well as whether they meet the four “commercial criteria” set out in Clause 23(5) of the Agreement. These four “commercial criteria” are: 1. the activities must fit with the Mission and the Public Purposes; 2. the activities must exhibit commercial efficiency; 3. the activities must not jeopardise the good reputation of the BBC or the value of the BBC brand; and 4. the activities must not, as a result of the relationship of the activity with the UK Public Services, trading activities or non-service activities, distort the market or create an unfair competitive advantage. The Board welcomes EY’s conclusion in the report that our commercial activities meet all four of these commercial criteria. In undertaking the review on the Board’s behalf, EY came to a number of conclusions and recommendations which are summarised on page 18. The Board accepts these conclusions and will begin implementation of the recommendations. The Board is particularly pleased that EY found that, based on their extensive benchmarking work and their understanding of the practices of other market operators, each of the BBC’s commercial subsidiaries exhibits commercial efficiency in line with their peer groups and the wider market. The report also concluded that the BBC has in place embedded processes and policies throughout the Corporation – including the UK Public Services, trading activities, non- service activities, and commercial activities – to ensure that it complies with Ofcom’s trading and separation requirements and mitigating any potential risk of market distortion. Informed by this report, the BBC Board has now set performance measures and targets for each of its commercial subsidiaries. These targets are referenced against EY’s work, which has set out what would be considered a commercial rate of return in the markets in which each main subsidiary operates. These targets also reflect the ambitions that the BBC has for its commercial activities and how they work to support the BBC. As required by the Agreement, we are publishing alongside this report further details of these targets for each commercial subsidiary. The BBC Board will keep these targets under review, and will continue to require the BBC’s commercial subsidiaries to provide regular updates on their commercial performance. We have separately also reviewed the governance and oversight of the BBC’s commercial subsidiaries and have agreed changes to the membership and composition of the BBC’s Commercial Holdings Board. We will strengthen this Board – which is responsible for ensuring that the commercial subsidiaries deliver against the agreed strategy – with the addition of non-executive directors from the main BBC Board, including as chair. These changes are being published separately. The Board thanks EY for this work and I would like to thank my colleagues, Steve Morrison and Anne Bulford, who along with myself oversaw this review on behalf of the Board. Sir David Clementi BBC Chairman 17 December 2018 A review of the BBC’s commercial subsidiaries Final report December 2018 Disclaimer This report has been prepared by Ernst & Young LLP, a limited liability partnership registered in England and Wales with registered number OC300001, in accordance with an engagement agreement for professional services with the British Broadcasting Corporation (“BBC”). Ernst & Young LLP’s obligations to the BBC are governed by that engagement agreement. This disclaimer applies to all other parties (including the BBC’s affiliates and advisors). This report has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Refer to your advisors for specific advice. Ernst & Young LLP accepts no responsibility to update this report in light of subsequent events or for any other reason. This report does not constitute a recommendation or endorsement by Ernst & Young LLP to invest in, sell, or otherwise use any of the markets or companies referred to in it. To the fullest extent permitted by law, Ernst & Young LLP and its members, employees and agents do not accept or assume any responsibility or liability in respect of this report, or decisions based on it, to any reader of the report. Should such readers choose to rely on this report, then they do so at their own risk. Ernst & Young LLP reserves all rights in the report. 2 Contents Disclaimer ................................................................................................................................ 2 Contents ................................................................................................................................... 3 1. Executive summary......................................................................................................... 4 2. Introduction and background ...................................................................................... 19 3. Scope and approach ..................................................................................................... 23 4. The BBC’s commercial subsidiaries and the markets in which they operate ........ 27 5. Fit with the BBC’s mission and public purposes ...................................................... 35 6. Exhibit commercial efficiency ...................................................................................... 50 7. Not jeopardise the good reputation of the BBC or the value of its brand ............... 75 8. Not distort the market or create an unfair competitive advantage .......................... 84 9. Overall conclusions and recommendations ............................................................ 108 3 1. Executive summary 1.1 Introduction The BBC is established by a Royal Charter (the “Charter”), which sets out the BBC’s independence, mission, public purposes, obligations and governance. In addition to its Charter, the BBC operates under a Framework Agreement (the “Agreement”) with the Secretary of State for Digital, Culture, Media and Sport (“DCMS”), which provides further context to the Charter and covers the BBC’s funding and regulatory duties. The Charter and Agreement permit the BBC to undertake commercial activities alongside its public service broadcasting activities, subject to certain requirements1. As part of these requirements, the Agreement states that the BBC’s commercial activities must comply with four commercial criteria: 1. The activities must fit with the BBC’s Mission and the Public Purposes; 2. The activities must exhibit commercial efficiency; 3. The activities must not jeopardise the good reputation of the BBC or the value of the BBC brand; and 4. The activities must not, as a result of the relationship of the activity with the UK Public Services, trading activities or non-service activities, distort the market or create an unfair competitive advantage. The BBC’s main2 commercial subsidiaries currently consist of BBC Studios Limited (referred to herein as “Studios”), BBC Global News Limited (referred to herein as “Global News”) and BBC Studioworks Limited (referred to herein as “Studioworks”): 1. Studios is responsible for production and distribution activities. Studios was created in its current form in April 2018 following the merger between: the legacy BBC Studios Limited, which was established as a commercial subsidiary in 2017 to produce TV, radio and digital content for the BBC and external clients; and BBC Worldwide (“Worldwide”), which was responsible for sales, distribution and exploitation of BBC content, format, brands, channels and intellectual property. 2. Global News operates the BBC’s international 24 hour TV channel, BBC World News, and the BBC.com digital platform, which publishes news, sports and features content on international websites and mobile applications. These activities are commercially funded through advertising sales, and sales to pay TV operators that offer the BBC World News channel to their subscribers. 3. Studioworks provides television