Guardian Media Group response to the BBC Trust Fair Trading Review

About Guardian Media Group

Guardian Media Group (GMG) is one of the UK's leading commercial media organisations and a British-owned, independent, news media business. GMG’s core business is Guardian News & Media (GNM), publisher of theguardian.com and the Guardian and Observer newspapers. As well as being the UK’s largest quality news brand, the Guardian and The Observer have pioneered a highly distinctive, open approach to publishing on the web and has sought global audience growth as a critical priority.

Rapid technological change and the financial challenges facing the newspaper sector more broadly triggered GMG to drive a significant evolution in its business strategy. In 2011 GMG revealed plans to become a digital first news organisation, placing a distinctive, open approach to digital journalism at the heart of its strategy at a time when many other news brands were putting up digital paywalls and charging premiums for their online content.

This open approach has seen GMG produce high-quality journalism, funded through a combination of advertising, sales, events, and sponsorship. GMG is increasingly connecting with new audiences via social media and other third party platforms, opening up our content to reflect changes in consumer behaviour. Online news services operated by GNM now include: theguardian.com website (optimised for desktop, tablet and mobile); a free iOS and Android app for mobile and tablet; and, a paid-for daily iPad edition.

This open approach to journalism has also seen GNM enjoy significant growth as theguardian.com has become one of the world’s leading quality English language newspaper websites in the world1 with over 120 million monthly unique browsers2. Two thirds of the Guardian’s readership is now based outside of the UK3 and the Guardian is now a trusted, independent, global media brand that flies the flag for British values on a global stage:

● In 2011, the Guardian opened a digital newsroom in New York, capitalising on its growing online audience in the US. Guardian US has gone from strength to strength, topping 30 million unique browsers a year at the beginning of 2015, while its burgeoning office on the West Coast has opened a new frontier for commercial expansion. ● In 2013 the Guardian extended its global reach with the launch of a news digital edition in Australia, transforming the media landscape in the process. Currently one of the biggest newsbrands in the country - reaching 1 in 10 Australians4 - Guardian Australia has challenged the consensus with a raft of agenda-setting investigations and scoops, nurturing an engaged and loyal community of readers in a high-value and competitive market.

1 Source: comScore, desktop (August 2015) 2 Source: abc digital (August 2015) 3 Source: abc digital (August 2015) 4 Source: Nielsen (July 2015)

● The Guardian’s journey from a regional newspaper (established in Manchester in 1821) to a global news brand was confirmed in 2014, when Guardian US became the first news organisation of non-US origin to receive the Pulitzer Prize for Public Service for its investigation into NSA surveillance.

Introduction

GMG is a strong supporter of the BBC, its values and its contribution to British public life. GMG supports the fundamentals of the BBC in its current form and a universal service funded through a universal levy, at least for the period covered by the next BBC Charter. This funding structure has underpinned the BBC, enabling the BBC to create an unparalleled network of journalists across the world.5

However, GMG is also committed to ensuring that the Guardian’s news services thrive in a digital world, alongside those of the BBC. There is no contradiction in supporting a strong BBC at the heart of British public life whilst also calling for limits to be placed on the scope and role of the BBC in the next Charter period.

The BBC is the most important cultural institution in the UK, sitting at the heart of British daily life. But if its place at the heart of British life is to continue, it will need to increase levels of transparency, openness and partnership.

Digital news brands operate in an increasingly complex and dynamic digital economy. This dynamism is challenging the fundamentals of the business models of established media organisations at an unprecedented rate. The BBC’s near £4 billion of annual public funding represents a very substantial amount of guaranteed income with which the BBC can navigate these choppy digital waters. To put that guaranteed public income in context, following the sale of GMG’s 50.1% stake in Trader Media Group, GMG has a cash investment fund of £843 million to help ensure the Guardian’s future in perpetuity. £843 million represents just over 2.5 months of the BBC’s guaranteed annual income.

Since the Government’s decision in 2014 to end public funding for the BBC World Service through the Foreign & Commonwealth Office, the BBC has also sought to commercialise its news content published outside of the UK through advertising and sponsorship6. Following this change in policy, in the UK the Guardian now competes for audiences with a licence fee funded, ad free BBC, while in the rest of the world the Guardian competes with an ad and sponsorship funded commercial BBC news. The BBC’s recent response to BBC Charter Review set out plans to “aggressively commercialise” the BBC’s global news operations, meaning that the Guardian will come into even closer competition with an increasingly commercial BBC in the years ahead.7 However, the existing oversight and transparency arrangements governing how the BBC creates new and shares existing news media content between the UK licence fee funded, and

5 See, for example, the GMG submission to “Public Service Content in a Connected Society, Ofcom’s third review of Public Service Broadcasting”, 2015. 6 http://www.theguardian.com/media/2014/jan/10/mps-bbc-commercialisation-world-service 7 http://www.bbc.co.uk/aboutthebbc/insidethebbc/howwework/reports/future_of_the_bbc_2015

1 commercially focused news operations were built for a different age. It is therefore essential that as the BBC seeks to compete more aggressively with the commercial sector, that the BBC is subject to a much more thorough oversight and transparency regime than it is today. These reforms should include a full, independent, public audit of the activities of BBC Worldwide and BBC Global News Ltd.

GMG’s proposals for reform of the BBC through Charter Review

In wider representations on Charter Review8, GMG proposes five points which it believes would result in a more open, transparent and productive relationship between the BBC and commercial news providers – a new settlement that would, in turn, bring real benefits to licence fee payers, industry and society.

At their core, these proposals are about how we build on and grow the strength and value of the BBC: how we protect and enshrine it, while acknowledging the rapidly-shifting media landscape and the need to promote media plurality rather than cultivate media dominance.

This short submission focuses on just one of those proposals, namely that Charter Review – and indeed a proper re-examination of the BBC’s Fair Trading principles - must encourage greater transparency around the way in which the BBC’s commercial activity functions alongside its public offering.

The BBC’s recent decision to bring the international operations of BBC Global News Ltd together with those of the licence fee-funded BBC News has seen much closer working between licence fee and commercially funded arms of the BBC’s news operations. In February 2015, the Chair of the BBC Trust said that she was “struck by the benefits of the changed approach – co- locating World Service, Foreign Language Services, the UK TV newsroom and the talents of the BBC’s multi-skilled journalists, has allowed it to operate with lower costs and enhanced authenticity”.

In 2012, Peter Horrocks, Director of BBC World Service Group, wrote to all staff, in both commercial and licence fee funded divisions, to say that one of their objectives should be to “let us know if you have any ideas on how we can strengthen our commercial focus and grow income".9 Comments which led Steven Barnett, professor of communications at the University of Westminster, to say "Everybody understands that the BBC is under huge pressure to generate more revenue after the licence-fee freeze. If they're going to start putting revenue- raising before the highest editorial standards it does raise serious questions about whether they have got their priorities right. We expect the BBC to promote journalism but not necessarily entrepreneurialism."10

8 See, for example, our submissions to the September 2015 inquiries in the BBC by both the Lords Communications Committee and the CMS Committee. 9 http://www.independent.co.uk/news/media/tv-radio/shock-at-the-bbc-as-reporters-are-told-to-start-making- money-7879748.html 10 ibid.

2 While de-duplication and smarter use of resources is positive, the BBC’s licence fee funding has enabled the BBC to build a formidable, world-leading news organisation. As the BBC sets out in its initial response to Charter Review, “The licence fee allows us to invest in the resources to do this in a unique way. The BBC reports from more countries, and to more people than any other international news broadcaster. It sustains an extensive newsgathering operation at a global, national and local level.”

The Guardian’s future is increasingly as an international news brand, with the vast majority of the Guardian’s audience - around two thirds - now based outside of the UK. This is positive for Britain. The world needs independent, challenging voices like the Guardian, especially at a time when nation states are investing vast sums of public money into television and online platforms in order to influence public sentiment and debate around the world. In its initial response to Charter Review, the BBC expresses concern the rise of “big state-sponsored news organisations and from news aggregated by digital platforms. Al Jazeera, China Central Television (CCTV) and Russia Today”, warning that these media brands “can command vast resources… reflects a particular world-view”. The BBC suggests that in light of the development of these services there is clearly a risk that the “the possibility of state services from less free countries dominating global debate and news provision, the value to democracy and liberty of the BBC’s global reach is higher than ever.”11

While GMG agrees that there would be the potential for global debate to be skewed by global citizens only being exposed to the viewpoints of these state funded news brands, the reality is that the range of news brands available to global citizens is much broader than the BBC suggests. The Guardian is one of a range of commercial news brands, completely free of any state interference or funding, which is providing independent, trusted viewpoints on global news stories, to millions of global citizens every day. News that the BBC plans to explore “new advertising deals, subscription services, live events, syndication packages and commercial opportunities across all platforms and languages” threatens the future sustainability of the Guardian, cutting across the existing and future commercial activities of the Guardian (for example as outlined in GMG’s 2014 annual results)12 and posing a severe risk to the health of international commercial news brands who do not have the luxury of the BBC’s near £4 billion of annual public funding. GMG is disadvantaged twice, first in funding the cost of commercial investment in the infrastructure to support new business models and second, in having to compete against the publicly subsidised BBC that has decided to move in and operate commercial services in direct competition with the Guardian.

GMG has huge respect for the historic and continued role of the BBC World Service in promoting key British values abroad. But the world of digital distribution means that the BBC no longer has a monopoly on promoting Britain, and British values abroad. The market for news, opinion and analysis is now global and plural, a development that Charter Review should celebrate, not inadvertently jeopardise by undermining the commercial sustainability of the

11 http://www.bbc.co.uk/aboutthebbc/insidethebbc/howwework/reports/future_of_the_bbc_2015 12 http://www.theguardian.com/gnm-press-office/guardian-media-group-plc-gmg-today-announces-its-results-for- the-financial-year-2014

3 BBC’s rivals such as the Guardian. Nor is it sensible or in Britain’s interests for policy makers to stake all of its bets on one media organisation projecting the British brand on a global stage.

The danger of policy makers making trade offs in support of a single news brand, is the recognition that even the BBC brand is susceptible to mistrust. For example, the BBC’s rolling Kantar trust tracker points to significant dips around the low point of faked competitions in October 2007, the Jimmy Saville scandal in October 2012,13 while the BBC’s coverage of the Scottish independence referendum in 2014 has been criticised by the BBC’s Scottish Audience Council for its ‘anglified perspective’14. It is in Britain’s interests to ensure that there is a plurality of trusted, independent news brands representing British values on a world stage, not just the BBC. The BBC does not have an exclusive claim on independence, quality and trust, either at home or abroad, and attempts by the BBC to paint itself as doing so are disingenuous.

At the core of these concerns about the BBC’s moves to commercialise its news services outside of the UK is the opaque transition of assets, people and content from the licence fee funded arm of BBC News to BBC World Service and BBC Global News arms of its news operation. The Guardian competes with the BBC’s commercial news arm for advertising and sponsorship in areas of the world outside of the UK where the BBC operates. This includes competing with the BBC in highly developed advertising markets in the United States and Australia. It is essential that fully commercial organisations such as the Guardian can have confidence that we are competing on a level playing field with the BBC.

As an international competitor to the BBC, GMG does not currently have that confidence, and is concerned that there is not a sharp enough divide between public and private funding of the BBC’s commercial news operations as is required by EU state aid law. The hybrid model of funding that emerged following the cessation of funding of BBC World Service by the Foreign Office in April 2014, and which the BBC is now looking to supercharge with a bid to both access more funding from the Government, and aggressively seem to commercialise represents the worst of all worlds for the BBC’s fully commercial competitors.

GMG is alarmed to read in the report prepared for this Fair Trading review, that Fingleton Associates apparently concur with GMG’s view, finding that “The Executive is inconsistent in its interpretation of ‘operational separation’ across its commercial subsidiaries. Potentially due to the lack of clarity over what the Trust means by ‘operational separation’, the Executive interprets this requirement differently in respect of each of its commercial subsidiaries. BBC Global News is the most integrated with the Public Service. It is not clear the Trust would be comfortable with the same degree of integration with BBC Worldwide, although the policy applies equally to all commercial subsidiaries. Nor has the Trust explicitly set out whether and why BBC Global News should be treated differently.”15

13 http://downloads.bbc.co.uk/aboutthebbc/insidethebbc/howwework/reports/pdf/bbc_report_trust_and_impartialit y_report_july_2014.pdf 14 http://www.theguardian.com/media/2015/jul/14/bbc-scottish-coverage-independence-row-referendum 15 Page 4, http://downloads.bbc.co.uk/bbctrust/assets/files/pdf/our_work/fair_trading/fair_trading_fingleton_jul15.pdf

4 GMG can find no reference to the issues raised by Fingleton Associates within the Fair Trading Review, nor any attempt to justify the integration of BBC Global News within the public service division.

The Fingleton report also states that the “Trust’s ex-ante review mechanisms tend to be used for more significant changes in activity and do not always capture potentially material changes; for example, changes in transfer pricing agreements between the BBC’s Public Service divisions and its commercial subsidiaries. The Trust’s ex-post review mechanisms are not used often in practice. For example, the Trust has not historically undertaken an own- initiative investigation on Fair Trading grounds.1 The Trust has considered few complaints appeals in recent years. The appeals mechanism can provide assurance the Executive is compliant with the Fair Trading Obligation, although the lack of appeals may itself be a sign of such compliance.”

In February 2015, the BBC Trust announced that it would “commission an independent review of separation and transfer pricing practices, covering the levels of transparency and compliance when the BBC’s commercial services buy rights to BBC content or pay to use BBC premises or services.”16

GMG understands that no such report has even been commissioned to date, let alone delivered in time to play a part in this review, or the broader Charter Review process.

A further finding of the Fingleton report highlights “apparent gaps in the Executive’s and Trust’s consideration of market impact. Several third parties expressed concern at the lack of formal mechanisms through which to express views on the impact of the BBC’s activity on the market, although we understand there is regular informal contact between third parties and the Trust. The cumulative impact of incremental changes in the BBC’s online activity does not appear to be systematically reviewed. In addition, there is evidence that the Executive’s model of internal checks and balances to ensure robust self-assessment may not be working as effectively as it could.”

In May 2009, GMG submitted evidence to the Culture, Media and Sport inquiry into the “Future for local and regional media”17, setting out the global and local challenges facing GMG’s portfolio of media assets at that time. GMG’s concerns also focussed on the impact of the BBC’s presence online on the commercial viability of local news websites, stating that:

“making a significant commercial return from an online audience has proved extremely difficult for all players—"traditional" media and start-ups alike. Online revenues still account for a very small proportion of the total. This is due to a number of factors, not least of which is the presence of huge quantities of free content on bbc.co.uk, which makes it virtually impossible to charge users to access content.”

In parallel with concerns about the BBC straying beyond its remit, GMG set out concerns about the BBC’s inability to build genuine partnerships with the commercial sector, submitting that:

16 http://www.bbc.co.uk/bbctrust/news/press_releases/2015/commercial_framework 17 http://www.publications.parliament.uk/pa/cm200910/cmselect/cmcumeds/43/43ii.pdf

5 “Our experience of attempting to partner with the BBC is that despite encouraging conversations and positive intentions on both sides, the culture of the BBC acts as an inherent, institutional barrier to effective partnership. For all the admirable public service values of the BBC, at root it is set up to compete—and to win. Very few of our past efforts to build partnerships with the BBC have resulted in concrete benefits for our businesses.

“To summarise: establishing reasonable parameters for the BBC's activity and ensuring proper oversight by the BBC Trust will be essential to the success of the UK's creative economy, because such actions will allow the commercial sector to invest with greater confidence in the future of their own businesses.”

Given these concerns about the BBC straying beyond its stated remit, and the lack of proper oversight by the BBC Trust, the finding in the Fingleton Report that “the cumulative impact of incremental changes in the BBC’s online activity does not appear to be systematically reviewed” is of significant concern.

Conclusion

In both the USA and Australia, the Guardian’s international commercial ambitions clash with the quasi-commercial arm of BBC Global News, competing directly with the BBC for the same advertising and sponsorship opportunities. To remove any suspicion of cross-subsidy and to ensure fair competition there must be far greater transparency over how the BBC’s international commercial ventures are funded / subsidised and what exactly their relationship is with the public service BBC. A full, independent, public audit of BBC Worldwide and BBC Global News Ltd is essential to providing such transparency.

The BBC’s mandate for providing public service content overseas through the BBC World Service used to be clear and simple. When BBC World Service funding came through the Foreign and Commonwealth Office there was no need for the BBC to seek to commercialise its global news services. With that funding model gone, the BBC’s funding arrangements of gaining bits and pieces of public funding here, commercial funding there, leads to a confused and opaque funding model which means that the BBC’s news services overseas are neither state funded nor commercial. As a competitor to the BBC outside of the UK, GMG believes that this funding arrangement is deeply unsatisfactory, and requires root and branch reform.

Guardian Media Group October 2015

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