BBC Commercial Operations

House of Commons Culture, Media and Sport Committee

Fifth Report of Session 2008–09

Report, together with formal minutes, oral and written evidence

Ordered by the House of Commons to be printed 25 March 2009

HC 24 Published on 7 April 2009 by authority of the House of Commons London: The Stationery Office Limited £0.00

The Culture, Media and Sport Committee

The Culture, Media and Sport Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Culture, Media and Sport and its associated public bodies.

Current membership Mr John Whittingdale MP (Conservative, Maldon and East Chelmsford) [Chairman] Janet Anderson MP (Labour, Rossendale and Darwen) Mr Philip Davies MP (Conservative, Shipley) Mr Nigel Evans MP (Conservative, Ribble Valley) Paul Farrelly MP (Labour, Newcastle-under-Lyme) Mr Mike Hall MP (Labour, Weaver Vale) Alan Keen MP (Labour, Feltham and Heston) Rosemary McKenna MP (Labour, Cumbernauld, Kilsyth and Kirkintilloch East) Adam Price MP (Plaid Cymru, Carmarthen East and Dinefwr) Mr Adrian Sanders MP (Liberal Democrat, Torbay) Helen Southworth MP (Labour, Warrington South)

Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk.

Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/parliamentary_committees/culture__media_and_sport. cfm

Committee staff The current staff of the Committee are Tracey Garratty (Clerk), Martin Gaunt (Second Clerk), Elizabeth Bradshaw (Inquiry Manager), Anna Watkins/Lisa Wrobel (Senior Committee Assistants), Rowena Macdonald (Committee Assistant) and Laura Humble (Media Officer).

Contacts All correspondence should be addressed to the Clerk of the Culture, Media and Sport Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6188; fax 020 7219 2031; the Committee’s email address is [email protected]

Contents

Report Page

1 Introduction 3

2 Benefits of the BBC’s Commercial Operations 5 Financial benefit to the licence fee payer 6 Investment in UK creative industries 6 Champion of UK programming overseas 7

3 Governance 8 The four commercial criteria 8 The role of the BBC Trust 10 Cross-Directorships 16

4 Programme sales 18 BBC Programming 18 Non-BBC Programming 21

5 Production Houses 22

6 Magazines and Websites 25 Magazines 25 Performance and prospects 25 Market impact 27 Websites 30

7 Channel 4 and BBC Worldwide 32

8 BBC Local Video Proposal (not a commercial activity) 34

9 Conclusion 35

Conclusions and recommendations 37

Formal Minutes 43

Witnesses 44

List of written evidence 44

List of unprinted evidence 45

List of Reports from the Committee during the current Parliament 46

1 Introduction

1. In July 2008 the Committee announced a new inquiry into the commercial operations of the BBC.1 The BBC has engaged in commercial activities since the launch of The Radio Times in 1923 and its commercial arm has become an established part of the BBC’s business model.2 In recent years the BBC’s commercial activities have undergone a marked expansion, with the Corporation seeking both to maximise income from traditional sources and diversify into other areas. It was this growth in the scope and value of the BBC’s commercial activities, and the implications for the media industry and general public, that instigated our inquiry. We announced our terms of reference as follows:

• The benefits and opportunities offered by the BBC undertaking a range of commercial activities in the UK and abroad;

• The potential risks to the BBC, licence fee payers and other stakeholders;

• The extent to which the BBC’s commercial activities meet the criteria required of them;

• The appropriateness and effectiveness of the governance framework for the BBC’s commercial activities;

• The future of BBC Worldwide and other BBC commercial subsidiaries;

• How the money returned to the BBC by its commercial operations is invested.

2. The principle that the BBC should undertake commercial activities has enjoyed strong support from licence fee payers. In research by the Department for Culture, Media and Sport (DCMS) in 2005, 90% of those surveyed agreed that the BBC should raise as much money as it can from selling its programmes and other products.3 The principle has commanded consistent support from successive governments as a means to lessen the reliance on the licence fee and supplement the BBC’s budget. In 1996, the then Secretary of State for National Heritage, the Rt. Hon Virginia Bottomley MP, encouraged the BBC to “take full advantage of the new commercial opportunities which are now available”.4 Similar support has continued, as signified by comments from the current Parliamentary Under-Secretary of State in DCMS, the Rt. Hon Gerry Sutcliffe MP. He told the House last year that “the BBC should seek to maximise commercial revenue in appropriate areas and reinvest it in programming and talent to the benefit of licence fee payers”.5

3. The new Minister for Communications, Technology and Broadcasting, Lord Carter of Barnes, reiterated to us the view that it was legitimate for the BBC to seek to maximise its

1 The Committee is grateful to Martin Le Jeune, who acted as Specialist Advisor on this inquiry. 2 Ev 79 3 Department for Culture, Media and Sport, Review of the BBC’s Royal Charter: What you said about the BBC, July 2004, p 29 4 Rt Hon Virginia Bottomley MP, Secretary of State for National Heritage, letter to Marmaduke Hussey, BBC Chairman, 1 April 1996 (see Ev 79) 5 HC Deb, 20 May 2008, col 51WH

commercial returns.6 However, his support for this principle was not unqualified: he added that the BBC is “on the horns of a dilemma”.7 Set against the benefits that might be reaped from an unchecked expansion in the BBC’s commercial operations was, he told us, the potential unfairly to distort the market, chill competition, and chill innovation.8

4. The BBC has three commercial subsidiaries:

• BBC Worldwide, a wholly owned commercial subsidiary of the BBC formed in 1995 as a result of a restructuring of its predecessor, BBC Enterprises;

• BBC World News, a commercially funded, international 24-hour news channel;

• BBC Resources, parts of which were sold off during 2007–08, but which still retains the commercial arms of BBC Studios and BBC Post Production.9

5. The Committee’s inquiry focused almost exclusively on BBC Worldwide, as this subsidiary accounts for the vast majority of the BBC’s commercial income. Worldwide’s core business is, according to the BBC, “the commercial exploitation and export of the BBC brand and BBC content”.10 However, in recent years Worldwide has also sought to use its capabilities as a global media business to distribute non-BBC content. Such a move was encouraged by the latest BBC Charter Review, published in 2005:

“The BBC should not restrict itself to the sale of BBC programmes. It should look to work closely in partnership with other UK broadcasters in developing its programme sales strategy. It should use the scale and power of BBC Worldwide to showcase the widest possible array of UK talent and secure the best possible deal for UK plc”.11

6. As a result, in 2007, BBC Worldwide announced five objectives as part of a new five year growth plan:

• Increase overseas revenue towards two-thirds of total revenue;

• Grow online revenues to more than 10%;

• Roll out of BBC-branded channels overseas;

• Create a global production business;

• Acquire businesses to help achieve the overall plan.12

7. Worldwide now operates seven different divisions, with the collective aim of meeting these objectives. The divisions span the operation of overseas television channels and the

6 Q 254 7 Q 254 8 Q 254 9 Ev 95 10 Ev 79 11 Department for Culture, Media and Sport, Review of the BBC’s Royal Charter: A strong BBC, independent of government, March 2005, p 44 12 BBC Worldwide: Annual Review 2007–08, July 2008, p 9–10

distribution of television programmes, to the publication of magazines, development of commercial websites, and DVD sales.13 Its newest division, called “Global Brands”, was formed to “manage properties that have global reach”, such as the newly acquired Lonely Planet business.14 Worldwide has a total staff of 2480, and in 2007–08 generated a profit of 118 million.15 In 2003–04, profit was just £37 million with a staff of 2143, indicating the rapid growth that Worldwide has undergone in recent years.16

8. The BBC is not permitted simply to undertake any commercial activity it chooses. Its commercial operations are governed by a set of requirements set out in the BBC’s Agreement with the Secretary of State.17 These requirements are designed to guard against the possibility that the BBC’s reputation could be damaged, or that markets could be unfairly distorted by its presence. They also require that the BBC’s commercial functions exhibit commercial efficiency, and fit with the BBC’s core values or purposes.

9. In February 2008, the BBC Trust instigated a review of the BBC’s commercial activities. The Trust told us that the aim of the review was “to reassess BBC Worldwide’s strategy and governance arrangements”.18 The BBC Executive was conducting the review in the first instance, and planned to report its findings to the Trust in November 2008. On 4 March 2009, the Trust published an interim statement which sets out its “emerging thoughts” on the BBC’s commercial activities.19 However, it has opted to delay making final decisions on the strategy and governance of Worldwide due to the prospect of a possible partnership between Worldwide and Channel 4. The BBC and Channel 4 are in discussions over a possible deal that Channel 4 hopes will help to close its current funding gap. We make reference to the Trust’s ongoing review in this report, and we consider the prospect of a partnership between Worldwide and Channel 4 in Chapter 7. 2 Benefits of the BBC’s Commercial Operations

10. We received evidence from a number of sources, including the BBC, outlining the benefits derived from the BBC undertaking commercial activities. These may be broadly split into three categories, which we will consider in turn:

• Financial benefit to the licence fee payer;

• Investment in UK creative industries;

• Champion of UK programming overseas.

13 BBC Worldwide: Annual Review 2007–08, July 2008, p 16–17 14 Ev 85 15 BBC Worldwide: Annual Review 2007–08, July 2008, p 9. Profit refers to profit before interest and taxation including prior year exceptional items. The staff figure was provided by the BBC for the Committee 16 Information provided to the Committee by the BBC 17 Department for Culture, Media and Sport, Broadcasting: An Agreement between Her Majesty’s Secretary of State for Culture, Media and Sport and the British Broadcasting Corporation, Cm 6872, July 2006, p 37–39 18 Ev 76 19 “BBC Trust review of the commercial activities of the BBC—interim statement”, BBC Trust press release, 4 March 2009

Financial benefit to the licence fee payer

11. The BBC contends that BBC Worldwide generates “value equivalent to nearly £9 for each licence fee”.20 The Chairman of the Trust explained to us in oral evidence that this estimate is based on “a dividend in two parts”.21 Firstly, the profits generated by Worldwide, which have amounted to a total of over £200 million in the last three years, are returned to the BBC.22 As the Chairman of the Trust told us, this means that the BBC can “do more”, while moderating the pressure on the licence fee payer. Secondly, we were told that Worldwide is a major investor in new programming. According to the BBC’s written submission, Worldwide’s contribution to individual programme budgets can be over 70% of the total (made up of both direct investment from Worldwide and the coordination of investment from international co-production partners).23 This leads the BBC to argue that “programmes such as Planet Earth, Cranford, Doctor Who and In the Night Garden simply would never have got off the ground without the support and investment provided by BBC Worldwide”.24 In fact, the two dividends to which the Chairman of the Trust referred are in effect the same money. It makes little difference whether the BBC invests in programmes using the profits generated for it by Worldwide, or if Worldwide invests its profits in new programmes itself, unless Worldwide has a multiplier effect by bringing in commercial partners who would not otherwise be involved. We accept that Worldwide may contribute in terms of international experience in the commercial sector, which is valuable in nurturing contacts and relationships and bringing in partners. Given the strength of the BBC brand, however, this might very well be accomplished by an internal division of the BBC.

Investment in UK creative industries

12. We received representations from three of the main unions representing artists in the broadcasting industry—Equity, the Musicians’ Union and the Writers’ Guild. All expressed strong support for BBC Worldwide, due to the income stream it provides for their members.25 Equity, the trade union representing 37,000 actors, performers and other creative professionals in the UK, estimated that BBC Worldwide generated a total of £24 million for its members last year.26 Meanwhile, Musicians’ Union and Writers’ Guild members received £2.3 million and £8 million respectively last year from Worldwide.27 In addition to the direct payments from Worldwide, the unions’ members also benefit indirectly from the dividends paid by Worldwide to the BBC. As the unions pointed out, the greater the financial returns generated by Worldwide for the BBC, the larger the pot of funds for new BBC programmes, with the subsequent trickle-down benefit to the artists.28

20 Ev 78 21 Q 155 22 Ev 78 23 Ev 88 24 Ev 88 25 Ev 163, 165, 167 26 Ev 163 27 Ev 165, 67 28 Ev 165

Finally, the unions were complimentary about BBC Worldwide as an employer, testifying to business practices that redistribute income along the supply chain, are sensitive to the risk of over-exposure of talent, and are generally in the interests of UK plc.29

13. In recent years, BBC Worldwide has also acquired minority stakes in independent production companies. The Committee received evidence from three of these companies: Baby Cow Productions, Big Talk Productions and Left Bank Pictures.30 They each attested to the benefits they have derived from the investment made in them by Worldwide. Baby Cow Productions expressed its appreciation that Worldwide was willing to make a “leap of faith” in providing backing, given that its owners had never made a programme before the BBC came on board.31 Meanwhile, Left Bank Pictures asserted that the success it has enjoyed since its launch in 2007 could not have been achieved without the backing of Worldwide, which owns a 25% stake.32 We discuss Worldwide’s investment in production companies in more depth in Chapter 5.

Champion of UK programming overseas

14. The BBC argues that Worldwide offers international exposure and recognition to UK talent.33 Acting as a “platform” for BBC and independently produced programmes, overseas channels such as BBC America and BBC Entertainment have been credited with launching British stars on the global stage. For instance, “The Office […] broke new ground in the US following its hugely successful transmission on BBC America”.34 The BBC also claims that this exposure has been the catalyst for programme formats to be purchased by US networks and re-made as local versions (e.g. The Office, Ramsay’s Kitchen Nightmares).35 However, there are no figures publicly available to determine whether this has actually generated a profit for the licence fee payer and the BBC could certainly be more forthcoming in this respect.

15. Nevertheless, BBC Worldwide’s overseas network of channels and programmes do have the potential to enhance and extend the BBC’s reputation overseas. The BBC told us that Worldwide’s activities have built the BBC’s reputation for quality and objectivity in key markets such as India, the USA and Eastern Europe.36 It argues that the extension and development of its brand overseas is an “increasingly important element of the BBC’s ability to attract and retain top talent for the benefit of UK licence fee payers”.37 However, some of Worldwide’s other activities, notably its investment in overseas production houses, were identified by other witnesses as having the potential to damage the BBC brand.38 We

29 Ev 163, 165–166, 168 30 Ev 159, 162, 171 31 Ev 159 32 Ev 171–172 33 Ev 88 34 Statement on Ricky Gervais’ website: http://www.rickygervais.com/office_international.php 35 Ev 81 36 Ev 88 37 Ev 88 38 Ev 1, 11

consider this issue in greater depth in Chapter 5, but a summary of the view of the BBC’s critics is that its minority stakes in overseas production houses give Worldwide little editorial control over content, while subjecting the BBC to reputational risk. Critics also maintain that such stakes may limit the returns for licence fee payers by giving individual companies preferential rights to BBC programmes or formats, rather than auctioning each in the open market.

16. We recognise that significant benefits are realised from the BBC undertaking commercial activities. Clearly, the profits generated by the exploitation of its intellectual property allows the BBC to invest more in its public service remit than would otherwise be the case. We also note the positive sentiments expressed by significant sections of the creative economy in relation to the business practices of BBC Worldwide, although we are conscious that the industry is unlikely to bite the hand that feeds it. The principle that the BBC should be able to maximise the value of its brand by exploiting its intellectual property, subject to appropriate safeguards, in order to relieve pressure on the licence fee is clearly sensible. We share the view of the public and the Government in this respect. In the chapters which follow in this report, however, it is the manner in which some of the BBC’s commercial revenue is generated, and the governance arrangements within which Worldwide operates, which give rise to legitimate concern. 3 Governance

The four commercial criteria

17. The BBC’s commercial operations are governed by a set of requirements outlined in clauses 68–74 of the BBC’s Agreement with the Secretary of State.39 Those clauses require that the BBC’s commercial operations must adhere to four commercial criteria (often referred to as the “4 Cs”). The BBC’s commercial activities must comply with all the following criteria:

• Fit with the BBC’s public purposes;

• Exhibit commercial efficiency;

• Not jeopardise the BBC’s good reputation or the value of the BBC brand; and

• Comply with the BBC’s fair trading guidelines, in particular avoiding market distortion.40

18. BBC Worldwide’s compliance, or otherwise, with these criteria was the central theme to our inquiry. Several witnesses presented evidence arguing that the BBC’s commercial operations no longer satisfied these requirements or that they are sufficiently vague so as to allow a loose interpretation of them. The BBC, on the other hand, sought to defend its

39 Department for Culture, Media and Sport, Broadcasting: An Agreement between Her Majesty’s Secretary of State for Culture, Media and Sport and the British Broadcasting Corporation, Cm 6872, July 2006, pp 37–39 40 Department for Culture, Media and Sport, Broadcasting: An Agreement between Her Majesty’s Secretary of State for Culture, Media and Sport and the British Broadcasting Corporation, Cm 6872, July 2006, p 37

activities. We return to the specific criteria throughout the remainder of our report, but it is necessary here to consider the crux of the dispute.

19. The last of the commercial criteria necessitates compliance with the BBC’s fair trading guidelines, and these have recently been subject to change. As part of the process for the renewal of the BBC Charter in 2006, the BBC and the Trust redrew the fair trading guidelines to which Worldwide was subject. Whilst the previous fair trading commitment stated that commercial activities must “plainly arise from and support BBC programmes”, the 2007 BBC Trust redraft instead requires that the activities “must link clearly […] with the ways in which the BBC promotes its public purposes”.41 As the Guardian Media Group pointed out to us, this means that the rules surrounding BBC Worldwide’s activities have been “loosened significantly since 2007”.42 It is this change in the rules, and BBC Worldwide’s exploitation of the change, that has allowed the expansion and diversification in Worldwide’s activity. Recent growth in Worldwide has included:

• New magazine launches in the UK, plus a joint venture to publish Hello and Grazia magazines in India;43

• The launch of several commercial websites containing advertisements;44

• The acquisition of stakes in production companies based in Australia, Russia, Argentina and Canada, as well as several in the UK;45

• The launch of new international television channels, bringing Worldwide’s portfolio to a total of 29 channels.46

20. However, the most controversial new activity has proved to be the acquisition of the travel information group, Lonely Planet Publications. The basis for this acquisition was outlined by Worldwide in its latest Annual Review:

“The Board identified the need to achieve some growth through acquisition and we set clear criteria to help us assess opportunities swiftly. The global travel information company Lonely Planet offered a clear fit with these criteria and, after appropriate consideration by our Board, the BBC Executive Board and the BBC Trust, we bought a 75% stake in the business in October 2007”.47

21. Worldwide’s recent expansion leads Pact, the trade association that represents the interests of the independent production and distribution sector, to state that “we cannot see how several of BBC Worldwide’s current activities […] bear any meaningful relation to its public purposes”.48 Similarly, FremantleMedia, a large independent creator and

41 Ev 47; BBC: The BBC’s Fair Trading Guidelines, July 2007, para 2.12 42 Q 35 43 BBC Worldwide: Annual Review 2007–08, July 2008, pp 29–30; Q 37 44 BBC Worldwide: Annual Review 2007–08, July 2008, p 23; Q 48 45 Q 2 46 BBC Worldwide: Annual Review 2007–08, July 2008, p 19 47 BBC Worldwide: Annual Review 2007–08, July 2008, p 10 48 Ev 11

distributor of television content, contends that Worldwide is “embarking on an aggressive, financially-driven overseas acquisition strategy which has no discernible connection to the BBC’s public purposes”.49 The Director General of the BBC maintained that the vast majority of Worldwide’s activity is based around BBC intellectual property.50 Nevertheless, the Chairman of the Trust accepted that “there is a case [for reining back the BBC’s commercial operations], and we intend to move forward with tightening the boundaries around Worldwide activity”.51 In its interim statement, the Trust has subsequently signalled its intention to “establish a more contained focus for [Worldwide’s] operations”.52

22. There is clearly a balancing act between allowing Worldwide to expand and potentially generate greater returns for the BBC, and limiting its operations in order to ensure it upholds the BBC’s reputation and does not unfairly distort the market. We believe the pre- 2007 model, which tied Wordwide’s activities to BBC programming, supplied the appropriate balance. We are concerned that the rules governing the BBC’s commercial operations have since been loosened and no longer make this explicit requirement. We believe that this has tipped the balance too far in favour of Worldwide’s expansion. The four commercial criteria are vague, allowing the BBC to interpret and justify them in its own favour. This is evidenced by the raft of new businesses in which BBC Worldwide has recently become involved, such as its part ownership of overseas production companies and magazines, and its controversial acquisition of Lonely Planet. We recommend that the commercial criteria and fair trading guidelines should be returned to the pre-2007 position, whereby all commercial activity must have a clear link with core BBC programming. The provisional comments by the Chairman of the Trust, and the Trust’s interim statement, suggest a degree of support for our position, and we encourage the Trust to act on this commitment.

The role of the BBC Trust

23. The BBC Trust is the body that oversees the BBC, having replaced the previous oversight body, the Board of Governors, on 1 January 2008. It claims to be “independent of BBC management and any external body, leaving it free to meet its clear responsibility to operate only in the interests of all licence fee payers”.53 It has responsibility both to regulate the BBC, and to set its strategic direction, conflicting requirements in the view of some of the witnesses to this inquiry. For instance, the Guardian Media Group argued that this dual function is “extremely confusing” and that instead “a regulator should be unambiguously a regulator; that is all they should do—regulate”.54 The role of the Trust has been blurred further by recent statements in which its Chairman has seemed to act as an apologist for the BBC, defending the business interests of the BBC, rather than the interests of the licence fee payer. For instance, in his speech to the Broadcasting Press Guild in October 2008, he said “I question the thinking behind a proposal to gift BBC Worldwide to Channel

49 Ev 2 50 Q 126 51 Q 126 52 “BBC Trust review of the commercial activities of the BBC—interim statement”, BBC Trust press release, 4 March 2009 53 Why the BBC Trust?, www.bbc.co.uk/bbctrust 54 Q 38

4. Put aside for a moment whether this is actually legal, State Aid issues, and the merits of removing £100 million a year of dividends back to the public via new BBC programmes. In what way might this make business sense for BBC Worldwide or Channel 4?”.55

24. However, the Chairman of the Trust defended the BBC’s governance framework, telling us: “It is quite a complicated model but it is one carefully determined by Parliament to reflect the status of the BBC as an organisation which is funded by universal levy, the licence fee, but where the most important principle was to protect its editorial independence”.56

25. Other witnesses questioned the Trust’s effectiveness specifically in relation to its regulation of the BBC’s commercial activities. The Chairman of Time Out Group expressed doubt that the Trust, despite the “62 people who work for it and a budget of £11 million”, had the track record to be able to hold an enormous organisation such as the BBC to account.57 Meanwhile, Pact argued that the Trust does not have any effective oversight of BBC Worldwide and that, in reality, commercial operations are managed exclusively by the Executive.58

26. We asked Lord Carter, the Minister for Communications, Technology and Broadcasting, if he was satisfied with the Trust’s effectiveness as a credible check on the BBC’s commercial ambitions. He told us:

“Creating institutions fast is a contradiction in terms because you need some time to do that and the BBC Trust is still [in its] relatively early days. Is it an improvement on the completely integrated governing structure that there was before? I think on balance, yes. Is it a forensically separate structure where accountability sits clearly in one place and regulatory responsibility sits clearly and singularly in another? No, it is not, but it never was”.59

27. BBC Worldwide’s new investment projects are subject to approval by different bodies depending on a number of factors, including transaction value. Transactions with a value of over £50 million automatically require approval by the BBC Trust. The BBC claims that this threshold is “low in financial terms compared to the equivalent ‘shareholder consent’ requirement for publicly listed companies”.60 Pact, Fremantle and Guardian Media Group told us, however, the £50 million threshold is extremely high in comparison to the commercial sector.61 Indeed, £50 million is nearly half of the £118 million profit that Worldwide generated last year. The result, Fremantle concludes, is that very significant investments can be made by BBC Worldwide without authorisation from the Trust. This point was demonstrated when the BBC was able to provide us with only one example—

55 Speech by Sir Michael Lyons to the Broadcasting Press Guild, 15 October 2008 56 Q 131 57 Q 40 58 Q 34 59 Q 263 60 Ev 92 61 Qq 5, 38

Worldwide’s acquisition of Lonely Planet—whereby the £50m threshold had been breached.

28. Several witnesses called for the £50 million threshold to be lowered considerably, with the Guardian Media Group suggesting that the ceiling value be benchmarked against other media boards.62 Fremantle could not give us the corresponding threshold figure(s) that it uses due to commercial confidentialities, but its Chief Executive did tell us it “would be a major order of magnitude less than £50 million”.63

29. In addition to the automatic referral system, the BBC Executive Board may also refer decisions to the BBC Trust “where they represent reputational issues or matters of wider significance for the BBC”.64 We asked the Chairman of the Trust for specific instances whereby the Trust had considered the merits, or otherwise, of a BBC commercial activity. He offered three examples:

• The acquisition of Lonely Planet, which the Trust ultimately approved;

• The decision to allow advertising on Worldwide’s bbc.com website, again approved by the Trust;

• The proposed “Kangaroo” joint venture video on demand service, on which the Trust claims it did not take a view, given the Competition Commission’s inquiry that ultimately ruled against it.65 However, as we concluded in our recent report on the BBC Annual Report 2007–08, it is apparent that the Trust reviewed proposals for a joint venture at a number of stages.66

30. Neither the bbc.com nor Kangaroo issues came up against the £50 million ceiling but, according to the Trust Chairman, both matters “automatically came to the Trust—it was not a question of being referred—because they were matters of novel activity”.67 This would seem to suggest a third means for engaging the Trust, one which required neither referral nor a breach of the £50 million threshold. The BBC Trust also accepted that, as yet, there had been no occasion where the Trust had rejected outright a BBC commercial activity.68

31. With respect to acquisitions and major investments, there are two issues the Trust needs to consider: firstly, the threshold for authorisation and secondly, transparency—that is, the details the BBC should make public. For quoted companies, the Stock Exchange imposes strict rules in these respects for good reason: to protect the interests of shareholders. In evidence to us the Trust, the BBC and Worldwide stressed that they

62 Q 38 63 Q 5 64 Ev 92 65 Culture, Media and Sport Committee, Fourth Report of Session 2008–09, BBC Annual Report and Accounts 2007–08, HC 190, Ev 27 66 Culture, Media and Sport Committee, Fourth Report of Session 2008–09, BBC Annual Report and Accounts 2007–08, HC 190, para 14–18 67 Q 145 68 Qq 146–147

followed an equivalent process.69 The analogy to a quoted company should not be taken too far—as the Trust has a wider remit than simply acting, in effect, as the controlling shareholder for the licence fee payer—but it is instructive.

32. The BBC followed up with a written submission to us showing how the Stock Exchange’s four different “Class Tests” had been calculated for the acquisition of Lonely Planet.70 These tests govern the amount of disclosure, and if a deal falls into the “Class 1” category, it requires shareholder approval. The BBC maintained that on these tests Lonely Planet was only “Class 2”, not requiring approval—yet because of its own threshold rule, Trust authorisation was actually required. On that basis, the BBC argued, Worldwide operates within a stricter system than similarly sized public companies.71

33. In reality, however, Worldwide is not publicly quoted and two of four tests—which include measures of market valuation—do not apply.72 In such circumstances, it might be reasonable to substitute either Worldwide’s gross or net assets as a proxy. In 2007, these stood at £410.5 million and £119 million respectively.73 On either of these bases, the price for Lonely Planet would fulfil the Class 1 requirements for approval, being above a 25% ratio. Using net assets would be much more conservative, but would acknowledge the risks of a large deal relative to the size of Worldwide’s balance sheet. It could also be used to support assertions from witnesses that the Trust’s £50 million threshold is, indeed, too high. Based on Worldwide’s net assets, the 25% test would currently suggest £30 million to be a more appropriate threshold.74

34. Regarding disclosure, the Lonely Planet purchase was announced in a press release by Worldwide on 1st October 2007.75 In its follow-up evidence, the BBC said: “The level of disclosure provided by BBC Worldwide was therefore no less than would have been required if BBC Worldwide was a plc given that the size of the acquisition was equivalent to that of a class 2 transaction”.76

35. This statement from the BBC, however, is mistaken. Unsurprisingly, Stock Exchange disclosure requirements are not just satisfied by the issue of a press release, but by its content. For a “Class 2” deal, its rules require disclosure of the price, the assets and profits of the business and details of any money payable later on (Class 1 requirements are more onerous).77 Neither the BBC, nor the Trust in its own release, disclosed any financial information about Lonely Planet at all, however.

69 Ev 139 70 Ev 139 71 Ev 139 72 Financial Services Authority, Handbook, accessed online March 2009, www.fsahandbook.info, London Stock Exchange Listing Rules, Section 10, Annex 1 73 BBC Worldwide: Annual Review 2007–08, July 2008, p 38 74 25% of BBC Worldwide’s net assets of £119 million equals approximately £30 million 75 “BBC Worldwide acquires Lonely Planet”, BBC Worldwide press release, 1 October 2007 76 Ev 139 77 Financial Services Authority, Handbook, accessed online March 2009, www.fsahandbook.info, London Stock Exchange Listing Rules, Sections 10.4, 10.5, 13.4 and 13.5

36. In evidence, competitors including Time Out and Wanderlust complained that it was difficult to establish and comprehend the price the BBC had paid, and therefore whether it was distorting the market.78 Their concerns are justified. Before the BBC’s evidence to us, the details could only be gleaned from a careful examination of the notes to the BBC and Worldwide accounts for the year ending 31st March, 2008, which were published in mid- June that year, over eight months after the acquisition.79

37. Even then, Worldwide’s Annual Review was less than forthcoming about the total valuation of Lonely Planet. Its summary puts the cost of 75% of the business at £89.9 million.80 Readers have to turn to the small print of the BBC’s own accounts regarding the remaining 25% retained by Lonely Planet’s founders. This was subject to a “put option” whereby the BBC had agreed to pay a further Aus$67.3 million (£28.8 million then, and £31.9 million at current exchange rates) if it were exercised by 31st October, 2009.81 In evidence, the BBC stated that this was a fixed price due to the founders, irrespective of the performance of Lonely Planet post-acquisition.82

38. To say, therefore, that the BBC has been less than forthcoming, in a timely fashion, about the Lonely Planet deal is an understatement. Limited companies, whether publicly listed or private, are obliged to follow accounting standards regarding information about acquisitions in their accounts. The BBC seems to be under the misapprehension that in satisfying these standards, it has disclosed everything a listed company would be obliged to do. It has not, however. Far from acting like a publicly quoted company, as it maintains, the BBC has behaved like a private firm, only formally disclosing financial details when required for its accounts. And this is more than just academic; the licence fee payer, like any shareholder, needs to be able to assess whether public money is being used wisely.

39. In evidence, the Trust, BBC and Worldwide said they were satisfied that the price was fair and reasonable.83 Worldwide’s Chairman, Etienne De Villiers, told the Committee: “Having come from a world of private equity […] we went through this with significant due diligence”.84 “We were not anywhere close to where I felt as a non-executive and the other two non-executives from outside the company with good commercial experience felt that we were overpaying for the business. We simply were just not overpaying,” he added.85 Competitors, including Time Out, begged to differ.

40. The reality is that we cannot judge. From the evidence, we know now that the BBC agreed to pay £118.7 million for a business which lost £2.1 million in 2007–08 on turnover of £45.7 million.86 Moreover, the BBC has added that “the book publishing activities

78 Qq 40, 45 79 BBC, Part Two: Annual Report and Accounts 2007–08, June 2008, p 130; BBC Worldwide: Annual Review 2007–08, July 2008, p 34 80 BBC Worldwide, Annual Review 2007–08, July 2008, p 34 81 BBC, Part Two: Annual Report and Accounts 2007–08, June 2008, p 130. “Current exchange rates” as on 23 March 2009 82 Qq 229–231 83 Ev 128–129; Q 232 84 Q 232 85 Q 232 86 Ev 139

accounted for 87% [£103 million] of the value attributed to Lonely Planet, with the balance represented by the online activities”.87 Sadly, it has given no further breakdown. In evidence, the Trust’s Chairman said: “Things have developed, as we have expected, but it still remains a matter for further reflection whether this merger will deliver all of the benefits that we expected for this purchase. Does that surprise me at this point […]? No, it does not. But the case is still to be proved”.88

41. We believe that the £50 million threshold at which a commercial transaction is referred to the Trust is too high. The BBC’s claim that it is low is based on a misleading comparison with the shareholder consent requirements of publicly listed companies. We note that in the past “novel” activities have been automatically considered by the Trust and any threshold should, of course, not be a substitute for discretion. Nevertheless, it is alarming that, in theory, a commercial transaction equivalent in value to almost half of Worldwide’s net assets or its shareholders’ funds could escape the need for the Trust’s approval. We believe the threshold should be lowered considerably, to allow the Trust more scrutiny and a greater say in the BBC’s commercial decisions. We have suggested that £30 million may be more appropriate, based on 25% of Worldwide’s net assets. To recognise the Trust’s unique regulatory role (and cater for the arbitrariness often found in balance sheet valuations), we would be more conservative still. We would urge the Trust to consider a level where the value of the investment exceeded 25% of Worldwide’s pre-tax profits (before exceptional items) in the previous year. Currently, this too would approximate to £30 million. We recommend that the Trust should, as a matter of priority, review the threshold level and report back to us on its findings.

42. The BBC has also been less than transparent about its commercial investments, notably Lonely Planet. In evidence to us, the Trust Chairman Sir Michael Lyons said: “I can offer a willingness […] to test that proposition about whether the levels of disclosure are less than you would expect of a plc in this setting. If you have a point, then that is something that the Trust will want to take on board”.89 We recommend, therefore, that the Trust also considers and reports back on the Committee’s and the industry’s concerns about disclosure and transparency.

43. With respect to directorships too, BBC Worldwide is less transparent than publicly quoted companies. The remuneration, including bonuses and benefits, of its Chief Executive is disclosed in the BBC’s main accounts by virtue of his being an Executive Director of the main board, as is that of two of Worldwide’s non-executive directors who also sit on the main BBC board. Worldwide’s Annual Review, however, makes no comparable disclosure with respect to its remaining executive and non-executive directors. Instead, it simply describes Worldwide’s approach and policy in two brief notes in the Review.90 In order to better understand the incentives within Worldwide, and whether remuneration is in line with comparable media companies, we believe full disclosure should be made for all its directors.

87 Ev 138 88 Q 156 89 Q 161 90 BBC Worldwide: Annual Review 2007–08, July 2008, p 47

Cross-Directorships

44. The BBC Executive Board, with ten executive and six non-executive members, has responsibility for delivering the BBC's services in line with the priorities set by the BBC Trust. One of its executive members is John Smith, the Chief Executive Officer of BBC Worldwide. As a result, BBC Worldwide has direct representation on the BBC Executive Board.

45. At the same time, BBC Worldwide also has its own Board (eleven executive members, including John Smith, and six non-executive members), which operates under the BBC Executive Board. Amongst its non-executive Directors are Zarin Patel, BBC Group Finance Director, and Jana Bennett, Director of BBC Vision (the in-house television production arm of the BBC). As both are also members of the BBC Executive Board, the BBC Executive therefore has direct representation on the Worldwide Board. These three cases of Directors sitting on both boards were frequently referred to in our inquiry as “cross- Directorships”.

46. The BBC Trust told us that the cross-Directorships had come about in an attempt to balance the “commercial imperative for BBC Worldwide” against the four commercial criteria, in particular the requirement that the BBC’s reputation should not be damaged.91 The Director General explained further, arguing the case for “close coordination” between Worldwide and the BBC’s public services. He told us the cross-Directorships helped to “make sure that we have the commercial operations of the organisation seen in the context of the total mission of the organisation”.92

47. Specifically, the BBC justified John Smith’s membership of the Executive Board on two counts. Firstly, “he represents BBC Worldwide in their role contributing towards the BBC’s delivery of its Public Purposes, in particular the fifth purpose, ‘bringing the UK to the world and the world to the UK’”.93 Secondly, “he is accountable to the Board for BBC Worldwide’s management of BBC content and brand in BBC Worldwide’s capacity as the main distributor, and for the performance of BBC Worldwide in the BBC’s capacity as shareholder”.94 The BBC offered no specific justification for Zarin Patel and Jana Bennett’s membership of the Worldwide Board, other than the need for “close coordination”.95

48. The BBC’s fair trading guidelines state that its commercial services must always maintain “a clear and separate management structure” from the BBC’s public service activities.96 The BBC’s public service activities must not “provide the commercial subsidiaries with access to information (or resources) beyond what would be strictly necessary for the efficient commercial exploitation of a particular right or asset owned by

91 Q 133 92 Q 134 93 Ev 136 94 Ev 136 95 Q 134 96 BBC: The BBC’s Fair Trading Guidelines, July 2007, para 3.6

the BBC’s Public Services”.97 Several witnesses argued that the cross-Directorships are in clear breach of these requirements.

49. Fremantle claimed that the cross-Directorships give Worldwide an “unfair commercial advantage because [Worldwide] know what the plans are for the future and from BBC Worldwide’s point of view they can have an impact on the planning of the BBC”.98 Specifically, Fremantle argued that the cross-Directorships give Worldwide “very significant contractual and informational benefits unavailable to the BBC’s commercial competitors”.99 Pact, told us that it “cannot see how the BBC can ensure an appropriate level of separation between its two activities under these circumstances”.100

50. When we put these concerns to the BBC, the Trust Chairman conceded that it represented something of a dilemma: “you might say commercially and in fair trading terms there should be clearer separation, but then you come back to the fact that brand management and protection of reputation requires very close working”.101 That said, the Executive’s view remains “that BBC Worldwide representation on the Executive Board does not make it privy to information which gives, or would give, it an unfair commercial advantage over its competitors”.102 The Director General insisted that John Smith would not have access to market sensitive programming or talent specific information, “bluntly because the discussions in the Executive Board are strategic ones”.103 Nevertheless, the Chairman of the Trust hinted that changes to the current arrangements were being considered, though we note that there was no specific mention of the cross-Directorships in the Trust’s interim statement.104

51. We accept that the BBC’s representation on the Worldwide Board, especially at Finance Director level, permits financial oversight and helps ensure coordination between the two organisations. However, we find it impossible to accept the justification for the presence of the Chief Executive of BBC Worldwide on the BBC Executive Board. We disagree with the BBC’s assertion that this does not give Worldwide a significant, unfair advantage over its competitors. Even if the BBC’s claim that Board level discussions are purely strategic and of little benefit to Worldwide has some credence, it still creates an unwelcome perception of special favours. It appears from the comments by the Chairman of the Trust that a revision of this arrangement is already being considered. We accept that the Executive and Worldwide may derive some operational benefits from the presence of the Worldwide Chief Executive on the BBC Executive Board, but believe that the BBC should seek to achieve these via other means which do not contravene its fair trading guidelines. We therefore recommend the removal of Worldwide’s representation on the BBC Executive Board. This would

97 BBC, The BBC’s Fair Trading Guidelines, July 2007, para 3.6 98 Q 18 99 Ev 2 100 Ev 22 101 Q 134 102 Ev 136 103 Q 136 104 Q 136; “BBC Trust review of the commercial activities of the BBC—interim statement”, BBC Trust press release, 4 March 2009

represent one practical step towards a more transparent, regularised and arms-length commercial relationship between the BBC and Worldwide. 4 Programme sales

52. A major element of BBC Worldwide’s business is the sale and distribution of television programmes. Worldwide is Europe’s biggest exporter of programmes, and this part of its business delivered profits of £46.7 million in 2007–08, accounting for 40% of Worldwide’s entire profits.105 Worldwide acquires the rights to programmes from two sources: from the BBC itself, and from independent producers. We shall deal with each of these in turn.

BBC Programming

53. BBC Worldwide has an exclusive “first look” option on the rights to all BBC programming.106 When new rights become available, Worldwide makes an assessment of their value and the return on sales they would be likely to generate. Based on this assessment, it may choose to submit a bid to the BBC’s (public service) Commercial Agency, which itself makes an estimate of the value of the rights. If Worldwide’s bid is at “the same sort of level” as the Commercial Agency’s estimate, then Worldwide acquires the rights.107 Under such a scenario no other distributors would have a chance to bid, and, as the BBC readily admits, in this sense Worldwide is its “preferred partner”.108

54. If Worldwide’s bid for the rights to a particular programme does not match the value attached to it by the BBC, or if Worldwide simply chooses not to bid, the programme is put on the open market and sold to the highest bidder. As a result, the BBC estimates that 20% of its output is sold to other distributors.109 Recent examples include House of Saddam, which was sold to HBO, and the DVD rights for That Mitchell and Webb Look, which went to Fremantle.110 However, it is worth noting that if Worldwide’s initial bid is unsuccessful, it may still make a further bid during the subsequent competitive bidding stage.111 The BBC insists that Worldwide has no “matching right” during this stage; if Worldwide is successful, it is purely on the basis of having submitted the optimal bid.112

55. All witnesses agreed that the issue of primary importance is obtaining maximum value for the licence fee payer from the sale of the rights to the BBC’s programmes. Where opinions differed was on the best means to achieve this. Independent producers and distributors, including the trade association Pact, argued that the current “first look” arrangement enjoyed by Worldwide fails to achieve the best price for the BBC. The BBC

105 BBC Worldwide, Annual Review 2007–08, July 2008, p 27: £46.7 million out of a total profit of £117.7 million 106 Ev 136 107 Q 184 108 Q 184 109 Ev 133 110 Ev 134 111 Ev 136 112 Ev 136

denied that that was the case, but due to commercial sensitivities refuses to make public the price it receives for particular programme rights.

56. The BBC’s Commercial Agency makes its assessment of an acceptable price for the rights to a particular programme via the process of benchmarking. The BBC’s Chief Operating Officer told us what this involves:

“They [the Commercial Agency] analyse the returns from previous exploitation of similar programmes by Worldwide, they look at what they have got in the market from selling similar programmes to other distributors, and they make an assessment”.113

57. This process may generate a figure that the BBC considers a fair rate, but, as Pact explained, it does not represent a “market rate”.114 Pact told us that this can only ever be established by actually putting a product out to the market: “then the market will bid for it and you will arrive at the best price you can get from the market”.115 The Chief Executive of Fremantle explained the problem further:

“We regard benchmarking as totally inadequate. The reason for that is, when you bid for a very big property, like a big drama, a big documentary, or a big entertainment show, in the open market those amounts are not disclosed; they are confidential. I do not know what my competitors would have bid when they have been successful. It is not bench-markable, and that is why we do not buy benchmarking as a replacement for a market mechanism”.116

58. Fremantle has, in fact, recently acquired the rights to Merlin117 which, because it was independently produced, was sold on the open market (as explained in the next section). Worldwide had been outbid for these rights, thereby indicating that in this instance, via open market competition, the production company had achieved a better deal than it would have if Worldwide had been the only bidder. Both Pact and Fremantle therefore argued that the very same benefits are available to the BBC itself, if it opened up its programming to the free market.118

59. The BBC defended the “first look” arrangements on several counts. The principle behind having a preferred distributor is that Worldwide is given “the incentive and the means to make the big investments necessary to build brands over a long period of time”.119 The BBC also claims its relationship with Worldwide ensures the protection of the BBC brand, something it believes would be “extremely difficult” to duplicate via contractual or licensing arrangements.120 Furthermore, the ownership link between the BBC and Worldwide means that the BBC receives the entirety of the generated proceeds. When the

113 Q 184 114 Q 11 115 Q 11 116 Q 14 117 A drama series first shown on BBC television. 118 Q 9 119 Q 189 120 Ev 135

BBC licenses to third parties, it loses the profit margin on the exploitation of rights that other distributors are able to achieve.121 Finally, the BBC questioned whether selling on the open market would be commercially efficient.122 It made this claim despite the existence of its Commercial Agency which could arguably undertake the task, and Pact and Fremantle’s insistence that it would not require particularly onerous processes.123

60. The BBC also pointed out that “first look” agreements are consistent with wider market practice, citing the relationships between ITV and Granada International, and Time Warner and Warner Bros Distribution.124

61. The BBC’s arrangements were, however, criticised by the media regulator Ofcom, which had examined the BBC’s approach in considering the BBC’s fair trading guidelines. Ofcom set out its view to us as follows:

“The preferred partnership status enjoyed by BBC Worldwide would appear to undermine many of the perceived regulatory benefits resulting from the system of pseudo-separation operated by the BBC. Whilst it may be theoretically possible to detect price-based forms of discrimination through conventional means, such as benchmarking and cost-based pricing, such methods are unlikely to be effective for the detection of non-price methods of discrimination. As we understand it, the preferred partnership relationship incorporates a close operational relationship, providing scope for both price and non-price forms of discrimination”.125

62. One possible solution to the discrimination identified by Ofcom would of course be to require the BBC to allow a free bidding system for the rights to all its productions. The BBC did accept that it “must strike a balance between offering an appropriate amount of programming to the marketplace whilst ensuring that the pecuniary and non-pecuniary benefits of its vertically-integrated distribution model are fully realised”.126 It believes the current 80-20 split in rights between Worldwide and third parties represents the “optimal outcome”, but one which is “monitored closely”.127 In its interim statement, the BBC Trust insists that the rationale in favour of the “first look” arrangement “remains strong”, reiterating the view of the BBC that it enables it to control the BBC brand.128

63. The BBC must aim to obtain as much value as possible from its programme sales in order to benefit the licence-fee payer. Yet it is difficult to judge whether it is generally obtaining the maximum value. The benchmarking process it uses is inadequate in comparison to competitive auctions which can drive up the value of programme rights. At the same time, Ofcom has raised serious doubts over the fairness of a system which grants BBC Worldwide preferred distributor status. We believe the solution to both

121 Ev 133 122 Q 192 123 Ev 19; Qq 21–23 124 Ev 133 125 Ev 184 126 Ev 133 127 Ev 133 128 ”BBC Trust review of the commercial activities of the BBC—interim statement”, BBC Trust press release, 4 March 2009

these issues is to make the BBC’s process for programme sales more transparent, and increasingly open up the market for the BBC’s programmes to competitive bidding. We reject the BBC’s suggestion that a competitive bidding process would be commercially inefficient. The BBC already has in place a Commercial Agency which must surely have the capability successfully to oversee such a process. The same Agency could also arrange licensing and contractual arrangements with successful bidders, so as to mitigate any possible damage to the BBC brand. What we propose here would not spell the end for BBC Worldwide’s sales and distribution business. Clearly, given its background and track record, it would still stand a good chance of acquiring many programmes. However, it would ensure that Worldwide always paid the full market value to the BBC and hence the licence fee payer. We accept that the BBC will not be able to effect this transformation overnight, but we recommend that it now begins a steady migration away from the “first look” arrangement by opening up an increasing number of programmes to competitive bidding. We urge the BBC Trust to reconsider its interim judgement on the “first look” arrangement.

Non-BBC Programming

64. BBC Worldwide also bids to acquire the rights to programmes from independent producers. Fremantle told us that in these type of transactions, they had witnessed Worldwide making surprisingly high bids.129 Evidently, this was not the case with respect to its bid for Merlin, the rights to which were acquired by Fremantle (as outlined in Paragraph 58). Pact and Fremantle alleged that Worldwide may, on occasion, deliberately overbid for programme rights. They suggested its motives could be to:

• Drive sales of its catalogue (new high profile programmes are essential to a distributor);130

• Ensure that high profile programming broadcast by the BBC is not distributed by anyone else.131

65. The result, Fremantle contends, is that commercial competitors are forced out of the market because they cannot compete with the “uneconomic rates” BBC Worldwide may be paying.132 Although distribution rights are in theory controlled by independent producers, in reality the BBC has significant leverage because of its power over commissioning decisions. Fremantle states that it is “aware of reports of overpaying and of reports by producers that they were threatened by the loss of a commission if they did not give rights to BBC Worldwide”.133 We have been unable to substantiate these claims. It may be that this fear of reprisals makes independent producers and distributors who are heavily reliant on business with the BBC unwilling to go “on the record”.

129 Ev 4; Qq 4, 11, 15 130 Ev 4 131 Ev 4 132 Ev 4 133 Ev 4

66. The Chief Executive of Worldwide countered these accusations by insisting: “the return we are making at the moment is 13% return on sales across the entire group. That is a good return in the context of the media industry, and we can only be doing that if we are paying a relevant price for the programmes.”.134 However, Pact told us that due to the lack of transparency in Worldwide’s accounts, it is impossible to know whether Worldwide’s profits are as high as they should be.135

67. The Committee has insufficient information available to determine the truth of the claims that Worldwide may be overpaying for programme rights from independent producers. However, we do recommend that the Trust satisfies itself that Worldwide is not overbidding and, to balance things out, potentially undervaluing rights to the BBC’s in-house productions. 5 Production Houses

68. Part of the agreed strategy of BBC Worldwide is to create a global production business.136 This has included in practice opening production facilities in the USA, India and Australia, taking stakes in overseas-based companies (such as Freehand in Australia, Mir Reality in Russia and Temple Street in Canada), as well as taking stakes in UK independent producers, such as Left Bank Pictures Ltd, Cliffhanger Productions, Baby Cow and others.137

69. The BBC argued that these investments were important for BBC Worldwide in a variety of ways. In the UK, they were a means of supporting domestic production capacity and ensuring that the BBC had a source of quality programming that met public purposes and was based on a close working relationship with individual creative talents.138 Internationally, the BBC summarised its approach as follows: “In some limited cases, BBC Worldwide has sought to build the BBC’s reputation internationally by partnering local companies as a means of securing both value and market presence in key markets. In all cases BBC Worldwide retains full control over the BBC Brand”.139 The advantages of this approach, the BBC argued, were that taking control over production moved the BBC up the value chain and generated revenues that merely licensing formats would not secure.140 The BBC added that this was an approach which was followed by international competitors such as Disney-ABC, Fremantle and ITV Worldwide.141 According to the BBC, the investment supported the BBC’s public purpose of “bringing the UK to the world”.142

134 Q 171 135 Q 7 136 BBC Worldwide, Annual Review 2007–08, July 2008, p 10 137 BBC Worldwide, Annual Review 2007–08, July 2008, pp 12–13; Ev 5, 82, 171 138 Ev 81–82 139 Ev 83 140 Ev 87, 135–136 141 Ev 82 142 Ev 135

70. The BBC also justified the investments which it had made in small UK production companies as being both good business and good for the UK creative industries: “the case for BBC Worldwide’s investment has been driven by the excellence of the production talent, the modest sums involved in BBC Worldwide’s investment and the resulting prospect of considerable financial and “cultural” returns for the licence fee payer at manageable levels of risk”.143 Although no precise figure was given, the BBC said that its investment in UK production was “tiny” compared to the total sum of £350–400 million invested in the sector.144

71. The companies which have received inward investments from Worldwide were understandably in favour of the BBC’s continued presence in this market. As a representative example, Left Bank Pictures145 said that they had received a £1 million investment from the BBC in exchange for a 25% stake in the business in 2007.146 The Chief Executive said that BBC Worldwide had provided “brilliant support”.147 The result had been that the company had been helped to move quickly to a forecast turnover of £20 million, without, Left Bank Pictures claimed, undue risk to BBC Worldwide. A similar stake has been taken by BBC Worldwide in Baby Cow Productions Ltd, with comparably positive feedback coming from that company too.148

72. The Chairman of the BBC Trust said to us that: “the primary purpose of BBC Worldwide existing at all is to exploit the rights generated by the BBC’s work in the United Kingdom”.149 Building on that characterisation, other witnesses questioned whether there was a justification for the international aspects of these activities. These critics included Pact, who stated that “we cannot see how several of BBC Worldwide’s current activities including […] its acquisition of ownership stakes in production companies overseas, bear any meaningful relation to its public purposes”.150 Pact was also highly critical of the way in which Worldwide’s investment in Freehand Group (an Australian production company) had led to the appearance of the BBC logo next to a still for an Australian comedy gambling game called Joker Poker displaying the logo of a casino company.151 In reply, BBC Worldwide said that the programme in question, although misleadingly named, was in fact a charitable comedy production.152 Nonetheless, this example does serve to demonstrate the issues that may arise through such investments, and the potential damage to the BBC’s reputation which might occur.

73. Pact also questioned the rationale behind investments of this nature in overseas companies. Such equity investments might (as we understand is the case in Australia) require BBC Worldwide to offer a “first look” arrangement to its overseas partner, rather

143 Ev 82 144 Ev 82 145 The producers of television programmes such as Wallander, and films such as The Damned United 146 Ev 171 147 Ev 172 148 Ev 159–160 149 Q 155 150 Ev 11 151 Ev 11; Q 4 152 Letter from the BBC to the Chairman of the Committee, John Whittingdale MP, 11 November 2008

than selling its programme rights on the open market with the possibility of a higher return. As the Chief Executive of Fremantle put it to us: “It is not necessary for the BBC to take stakes in production companies in order to get the best commercial return from its programming and its formats”.153 That is particularly the case with high-value popular formats such as Strictly Come Dancing, which has been remade in many countries. Pact disagreed with the argument that such investments allowed the BBC to protect its brand, suggesting that brand protection could easily be done through contractual conditions rather than by minority stakes.154

74. Other critics, particularly Fremantle, also argued that the BBC Worldwide policy exposed the UK licence fee-payer to unacceptable levels of risk. They noted that the independent television production sector is highly volatile. Whether these investments were made from debt financing or from profits, the ultimate cost in both cases would be carried by the licence fee-payer in the form of a poorer return to the BBC.155

75. Fremantle also pointed out that, in its view, the analogy made by the BBC between Worldwide creating an international network and those of commercial companies was flawed. It told us that international production companies expand across territories in order to develop and sell internationally attractive formats: that was their purpose. The task of the BBC, as Fremantle asserted, was not to produce programming which would be internationally attractive: it was to serve the interests of the British viewer.156 As the Director General of the BBC put it in his evidence to us: “We must not be in a position where, through lack of co-ordination or an understanding of what commercial operations are, you end up with the commercial interests of BBC Worldwide becoming more important now or overtaking or becoming divergent from the absolute clarity of our central mission, which is to do with serving the British public with the right services and the right programmes”.157

76. In our view, the idea that the BBC should take responsibility for promoting the UK creative industries, including supporting independent UK production, is clear and unarguable. It is however debatable whether that is best achieved by a series of selective equity investments in UK independent production companies. As an overall strategy it seems to us to be deficient in five respects:

• It distorts the investment market. BBC commercial activities should avoid such distortion, according to the ‘four Cs’;

• The most efficient method of supporting independent production is not by equity investment but by commissioning programmes from a wide range of independent companies, to spread the impact of the BBC’s money much more widely and act as a financial support enabling independent producers to build a track record and therefore attract commissions from other programme commissioners and channels;

153 Q 30 154 Q 4 155 Ev 6 156 Ev 8, 203 157 Q 134

• Taking minority stakes in production companies in the UK by its very nature has to be a highly-selective process. The BBC cannot invest in anything other than a tiny proportion of companies in the market and is in the position of acting as a venture capitalist with licence-fee payers’ money;

• Minority stakes do not by definition give the BBC control. Indeed, it is difficult to see what advantage they do give to a public sector investor, particularly given the levels of risk in the sector.

• It exposes the BBC, by virtue of being highly selective, to potential reputational risk. For instance, none of the independent companies—as far as we are aware—has yet been sold. Were such sales to occur, they may leave the BBC open to questioning about the balance of risk and reward accruing to the outside shareholders and licence fee payer.

77. It is true that the BBC’s investments do boost parts of the UK creative sector. In today’s economic climate that might be an important source of funding to keep companies afloat and prevent the loss of creative resources (although that is not the justification argued by BBC Worldwide itself, which views these largely as normal commercial investments). We therefore recognise that, in the short-term, there may a case for Worldwide to retain some of its minority equity stakes in UK production companies. However, we believe that in the medium term it is in the interests of the UK creative industries as a whole that this practice is discontinued. We recommend that Worldwide should exit existing investments as soon as is feasible, and without damage to the viability of the production companies concerned.

78. Whatever the arguments for UK investment, it is very difficult to make a case for BBC Worldwide’s investments in overseas production houses. We were convinced by the arguments of those who demonstrated that the risks, both financial and reputational, far outweighed the possible return to the BBC. More importantly, the attempt to create an international BBC Worldwide business creates the clear risk that it is this business, rather than the core public service remit, that will increasingly drive BBC programming. That is not a risk that licence fee payers should have to bear. We therefore recommend that the strategy of overseas investment is brought to an end. Investments already made should be disposed of when market conditions permit a profitable (or at least loss-minimising) exit. 6 Magazines and Websites

Magazines

Performance and prospects

79. BBC Worldwide is the third largest consumer magazine publisher in the UK. It reported a “strong year” in 2007–08 “despite turbulence in the UK [magazine] industry and continuing challenges in the advertising market”.158 Worldwide’s BBC Magazines division delivered sales of £177.9 million in 2007–08, up 3.9% on the previous year, but

158 BBC Worldwide, Annual Review 2007–08, July 2008, p 29

profits fell by 15.5% to £16.7 million which, according to Worldwide’s annual report, was due to the cost of new launches and investment overseas.159 BBC Magazines recently announced that its strong performance had continued in the latter half of 2008, with subscriptions now at an all time high.160 BBC Magazines has over 50 publications in the UK—with a particular prominence in the children’s magazine sector161—and links to a number of international operations.

80. In the future, BBC Magazines plans to “progress its strategy of driving international growth, developing richer and deeper relationships with its consumers, including through subscriptions, and launching print magazines and online sites that exploit the BBC’s programming and, internationally, other content”.162 Worldwide has already developed a joint venture with The Times of India, called the Worldwide Media Group, jointly to publish the magazines Grazia and Hello in India.163 Pact questioned whether such a shareholding “has got anything to do with the BBC’s public purposes in any way, shape or form”.164

81. We received evidence demonstrating the privileged position BBC Magazines occupies in the marketplace, thanks to several advantages it holds over its commercial competitors. Most BBC magazines feature the BBC brand on the front cover, often in a prominent position adjacent to the magazine title. Signature Publishing, an independent consumer magazine publishing company, told us that this was a major advantage: “No other publisher has the luxury of being able to establish credibility, authority, and the instant understanding of an internationally recognisable and familiar brand”.165 The BBC brand has, of course, been established over many decades and, as Signature Publishing points out, is instantly and freely available to BBC Magazines at no transfer cost. While BBC Worldwide recognises the value of the BBC brand to its operations, it does not include the value of its exclusive right to use it in its accounts.166 In contrast, an independent commercial publisher “has to progressively build up their brand and Intellectual Property assets through, firstly creating, and then re-investing its company income, generally over a long time period”.167 Signature Publishing therefore argues that BBC Magazines has a “distinct, unfair advantage over other magazines” in three key areas:

• BBC Magazines is not subject to the true cost of producing and marketing a magazine;

• Major retailers are more receptive to stocking BBC branded magazines;

159 BBC Worldwide, Annual Review 2007–08, July 2008, p 29 160 “BBC Magazines delivers robust ABCs for July–Dec 08”, BBC Worldwide press release, 12 February 2009 161 BBC Worldwide, Annual Review 2007–08, July 2008, p 29. BBC Worldwide is estimated to own around 40% of the children’s magazine market (Q 35) 162 BBC Worldwide, Annual Review 2007–08, July 2008, p 30 163 Qq 29, 37 164 Q 29 165 Ev 160 166 Ev 47 167 Ev 160

• A new title carrying the BBC logo will inevitably gain a “preferred” status over a comparable new but unknown title from another publisher, particularly one from a smaller independent company. 168

82. BBC Magazines also has access to an enviable range of current and popular TV characters and cartoons. Signature Publishing allege that these characters are “given” to BBC Magazines, “without the real cost of acquiring them”.169 As a result, it argues that BBC Magazines is able to price its publications at a level its competitors struggle to match. Finally, BBC Magazines has the advantage of owning a 23% stake in Frontline, the UK’s largest distributor of magazines.170 However, it is worth noting that two other publishers, Haymarket and Bauer, own the remainder of the company.

Market impact

83. Despite these apparent advantages, BBC Worldwide argues that its presence in the magazine market does not adversely impact upon its commercial competitors. Indeed, Worldwide’s Chief Executive suggested that the contrary was in fact the case. He told us that “what tends to happen […] is that the overall market in [a particular magazine sector] grows as a result of our arrival, rather than shrinking”.171 In a subsequent submission to us, the BBC presented evidence which it claims supports this assertion. It offers an analysis of some of the major magazine sectors in the UK: food, homes, motoring, gardening and children’s. In each of these sectors it contends that the launch of a BBC branded magazine, for instance Top Gear magazine or Gardener’s World magazine, has led to an increase in both the number of titles and the total circulation of the sector. The BBC concludes that its presence “does not block out other publishers or lead to an overall decline in the number of titles”.172

84. The views offered to the Committee by BBC Magazines’ competitors were rather different. In 2003, Seven Publishing beat competition from BBC Magazines to acquire the licence to publish Delicious magazine, a food publication which had previously been published in Australia. The magazine was launched in the UK later that year. Having missed out on Delicious, BBC Magazines instead developed its own magazine, Olive. It launched this at the same time as Delicious, with, according to Seven Publishing, “the same editorial proposition into the same market sector”.173 The two magazines also retail at exactly the same price. The BBC launched Olive despite already publishing the market leader, BBC Good Food. Seven Publishing stated that sales figures showed that its launch of Delicious posed no threat to BBC Good Food, and that Olive was launched “simply as a spoiler” by the BBC.174

168 Ev 161 169 Ev 161 170 Frontline: Partners, www.frontline.ltd.uk 171 Q 182 172 Ev 143 173 Ev 206 174 Ev 206

85. Evidence we have received from the magazine industry suggests that it is not only the smaller publishers who are competitively affected by the BBC’s presence in the marketplace. BBC Worldwide recently launched BBC Match of the Day magazine into the football sector, targeting a pre-teen audience, rather than the older age demographic of the television programme of the same name.175 A long established youth football title, Shoot!, from the major publisher IPC Media, was, according to Signature Publishing, “effectively closed as a result of the BBC's launch into this sector of magazines”.176 The BBC again claims that early assessments suggest that its new launch has grown this particular market by 89.5%177, but, even if this is an accurate appraisal, it is clear that Shoot! did not derive any benefits. According to the British Internet Publishers Alliance, BBC Match of the Day magazine is now targeting the market of another major publication in the football sector, Match magazine.178

86. The Editor-in-chief of a travel magazine, Wanderlust, argued that BBC Magazines are now making a “deliberately aggressive” move into the travel sector of the magazine market.179 The launch of BBC Lonely Planet magazine, originally set to launch on 20 November, the same day as Wanderlust’s 100th issue (a move subsequently revised—it was instead launched on 28 November 2008) drew strong criticism from the panel of publishers from which the Committee heard evidence. For instance, Wanderlust told us that BBC Lonely Planet magazine was undercutting its advertising rates to such an extent that it struggled to see how the new magazine could possibly make any profit.180 Another major complaint centred around the allegation that there is no clear link between the BBC Lonely Planet magazine and BBC programming, an issue to which we now turn.

87. “Predominantly aimed at frequent travellers with the time and means to indulge their passion”, Worldwide states that the BBC Lonely Planet magazine “will combine inspirational ideas for future trips—from short breaks in the UK to long-haul journeys— with outstanding journalism and photography”.181 However, according to the Government’s 2005 Green Paper, the remit of Worldwide’s magazine business is to produce titles that are brand extensions of existing programming, leveraging the content that the programme produces (e.g. BBC Countryfile and BBC Top Gear magazines):

“Magazines will in future be focused more on brands and subjects that are connected to BBC programmes”.182

88. Travel publishers, such as Wanderlust and Create Publishing, contend that the BBC’s travel programming has neither been extensive nor germane to the kind of independent back-packing approach associated with the Lonely Planet brand. They argue that BBC

175 The BBC Magazines website lists BBC Match of the Day magazine in its “pre-teen” category, see www.bbcmagazines.com 176 Ev 161 177 Ev 143 178 Ev 177 179 Q 59 180 Q 59 181 “BBC Magazines to launch Lonely Planet title”, BBC press release, 5 August 2008 182 Department for Culture, Media and Sport, Review of the BBC’s Royal Charter: A strong BBC, independent of government, March 2005, p 101

programming has instead focused on family package holidays and therefore there is no natural extension of the BBC brand in this area.183 They conclude that the BBC has acquired a bridgehead in an entirely new area because it seemed attractive, will use its considerable resources to start a magazine which it will cross-promote with a TV series, and the result will be to drive the independent publishers currently active in the area out of business.184

89. The BBC rejected the accusation that there was no strong link between the Lonely Planet magazine and BBC programming. In fact, the Chairman of the BBC Trust told us that the primary reason for the proposition coming forward in the first place, and the primary reason for the Trust granting approval, “was that it was seen to be a clear opportunity to explore a very considerable amount of intellectual property the BBC holds within its archive and within current programmes which relate to travel and international affairs”.185 Worldwide estimates that it has “about 3,000 hours of TV programming that is in that zone of pure travel”, citing Coast, Britain from Above, and the various Michael Palin travel documentaries.186 It strikes us as odd, therefore, the newly launched Lonely Planet magazine does not carry the BBC brand or logo prominently on its front page.

90. Worldwide has previously been forced to dispose of some of its magazines due to a lack of connectivity with BBC programming. Four years ago, Eve, a women’s interest publication, and Cross Stitch Crazy, were sold off because, as Worldwide itself admits, “there were not really any cross-stitching programmes on BBC television, and, similarly, there were not any general women’s interest programmes on BBC television at the time”.187 The Chief Executive of Worldwide confirmed that “there has to be that connectivity but it does not have to be directly a programme to a magazine”.188

91. It is right that the BBC should exploit its intellectual property, including by allowing the publication of magazines using the BBC brand, in order to generate returns for the licence fee payer. However, the BBC must take due care not to distort the market, and it should not buy new brands—as it did with Lonely Planet—to enter new markets. The BBC’s assertion that its presence in the magazine market has grown sectors and benefited commercial rivals is highly counter-intuitive. If that were the case, we should expect commercial rivals to welcome BBC innovations in their markets. They do not. Rather than benefiting commercial competitors, the inherent advantages that BBC Magazines has over its rivals means that it can dominate markets at the expense of others. The closure of the long-established Shoot! magazine shortly after the launch of BBC Match of the Day magazine was perhaps an example of this.

92. There is no reason in principle why the BBC should produce its own magazines in- house, and there is certainly no justification for its stakes in overseas publications. New BBC magazines should only be launched if there is a clear link with core BBC

183 Ev 51, 174 184 Ev 51–52, 176 185 Q 156 186 Q 202 187 Q 238 188 Q 238

programming, and where the public value of launching a magazine outweighs any adverse impact on the existing marketplace. This could be assessed using a public value test similar to that applied to other BBC services.

93. This Report is critical of the acquisition of the Lonely Planet brand, its exploitation through the recent launch of Lonely Planet magazine and the market-distorting effects of those initiatives. We recognise, however, that a forced sale of the business may well lead to a substantial loss to Worldwide, the BBC and ultimately, therefore, the licence fee payer. We do not, therefore, recommend such a step, but urge the Trust to take account of the criticisms in this Report and moderate Worldwide’s behaviour accordingly in the future. Given the relative size of the acquisition—and its considerable effects on Worldwide’s balance sheet—we also ask the BBC to disclose further details of the deal and of the performance of the Lonely Planet business, both before and since the acquisition.

Websites

94. The BBC’s public service website, bbc.co.uk, is the most popular content site in the UK: 44% of UK adult internet users use the site on at least a weekly basis.189 Less familiar, at least for UK audiences, are the BBC’s additional commercial websites. BBC Worldwide’s magazines and digital media divisions have launched several commercial websites in recent years. Examples include topgear.com and gardenersworld.com, together with bbc.com, the international version of bbc.co.uk. These BBC Worldwide websites provide news, entertainment and services much like bbc.co.uk but, unlike the public service site, they contain advertising. The Guardian Media Group argued that some of the advertisements appearing on these sites were inappropriate, citing a McDonalds advert on Worldwide’s environment website, BBC Green.190 However, the BBC strongly refuted this suggestion, and we are satisfied that this particular allegation was mistaken.191

95. Of greater concern to us is the general expansion in Worldwide’s online operations. The Guardian Media Group reports that the BBC Magazines division of Worldwide has “moved from extending existing programming brands to creating entirely new, often multiplatform media brands”.192 This has resulted in the launch of new “passion” websites which the Guardian Media Group claims “have no direct link to existing programming brands and have a significant negative impact on existing operators in their respective markets”.193 The example that both the Guardian Media Group and the British Internet Publishers Alliance (BIPA) cited was BBC Green. According to the Guardian Media Group, this site was launched despite there being “at least eight [commercial] websites already struggling to see where the return is going to come in the area of environment” (e.g. Treehugger, Telegraph Earth, New Scientist, as well as the science and nature site on bbc.co.uk which includes all the BBC’s public service natural history, nature and

189 BBC, Part Two: Annual Report and Accounts 2007–08, June 2008, p 31 190 Q 65 191 Letter from the BBC to the Chairman of the Committee, John Whittingdale MP, 11 November 2008 192 Ev 47 193 Ev 47

environmental content).194 The BBC informed us in November that for commercial reasons the site would close on or before 20 November 2008 (unless a buyer could be found), although we note that the website was not actually closed until February 2009.195 Press reports provided further clarity on the reasons for the closure, with a BBC Worldwide spokesperson quoted as saying “we are a commercial business and in difficult times we have to look at our portfolio”.196

96. Nevertheless, BIPA concludes that “through superior technology and marketing power the BBC dominates the UK’s online market”.197 It claims that BBC Worldwide’s commercial sites use the same technology that was developed for the licence fee funded bbc.co.uk site. This, combined with “unrivalled, privileged access to un-regulated cross- promotional opportunities, cross-subsidised access to content production and assets”, creates, according to BIPA, “unfair competition” with commercial websites.198 For instance, Shoot Gardening, an “online gardening diary” and commercial competitor of the BBC, has submitted a complaint to the BBC that Worldwide has violated its fair trading guidelines. It reports that some of the content on Worldwide’s gardenersworld.com site has been copied directly from the public service site bbc.co.uk/gardening. Shoot Gardening’s founder argues that “even if [Worldwide] paid a fair market price [for the information], which I am not certain they did, the fact they have it at all gives them a significant leap forward in competing with us”.199 The Guardian Media Group concluded that “the ‘passion sites’ take eyeballs and advertising income away from existing commercial sites […] private investment is crowded out by an expanded public service”.200

97. We believe that there is little justification for Worldwide to launch commercial websites in markets that are already well served by commercial competitors, or where a clear link to BBC programming is absent. We therefore welcome the closure of the BBC Green website, which was clearly operating in a crowded marketplace and was not directly linked to a specific BBC programme. We hope that this sets a precedent and represents an end to such online expansion by Worldwide, although we note the BBC’s insistence that this decision was taken purely for commercial reasons, rather than due to any adverse impact on competitor sites. We believe the BBC should exhibit extreme caution before launching any further commercial websites. In particular, we recommend that it undertakes thorough market impact assessments prior to launching new websites or services on existing sites.

194 Q 48 195 Letter from the BBC to the Chairman of the Committee, John Whittingdale MP, 11 November 2008 196 “BBC must axe business ventures, insist MPs”, The Guardian, 14 February 2009 197 Ev 177 198 Ev 177 199 Letter to Balbir Binning, Controller, Fair Trading & BBC Compliance Officer, BBC, from Nicola Gammon, Founder, Shoot Limited 200 Ev 49

7 Channel 4 and BBC Worldwide

98. Since the Committee held its oral evidence sessions in November and December 2008, the prospect of a partnership between BBC Worldwide and Channel 4 has emerged. Channel 4 is currently experiencing severe financial pressures, in part due to the structural changes caused by digital switchover and the growth of online distribution. The indirect subsidy Channel 4 currently receives thanks to its free analogue spectrum will diminish as the UK approaches digital switchover. This problem, which Channel 4 has long recognised, is being exacerbated by a decline in advertising revenue associated with the recession. As a result, Channel 4 estimates that it will have a funding gap of around £150 million per annum by 2012.201

99. We recognised the pressures facing Channel 4 in our report into Public Service Content in November 2007. In the same report we also outlined the importance of maintaining plurality in the provision of content, and the need for Channel 4 to produce highquality, challenging UKproduced drama and documentaries. As a result we concluded that, should a funding gap arise, “Channel 4 should be able to apply, on a contestable basis, for public funding—which could potentially include television licence fee income—to make specific public service programmes that meet its remit”.202

100. Our recognition of the importance of plurality in the provision of UK-produced public service content is a view also shared by the Government and Ofcom. The Secretary of State for Culture, Media and Sport recently stated that the Government would “explore how we can establish a sustainable public service organisation that offers scale and reach alongside the BBC, building on the strength of Channel 4”.203 In January 2009 Ofcom outlined a host of proposals to strengthen and sustain PSB programming over the next decade. In its Second Public Service Broadcasting Review, it states that one of its top priorities is to ensure “a financially robust alternative provider of public service content alongside the BBC, with Channel 4 at its heart”.204

101. One option identified by the review is to establish a relationship between Channel 4 and BBC Worldwide. Ofcom states that “BBC Worldwide and Channel 4 have already established that there is potential value from collaboration between the two organisations. It is possible that this could be extended to a deeper and more integrated partnership with opportunities for future growth”. While neither the BBC nor Channel 4 has ruled anything out from a potential partnership, it is expected that any deal would be likely to be based around their UK assets. We understand that discussions have centred around the possible combination of businesses in the following areas:

• Digital channels: Channel 4 has a portfolio of digital channels (E4, Film4, More4, 4Music, Channel 4+1, E4+1, Film4+1, More4+1, and a 50% stake in Box television),

201 Oral evidence taken before the Culture, Media and Sport Committee on 21 October 2008, HC (2008–09) 189, Q 76 [Helen Southworth] 202 Culture, Media and Sport Committee, First Report of Session 2007–08, Public Service Content, HC 36–I, para 161 203 HC Deb, 29 January 2009, col 462 204 Ofcom, Second Public Service Broadcasting Review: Putting Viewers First, January 2009, pp 1, 66

while BBC Worldwide has a 50% stake in UKTV (which comprises: Alibi, Blighty, Dave, Eden, G.O.L.D., UKTV Food, UKTV Gardens, UKTV Style, Watch, and Yesterday, with “+1” channels for each of these excluding Blighty and UKTV Gardens205).

• DVD distribution: possible combination of BBC Worldwide’s stake in 2entertain with Channel 4’s 4DVD business.

• Online and on demand: Channel 4 has its channel4.com website and on demand service 4oD, while Worldwide has several commercial websites (as discussed in Chapter 6).

102. Channel 4 believes that a partnership with Worldwide would present opportunities for substantial synergies in both costs (such as removing duplication in common business areas) and revenues (for example, combining assets to drive commercial benefits). In mid- January, the BBC estimated that these partnerships could release additional benefits of around £45 million per annum for Channel 4.206 Discussions between BBC Worldwide and Channel 4 on the details of any possible partnership are ongoing and a decision is expected within the next few months.

103. We recognise the financial pressure Channel 4 is experiencing and we restate our view that it is essential to retain plurality in the provision of UK-produced public service content. We appreciate that a partnership between Channel 4 and BBC Worldwide could deliver financial benefits that may go some way towards closing Channel 4’s funding gap. However, we are sceptical as to whether a wide-ranging partnership or even merger with BBC Worldwide would be the best solution for Channel 4, for the licence fee payer, or for the media industry as a whole. While we do see some value in the direct transfer of assets—particularly Worldwide’s UKTV channels—to Channel 4, we believe that a broader and more complex arrangement would have a number of drawbacks. The extra businesses in which Worldwide would have a stake in would be likely to make Worldwide an even more aggressively commercial organisation. Furthermore, we see no obvious synergy between Channel 4, which produces no content of its own, and Worldwide, which is primarily a content distributor. It is also apparent that any partnership, however great the scope, would still only account for a proportion of Channel 4’s £150 million annual funding gap.

104. While a partnership between Channel 4 and BBC Worldwide would be likely to increase funding for Channel 4, at the same time it would also reduce the revenue returned to the BBC by Worldwide, thereby putting more pressure on the licence fee. We believe it would be far cleaner and simpler to effect this funding change directly. We therefore reiterate our previous recommendation that, instead of the proposed partnership, a proportion of the licence fee should be made available to Channel 4, in order for it to sustain its public service programming.

105. We believe that the issues we have identified in relation to Worldwide’s activities and governance will still need to be addressed even if a partnership with Channel 4 is

205 UKTV: TV listings, www.uktv.co.uk 206 Oral evidence taken before the House of Lords Communications Committee on 14 January 2009, Q 11 [Lord Fowler]

established. Whatever the decision on any proposed partnership, we believe that the rest of our recommendations in this report continue to stand. 8 BBC Local Video Proposal (not a commercial activity)

106. In May 2008 the BBC submitted plans to the BBC Trust to provide a new, on-demand, local video service, delivered via fixed and mobile broadband internet connections. It came about from a challenge from the Trust for “BBC management to respond to licence fee payers wanting better local services”.207 The proposal would have provided local news and video content on 65 existing local BBC websites in England and Wales, at a cost of £68 million over four years. It would not have been a commercial activity: it would have been funded by the licence fee, without advertising or any other form of income generation.208 However, the proposal was rejected by the BBC Trust in November 2008 “because it would not improve services for the public enough to justify either the investment of licence fee funds or the negative impact on commercial media”.209 Following a three month public consultation on its findings, the Trust confirmed its rejection of the proposal on 23 February 2009.210

107. The Trust’s decision came after a Public Value Test (PVT), which incorporated a Market Impact Assessment (MIA; commissioned by the Trust but undertaken by Ofcom). The decision also came shortly after the Committee had itself investigated the merits and drawbacks of the proposal. In November 2008, during our oral evidence sessions in relation to the BBC’s commercial operations, we took the opportunity to discuss the local video proposal with the newspaper and radio industries, and the BBC Trust and Executive.

108. The BBC’s Director General told us that the local video proposal had been four years in the making, and had the potential to provide an enhanced local service—in particular an improved local news provision—for licence fee payers.211 However, Ofcom concluded in its MIA that “the launch of the proposal would have a significant negative market impact on commercial providers”.212 This finding was reflected in the evidence we heard from the local media industry. Sly Bailey, the Chief Executive of Trinity Mirror plc, one of the UK's largest newspaper publishers, told us that the resources of the BBC would dwarf the budgets that the local press has to maintain their own websites, forcing many of them out of business. She informed us that the local press is already “absolutely inundated with competition”.213 Trinity Mirror closed 44 local newspapers in 2008 (140 of its local newspapers continue to operate).214

207 “BBC Trust begins public value test of BBC local video proposal”, BBC Trust press release, 24 June 2008 208 Q 162 209 “BBC Trust rejects local video proposals”, BBC Trust press release, 21 November 2008

210 “BBC Trust rejects local video proposals”, BBC Trust press release, 23 February 2009 211 Q 162 212 Ofcom, Market Impact Assessment of the BBC’s Local Video Service, 21 November 2008 213 Q 81

214 Q 72; Trinity Mirror plc, www.trinitymirror.com

109. Meanwhile, RadioCentre, the industry body for commercial radio, told us that the proposed service would have a “devastating” impact on local radio stations. Its Chief Executive said last July that 40% of local radio stations are already unprofitable and that some are beginning to hand their licences back.215 Despite this, RadioCentre report that the local news market is already well served, with the average commercial radio station broadcasting 22 news bulletins per day.216

110. A total of £1.32 million was spent developing and assessing the local video proposals, although this does not include the cost of the time spent on the project by BBC staff, which the BBC was unable to accurately estimate.217 However, it does include £814,604 charged by Ofcom for its role in the PVT, the Market Impact Assessment. This cost was substantially more than a “usual” MIA, “due to the complexity introduced by the need to assess multiple markets” (i.e. the need to assess the impact in several of the local geographic markets that the 65 new services would cover).218

111. We recognise the benefits that the proposed local online video service could have brought to consumers, but agree with the Trust’s conclusion that these were insufficient to warrant the very significant adverse impact on commercial competitors. At a time when local commercial media services are under extreme pressure, the BBC should be looking to help rather than hinder local newspapers and radio stations. We therefore welcome the Trust’s decision to reject the plans, and we hope that this example sets a precedent whereby the BBC gives necessary consideration to its impact on the rest of the marketplace. Indeed, it is apparent that this decision does not necessarily spell the end of the BBC’s ambitions in this area, and the Trust must continue to exercise caution when reviewing any revised plans. At the same time, we encourage the commercial media sector to continue to seek to raise its game in spite of the difficult economic circumstances, and continually improve the products aimed at local audiences. 9 Conclusion

112. There are major benefits from the BBC undertaking commercial activities. Most importantly, the profits generated by the exploitation of the BBC’s intellectual property can be reinvested in the BBC’s public services, to the benefit of licence fee payers. We fully support this principle. However, the manner in which some of the BBC’s commercial revenue is generated, and the governance arrangements within which the BBC’s commercial arm—BBC Worldwide—operates, cause us and others increasing concern. Worldwide has proved successful in recent years in exploiting new commercial opportunities. Its expansion was largely made possible by a loosening of the rules that govern the limits to its operations. However, there is clearly a balance to be drawn, between Worldwide generating a return for the BBC, and limiting

215 “Commercial radio attacks BBC local online video plans”, The Guardian, 16 July 2008 216 Radio Centre, Action Stations: The Output and Impact of Commercial Radio, July 2008, p 38 217 Ev 137–138. The evidence provided by the BBC in January did not represent the final cost as the process was ongoing. However, the BBC subsequently confirmed that the final cost was £1,317,278. 218 Ev 138

Worldwide’s operations in order to ensure it upholds the BBC’s reputation and does not damage its commercial competitors.

113. The new businesses in which Worldwide has become involved, particularly its minority stakes in overseas production companies, its controversial acquisition of Lonely Planet, and its growing portfolio of magazines, suggest that the balance has been tipped too far in favour of Worldwide’s unrestricted expansion. Worldwide’s new activities risk jeopardising the reputation of the BBC and have had an adverse impact on its commercial competitors. Furthermore, it seems likely that the BBC could gain a better return for the licence fee payer if it sold more of its rights on the open market rather than offering them exclusively to Worldwide. We believe it is in the interests of the UK’s creative economy as a whole that BBC Worldwide’s activities are reined back. Among our other recommendations, we therefore recommend that the BBC Trust reinstates the rule that all BBC commercial activity must have a clear link with core BBC programming.

Conclusions and recommendations

1. We recognise that significant benefits are realised from the BBC undertaking commercial activities. Clearly, the profits generated by the exploitation of its intellectual property allows the BBC to invest more in its public service remit than would otherwise be the case. We also note the positive sentiments expressed by significant sections of the creative economy in relation to the business practices of BBC Worldwide, although we are conscious that the industry is unlikely to bite the hand that feeds it. The principle that the BBC should be able to maximise the value of its brand by exploiting its intellectual property, subject to appropriate safeguards, in order to relieve pressure on the licence fee is clearly sensible. We share the view of the public and the Government in this respect. In the chapters which follow in this report, however, it is the manner in which some of the BBC’s commercial revenue is generated, and the governance arrangements within which Worldwide operates, which give rise to legitimate concern. (Paragraph 16)

2. We recommend that the commercial criteria and fair trading guidelines should be returned to the pre-2007 position, whereby all commercial activity must have a clear link with core BBC programming. The provisional comments by the Chairman of the Trust, and the Trust’s interim statement, suggest a degree of support for our position, and we encourage the Trust to act on this commitment. (Paragraph 22)

3. We believe that the £50 million threshold at which a commercial transaction is referred to the Trust is too high. The BBC’s claim that it is low is based on a misleading comparison with the shareholder consent requirements of publicly listed companies. We note that in the past “novel” activities have been automatically considered by the Trust and any threshold should, of course, not be a substitute for discretion. Nevertheless, it is alarming that, in theory, a commercial transaction equivalent in value to almost half of Worldwide’s net assets or its shareholders’ funds could escape the need for the Trust’s approval. We believe the threshold should be lowered considerably, to allow the Trust more scrutiny and a greater say in the BBC’s commercial decisions. We have suggested that £30 million may be more appropriate, based on 25% of Worldwide’s net assets. To recognise the Trust’s unique regulatory role (and cater for the arbitrariness often found in balance sheet valuations), we would be more conservative still. We would urge the Trust to consider a level where the value of the investment exceeded 25% of Worldwide’s pre-tax profits (before exceptional items) in the previous year. Currently, this too would approximate to £30 million. We recommend that the Trust should, as a matter of priority, review the threshold level and report back to us on its findings. (Paragraph 41)

4. The BBC has also been less than transparent about its commercial investments, notably Lonely Planet. In evidence to us, the Trust Chairman Sir Michael Lyons said: “I can offer a willingness […] to test that proposition about whether the levels of disclosure are less than you would expect of a plc in this setting. If you have a point, then that is something that the Trust will want to take on board”. (Paragraph 42)

5. We recommend, therefore, that the Trust also considers and reports back on the Committee’s and the industry’s concerns about disclosure and transparency. (Paragraph 42)

6. With respect to directorships too, BBC Worldwide is less transparent than publicly quoted companies. The remuneration, including bonuses and benefits, of its Chief Executive is disclosed in the BBC’s main accounts by virtue of his being an Executive Director of the main board, as is that of two of Worldwide’s non-executive directors who also sit on the main BBC board. Worldwide’s Annual Review, however, makes no comparable disclosure with respect to its remaining executive and non-executive directors. Instead, it simply describes Worldwide’s approach and policy in two brief notes in the Review. In order to better understand the incentives within Worldwide, and whether remuneration is in line with comparable media companies, we believe full disclosure should be made for all its directors. (Paragraph 43)

7. We accept that the BBC’s representation on the Worldwide Board, especially at Finance Director level, permits financial oversight and helps ensure coordination between the two organisations. However, we find it impossible to accept the justification for the presence of the Chief Executive of BBC Worldwide on the BBC Executive Board. We disagree with the BBC’s assertion that this does not give Worldwide a significant, unfair advantage over its competitors. Even if the BBC’s claim that Board level discussions are purely strategic and of little benefit to Worldwide has some credence, it still creates an unwelcome perception of special favours. It appears from the comments by the Chairman of the Trust that a revision of this arrangement is already being considered. We accept that the Executive and Worldwide may derive some operational benefits from the presence of the Worldwide Chief Executive on the BBC Executive Board, but believe that the BBC should seek to achieve these via other means which do not contravene its fair trading guidelines. We therefore recommend the removal of Worldwide’s representation on the BBC Executive Board. This would represent one practical step towards a more transparent, regularised and arms-length commercial relationship between the BBC and Worldwide. (Paragraph 51)

8. The BBC must aim to obtain as much value as possible from its programme sales in order to benefit the licence-fee payer. Yet it is difficult to judge whether it is generally obtaining the maximum value. The benchmarking process it uses is inadequate in comparison to competitive auctions which can drive up the value of programme rights. At the same time, Ofcom has raised serious doubts over the fairness of a system which grants BBC Worldwide preferred distributor status. We believe the solution to both these issues is to make the BBC’s process for programme sales more transparent, and increasingly open up the market for the BBC’s programmes to competitive bidding. We reject the BBC’s suggestion that a competitive bidding process would be commercially inefficient. The BBC already has in place a Commercial Agency which must surely have the capability successfully to oversee such a process. The same Agency could also arrange licensing and contractual arrangements with successful bidders, so as to mitigate any possible damage to the BBC brand. What we propose here would not spell the end for BBC Worldwide’s sales and distribution business. Clearly, given its background and track record, it would still stand a good chance of acquiring many programmes. However, it would

ensure that Worldwide always paid the full market value to the BBC and hence the licence fee payer. We accept that the BBC will not be able to effect this transformation overnight, but we recommend that it now begins a steady migration away from the “first look” arrangement by opening up an increasing number of programmes to competitive bidding. We urge the BBC Trust to reconsider its interim judgement on the “first look” arrangement. (Paragraph 63)

9. The Committee has insufficient information available to determine the truth of the claims that Worldwide may be overpaying for programme rights from independent producers. However, we do recommend that the Trust satisfies itself that Worldwide is not overbidding and, to balance things out, potentially undervaluing rights to the BBC’s in-house productions. (Paragraph 67)

10. It is true that the BBC’s investments do boost parts of the UK creative sector. In today’s economic climate that might be an important source of funding to keep companies afloat and prevent the loss of creative resources (although that is not the justification argued by BBC Worldwide itself, which views these largely as normal commercial investments). We therefore recognise that, in the short-term, there may a case for Worldwide to retain some of its minority equity stakes in UK production companies. However, we believe that in the medium term it is in the interests of the UK creative industries as a whole that this practice is discontinued. We recommend that Worldwide should exit existing investments as soon as is feasible, and without damage to the viability of the production companies concerned. (Paragraph 77)

11. Whatever the arguments for UK investment, it is very difficult to make a case for BBC Worldwide’s investments in overseas production houses. We were convinced by the arguments of those who demonstrated that the risks, both financial and reputational, far outweighed the possible return to the BBC. More importantly, the attempt to create an international BBC Worldwide business creates the clear risk that it is this business, rather than the core public service remit, that will increasingly drive BBC programming. That is not a risk that licence fee payers should have to bear. We therefore recommend that the strategy of overseas investment is brought to an end. Investments already made should be disposed of when market conditions permit a profitable (or at least loss-minimising) exit. (Paragraph 78)

12. It is right that the BBC should exploit its intellectual property, including by allowing the publication of magazines using the BBC brand, in order to generate returns for the licence fee payer. However, the BBC must take due care not to distort the market, and it should not buy new brands—as it did with Lonely Planet—to enter new markets. The BBC’s assertion that its presence in the magazine market has grown sectors and benefited commercial rivals is highly counter-intuitive. If that were the case, we should expect commercial rivals to welcome BBC innovations in their markets. They do not. Rather than benefiting commercial competitors, the inherent advantages that BBC Magazines has over its rivals means that it can dominate markets at the expense of others. The closure of the long-established Shoot! magazine shortly after the launch of BBC Match of the Day magazine was perhaps an example of this. (Paragraph 91)

13. There is no reason in principle why the BBC should produce its own magazines in- house, and there is certainly no justification for its stakes in overseas publications. New BBC magazines should only be launched if there is a clear link with core BBC programming, and where the public value of launching a magazine outweighs any adverse impact on the existing marketplace. This could be assessed using a public value test similar to that applied to other BBC services. (Paragraph 92)

14. This Report is critical of the acquisition of the Lonely Planet brand, its exploitation through the recent launch of Lonely Planet magazine and the market-distorting effects of those initiatives. We recognise, however, that a forced sale of the business may well lead to a substantial loss to Worldwide, the BBC and ultimately, therefore, the licence fee payer. We do not, therefore, recommend such a step, but urge the Trust to take account of the criticisms in this Report and moderate Worldwide’s behaviour accordingly in the future. Given the relative size of the acquisition—and its considerable effects on Worldwide’s balance sheet—we also ask the BBC to disclose further details of the deal and of the performance of the Lonely Planet business, both before and since the acquisition. (Paragraph 93)

15. We believe that there is little justification for Worldwide to launch commercial websites in markets that are already well served by commercial competitors, or where a clear link to BBC programming is absent. We therefore welcome the closure of the BBC Green website, which was clearly operating in a crowded marketplace and was not directly linked to a specific BBC programme. We hope that this sets a precedent and represents an end to such online expansion by Worldwide, although we note the BBC’s insistence that this decision was taken purely for commercial reasons, rather than due to any adverse impact on competitor sites. We believe the BBC should exhibit extreme caution before launching any further commercial websites. In particular, we recommend that it undertakes thorough market impact assessments prior to launching new websites or services on existing sites. (Paragraph 97)

16. We recognise the financial pressure Channel 4 is experiencing and we restate our view that it is essential to retain plurality in the provision of UK-produced public service content. We appreciate that a partnership between Channel 4 and BBC Worldwide could deliver financial benefits that may go some way towards closing Channel 4’s funding gap. However, we are sceptical as to whether a wide-ranging partnership or even merger with BBC Worldwide would be the best solution for Channel 4, for the licence fee payer, or for the media industry as a whole. While we do see some value in the direct transfer of assets—particularly Worldwide’s UKTV channels—to Channel 4, we believe that a broader and more complex arrangement would have a number of drawbacks. The extra businesses in which Worldwide would have a stake in would be likely to make Worldwide an even more aggressively commercial organisation. Furthermore, we see no obvious synergy between Channel 4, which produces no content of its own, and Worldwide, which is primarily a content distributor. It is also apparent that any partnership, however great the scope, would still only account for a proportion of Channel 4’s £150 million annual funding gap. (Paragraph 103)

17. While a partnership between Channel 4 and BBC Worldwide would be likely to increase funding for Channel 4, at the same time it would also reduce the revenue returned to the BBC by Worldwide, thereby putting more pressure on the licence fee. We believe it would be far cleaner and simpler to effect this funding change directly. We therefore reiterate our previous recommendation that, instead of the proposed partnership, a proportion of the licence fee should be made available to Channel 4, in order for it to sustain its public service programming. (Paragraph 104)

18. We believe that the issues we have identified in relation to Worldwide’s activities and governance will still need to be addressed even if a partnership with Channel 4 is established. Whatever the decision on any proposed partnership, we believe that the rest of our recommendations in this report continue to stand. (Paragraph 105)

19. We recognise the benefits that the proposed local online video service could have brought to consumers, but agree with the Trust’s conclusion that these were insufficient to warrant the very significant adverse impact on commercial competitors. At a time when local commercial media services are under extreme pressure, the BBC should be looking to help rather than hinder local newspapers and radio stations. We therefore welcome the Trust’s decision to reject the plans, and we hope that this example sets a precedent whereby the BBC gives necessary consideration to its impact on the rest of the marketplace. Indeed, it is apparent that this decision does not necessarily spell the end of the BBC’s ambitions in this area, and the Trust must continue to exercise caution when reviewing any revised plans. At the same time, we encourage the commercial media sector to continue to seek to raise its game in spite of the difficult economic circumstances, and continually improve the products aimed at local audiences. (Paragraph 111)

20. There are major benefits from the BBC undertaking commercial activities. Most importantly, the profits generated by the exploitation of the BBC’s intellectual property can be reinvested in the BBC’s public services, to the benefit of licence fee payers. We fully support this principle. However, the manner in which some of the BBC’s commercial revenue is generated, and the governance arrangements within which the BBC’s commercial arm—BBC Worldwide—operates, cause us and others increasing concern. Worldwide has proved successful in recent years in exploiting new commercial opportunities. Its expansion was largely made possible by a loosening of the rules that govern the limits to its operations. However, there is clearly a balance to be drawn, between Worldwide generating a return for the BBC, and limiting Worldwide’s operations in order to ensure it upholds the BBC’s reputation and does not damage its commercial competitors. (Paragraph 112)

21. The new businesses in which Worldwide has become involved, particularly its minority stakes in overseas production companies, its controversial acquisition of Lonely Planet, and its growing portfolio of magazines, suggest that the balance has been tipped too far in favour of Worldwide’s unrestricted expansion. Worldwide’s new activities risk jeopardising the reputation of the BBC and have had an adverse impact on its commercial competitors. Furthermore, it seems likely that the BBC could gain a better return for the licence fee payer if it sold more of its rights on the open market rather than offering them exclusively to Worldwide. We believe it is in the interests of the UK’s creative economy as a whole that BBC Worldwide’s

activities are reined back. Among our other recommendations, we therefore recommend that the BBC Trust reinstates the rule that all BBC commercial activity must have a clear link with core BBC programming. (Paragraph 113)

Formal Minutes

Wednesday 25 March 2009

Members present:

Mr John Whittingdale, in the Chair

Janet Anderson Mr Mike Hall

Mr Philip Davies Helen Southworth

Paul Farrelly

Draft Report (BBC Commercial Operations), proposed by the Chairman, brought up and read.

Ordered, That the Chairman’s draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 113 read and agreed to.

Resolved, That the Report be the Fifth Report of the Committee to the House.

Ordered, That the Chairman do make the Report to the House.

Written evidence, reported to the House on 28 October 2008 and 27 January 2009, was ordered to be printed with the Report.

Written evidence was ordered to be reported to the House for placing in the Library and Parliamentary Archives.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

[Adjourned till Tuesday 21 April at 10.15 am

Witnesses

Tuesday 4 November 2008 Page

Tony Cohen, Chief Executive Officer, FremantleMedia, John McVay, Chief Executive and Charles Wace, Chairman, Pact Ev 26

Tony Elliot, Chairman, Time Out Group, Carolyn McCall, Chief Executive, Guardian Media Group and Lyn Hughes, Editor-in-chief, Wanderlust Publications Ltd Ev 53

Andrew Harrison, Chief Executive, RadioCentre, Sly Bailey, Chief Executive and Paul Vickers, Group Legal Director, Trinity Mirror plc, and Santha Rasaiah, Political, Editorial and Regulatory Affairs Director, Newspaper Society Ev 66

Tuesday 18 November 2008

Sir Michael Lyons, Chairman, BBC Trust and Mark Thompson, Director General, BBC Ev 98

John Smith, Chief Executive, Etienne De Villiers, Non Executive Chairman, BBC Worldwide, Zarin Patel, Director of Finance, and Caroline Thomson, Chief Operating Officer, BBC Ev 116

Wednesday 10 December 2008

Lord Carter of Barnes CBE, a Member of the House of Lords, Minister for Communications, Technology and Broadcasting Ev 146

List of written evidence

1 FremantleMedia Ev 1: Ev 72: Ev 201 2 Pact Ev 9 3 Time Out Group Ltd Ev 34 4 Guardian Media Group (GMG) Ev 45 5 Wanderlust Publications Ltd Ev 51 6 RadioCentre Ev 60: Ev 73 7 The Newspaper Society Ev 65 8 BBC Trust Ev 75 9 British Broadcasting Corporation (BBC) Ev 78: Ev 128 10 Department for Culture, Media and Sport (DCMS) Ev 144 11 Radio Telefis Éirann (RTE) Ev 158 12 Baby Cow Productions Ltd Ev 159

13 Signature Publishing Ltd Ev 160 14 Big Talk Productions Ev 162 15 Equity Ev 163 16 Musician’s Union Ev 165 17 Writers’ Guild of Great Britain Ev 167 18 PPL Ev 169 19 MCPS-PRS Alliance Ev 169 20 Left Bank Pictures Ev 171 21 UKTV Ev 173 22 Create Publishing Ltd Ev 173 23 Whatsonwhen Ltd Ev 176 24 British Internet Publishers Alliance (BIPA) Ev 177 25 Ofcom Ev 181 26 Burma Campaign UK Ev 187 27 Northcliffe Media Ltd Ev 189 28 JC Woods Ev 196 29 Channel 4 Ev 197 30 The Publishers Association Ev 199 31 Stephen Games Ev 201 32 Kent Messenger Group Ev 205 33 Seven Publishing Ltd Ev 205

List of unprinted evidence

The following memoranda have been reported to the House, but to save printing costs they have not been printed and copies have been placed in the House of Commons Library, where they may be inspected by Members. Other copies are in the Parliamentary Archives, and are available to the public for inspection. Requests for inspection should be addressed to The Parliamentary Archives, Houses of Parliament, London SW1A 0PW (tel. 020 7219 3074). Opening hours are from 9.30 am to 5.00 pm on Mondays to Fridays.

FremantleMedia Pact (Annex A) British Internet Publishers Alliance (BIPA) (Annexes A–D) Time Out Group Ltd (Annexes A–D) Northcliffe Media Ltd (Appendix) The Newspaper Society Shoot Limited

List of Reports from the Committee during the current Parliament

Session 2005–06

First Special Report Maritime Heritage and Historic Ships: Replies to the HC 358 Committee’s Fourth Report of Session 2004-05

First Report Broadcasting Rights for Cricket HC 720

Second Report Analogue Switch-off HC 650 I, II

Third Report Preserving and Protecting our Heritage HC 912 I, II, III

Fourth Report Women’s Football HC 1357 Second Special Report Women’s Football: Replies to the Committee’s HC 1646 Fourth Report of Session 2005–06

Session 2006–07 First Report Work of the Committee in 2006 HC 234

Second Report London 2012 Olympic Games and Paralympic Games: HC 69 I, II funding and legacy

Third Report Call TV quiz shows HC 72

Fourth Report Call TV quiz shows: Joint response from Ofcom and HC 428 ICSTIS to the Committee's Third Report of Session 2006-07

Fifth Report New Media and the creative industries HC 509 I, II

Sixth Report Caring for our collections HC 176 I, II

Seventh Report Self-regulation of the press HC 375

First Special Report Self-regulation of the press: Replies to the HC 1041 Committee’s Seventh Report of Session 2006–07

Session 2007–08 First Report Public service content HC 36 I, II

First Special Report Public service content: Response from Ofcom to the HC 275 Committee’s First Report of Session 2007–08

Second Report Ticket touting HC 202

Third Report Work of the Committee in 2007 HC 234

Fourth Report BBC Annual Report and Accounts 2006–07 HC 235

Fifth Report On-course horserace betting HC 37

Second Special Report On course horserace betting: Government Response HC 549 to the Committee’s Fifth Report 2007–08

Sixth Report London 2012 Games: the next lap HC 104 I, II

Seventh Report European Commission White Paper on Sport HC 347

Third Special Report European Commission White Paper on Sport: HC 1029 Government Response to the Committee’s Seventh Report 2007–08

Eighth Report Tourism HC 133 I, II

Ninth Report Draft Cultural Property (Armed Conflicts) Bill HC 693

Tenth Report Harmful Content on the Internet and in Video HC 353 I, II Games

Eleventh Report Draft Heritage Protection Bill HC 821

Session 2008–09 First Report Pre-appointment hearing with the Chairman-elect HC 119 [First Joint Report with of Ofcom, Dr Colette Bowe the Business and Enterprise Committee] Second Report Work of the Committee 2007–08 HC 188 Third Report Channel 4 Annual Report HC 189 Fourth Report BBC Annual Report and Accounts 2007–08 HC 190 First Special Report Unauthorised Disclosure of Heads of Report HC 333

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Culture, Media and Sport Committee: Evidence Ev 1 Oral evidence

Taken before the Culture, Media and Sport Committee

on Tuesday 4 November 2008

Members present:

Mr John Whittingdale, in the Chair

Janet Anderson Alan Keen Philip Davies Mr Adrian Sanders Paul Farrelly Helen Southworth

Memorandum submitted by FremantleMedia

1.SummaryResponses to theIssuesRaised by theSelectCommittee

(a) The benefits and opportunities oVered by the BBC undertaking a range of commercial activities in the UK and abroad FremantleMedia supports the BBC’s attempts to maximise the value returned to UK licence fee payers from its publicly-funded intellectual property (IP) through commercial exploitation. However, the BBC must always ensure all its commercial activities meet the four criteria set out in its Agreement with the DCMS:1 fit with Public Purposes, commercial eYciency, maintaining the BBC’s reputation and avoiding market distortion. The requirement to demonstrate commercial eYciency means that in each area of exploitation, BBC Worldwide needs constantly to justify its role against the alternative of a commercial relationship with an existing market player. The BBC should not automatically assume that a near-exclusive relationship with a wholly-owned commercial subsidiary will necessarily provide maximum commercial eYciency or be the most appropriate means of ensuring the public interest. Significant benefits can also be derived from the exploitation of BBC IP by other market players, with lower risk, potentially higher returns and greater consistency with other public interest objectives.

(b) The potential risks to the BBC, licence fee payers and other stakeholders The BBC’s commercial activities create a wide variety of risks both for the BBC itself and for other stakeholders (see 3(e) below): — risk that speculative commercial ventures such as investments in overseas channels and production companies will lose money and reduce the funds available to the BBC from BBC Worldwide. The BBC’s investment in overseas channels appears to be a signiﬁcant drain on the BBC’s resources.2 It is not clear how these will deliver an appropriate return to the BBC, since these channels cannot readily be sold because the BBC must retain control to protect its brand, and in the short run they appear unlikely to be particularly proﬁtable; — reputational risk for the BBC when BBC Worldwide acts as a producer without editorial supervision from the BBC itself (ie the risk of poor editorial decision-making, which can lead to major reputational problems for producers: see the problems experienced in the UK over the past year, with the abuse of premium rate telephony and “Queengate”); — reputational risk for the BBC from the production of shows by BBC Worldwide’s wholly commercial overseas associates which are not consistent with the values of the BBC brand (eg Joker Poker, a gaming show produced by Freehand in Australia sponsored by a casino group); — risk for licence fee payers that the BBC’s commercial activities will skew the BBC’s public service output towards less UK-focused programming which will show a greater commercial return; and — risk that the BBC is distorting the market by eliminating competition for valuable content rights, raising barriers to entry to the distribution business and increasing prices.

1 The four criteria for the BBC’s commercial activities are set out in the Agreement, cl 69(1): (a) they must fit with the BBC’s Public Purpose activities (in the manner defined by paragraph (3)); (b) they must exhibit commercial eYciency; (c) they must not jeopardise the good reputation of the BBC or the value of the BBC brand; (d) they must comply with fair trading guidelines in force under clause 67(1)(a) and in particular avoid distorting the market. 2 In the year to 31 March 2008, BBC Worldwide relaunched channels in Asia at a cost to the P&L of £7.1 million, and predicts that additional channel launches in Latin America, Australia and Africa will depress profits further in 2009 (BBC Worldwide Annual Review 2007–08, p 19). Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 2 Culture, Media and Sport Committee: Evidence

The chorus of exasperation at BBC Worldwide’s activities which has motivated and informed the establishment of this Select Committee inquiry suggests that the BBC’s reputation has already been put at risk, and that some stakeholders no longer have conﬁdence that the BBC acts consistently in the public interest rather than pursuing its own institutional agenda.

(c) The extent to which the BBC’s commercial activities meet the criteria required of them The BBC’s commercial activities do not meet the four criteria set out in the Agreement (see 3(d) below): — Fit with Public Purposes: by embarking on an aggressive, ﬁnancially-driven overseas acquisition strategy which has no discernible connection to the BBC’s Public Purposes, BBC Worldwide is failing to meet the requirement that its activities should be “connected, otherwise than merely in ﬁnancial terms, with the ways in which the BBC promotes its Public Purposes”.3 — Commercial eYciency: by locking its most valuable IP into BBC Worldwide and failing to allow commercial players to bid for exploitation rights, the BBC is failing to exhibit commercial eYciency. — Reputational risk: by undertaking widespread overseas production activity, BBC Worldwide risks jeopardising the BBC’s reputation and devaluing the BBC brand. — Market distortion: if, as we believe may be happening, the BBC is over-bidding for rights, talent and resources, then BBC Worldwide is distorting the production market by raising barriers to entry and reducing competition.

(d) The appropriateness and eVectiveness of the governance framework for the BBC’s commercial activities The existing governance framework has not been eVective in ensuring that BBC Worldwide’s activities meet the criteria required of them. As set out in (c) above, the BBC’s commercial activities do not appear to fit with its Public Purposes, they do not unchallengeably exhibit commercial eYciency, they expose the BBC to reputational risk and the devaluing of the BBC brand, and they may well be distorting the market. The governance framework continues to allow the BBC to contravene its own policy on fair trading, which forbids BBC Worldwide from deriving advantages not available to commercial competitors.4 Yet BBC Worldwide’s right of first refusal on BBC IP and the cross-directorships between BBC Worldwide and the BBC Executive Board (the CEO of BBC Worldwide sits on the BBC Executive Board, while the Director of BBC Vision and the BBC Group FD sit on the Board of BBC Worldwide) together provide very significant contractual and informational benefits unavailable to the BBC’s commercial competitors. The BBC Trust’s remit for the BBC’s commercial activities does not make clear how they are intended to fit with the BBC’s Public Purposes, and the Trust has not in a transparent way demonstrated that it requires BBC Worldwide to deliver a commercial level of return on investment. There is a potential for conflict between the Trust’s role in setting the BBC’s commercial strategy, and its role as regulator overseeing the BBC’s detailed execution of that strategy.5 There is a lack of clarity about the Trust’s role in strategy development, and the £50 million limit over which investments need to be referred to the Trust for approval seems by commercial standards extremely high, so it appears that very significant investments could be made without authorization from the Trust. As a result, the Trust is perceived as failing in its regulatory role by commercial players and does not yet appear to act as a fully independent and impartial regulator between the BBC and the commercial sector (see 3(g) below).

(e) The future of BBC Worldwide and other BBC commercial subsidiaries

FremantleMedia would like to see (see 4 below): — the introduction of independent market impact assessments for new BBC commercial initiatives and the revision of the BBC Trust’s Fair Trading guidelines to take into account the ways in which BBC Worldwide can distort the market by using its privileged access to BBC IP and BBC capital;

3 BBC Agreement, cl 69(3)(b). 4 BBC Trust Statement of Policy on Fair Trading, cl 21: “The BBC’s Commercial Services should not receive from the BBC’s Public Service Activities, an advantage which is not available to its commercial competitors.” 5 BBC Protocol B6—Commercial Strategy, cl 4.1: “To strike an appropriate balance between its duty to approve a strategy for the BBC’s commercial services and its obligation to hold the Executive Board to account for the delivery of services according to that strategy, the Trust will communicate to the Executive Board its points of strategic direction and require it to develop, and submit for the Trust’s approval, proposals for the commercial strategy for the BBC.” Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 3

— the elimination of BBC Worldwide’s first option on BBC programmes and formats and the introduction of competitive bidding for the right to exploit BBC IP; — the removal of the CEO of BBC Worldwide from the BBC Executive Board and the Director of BBC Vision and the BBC Group FD from the Board of BBC Worldwide to eliminate the informational advantages these management links provide over commercial competitors; — the sale of BBC Worldwide stakes in production companies, particularly overseas, to ensure fit with the BBC’s Public Purposes and to avoid financial and reputational risk to the BBC; — the development and implementation of more defined and transparent guidelines on the required fit with Public Purposes for the BBC’s commercial activities, and how these activities must be connected, other than merely in financial ways, with the ways in which the BBC promotes its Public Purposes; — the publication of the BBC’s Fair Trading audit, and the establishment of a transparent transfer pricing regime: — between the BBC as a seller and BBC Worldwide as a buyer of programme format and distribution rights, — within BBC Worldwide, between its roles as programme distributor and as purchaser of programming for its overseas channels, to ensure that the BBC cannot compete on an unfair basis for distribution rights, and that the true return to the BBC of income from the exploitation of its IP is shown in BBC Worldwide’s accounts separate from the results for BBC Worldwide’s channel and other interests, and — the impartial and eVective regulation of the BBC’s commercial activities by the BBC Trust and greater clarity about the Trust’s involvement in the setting and assessment of commercial strategy. It has recently been suggested that BBC Worldwide should be gifted to Channel 4 in order to help address the shortfall in resources to support public service broadcasting. Given the arguments set out above, this appears an extremely diYcult and impractical proposition, but if it is pursued it is all the more important that there should be transparency about its role and eVective safeguards against market distortion.

(f) How the money returned to the BBC by its commercial operations is invested Subject to the comments above, FremantleMedia believes it is a matter for the BBC to determine how its commercial funds are reinvested in its public service activities.

2.Introduction (a) FremantleMedia is one of the most successful independent creators and distributors of television content in the world. In 2007, we produced over 10,000 hours of original programming across 318 titles. We make award-winning and top-rated programmes in 22 production operations around the globe, including major production operations in the US, Germany, France, Italy and Australia as well as the UK. We produce prime time drama, serial drama, entertainment and factual entertainment, which we export to 150 territories. FremantleMedia’s programmes include shows like Grand Designs, The Bill, X Factor,6 American Idol,7 QI, The Apprentice, Never Mind the Buzzcocks, Got Talent,8 IT Crowd, How Clean Is Your House?, Family Fortunes and Neighbours. Our headquarters are in London. We employ over 1,100 people in the UK and over 1,800 people worldwide. In addition, many people on fixed-term contracts and freelancers work on our various productions. (b) FremantleMedia competes in the production and distribution of TV programming with the BBC’s commercial operations at all stages of the value chain, both in the UK and abroad. FremantleMedia is also both a supplier of programming to the BBC (eg The Apprentice) and a major competitor to BBC Worldwide in formats, overseas production and the distribution of finished programmes. Our comments are made on the basis of longstanding familiarity with BBC Worldwide’s activities and strategy in these areas. (c) FremantleMedia is strongly supportive of the BBC. We acknowledge the high standard of public service broadcasting the BBC has provided for the UK for more than 60 years, and we recognise the importance of the role the BBC has played in the current global creative success of the UK production sector. We believe the BBC can and should continue to play a vitally important role in British broadcasting. However we do not believe that BBC Worldwide, the BBC’s commercial arm, is necessary in its current form and with its current remit to maximise the benefit to UK licence fee payers of the commercial potential of the BBC’s programming. The market can do this as or more eVectively.

6 Co-produced in the UK with Syco TV. 7 Co-produced with 19TV. 8 Co-produced in the UK and US with Syco TV. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 4 Culture, Media and Sport Committee: Evidence

3.ProblemsCreated by BBC Worldwide’sCurrentStrategy andSystem ofGovernance

(a) Lack of transparency in the relationship between the BBC and BBC Worldwide There is a lack of transparency in the relationship between the BBC and BBC Worldwide. BBC Worldwide appears to have both an exclusive ﬁrst look9 and matching10 right to the BBC’s IP, but the precise nature of the relationship is unclear. Although the BBC Trust places great emphasis on the importance of transfer pricing (ie the price BBC Worldwide pays for rights secured from the BBC Commercial Agency, which represents all IP created in-house at the BBC) in ensuring compliance with its Policy on Fair Trading, there is no publicly available information on the level at which transfer prices between the BBC and BBC Worldwide are set. The BBC does have guidelines about the process to be used in setting transfer pricing levels. These establish that transfer prices “should broadly be in line with the overall market context”,11 and sets out the parameters for the benchmarking process to be used in establishing market value. We are aware of a small number of BBC programmes whose rights have been acquired by distributors other than BBC Worldwide, but these are all programmes of relatively limited commercial potential. Values vary enormously according to the popularity of the product; any benchmarking process based on this material will severely underestimate the overall value of the BBC’s output. The bulk of revenues will derive from a small number of exceptional programmes like Strictly Come Dancing, a hugely successful TV entertainment format produced by BBC America for US network TV as Dancing with the Stars. The deals for this top level of material are commercially conﬁdential and not open to benchmarking exercises; the only way to establish the real value of these properties is through a proper bidding process. The BBC’s guidelines contemplate the use of indicators such as the incremental cost of production as an alternative to benchmarking, but these provide little guidance because production costs will in most cases have already been covered by original production budgets, and incremental costs will be close to zero.

(b) Underpaying for BBC public service-funded programmes and IP As a result, it is very possible the BBC may be subsidising BBC Worldwide because BBC Worldwide is not paying the market rate for the programmes and formats developed and produced by the BBC in its catalogue. In any event, it is clear that benchmarking processes are a totally inadequate substitute for a proper tendering process when it comes to the most valuable properties. The ﬁrst right BBC Worldwide has over BBC IP means that there is little incentive or opportunity to establish the competitive market rate. Individual programme benchmarking will also fail to capture the very substantial value of BBC Worldwide’s exclusive ﬁrst right to the BBC’s IP.

(c) Overpaying for programmes and formats from third parties BBC Worldwide may be overpaying to acquire third party rights (ie rights owned by independent producers) in order to maintain its market-leading position. We believe that it may be overpaying for the right to distribute programmes acquired from independent producers, to ensure it acquires the rights to independently produced programmes originally broadcast by the BBC in the UK. Its motivation for this is both to drive sales of its catalogue (new high profile programmes are essential to a distributor) and to ensure that high profile programming broadcast by the BBC is not distributed by anyone else. These programmes can then be sold onto the BBC’s overseas channels (whether at or above market rates is again unclear). Commercial competitors are forced out of the market because they cannot compete with the uneconomic rates BBC Worldwide may be paying. Distribution rights are in theory controlled by independent producers, but in reality the BBC has significant leverage because of its power over commissioning decisions. FremantleMedia is aware of reports of overpaying and of reports by producers that they were threatened by the loss of a commission if they did not give rights to BBC Worldwide. This fear of reprisals makes independent producers and distributors who are heavily reliant on business with the BBC unwilling to go on the record.

(d) Exceeding the remit for the BBC’s commercial activities The remit for the BBC’s commercial activities makes clear that they must “ﬁt with the BBC’s Public Purpose activities” and that this requires them to be “connected, otherwise than merely in ﬁnancial terms,

9 Under a first look arrangement, a distributor has the first opportunity to bid for the exploitation rights to a producer’s IP before any competitor can submit a bid. 10 Matching rights give a distributor the right to win exploitation rights if they are prepared to match the leading bid submitted by a competitor at the close of a bidding process. The combination of first and matching rights makes it practically impossible for a competitor to win the right to exploit BBC IP if BBC Worldwide wish to retain it. 11 BBC’s Fair Trading Guidelines, cl 3.12. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 5

with the ways in which the BBC promotes its Public Purposes”.12 Over the past couple of years, BBC Worldwide has embarked on an aggressive acquisition strategy in the production sector. It is not easy to see how this strategy ﬁts within the remit.

In 2007, BBC Worldwide bought a 25% stake in Freehand Productions, an Australian independent production company. We understand that under the terms of the deal, Freehand now has a ﬁrst look option in Australia and New Zealand to produce all BBC and independent formats to which BBC Worldwide has rights. Freehand also has all its formats distributed through BBC Worldwide. These purely commercial productions may never be seen on British screens, so BBC Worldwide’s activities are going far beyond selling the BBC’s existing programmes abroad. BBC Worldwide has also just done a similar deal with production company Temple Street in Canada and very recently with production company Mir Reality in Russia. It is also setting up, or has already set up, its own production companies in America, France, Germany and India.

BBC Worldwide has also bought stakes in UK production companies in order to guarantee a ﬂow of distribution rights. For example, in January of this year it bought a 24.9% stake in Left Bank (a producer that has made programmes such as the feature ﬁlm The Queen and Longford). As a result, BBC Worldwide will be the sole worldwide distributor of all the programmes produced by Left Bank. It has also bought a 24.9% stake in drama start-up CliVhanger Productions, and recently purchased 24.9% stakes in Baby Cow, the production company part-owned by comedian Steve Coogan, and Big Talk, the company responsible for Simon Pegg’s TV and feature projects.

It is hard to see how the acquisition of a stake in a purely commercial production company in Russia, Australia or Canada fits with the BBC’s Public Purposes. One of these Purposes is to bring “the UK to the world and the world to the UK”,13 but this broad requirement needs to be interpreted in a way that links to clearly identifiable public benefits, otherwise the requirement is eVectively meaningless, and gives the BBC the green light to pursue almost any activity involving the export or import of programming material. This cannot be the intention of the legislation setting out the BBC’s remit.

It is clearly not the case that the BBC has to have a stake in a production company in Australia or Canada in order to enable successful BBC formats to be sold and shown there. There are thriving production markets in these countries, with many local and international companies eager to compete to acquire the BBC’s formats and able to produce them to the highest levels of quality. It is competition between producers which will provide the clearest guarantee that the BBC is maximising the value of its IP and generating the highest return for the licence fee payer.

The BBC may argue that it has greater control over the way formats are produced by owning a stake in the production company; however, the logical conclusion of this argument is that the BBC has to own production companies in all territories to which it exports formats, which is clearly impractical. In fact the BBC has successfully licensed its formats to third parties for many years without acquiring production assets. As we will argue (see 3(e) below), we believe the BBC is taking more rather than less risk by building overseas production capability. Since 2000, the market for formats which travel successfully from country to country has developed dramatically in both size and reﬁnement: the leading commercial players now have sophisticated mechanisms in place to ensure the integrity and success of hit formats as they are remade for diVerent national tastes. The commercial sector can perform this task very eVectively. It is arguable that by taking 25% stakes in overseas production companies, the BBC has the worst of both worlds: it does not directly control these companies and their output, but it is exposed to damage to the BBC’s brand and reputation if editorial mistakes are made;

The BBC may argue it is merely pursuing the strategy that the largest and most successful international production companies like FremantleMedia and Endemol are following themselves. If it is the right strategy for them, why not for the BBC? However, there is a crucial diVerence between the BBC’s objectives and those of the commercial players. Commercial enterprises like FremantleMedia maximise returns by focusing development on programming which has the potential to succeed in as many markets as possible. Owning operations in the main broadcast markets makes sure the company has the widest possible market in mind as it undertakes development activity. The BBC is under no such requirement; indeed, its development focus should be on the needs of UK licence fee payers who fund it, not on the international market. Building an international network only makes commercial sense if there is a constant ﬂow of internationally attractive programmes and formats; the BBC should not be under pressure to compromise the requirements of UK licence fee payers and to deliver programming which will perform well in international markets. BBC Worldwide’s primary goal is to maximise the value of the BBC’s IP within the four criteria of ﬁt with Public

12 BBC Agreement, cl 69. 13 BBC Charter, cl 4. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 6 Culture, Media and Sport Committee: Evidence

Purpose, commercial eYciency, maintenance of the BBC’s reputation, and avoidance of market distortion, as laid down in its constitution; building an international production network is not necessarily the best way to achieve this, and as we shall argue below, exposes the BBC to a high level of risk.

(e) Taking unnecessary financial and reputational risks BBC Worldwide is exposing itself to significant financial risk through its ownership of BBC production operations and global BBC-branded channels such as BBC Knowledge and BBC America. It is entirely liable for these businesses. If these investments suVer losses, it directly impacts the BBC by reducing the amount of money returned to the public service parent. Recently BBC Worldwide has acquired a minority stake in a production company in Russia, which must be regarded as a very high risk territory in which to invest. In addition to additional financial risk, the BBC is also taking on significant reputational risk by pursuing a strategy of building production capability overseas. BBC Worldwide does not have the sophisticated editorial and creative quality control and compliance structures the BBC production operation has evolved in the UK. Yet BBC Worldwide now must stand behind and take responsibility for any editorial or production problems created by its new partly-owned commercial subsidiaries like Freehand or Temple Street. The BBC’s status means it is held to the very highest editorial standards everywhere in the world, yet these companies have no history of public service production and the elevated standards it demands even when making programmes which will never be seen on British screens. This reputational risk extends to the production of BBC formats overseas. If the BBC licenses a programme to a third party, it may not have complete control over its production, but it also does not bear responsibility for any problems encountered in its making. Now these programmes are made by local BBC subsidiaries or associate companies, these risks are borne by BBC Worldwide, but without the support of the BBC’s extensive experience in editorial quality control and compliance. BBC Worldwide appears to be running a complete “parallel” editorial operation away from experienced UK supervision and entirely free from proper senior creative risk control. This does not mean the BBC should divert key editorial resources away from its public service activities in the UK; the point is that this additional editorial risk and responsibility is a distraction from the BBC’s core public service purpose. BBC Worldwide’s strategy of acquiring stakes in UK independents inevitably raises suspicions that these companies both have preferred access to BBC slots and are being used to meet independent and WOCC14 quota targets in a way which ensures BBC Worldwide holds onto programme rights. Whether or not this proves to be the case, the acquisition strategy exposes the BBC to reputational risk. The lack of transparency in the relationship between the BBC and BBC Worldwide, and the lack of confidence in the impartiality and eVectiveness of the Trust in its regulatory role, continue to create further reputational risk for the BBC. This comes at a time when the BBC has already suVered a number of significant blows to the level of public trust it commands. The stress on the BBC’s public profile will continue until remedial steps are taken.

(f) Distorting the market for talent and programme rights The BBC’s programme of acquiring companies and rights both in the UK and overseas distorts the market and drives up prices for resources and talent in otherwise fully functioning production markets. It is not clear that the BBC operates to the same required rates of investment return as its commercial competitors. Although the BBC is tasked to exhibit commercial eYciency, the range of measures used to deﬁne this more closely is very broad.15 Return on investment is merely one of a range of measures the BBC can refer to as it applies a “basket of ratios”16 to assess the commercial eYciency of a new proposal. The BBC does not reveal whether the “basket of ratios” used is judged in the same way as a commercial company or whether the level of risk that BBC Worldwide is able to take on is higher because it has the backing of the BBC. It is not clear that BBC Worldwide has to achieve the same return on investment as commercial companies with shareholders, and it seems likely that their cost of capital will be lower than any commercial entity because they are de facto guaranteed by a state owned corporation, so it is very likely that BBC Worldwide has easier access to capital than its commercial competitors. If the rates of return required by the BBC are lower than its commercial competitors, it will be able to bid more aggressively and undermine market pricing structures. Ultimately this will lead to a loss of competition in key production and distribution markets.

14 The WOCC is the “Window of Creative Competition” commitment, under which in addition to the 25% independent quota, the BBC has agreed to open up a further 25% of its production requirements to competition between independent and in- house producers. 15 BBC Protocol D6—The BBC’s Commercial Services, Annex B. 16 The “basket of ratios” is the mechanism set out in Annex B of BBC Protocol D6—The BBC’s Commercial Services which the BBC applies to measure the proﬁtability, risk and return of new investment proposals. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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(g) IneVective regulation by the BBC Trust

It is ultimately the Trust’s responsibility to ensure that the BBC interprets the remit for its commercial activities in the most appropriate way and follows a strategy that falls within that remit. It seems to be failing to do so, by appearing to allow BBC executive management to define its own course with insuYcient reference to the uniqueness of the BBC’s position and insuYcient regard for its potential impact on the commercial market. We have drawn attention to the way in which BBC Worldwide appears to be exceeding its remit in pursuing its overseas investment strategy, setting up channels and acquiring production subsidiaries (see 3(d) above). In setting the framework for the BBC’s commercial activities, there is a lack of clarity when the Trust comes to consider the issue of “fit” with the BBC’s Public Purposes which goes to the heart of the definition of the remit.17 When it does pronounce on the interpretation of “fit”, it does so in a statement so convoluted and elliptical as to be meaningless: “The requirement for a connection, otherwise than merely in financial terms, with the ways in which the BBC promotes its Public Purposes should be assessed in relation to the activities that the BBC undertakes to fulfil its Public Purposes. This need not be at the level of the individual commercial services (eg demonstrating that a proposed Commercial Activity is connected with a specific BBC channel, such as BBC3) but the activity must link clearly with the way in which the BBC promotes its Public Purposes (for example, promoting innovative British content and talent aimed primarily at younger audiences).”18 The Trust is also explicitly responsible for ensuring that the BBC’s commercial activities “comply with fair trading guidelines [. . .] and in particular avoid distorting the market”.19 The way in which the Trust has chosen to interpret this requirement shows a limited appreciation of the BBC’s potential market impact. In the Trust’s view as stated in their Policy on Fair Trading, the BBC’s commercial activities cannot by definition negatively impact the market as long as the BBC fulfils two conditions: (a) it does not use the licence fee to fund commercial activities; and (b) it ensures the transfer pricing regime for public service activity inputs is fair.20 This interpretation is erroneous and inadequate. Firstly, the transfer pricing regime cannot be fair given the lack of competitive bidding. Secondly, this policy fails to take into account further ways in which the BBC can distort the markets in which it operates. If the BBC operates to less stringent commercial criteria than its competitors, it can undermine market pricing and commercial returns. It will also raise barriers to entry for new players and ultimately reduce the level of competition for valuable programming and distribution rights. The Trust also fails to take notice of flaws in the structure of the relationship between the BBC’s public service operations and its commercial activities which lead to clear contraventions of its fair trading policy. The policy states that: “The BBC’s Commercial Services should not receive from its Public Service Activities, an advantage which is not available to its commercial competitors.”21 Yet the relationship between the BBC and BBC Worldwide oVers BBC Worldwide major advantages clearly not available to its competitors: (a) BBC Worldwide’s right of first refusal on and matching rights to BBC IP gives BBC Worldwide an overwhelming advantage in securing exploitation rights; and (b) the CEO of BBC Worldwide sits on the BBC Executive Board, and the Director of BBC Vision and the BBC Group FD sit on the BBC Worldwide Board, providing BBC Worldwide with direct access and input to BBC strategy, budgets and programme planning. These cross directorships also contravene the BBC’s Fair Trading Guidelines, which state that the BBC’s commercial services must always maintain “a clear and separate management structure” from the BBC’s public service activities, and that the BBC’s public service activities must not “provide the Commercial Subsidiaries with access to information (or resources) beyond what would be strictly necessary for the eYcient commercial exploitation of a particular right or asset owned by the BBC’s Public Services”.22 The overall impression is that the Trust interprets the remit with which the BBC carries out its commercial activities in a way which gives maximum flexibility to BBC management, and which gives little consideration to ways in which the BBC can distort eVective and eYcient markets. Under the Trust’s loose interpretation

17 The BBC’s Public Purposes are deﬁned in the Charter, cl 4: (a) sustaining citizenship and civil society; (b) promoting education and learning; (c) stimulating creativity and cultural excellence; (d) representing the UK, its nations, regions and communities; (e) bringing the UK to the world and the world to the UK; (f) in promoting its other purposes, helping to deliver to the public the beneﬁt of emerging communications technologies and services and, in addition, taking a leading role in the switchover to digital television. 18 BBC Trust Statement of Policy on Fair Trading, cl 28. 19 BBC Agreement, cl 69. 20 BBC Trust Statement of Policy on Fair Trading, cl 29. 21 BBC Trust Statement of Policy on Fair Trading, cl 21. 22 BBC’s Fair Trading Guidelines, cl 3.6. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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of the Charter obligations, it is hard to see what areas of activity in the TV production and distribution markets would be rendered oV-limits to BBC Worldwide. The parameters for referring investment decisions to the Trust underline the latitude the regulatory regime gives to the BBC’s management: below £50 million, investments do not have to be referred to the Trust.23 The referral level would be very much lower in a commercial organization of comparable size. Although the BBC’s constitution gives the Trust comprehensive and eVective control over the strategic direction of the BBC’s commercial activities, the Trust appears too far removed from the development and execution of commercial strategy to be eVective. Other elements of BBC Worldwide’s governance structure closer to operational management are unable to provide an eVective or publicly credible regulatory restraint on BBC Worldwide management’s interpretation of its remit: BBC Worldwide’s non-executive Directors because they are inevitably too heavily focused on the need to generate commercial returns, and the BBC Executive Board because it has too great an interest in BBC Worldwide’s contribution to BBC budgets.

4.Proposals forChange

(a) Review the remit for the BBC’s commercial activities to eliminate the potential for market distortion and introduce independent market impact assessments for new commercial initiatives The discussion above illustrates the importance of a clear definition for the remit for the BBC’s commercial activities. The BBC should be able to exploit the value of its intellectual property as far as possible to oVset the burden of the licence fee, but not at the expense of the other criteria to which it is required to adhere. It is clearly not intended that the BBC should become entirely driven by the commercial imperative. At present, the balance between the two is struck at a point which appears to allow the BBC, through BBC Worldwide, to use the bridgehead of its privileged funding and programme supply to annex new commercial territory unrelated to its core purposes. The wording of the remit for the BBC’s commercial activity is broad and imprecise; in its capacity as regulator the Trust needs to take responsibility for defining the boundaries. These have to provide the BBC with clear direction and commercial rigour while leaving the commercial sector satisfied it is not competing with a player whose privileges give it significant, market- distorting competitive advantages. Until now the Trust’s Fair Trading guidelines have inadequately represented the BBC’s potential to distort the market; the Trust needs to revise these guidelines to recognise how the BBC’s commanding position and privileged access to rights and capital can distort the markets in which it operates. This revision of the guidelines needs to be supplemented by market impact assessments for new commercial initiatives carried out by an independent third party, as is the case with the BBC’s public service initiatives.

(b) End BBC Worldwide’s ﬁrst option on BBC output and open up BBC IP to competitive bidding It is time to end BBC Worldwide’s ﬁrst right to the BBC’s IP. This relationship is preventing the establishment of a transparent pricing structure between the BBC and BBC Worldwide, and is likely to under-represent the full value of the BBC’s output. The distribution rights to BBC programmes and formats should be opened up for bidding across the commercial sector.

(c) Remove the directorship links between the BBC Executive Board and the Board of BBC Worldwide The CEO of BBC Worldwide should no longer sit on the BBC Executive Board, and the Director of BBC Vision and the BBC Group FD should no longer sit on the BBC Worldwide Board, giving BBC Worldwide privileged access to BBC strategy and programme plans.

(d) Sell oV BBC Worldwide stakes in production companies The stakes that BBC Worldwide has built up in production companies both in the UK and overseas should be sold oV, and the returns reinvested in programming for the UK licence fee payer.

(e) Develop clearer guidelines for fit with Public Purposes The Trust needs to develop more defined and transparent guidelines on the required fit with Public Purposes for the BBC’s commercial activities, spelling out clearly how these activities must be connected, other than merely financially, with the ways in which the BBC promotes its Public Purposes.

23 BBC Protocol D6—The BBC’s Commercial Services, cl 5.4. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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(f) Establish transparent transfer pricing between BBC & BBC Worldwide and publish the BBC’s Fair Trading audit report

There should be transparency about the amount BBC Worldwide pays the BBC for distribution rights. The transfer pricing scheme should be open to public scrutiny. The Fair Trading audit the BBC commissions each year from PwC should be publicly available. The BBC’s Annual Report has for the last two years announced that details of the audit and opinion are available on the BBC’s website, but they are not to be found. The remit for the Fair Trading audit should be revised. At present, the audit is tasked: “to determine whether BBC management has established and applied a system of internal controls which provide reasonable assurance that it has complied with the Fair Trading Policy”.24 As we have argued, the Fair Trading policy fails to take account of ways in which the BBC’s commercial activity can distort the market. The auditors should be asked to give their opinion on the adequacy of the Fair Trading Policy itself.

(g) Ensure the external credibility of the regulatory regime

The Trust appears so far to have taken a laissez-faire approach to its responsibilities as regulator of the BBC’s commercial activities, with the result that there is now widespread concern among the commercial sector (including publishers and newspapers as well as television producers) about the nature and scope of BBC Worldwide’s ambitions. The Trust needs to demonstrate a much stronger appreciation of the limitations imposed by the BBC’s unique position, and a much greater public willingness to establish clear guidelines for the BBC’s commercial management. It also needs to occupy a more impartial position between the BBC and the commercial sector, and to show the commercial sector that it is ready to listen to its concerns. The Trust needs to acknowledge it is the only element in the BBC’s governance structure which is able to act eVectively to ensure BBC Worldwide continues to act within its governing criteria. Neither BBC Worldwide’s non-executive Directors nor the BBC Executive Board can or should fulﬁl this function. The process for raising complaints over fair trading issues needs reform. At present complaints about BBC Worldwide have to be taken ﬁrst to a member of the BBC’s executive team25 (ie an executive reporting to the BBC Executive Board), which is unsatisfactory. It is diYcult to have faith in the impartiality and independence of an executive of the enterprise against whom a complaint is being raised. Given that most companies will want to continue to do business with the BBC there is inevitably a reluctance to knock on the front door and complain. This process also assumes that the fair trading rules themselves are satisfactory; we have argued here that there are many instances where they require further thought. October 2008

Memorandum submitted by Pact

ExecutiveSummary

1. The UK has a public service broadcasting system that is envied around the world, with a range of broadcasters and programme makers providing the public with high quality television that meets such public service goals as educating, fostering citizenship and representing diverse viewpoints. At the heart of this system is UK-made programming, as opposed to imported shows. UK-made programmes are integral to public service broadcasting’s ability to help us understand ourselves, our society, and, at its best, unite us—and being made in the UK is rightly one of the deﬁning characteristics of a public service programme.26 2. Public service programming now faces well-documented funding issues. With pressures on advertising revenues increasing, Ofcom’s ongoing second review of Public Service Broadcasting predicts a funding gap of up to £235 million per annum by 2012 just to maintain current levels of UK-made, public service programming.27 Channel 4 and ITV have already made widely-reported cuts in public service programme budgets such as news, programming from the devolved nations and English regions, and children’s content. Even the BBC, relatively well protected due to its funding from the licence fee, has made cuts in core programming areas following the last Charter settlement.

24 BBC Annual Report and Accounts 2007–08, p 63. 25 BBC Fair Trading Complaints and Appeals Process. 26 All Public Service Broadcasters (the BBC, ITV1, Channel 4 and Five) have quotas for “original” programmes, which the Broadcasting (Original Productions) Order 2004 deﬁnes as programmes which have their ﬁrst appearance on television in the UK. In practice, this means programmes that are made in the UK. 27 Second Public Service Broadcasting Review, Phase 2: preparing for the Digital Future, Ofcom, September 2008, page 5. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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3. The industry must find self-help measures as far as possible to help alleviate this pressure, and it is therefore increasingly important that the BBC maximises the commercial value of its existing assets—ie its programmes. Resulting revenues should be re-invested back into making new UK programmes that deliver the goals of public service broadcasting. In so doing, the BBC returns an added value to licence fee payers, who will see those programmes on their television screens. 4. Under the BBC Charter, the BBC’s Public Purposes are of overriding importance, and commercial activities are secondary.28 It follows that commercial activities should exist to maximise the revenues that can be reinvested in the pursuit of these Public Purposes—ie in the creation of public service programming and content that contributes to this pursuit.29 5. This is reflected in the BBC Trust’s guidance for the strategy of BBC commercial activities, which states: “At the highest level, the Trust will be concerned with the objective that the BBC should relieve pressure on the licence fee by seeking to maximise commercial revenue within appropriate areas and by returning value to licence fee payers by reinvesting profits in the BBC’s Public Services.”30 6. We are concerned that the BBC is not maximising the potential of these assets on a number of counts, and welcome the inquiry by the Culture, Media and Sport Committee. Firstly, BBC Worldwide currently has an automatic and exclusive “first look” to buy all programmes made by BBC in-house production departments. It then exploits these programmes commercially (for example, by selling Doctor Who to broadcasters and BBC Worldwide’s own wholly-owned channels in other countries), returning a share of profits to the BBC. However, many companies in the private sector perform the same function as BBC Worldwide with regard to programmes outside the BBC’s in-house production departments. Many of these third-party distributors would bid against BBC Worldwide for the right to license programmes made by BBC in-house if the BBC allowed them to, and the resulting competition for rights to BBC shows might well yield a higher return for the BBC. When high profile television shows are auctioned on the open market, it is not uncommon for bidding wars to take place. This has occurred when the BBC has commissioned programming from external suppliers, who have then auctioned the international rights to the show to the market, with the result that private sector distributors have outbid BBC Worldwide.31 7. Opening up in-house programming to such competition could potentially generate significant additional income for the BBC, which could then be reinvested in public service programme-making. The BBC invests £800 million in in-house production a year compared to around £400 million on external programming. Much of this will comprise high profile shows that are highly attractive to the market, given that they will have built audience awareness on BBC1 and BBC2, two of the UK channels with the highest audience share. 8. Just as importantly, without auctioning programmes on the open market, the BBC cannot be confident that it is realising the maximum possible added value on its assets. This is one area where the BBC’s regulations are inadequate. Under the Fair Trading Guidelines, the BBC is required to charge BBC Worldwide prices that are in line with the market for its programmes; yet, for the majority of in-house programmes, the BBC has no way of accurately knowing the market rate as it has never tested what the market is willing to pay. To ascertain the correct market rate, the Fair Trading Guidelines merely task the BBC with occasionally benchmarking prices. This is a wholly unsatisfactory way to gauge prices for television programmes, which are not homogenous, exist in a fast-changing market, and may be subject to commercial confidentiality. It means that, under the current system, the BBC cannot guarantee that it is securing the maximum possible added value from its programme assets when its passes them on to BBC Worldwide. 9. The BBC has previously objected to an open auction system, whereby it would oVer a programme to the market so that private sector companies could compete for it alongside BBC Worldwide, on the grounds of eYciency. We reject this: distributors in the commercial sector routinely conduct such auctions to sell programmes, as has the BBC itself, as we will outline. 10. We also have concerns over the transparency of the BBC’s commercial activities in a number of areas, including where profits that accrue from exploiting programmes are re-invested. As we have noted, this should be into the pursuit of the BBC’s Public Purposes, and in particular into the creation of public service content that delivers these Purposes. Currently, it is not clear where those profits are spent. 11. Nor is BBC Worldwide obliged to make public what it is paying for rights to BBC in-house programming. The Fair Trading Guidelines call for “transparency and accounting separation” between the BBC’s public service activities and BBC Worldwide.32 However, they do not require an appropriate level

28 Charter Article 3. 29 Under section 4 of the Royal Charter, these are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the beneﬁt of emerging communications. 30 BBC Trust, Protocol B6 Commercial Strategy. 31 Under the Codes of Practice/Terms of Trade introduced in the 2003 Communications Act, and regulated by Ofcom, independent suppliers retain control of certain secondary rights to programmes that they create, including the overseas exploitation rights. The BBC, as primary commissioning broadcaster, will receive a share of any revenues generated from subsequent exploitation. 32 BBC Fair Trading Guidelines, 3.4. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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of transparency for transactions within BBC Worldwide (ie between its divisions) that may have a bearing on the prices its pays the BBC or third parties. BBC Worldwide operates a portfolio of 29 channels around the world, and will pass on programmes that it buys from the BBC or other parties to these channels for broadcast for a fee. This fee is not disclosed in BBC Worldwide’s annual accounts, and it is unclear what value is attached to the programme when BBC Worldwide passes it on to its wholly-owned channel, and whether this is a genuine market rate. This means that BBC Worldwide may allow its channels to underpay for BBC in-house programming, which it in turn has acquired at relatively low cost through its exclusive first-look arrangement. 12. We have similar concerns regarding the transparency of BBC Worldwide’s investments in BBC programmes at production stage (as opposed to its purchase of completed programmes). This is a common practice and, in exchange for its investment, BBC Worldwide will take rights to the show for sale at a later point. The BBC will use the investment from BBC Worldwide to augment its core programme budget and fund the creation of a programme. We have no objection to the principle of BBC Worldwide investing in BBC shows at financing stage—indeed, BBC Worldwide revenues should be reinvested in the BBC’s core activity of making UK public service programmes. However, the BBC does not make clear how BBC Worldwide’s investments are spread between in-house programmes and external BBC commissions, or the proportion of the budget BBC Worldwide pays for investments in in-house programmes compared to external programmes. Were in-house producers securing a greater level of investment than external producers who have been commissioned by the BBC, they could have an unfair advantage when competing with external suppliers for BBC commissions. This would potentially undermine the BBC’s stated policy of commissioning the best ideas, no matter where they come from, so that the licence fee payer benefits from the most diverse, engaging and innovative mix of shows.33 13. In terms of its regulatory framework, the BBC Charter and Agreement set out very broad requirements requiring the BBC to focus on its Public Purposes, and the Trust to be mindful of the BBC’s competitive impact and to adopt a statement of policy on fair trading.34 This is then implemented by the Trust’s Fair Trading Policy and BBC management’s Fair Trading Guidelines, which are approved by the Trust. Under the Fair Trading Guidelines, BBC Worldwide is required to meet each of four Commercial Criteria. Any BBC commercial activity must adhere to all four criteria, which are: — “Fit with the BBC’s Public Purposes; — Not jeopardise the good reputation of the BBC or the value of the BBC Brand — Exhibit commercial eYciency; and — Comply with the Trust’s Fair Trading Policy, the BBC’s Fair Trading Guidelines and, in particular, avoid distorting the market.”35 14. We are concerned that BBC Worldwide is failing to meet these criteria on a number of counts, and in some cases is in clear breach, particularly in light of its aggressive expansion strategy over recent years.

Fit with the BBC’sPublicPurposes 15. We cannot see how several of BBC Worldwide’s current activities—including its investments in consumer magazine publishing in India, its acquisition of Australian book publisher Lonely Planet, and its acquisition of ownership stakes in production companies overseas—bear any meaningful relation to its Public Purposes. This creates several dangers, including an unnecessary ﬁnancial and reputational risk to the BBC.

Reputation of the BBC 16. As noted above, the BBC’s involvement in a range of commercial ventures that are increasingly far removed from its core programming creates a danger of damaging the BBC’s reputation as the nation’s main public service broadcaster. As we detail, for example, BBC Worldwide’s current investment portfolio includes an ownership stake in the Freehand Group, the Australian production company behind Joker Poker, a well-known game show in Australia sponsored by an alcohol company and a casino group (in return for being associated with the show, promoting their brands in the show, and/or exposure in its publicity material). As an investor in Freehand, therefore, the BBC logo is clearly visible (as BBC Worldwide) on Freehand’s website, next to a publicity still from Joker Poker featuring a poker table with the logo of a casino group on it.36 17. Joker Poker is an example of “branded content”—ie where an advertiser sponsors or invests in a programme in return for exposure of its brand either within the programme or its publicity material, or both. We understand that Joker Poker would be classiﬁed in the UK as product placement, and would therefore be

33 BBC director general Mark Thompson told the House of Lords Select Committee during the Charter review: “It is in the interests of the licence payer that the licence fee investment should go to the best ideas and the best talent.” Mark Thompson oral evidence to House of Lords Select Committee on the BBC Charter Review, First Report, Section 255. 34 BBC Charter Article 23 and 24; Agreement Clause 66. 35 BBC Fair Trading Guidelines, 2.3. 36 http://www.freehandtv.com.au/ Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 12 Culture, Media and Sport Committee: Evidence

illegal for the BBC to make it in the UK. The BBC’s Editorial Guidelines, to which the BBC Trust’s guidance requires commercial services to adhere, state: “We must never include a product or service in sound or vision in return for cash, services or any consideration in kind. This is product placement. It is illegal to make any such arrangements in the EU.”37

ExhibitCommercialEfficiency 18. This section in the Fair Trading Guidelines requires BBC Worldwide to report annually to the Trust on the performance of each of its commercial Services. However, performance is judged against an extremely broad set of investment criteria in the Trust’s Commercial Protocols, including setting the minimum investment level for referral to the Trust’s Finance and Strategy Committee at £50 million, an extremely high threshold in comparison to the commercial sector.38 Additionally, as we have noted above, BBC Worldwide does not make public the individual performances of its 29 UK and overseas channels, nor how much they pay for programmes acquired from the BBC. BBC Worldwide may be allowing its channels to underpay for BBC in-house programming, which it in turn has acquired at relatively low cost through its exclusive ﬁrst- look arrangement.

Conclusions andPotentialSolutions 19. In our view, therefore, the current regulatory and governance system of the BBC is failing on several counts. In some instances, BBC Worldwide appears to be in clear breach of the BBC’s Commercial Criteria, such as in the case of investments overseas that do not fit with BBC Public Purposes and/or risk damaging the BBC’s reputation. In other cases, the Fair Trading Guidelines are framed so loosely, or require inappropriate practices such as benchmarking prices to try to establish market rates, that it is almost inevitable that some of the BBC’s commercial activities will be inappropriate. Were a robust governance process in place it might be possible to require the BBC’s commercial activities to adhere to the spirit of the BBC Charter even if they were loosely worded. However, with members of the BBC Worldwide board sitting on the BBC board, and vice versa, there is no clear separation between the two (which in itself is a breach of the Fair Trading Guidelines).39 20. We suggest a range of measures to address these issues, including: — The BBC Trust should amend its Fair Trading Policy and the BBC its Fair Trading Guidelines to ensure that the BBC maximises the added value of its assets. Instead of allowing the BBC to gauge a market rate for a programme by benchmarking, it should be required to put the rights to all in- house content out to tender in the open market so that it can guarantee that it is securing the maximum added value from their commercial exploitation on behalf of the licence fee payer. This should apply to finished programmes and to programmes where the BBC seeks a distributor as part of the financing package prior to or during production. — BBC Worldwide should be required by the BBC Trust of divest itself of ownership stakes in businesses based overseas where it cannot demonstrate a clear and meaningful link with its Public Purposes. — The BBC Trust’s Fair Trading Policy and the BBC’s Fair Trading Guidelines should be amended to require that the BBC’s commercial activities are subject to far greater transparency. This should include a greater level of transparency for investments, including reducing the £50 million threshold referred to above. Also, greater transparency is important in prices that BBC Worldwide pays for rights to programmes from the BBC’s Commercial Agency, and in terms of investments at production stage in in-house compared to external programmes commissioned by the BBC. We are not aware of any public document detailing at any level the prices paid by BBC Worldwide to the BBC or third parties. If these are contained with PricewaterhouseCoopers’ annual audit on behalf of the BBC Trust, this, or the relevant sections, should be made public. — Additionally, the BBC should provide greater transparency in where profits that accrue from the exploitation of its assets are invested. This added value should be re-invested clearly in public services activities that fulfil the BBC’s Public Purposes, particularly UK programme making. — The BBC Trust should conduct a root-and-branch, public review of regulations and governance for BBC commercial services. The Trust is required to conduct a comprehensive compliance review involving public consultation every three years,40 but we ask the Committee to recommend that the Trust reviews BBC commercial activities not just in terms of the letter of the BBC’s (flawed) guidelines, but also in the light of the BBC’s high-level goals in the BBC Charter that require the

37 BBC Editorial Guidelines, Page 118. 38 BBC Trust Protocol C1, page 8. 39 The BBC Fair Trading Guidelines (Section 3.6) require clear separation between the BBC’s public service and commercial activities. They require commercial services to operate “at arm’s length” from public service activities, and to maintain “a clear and separate management structure.” 40 BBC Charter Agreement, section 65 (4). Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 13

BBC’s Public Purposes to take priority over commercial activities—which should entail maximising the added value of BBC assets for reinvestment in the pursuit of the Public Purposes. This should be explicit in the Fair Trading Policy and Guidelines. 21. There is inevitably tension between any policy of maximising revenues and the BBC’s status as a publicly-funded institution. These potentially conﬂicting incentives create the risk of damaging the BBC’s reputation as a public service broadcaster, a loss of focus on the BBC’s Public Purposes as laid out in the Charter,41 and competition issues, amongst other matters. Adding to this tension is the existence, in BBC Worldwide, of a standing, commercially-driven subsidiary with its own cost base to justify. 22. However, the current system is oVering the worst of both worlds: the BBC’s commercial activities are exceeding their remit and running the risk of damaging the reputation of the BBC; but at the same time they are providing no guarantee that they are maximising proﬁts on behalf of the licence fee payer, and in our view are failing to do so.

Introduction andMarketOverview 1. Pact is the trade association that represents the commercial interests of the independent production and distribution sector. We have more than 600 member companies across the entire UK, involved in creating and distributing television, ﬁlm and interactive content. 2. We welcome the opportunity to respond to this inquiry by the Culture, Media & Sport Committee, and will focus on the activities of BBC Worldwide. This section of our submission contains a brief overview of the export market for UK television programmes and an outline of the market and business model for exploiting the rights to UK programmes around the world. The sections after this outline our response to the Committee’s areas of interest as laid out in its formal announcement of the inquiry. 3. The independent production sector has a turnover of more than £2 billion per annum, and accounts for around half of all new UK programmes broadcast each year.42 Broadcasters’ in-house production departments account for most of the remainder. 4. This programming is a valuable form of intellectual property (IP). The rights to broadcast or remake these programmes are sold around the world by distributors, which eVectively act as middlemen between producers (either broadcasters’ in-house production departments or independent companies) who create the content, and broadcasters in other countries that buy the IP rights so that they can air a programme. 5. Rights are typically deﬁned by country, but also by the manner of exploitation (eg television or DVD). Overseas broadcasters will buy the right to, for example, broadcast a UK programme in Germany. Broadcasters or producers in other countries will also buy the right to remake a UK show for a local audience—a practice known as formatting. 6. The UK is a leading exporter of television programmes. UK programmes have more than 13% of the global television exports market—second only to the far larger US industry, as the table below shows.43

41 Under section 4 of the Royal Charter, these are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the beneﬁt of emerging communications. 42 Independent Production Census 2007–08, Digital-i for Pact. 43 Rights of Passage report 2007, TRP for Pact. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 14 Culture, Media and Sport Committee: Evidence

Figure 1

SHARE OF GLOBAL TELEVISION EXPORT MARKET BY COUNTRY

67.0 67.3

2003 2007

40 Hours (%)

20 13.1 13.1 9.6 8.3 3.9 3.6 3.0 2.8 1.9 2.4 1.7 2.3 0 USA UK Ger Can Fra NL Oth

Source: Rights of Passage 2007, TRP for Pact. 7. The UK is also the global leader in exploiting format (remake) rights, with a 53% share of the formats market, far larger than that of the US, as illustrated below.44

Figure 2

SHARE OF GLOBAL TELEVISION FORMAT MARKET BY COUNTRY

60 53 51

2003 2007 40 % hours

20 18 17 15 14

7 5 5 4 3 3 4 2 0 UK NL USA Fra Argentina Spa Other

Source: Rights of Passage 2007, TRP for Pact. 8. BBC Worldwide is the UK’s largest distributor, with exclusive access to programmes made by BBC in-house production departments via a “ﬁrst-look” arrangement. BBC Worldwide will also seek to acquire programmes made by external suppliers for the BBC and other broadcasters, on commercial terms. 9. Many companies in the commercial sector perform an identical function to BBC Worldwide, acquiring the rights to programmes from other broadcasters and also from independent producers. Under the Codes of Practice/Terms of Trade introduced in the 2003 Communications Act, independent producers retain

44 Rights of Passage report 2007, TRP for Pact. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 15

control of certain secondary rights to their programmes, including the right to exploit those programmes in overseas market. They typically license this right on to a distributor, either BBC Worldwide or a distributor in the private sector. The commissioning broadcaster will, however, receive a substantial share of any revenues that are generated as a result of this exploitation, regardless of who distributes the programme. 10. Following the creation of the Codes of Practices, independent producers and distributors have noticeably developed the UK television export market, helping establish the UK as the world leader in format exports, for example. 11. All distributors will charge a fee and deduct costs before returning the remaining revenues to the rights holder (this applies to BBC Worldwide, which will deduct such charges before returning proﬁts to the BBC, and commercial sector distributors). 12. We have attached an electronic copy of our recent report on UK television exports, the Rights of Passage report 2007.45

Response toCommittee’sAreas ofInquiry

The benefits and opportunities oVered by the BBC undertaking a range of commercial activities in the UK and abroad 1. The UK is widely recognised as having one of the most vibrant, successful and creative television production sectors in the world. Decade after decade has produced programmes that have challenged and influenced UK society. Such home-grown programming is at the heart of public service broadcasting, essential to delivering the goals of public intervention in this area. UK programming is integral to informing ourselves about our society, representing diverse viewpoints within the UK, including the devolved nations and the English regions, and to interpreting international issues by using appropriate reference points. In this regard, UK-produced programming is fundamental to fulfilling the Public Purposes of the BBC under its Charter, and the four public service broadcasting purposes outlined by Ofcom.46 2. Ofcom’s recent audience research shows that the public places great value on programmes made in the UK, with 83% of people saying that it was important or very important that programmes made in the UK and reflecting life in the UK are shown on the main television channels.47 3. It is precisely this type of programming that is currently under threat. Ofcom has identified a shortfall in investment in public service programming of between £145 million and £235 million a year by 2012, largely due to the migration of advertising revenues away from the licensed commercial public service broadcasting channels (ITV1, Channel 4 and Five) towards the so-called multi-channel broadcasters on digital, cable and satellite platforms. The BBC is also under pressure, and has announced programme budget cuts as part of a cost saving exercise following the last Charter settlement. These broadcasters are responsible for around 90% of all investment in new UK television programming.48 4. Commercial exploitation of BBC programmes therefore has an increasingly important role to play. Commercial exploitation should maximise the value of assets that the public has paid for—ie BBC programmes—and return the benefits to the public in the form of additional investment in public service programming, providing added value for the licence fee payer. 5. Under the BBC Charter, the BBC’s Public Purposes are of overriding importance, and commercial activities are secondary.49 In our view, it follows that commercial activities should exist to maximise the revenues that can be reinvested in the pursuit of these Public Purposes—ie in the creation of public service programming and content that contribute to this pursuit.50 6. This is reflected in the BBC Trust’s guidance for the strategy of BBC commercial activities, which states: “At the highest level, the Trust will be concerned with the objective that the BBC should relieve pressure on the licence fee by seeking to maximise commercial revenue within appropriate areas and by returning value to licence fee payers by reinvesting profits in the BBC’s Public Services.”51

45 Not printed. 46 Under section 4 of the Royal Charter, the BBC’s Public Purposes are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the benefit of emerging communications. Ofcom’s public service purposes are: informing our understanding of the world; stimulating knowledge and learning; reflecting UK cultural identity; and representing diversity and alternative viewpoints (see Second Public Service Broadcasting Review—Phase 2: Preparing for the Digital Future, page 13). 47 Second Public Service Broadcasting Review -Phase 2: Preparing for the Digital Future, Ofcom, Page 31. 48 PSB Review Phase 1: The Digital Opportunity, Ofcom, page 55. 49 Charter Article 3. 50 Under section 4 of the Royal Charter, these are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the benefit of emerging communications. 51 BBC Trust, Protocol B6 Commercial Strategy. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 16 Culture, Media and Sport Committee: Evidence

7. The BBC has previously committed to maximising added value under its Fair Trading Commitment,52 and this aim was also outlined in the Government’s White Paper during the last Charter review process, which stated that the BBC’s commercial services had two roles in an international context: “Better promotion of UK culture, talent and intellectual property overseas; added value returned to licence fee payers.”53 8. Key to our concerns, however, is whether BBC Worldwide is always the best vehicle through which the BBC should seek to maximise returns, and where those returns are being invested within the BBC.

The potential risks to the BBC, licence fee payers and other stakeholders

Reputation 1. The BBC has a worldwide reputation as a trusted and independent source of content. The BBC’s Editorial Guidelines rightly warn that the BBC must be seen to be impartial and not influenced by commercial third parties at all times—including when engaging in commercial activities. They state: “The BBC’s global reputation is based on its editorial integrity and independence. Our audiences need to be confident that our decisions are influenced neither by political or commercial pressures, nor by any personal interest. We must not undermine these values by any actions which could bring the BBC into disrepute.”54

Risk to licence fee funds 2. In engaging in commercial activities there is a potential risk to licence fee funds. It is important therefore that the BBC ensures that there is adequate separation between its public service (licence-fee funded) activities and its commercial services such as BBC Worldwide, so that the BBC is not liable for BBC Worldwide losses. 3. In addition, the BBC can help minimise the risk to licence fee funds by ensuring that its commercial activities are based on exploiting its existing programmes assets, rather than making speculative investments in unrelated areas. In addition to the resulting ﬁnancial risk, this increases the danger of the BBC having an undue and negative market impact.

Market impact 4. The BBC is a substantial public intervention in the market. It is the sole recipient of funds from the licence fee, which represents around 25% of total revenues in the television sector (including, for example, advertising and subscription revenues). As pressure on advertising revenues amongst commercial sector broadcaster increases, the BBC is likely to be in an ever stronger position due to the exceptional nature of its funding. 5. There is therefore a risk that the BBC’s commercial activities will distort or dampen competition in the commercial sector and use licence fee funds for commercial purposes, which would potentially breach European rules on State Aid, as the licence fee would count as public funding.55 6. These issues are at the heart of the BBC Fair Trading Guidelines, which require the BBC to be mindful of its impact on competition and ensure that its commercial activities do not have an undue advantage because of their parentage. The Guidelines state that the BBC’s commercial activities must not be: “given unfair commercial advantage which could unduly and negatively inﬂuence the market.”56

Focus on Public Purposes 7. The BBC’s most important activities should be fulfilling its six Public Purposes as defined by its Royal Charter.57 This priority is enshrined in the BBC Charter, which calls for the BBC’s “main object” to be the Public Purposes,58 and is reflected in the BBC’s Fair Trading Guidelines, which state: “The BBC’s primary purpose is the promotion of its Public Purposes through the provision of output that informs, educates and entertains.”59

52 BBC Fair Trading Commitment. 53 A public service for all: the BBC in the digital age, DCMS March 2006, Section 3.6.1. 54 BBC Editorial Guidelines, Page 118. 55 The BBC Fair Trading Guidelines, page 44, state that the BBC must comply with EU law on State Aid, stating that: “Broadly, the EC Treaty prohibits any aid granted through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain ﬁrms or the production of certain goods.” 56 BBC Fair Trading Guidelines, 2.30. 57 Under section 4 of the Royal Charter, these are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the beneﬁt of emerging communications. 58 BBC Charter Article 3. 59 BBC Fair Trading Guidelines, Introduction, page 3. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 17

8. The BBC’s commercial activities are therefore required to be closely linked to its core Public Purposes. The BBC’s Charter Agreement requires that commercial activities “ﬁt with” its Public Purposes.60 This is also expressed in the BBC’s Fair Trading Guidelines, which state that any commercial activity must: “ﬁt with the BBC’s public purposes.”61 9. Yet the BBC’s commercial activities have in Pact’s view strayed into areas that are unrelated to its Public Purposes. As we will detail in the next section, BBC Worldwide is, for example, involved in consumer magazine publishing in India and has acquired Australian-based travel publisher Lonely Planet at a cost of around £90 million.

Conﬂicting incentives 10. As we have noted above, the BBC’s primary concern should be its Public Purposes. In our view, it follows that commercial activities should exist to maximise the revenues that can be reinvested in the pursuit of these Public Purposes. 11. There is, however, a danger that, in maintaining an ongoing commercial subsidiary, the BBC will focus on maintaining and strengthening that subsidiary, rather than on the best way to maximise added value for the BBC.

The extent to which the BBC’s commercial activities meet the criteria required of them 1. As we have noted in section 1, commercial activities should exist to maximise the “added value” of BBC assets such as programmes, and return the resulting income to the BBC so that it can be re-invested in public service activities.62 2. In addition, the BBC’s Fair Trading Guidelines stipulate that any BBC commercial activity must adhere to four Commercial Criteria, which are: — “Fit with the BBC’s Public Purposes; — Not jeopardise the good reputation of the BBC or the value of the BBC Brand — Exhibit commercial eYciency; and — Comply with the Trust’s Fair Trading Policy, the BBC’s Fair Trading Guidelines and, in particular, avoid distorting the market.”63 3. We note that the requirement under the Fair Trading Guidelines is for each activity to conform to all four of these Commercial Criteria. 4. Pact has concerns that BBC Worldwide is failing to meet the above requirements in three key areas: (a) BBC Worldwide’s “preferred partner status”: BBC Worldwide has a “first-look” arrangement with the BBC under which it can exclusively bid for the right to act as the distributor for all BBC programming made in-house. The BBC Fair Trading Guidelines require that programmes sold to BBC Worldwide by the BBC are at market rates, yet they allow the BBC to gauge this market rate through occasional benchmarking. This means that the BBC has no eVective way of gauging the market rate for prices to its programming, and therefore cannot guarantee that it is maximising the value of BBC assets, which should be its overriding goal. (b) Scope: BBC Worldwide’s overseas investments in some cases do not fit with a Public Purpose, thereby breaching the first point in the BBC’s Commercial Criteria. Moreover, they represent in Pact’s view an unnecessary financial and reputational risk, therefore potentially breaching points two and three of the Commercial Criteria (reputation and commercial eYciency). (c) Transparency: BBC Worldwide manages 29 diVerent television channels around the world, but only publishes a public financial breakdown of these businesses by three geographic areas: Europe, Middle East and Africa; America; and Rest of the World. This means it is impossible to see whether these channels are paying BBC Worldwide market rates for the rights to BBC programmes, and therefore represents a failure to demonstrate commercial eYciency. Additionally, the criteria for reviewing the eYciency of commercial investments are in our view too broad, and the minimum threshold of £50 million for investments that must be referred to the Trust’s Finance and Strategy Committee is too high. We also see a need for greater transparency in terms of BBC Worldwide’s investments in BBC in-house compared to external programmes at production stage. This is important in order to ensure that in-house and external suppliers are operating on a level playing field.

60 BBC Charter Agreement, clause 69. 61 BBC Fair Trading Guidelines, 2.3. 62 White Paper on BBC Charter: A public service for all: the BBC in the digital age, DCMS March 2006, Section 3.6.1. 63 BBC Fair Trading Guidelines, 2.3. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 18 Culture, Media and Sport Committee: Evidence

5. The following sections deal with each area in more detail.

BBC Worldwide’s “preferred partner status” 6. BBC Worldwide is the BBC’s “preferred partner” for exploiting its content. This means that BBC Worldwide has first refusal on acquiring the commercial rights to any in-house programme for subsequent exploitation, such as the rights to sell Doctor Who or Top Gear overseas (to be clear, this is in addition to the rights that BBC Worldwide may acquire to programmes that are commissioned by the BBC from external suppliers in the independent production sector. These are subject to a greater level of competition from commercial sector distributors as the rights are owned and sold by the external producer). 7. We understand the process by which BBC Worldwide acquires rights to programmes made by BBC in- house production is as follows. The BBC’s programmes are commercially exploited through its Commercial Agency. This is done by selling the rights to commercially exploit that IP to third parties. BBC Worldwide will be asked by the Commercial Agency to make a bid for such properties on an exclusive basis—ie before any other party has the opportunity to make a rival oVer for those rights. If the Commercial Agency is not satisfied with BBC Worldwide’s oVer it is common for BBC Worldwide to have a further exclusive period— an exclusive “second look”— in which it may raise its bid. Again, no other third party company will be able to compete to represent BBC programmes at this stage. 8. Finally, if BBC Worldwide chooses not to make a further higher bid after its second exclusive period, or the Commercial Agency is still not satisfied with the oVer, a programme may be put out to tender on the open market. This rarely happens. BBC Worldwide chief executive John Smith told the review conducted by Lord Burns in 2004 that, under this arrangement, “roughly 20% of all the rights that come oV the machine every year are acquired by the private sector.”64 We believe this even this 20% figure may include programmes made by external producers as well as BBC in-house, and that closer to 10% of in-house programmes is oVered to market. We are writing to BBC Worldwide for clarification. 9. The preferred supplier status of BBC Worldwide calls into question whether the BBC is maximising the value of its assets, as without exposing those assets to genuine competition in the marketplace it is impossible to accurately gauge their real worth. The Fair Trading Guidelines require that the BBC charge fair prices for these programmes, stating that fair prices: “should broadly be in line with the overall market context where there is an external market for comparable goods or services and where public data is available.”65 They add that, to establish the market rate, the BBC may use “benchmarking exercises or market testing.”66 10. This in Pact’s view is an unsatisfactory way to gauge the value of IP, which is not a homogenous product. Occasional benchmarking cannot capture the complexities of a rapidly evolving market, or take into account deals that are confidential. 11. Furthermore, if competitors in the commercial sector were genuinely able to compete on a level playing field for rights to BBC in-house programmes, it is highly likely that certain properties would be subject to bidding wars between diVerent companies, thereby greatly increasing the potential returns to the BBC and, by extension, the licence fee payer. When programmes commissioned by the BBC from external suppliers have been auctioned in the open market, private sector companies have in cases outbid BBC Worldwide.67 Additionally, companies in the private sector would be encouraged to develop ways to exploit BBC content that BBC Worldwide might not consider or be well placed to develop. Enabling a wide range of companies to compete for BBC rights will present the BBC with new ways of exploiting its content.

64 John Smith, BBC Charter Review Seminar: Commercial Services, 22 September 2004. 65 BBC Fair Trading Guidelines, 3.12. 66 Ibid, 3.15. 67 Under the Codes of Practice/Terms of Trade introduced in the 2003 Communications Act, independent suppliers retain control of certain secondary rights, including overseas rights, to programmes they make (although the BBC will receive a substantial share of any revenues from their exploitation as the commissioning broadcaster). Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 19

12. Crucially, without exposing in-house programme assets to real competition, the BBC cannot guarantee it is maximising their added value. The assets in question are substantial. The BBC is the biggest investor in new UK television programming, and invests twice as much in in-house programming (£800 million per annum) as it does not external commissions (£400 million), as shown below.

Figure 3

INVESTMENT IN NEW UK PROGRAMMING BY BROADCASTER

1400

1200

1000

800 external investment £m 600 in-house investment

400

200

0 BBC ITV C4 Five

Source: Ofcom, Communications Market Report 2008, page 184 (adjusted data).

13. BBC in-house programming therefore represents around 30% of all new UK programming made by all broadcasters. Much of this programming will have a strong market presence, as it will have aired on BBC1 or BBC2, which have a high audience share, and will be highly attractive to distributors in the commercial sector.

14. BBC Worldwide has previously objected to opening up in-house programming to an auction process on the grounds of eYciency.68 We do not accept this. Auctioning rights is common practice across the industry, and could involve as little as notifying potential bidders with an email. Our proposed system is already practiced by other parts of the BBC, including the Commercial Agency itself. Bidding might be conducted where appropriate on groups of shows rather than individual programmes. However, even under an open auction for individual programmes, it is reasonable to expect increased revenues resulting from the ensuing competition would more than cover any (moderate) overhead costs incurred by the BBC’s Commercial Agency. We will detail our arguments on this in the section on the future of the BBC’s commercial activities.

15. The BBC has also suggested that only its own commercial subsidiaries can be trusted to safeguard the BBC’s reputation. This does not bear scrutiny in the market place, where private companies regularly licence the use of properties around the world to third parties with no discernable damage to the quality of the show or their reputation. It is common practice for clauses to be included in any licence agreement to safeguard this. As we detail later in this section under Scope, BBC Worldwide’s claim to be the guardian of the BBC brand is questionable.

16. BBC Worldwide has also argued that it must have high proﬁle BBC shows in order to maximise the commercial value of its less commercially attractive properties, or oVset losses on non-commercial properties with proﬁts from hit shows. This argument does not take into account the likelihood of certain properties commanding a higher price if they were exposed to competition amongst buyers, and the overall return to the BBC being greater as a result. We also note that BBC Worldwide’s ability to use hit shows to leverage the sale of other shows is already subject to competition rules, and making the supply of one product conditional on the customer accepting another product could amount to abuse of a dominant market position. We will outline these arguments in more detail in the section on the future of the BBC’s commercial activities.

68 Chief executive John Smith told Lord Burns’ review in 2004 that auctioning rights on an individual spot basis so that all companies, including BBC Worldwide could compete for them: “would be very fair but highly ineYcient.” John Smith, BBC Charter Review Seminar: Commercial Services, 22 September 2004. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 20 Culture, Media and Sport Committee: Evidence

Scope

17. Under the Fair Trading Guidelines, BBC Worldwide’s activities are required to “fit with” the BBC’s Public Purposes.69 As we have outlined, this is important on a number of grounds, including minimising the risk to public funds and of an undue and negative market impact, as well as ensuring the BBC maintains a focus on its core Public Purposes. The BBC Trust elaborates on this in its Fair Trading Policy, stating that a commercial activity must connect with the Public Purposes other than in purely financial terms: “The Agreement specifies that a Commercial Activity is to be considered to fit with the BBC’s Public Purpose activities if it is appropriate to be carried on in association with the promotion of the Public Purposes; and it is connected, otherwise than merely in financial terms, with the ways in which the BBC promotes its Public Purposes.”70 18. With this in mind, we question the grounds for some of BBC’s Worldwide’s investments overseas. BBC Worldwide has adopted an aggressive expansion strategy in recent years, investing in anything from Australian travel book publisher Lonely Planet, to the Indian version of Hello! magazine, through to a string of production companies dotted around the world. 19. We cannot see how BBC Worldwide’s consumer magazine joint venture in India fits with its Public Purposes. Called Worldwide Media, the joint venture includes the Indian versions of Hello! and Grazia magazines. Arguably, the BBC’s ownership of such celebrity-focused magazines actually conflicts with the second Commercial Criteria of not jeopardising the reputation of the BBC. 20. BBC Worldwide has previously said that its joint venture with the Times of India is marginal to its other activities, and the Charter Agreement makes allowances for commercial activities that do not fit with the BBC’s public purposes if they are peripheral to other activities that do meet those requirements. However, the sole purpose of this joint venture is publishing consumer magazines in India, while the reported cost of BBC Worldwide’s ownership of Lonely Planet is £90 million—which would represent around 10% of BBC Worldwide’s total annual sales of £916 million for the year to March 2008. 21. For the same reason, we are also concerned by BBC Worldwide taking ownership stakes in production companies overseas. BBC Worldwide has done this, we understand, in order to control the remaking of BBC programmes for local markets in overseas countries (known as “formatting”), and to have privileged access to the output of that company so that it can exploit the rights internationally. 22. Pact has no objection in principle to BBC Worldwide investing where appropriate in a UK-based production company, providing this is subject to a clear and rigorous accountability process. This can help the BBC fulfil its Public Purpose of stimulating creativity, which calls for the licence fee to be used to support UK creative talent and the UK’s creative industries. But we cannot see how investments in overseas production ventures fit with this Public Purpose, which is clearly aimed at supporting and stimulating UK creativity, not the creative industries in other countries. The Government’s White Paper on the Charter required the BBC to: “use its unique position to inspire, support and showcase the best of the UK’s creative talent.”71 Its rationale was that: “The creative industries are already important to the UK economy, and the government wants them to make an even greater contribution in the future. Between 1997 and 2003 the creative sectors grew twice as fast as the overall economy. They employ around 1.8 million people and account for a twelfth of our economy, more than in any other country. The UK’s current strength in creative industries is a real opportunity. We need to build on this strength and capitalise on growing markets.”72 23. Another of the BBC’s six Public Purposes is “bringing the UK to the world and the world to the UK.”73 Although this clearly has an import/export element, it should not give BBC Worldwide carte blanche to engage in any activity of its choosing. In describing this Public Purpose, the Charter Agreement stresses the goal of making UK people aware of international issues and culture, and bringing high quality international news coverage to international audiences.74 In our view, investing in an overseas company does not deliver on this Public Purpose. Programmes made by these companies may never appear on UK television, and therefore do not contribute to raising UK people’s awareness of international issues. Nor are the companies concerned known for their news programming. 24. The White Paper on Charter renewal explicitly refers to the role of BBC commercial activities in regards to this Public Purpose as: “Better promotion of UK culture, talent and intellectual property overseas; added value returned to licence fee payers.”75

69 The BBC’s Fair Trading Guidelines, section 2.3. Also see Charter Agreement, Section 69. Our highlighting. 70 Fair Trading Policy, BBC Trust, Section 27. 71 A public service for all: the BBC in the digital age, DCMS March 2006, Section 3.4.1. 72 Ibid, Section 3.4.4. 73 BBC Charter Agreement, Section 10. 74 Ibid, Section 10 (b). 75 A public service for all: the BBC in the digital age, DCMS March 2006, Section 3.6.1. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 21

25. We cannot see how investing in overseas companies promotes UK culture, and view the potential for added value to be derived as a result as highly questionable. Selling the rights to remake BBC programmes to these companies would constitute creating added value from BBC assets. Investing in the company is an entirely diVerent proposition, as we will outline. 26. BBC Worldwide may argue that it stands to recoup a higher level of return on its format (remake) rights by owning a producer in an overseas market, as it will also receive production fees from remaking its show. Yet by investing in one company, the BBC creates the incentive of automatically channelling all remakes of BBC programmes through that entity, rather than auctioning the rights on the open market (in some cases, is part of the contract that the company in question will have exclusive “first look” at remake rights to BBC properties). Having an automatic partner in a local market means that the BBC is missing out on the opportunity to benefit from competition between broadcasters and producers in that market for the remake rights to BBC shows. Distributors with a high-profile property for remaking in an overseas territory often create an auction between various parties, with the price for the property rising as a result. 27. Moreover, there is a considerable financial cost in taking share of ownership in a production company. We would argue that taking an ownership stake in a company in fact exposes the BBC to a greater financial and reputational risk than simply licensing a format. The UK independent production sector has stabilised following the introduction of the Codes of Practice/Terms of Trade in the 2003 Communications Act, but independent television production around the world is notoriously volatile and, given general economic conditions, private sector investment in media stocks has cooled significantly over the last 12 months on a worldwide basis. We assume that funding for BBC Worldwide’s equity stakes in overseas production companies is raised through debt financing, in which case BBC Worldwide should be made to disclose in detail the terms of that arrangement in order to provide assurances that it is operating in a manner comparable to the market. In the case that BBC Worldwide used equity from profits on its other activities, this represents a direct reduction in the returns that BBC Worldwide has generated for the core public service activities of the BBC. In either case, BBC Worldwide is assumed to be exposed to the significant risk of its investments making a loss, again resulting in a reduction of the profits it can return to the BBC for reinvesting in public service activities. 28. The BBC has previously suggested that it requires an ownership stake in overseas production companies in order to control the production, through that company, of local versions of BBC shows, and thereby protect the BBC brand. This ignores the fact that private companies regularly licence the remaking of properties such as Who Do You Think You Are? and Who Wants To Be A Millionaire? around the world, with no discernable damage to the quality of the show or the reputation of the original broadcaster. So has the BBC previously—in fact it still licences formats to many of its hit shows, such as The Weakest Link and Strictly Come Dancing, to third parties in dozens of countries, with no negative impact on its reputation. 29. By taking equity in a company, the BBC actually increases the risk to its reputation. By aligning itself with one producer in a market, the BBC is not just missing the opportunity to spark a bidding war; it is also failing to sell the remake rights to the most suitably qualified producer for that particular show—the skill set for remaking a quiz show is radically diVerent to that required for a drama, for example. This could in turn have a reputational impact if the BBC’s automatic partner does a poor job on a show in a genre in which it has little or no experience. This is quite possible; it is extremely unusual in the production sector for companies to stray outside their specialist genres. Pact’s annual census of the UK independent production sector shows that companies work on average in two genres.76 30. Additionally, as a co-owner of a company, the BBC does not just have to manage production on one show, but to an extent becomes responsible for and, most importantly, associated with that company’s entire output. In Australia, for example, BBC Worldwide has taken 25% equity in The Freehand Group, which is producing a local version of the BBC show, Top Gear. One of Freehand’s most well-known programmes is Joker Poker, an entertainment show based around gambling and sponsored by a whiskey company, Wild Turkey Bourbon, and casino groups. According to the Sydney Morning Herald, Wild Turkey invested up to A$1m to fund one version of the show.77 31. The BBC is therefore linked to a well-known show that involves, promotes and/or is associated with gambling and alcohol. On the company website for Freehand, the BBC logo is clearly visible as a stakeholder (as BBC Worldwide), next to a publicity still for Joker Poker prominently featuring a poker table with the logo of Crown Casino on it.78 32. Joker Poker is an example of “branded content”—ie where an advertiser sponsors or invests in a programme in return for publicity within the show and/or its publicity materials. We understand that in the UK Joker Poker would be classified as product placement and that the BBC would therefore be prohibited from making it in the UK. The BBC’s Editorial Guidelines state: “We must never include a product or service in sound or vision in return for cash, services or any consideration in kind. This is product placement. It is illegal to make any such arrangements in the EU.”79

76 Independent Production Census 2007/08, Pact, page 46. 77 http://www.smh.com.au 78 http://www.freehandtv.com.au 79 BBC Editorial Guidelines, Page 118. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 22 Culture, Media and Sport Committee: Evidence

33. We note that the BBC Trust’s guidance on fulﬁlling this Commercial Criterion explicitly requires commercial services to adhere to Editorial Guidelines, stating: “The assessment of the proposals should comply with the editorial controls set out in the BBC’s Editorial Guidelines.”80

Transparency 34. BBC Worldwide’s Channels Division manages a portfolio of 29 channels around the world, including BBC America and a 50% share of UKTV. Our concern is that the amount paid by each channel for rights to a programme is not made public. BBC Worldwide’s annual report merely groups its channels by US; Europe/Middle East/Africa; and Rest of the World. In the case of BBC in-house programmes, BBC Worldwide’s channels may be underpaying for programmes as BBC Worldwide does not have to compete with distributors in the commercial sector for the rights, and may pass on programmes to its channels at a subsidized rate. 35. We have similar concerns regarding the transparency of BBC Worldwide’s investments in BBC programmes at production stage. It is common for BBC Worldwide to invest during the production process in both in-house and external programmes commissioned by the BBC as part of the financing package for a show—it spent £85.1 million on such activity in 2008.81 In exchange for its investment, BBC Worldwide will take rights to the show for sale at a later point. 36. The BBC will use the investment from BBC Worldwide to sit alongside its core programme budget and fund the creation of a programme. We have no objection to the principle of BBC Worldwide investing in BBC shows at financing stage—indeed, BBC Worldwide revenues should be reinvested in the BBC’s core activity of making UK public service programmes. However, the BBC does not make clear the split between BBC Worldwide’s investments in in-house and external programmes. Nor does it make public the proportion of the budget BBC Worldwide pays in either case. Were in-house producers securing a greater level of investment from BBC Worldwide than external producers who have been commissioned the BBC, this could give them an unfair advantage when competing with external suppliers for BBC commissions. 37. This would potentially undermine the BBC’s stated aim of commissioning the best ideas, no matter where they come from, so that the licence fee payer benefits from the most diverse, engaging and innovative mix of shows. BBC director general Mark Thompson told the House of Lords Select Committee during the Charter review that: “It is in the interests of the licence payer that the licence fee investment should go to the best ideas and the best talent.”82 38. Finally, the criteria used for reviewing BBC Worldwide’s investment’s, for example in overseas production companies or in Lonely Planet, are extremely broad as set out in the Trust’s Commercial Protocols (C1 and C2)—and arguably require less detail than a publicly-listed company would have to provide its shareholders. These Protocols also include setting the minimum investment level for referral to the Trust’s Finance and Strategy Committee at £50 million, an extremely high threshold in comparison to the commercial sector.83 This threshold would probably be high enough to mean that BBC Worldwide’s investments in production companies overseas were not referred to the Finance and Strategy Committee.

TheAppropriateness andEffectiveness of theGovernanceFramework for the BBC’sCommercial Activities 1. We have outlined in the preceding section our concerns that BBC Worldwide is acting in an inappropriate manner in a range of areas—ie its preferred partner status, scope of investments and transparency. In our view, the regulatory and governance framework is logically failing as these activities have been allowed to happen.

Separation 2. The BBC Fair Trading Guidelines require clear separation between the BBC’s public service and commercial activities. They require commercial services to operate “at arm’s length” from public service activities, and to maintain “a clear and separate management structure.”84 3. However, the relationship between BBC Worldwide and the BBC has become blurred, with BBC executives sitting on the BBC Worldwide board and vice versa. John Smith, chief executive oYcer of BBC Worldwide and a member of the BBC Worldwide Board, sits on the BBC Executive Board, while Jana Bennett, Director BBC Vision and a member of the BBC Executive Board, sits on the BBC Worldwide board. Zarin Patel, BBC Group Finance Director, also sits on both boards. We cannot see how the BBC can ensure an appropriate level of separation between its two activities under these circumstances.

80 BBC Trust. Protocol D6—The BBC’s Commercial Services, page 11. 81 BBC Worldwide Annual Review 2007–08, page 38. 82 Mark Thompson oral evidence to House of Lords Select Committee on the BBC Charter Review, First Report, Section 255. 83 BBC Trust Protocol C1, page 8. 84 BBC Fair Trading Guidelines, 3.6. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 23

Framing of regulations 4. Along with the issue of separation, in our view the regulations governing BBC Worldwide contained in the Fair Trading Guidelines are also inadequate. In the case of separation issues outlined above, the Guidelines are in our view simply being breached. In other cases, they outline the appropriate high-level requirements, eg the broad headlines of the Commercial Criteria, but fail to create an adequate framework to ensure that these requirements are being adhered to. In some instances, the Guidelines are framed too loosely and are therefore potentially open to abuse. In other areas, they contain a reasonable level of detail, but still fail to address the real issue, and so fail to achieve their own goals. 5. As an example of where the framing is too broad, one of the four Commercial Criteria in the Fair Trading Guidelines—to which all commercial activities must adhere—is to “fit with” the BBC’s Public Purposes.85 The Trust states that this means that an activity “must link clearly with the way in which the BBC promotes its Public Purposes.”86 Although it is clear that a commercial activity does not have to be directly tied to a specific channel, what it means to “clearly link with” a Public Purpose may be open to interpretation and oVers no more clarity than “fit with.” In our view, investing in publishing consumer magazines in India, Lonely Planet and overseas production companies are either breaches of this Commercial Criterion or, at best, evidence that it is framed so loosely as to fail to prevent inappropriate activity. 6. In other cases, the Guidelines are detailed but fail to achieve their stated aims, as the guidance they oVer is inappropriate. The BBC Trust’s Protocol requires BBC commercial services to maximise added value for the benefit of the licence fee payer, and the Fair Trading Guidelines stipulate that any services, including programmes, that the BBC supplies to its commercial subsidiaries must be at prices that are in line with market rates. But the Guidelines then allow the BBC to establish the prices of its assets by occasional benchmarking, which is inadequate as a way of ensuring that prices are in line with the market. As a result, the BBC cannot guarantee it is charging market rates or maximising the value of its assets. 7. Additionally, the Fair Trading Guidelines focus on ensuring a (right and proper) separation between BBC public service and commercial subsidiaries such as BBC Worldwide; however, they do not require suYcient transparency of accounting between individual commercial services operated within a commercial subsidiary, such as BBC Worldwide’s extensive portfolio of channels in overseas markets. Nor do they call for an appropriate level of detail in BBC Worldwide’s financial reporting on its investments.

TheFuture of BBC Worldwide and other BBC CommercialSubsidiaries 1. We have stressed that we see the commercial exploitation of the BBC’s assets as hugely important to the future of public service broadcasting, and this should in our view continue, within appropriate limits. However, for Pact, the key issue is the nature of future commercial exploitation, and more precisely the nature of the appropriate vehicle for that exploitation. It should not be assumed that BBC Worldwide is automatically the best partner for the BBC, which should consider harnessing the wider commercial sector to a far greater degree.

BBC Worldwide’s “preferred partner status” 2. We have argued that BBC Worldwide’s preferred partner status means that the BBC has no guarantee that it is maximising the added value of its programme assets. We consider that an open auction system that required all rights to BBC in-house programmes to be put to tender so that third parties in the private sector could compete to distribute them, alongside BBC Worldwide, would address this. Such a system would: — Maximise competition, allowing the BBC to achieve the best possible added value on its assets for the licence fee payer. — Encourage innovation by allowing a wider range of distributors to develop ways to exploit BBC shows, again increasing potential returns to the BBC. — Enable the BBC to guarantee and demonstrate that it is achieving the best possible prices for its rights. — Help the BBC to fulﬁl its Public Purpose of stimulating creativity by allowing private companies access to a substantial source of content, at the same time as maximising returns to the BBC. 3. BBC Worldwide has acknowledged that such a system would be very fair, but has historically objected on the grounds of eYciency. Chief executive John Smith told Lord Burns’ review in 2004 that auctioning rights on an individual spot basis so that all companies, including BBC Worldwide, could compete for them: “would be very fair but highly ineYcient.”87

85 BBC Fair Trading Guidelines, 2.3. 86 Fair Trading Policy, BBC Trust, Section 28. 87 John Smith, BBC Charter Review Seminar: Commercial Services, 22 September 2004. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 24 Culture, Media and Sport Committee: Evidence

EYciency

4. We do not accept that opening up the auction process for BBC in-house programmes so that commercial sector companies can compete on a fair basis need be ineYcient to the BBC. Auctioning rights to the market is standard industry practice, and is conducted by hundreds of private sector distributors around the world. Our proposed system is already practiced by other parts of the BBC, and has in the past been used by the Commercial Agency itself. When seeking suppliers to make a BBC show such as Question Time, the BBC conducts a public tendering process involving the private sector on a regular basis. There is also clear precedent for an open auction model within the BBC’s Commercial Agency, which until relatively recently would conduct auctions involving the private sector for book publishing rights. 5. Bidding might be conducted where appropriate on groups of shows—eg all BBC drama over a season—subject to competition rules. Under an open auction for individual programmes, it is reasonable to expect increased revenues resulting from the ensuing competition would more than cover any overhead costs incurred by the BBC’s Commercial Agency. 6. From BBC Worldwide’s point of view, an open auction process would not necessarily require any substantial changes to current practice—providing its current practice is robust. Currently, when BBC Worldwide formulates a bid for a property from the Commercial Agency, it is necessary for it to evaluate the potential revenues that can be derived from the market place for each of the various rights to a programme in order to reach an overall oVer. BBC Worldwide’s chief ﬁnancial oYcer, David King, stated in 2004: “The way the process works is that the Commercial Agency bring programmes to [BBC Worldwide] and oVer rights [. . .] The basic principle of the process is [BBC Worldwide] then assesses the programme across the television, video, audio, book and other medias to determine what value it thinks it can derive from the market-place from selling those programmes, those books, etc.” 7. There should be little if any change to this process for BBC Worldwide even if private sector companies are also formulating bids for a property, and we cannot see how an open tendering process for BBC in-house programmes would automatically increase costs

Reputational risk

8. An argument put forward by the BBC is that only the BBC and its commercial subsidiaries can be trusted with the BBC brand. As we have mentioned, this does not bear scrutiny in the market place, where private companies regularly licence the use of properties around the world to third parties with no discernable damage to the quality of the show or the reputation of the original commissioning broadcaster. Additionally, BBC Worldwide’s association with a production company involved in branded content involving alcohol and gambling concerns shows that it is no guarantor of the BBC’s reputation for public service.

Scale

9. BBC Worldwide has also suggested that its scale makes it the best-placed organisation to exploit BBC content, and that without access to hit shows it cannot eVectively market less commercially attractive properties, or use revenues from hit shows to oVset investments in other properties. 10. In considering this argument, it is important to bear in mind that BBC Worldwide’s ability to demand a buyer purchase a less attractive programme in order to buy a hit show is constrained under competition rules. BBC Worldwide should not insist that a buyer must acquire one show if it wishes to buy another— ie force a buyer to buy a low proﬁle programme in order to buy a hit show. This could represent “tying”, ie making the supply of one product conditional on the customer accepting another product, and could amount to abuse of a dominant market position. 11. In terms of BBC Worldwide’s ability to cross-subsidize less commercial properties with more valuable ones, this argument fails to take into account the potential for the BBC to recoup proﬁts on its hit programmes from a third-party distributor in the commercial sector, and reinvest them itself in appropriate areas of programming. The BBC’s Commercial Agency already has to administer revenues generated by private sector distributors on the limited amount of in-house programming that it does put out to the market. 12. Most importantly, however, the BBC’s argument does not take into account the fact that, under the current system, it cannot guarantee that it is achieving the market rate for its assets, or that its assets might command a higher price if they were exposed to competition amongst buyers, with the overall return to the BBC being greater as a result. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 25

Scope 13. We have also outlined concerns regarding BBC Worldwide exceeding the BBC’s core public service remit and making investments that are unrelated to its programme assets or its Public Purposes. In our view, this amounts to a breach of the Fair Trading Guidelines’ stipulation that all commercial activities “fit with” the BBC’s Public Purposes.88 14. In the specific case of investments in overseas production companies, it is not necessary or appropriate for the BBC to take ownership of a company in order for it to derive added value from BBC programme assets. The BBC should divest itself of such interests. Going forward, it would be far safer financially and reputationally for the BBC to simply licence the right to make a local version of shows to another company after conducting an open auction. This is common industry practice. The BBC would be able to insist on approval over any editorial issue, or any matter that might compromise the BBC reputation, without making a long-term investment. 15. More generally, we call for the BBC to reduce its investments in overseas ventures. BBC commercial activities should focus on generating added value for existing programme assets, not long-term overseas investments.

Transparency 16. We have expressed concerns over a lack of transparency within BBC Worldwide, particularly in relation to its portfolio of overseas channels, and in terms of the broadness of the investment criteria for BBC commercial activities. The Fair Trading Guidelines focus on ensuring a separation between BBC public service and commercial activities; they do not in our view explicitly require suYcient transparency of accounting between individual commercial services operated by a commercial subsidiary such as BBC Worldwide, which may have a bearing on prices BBC Worldwide pays to the BBC. Nor do the Guidelines require suYcient detail in terms of comparing investments that BBC Worldwide makes at production stage in in-house and external BBC commissions. We therefore ask the Committee to recommend that the Trust review and, if appropriate, tighten the transparency and reporting requirements for BBC Worldwide.

How theMoneyReturned to the BBC by itsCommercialOperations isInvested 1. Public service programming faces well-documented funding issues. Increasing pressures on broadcasters’ advertising revenues (due to the growing number of channels across which advertising budgets are spread) are already impacting on UK programme budgets, with less commercial public service genres such as news and children’s the ﬁrst to be cut. 2. Ofcom’s ongoing second review of Public Service Broadcasting predicts a funding gap of up to £235 million per annum by 2012 just to maintain current levels of UK-made, public service programming on the four main public service broadcasters (BBC, ITV1, Channel 4 and Five).89 The table below illustrates Ofcom’s forecasts for the decline in spend on new UK programming, based on four diVerent models.

Figure 4

SPEND ON NEW UK PROGRAMMING

2.5

2 Gradual Medium 1 1.5 Medium 2 £bn Radical 1

0.5

0 2007 2012 2016 2020 Source: Ofcom PSB Review Phase 1: The Digital Opportunity, page 67 (adjusted data).

88 The BBC’s Fair Trading Guidelines, section 2.3. Also see Charter Agreement, Section 69. 89 Second Public Service Broadcasting Review, Phase 2: preparing for the Digital Future, Ofcom, September 2008, page 5. Processed: 31-03-2009 23:30:02 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 26 Culture, Media and Sport Committee: Evidence

3. Ofcom does not envisage the digital, cable and satellite channels plugging the gap: their spending is predicted to remain at 10% of overall investment in new UK programming, just as it has done over the last decade. 4. The pressure on Public Service Broadcasting is therefore very much a pressure on investment in the making of (UK) public service programmes. As we have outlined in this submission, we see UK-made programming, as opposed to imports, as at the heart of public service broadcasting, essential to delivering the goals of public intervention in this area—such as informing ourselves about our society; representing diverse viewpoints within the UK, including the devolved nations and the English regions; and to interpreting international issues by using appropriate reference points. UK-produced programming is therefore fundamental to fulfilling the Public Purposes of the BBC under its Charter, and the four public service broadcasting purposes outlined by Ofcom.90 5. Commercial exploitation of BBC assets can help oVset these declines by reinvesting profits into the areas of public service programming and online content most under threat, ie core public service genres and areas such as programming from the devolved nations and English regions outside London and children’s. These programmes are crucial to the BBC’s delivery of its Public Purposes, as defined by its Charter. And in focusing on programming, this investment ensures that licence fee payers can see the benefits on screen. 6) It is currently unclear where profits from commercial activities are re-invested as the BBC does not disclose this information. BBC Worldwide declares how much it invests at production stage in BBC programming as part of the financing package in its annual report (although not, as we have noted, the breakdown between in-house and external BBC commissions). However, the BBC does not reveal where profits (eg royalties from programme sales) are re-invested. In our view, these too should be reinvested into programming. 7. We propose therefore that the BBC be required to declare where profits from commercial exploitation are being re-invested in order to help ensure that the licence fee payer is benefiting from this added value. October 2008

Witnesses: Mr Tony Cohen, Chief Executive OYcer, FreemantleMedia; and Mr John McVay, Chief Executive and Mr Charles Wace, Chairman, Pact, gave evidence.

Chairman: Good morning everybody.This is the first return them back to the BBC which should reward session of the Committee’s inquiry into the BBC’s the licence fee payer. It is not a question about the commercial operations. We have three sessions this BBC or Worldwide making profits; it is a question of morning beginning with representatives of the how they make profits; how they are accountable for independent production sector. I would like to the profits they make; and the various investments welcome Tony Cohen, Chief Executive OYcer of and the nature of the investments they make. From Freemantle, Charles Wace, Chairman of Pact and our position, many of our independent producers John McVay, Chief Executive of Pact. I am going to enjoy the relationship with BBC Worldwide; we are ask Adrian Sanders to begin. very pro-Worldwide making profits and returns to the BBC. So the purpose of Worldwide is not the question. The question is: how does it achieve those Q1 Mr Sanders: Is the BBC Worldwide simply doing profits; and, in terms of its scope, what should it what is required of it, in that it is maximising invest in, and what should it not invest in, and the commercial revenue by exploiting the BBC brand nature of those investments. and also diversifying into other profitable areas? Mr Wace: I think also how transparent is the process Why should we be worried about that? as well and, in that transparency, how often the Mr McVay: First of all, I would like to thank the licence payer is getting best value for money out of Committee for beginning this investigation. The last BBC Worldwide. If all the programmes were thrown review of BBC Worldwide was conducted several out into the commercial market, whether the market years ago before the creation of the BBC Trust. I would itself set a rate which might be more profitable think it is very helpful that the Committee is for the BBC than the situation that currently exists. conducting this review now, particularly when we Mr Cohen: I would just like to introduce myself to come to a point where issues around the future of the Committee. My name is Tony Cohen; I am the PSB and so on are going to come to the fore before CEO of Fremantle. I would also like to thank the the debate in Parliament next year. The issue Committee very much for inviting me to talk to you primarily, to answer your question, is BBC today. FreemantleMedia is an international Worldwide should be a highly successful and highly production company. We operate in 22 countries profitable arm of the BBC to maximise profits, to around the world, mostly in popular drama and

90 Under section 4 of the Royal Charter, the BBC’s Public Purposes are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the beneﬁt of emerging communications. Ofcom’s public service purposes are: informing our understanding of the world; stimulating knowledge and learning; reﬂecting UK cultural identity; and representing diversity and alternative viewpoints (see Second Public Service Broadcasting Review—Phase 2: Preparing for the Digital Future, page 13). Processed: 31-03-2009 23:30:02 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 27

4 November 2008 Mr Tony Cohen, Mr John McVay and Mr Charles Wace popular entertainment. Our company here in the happen. The last point I made is about market UK, talkbackTHAMES, produces many of the top distortion of the fair trading guidelines. The fair shows in the UK, like The Apprentice for the BBC, trading guidelines are really clear. They absolutely like Grand Designs for Channel 4, the X Factor and insist on the division between the BBC’s commercial Got Talent for ITV, just to give you a sense of who services and the BBC’s public services. They also say we are. We work extensively with the BBC. We sell that no advantage should be given to BBC programmes like The Apprentice to them; and we sell Worldwide that is not available to its competitors in programmes to BBC Worldwide too. We cooperate terms of information, commercial advantage and so with the BBC as well as compete with them as on. Yet the CEO of BBC Worldwide sits on the BBC distributors and as programme makers. We are here Executive Board; the Director of Vision and the today because we have some serious concerns about Finance Director of the BBC sit on the BBC how BBC Worldwide is conducting its operations, Worldwide Board. They are clearly intertwined in a particularly in the light of the very recent expansion way that, it seems to us, contravenes the fair trading into international production. There are four guidelines. Because BBC Worldwide has that ﬁrst concerns that we have. The ﬁrst is: we believe that right of refusal of all the shows coming out of the BBC Worldwide is exceeding its remit; secondly, we BBC, then it seems also to give them a commercial do not believe that it is unarguably commercially advantage that is not available to operators like us. eYcient; thirdly, we think it does run the risk of That is the summary of our feelings about it—those jeopardising the BBC’s reputation; and, lastly, and four points: exceeding the remit; not really being for us most importantly, we think it distorts the demonstrably commercially eYcient; jeopardising market and it does not observe its own fair trading potentially the reputation of the BBC; and, lastly,the guidelines. Those are the four big issues as far as we market distortion and the fair trading guidelines, as are concerned. far as we can see, not being properly observed.

Q2 Mr Sanders: Could you give the Committee a Q3 Mr Sanders: Would you want to see BBC specific example? Worldwide completely separate from the rest of the Mr Cohen: May I just talk about the four concerns BBC, in order that you could then have that a little bit if that would help to give you some competition for a BBC programme that is then specifics. In terms of exceeding the remit, BBC available to go worldwide? Is that part of the Worldwide has to support the BBC’s purposes. It answer? has to fit with them in ways, other than merely financial, laid down as to what it must do. We do not Mr Cohen: Yes, BBC Worldwide has a very, very really understand how that fits with the BBC setting privileged position. It has this enormous amount of up production companies in India and in France, money that is spent on fantastic programmes from and buying stakes in production companies in the BBC, and it has this extraordinary exclusivity to Russia, in Argentina, in Canada, in Australia as well get those programmes. It seems to me a much fairer as in the UK. This does not seem to fit with the way to separate it completely so that it has to public purposes. The second issue is to do with compete in the market like we do for the right to commercial eYciency. I do not know whether the export and to develop the commercial potential of Committee is familiar with this, but BBC Worldwide the work that the BBC does, for a return obviously has a right of first refusal on all TV programmes that to the BBC licence fee payer, but also because it is a come out of the BBC. What that means, to be real commercial opportunity too. It is only by specific, is if the BBC invent a fantastic show like competition that real value can be achieved. Strictly Come Dancing, which is a very big show here and also has enormous international potential, commercial competitors like us are not able to bid Q4 Mr Sanders: What evidence could you give us to for the rights to remake and export that show. It is show that if that were the set-up the licence fee payer not put out for any kind of competitive tender, so it would benefit more than the licence fee payer does not maximise the value of that programme for benefits at the moment? the BBC licence fee payer and it is not commercially Mr Cohen: The only way I could give you evidence eYcient. The reputation issues that I mentioned I is by saying, “Let’s try it and see what happens”. I think are also pretty serious. BBC Worldwide is not can only tell you from our experience. Heaven for us to jeopardise the reputation of the BBC. BBC is when you have more than one potential buyer, Worldwide programmes, which are made now because then you have competition in the market around the world through its subsidiaries, or and the price will rise as people want these through its wholly owned subsidiaries, are properties. The material that comes out of the BBC, controlled by an editorial system that is quite I am sure you know, is very valuable, particularly separate, as we understand it, from the BBC. The when they come up with big hits like Strictly Come Committee I am sure is very familiar now and very Dancing or The Weakest Link. These shows can be aware of how easy it is for editorial mistakes to really remade in many, many countries around the world. damage the reputation of the BBC, even with the They are very valuable, and any bidding situation experience and the skills of the BBC management. will almost always push the price up. I cannot give BBC Worldwide producing shows overseas outside you evidence, I am afraid, but I would say, “Try it the BBC’s own editorial control system seems to me, and let’s see what happens”. I would be quite to be honest, to be potentially an accident waiting to confident. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 28 Culture, Media and Sport Committee: Evidence

4 November 2008 Mr Tony Cohen, Mr John McVay and Mr Charles Wace

Mr McVay: There is a way to get some sense of how relationship. One of the things which came out of a it would operate, because independent producers are previous session that we had with the BBC was: the not required to give their distribution rights to BBC question of acquisitions by BBC Worldwide was Worldwide. As a result of the Communications Act only referred up to the Trust if it exceeded £50 those rights do go out to the market and are subject million. The BBC has told us that actually that is to bidding wars amongst distributors, including pretty comparable to most boards having to refer Worldwide. Indeed, I think Tony’s company recently back to its shareholders. That may not be quite an won the rights for Merlin in such a process. exact parallel. Do you find it is surprising that that is Worldwide did not get that, so obviously the money the threshold at which the BBC Trust gets involved? returned because BBC shares in the sales of those Mr McVay: Tony can probably talk about what he programmes; and the money returned to the BBC has to do to refer back to his shareholders when he could be considerable. The question is not about is making an investment. I think from Pact’s whether it is significantly more money. The question perspective it is unclear how the governance actually is: is the BBC currently getting as much as it should? works, because the Chief Executive of Worldwide The heart of your question is actually where we have sits on the management board, the executive board a major problem that we do not know. There is no of the BBC, which is the main board that is meant to way to find out whether BBC Worldwide overpays oversee the operation of BBC Worldwide. It seems a for programmes from independent producers and bit strange that that is the situation, and we would underpays for programmes from its own in-house certainly encourage the BBC and BBC Trust to think production. That is information which is not about a more appropriate means of governance of available to yourselves or indeed us, in terms of the commercial arms of the BBC. The £50 million is trying to scrutinise how BBC Worldwide works. nearly half of the profits that Worldwide returns to Your earlier point, which I think Tony alluded to as well about reputational risk, is very critical. the BBC. If it is 50% of your available profit we Worldwide currently has a 25% shareholding in a would tend to think that is quite a lot of money you company in Australia called Freehand which makes are putting at risk in any one single investment. We a programme called Joker Poker, which is a do feel the Trust should have far more oversight gambling show, which they profit from. That is about the operations of the commercial arm, something they would not be allowed to do in this because it impacts on the money returned to the country. Indeed, if you look at their website you will BBC; so therefore it impacts hopefully on the see prominently displayed on the front page of the programme budgets that the BBC spend to reward website “BBC Worldwide” next to “Joker Poker”. the licence fee payer who invested originally in those Again, something the BBC would not be allowed to programmes in the first place. The other question is: do in this country. I think the risks are that if we are not clear how the BBC manages those risks. Freehand broke some of the rules in Australia it Do they manage those risks consistent with good would not be just Freehand getting it in the neck, it commercial practice? We do not know. Or do they would be the BBC as well because they have a just say, “We’ve got a whole lot of money there; let’s shareholding in that company. They could easily find a way to spend it”. Much like maybe a have disposed of those programme rights at open stationery budget in a local authority: “It’s just tender in the Australian market, and any company there; let’s spend it”. That to us does not seem to be that then broke any rules in that territory would be a very appropriate way to risk that public asset. subject to the rules of that country; and Worldwide Mr Wace: What happens to profit overall? Does the could then close the contract down and not have to profit go back into programming, or does it go into take any of the pain that goes with it. We do not see general infrastructure? There seems to be a lack of how any investment in an Australian company transparency, not only about the governance but which makes gambling shows fits the BBC’s public also about where the money actually goes back into purposes. Worldwide is only meant to make the BBC. investments if it fits all four of the public purposes Mr Cohen: From a commercial operator’s point of laid out for them, and clearly that is one we feel they view £50 million seems incredibly high to be the level do not fit. It may be an exceptional point, but is it the at which investments are judged. I cannot give you tip of the iceberg; or is it the iceberg? Is that actually specific examples from our company because they where Worldwide is heading? Is that their global are commercially confidential, but it would be a plan? To make more risky investments which could major order of magnitude less than £50 million being damage the BBC? Pact is a big supporter of the BBC. the threshold on which you would have to take Clearly the BBC recently has had some problems in serious investments to be assessed by our terms of its reputation. We would rather that did not supervisory board and the supervisory boards above continue through the activities of its own Freemantle. That would be quite consistent with commercial arm. normal commercial practice. As John says, £50 million is half the annual profits of BBC Q5 Chairman: We are going to go into some of these Worldwide—that cannot be right; it must be lower. specific areas in greater detail. I do not want to cover There can only be one other body in the BBC that everything in the answers to the first questions. At supervises BBC Worldwide’s investments, and that the beginning we do want to look at the question of would be the BBC’s executive board. As we have governance and whether or not the BBC Trust is already argued, it is hard to see how they can take a succeeding in maintaining an arm’s length completely dispassionate view. It is not clear what Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 29

4 November 2008 Mr Tony Cohen, Mr John McVay and Mr Charles Wace their powers are and what levels they have to Q8 Alan Keen: Why do you think the BBC is selling approve. All we know is the Trust’s £50 million programmes to BBC Worldwide at a cheaper rate threshold. than the market? Mr Cohen: Because BBC Worldwide has a guaranteed first look at this enormous output from Q6 Alan Keen: We all own a little bit of the BBC so the BBC. It is not put out to any kind of competitive my interest is with my constituents who pay the position at all. If it was put out to a competitive licence fee and I want the best from it. You obviously position then I think, as I argued earlier, you would have more to gain really from the BBC being see prices rise. Your first question was: why should restricted. Could you expand a little more on why we we try and restrict BBC Worldwide further? I think should restrict it further than we are now on it is worth just pointing out that the reason why we Worldwide, and how you would like to see it actually are here today is that there were quite careful rules managed? drawn up to circumscribe what BBC Worldwide Mr McVay: We are not trying to restrict the BBC. could do. The reason for those rules is that they have What we are trying to do is make clear that the such a fantastic privileged position getting all of this commercial arm and commercial functions of BBC publicly paid for programming which, by the way, is Worldwide maximises profits back to the BBC to probably £² billion worth of programming every year being invested by the BBC. BBC Worldwide can invest back into programming. As Charles has take all of that, and because it has this privileged already said, it is unclear where that money does go. position it can damage its competitors, and it can It may go to the overspend on Broadcasting House; damage markets. That is why all of the rules—about it may go into bonuses; it could go a whole range of not jeopardising reputation; making sure it is places. I think it is critical, with the licence fee payers commercially eYcient; abiding by the fair trading in your constituency, if there is a profit made from guidelines—are there. The first part of the answer to their investment in the licence fee that they get that your question is they ought to follow the rules clearly back on screen and on services that they feel add and unambiguously in order to prevent the value to that licence fee. What we are seeking is consequences that were foreseen of damaging clarity on: how Worldwide operates; what is its scope competitors in the market. To open up the product to minimise risk; and to ensure that when it makes from the BBC to competition I think would give you investments that those investments have a return a better return. I would argue that, because I see that that then goes back to the BBC to reward the licence every day in the commercial work that we do. I think fee payers. That is our fundamental concern. the BBC has real issues about undermining markets, not just by this privileged position, but also by the fact that the BBC is funded by debt. It does not have Q7 Alan Keen: What incentive has BBC Worldwide any equity. As a commercial operator we have to sell stuV cheap and be ineYcient? Are you just shareholders. When I put forward an investment saying they are ineYcient; they would like to be proposition, like in a production company overseas, eYcient but they are incapable of it? I have commercial returns to meet. It is absolutely Mr McVay: I think they are scarily eYcient actually. not clear to us, what are the returns BBC Worldwide I think that is one of the things, that Worldwide is have to meet when it goes out bidding for very commercially eYcient. What we are concerned companies? It is fuelled by debt—debt is cheaper about is with some of the investments it takes we are than equity—that is all we know. If it has cheaper not clear whether we get a return on those resources than we do to invest it can pay more than investments; when they get a return and if they get a we can. You also asked: what could we do about return; which we think is gambling with licence fee that; what would be our prescription for BBC payers’ profits eVectively. It may be that they do get Worldwide? We would have three. The first is to open a return and it is a very large amount that they get, up to free-bidding the product that comes from the but there is no way to find out. Part of the problem BBC; that would help a lot. Secondly,I do think they is that you cannot actually interrogate this to say, “If should sell down in the States in the production Worldwide is making a profit of £118 million maybe companies they have invested in; because, as John it should be making £218 million”. There is no way argued, we cannot see how that serves the BBC’s to find out if the return to the BBC is as much as it public purposes. Thirdly, we think that the remit for should be. It is a question that we do not really know Worldwide needs to be much clearer, so that we all and that is why we think this inquiry is very helpful, understand: what are the principles that it has to to try and establish some sense of: is it follow; what are the rules where we are competing outperforming; is it underperforming? At a time with them in the market? I hope that answers your question. when we are facing economic downturn across the rest of industry because of the advertising recession, clearly with the role of the BBC and the BBC’s Q9 Alan Keen: On the one hand you seem to be ability to maintain programme budgets for the saying that it is ineYcient and you are not getting a licence fee payers to invest particularly in areas like good enough return; and on the other hand you are drama, which is very expensive, it is very critical that saying it has got an advantage of unfair competition. Worldwide is overperforming, but we have to be Therefore, you must mean that they are selling the clear what that is. The current return on profit—we programmes too cheaply overseas; or they are are not sure whether that is a good one or a bad one. producing them overseas too cheaply so you cannot Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 30 Culture, Media and Sport Committee: Evidence

4 November 2008 Mr Tony Cohen, Mr John McVay and Mr Charles Wace compete with them; and if they did them in a more Q12 Chairman: You have brought up the position of eYcient way, a more cut-throat manner, licence fee Merlin which, because it was made by an payers could gain a lot from it; but you are not really independent production house, went out to market. sure whether they are or they are not because it is not BBC Worldwide bid for the right to distribute Merlin transparent. That is really the point, is it not? and Tony outbid BBC Worldwide. Therefore, by Mr Wace: Until it goes out into the open market it definition, in that particular instance the company will be very diYcult to tell that. Until it is actually that made it got a better deal by competition. Had subject to commercial competition it will be very that been the BBC that had made it they would not diYcult to know that definitively one way or the have got that extra money. That is essentially your other. argument? Mr Cohen: BBC Worldwide when it is selling a Mr McVay: Under the current arrangements we do programme in the open market to a commercial not know! broadcaster in America, India, Argentina or wherever they are, is not doing the best deal it can. It Q13 Chairman: Tony, is there plenty of BBC product is in an open market; they are professional people that you would like to bid for if you had the chance? and they will do the best they can. Our argument is Mr Cohen: All the big dramas, all the big about their supply of programming that has enabled entertainment, we would be very happy to go in and them to fuel their international expansion, bid for. Some of it we would absolutely really love to particularly into production. I would probably go as have. As an international company we need supply far as to argue that they must be, by definition, and we are very willing to pay for it. systematically underpaying for the product, simply because they do not have to compete for it. Q14 Chairman: Give us an example. What would you like to bid for? Q10 Alan Keen: You are accusing them of using loss- Mr Cohen: I would have liked to have had the right leaders in the way they are trying to expand overseas to bid for Strictly Come Dancing. That is in 26 by giving them programmes too cheap; but that may countries around the world now. We have a lot of be a strategy that is quite acceptable to licence fee properties that are in that many territories. That payers if it is going to benefit us in five years’ time would be a very good entertainment example. Could because they have put their tentacles out. You are I oVer one other thought to the Committee, that the saying, because we have no idea, that is wrong? purpose of benchmarking which was to simulate Mr McVay: Yes. The BBC have launched 29 some kind of approximate, some kind of market channels in diVerent territories. We have no idea rate. That is why benchmarking was put in place. We whether any of those channels, of themselves, are regard benchmarking as totally inadequate. The making a profit. They could all be loss-leading, we reason for that is, when you bid for a very big do not know. property, like a big drama, a big documentary, or a big entertainment show, in the open market those amounts are not disclosed; they are confidential. I do Q11 Chairman: We are assured that BBC Worldwide not know what my competitors would have bid pays the market rates for the rights to distribute BBC when they have been successful. It is not bench- product. They have told us that one of the ways they markable, and that is why we do not buy do this is by benchmarking on an occasional basis. benchmarking as a replacement for a market Do you have any idea of what benchmarking mechanism. consists of and whether or not it actually does result in the market rate being paid? Q15 Philip Davies: I have got a great deal of Mr McVay: Benchmarking would appear to be a sympathy with some of the concerns you are raising. number of people in the commercial rights agency Tony, I am getting slightly confused, in the sense that inside the BBC making their assessment of what the one of your allegations is that BBC Worldwide price may or may not be for a programme at any underpaid for BBC programmes, and they are not given time. Clearly that is not a market rate; that is getting full market value. On the other hand, you a group of people coming up with a figure. The only also seem to complain that BBC Worldwide over- way you ever establish market rates is by putting a bids for the rights, talents and resources from third product out to the market, then the market will bid parties in your evidence. It seems to me you are for it and you will arrive at the best price you can get trying to have it on all handles: one that they are from the market. If it is the case where Worldwide under-bidding; and one that they are over-bidding. overpays or pays large amounts of money for Even if the BBC stuV was put out for tender, as you independent rights but is underpaying for in-house, would like to see, surely all that would happen is that then I do not see how they arrive at any market rate. the BBC Worldwide would over-bid for it and your Again, none of that is publicly available in terms of second allegation would kick in? It seems to me that information. There are not even aggregated reports the BBC cannot really win whichever way they go in the annual report about the average price they pay on this? per hour for BBC in-house programmes. That is Mr Cohen: They are two diVerent things. The under- something we think would be very useful to paying is about exposing BBC products to the establish: is the BBC getting the proper return from market so they can be properly valued. Maybe BBC the money that has been invested by the licence fee Worldwide would overpay. In the fullness of time payer? you cannot overpay forever because you do not get Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 31

4 November 2008 Mr Tony Cohen, Mr John McVay and Mr Charles Wace that money back. What would be established is the commercial advantage because they know what the market rate for those properties. When they are plans are for the future; and from BBC Worldwide’s dealing with independent product in our knowledge point of view they can have an impact on the they do tend to oVer more money in quite a number planning of the BBC. of instances than we as commercial operators might bid. The question is: why would they be able to do that? I think it comes down to John and Charles’s Q19 Philip Davies: Is your suspicion that the BBC point that we do not have an transparency about are making programmes using licence fee payers’ how they make those decisions; and we do not know money that they otherwise would not do, because on what commercial return basis they make those they are not particularly a benefit public service investments. broadcaster, but making the programmes specifically to sell commercially by BBC Worldwide, that they otherwise would not make? Q16 Philip Davies: You say that and indicate they are Mr Cohen: Are you asking about what the BBC not a commercial organisation and, therefore, you might be doing? cannot compete. In their accounts for the year last year they made a profit of £77 million; so they quite clearly are a commercial operator; and they are quite Q20 Philip Davies: Yes. clearly operating on a commercial basis because they Mr Cohen: I have got no evidence of that at all; but are making what most people consider a healthy it seems to me quite possible that that influence will profit. That does not sound to me as if they are not be brought to be bear on the BBC. operating on commercial grounds? Mr Cohen: I would argue that the question we ask Q21 Helen Southworth: Could I take you back to the about that is: is that as much money as those process of whether or not Worldwide underbids and properties that they have got to sell are worth? The what impact that has on the return to the licence number that you quote is what they show. Could payer. I am hoping you can explain to me a couple they have earned more? I believe that had it been out of things. One is, if Worldwide were to underbid how for commercial bidding they might well have done. would this be a net loss to the licence payer; because That money, I would suspect, also includes if it underbids for a programme that it then sells at a investments they make which are not separately high profit and that profit is all returned to the BBC disclosed. We do not know how much money they where has the licence payer lost in that process? The are investing in production companies. We do not other question is: if the BBC were required to put all know how much money they are investing in its programme sales out to a competitive tender channels. That will all aVect the net return to the process how much would that cost in terms of the BBC. administration of that process? How would that cost be returned to the licence payer? Q17 Philip Davies: You have said they could have Mr McVay: Putting a number of programmes out to earned more, but you also said they are under- tender is sending an e-mail out to people who want paying for all the BBC programmes. Presumably if to bid for it. It does not necessarily have to be a huge you had your way they would be making less money, cost. This happens on a regular basis in all markets. and not more money? If I am an independent producer and I have a Mr Cohen: The question is what the licence fee payer programme and I want Tony to bid for it, or Shed, gets as a return, and what BBC Worldwide gets as or Outright Productions, I can send an e-mail a return. saying, “I’d like you to bid for this programme”. Charles maybe wants to reflect on that as a producer Q18 Philip Davies: On the cross-directorships you who does this on a regular basis. are concerned about between BBC Worldwide and Mr Wace: What we are interested in as an the executive, you mentioned earlier about how easy independent production company is: which it was for the BBC to lose its reputation, as we are distributor is going to give us the best possible obviously seeing with Jonathan Ross and Russell return? If you are an in-house programme you do Brand. BBC Worldwide was therefore an accident not have that option, because your programme has waiting to happen—I think you described it as been taken directly to BBC Worldwide, for BBC potentially? Surely given that background it makes Worldwide to sell that programme. On your point of sense for the BBC to have people on the main board the advance, the advance is obviously one aspect of of the BBC and on the board of BBC Worldwide it. We do not know that BBC Worldwide is presumably to ensure that that damage to their necessarily selling the totality of all the BBC reputation does not take place? programming in the most eYcient way it possibly Mr Cohen: I do not think people at board level are could. The advance is just one element of it; but, in going to be exercising the kind of editorial control terms of the vast range of BBC programmes, will do themselves; it is done by the system and by the better for more independent distribution companies people probably further down the organisation than to get involved, who would have more of a vested people sitting on the boards. Our point about the interest in selling those programmes individually boards is that they are required to keep separate the than perhaps one great collective. We are not management of both of these parts of the BBC; and necessarily saying they would, but what we are yet we see the cross-board membership pattern; and saying is that until you actually put it out to the that must give them, in our view, an unfair commercial market you will never know. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 32 Culture, Media and Sport Committee: Evidence

4 November 2008 Mr Tony Cohen, Mr John McVay and Mr Charles Wace

Q22 Helen Southworth: You are really saying to me FreemantleMoters rather than FreemantleMedia that the cost for a public body of putting things out and you went to the States and complained that to competitive tender is the cost of an e-mail? Ford International has first look at all Ford cars, I Mr Wace: I think what we are saying is that it is not suspect you would be laughed out of Detroit. I am a particularly expensive process. It is not necessarily not quite persuaded why the BBC should be treated more expensive than the process you already have in quite diVerently if it is as good as it says it is. On that place at the moment, because there are independent score clearly Helen’s argument is correct. As long as distributors who would be happy to take up that the BBC is actually making money at whichever end slack at the moment. They would be happy to get and it is a good return to the licence payer it does not involved in that process. really matter what BBC Worldwide as a subsidiary Mr Cohen: I am sure the BBC would claim that it is pays the BBC. If we take the BBC at face value where extremely expensive and very diYcult to do. I do not they say they are paying a fair price, from Worldwide agree that it would be very diYcult to do because we to the BBC, and then you are saying at the same time run auctions all the time. The answer to your that they are overpaying for independent question, I think, is we believe that the extra value acquisitions, then you would be able to see that eVect generated by the bidding process would more than on profitability, would you not? The BBC says its outweigh whatever the administration costs were of margins are pretty much consistent with the doing the bidding process. industry. If we took it at face value and it is paying near the market price for BBC programmes, if it is Q23 Helen Southworth: Would you be able to give us overpaying for independent acquisitions then you evidence of those things? You operate in a would not see that in the profit margins. It would commercial environment so presumably you do imply that actually the BBC, if it is overpaying for have evidence of those processes? independent productions, is pretty much very Mr Cohen: Yes, and they are basically e-mails. You successful in marketing what it makes in-house. need a lawyer and an accountant to have a look at Would you not agree? whether it fulfils the criteria for brand protection, for Mr Cohen: The first point is that I do not really agree capability, for the chance they are going to pay the with you about the Ford motor example because the money, and that is really not much more Ford motorcars are not made by money that comes complicated. from the licence fee payer. It is a commercial Mr McVay: To be clear, the BBC already has a company; it takes risk on making its cars, in the way department that does this, called the Commercial that we take risks on productions. Rights Agency, which is meant to achieve the best price. It is already paid for; there is a department there; it would not be an additional cost. You could Q26 Paul Farrelly: We are the shareholders. basically say to that department, “Instead of Mr Cohen: It is basically public money that is going guaranteeing all the programming to Worldwide, into these programmes. It is not a risk investment by could you make sure you oVer it up to other people the shareholders in the way that your Ford motorcar to bid for it”. There are already people paid for by example is. Your other point was that you would see the licence fee to do that, so I do not accept there in the profits the results of consistent overbidding, would be additional cost. There may be a few more and that would be true if we could see it, but we do e-mails, but I do not think it is an additional cost to not know. Those accounts that we do have do not the licence fee payer. show by area what the diVerent parts of BBC Worldwide are contributing from the investments they make in other people’s programming, from the Q24 Helen Southworth: The other question is about channels that they launch; we just do not know. You where the net loss to the licence payer is if, as you are may be right; I would not argue about it, except that speculating, Worldwide underbids but makes a our experience is anecdotally that they seem to pay profit and then returns the profit. very high. Mr Cohen: It would be flushed out by the competition process itself. DiVerent distributors at diVerent production companies will value Q27 Paul Farrelly: Any set of accounts will mix in all programmes diVerently, depending upon their sorts of things. It is very hard without going into the capability and what they think they can make for it. underlying figures to find out the truth. That is the At the moment the BBC is in a position where it gives same with FreemantleMedia—if we wanted a its properties to BBC Worldwide. There is no comparison would you be able to give us that level competition from other companies which do similar of disclosure that we might demand from the BBC; kinds of things who, by the way, might value it quite or would you say that is commercially confidential? diVerently in terms of what they want to pay for the Mr Cohen: I can split it out by business segment, and rights to do something. We cannot prove that to you, indeed I do every day because I want to know how but we will not know until it is tried. profitable each segment is for my shareholder as well as for my management. BBC Worldwide is a Q25 Paul Farrelly: I am sympathetic to some of the company which has a special relationship with the arguments and evidence we have heard particularly BBC and has particular oversight issues that it over the BBC’s acquisitions policy. I must say, Mr causes because of the impact it has on the market. Cohen, I am not terribly persuaded by your That is why the disclosure request that we all have argument. For instance, if you were here is so much more important. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 33

4 November 2008 Mr Tony Cohen, Mr John McVay and Mr Charles Wace

Mr McVay: The point you made quite rightly is that payers’ money in a venture like that? Whether they we are all shareholders. I think as shareholders we are subject to editorial control or not, the question should have the information to let us judge. It may is: what has that got to do with the BBC? be maximising profits—that may be absolutely right Mr Cohen: I think the same is true about the and proper; but I think we need to be very confident. production companies. Joker Poker may be just the How is it doing it; is it minimising reputational risk; particulars of Freehand, but the issue for us is that is it maximising return; and is it doing in a way which they are taking these stakes at all. It is not necessary is consistent with best commercial practice? We are for the BBC to take stakes in production companies not saying that WorldWide should not be a in order to get the best commercial return from its commercial organisation and it should be programming and its formats. aggressively marketing the products and rights that it has acquired; but as shareholders all of us need to be assured that it is doing it in a way which is eYcient Q31 Chairman: It is part of the deal that if they take and gives a return back to the public. a stake in a production company in any one of these countries then from that moment on that production Q28 Paul Farrelly: Clearly there has been a concern company has exclusive rights to BBC properties? over some things the BBC is doing particularly. Mr Cohen: It has a first right in all of those cases, yes. Buying Lonely Planet, which is a well known brand, it is not a name people did not know that the BBC could develop as a brand; it is a well known brand. Q32 Chairman: Is it possible for you to compare how It is not the BBC developing its own brand. Taking much the BBC is getting for a BBC product in a stakes in overseas companies which then have a country where it has a stake in a production house further first right of refusal is also an area of and, therefore, there is only one bidder, if you like, discomfort. Also clearly the BBC now in these times and another country where it does not and has the advantage of a public source of funding for presumably goes out to competition? acquisitions which may not be open to private Mr Cohen: It would be possible to do that analysis, companies. It is the BBC bank really.That is another but this is in the last year that this has all been area where scrutiny is required. John, you mentioned happening. I think it is too recent for us, even if we Freehand and the Joker Poker example, is this an had visibility, to be able to answer that question. isolated example? In terms of the BBC’s reputation, Mr McVay: I am sure Worldwide could answer that are there other examples of acquisitions? question for you. Mr McVay: You will be talking about Lonely Planet no doubt later on in today’s session so I will not touch on that, because it is not an area in which we Q33 Paul Farrelly: We have mentioned Merlin and are particular expert in terms of publishing. One area clearly BBC Worldwide has taken the view that it we do have to question is the joint venture in India cannot make as much money out of Merlin as you to produce Grazia. I do not see how Worldwide think you can, and therefore was not successful having a shareholding in a joint venture in India has unless it was a sop to the market. Are there any anything to do with the BBC’s public purposes. examples at all of the BBC making its own programmes where WorldWide has not taken them Q29 Paul Farrelly: To produce? up, but the independent sector has done? Mr McVay: Grazia in India. They have a joint Mr McVay: At the margins. venture with The Times of India, called the Mr Cohen: There are a few. I am very happy, if the Worldwide Media Group, and they jointly publish Committee would like, to send you a list of the Grazia in India. I do not see how the licence fee programmes that we know about but it is a handful payers’ money being ventured on that has got and I have not heard of most of them. anything to do with the BBC’s public purposes in any way, shape or form. They may be isolated; they may be anomalies, which Worldwide would Q34 Helen Southworth: Are you confident that the probably argue; but we have got to ask, and I think BBC Trust has an eVective audit and reporting it is right to ask as any shareholder would of any process to make sure that there is not a cross-subsidy management group: is this part of a long-term between, for example, getting a low price for a BBC strategy; is this a consistent strategy with your product and paying a high price for an external purposes; and, if it is, could we please have that product? Are you confident it is in place at the published so we can all understand it? If it is not, moment? then why are you doing it? Mr McVay: No. I think we would encourage the BBC Trust to look carefully at how it can have Q30 Paul Farrelly: Do you think Grazia in India or greater oversight of the functions of the BBC’s elsewhere would sell as many copies if it complied commercial arm. Currently it does not per se. It is the with the BBC’s editorial standards? Executive Board that oversees BBC Worldwide. Mr McVay: Probably not. I am sure it is a fantastic Mr Cohen: I have nothing to add to that. The Trust product and I am not casting any doubt on the does not take notice of things at that level. The £50 product or the people from The Times of India who million is their threshold where they must take make the product at all. I think that is fine. The notice; and below that, as I understand it, is whether question is: why is Worldwide venturing licence fee they wish to take notice or not. As John says, the first Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 34 Culture, Media and Sport Committee: Evidence

4 November 2008 Mr Tony Cohen, Mr John McVay and Mr Charles Wace port of call for all of these evaluations would be the Chairman: We need to move on to our next session, Executive Board. so can I thank the three of you very much.

Memorandum submitted by Time Out Group Ltd

1.ExecutiveSummary

The BBC is an institution of which the United Kingdom should be proud. Its position as a public services broadcaster maintained by the licence fee, free from commercial and political influence, should be fiercely maintained and protected. It has an unrivalled worldwide reputation for editorial integrity and independence. It is right that the BBC’s intellectual property should be commercially exploited to give value back to the licence fee payer. But BBC Worldwide (BBCW), the commercial arm of the BBC, is a diVerent matter entirely. It is out of control, under-regulated and unfairly dominating markets in an opportunistic and unplanned dash for profit. BBCW is required to meet targets set by the BBC. Its five year plan, approved by the Trust on 21 March 2007, included the need for BBCW to pursue acquisitions in order to meet its targets. This vague exhortation to go out and make money was not accompanied by any clear remit or guidelines, and has left BBCW in an invidious position: having to grow aggressively, but with no rules as to how to do so. The inevitable result has been that BBCW—driven by commercial imperatives—is now dictating BBC policy. And just as inevitably, BBC/BBCW is dominating and distorting any market it enters—based on its size, its brand, its resources; and above all on the fact that it has exclusive access to investment, made over many years—in people, databases, R&D, programming, expertise—by the publicly funded BBC. The original remit of BBCW was to exploit the intellectual property of the BBC. The purchase of Lonely Planet by BBCW is the first significant, and most striking, example of a company being bought which, by BBCW’s own admission, has almost no connection to anything that has been developed by the BBC. The resulting behemoth promises to overwhelm the fledgling online travel guide market—and its success has been predicated on the BBCW/LP company having access to BBC resources and material which should never have been signed through under the BBC’s competitive impact framework and Fair Trading Policy/ Guidelines. Any BBCW commercial transaction must comply with four criteria, and as we shall see they are in significant breach of every one of them. BBCW has twisted itself into extraordinary contortions, trying to show that it is meeting the four criteria, but all we can hear is the sound of square pegs being hammered into round holes. Can it really be said that an Australian publisher based in Melbourne is well placed to represent “the UK, its nations, regions and communities?” Yes, according to BBCW. Is Lonely Planet really a good fit with BBCW’s digital plans, when 94% of Lonely Planet’s turnover relates to its book business? Is there really no risk to the BBC’s reputation by buying a commercial company which in April 2008 was severely criticized in the media when one of its authors admitted to never having visited the country he wrote about? Also this year, and after the purchase, when the TUC and Tourism Concern called for Lonely Planet’s Burma guidebook to be withdrawn because it gave succour to a murderous regime, Tony Wheeler, the founder and remaining 25% shareholder, stated: “If BBC decides to withdraw the guide, it would be a deal breaker.”91 Most breathtakingly of all, when BBCW came to look at whether this purchase would distort the market, they complacently announced “We do not anticipate any issues, or need for merger filings, in the UK”.92 And that was it. As soon as the deal was finalised, we were then told, in BBCW press releases and by the Director General of the BBC, that the Lonely Planet website would have access to “thousands of hours” of publicly funded BBC travel content. The transaction was driven through with the assistance of an artificial deadline and suggestions of a wider commercial auction that never existed. The price paid was extreme and the deal represents a sea change in the activities of BBCW. Lonely Planet, predominantly a book publisher (a business in which neither BBC

91 The Associated Press, 1 May 2008. 92 BBCW Commercial Criteria Assessment 6 July 2007. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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or BBCW are engaged—indeed, BBCW had recently divested itself of BBC Books as not being “core to its business”), was purchased for the purpose of developing its online business, which represented less than 6% of its turnover. We have now learned from documents disclosed under the Freedom of Information Act that BBC/BBCW has acquired Lonely Planet in order to make it “the travel brand” of the BBC. BBC documents contain an explicit representation of this. It is a graphic example of how the ill-conceived purchase of Lonely Planet by BBCW will drag the BBC into a market it never inhabited and a commercial embrace that can only compromise its editorial independence and prejudice the survival of any independent competitors attempting to exist on a level playing ﬁeld.93

Conclusion The purchase of Lonely Planet is an aberration. It should not be permitted to become the travel brand of the BBC and should be sold immediately to prevent any further damage to the BBC and distortion of the market. BBCW should return to its founding principles (the exploitation of the BBC’s intellectual property) and given clear guidelines as to how to do this. There needs to be proper scrutiny of BBCW’s operations. It is not for us to comment on the BBC Trust’s performance to date, other than to say that in this one instance (the purchase of Lonely Planet by BBCW) there has clearly been a lack of rigorous scrutiny and that quite reasonable objections were brushed aside far too easily. There is a strong suggestion that unrealistic commercial expectations placed on BBCW are compromising and malignly inﬂuencing both the BBC and the BBC Trust. It is also clear that in this instance the BBC Trust found itself joining with the BBC and BBCW in order to drive the transaction through.

2.Background

A. BBCW Strategic Vision “BBCW’s strategic vision is to be a brand-led global consumer entertainment business [. . .] This vision is based on the ability to exploit the unique content and brands we have access to through: — the BBC’s IP; — creating our own IP; and — acquiring rights from third parties”.94 “[. . .] we have focused on the key issue of whether this really did meet the purpose for which the BBC Worldwide was set up, to exploit BBC generated intellectual property rights and to bring back a return for the licence fee payer who has eVectively invested in those property rights.” Sir Michael Lyons.95

B. About Time Out Time Out Group Limited is an independently funded group of companies established over 40 years ago and still in private ownership. Time Out is one of the world’s foremost providers of events listings, travel information and travel guides. Time Out publishes the leading weekly listings magazine for London, Time Out London and, in conjunction with local publishers, publishes more than 25 other city magazines in four continents. Time Out also publishes a series of travel guides relating to more than 50 cities and destinations around the world. Time Out has invested substantial funds and resources in the development of a website at www.timeout.com which attracts 1.7 million unique users and 10 million page impressions per month. The website contains information about worldwide cities and travel. The consolidated group turnover of Time Out is £22 million.

93 Logo prepared by BBCW under the heading “What does BBCW bring to the business” BBCW Discussion Document 11 May 2007. 94 BBCW Discussion document 5 July 2007. 95 In answer to a question from Paul Farrelly at the DCMS Select Committee 8 July 2008. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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C. About Lonely Planet Lonely Planet was established by private individuals Tony and Maureen Wheeler in 1973. Its core activity is the publication of travel guides. It also distributes its content over multiple platforms: TV, online and mobile. lonelyplanet.com attracted ﬁve million unique users and 40 million page impressions per month in 2007. The turnover of Lonely Planet is £45 million.96

D. BBCW’s reasoning for the purchase of Lonely Planet

(a) Digital Growth “BBCW believes that there is a signiﬁcant opportunity for growth in its digital business”.97 “A key feature of BBCW ownership of LP will be the increased focus on digital media”. “BBCW’s experience across a range of media will help LP’s transition from physical to digital content”.

(b) Acquiring a travel brand for the BBC “BBC intends ‘Lonely Planet’ to become its brand for the travel genre”. “Under BBCW ownership the Lonely Planet brand, which will then become a commercial brand of the BBC”.98

E. Commercial environment at time of purchase The Lonely Planet business started in Melbourne, where it has its headquarters. In Australia it has a dominant share of the travel guidebook market, but it is less dominant outside its home country. Prior to the acquisition by BBCW, the Wheelers had for some years been seeking investment for the Lonely Planet business. The principal concern of all book publishers in recent times has been how to fund and embrace the online world and how that interrelates with their interests in print. Lonely Planet, although a world brand in printed books, faced the same challenges as all publishers in trying to migrate its content to digital and online. In BBCW’s analysis of Lonely Planet’s revenue split, only 6% of Lonely Planet’s revenue came from online activities in 2007 (3% in 2004).99 In common with all travel guide publishers, Lonely Planet had been exploring ways editorially and ﬁnancially to develop the Lonely Planet digital business, but did not appear to have suYcient funds to do so. The research and development costs in discovering how to attract and engage the online community are considerable and often it is a matter of expensive research with an element of trial and error. The BBC website is the third most visited website in the United Kingdom. The BBC spent almost £36 million more than planned developing and continuing to expand its family of websites in 2007. The site had a budget of £74.2 million but spent £110 million at a time when commercial rivals were already complaining about the impact that the public broadcaster was having on their businesses.100 The likelihood of any investor or purchaser investing into or acquiring a book publisher with minimal online expertise or revenue with the principal intention of developing that online business is remote. Any purchaser or investor would have to be conﬁdent that it had access to substantial development funds, or had at its disposal or could piggyback on the knowledge, experience, investment and resources of others. The organisation with that very knowledge, experience, investment and resources and with a history of having spent the most money developing one of the world’s best websites is the BBC—achieved through substantial investment of public funds.

3.AcquisitionProcess On 18 July 2007 the BBC Trust approved the proposed acquisition by BBCW of Lonely Planet subject to four conditions: 1. A further assessment of the proposal against the “four criteria” for commercial activities, including more detail on how the parties would exploit BBC rights; 2. Conﬁrmation that the due diligence work being undertaken was completed and was acceptable;

96 Information disclosed by the BBC under the Freedom of Information Act the turnover of Lonely Planet for 2006 was £45 million. 97 From BBC Executive Board Paper from John Smith to BBC Executive Board. 98 BBCW Commercial Criteria Assessment July 2007. 99 BBCW discussion document 11 May 2007. 100 The Times 30 May 2008. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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3. Confirmation that external Counsel had given final clearance on merger control issues; 4. Confirmation that the BBC Executive Controller of Fair Trading had given final clearance on compliance with BBC fair trading guidelines. Supplementary material was supplied to the Trust on 29 August 2007 which, although produced to Time Out under the Freedom of Information Act, has been heavily edited on the grounds that without such editing disclosure would or would be likely to prejudice commercial interests.101 There is no indication of whose commercial interests might be prejudiced, but it is diYcult to see how the release of information relating to the fulfilment of the public purpose criterion, and other measures in place to maintain the good reputation of the BBC and ensure that it is free from commercial and political interests, could conceivable cause commercial prejudice. Further clarification of the justification for withholding information will be sought. However there was concern. In response to the supplementary information supplied to the Trust on 29 August 2007, after a review of that information in an e-mail from an unknown source (edited by the BBC under the Freedom of Information Act) to the Chief Strategy and Policy Advisor for the BBC Trust, Jon Cowdock, it was stated: “The paper from Worldwide includes a few lines about the synergies between the Project Joe102 brand and BBC content and gives some examples, but it does not suggest how or convince that any planning to develop the synergies and provide services that no other buyer could underlies the words. The Criteria Assessment is much better. It explains how the Project Joe brand will become a BBCW brand, supported by video audio and stills, and is particularly strong in the use of the video-on-demand to provide a rich experience that could not be achieved elsewhere or in any other way. That, of course was what the Trust was looking for. However coming from the Compliance Department and not the purchaser/developer of the brand, it is not yet clear how much real planning lies behind the rhetoric”. The impression from such sentiments and the documents reluctantly released by the BBC under the Freedom of Information Act is that the approval process for the purchase of Lonely Planet was in substance a consolidated eVort by the BBC, BBCW and the BBC Trust to ensure that there was suYcient compliance to enable the BBC Trust to approve the transaction rather than the BBC Trust actively testing the proposition. A matter of, can we tick the boxes and if not, what can we say in order to be able to do so. For an unknown reason a period of exclusivity was agreed between BBCW and Lonely Planet for completion of the acquisition. There would appear to have been no commercial reason for the exclusivity period, there being no other purchasers with suitable resources, but repeatedly in communications between BBCW and the BBC the deadline was sited as a reason for haste. Jon Cowdock queried why there was a need for urgency but, from documents supplied, this appears to have been unanswered.103 The exclusive period to agree terms for the acquisition with the then shareholders expired on 31 August 2007. The transaction had not been completed by that date in any event. There is a suggestion from documents disclosed under the Freedom of Information Act that the exclusivity period was a device to speed up approval. In a memorandum from Jon Cowdock and the Head of Finance Economics and Strategy of the BBC Trust Unit Chris Woolard to Sir Michael Lyons, Chitra Bhrarucha and Rotha Johnston, Sir Michael Lyons was advised: “BBCW has secured a window of time for exclusive negotiations up to the end of July. So timing is tight—For BBCW to proceed, a Trust decision will be required on 18 July. We have suggested that the case is considered first by FSC the day before.” 29 June 2007”104 In an e-mail from the BBC Senior Advisor, Editorial Policy Nathalie Christiansen to the BBC Controller, Fair Trading Balbir Binning, Ms Christiansen stated: “In principle there are no major editorial issues with this deal. We have had somewhat limited discussions on this and as you know did not know of this current timetable until last night. It would be good to discuss these processes going forward. Unlike the [edited by the BBC] we have seen no examples of current product—books or AV content—we have also had no details of its television activities, my advice is based solely on the information I have had.”105 Ultimately, in giving its Approval, the BBC Trust were very cautious: “Under the Charter and Agreement the BBC must report publicly to the Trust on ongoing compliance with the commercial services criteria.

101 Reliance is placed on Section 43(2) of the Freedom of Information Act. 102 The project name for the acquisition of Lonely Planet by BBCW. 103 Memorandum from Jon Cowdock and Chris Woolard to Sir Michael Lyons, Chitra Bhrarucha and Rotha Johnston 29 June 2007. 104 FSC% Finance Strategy Committee of BBC Trust. 105 E-mail Nathalie Christiansen to Balbir Binning 6 July 2007. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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Trust approval in this case is conditional on the Trust receiving separate reporting covering this investment as an ongoing part of that annual process to enable it to assess, over time, whether this investment fully meets the commercial services criteria in practice. If the Trust concludes at any point that the criteria are not being met fully in practice, it will take whatever actions it considers to be appropriate at the time to ensure compliance. As part of the annual commercial reporting process, the Trustees would like you to report back once your more speciﬁc plans for the business have been developed.”106

4.TheFourCriteria Any BBCW commercial transaction must comply with four criteria.

Criterion 1

Fit with the BBC’s Public Purpose activities — Appropriate to be carried on in association with the promotion of the Public Purposes; — Connected, otherwise than merely in financial terms, with the ways in which the BBC promotes its Public Purposes (to be assessed in relation to the activities the BBC undertakes to fulfil its Public Purposes). In 2004 Mark Thompson, in a review of the BBC, identified a number of areas that would be deemed non core to the public service broadcaster. One of them was Eve, a top-selling women’s magazine, which was sold to Haymarket. In June 2006 BBCW sold BBC Books to Random House. In a statement to BBC Books staV at the time of the sale, BBCW stated that BBC Books was no longer part of the “core business”. Perversely, in 2007 BBCW acquired Lonely Planet, predominantly a book publisher. In assessing compliance requirements with Competition Law, BBCW confirmed: “As BBCW does not currently trade in this market there will be no increase in market share as a result of the merger.” Jon Cowdock and Chris Woolard of the BBC Trust Unit advised Sir Michael Lyons prior to the purchase in relation to the fitness for public purpose that: “the proposition can probably tick the box against the public purpose, but it is harder to rationalise in terms of synergies with BBC activities or the travel genre [. . .]. In terms of framework this proposal fits with BBC Worldwide’s priority markets in geographical terms, but is harder to see the case against the sectoral priorities which are new media focused (Lonely Planet essentially a travel book business and BBC Worldwide has recently disposed of its book business).”107 And there was also doubts expressed about whether there was any real connection between the activities of the BBC and Lonely Planet; Lonely Planet being a travel business which is not a significant part of the BBC’s present activities. As the BBC Trust stated: “[. . .] whilst we can see clear links between this proposal and the BBC’s public purpose in the broadest sense [. . .] it is more diYcult to rationalise in the context of the BBC’s activities, where travel is not a genre with a particularly high profile [. . .]”108 In a speaking note for Dermot Gleeson from the Trust Unit of the BBC Trust, concern was expressed as follows: “our consideration focused on how compliance with the commercial criteria—particularly the requirement that the proposal should fit with the public purpose—could be demonstrated. We noted the fundamental purpose of BBCW was to exploit BBC IP rights. This proposal could appear to be diVerent in that it appeared to exploit the Lonely Planet IP. The commercial criteria case needed to show clearly how the proposed acquisition would help the BBC to extract additional value from its own IP.”109 One of the more imaginative ways in which BBCW sought to persuade the BBC Trust that the commercial aspirations of BBCW were capable of being shoehorned into the four criteria is exemplified in the Commercial Criteria Assessment which claimed that the public purpose of the BBC, namely “Representing the UK, its nations, regions and communities” was fulfilled by the acquisition of Lonely Planet, an Australian company, based in Melbourne, on the basis that amongst its portfolio of 500 titles covering 130 countries is a handful of guides to England, Ireland, Scotland and Wales.

106 Letter from Director BBC Trust, Mark Kroll to Mark Thompson 28 September 2007. 107 From a memorandum from Jon Cowdock and Chris Woolard to Sir Michael Lyons, Chitra Bhrarucha and Rotha Johnson dated 29 June 2007. 108 Ibid. 109 Underlining is contained in the documents disclosed. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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In an assessment of the commercial criteria assessment dated 6 July 2007 it was claimed that the acquisition of Lonely Planet would assist in representing the UK, its nations, regions and communities by: “LP’s desire to represent Britain in all its diversity [. . .]” It was suggested that such desire would be strengthened by its access to a huge amount of BBCW content relating to almost every region, culture and community in the UK. But Lonely Planet does not “represent” either the UK, its regions or communities. It is widely recognised as representing the Australian “walkabout” culture. As Tony Wheeler is presently quoted on the Lonely Planet website: “And the company is still driven by the philosophy in Across Asia on the Cheap: ‘All you’ve got to do is decide to go and the hardest part is over. So go!’” In striving to establish a connection between Lonely Planet and the BBC’s public purpose, BBCW also stated that major travel writers such as Eric Newby, William Dalrymple and Jan Morris were part of the Lonely Planet publishing programme. Eric Newby is now published by Lonely Planet, but the other two appear only in anthologies and their main publishers are Bloomsbury (Dalrymple) and Faber (Morris).

Criterion 2

Exhibit commercial eYciency — Take account of the degree of risk associated with the proposal; — Apply “basket of ratios” to cover: Profitability, Payback (eg risk and time taken to deliver positive income stream for the BBC), Return on Capital, Valuation, Growth (eg sales and profits over time, set against market expectations), AVordability. The BBC has refused to supply any information in relation to commercial eYciency on the grounds of confidentiality. All financial data has been heavily edited from documents disclosed under the Freedom of Information Act. There is speculation over the amount actually paid for Lonely Planet and the cost of acquiring the remaining shares held by the Wheelers who continue to reside in Australia. The acquisition price for 75% of Lonely Planet has been variously reported to be £75 million (The Times), £90 million (The Daily Telegraph), £100 million (FT.com) and although the price and terms of the acquisition from public funds have not been fully disclosed, this was not a price that any commercial organisation was prepared to pay. The suggestion by BBCW that the purchase could have developed into “an auction” had no substance. However, there could have been no expectation of an immediate return on capital as the rationale for the purchase was the growth of Lonely Planet’s online activities which would require substantial investment. As revealed above, the book publishing division was of significantly less interest. The costs of the development of online activities as well as the purchase price would have been beyond anything a commercial organisation in the ordinary course of events would have been prepared to pay. We do not know why BBCW sought to make the acquisition of Lonely Planet at all if the intent was to exploit the intellectual property of the BBC. BBC content could and should be commercially exploited by means of making the same available to all travel publishers in a free competitive market. It is not, and the acquisition reduces the likelihood that it will be. BBCW has simply created a structure with the acquisition where the “over 3,000 hours of completed programming and about 15,000 clips” identified by the BBC and BBCW as being capable of being exploited by Lonely Planet will be available only to Lonely Planet. If BBCW is to obtain value from BBC intellectual property then its proposed acquisitions must be judged against how value could be obtained by other means such as making intellectual property available to all travel publishers and travel websites. Making an acquisition to subsume intellectual property reduces the opportunities for exploitation and reduces the value capable of being obtained.

Criterion 3

Not jeopardise the good reputation of the BBC or the value of the BBC brand BBC is a content and service provider funded and owned by the British public, free from commercial and political interests. Beneﬁt is directly tied to value and reputation of BBC brand. Where concerns arise about the impact on brand or reputation of an activity, the Executive should consider ﬁrst what actions might be taken or safeguards put in place to mitigate any negative impact. An important aspect relates to how the BBC deals with other companies and individuals in connection with its brand. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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Jon Cowdock in an e-mail to BBCW Chief Operating OYcer Sarah Cooper suggests: “An early review of whether the brand development is, indeed, producing the unique BBC service that justifies the acquisition of a business that does not currently have that characteristic.”110 It is a misconception that in the eyes of anyone other than those intimately associated with the BBC and its operations that there is any distinction between the BBC, the United Kingdom’s public service broadcaster funded at public expense and BBC Worldwide, a limited company whose purpose is to make money by exploiting the assets of the BBC. Nor is there any attempt to create a distinction—quite the reverse. BBCW uses the name of the BBC. It does not need to do so and indeed the commercial activities of the BBC would be better protected were such a distinction to be made. BBCW uses the BBC logo in its name and activities. Damage to the BBC brand has already been caused by the purchase of Lonely Planet itself. Such damage was anticipated and disregarded. As was reported to Sir Michael Lyons by Jon Cowdock and Chris Woolard in connection with the purchase of Lonely Planet. “Whilst this is a commercial venture which, if successful, will benefit the licence fee payers, we should be prepared for potential negative press [. . .] This deal might well upset some powerful businesses such as Pearson (Rough Guides) and Random House (Fodors).”111 The perception and expectation was that the acquisition of Lonely Planet would be likely to and indeed did upset the travel guide industry. That in itself jeopardises the good reputation of the BBC, as indeed does the very investigation by the Select Committee into the activities of BBCW. Travel publishers will view the BBC, not as a public services broadcaster but as a competitor and the BBC will view travel publishers and other online travel site as competitors. Time Out is, of course, a potential competitor and Tony Elliott, the Time Out Group Chairman, set out his profound disquiet at the Edinburgh TV Festival in August 2008. See Appendix b (not printed). Acknowledging that a transaction will cause negative press and upset powerful business in the United Kingdom might have properly led Sir Michael Lyons to conclude that the purchase of Lonely Planet was incapable of fulfilling criterion 3 at all. Since the purchase, the warning of Jon Cowdock and Chris Woolard materialised and there has been a substantial amount of adverse press and publicity to the BBC. It fosters the concern that BBCW and (in the eyes of all but the few) the BBC is not free from commercial and political interest and has strayed into commerce. See Appendix c (not printed). The BBC Trust Unit, when reporting to the BBC Trust and in considering any risk to the good reputation of the BBC, considered that: “At an operational level, risk is limited given that LP is a non BBC branded business; any use of BBC brand by LP in the future would only be permitted under BBC license terms”112 That was simply incorrect. Lonely Planet may not be presently, but the clear intention is for it to become a BBC branded business which was expressed clearly in its document seeking approval for the transaction. BBCW even created its own logo to present the concept to the BBC Trust. The intention is obviously for Lonely Planet to stand alongside BBC Radio, and other BBC divisions. In any event, any control by BBCW of the activities of Lonely Planet (to the extent that there is any) is only practical during the ownership and control by BBCW of Lonely Planet. As more and more BBC intellectual property is made available to and absorbed by Lonely Planet, and the more that Lonely Planet is perceived as the BBC’s brand for the travel genre, the greater becomes the potential danger to the BBC brand.113, 114 If the process is not stopped now, the ability of BBCW ever disposing of the Lonely Planet business without a substantial risk to the reputation of the BBC is severely prejudiced. There is a fundamental diVerence between exploiting BBC brands and acquiring new ones for the BBC. What the BBC has historically sought to do is to create and nurture its own brands, such as Top Gear and Dr Who115 which BBCW was charged to exploit.

110 30 August 2007. 111 From a memorandum from Jon Cowdock and Chris Woolard to Sir Michael Lyons, Chitra Bhrarucha and Rotha Johnson dated 29 June 2007. 112 BBC Executive Board Paper sponsored by John Smith 5 July 2007. 113 Lonely Planet has since the acquisition by the BBC been heavily criticised for publication of its travel guide to Myanmar/ Burma. 114 Tony and Maureen Wheeler were reported in Times Online on the 1 October 2007 “[. . .] In our discussion with John [Smith] and his team, we felt that BBC Worldwide would provide a platform true to our vision and values, while allowing us to take the business to the next level”. 115 Both Top Gear and Dr Who are registered trademarks of the BBC. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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With the introduction of a third party brand comes commercial risk: In February 2008 the TUC called for a boycott of Lonely Planet guidebooks until the Burma edition was withdrawn from sale. The trade union umbrella organisation claimed that travel to Burma was unethical and helped prop up the military government. In response Tony Wheeler was quoted as saying “if BBC decides to withdraw the guide, it would be a deal breaker”, indicating that he would sell his remaining shares. This is diYcult to reconcile with freedom from political and commercial inﬂuence. A Lonely Planet writer has been criticised for writing guides to countries without even visiting them.116 In June 2008 Mr Kohnstamm heavily criticised the management of Lonely Planet in his book Do Travel Writers Go To Hell? Damage to the BBC brand is inevitable and could be substantial. A commercial brand acquired on the open market can never be free from commercial and political interests and should never become a brand of the BBC.

Criterion 4

Comply with BBC Fair Trading Guidelines Avoid distorting the market. In so doing there must be a separate assessment of the Fair Trading Guidelines. Lonely Planet Commercial Activities shall not be regarded as distorting the market where they have not been given an unfair commercial advantage which could unduly and negatively influence the market. The BBC Trust in considering the purchase was concerned that clear mechanisms were in place to preclude any public subsidy of this commercial venture. However, in reply to a question from Paul Farrelly as to why “the BBC” (notably not BBCW) was buying another brand when BBCW is about promoting the BBC’s own intellectual property, Mark Thompson stated baldly to the DCMS Select Committee: “Central to the question is whether or not we are actually able to demonstrate the use of BBC intellectual property. We have identified over 3,000 hours of completed programming and about 15,000 clips of BBC content about travel, natural history and so forth which we think we can integrate [into Lonely Planet’s website].” There was no recognition that the sensible approach was for the identified completed programming and clips to be made available to all travel publishers including Lonely Planet and save BBCW £75 million, or £90 million or £100 million or whatever the total figure will be when the Wheelers are paid for the 25% of Lonely Planet they astutely retained. “We are all convinced that the association will strengthen Lonely Planet’s visibility and growth potential, particularly in the digital arena, as well providing their users access to the wide range of BBC content which connects with their interests—from Michael Palin’s New Europe to Planet Earth”117 There is no doubt that with the benefit of the BBC’s intellectual property, resources and wealth of experience in developing online activities, Lonely Planet will be unassailable and its online presence embedded into the BBC’s own online activities will distort the market throughout the world. During the approval process for the purchase of Lonely Planet lip service was given to the issue.

Jon Cowdock and Chris Woolard of the BBC Trust Unit reported to Sir Michael Lyons in respect of market distortion: “the deal is unlikely to raise competition issues and provided that the terms on which the BBC makes any IP available to the business comply with its fair trade rules there should be no issues here”.118 To comply with fair trading guidelines BBCW states: “Lonely Planet will operate on the same arms-length basis with the BBC as other BBCW subsidiaries”

116 A Mr Kohnstamm claimed that he had worked on more than a dozen books for Lonely Planet, including their titles on Brazil, Colombia, the Caribbean, South America, Venezuela and Chile. In one case, he said he had not even visited the country he wrote about. “They didn’t pay me enough to go Colombia,” he said. “I wrote the book in San Francisco. I got the information from a chick I was dating—an intern in the Colombian consulate. “They don’t pay enough for what they expect the authors to do”. 117 The BBC press release 1 October 2007. 118 From a memorandum from Jon Cowdock and Chris Woolard to Sir Michael Lyons, Chitra Bhrarucha and Rotha Johnson dated 29 June 2007. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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BBCW is under substantial pressure to meets its financial targets and that includes making the acquisition of Lonely Planet a successful commercial venture. In seeking approval for the transaction the BBC Trust were told: “BBCW considers Project Joe as a unique digital opportunity. By acquiring the LP Business it would gain access to a complementary brand and quality content in a valuable market genre in which it has not previously been active. BBCW considers that it can significantly increase the value of the LP Business by exploiting the LP brand and the content across all its divisions, and in particular by helping to unlock its digital potential” In a Commercial Criteria Assessment by BBCW119 it was acknowledged that: “Under BBCW ownership Lonely Planet brand, which will then become a commercial brand of the BBC.” How can that statement of intent be achieved if Lonely Planet does actually operate on the same arms- length basis with the BBC as other BBCW subsidiaries? Or does it simply indicate the arms-length terms that other BBCW subsidiaries operate on with the BBC are not in fact at arm’s-length at all? Are Lonely Planet really paying the same as a foreign broadcaster for the right to use Michael Palin material? Can other online publishers use Michael Palin material at all? The terms of the BBC’s transfer pricing for intellectual property to any BBCW activity including Lonely Planet have not been disclosed and are private and are the cause of deep suspicion and mistrust. There is equal suspicion on good grounds that the BBC and its assets and resources paid for by the licence fee payer are being used to promote the BBC’s commercial activities. BBC’s references to the Lonely Planet brand on the BBC website and television channels undermine the principle that the BBC is free from commercial interests and unfairly promotes its products.120 Lonely Planet has the ability to evaluate and utilise all BBC archive material accumulated at public expense which no private travel publishers has. It is acknowledged that Lonely Planet will acquire BBC programming to support, for instance, a relevant online guide, to which other online guide publishers do not have access. No privately owned company will be able to achieve the same level of investment into its online activities as is now available to Lonely Planet. The investment from BBCW that is now required to fully exploit Lonely Planet’s potential far exceeds anything available to a commercial organisation. What is more, everything now available to Lonely Planet and its digital future is rooted in a history of investment—in people, databases, R&D, software, expertise – made over many years by the publicly funded BBC. By its association with the BBC—its “brand for the travel genre”—Lonely Planet will have access to finance and commercial opportunities that would not be available to a commercial organisation. The perception (even if it is just that) that Lonely Planet is a division of the BBC gives Lonely Planet unequalled gravitas within the travel publishing industry. The claim that BBC intellectual property is subject to fair transfer pricing is hollow.

FourCriteriaConclusions In the heavily edited documents disclosed by the BBC it is clear that BBCW was struggling to meet the four criteria and could not do so. The approval process was a collaboration between BBCW, the BBC and the BBC Trust to be able to justify approval, not a rigorous test by the BBC Trust of whether approval should have been given. The starting point was that by seeking approval in the first instance the transaction was a sound one and the pre-existing mindset was for approval. The emphasis was not on whether the transaction met with the commercial criteria but how it could be demonstrated that it did and that inevitably led to the approval of the purchase of Lonely Planet. Unless the approval process is rigorous it will lead to the acquisition of other inappropriate acquisitions. In BBCW’s five year plan given to it by the BBC Trust it was given an obligation to make acquisitions. BBCW brought to the BBC Trust the acquisition of Lonely Planet as the proposed fulfilment of that obligation. If the proposed acquisition had been refused by the BBC Trust, BBCW would have failed in its given obligation. Was the transaction ever going to be refused by the BBC Trust in those circumstances?

119 Commercial Criteria Assessment 6 July 2007. 120 Working Lunch, BBC2 consumer aVairs programme invited a Lonely Planet travel editor to give holiday advice. His appearance was accompanied by an article on the bbc.co.uk website featuring a link to Lonely Planet and no other travel guide publishers. This was only rectiﬁed after a complaint by the Daily Telegraph. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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5.UnansweredComplaint Neither the BBC nor BBCW made available information regarding the transaction until it was supplied to Pearson following a request under the Freedom of Information Act. It took seven months for heavily edited documents to be produced, during which time BBCW invested heavily in terms of facilities and finance to develop the Lonely Planet online presence using the skills and assets of the BBC. The information requested under the Freedom of Information Act was heavily edited and did not disclose any details of transfer pricing nor how the BBC’s fair trading guidelines were to be implemented to ensure that Lonely Planet did not receive an unfair benefit, nor how the relationship between the BBC and Lonely Planet was to be managed in particular with regard to access to and pricing of BBC Intellectual Property made available to Lonely Planet. In the documents disclosed it is clear that the intention of BBCW is for Lonely Planet to have access to and embrace all BBC intellectual property identified by BBCW as capable of being exploited. On 13 May 2008 Time Out made a formal complaint to the OYce of Fair Trading and to the Chairman and each of the members of the BBC Trust and the BBC Executive. A copy of the letter of complaint is attached (See Appendix a). No response was received from Sir Michael Lyons, the BBCW Executive or the BBC Trust. The OYce of Fair Trading declined to pursue the matter at that stage.121

6.Conclusions

A. The Problem and the Cause The recorded objects of BBCW at Companies House up until as late as 7 August 2008 (and nearly a year after the acquisition of Lonely Planet) did not even recognise the Corporations’ Fair Trading Guidelines. Up until that date the objects of BBCW were to carry on business in general areas of media and entertainment and to trade as a general trading company and that it seems is what it did.122 See Appendix d. Providing BBCW with a five year plan in March 2007, which included the need for BBCW to pursue acquisition opportunities in order that it might meet the targets set for it by the BBC (up 172%), without giving it clear guidelines as to how to achieve them, was the cause of the present problems and will lead to more mistakes such as the purchase of Lonely Planet. Jon Cowdock and Chris Woolard of the BBC Trust Unit reminded Sir Michael Lyons of the point in July 2007: “because of the opportunistic dimension to acquisitions, the BBC Worldwide 5 year plan you approved in March sets out the broad framework but did not spell out any specific acquisition plans.” Without any specific acquisition plan John Smith, BBCW Chief Executive and BBCW have a free rein to enter any such business acquisition opportunities as they may wish to do. Are they likely to be prevented from doing by the BBC Trust which has set them that very task? Driving such a substantial financial acquisition as Lonely Planet through to a self imposed timetable with dubious reasoning might have been seen as a solution for all parties to the problem of having to find and seek approval for other targets truly capable of fulfilling the four criteria in the absence of specific acquisition plans.

B. Consequential Confusion There is a fundamental misconception by BBCW that fulﬁlment of the BBC’s public purpose is achieved by the acquisition of commercial enterprises that have a similar ethos. In a BBC Executive Board Paper dated 5 July 2007 sponsored by John Smith he claimed: “the acquisition of LP is consistent with the BBC’s public purpose for two key reasons. Firstly, because the brands are natural bed fellows—they share the same high standards of editorial integrity and approach in the development of editorial content, and adopt a similar ethical stance in the way they treat their staV, suppliers and customers. Secondly, taking a strong global brand like Lonely Planet and building its presence and engaging with consumers across multiple formats is exactly what BBC Worldwide does—it plays directly to the organisations core skills, as it has demonstrated with brands like Top Gear, Planet Earth and the Teletubbies”.

121 The letter of complaint and replies are attached in Appendix a (not printed). 122 The main object in the Memorandum of Association of BBCW did not set out that BBCW was established to support and further the objects of the Corporation set out in the Charter or that BBCW was to act in accordance with all applicable laws and regulations including the Corporation’s Fair Trading Guidelines until 7 August 2008. See Appendix d (not printed). Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 44 Culture, Media and Sport Committee: Evidence

The true requirement is that there must be a connection in terms of the activities that the BBC undertakes to fulfil its public purpose. The criteria to be fulfilled are whether the BBC and an acquisition undertake similar activities. At the time of the acquisition of Lonely Planet they did not. If criteria are permitted to be fulfilled post acquisition then BBCW are free to acquire any business at all on a promise that the four criteria will be fulfilled in due course. The misconception by BBCW is that the “fit” for an acquisition should be with what BBC Worldwide does and not what the BBC does. If the criteria are simply achieved by following BBC Worldwide’s activities, the objective of BBCW is distorted and self-fulfilling. If BBCW’s ultimate remit is to make money and it is permitted to expand into areas and activities not undertaken by the BBC (as in the case of creating a new “travel genre”), then BBCW is eVectively unconstrained. Because of the lack of constraint BBCW is out of control. The fundamental purpose of BBCW is to exploit the intellectual property rights of the BBC, not the rights of another company or in the case of Lonely Planet for the benefit of its remaining Australian private shareholders. Any argument that the Lonely Planet acquisition assists the BBC to extract additional value from its own intellectual property is inherently flawed and can only be achieved in circumstances where BBC intellectual property is not made available to any other party or is made available to Lonely Planet on preferential terms (either as to cost or access). If the BBC does so it must be a distortion of the market. If BBCW strays from its purpose of exploiting and bringing value to BBC assets then it is no more than a commercial organisation trading for profit but with inherent major advantages: it has privileged access to finance simply through its association with the BBC; and it can use BBC assets created at public expense to increase its own profit and that of its acquisitions—and that must distort the market. If the purchase of Lonely Planet fulfils the four criteria, then what business will John wish to go into next? And the problems with BBCW’s ownership of Lonely Planet will continue. BBCW acknowledges that it is not in the book business and it sold BBC Books in 2006 as this was not “core business”. BBCW sees the future of Lonely Planet to be the travel brand of the BBC and online, so what happens to the book division of Lonely Planet for which BBCW paid £75 million or £90 million or £100 million or some other sum presently undisclosed? Approval by the BBC Trust was conditional on “[. . .] whether this investment fully meets the commercial services criteria in practice [. . .]”. It clearly does not. The BBC Trust has stated that: “If the Trust concludes at any point that the criteria are not being met fully in practice, it will take whatever action it considers to be appropriate at the time to ensure compliance”.

6.Summary The purchase of Lonely Planet is an aberration. It should not be permitted to become the travel brand of the BBC and should be sold immediately to prevent any further damage to the BBC and distortion of the market. BBCW should return to its founding principles (the exploitation of the BBC’s intellectual property) and given clear guidelines as to how to do this. There needs to be proper scrutiny of BBCW’s operations. It is not for us to comment on the BBC Trust’s performance to date, other than to say that in this one instance (the purchase of Lonely Planet by BBCW) there has clearly been a lack of rigorous scrutiny and that quite reasonable objections were brushed aside far too easily. There is a strong suggestion that unrealistic commercial expectations placed on BBCW are compromising and malignly inﬂuencing both the BBC and the BBC Trust. It is also clear that in this instance the BBC Trust—despite the misgivings of many of its members and staV—found itself joining with the BBC and BBCW in order to force this transaction through.

DramatisPersonnae

Balbir Binning Controller, Fair Trading Chitra Bhraruchi Vice Chairman BBC Trust Nathalie Christiansen Senior Advisor, Editorial Policy Sarah Cooper Chief Operating OYcer BBCW John Cowdock Chief Strategy and Policy Advisor to BBC Trust Nicholas Eldred Group General Counsel, BBC Dermot Gleeson BBC Trust Member Rotha Johnston BBC Trust Member Mark Kroll Director, BBC Trust Sir Michael Lyons Chairman BBC Trust Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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John Smith Chief Executive BBCW Caroline Thompson Chief Operating OYcer, BBC Mark Thompson Director General BBC Tony and Maureen Wheeler Sellers of the majority interest in Lonely Planet and remaining owners 25% Chris Woolard Head of Finance, Economic and Strategy BBC Trust Unit October 2008

Memorandum submitted by Guardian Media Group (GMG)

About GMG Guardian Media Group (GMG) is a leading UK multimedia business. In addition to our ﬂagships—the Guardian, Observer and guardian.co.uk—we have a wide portfolio of companies in areas such as regional press, online, radio and B2B media. We are strong and long-standing supporters of the BBC as a champion of public service broadcasting and a hugely important ﬁxed point in today’s shifting media landscape. We have, however, become increasingly concerned about certain of the BBC’s expansionary commercial activities.

Background Until recently, BBC Worldwide (WW) had succeeded in mitigating, to a considerable degree, the negative impacts of its activity and, as a result, the commercial sector was largely willing to accept the BBC’s right to generate revenues from its content. In recent years, however, this balance has been undermined: WW has become more aggressive and its activities are extending into previously unconsidered areas (eg the launch of “passion sites” such as BBC Green, the acquisition of Lonely Planet). Increasingly, public funds are being exposed to risk, WW’s market eVects are being increased and a plural media sector is being jeopardised. This expansion of WW is the result of three factors: increased opportunities in areas such as online, multichannel TV and international format sales; a significant loosening of the regulations governing WW’s activity; and a re-orientation of WW towards profit maximisation. To illustrate the reduced regulatory oversight: the BBC’s pre-2006 Fair Trading Commitment had general but explicit conditions covering what its commercial arm could do, including the requirement that activities should “plainly arise from and support BBC programmes”. The 2007 BBC Trust redrafting of policy on fair trading, however, states that activities “must link clearly with the way in which the BBC promotes its Public Purposes”. This allows for a vastly increased range of activity, and can be used to justify almost any “media- flavoured” investment. In addition, the current governance arrangement also sets out that WW’s executive board need only refer for review to the Trust those investments it wishes to make that are in excess of £50 million. This is an extremely high figure in the context of the commercial media industry,and it widens hugely the field of potential investment for WW that requires no oversight by the Trust.

NegativeImpacts The unfettered use of the brand on non-core BBC output must at some stage begin to damage the BBC’s image as a producer of high-quality content. In addition, by expanding into areas that are unrelated to BBC core programming, WW is eVectively leveraging the BBC’s public service brand in a potentially endless number of markets. The “passion sites”, for example, take “eyeballs” and advertising income away from existing commercial sites: private investment is crowded out by an expanded public service. And acquisitions like Lonely Planet not only distort the acquisition market, but also unacceptably risk public funds.

What GMG wouldLike toSee inFuture — The relationship between WW, the BBC and the Trust needs to be more transparent. There needs to be an improved oversight framework governing WW’s behaviour. — While the BBC must be able to beneﬁt from its assets, how it can do this needs to be more tightly deﬁned: restrictions need to be placed on WW’s activities returning them to previously established limits.

RecommendedSteps — The BBC Trust must be shown to be impartial, transparent and independent. The Trust, more than ever, needs to be a truly credible regulator of the BBC. It must bring much more openness to its decisions and processes; it must provide clear separation between its roles as BBC champion and regulator; and it must build industry conﬁdence of its impartiality. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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— The BBC’s commercial activity should be brought back under proper control. All commercial activity should be linked directly to core BBC programming to restore certainty to the market and a sense of proportion to the use of the BBC brand. In addition, the monetary threshold for referring activities for Trust oversight should be lowered from the current minimum of £50 million. — Non-current programming assets (eg archive) should only be exploited through licensing. Value for the BBC’s assets would be realised, but without intervention of the scale of current market activities.

GMG Submission to CMS CommitteeInquiry into BBC CommercialActivity

About GMG

1. Guardian Media Group (“GMG”) is a leading UK multimedia business. Our operations span national, regional and local press, online businesses, regional radio stations, magazines and business-to- business media: — Guardian News and Media: the Guardian and Observer newspapers and guardian.co.uk. — GMG Regional Media: the Manchester Evening News and its website, other regional newspapers in the North West and South of England, and the Channel M TV station for Greater Manchester. — GMG Radio: regional radio stations across the UK under the Real, Smooth, Century and Rock brands. — GMG Property Services: providers of software to independent estate agents. — Trader Media Group: publisher of the Auto Trader magazine and website. — Emap: the B2B publishing, events and information business. 2. We are wholly owned by the Scott Trust, which was created in 1936 and has the core purpose of safeguarding the ﬁnancial position and editorial independence of the Guardian in perpetuity.

GMG and the BBC

3. As we have consistently made clear in our public statements and submissions to recent consultations and inquiries, GMG is a strong and long-standing supporter of the BBC as a champion of public service broadcasting and a hugely important ﬁxed point in today’s shifting media landscape. The BBC’s public service principles and objectives are very similar to those enshrined in the constitution of our owner the Scott Trust and expressed through the Guardian’s journalism. Our aim is not in any way to damage, undermine or unduly restrict the BBC. We have, however, become increasingly concerned about certain expansionary activities and their eVect on commercial media players—and on the reputation of the BBC. We welcome the opportunity to restate our support for the BBC, and to outline our concerns and potential remedies.

Introduction

4. One of the main benefits of the BBC’s licence fee funding is that it allows the broadcaster freedom from commercial (and, in principle, political) pressure to produce high-quality, innovative, educational and trustworthy content. However, the BBC simply broadcasting its licence fee funded programming to its UK audience does not extract all the value from this content. The BBC has, therefore, long had the practice of selling its output in other markets and adding these earnings to its licence fee funds. 5. In principle, there are two ways in which the BBC can make money from its content: by exploiting it commercially itself, or by licensing it to a third party.Historically,in order to protect its brand and reputation and to ensure maximisation of profits, the BBC has opted to exploit the content itself through a wholly owned commercial subsidiary,now known as BBC Worldwide (WW). The creation of WW posed a challenge for the BBC, as it was important to ensure that it generated revenue without excessively stifling private interests, jeopardising public money or damaging the BBC’s valuable brand. 6. Until recently, WW had succeeded in mitigating, to a considerable degree, the negative impacts of its activity and, as a result, the commercial sector was largely willing to accept the BBC’s right to generate revenues from its content. In recent years, however, this balance has been undermined: WW has become commercially aggressive and its activities are extending into previously unconsidered areas. Increasingly, public funds are being exposed to risk, the market eVects of WW’s activity are being increased and a plural Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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media sector is being jeopardised. For example, BBC Magazines has moved from extending existing programming brands to creating entirely new, often multiplatform media brands. These include Olive Magazine and single-issue “passion sites” such as BBC Green. Neither of these has a direct link to existing programming brands and both have a signiﬁcant negative impact on existing operators in their respective markets. 7. In addition, the link between the BBC’s public service content and its brand has been cut, increasing the risks to the value of that brand through over-exploitation. WW should re-establish the previously accepted equilibrium by limiting its activity to core programming areas and reducing the risk taken with public money.

Development of WW’sCurrentForm andDirection

Opportunities expanded in multichannel TV, worldwide format sales and online business 8. With the growth of international format markets and the explosion of communications technology, greater opportunities arose not only further to exploit catalogues and programming ideas, but also for strategic investments, acquisitions and partnerships. This was explicitly recognised in the process to renew the BBC’s Charter, with the Corporation being encouraged to bolster its state funding further with commercial income.

The BBC guidelines covering WW’s activities and their relationship with PSB content were loosened 9. The BBC’s relationship with WW has long been ruled by guidelines covering what activities are deemed permissible for the latter to undertake. These guidelines were principally put in place to protect the BBC brand and to minimise the impact of its commercial activity on markets. With the process for renewal of the Charter in 2006, however, the BBC and the BBC Trust redrew these guidelines with a much broader remit for WW. For example, the BBC’s pre-2006 Fair Trading Commitment had general but explicit conditions covering what its commercial arm could do, including the requirement that activities should “plainly arise from and support BBC programmes”. The 2007 BBC Trust redrafting of policy on fair trading, however, states that activities “must link clearly with the way in which the BBC promotes its Public Purposes”. This second formulation is far broader: virtually any activity that returns money to the PSB core of the BBC can be said to be promoting purposes such as “bringing the UK to the world and the world to the UK”, “stimulating creativity” or “delivering to the public the beneﬁt of emerging communications technologies”.123

WW was re-orientated towards expanded commercial horizons and given the target of increasing its returns 10. While the scope for WW to expand its activities into new markets was furthered by the Charter renewal process, the organisation itself was given a much clearer steer towards commercial activity. The subsidiary’s aim was clearly set as straightforward profitability—for example, it was publicly announced in 2007 that it was aiming to double its profits within five years. 11. This combination of market opportunity, eVective de-regulation and re-orientation has resulted in a radical alteration in WW’s behaviour, from limited intervention to unrestrained commercialism.

Implications of these changes for WW’s activity 12. The main result of this sequence of developments has been a shift in WW’s orientation beyond the original purpose of obtaining full value for the BBC’s licence fee funded output. WW’s objective now involves the use of BBC assets and retained cash as investment resources with the simple goal of maximising returns: the link to PSB assets has been broken. Furthermore, this has been done increasingly at the expense of WW’s previous aims to protect the BBC brand and to minimise the commercial impact of its activity. 13. This unfettered use of the brand on non-core BBC output must at some stage begin to damage the BBC’s image as a producer of high-quality content. Indeed, a glance at the advertising carried on some of the BBC’s commercial websites shows the fall-back BBC argument of “brand protection” for setting up its own services to be less than convincing: McDonald’s advertise on BBC Good Food; domestic electrical appliances on BBC Green; and artiﬁcial grass on BBC Gardens Illustrated. These are hardly indicative of a policy of careful and selective commercial association. It is also worth noting that, while clearly recognising the value of the BBC brand, WW as yet does not include the value of its exclusive right to use it in its accounts. 14. GMG and other media organisations have been willing to accept the existence of the BBC’s commercial activities in media markets, because measures existed to limit possible negative eVects, and mitigating circumstances existed. WW’s activity was characterised by certainty, limits and predictability: the

123 For the full list, see http://www.bbc.co.uk/info/purpose/public purposes/index.shtml Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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fact that WW could only exploit product/content that emerged directly from its core programming eVorts meant that commercial competitors could plan their strategies and minimise their exposure to crowding out from the better resourced BBC by avoiding those areas where they might invest and launch products. 15. In the past, when WW’s activity has not been directly related to BBC programming, the BBC has ordered a withdrawal from this activity. For example, the BBC took the decision to sell Eve magazine on the basis that it did not arise from BBC output. In the UK Parliament’s 2005 Select Committee Review of the BBC Charter, WW CEO John Smith referred to the BBC’s divestment of Eve as evidence of the BBC’s commitment to engage only in commercial activity that is related to BBC’s public remit and purpose. He stated: “There were some things which the BBC did commercially which, to be honest, did not spring naturally out of the BBC’s public service programmes. Let me give you an example: a magazine known as Eve Magazine, a women’s glossy, did not really reflect any of the BBC’s programming output so we took a decision to fit with these criteria that it was not really appropriate and we sold the magazine to Haymarket.”124 16. This situation has now changed significantly. While previously the BBC’s commercial activity was limited to its core programming, the key criteria of the Corporation’s Charter have been changed. Commercial activities now need to demonstrate, among other requirements, that they: fit with BBC’s public purposes; do not distort the market; and do not risk public funds.125 17. The first issue here is that commercial ventures now need only fit with the BBC’s “public purposes”. These purposes are very broadly couched and can generally be made to accommodate any “media- flavoured” investment. In addition, the current governance arrangement also sets out that WW’s executive board need only refer for review to the Trust those investments it wishes to make that are in excess of £50 million.126 This is an extremely high figure in the context of the commercial media industry—one that is far in excess of the investment required for a major consumer magazine launch, for example, let alone a website launch. This has widened hugely the field of potential investment for WW that requires no oversight by the Trust. 18. The second issue lies in the way in which the other criteria for commercial activities are enforced. The Trust’s credibility in ensuring that WW’s ventures neither distort the markets in which they operate, nor risk licence fee payers’ money, has come into question following the £90 million acquisition in 2007 of a 75% share in travel publisher Lonely Planet and its minority investments in production companies. It is, of course, essential that the BBC does not overpay, as this would waste licence payers’ money. Conversely, one can see why dealing with the BBC—rather than commercial players—might be more attractive to the acquired party given the content, resources and brand value the BBC brings. This could allow for an acquisition price that is below market rates, which would clearly be anti-competitive and unfair to rival commercial bidders. In this regard it is clear that the very presence of WW in the acquisition market is problematic. 19. Thirdly, while the BBC and WW would both point out that their requirement is not to risk public funds, and that this is regarded as referring to licence fee funds themselves (which the BBC are disallowed from using for commercial purposes), it cannot be denied that the profits retained by WW for re-investment nonetheless belong ultimately to the BBC and therefore the licence fee payers. The distinction between the licence fee fund itself and the broader category of money that has come to the BBC essentially through use of licence fee funds seems somewhat arbitrary: both are ultimately intended to be used for the production of public service content, and to risk the latter doesn’t seem any less desirable or more justifiable than risking the former. In summary, WW now seems to have carte blanche for commercial activity, and insuYcient regard for the consequences for competitors and public funds, facilitated by minimal and unconvincing oversight. 20. These changes are all the more important given the changing—and challenging—nature of the media landscape: the proliferation of online media means that the possibilities for oVering services on a broader international scale are greater and the ability for the BBC to expand into “areas that fit with their core purposes” are similarly great. The growth of online media and the opportunities it holds, not just for WW but the commercial media sector, mean that now is the time when limits and boundaries should be drawn.

The eVects of WW’s activities on markets 21. WW’s more aggressive strategy is having both short- and long-term negative eVects on private sector commercial initiatives, citizens and licence fee payers. There are three main actions which are tipping the balance against the interests of a plural media sector: — the extension of its brand-exploitation into areas not related to BBC content; — the increasing risk to licence payers’ money; and — the inclusion of advertising on licence fee funded services.

124 See http://www.publications.parliament.uk 125 This condition is included in the more general requirement that commercial activities respect the BBC’s Fair Trading Guidelines. 126 See BBC Protocol D6—The BBC’s Commercial Services. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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Extension of its brand exploitation

22. WW is aggressively pursuing a BBC brand expansion strategy into areas that are unrelated to the BBC’s core programming, seemingly believing that the Trust has no desire to limit its activities. This may be seen, for example, in the BBC “passion sites” mentioned above. While sites like BBC Green are not related to BBC’s core programming, and therefore would not have been a permissible activity under the old regime, they are argued to ﬁt with BBC’s newer public purposes. The acquisition of Lonely Planet raises similar issues—it is not related to BBC content but it arguably ﬁts with BBC’s public purpose of informing and educating. 23. By expanding into areas that are unrelated to BBC core programming, WW is eVectively leveraging the BBC’s public service brand in a potentially endless number of markets. The use of this brand can be extremely eVective: for example, the BBC’s content related to environmental issues on BBC Green will have a strong pull on interested audiences. Because of this, such sites take “eyeballs” and advertising income away from existing commercial sites: private investment is crowded out by an expanded public service.

Risking licence fee money

24. WW is increasingly risking licence payers’ money through its aggressive expansion strategy. As noted above, while WW is not allowed to use the licence fee itself, it nonetheless uses funds that have resulted through the use of licence fee funded assets: this money still ultimately accrues to the licence fee payers. The recent acquisition of Lonely Planet (which, in its ﬁrst year under WW ownership, made a £2.1 million loss) suggests that licence fee payers are far from being guaranteed returns from WW’s investment. The BBC’s new taste for speculation calls into question the Trust’s interpretation of the key criteria which must be satisﬁed in order to launch a production commercially.The Trust has clearly taken a very loose interpretation of “risking public funds”.

The inclusion of adverts with licence fee funded services

25. In 2007, the BBC decided to take advertising on bbc.com with the justification that it would be on non-UK sites and that it believed there were suYcient controls for this not to aVect the quality or integrity of the website. The site itself is run by WW but uses core PSB BBC news content. No adequate justification (other than monetary) was given either for the use of BBC branding on a commercial site, or for the use of licence fee funded content in a commercially funded context. This move is also likely to have a negative eVect on other ad-funded operators, such as the Guardian’s nascent US online commercial activity. While market impact is hard to assess in such cases, this decision is another example of how the BBC has moved beyond its original remit and boundaries, and how commercial players find that, in an extremely challenging environment, wherever they turn for new audiences and revenues the BBC has placed a roadblock in their path. 26. The net eVect of the Trust’s inability or unwillingness to limit WW’s aggressive expansion is the undermining of the BBC’s commitment to a plural media society and the risking of licence fee money.

WhatThisMeans for theFuture

What is a desirable position for the BBC, the Trust and WW in the future?

27. GMG would like to see a well and independently funded, responsible BBC, free to generate returns from its licence fee funded assets in a manner consistent with PSB principles and editorial standards. This would require several changes: — The relationship between WW, the BBC and the Trust needs to be more transparent. There needs to be an improved oversight framework to ensure that any guidelines for WW’s behaviour are interpreted correctly and that a suYciently narrow interpretation of “public purposes” and “risk to licence fee” is made. — While the BBC must be able to beneﬁt from its assets, how it can do this needs to be much more tightly deﬁned: restrictions need to be placed on WW’s activities returning them to previously established limits. 28. These remedies will become all the more important if, as Ofcom has suggested, WW takes an active interest in exploiting C4’s content overseas as well as the BBC’s. Such a move would increase the potential distortion in media markets if WW’s activities were not scaled back to exploiting PSB-funded assets. Even this would still result in a concentration of quality PSB content in the hands of one commercial distributor, and transparency of activity would become even more important. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 50 Culture, Media and Sport Committee: Evidence

Steps that could be taken to eVect these changes 29. The BBC Trust must be shown to be impartial, transparent and independent. With expanding opportunities, technologies and markets, and with the BBC’s commercial activities becoming more deeply involved in these, the Trust, more than ever, needs to be a truly credible regulator of the BBC. It must bring much more openness to its decisions and processes; it must provide clear separation between its roles as BBC champion and regulator; and it must build industry confidence of its impartiality. In conjunction with this, the management of the BBC, WW and the BBC Trust should be made totally separate and mutually exclusive. 30. The BBC’s commercial activity should be brought back under proper control. All commercial activity undertaken by BBC subsidiaries should be linked directly to current core BBC programming to restore certainty to the market and a sense of proportion to the use of the BBC brand. In addition, the monetary threshold for referring activities for Trust oversight should be lowered from the current minimum of £50 million to a more appropriate industry level. Furthermore, the relationship between the BBC and WW must be made completely transparent. This would mean openly justified pricing for the transfer of assets between the two organisations, or an end to the “preferred partner” status of WW altogether. As such, the BBC could continue to sell WW its latest comedy series for re-transmission on UKTV Gold, for example, but this would have to involve an open-market bidding process for the content. 31. This would still allow the BBC to exploit fully the value of its current licence fee funded assets—such as comedy series—through international sales, format franchising etc, but would prevent it from the large- scale media investment that it has undertaken in recent years—such as the acquisition of Lonely Planet. 32. These first two measures would bring WW and the BBC properly within necessary regulatory control. However, on their own, they could limit the ability of the BBC to obtain full returns on BBC assets, including those unrelated to current programming. For example, BBC DG Mark Thompson justified the acquisition of Lonely Planet by revealing that the BBC had 3,000 hours of archive footage that it could integrate into the publisher’s website oVering. While uncontrolled exploitation of these—eg buying a travel publisher to use the footage, in this case—can damage markets, there are ways in which they can still be exploited acceptably. These involve giving use of these other assets over to third parties, in the form of licensing, where the BBC would hand over full use its assets with brand protection conditions. 33. Non-current core BBC programming assets should only be exploited through licensing. As with programme related material, this should involve an open market for licence fee funded content, which would generate the best possible return on licence fee funded content. The purpose of the Lonely Planet deal, for example, could still be achieved—through licensing of the BBC content and expertise concerned to the other party, rather than through acquisition. In combination with the first two recommendations, this would reduce further the market uncertainty and distortion caused by the BBC’s expansionary behaviour. Value for the BBC’s assets would be realised, but without an intervention of the scale of the BBC’s current market activities. 34. The BBC might protest that having to licence its assets could cause damage to the BBC’s brand. However, eVective third party use of brands is currently achieved by many large media organisations, and in any case, as we have seen, the BBC’s current policy on advertisers, for example, doesn’t seem to reflect such concerns. 35. We believe that, with the correct level of eVective regulation, the measures described above would allow the BBC to return significant value for all its assets to the licence fee payer, and protect the BBC brand, without unnecessarily distorting markets and aVecting UK media businesses.

BBC Local Video 36. Although outside the formal remit of this inquiry, as they are not commercial activities, the BBC’s plans for local video are another good example of how the Corporation is aVecting commercial markets, and how the BBC’s governance can lack transparency. GMG has serious concerns about the BBC’s plans to invest £68 million in local video content. At a time when the plurality of local and regional news provision is under threat as ITV reduces its PSB commitments, the BBC’s plans threaten to stifle online innovation by commercial players, and snuV out fledgling markets. Along with the rest of the regional press industry,GMG has been closely involved in the BBC Trust/Ofcom public value test of these proposed services. 37. This consultation has highlighted the problems concerning the Trust and its relationship with the BBC Executive. During the consultation process, information about the proposed new service has not been fully supplied to local media; the BBC has not reciprocated in providing important market information that, in contrast, local media have given when asked; and the timings involved in the process have appeared to be arranged with the BBC’s interests in mind. This has been to the detriment of the industry’s confidence in the consultation process. October 2008 Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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Letter from Wanderlust Publications Ltd to the OYce of Fair Trading We are writing to register a complaint and request that the OYce of Fair Trading carries out an investigation into the acquisition of a majority shareholding of Lonely Planet by BBC Worldwide and the planned launch of a Lonely Planet-branded magazine by BBC Worldwide. Wanderlust Publications Ltd is an independent publishing company founded in 1993, which publishes the consumer travel magazine Wanderlust that is aimed at the independent and adventurous traveller. The principal travel titles within the magazine sector at present are Sunday Times Travel Magazine, Conde Nast Traveller and Wanderlust, all with very diVerent target markets. We lead the adventure and specialist sector, and other titles include Real Travel and Travel Africa. The total circulation of us all is comparatively small compared to other categories of the magazine industry,perhaps because travel is covered so extensively in the national press and elsewhere. Indeed, there have been many failures over the years within the market, including BBC Holiday magazine. The type of traveller that Wanderlust targets is the type of traveller that has traditionally been the target audience of the Lonely Planet guidebook series. Indeed this synergy has led Wanderlust to a long association with Lonely Planet including cover-mounting Lonely Planet mini-guidebooks and oVering Lonely Planet books as subscription incentives. Lonely Planet guidebooks are the most used guidebooks by our readers and have won the “Best Guidebook Series” category in the Wanderlust annual travel awards as voted by them on many occasions. BBC Worldwide have recently announced that they are to launch a Lonely Planet magazine in the UK, and it is speciﬁcally this launch that we would like the OFT to investigate. In this letter we aim to highlight that: — The launch of this magazine does not ﬁt within the requirement that the BBC may only engage in commercial activities that are in support of BBC programming. — The launch of this magazine will distort the market, and give the BBC an unfair advantage over other magazine publishers. Furthermore, in what is a surprisingly small sector. — To create a programming/magazine link, the BBC would have to launch a Lonely Planet or other adventure-travel television programme, which would entail employing public funds in support of a commercial activity. The details of our complaint are as follows:

Outside the scope of the BBC’s permitted commercial activities

The Government’s March 2005 Green Paper discusses the scope of the BBC’s commercial activities and states that four criteria should be used to asses whether or not the BBC should engage in any particular activity. They are: — Fit with PSB purposes—does the activity relate to PSB purposes? — Commercial eYciency—is BBC ownership the most eVective economic exploitation of the capital involved or might a sale or licensing of the asset create better value for money for the licence fee payer? — BBC brand protection—is there a positive or negative implication for the BBC’s brand or values? — Market distortion—are BBC commercial services being sold or structured in a way that might give them an unfair advantage over the competition. We believe that the launch of the Lonely Planet magazine is contrary to the ﬁrst and fourth point.

Fit with PSB purposes

Firstly, the requirement that BBC commercial activities fit with PSB purposes is one that is clearly not met. The remit of BBC’s magazine business is to produce titles that are brand extensions of existing programming, leveraging the content that the programme produces—BBC Countryfile and BBC Top Gear magazines are good examples. Both these titles relate to programmes that the BBC produces and seek to further exploit the Countryfile and Top Gear brands. Although the BBC does sporadically produce travel programmes they tend to be mainstream holiday programmes and are not in the same “adventure travel” sector that the Lonely Planet brand inhabits. It may be argued that the BBC could launch a Lonely Planet- branded television programme, but this would be producing programming to directly support its commercial venture, rather than producing a brand extension of an existing programme and would fall foul of the market distortion rule, discussed below, and may also be considered as utilising public funds in support of a commercial activity. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 52 Culture, Media and Sport Committee: Evidence

Market distortion

Our second concern is around the likelihood of market distortion. The resources that the BBC can invest in this commercial activity are significantly more than the likes of Wanderlust can invest. The BBC has archives of content and access to travel “celebrities” that are beyond the reach of the independent publishers. Whilst leveraging existing content is within the BBC’s remit, to do so to commercially promote the Lonely Planet brand rather than the BBC brand is outside the remit of the BBC. The ability of the BBC to “advertise” the Lonely Planet title on its public television channels or even to produce programming specifically to support the magazine also places it at a significant advantage—this would apply to any use of the Lonely Planet brand on the BBC, as this would impact the guidebook market as well as the magazine market.

BBC’s stated position

In the Government Green Paper, the BBC states its position on its publishing activities as: “The BBC has recently conducted an internal review of its commercial services. It concluded that the BBC should only have commercial services that exploit and /or export BBC content and the BBC brand” (paragraph 9.5) “Magazines will in future be focussed more on brands and subjects that are connected to BBC programmes.” (paragraph 9.6) As a result of this the BBC disposed of its non-BBC magazine titles such as Your Hair and Cross Stitch Crazy. The acquisition of the Lonely Planet brand seems to be entirely at odds with this position.

Fair Trading Guidelines—Unfair advantage from the BBC’s Public Service Activities

The BBC’s activities are governed by, amongst others, the Fair Trading Guidelines that are designed to ensure that the BBC does not gain an unfair commercial advantage from its position as a publicly funded organisation. Chapter 3 discusses the need for commercial activities to be separate from the BBC’s publicly funded activities: “3.2. “Separation” is necessary to fulfil the following obligations: — The BBC’s Commercial Activities must not receive an unfair advantage from the BBC’s Public Service Activities (Section I). — No Public Funds must be used, or put at risk, by the BBC’s Commercial Activities (Section II).” “Section I—The BBC’s Commercial Activities must not receive an unfair advantage from the BBC’s Public Service Activities 3.3. This key principle comprises three, closely-related conditions which together ensure that the BBC’s Commercial Activities do not receive an unfair advantage from the BBC’s Public Service Activities: — Financial and operational separation between the BBC’s Public Service Activities and its Commercial Activities. — Fair transfer pricing between the BBC’s Public Service Activities and its Commercial Activities. — No unfair promotion of the BBC’s Commercial Activities through the BBC’s Public Service Activities.” The final point in the above extract is the important one. It is clear that a Lonely Planet magazine would not be in support of BBC programming, since no such programming exists. Therefore the only way to create a link between programming content and the magazine would be to specifically create adventure-travel content, whether branded Lonely Planet or not. This would entail the use of the BBC’s Public Service Activities in support of its commercial activities. “Section II No risk to, or use of, public funds 3.20. If properly enforced, the requirements outlined in Section I above will ensure that public funds are not diverted to the BBC’s Commercial Activities.” The production of programming to support the Lonely Planet brand or the adventure-travel market would constitute the indirect diversion of public funds to support the commercial activity. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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InSummary The BBC does not currently produce any programming that the Lonely Planet magazine could be considered an extension of. To commission such programming would constitute the use of public funds in support of the commercially produced magazine. The BBC’s ability to leverage its position in support of the Lonely Planet brand will inevitably lead to market distortion. The BBC has already disposed of other non-BBC brand magazines and the recent acquisition of Lonely Planet brand and the proposed launch of the Lonely Planet magazine are contrary to the BBC’s stated position. We request that the OFT carries out an investigations into the BBC acquisition of the Lonely Planet brand and plans for launch of a magazine. We recognise that a comprehensive investigation will take time to carry out, and therefore we request that the OFT takes steps to prevent the launch of the Lonely Planet magazine until such time as an investigation has been completed. 18 September 2008

Witnesses: Mr Tony Elliott, Time Out, Ms Carolyn McCall, Chief Executive, Guardian Media Group and Ms Lyn Hughes, Editor-in-chief, Wanderlust Ltd, gave evidence.

Chairman: For the second part of our session, which Ms Hughes: We have been absolutely passionate roughly corresponds to the publishers, can I about the BBC, and I myself have done a lot of work welcome Tony Elliott, the Chairman of the Time Out for the BBC, for the radio in particular, and have Group, Carolyn McCall, the Chief Executive of the always been proud of the BBC around the world; but Guardian Media Group, and Lyn Hughes, the BBC Worldwide seems to be an out of control Editor-in-chief of Wanderlust publications. juggernaut at the moment. BBC Magazines in particular seems to be totally out of control. It is now the third biggest magazine publisher in the country. Q35 Mr Sanders: Commercial success achieved by It has something like 40% of the children’s BBC Worldwide obviously reduces the reliance on magazines market. Whereas it used to argue that its the licence fee. Why, therefore, should we be magazines were in support of BBC programming, concerned by the growth of BBC Worldwide? for instance, say, Top Gear magazine, they do not Ms McCall: Could I just say first that the Guardian have a Lonely Planet television programme, so why Media Group is a great supporter of the BBC, of its therefore are they launching a Lonely Planet concept, of the fact that it is licence fee funded, and magazine? It has no direct link to any BBC on its ability to raise additional funds through programming at all. How on earth can that be justified? exploiting its programming and its core content. In Mr Elliott: I would also like to stress my support for answer to your question, we believe the rules the BBC. surrounding BBC Worldwide’s activities have been loosened significantly since 2007, where the BBC Worldwide is creating new brands and they are Q36 Chairman: I think in future we will take it as acquiring businesses; and that is having a read that everybody supports the BBC and move detrimental eVect on commercial players and, straight on to the “But”, if we may! Mr Elliott: There are clearly some real problems with therefore, on commercial plurality. We have made the structure and the remit for Worldwide. In very some very specific recommendations because we simple terms, I think where the external agency is believe to address these problems the Trust should exploiting assets that come out of the broadcasting tighten the rules governing BBC Worldwide; there system, it is absolutely straightforward. I think we should be greater transparency about the oversight would all applaud their exploitation of the Top Gear of Worldwide; and there needs to be a greater magazine around the world, and they can do separation between the strategic role of the Trust and whatever they like in terms of the number of the regulatory role of the Trust, which we believe is programmes with that all around the world; but extremely confused and leads to some considerable when they take quantum leaps into areas that have problems for the commercial sector but also to nothing to do with the BBC as a broadcasting entity licence fee payers. Specifically in our submission we and a British brand et cetera you have to ask have said that we believe BBC Worldwide should go yourself: what is going on here? One example which back to the pre-2007 fair trading rules, and that this I would like to get on the record is that they are the investment figure of £50 million should be reduced co-publishers through a joint venture of Hello quite considerably, and we can go into that. To your magazine, which they license in India. I just do not question—which is: is it just about the success of understand what that has to do with the BBC. They Worldwide?—no, we want Worldwide to be will argue that makes money, and it does; but it successful; it is simply about the boundaries that are clearly is not what they should be doing. I think if set for Worldwide’s activities that we are concerned you follow that particular strand down the line, they about. will defend it on the basis that they have a joint Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Tony Elliott, Ms Carolyn McCall and Ms Lyn Hughes venture with The Times of India and that that was “a for quality newspapers, has probably in eight years legitimate thing which the Indians were doing—not not spent £50 million of investment in that site. I us”. If you do a joint venture with an Indian think £50 million is a ludicrously high figure for the publishing company and you want to make a success Trust to have to scrutinise. It needs to be of it you pour money, resources, talent, reputation et considerably lower than that. I would make the case cetera into that; and I think that is a good example that it should be benchmarked against other boards, of something that is way beyond what they should be not just plc boards but media boards, because a lot doing in the publishing field. I know we will come of media, as you know, is not in plc hands; some are back to the Lonely Planet question in due course, but and some are not. that is clearly a very big thing. Q39 Helen Southworth: I am sure you will not be at Q37 Paul Farrelly: It is Hello and Grazia, is it? all surprised to know that the Guardian Series Mr Elliott: They do Grazia as well. There are a newspaper, with its huge impact on Warrington, in number of them. You do have to say to yourself: my constituency, has been quite keen to make clear why? I would also like to say, because I think this is to me that they are very anxious to see that there important, I do know a lot of people at the BBC and should not be unfair competition. How much of this see them and most of them say they do not know process needs to be about the BBC guaranteeing that what is going on with Worldwide. They all say they it plays fair with licence fee payers’ money and how do not know what they are doing. There is not a clear big an impact could it have if it does not play fair? enough brief. They will all hasten to say, “But it’s Ms McCall: I think it is a really big issue. A lot of great. They make money for us to make programmes these nascent websites are new businesses, with”; but there is deep, deep concern culturally embryonic businesses, that need the oxygen to across the whole organisation about the activities. survive. When the BBC enters any market it enters Paul Farrelly: I am a former employee of the aggressively; it has deep pockets, it has a big brand, it Guardian Media Group and, if there is any money therefore can decimate competition very easily. The left in the pot, a pensioner as well! reason the Manchester Evening News in your constituency will have been very vocal about this is Q38 Helen Southworth: I wanted to ask if you could that they are fighting for their survival. That is not perhaps expand on the governance side of the BBC a dramatic phrase. Margins in the regional press are Trust and on the reference up of the £50 million cut- being squeezed very, very hard and therefore the oV point. How do you think that should be changed? issue for me is significant, not simply because I am a What level of scrutiny should the Trust be having, publisher but because I think this plays to diversity, and what sort of mechanism should they have in to plurality and to democracy. I think it is about place to report through to them? citizenship in a democracy and I think if you start Ms McCall: I think for us it is extremely confusing losing local newspapers, local websites, you will end to see the Trust as regulator and having a strategic up having a very strong BBC and nothing else. role. I will give you one specific example of that— local video—although I know this is not in the remit Q40 Helen Southworth: Any other comments? of this particular Committee but it is a good example Ms Hughes: I would just agree that £50 million is of where this gets very confused. The Trust has made astoundingly high. I only really know about it clear to management that it is a strategic magazines and about travel but £50 million could imperative to enter local. They are not really in local buy 50 magazines without the Trust’s approval. It is video; they are not in it at all, and they plan to spend a ridiculous threshold. As Carolyn said, I do not £68 million on this. When we then engage with the think there is any other company in the UK where it Trust and say, “We have a real problem with local would be such a high threshold. But even when it is video”, who are we talking to, the regulator or over £50 million, I question how rigorous the Trust someone championing the BBC in local? It is a very are anyway because in the case of Lonely Planet they diYcult distinction to make. The Chairman of the have not gone on record to say how much they did Trust has actually come out and dismissed regional pay for their 75% stake but the lowest estimate seems press’s issues with this. £68 million is a lot of money; to be £75 million. It did go before the Trust and I just as £50 million is a lot of money. To give you an really question how it got past them, what questions example: in local we spent £° million on a website to did they ask. I really do not see how they could have do an entertainment website in the north-west, so justified it at all. It is clear it is going to distort the £68 million is a lot of money. I think the first issue is, marketplace. It does not fall within the criteria so there have been lots of options discussed; the Burns how did it get past them anyway? Report made an option about separating regulation Mr Elliott: In very trite terms, I do not think there from the Trust. I think there are so many options that should be any financial level because it should be to could be discussed, I think the key thing for us is that do with the nature of what they are going to do. a regulator should be unambiguously a regulator; There may be activities in this country or elsewhere that is all they should do—regulate. That is the first where just the nature of the BBC’s involvement in thing. On the £50 million, again to give you an something, by virtue of the brand and the example, £50 million is a lot of money.Only the BBC promotional activity and all the rest that goes with could say £50 million was not a lot of money,because it, confers an enormous responsibility on the Trust to if you are a commercial player, for example, make sure that this monolithic organisation, which Guardian.co.uk, the leading website in this country we all want to succeed, goes forward in a way that is Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Tony Elliott, Ms Carolyn McCall and Ms Lyn Hughes built to last. Just doing it on a financial level I do not severe issues in the regional press, so I think he is understand. Clearly, within that perspective, £50 right to say that. I think the second issue is about the million is a nonsense. The other issue which I think BBC themselves. You cannot have a local website we are touching on, and it is incredibly important, without video. It has taken most publishers quite a and has caught everybody a bit by surprise, is this long time to be able to get the investment to do video whole issue of the BBC and its online activities and and to actually try and justify video in a return on where on earth in this new age the borders are to be investment type basis. What is the return on drawn. None of us would have any problems where investment? It would be advertising-funded. We are they are clearly extending what they already do with having to go through quite a lot of pain to justify the news, sport, probably even commentary related to capital expenditure required to do local video on news and so on. I happen to have a friend who was websites, because at the moment websites do not the facilitator at a conference attended by all the top have the return on investment that a commercial people at the BBC involved in online, and they were player would look to, so you are having to take risk. having a serious conversation about whether the The BBC will be able to do local video much more BBC’s website should be a “go to” source for quickly, with much deeper pockets, and they will be anything in the world. That clearly would give them able to leapfrog the regional press in terms of what carte blanche to go and buy anything to do that. It is they can do in local media. That is going to be very admirable, and I think, frankly, they could unbelievably damaging for local press. They might possibly do that with yet more public money but not be able to survive that kind of onslaught at a somebody has to get a grip on this. I do not think time when there is a cyclical depression as well. anybody who is involved here believes that the Trust has certainly the track record, because it has not Q42 Paul Farrelly: Just in terms of benchmarking, been around long enough. It certainly has the Carolyn, can I ask you what level of investment, be it facilities—62 people who work for it and a budget of an acquisition or for a single programme, would the £11 million, which is in the BBC report. They clearly Scott Trust get involved in? could do a job but I do not think they realise what Ms McCall: It would not be the Scott Trust. It would they are dealing with long term. be the Guardian Media Group board, which is the company that runs all our businesses, which include Q41 Janet Anderson: I would just like to pursue on Trader Media Group, Auto Trader, Emap, Business how damaging you think this new proposal from the 2 Business, as well as the Guardian, the Observer, BBC would be for local newspapers. I have some regional press and radio. We would declare anything excellent local newspapers: the Rossendale Free over £5 million. Press, which is part of your Group, Carolyn, and of course, the Lancashire Telegraph. I have a letter here Q43 Paul Farrelly: The Scott Trust board, to use an from Kevin Young, who is the editor of the analogy with the BBC, is also responsible for Lancashire Telegraph and he is saying that what the ensuring that the Guardian Media Group operates BBC is planning to spend £68 million on is virtually in accordance with the Trust’s aims and ambitions. creating 65 online local newspapers. He says in his Would the Scott Trust board get involved in any letter—and I will not read all of it—“If it is allowed way? to go ahead, the BBC will almost certainly continue Ms McCall: The Scott Trust would be informed of to bolster its service by lifting news from local all potential acquisitions, all disposals, all mergers, newspapers free of charge, it will heavily promote its and in fact we would do that on relatively small services and its news, sport and user-generated things but we would do that for information because content and will be in direct competition with our constitution is that the Group board is newspapers like mine, its website and mobile commercially responsible for the running of the messaging service.” Do you think if this goes ahead company, which includes acquisitions. that local newspapers like that will actually go out of business? Q44 Paul Farrelly: So in the way that the Scott Trust Ms McCall: I am afraid I do. I think there are two operates, in the way that the BBC Trust is alleged to major issues here. One is that competition law at the operate, it is simply informed by management of moment does not allow local newspapers to be what management is going to do? bought by each other. We have an example, which I Ms McCall: The Scott Trust on big acquisitions will am sure will come up in the next session, of seven take a view but it is not its primary purpose. Its local newspapers being closed rather than being sold primary purpose is to secure the independence of the because they were not allowed to be sold to another Guardian, the editorial independence of the newspaper publisher, who could actually get Guardian, which is my point really about the BBC synergies and cost savings. It would have led to the Trust. If the BBC Trust is there to secure the editorial survival of those papers, or at least some of those integrity and process and diligence of the content of papers, where they actually closed. I think you have the BBC, that is fine. It also is the regulator of that a real example of how tough it is for regional and that is where I think there is a problem. newspapers at the moment. There has been structural change in this industry for at least eight Q45 Paul Farrelly: I just want to come to Lonely years, probably more, and we are now being Planet now specifically. I thought, Chair, we had hammered by the downturn and the recession, which established the last time we saw the BBC the price is at least two years in the running. There are some that was paid and that we could see the acquisition Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Tony Elliott, Ms Carolyn McCall and Ms Lyn Hughes agreements and we could ensure that any earn-out Q46 Paul Farrelly: Whether there was a competitive arrangements were above board and so on. I am bidding process or not is not a matter for the BBC; surprised to hear that you do not know how much it is a matter for the Wheelers, but as far as you are the BBC paid. We need to rectify that when we next aware, there was no merchant bank appointed, no see the BBC. It is a long time since I have looked at information memorandum freely circulated? the Yellow Book of the Stock Exchange but in terms Mr Elliott: I think they did it themselves. It was of the size compared with the BBC’s profits, fairly low-key. certainly you would expect a far higher level of disclosure from a public limited company and that Q47 Paul Farrelly: The question for us clearly is may be the same parallel that we should use with the whether the BBC has in any way overpaid so that it BBC. In terms of Lonely Planet, can you just cannot possibly get a decent return on its money. describe to us the circumstances of the sale of Lonely Mr Elliott: Carolyn and I can both talk to the issue Planet? Was it put up for auction by its owners? Did of trying to make money out of websites, and the real other companies have the opportunity to bid value of the publishing side was £20 million. There is alongside BBC Worldwide, including yourselves? a huge amount of goodwill there which is basically Mr Elliott: I knew that the Lonely Planet founders, going to be clawed back over time from trading on the Wheelers, were looking for investors because I the website and maybe or maybe not through some had a conversation with Lachlan Murdoch, who kind of write-oV through programming or whatever. came to talk to me, and by the way said Time Out Ms McCall: I think the point is actually further back was a better brand than Lonely Planet. What than that. I do not think it is about Lonely Planet. I happened really was that the people from BBC think it is risking licence payers’ money and my Worldwide—and there is a background dimension question is, why is the BBC allowed to acquire to this that we should be aware of, which is that the something which is so far removed from any core Trust has charged Worldwide to hit certain targets. content or core programming? The pre-2007 People from the Worldwide scouting expedition, as guidelines were very clear. They were uncomfortable it were, happened to come across the Wheelers, as far in some ways. Top Gear is ferociously competitive as I understand, and it was to some degree a and formidable as a brand but we can live with that marriage made in heaven because in the same way because it comes from core content of the BBC. The that, frankly, if I wanted to sell Time Out, the BBC guidelines’ fair trade ruling was that things should would be a very good home for it in terms of quality plainly arise from and support BBC programmes. of content and all the rest of it. I do not know the full Lonely Planet does not do that and I think that is the fundamental problem with Lonely Planet, despite all details but they had obviously made very little of the other things we are talking about in terms of progress in finding other purchasers or people to value and fair value and whether it was anti- invest, and a deal went oV like a train basically, and competitive in terms of the process. Actually, I think by all accounts from what we can tell from the those things do not even matter because I do not figures, the sums of money were very high compared understand why they were allowed to buy something to what one would have thought. I think if Lonely like that. Planet were sold today,my guess is that it is probably worth about £30 million or £35 million. There is a lot of fine detail, as you know, in our evidence of the Q48 Paul Farrelly: I take that point as the final background to this but there was floated the idea question. That is clearly the substantive point we will that there was an auction, that there was a want to consider. There is also the use and level of competitive process, but we remain unconvinced use of licence fee payers’ money. I do not want to that there was a genuine competitive process behind disparage, Lyn, your company, or yours, Tony, but that, and we felt that was being used to push the the Guardian Media Group is a quantum size above you and has access to lots of finance to buy 75% of Trust along quickly in its decision-making. We have the company, as has the BBC, but, Carolyn, when not heard any evidence from any person in the book you say that your bid could not compare, publishing business about serious bids for Lonely presumably in terms of the development of the Planet. brand and therefore the returns that flow through for Ms McCall: Could I reinforce that just simply by the extra 25%, the implication is that there is a nice, saying that the reason Guardian Media Group were juicy earn-out formula attached to the rest of the talked to about Lonely Planet was that our former shares that the BBC does not own in terms of either Marketing Manager is their Managing Director, so the owner’s future rewards or the management of we had a very informal conversation with them, Lonely Planet’s financial performance. which was so loose that it could not be construed as Ms McCall: At the moment Lonely Planet is losing a pitch for anything. We were surprised when it went money and I think it would be questionable over the to the BBC, and when we went back and asked what next two or three years, given the economy and the had happened, we were told there was no way advertising climate, whether that would make actually we could have competed with the BBC on money because it is advertising funded. Tony’s point that because what the BBC had to oVer was just so earlier: the BBC talk a lot about passion sites at the vast in comparison to a publisher, because of TV moment. When they talk about Top Gear as a rights and so on, that had we been interested in passion site or Good Food as a passion site, OK, it bidding, we would not have been able to put in a bid is competitive but we can live with that. When they that was in any way comparable. start talking about BBC Green as a passion site— Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Tony Elliott, Ms Carolyn McCall and Ms Lyn Hughes they do not have a programme called “BBC Green”. what they are going to bid for, we do not know what If you go to bbc.co.uk/environment you can access they are going to launch. It could be anything all their environmental coverage, you can access because public purpose could be interpreted in a natural history, science, nature. You can access all of number of diVerent ways. The post-2007 guidelines the BBC’s content, so it is available there for licence have said that they can do anything that ﬁts the fee payers. What they are doing is purely public purpose and that is what is causing us a commercial. They are saying, “We are going to signiﬁcant problem. create a new band.” When you look at this market, Mr Elliott: Could I just give some background to the again, there are at least eight websites already question because I think the point is important. The struggling to see where the return is going to come in world is now covered with an incredibly the area of environment. There is New Scientist, sophisticated licensing system for titles. We license there is ourselves, there is the Times, the Telegraph, Time Out in something like 22 countries now. If Telegraph Earth, a whole range of sites. There is Tree somebody decided to close down Worldwide Hugger, which is owned by Discovery. You just completely, your underlying question about the Top wonder why the BBC is being allowed to go into Gear magazine is that that, in today’s environment, something called BBC Green purely to make a would be taken up by licensees, and I cannot believe commercial risk. It is risk, so one, it is risky so it is there would be less money going back to the BBC at risking licence fee money, which they could be all. In fact, there might very well be more. So do not reinvesting in something like original and distinctive let them come in here and tell you you cannot make programming, and two, they are distorting the comments on that. market for commercial players because they can cross-promote, they can do a magazine and do all of Q51 Chairman: You have argued that the BBC’s this other activity. That for us is a massive concern. acquisition of Lonely Planet, or 75 % of it, is too far Paul Farrelly: We are coming to that. We just wanted removed from their core purpose and has no real to understand the circumstances around the Lonely relation. Did you not have conversations yourself Planet acquisition that made it so special, quite apart with the BBC about the BBC acquiring a stake in from them buying a brand. Time Out? Mr Elliott: No. That has been misinterpreted. The Q49 Chairman: Carolyn, you said that you did not background there is that there have been a number have a great objection to Top Gear magazine because of conversations over the last six, seven or eight it was clearly linked to a programme. Would you not years at diVerent points in time, a lot of them to do like to have the right yourself to publish Top Gear with Peter Phippen, who you obviously know or will magazine? know very well, about ways that Time Out might Ms McCall: We publish Auto Trader magazine so work with the BBC. One of the frustrations has . . . Actually no, I think they created the magazine, always been that they have always said that they did they launched the website and that is their not want to work with us either as a minority intellectual property, so no, I would not want to be shareholder or even on an arm’s length deal, that bidding for Top Gear unless it were for sale, and then they wanted to buy us, and every time I saw Peter I we would consider it. just said, “Why have you got brought that up again? You know that is not going to work.” Our view with Q50 Chairman: There is an argument in parallel to the BBC is that we say adamantly that we do Tony Cohen’s argument that the licence fee payer information which they do not do—information would get more money if it was put out to tender to about cities all round the world, obviously magazine publishers rather than have an in-house, information about London, which we could extend exclusive right. to other cities in this country—and, given that they Ms McCall: It depends on Top Gear, does it not? are a public utility, an essential public information Top Gear, it seems to me, is one of the most utility, why should they not integrate in some way important programmes for the BBC and it is also our information into their system? An example that one of the most important programmes that they I have often mentioned is that we would like to exploit in terms of rights. It is doing very well for the provide—and I had a conversation with Jenny BBC now. I cannot comment on Tony because I am Abramsky, which is that we would like to supply not in that sector. I do not know whether they could Time Out information to all their radio stations so get more money by putting that on the open market. that they had better information about what was From our perspective, although they are very happening with music, clubs and bars and things like diYcult to compete with and they have a website that. One of the underlying problems—and I think which is a very strong website, we understand the this is a really important long-term thing for the parameters by which they are doing Top Gear. It is BBC—is how they work with other brands in clear why they do it. Our issue is not about partnerships or relationships or whatever, competition with the BBC. We compete with them in particularly in this online, moving environment. virtually every sector we operate in, including radio, They cannot constantly say it has to be the BBC where they are completely unregulated and we are only. It is not a viable way through for the rest of the highly regulated. So we are used to competition with world for the future. the BBC. The issue for us is Worldwide’s boundaries have got so blurred, they are so wide, we do not Q52 Chairman: So you were looking to establish a know where they are coming from, we do not know commercial relationship with the BBC? Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Tony Elliott, Ms Carolyn McCall and Ms Lyn Hughes

Mr Elliott: Yes. programmes, the ones that fall into that sector, and indeed, in our next issue, which comes out on 20 Q53 Chairman: You said they insisted on talking November—which is the same date that the first about wishing to acquire the group but you gave the issue of Lonely Planet is due out—quite a impression that you would have been content for coincidence—we do actually have several BBC them to take a minority shareholding. personalities who have contributed to Wanderlust Mr Elliott: There was definitely a moment, I think such as Michael Palin, Kate Humble, and Jonathan about three or four years ago, when we were looking Scott, because they are all huge fans of the magazine for money to develop our online, where we asked and this is a very special issue for us. So yes, Worldwide if they would be interested in taking a obviously competition we know could come along at stake, and they said they would not be. any time. There have been a lot of titles that have launched against us in the past 15 years. At least a Q54 Chairman: Would that not have been far dozen, maybe as many as 20 magazines have removed from the core purpose of the BBC? launched against us. They have come and gone. We Mr Elliott: Not if it had been what I was trying to are not smug about that but we have worked very, talk to them about then, which was a conscious very hard to be in the position that we are in. I would policy eVort to have a close relationship with an question though why any travel magazine would be information provider who was doing something that launching at this time. Carolyn has already touched added to doing something they did not do and on the recession. Airlines are going out of business. therefore added to their oVering to the UK or the There is a very cold wind going through the travel rest of the world. I think that would be industry.Holidays are being slashed. I know that our straightforward. I think there are massive brand advertisers are finding it tough at the moment. The issues all the way down the line. phone has not been ringing for them for the last month or so. No other magazine publisher would be Q55 Paul Farrelly: I think the Manchester Evening launching a travel magazine at this time. If they said News would go berserk if you were tied up with the they were, we would think they were completely daft, BBC. so why is the BBC launching a travel magazine at Mr Elliott: I have said this on the record. We have this, the worst possible time? I can only think it is never, ever wanted an exclusive arrangement with because they are fairly smug, in that they know they the BBC in any field. I think, for example, on the have a safety net, they feel secure. They do not need Lonely Planet and the Worldwide Web site it would to make money. They have deep pockets. They could be appropriate for the BBC to have a button that carry this magazine, for whatever purpose they want says “travel” alongside “sport” or “news” and I this magazine for, for the next few years so that is think they should have information there from definitely unfair competition. everybody, frankly, as a host.

Q56 Chairman: Can we come to Lonely Planet magazine? Lyn, I know you are extremely concerned about the launch of Lonely Planet magazine. Do you Q58 Chairman: You have just announced the stake regard it as potentially a threat to the survival of your business? in Wanderlust that has been taken by Haymarket, so Ms Hughes: Very much so. The travel magazine clearly Haymarket view your future as perhaps business in the UK is relatively small. There are rather brighter than you do. several titles but the top three titles, which are Conde´ Ms Hughes: Yes. That was announced yesterday. Nast Traveller, Sunday Times Travel and ourselves, Indeed, one of the top publishers, Haymarket, has only sell around 100,000 copies in the UK between bought a minority stake in Wanderlust. They have us. It might be relatively small obviously because the been wanting to buy us for years and we have turned national newspapers, and indeed every magazine them down but they have actually now bought some and newspaper these days, cover travel themselves. shares from one of my shareholders. We are very The sort of readers that read Wanderlust magazine excited about it. It does oVer opportunities are those who are absolutely passionate about obviously to work with a bigger publisher with their travel, live and breathe it, always planning their next expertise and knowledge. However, the fact still is trip, it is an obsession, it is their life. 78% of our that we are an independent company, we are going readers use Lonely Planet guidebooks and every to be autonomous, it is the same team from the same year in our travel awards we have a prize for the top oYce. It is only a minority stake that they have guidebook company and it is voted by the readers, bought. and every year bar one Lonely Planet have won Ms McCall: Can I give you an example in another that award. sector of BBC magazine activity? An Australian company franchises a magazine called Delicious. Q57 Chairman: That is bad news for Tony. BBC Magazines bid for it. A company called Seven, Ms Hughes: We are very much in that territory. We which the Guardian Media Group owns 40% of, bid have always had very close links with Lonely Planet for it too. Seven was awarded Delicious. It now and we have always given the guidebooks very good publishes Delicious in this country. The BBC mentions. We have used a lot of their authors. Ditto: launched a magazine called Olive targeted at exactly we obviously publicise the BBC travel and television the same audience with a very similar style and tone Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Tony Elliott, Ms Carolyn McCall and Ms Lyn Hughes to Delicious. It has no programme called Olive. It not careful. I have absolutely no issue with them already has the Good Food magazine and it makes doing what they did pre 2007, although it is does very well on that. Delicious has never made a uncomfortable, it is competitive, it is aggressive, and profit and is going to struggle, I think, to make a it is from the BBC. They are no nicer than anybody profit in the future as a result of having what we else that we compete with. They are simply now believe was a spoiler in the market directly by the going so far away from their original guidelines, the BBC against a commercial venture. It was a diYcult fair trade rule guidelines, that they are creating market anyway, made far more diYcult by the uncertainty in the market. People cannot plan advent of a magazine which had absolutely no core against their activity. You do not know where it is content before a new launch. That is a really specific coming from and you do not know when it is coming example, and I can tell you that Delicious has not and you do not know what they are going to pay. been profitable and it has been in existence for four There is no banker that can tell you what the BBC years. would pay for an acquisition in a certain market because they do not follow the same economic rules as other companies. That is the principle and that is Q59 Paul Farrelly: Is that a deliberate example of the problem. pique at not being successful? Sour grapes? Ms McCall: I do not know. I would not want to Q61 Helen Southworth: I have a very quick question discuss their motives. I do not think they do things to ask about governance. Is the BBC Trust eVective out of spite. I think they actually sometimes do not in ensuring that BBC Worldwide does not create realise quite the consequence they have in the market failure and does not have a market failure commercial market. It is incredibly diYcult specific indicator when it is evaluating what operating in the magazine market and in the web investment it should go into? market. It was before the recession; it is going to be Ms McCall: No. much more diYcult now. Ms Hughes: But I do think in this case that this must be fairly deliberate, what they are doing with us and Q62 Helen Southworth: Or should they have one? how they have targeted us. We do not know what Mr Elliott: Yes, I think they should have as much as their motives really are but the fact is they are possible and we should be able to see it. When we coming out with their first issue on the same date asked for all the information on the Lonely Planet that we celebrate our anniversary, our 100th issue. acquisition, which was black and white, had a They are phoning round my advertisers and they are beginning, a middle and an end—we wanted all the undercutting our advertising rates. They are doing information and we asked for that under the special deals at the moment. When you look at the Freedom of Information Act—we only got 35% figures, they were putting forward quite a modest because a lot of it was censored, frankly. circulation figure that they are anticipating in the Ms McCall: It was not transparent at all. Mr Elliott: It was not transparent and it certainly next year, which is very much in line with what looked like they did not do it very thoroughly, Wanderlust and the other two main travel magazines frankly. sell. So when I look at the advertising rates that they are oVering my advertisers, I really do not see how the numbers stack up anyway and how they are Q63 Helen Southworth: Should there be a scrutiny going to make any profit. They are not, on those process on that specific point? rates. You have to question why they are doing it. I Mr Elliott: Yes. do think they are being deliberately aggressive. Ms McCall: Yes. I think one of the big issues about the Trust is it is not scrutinising the activities of Worldwide, nor does it seem are BBC management Q60 Paul Farrelly: We have seen some pretty vicious actually. So there are issues about transparency, spoilers and price wars in the newspapers, from clarity and scrutiny around Worldwide. Rupert Murdoch to the protection of the position of the Evening Standard. Guardian Media Group Q64 Paul Farrelly: The final question, and this is would not take kindly to somebody trampling over another area which is very uncomfortable for the its patch and threatening Manchester Evening News. BBC. You have mentioned the passion websites and Is your complaint that actually they are just being as the roll-out of more BBC websites. The question is, nasty as the rest of them? how appropriate is it for the BBC to accept Ms Hughes: They are, but you do not expect that of advertising on bbc.com websites? the BBC, do you? We love them. Ms McCall: In 2007 they made it clear that they were Ms McCall: I think it is not because of that at all. I going to carry advertising on bbc.com, which broke have absolutely no problem with competition. My a precedent. They did that because it was point is the point we have been talking about quite a international and the licence fee is not allowed to lot today, which is the principle: why are they fund international development. So, again, at least entering markets? Why are they embarking on there was some clarity around that. We would have a activities that are about acquisition, about creating significant issue, I think, if the BBC started carrying new brands, when there are already markets that advertising on what they called passion sites. For a exist? There is no market failure. They are going to start, we have an issue with what passion sites are. come in and create market failure if they are Are they core programmes or are they anything they Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 60 Culture, Media and Sport Committee: Evidence

4 November 2008 Mr Tony Elliott, Ms Carolyn McCall and Ms Lyn Hughes like? That is the first problem. The second is that as Mr Elliott: I just think it is disingenuous in the soon as they start carrying advertising, they are extreme to say that the world changes when you go carrying advertising on licence fee-funded websites beyond the White CliVs of Dover with online. It is eVectively, and that does not seem the right way to just ridiculous. There should be one agreed way of go because they will end up distorting the advertising doing things. market by doing so. Q66 Paul Farrelly: You are saying the wall has already been breached? Q65 Paul Farrelly: Have you seen evidence that they Ms McCall: Yes. I think at the moment they are are going to do that inside the firewall? selling ads on BBC Green. Ms McCall: They are doing that on BBC Green now. Chairman: We are going to have to move on to our There is a McDonalds advertisement on BBC final session but can I thank all three of you very Green already. much for your evidence.

Memorandum submitted by Radio Centre

Background 1. RadioCentre is the industry body for Commercial Radio. Formed in July 2006 from the merger of the Radio Advertising Bureau (RAB) and the Commercial Radio Companies Association (CRCA), its members consist of the overwhelming majority of UK Commercial Radio stations, who fund the organisation. 2. The role of RadioCentre is to maintain and build a strong and successful Commercial Radio industry—in terms of both listening hours and revenues. As such, RadioCentre operates in a number of areas including working with advertisers and their agencies, representing Commercial Radio companies to Government, Ofcom, copyright societies and other organisations concerned with radio, and working with stations themselves. RadioCentre also provides a forum for industry discussion, is a source of advice to members on all aspects of radio, jointly owns Radio Joint Audience Research Ltd (RAJAR) with the BBC, and includes copy clearance services for the industry through the Radio Advertising Clearance Centre (RACC).

ExecutiveSummary 3. We recognise that the inquiry will focus on the BBC’s Commercial Services but urge the Committee to examine any BBC Public Service activities which exhibit commercial characteristics, including “commercial trading activities”. 4. This broader perspective is important because of inherent weaknesses in the current governance framework for the BBC’s commercial activities, which blur the distinction between Public and Commercial Services. 5. A key way of addressing this would be to introduce genuine operational separation between Public and Commercial Services. At present, the BBC Executive has considerable influence over BBC Worldwide’s strategy,which we believe is inappropriate. There is also insuYcient transparency as to the approvals process for BBC Worldwide activities, which could be addressed with clearer external oversight. 6. The major area of competition between the BBC’s Commercial Services and RadioCentre’s members arises from BBC Worldwide’s activity as a publisher of live and on-demand audio, video and music content. We believe that this area justifies careful scrutiny, particularly as technological change alters the structure of the music industry. 7. In addition, there is also insuYcient clarity as to the terms on which the BBC is able to undertake commercial activity through its Public Services. Specifically, we believe that the category of permissible “commercial trading activities” is insuYciently well-defined, leading to risks of unfair market impact arising from practices such as giving on-air exposure to event sponsors. 8. RadioCentre also believes that the BBC eVectively sells its airtime if it allows a rights holder to factor the value of promoting a sponsor, product or service in BBC programming whilst negotiating a rights deal. We suggest a number of means of restricting negative commercial activity of this kind.

TheScope of theCommittee’s inquiry 9. We have inferred that the Select Committee’s inquiry focuses on the BBC’s “Commercial Services”, as deﬁned by the BBC Charter and Agreement, but that it will also investigate activity with commercial characteristics undertaken by the BBC’s Public Service arm. The division between each of these areas is laid out in the BBC Charter and Agreement 2006 and is, in our view, ambiguous. The Agreement states that “Any Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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commercial services must be provided through one or more commercial subsidiaries” but also that “The BBC as a corporation shall not directly provide any commercial services, but it may carry out other trading activities”.127 10. The existence of the latter category, “other trading activities”, or “commercial trading activities” as they are called in the BBC’s Fair Trading Guidelines, permits the BBC to undertake a range of commercial activity which does not require operational and financial separation through a subsidiary. 11. The scope of this category of activity is defined only by the BBC’s own Fair Trading Guidelines, which state that “commercial trading activities” are undertaken directly by the BBC’s Public Services “to promote the BBC’s Public Purposes but may—as a secondary consideration—also generate a profit”.128 Elsewhere, the Guidelines state that that “Commercial Trading Activities [. . .] are not operated with the intention of earning a profit—although they may do so in some circumstances”.129 It is unclear how “intent” to earn a profit would be identified, or what quantity of unlooked-for profit would be acceptable. 12. Therefore, while we recognise that the inquiry will focus on the BBC’s Commercial Services, we urge the committee to examine any BBC Public Service activities which exhibit commercial characteristics, including “commercial trading activities” and to investigate whether there is suYcient definition around such activity. 13. We believe that it would also be valuable for the Committee to investigate the BBC’s involvement in developing distribution platforms, including online platforms such as the iPlayer (Public Service) and Kangaroo (Commercial Service). Although this issue is outside the scope of this inquiry, we would welcome an opportunity to discuss with the Committee the impact that BBC-supported closed platforms have in terms of market foreclosure, either now or in the context of a future inquiry.

TheBenefits andOpportunitiesOffered by the BBC Undertaking aRange ofCommercialActivities in theUK andAbroad

14. We do not have any comment to oVer on the benefit of the BBC Public Services undertaking commercial trading activities. 15. The operation of the BBC’s Commercial Services has a number of potential public benefits. These may include: — ensuring that the BBC is recompensed for consumption of content by overseas audiences which do not pay the licence fee; — allowing UK audiences further opportunities to access content which is no longer available through public service channels or platforms; — in theory at least, allowing the level of the licence fee to be lower; and — showcasing British culture and perspectives internationally. 16. A somewhat more subtle benefit, but one which is of potentially greater significance to commercial operators, is the role which the BBC’s Commercial Services play in placing natural limitations on the scope of its Public Services. 17. For instance, by selectively monetising archive content rather than making it widely available in perpetuity for nothing, the BBC avoids flooding markets with content and undermining business models for distributing equivalent non-BBC content. A good example is audio and video from archive live sessions and concerts. If the BBC’s strategy was to distribute every piece of content of this kind in its archive via free- to-air public service platforms, it would undermine consumers’ interest in purchasing CDs, downloads or subscriptions oVered by Commercial Radio broadcasters, or in accessing ad-funded websites which oVer videos of live performances. 18. With appropriate safeguards, such as ensuring that the BBC’s commercial subsidiaries do not participate in anti-competitive closed platforms or retail content at below market prices, the BBC’s Commercial Services can have the eVect of maintaining appropriate limits on the scope of the BBC’s Public Service activities. To return to the archive audio content example, the BBC’s ability to distribute content which is more than seven days old through BBC Worldwide was a helpful justification for restricting the age of content available on BBC iPlayer. 19. We do not rule out the possibility that BBC Commercial Services could help to build new markets which commercial operators can exploit. However, there are not any obvious examples of this in the area that our members operate in—principally audio and music content.

127 BBC Agreement, (68) 1–2. 128 BBC Fair Trading Guidelines, (2.7). 129 BBC Fair Trading Guidelines, (2.28). Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

Ev 62 Culture, Media and Sport Committee: Evidence

ThePotentialRisks to the BBC, LicenceFeePayers and otherStakeholders

20. RadioCentre has interests in both the BBC’s Commercial Services (particularly BBC Worldwide) as well as its commercial trading activities (ie those activities undertaken by the BBC’s public service operations). The risks of the BBC undertaking either category of activity include that this might: — set price expectations amongst consumers; — lead to the BBC taking revenue directly from commercial operators; — shape the terms of licences available to third parties from copyright holders for the distribution of music or other types of content; — lead to the creation of dominant closed platforms, to the exclusion of commercial operators; or — inﬂuence the BBC’s strategy for meeting its public purposes through its public service arm.

Commercial services

21. In the case of the BBC’s commercial services, these potential risks ought to be minimised by the natural incentive to achieve optimal profitability and commercial eYciency, within the limits imposed by standard business and competition law. However, the privileged access which the BBC’s commercial operations have to BBC content and services acts as an implicit state subsidy, which heightens the risk of market distortion. 22. The major area of competition between BBC Worldwide and RadioCentre’s members is in publishing live and on-demand audio, video and music content. Commercial Radio stations such as Classic FM, Jazz FM, XFM and Absolute Radio are pursuing a strategy based on monetising audio and music content outside of a broadcast environment. This can be through podcasts, physical CD sales or online ad-funded on-demand video and audio clips of music (either recorded themselves, or licensed from record labels). 23. According to BBC Worldwide’s latest Annual Report, the Audio and Music department of its Home Entertainment division generated profits of £6.0 million on sales of £26.7 million in 2007–08. The Annual Report states that “the established BBC Worldwide music businesses had a strong year, with the licensing team celebrating a number of hit CDs including Live Lounge 1 and 2” and also mentions the agreement of a commercial deal with the record label EMI in May 2008 to “unlock the BBC archive of TV and radio material relating to the EMI stable of artists”. BBC Worldwide Audio and Music’s current five year plan lists the following objectives: — unlock the BBC archive and make more content available; — develop live music events; and — extend investment in new output. 24. Competition between BBC Worldwide and Commercial Radio is not new in this area, and indeed BBC Worldwide and Commercial Radio stations are themselves only part of a wider audio and music retail market. We believe that this area justifies careful scrutiny, particularly as technological change alters the structure of the music industry. 25. The Internet has a number of eVects on business models, and we are concerned that BBC Worldwide’s privileged scale, technology resources and access to BBC content means that it is unfairly well placed to capitalise upon these changes: (i) domestic and international markets blur, meaning that the rewards for success are potentially even greater, in so far as participants are able to secure international agreements for the use of content; (ii) the opportunity for the BBC to include web-links between its Public Services and Commercial Services creates the potential for cross-promotion between the two, unless careful safeguards are put in place; (iii) BBC Worldwide gains the opportunity to become a platform provider as well as a content publisher (meaning it could bar third party content providers from accessing a web-based platform on equivalent terms); and (iv) the Internet makes it cheaper to increase the volume of content made available and so harness the “long tail eVect”. This has the potential to flood the market with BBC content. 26. We believe that the risks of market distortion which flow from these factors could be minimised by improvements to the governance arrangements for the BBC’s commercial services, as outlined in paragraphs 40–42. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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Commercial Trading Activities 27. As outlined above, we believe that “commercial trading activities” (that is commercial activity undertaken directly by the BBC’s public service arm), are insuYciently well-defined, leading to risks of unfair market impact. 28. The BBC’s Fair Trading Guidelines include a non-exhaustive list of potential commercial trading activities, including licensing of content rights, securing investment by third parties in BBC productions and trading between diVerent parts of the BBC. A further area is listed which we believe lacks adequate restrictions as to its scope: “The provision of facilities, services and goods which are ancillary to the BBC’s Public Service Activities and in respect of which any charge is imposed primarily for the purpose of recovering costs/expenses. For example, the provision by the BBC’s Public Services of programme support material (eg booklets) or tickets for events.”130 29. RadioCentre’s concern about the ambiguity in the way that this area of activity is defined arose in the context of our complaint to the BBC and appeal to the BBC Trust about the presence in editorial of on-air credits for sponsors of BBC radio and television events programmes. 30. On-air sponsorship credits: Between December 2007 and July 2008, RadioCentre complained to the BBC and BBC Trust about the BBC’s practice of entering into agreements with sponsors to provide on-air credits on the basis that such activity was inappropriate and breached the BBC’s editorial and fair trading guidelines. One of our arguments was that seeking sponsors for events which feature in programmes should have been classified as a “commercial service”, meaning that it should be subject to operational and financial separation from the BBC’s public service activities. 31. The BBC Trust ultimately upheld our complaint on editorial grounds only, although the BBC Executive subsequently decided of its own volition to stop broadcasting sponsor credits in events programmes. We therefore assume that providing on-air credits to event sponsors remains legally permissible, presumably under the ambiguously defined category of “commercial trading activities” quoted above. The BBC’s justification for classifying the activity in this way is indeed that “any charge is imposed primarily for the purpose of recovering costs/expenses”, however we contend that this definition could be applied, albeit on a larger scale, to any of the BBC’s commercial services.

Other BBC Public Service Commercial Activities 32. RadioCentre would like to flag up a further area of activity which is eVectively commercial in nature, and which we believe lacks proper treatment under the current framework governing the BBC and its services. We have concerns that the BBC uses the ad-free environment of its programmes to obtain an advantage in commercial negotiations for content rights. 33. BBC content rights deals and on-air promotion of third party products and services: RadioCentre believes that the BBC eVectively sells its airtime if it allows a rights holder to factor the value of promoting a sponsor, product or service in BBC programming into a rights deal negotiation. This is regardless of whether there is an explicit reference to this in a written agreement, or whether any charge is involved, since payment may be implicit and in kind. Examples of programming aVected may include sports commentary rights on Radio Five Live or BBC Local Radio or an appearance by a leading chart-topping artist at a Radio 1 concert. 34. Particular risks arise as a result of the unbranded nature of BBC output, coupled with its sometimes very high audience figures. These factors mean that even very incidental references to brands, products or services in BBC programming can carry a high value. For instance, the BBC gains a tangible advantage in securing rights for Premier League matches due to its ability to showcase the Barclays brand in Radio Five Live output which is free of commercial references. This is even more the case in radio than television, since the BBC can control what listeners hear but cannot entirely obscure visual references to a sponsor at a televised event. 35. In a similar way, we also have concerns that BBC radio stations may promise to give on-air exposure to tracks by certain artists in exchange for their appearance at a concert associated with and broadcast on that radio station. 36. We therefore suggest that: — the BBC’s editorial guidelines should be revised to prevent any references to brands, products or services which are sponsors of content to which the BBC carries broadcast rights. This will ensure a level playing field in rights negotiations between the BBC and commercial broadcasters; — the BBC should be prevented from making any promises regarding product exposure to artists in exchange for access for concerts, live sessions, interviews or any other on- or oV-air context; and

130 BBC Fair Trading Guidelines, (2.7). Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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— the BBC should avoid signing any exclusive agreements for content rights, in order to avoid securing privileged access to content rights on account of oVering implicit payment in kind or other beneﬁts. 37. On the latter point, RadioCentre’s view is that the BBC should avoid signing any exclusive rights deals unless it is unavoidable to do so, on account of the risk of unfair market impact arising from such an approach and the loss of public value. However we recognise that this broader point may lie outside of the scope of this inquiry.

TheExtent to which the BBC’sCommercialActivities meet theCriteriaRequired of them 38. We understand that the BBC’s Commercial Services are required to comply with the following principles: — fit the BBC’s Public Purposes; — exhibit commercial eYciency; — not jeopardise the good reputation of the BBC or the value of the BBC brand; and — comply with fair trading guidelines and avoid distorting the market. 39. RadioCentre does not have any major complaints about any of the BBC’s current Commercial Services under the above criteria. However, we have identified risks of negative market impact in the area of online distribution in the area of online audio, music and video, as outlined above. If such activity is not subject to adequate scrutiny, it risks compromising the third and fourth criteria. We are also concerned that the BBC is able to undertake commercial activity through its Public Services which is not subject to equivalent criteria and governance arrangements, and believe that this should be subject to greater definition.

TheAppropriateness andEffectiveness of theGovernanceFramework for the BBC’sCommercial Activities 40. We have two major concerns about the governance framework for the BBC’s Commercial Services, as laid out in BBC Protocol D6—The BBC’s Commercial Services. These are over and above the concerns we outline above about the lack of definition regarding commercial trading activities and other commercial practices undertaken by the BBC’s Public Services. 41. Firstly, we believe that the BBC Executive’s oversight of BBC Worldwide undermines the operational separation between Public and Commercial Services. This creates the risk that the BBC’s strategy for meeting its public purposes may be influenced by commercial considerations. For instance, the BBC may be encouraged to increase its investment in Glastonbury coverage if it discovers that BBC Worldwide is able to derive significant revenue from post-transmission distribution of videos of live performances via an online music portal. To avoid this, we propose transferring responsibility for overseeing BBC Commercial services away from the BBC Executive. 42. Secondly, we believe that there is insuYcient transparency as to the approvals process for BBC Worldwide activities, which could be addressed with clearer external oversight. In so far as the BBC Trust does have a role in approving more significant BBC Worldwide services, such as the video on-demand service Project Kangaroo, the details of this scrutiny process are opaque. We believe that they should be subject to far greater transparency.

TheFuture of BBC Worldwide and other BBC CommercialSubsidiaries 43. The role of BBC Worldwide played a key part in the recent debate surrounding the level of the BBC Licence Fee. As part of the 2007 settlement, the BBC’s Commercial Services are expected to provide an increasing share of the BBC’s Public Service operating costs. As BBC Worldwide’s importance grows, and as it expands into new areas and exploits the Internet, we believe that there is a clear rationale for greater operational independence from the BBC Executive, allied with tighter external scrutiny. 44. We do not rule out a future privatisation as a means to ensure that BBC Worldwide does not gain an unfair advantage from its relationship with the BBC, although RadioCentre is not calling for this at present. 45. Another area of debate which the inquiry is likely to cover is the extent to which BBC Worldwide should enter into exclusive partnerships with other non-BBC organisations, either through joint ventures or other revenue sharing arrangements. We have concerns about any instance in which a particular broadcaster or organisation receives preferential assistance from the state which is not available to other operators within that market and are therefore opposed to signiﬁcant activity of this kind. This is due to the likelihood that this will distort markets. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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How theMoneyReturned to the BBC by itsCommercialOperations isInvested 46. Any proﬁt generated by the BBC’s commercial operations should be used to reduce the amount of licence fee funding required by the BBC. If the level of proﬁt exceeds expectations, the BBC should return money to licence fee payers, to ensure that it is not overcompensated. This also has the eVect of promoting eYciency. 47. We are concerned that the current BBC governance structure acts as a disincentive to licence fee revenue being refunded. The BBC Trust’s duties to ensure that BBC content is of a high quality may take precedence over such considerations, highlighting potential tensions in its responsibilities. We suggest that this would merit investigation by the Committee. October 2008

Memorandum submitted by the Newspaper Society 1. Britain’s local media is a £4 billion sector delivering trusted, relevant news and information to over 40 million people a week across its print, online and broadcast channels: — 1,300 core newspapers; — 1,100 websites; — 750 magazines; — 36 radio stations; and — 2 TV stations. 2. Publishers are harnessing a powerful combination of print and digital to layer their local markets, extend audience reach and deliver ever greater advertiser response. 3. Regional media companies have become increasingly concerned about the BBC’s regional and local aspirations, especially as it develops its online ambitions. Despite the recommendations of both the Graf review and the BBC Trust’s review of the bbc.co.uk service, the BBC replicates the services oVered by the commercial media rather than develop distinctive content. Yet, unlike the commercial media, it can exploit the unique combination which it enjoys of discretion to pursue the broadest range of activities under its Charter, internal Governance arrangements, licence fee funding, the strength of the BBC brand and powerful cross-promotion opportunities. 4. The BBC’s new ambitions to colonise the nations and regions, without regard to the long established independent commercial (multi-media) sector illustrate the problems created by the present system. The Charter, purpose remits and service licence are all deliberately broadly drawn so as to give the BBC unrivalled freedom of action. The governance structure has yet to prove that its lack of independent standing does not preclude independent decision-making. And the BBC Management has still to put forward publicly any new system of local controls, checks and balances which could convince the commercial sector that it will eVectively police and enforce the restraints by which its commercial and licence fee funded operation are supposed to be bound. The regional media is particularly concerned by the eVectiveness and eYciency of any new controls over bbc.co.uk and its regional focus. 5. Indeed, our members do ﬁnd it rather extraordinary that the BBC can draw upon its public service obligations and turn the severe criticism of the standards of its current service into an argument for the same service’s expansion, funded by the licence fee. They were also somewhat disconcerted by the way that the BBC Trust in announcing the launch of the PVT whereby it will decide whether or not the BBC should be allowed to develop its regional and local services, greeted the BBC’s application as a response to their criticism and challenge to improve. 6. Our members are united in opposition to the BBC’s proposal to develop its online regional and local activities in direct competition with the regional media. This is currently the subject of a Public Value Test. Companies have explained how the BBC would undermine their future business strategy by taking audience and the advertising revenue upon which the independent regional and local media depend. The BBC’s licence fee funded activity will be in direct competition with the editorial, advertising and other commercial services oVered by the regional and local media. It is jeopardising companies’ future business strategies at the most critical time for the industry’s digital development and diversiﬁcation, (including monetising websites and online services), against the most diYcult economic backdrop. Our members in their evidence to Ofcom and the BBC Trust have explained the devastating impact that this could have upon the independent regional media and local plurality. 7. The BBC has a history of commercial exploitation of the strength of its brand, cross promotion, and public service activities at regional and local level. It has launched services from swap shops to listings to publication of regional magazines which have competed for audience and third party advertising revenue with the commercial media. In the past, successive Director-Generals have had to intervene. The NS itself had to raise the possibility of service licences having express prohibitions against provision of advertising Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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services, public assurances that the BBC would not be launching new advertising services, and express exclusion of direct provision of advertising services within the BBC’s Local Video application. However, even such assurances were dependent upon the discretion of the BBC and its governance machinery. 8. There is a danger that the BBC will indeed be allowed to expand its services, with the advantages of licence fee funding and cross-promotion, precluding the regional commercial media from facing it on equal terms and in fair competition, entrench itself and further weaken its commercial rivals—and then be permitted to expand into commercial activities, whether sponsorship, advertising or other services, across all or any part of the multi-media platforms and services at its disposal. The BBC’s Local Video proposals already demonstrate its interest in developing links which would undermine public sector advertising, sports relationships and other sources of revenue for the independent commercial media, which cannot compete against the strength of the BBC brand and cross-promotional activities. The industry fears that the current system will not prevent such damaging commercial expansion of the BBC. 9. The industry had hoped that the last Charter renewal would lead to independent oversight over the BBC’s activities. It has yet to be convinced that the new system will deliver the rigorous controls necessary. We hope that the Committee will consider some of these wider issues in the course of its inquiry. October 2008

Witnesses: Mr Andrew Harrison, Chief Executive, RadioCentre; Ms Sly Bailey, Chief Executive, and Mr Paul Vickers, Group Legal Director, Trinity Mirror plc; and Ms Santha Rasaiah, Director of Political, Editorial and Regulatory AVairs, Newspaper Society, gave evidence.

Q67 Chairman: For the final part of this morning’s 320 small commercial radio stations, dotted around session I welcome Sly Bailey, the Chief Executive of the country in each of your constituencies. On Trinity Mirror, and Paul Vickers, the Group Legal average each station has a turnover of only £1 Director; Andrew Harrison, the Chief Executive of million or £2 million. Those fledgeling small RadioCentre; and Santha Rasaiah, the Political, businesses in each constituency are then competing Editorial and Regulatory AVairs Director of the against the BBC for audience and need to secure Newspaper Society. Can we perhaps start with advertising revenue in the wider media market. That audio? Can I ask you, Andrew, what impact the puts a great challenge, I think, on a small sector growth of BBC Worldwide is having on your when it is competing with music labels, when it is members? competing for exclusive content for artists, when it is Mr Harrison: The major impact the growth of BBC competing for sports rights, all those sorts of things Worldwide potentially has on our members is the which should facilitate strong programming focus potentially on audio, video and music content content. It is a real challenge to do that against a going forward. Like a number of your earlier strong market player and a strong state intervention witnesses, we have seen many of the diYculties of the in the BBC. potential lack of separation between the role of the Trust and the role of the Executive of the BBC and then indeed the role of the management of BBC Q69 Alan Keen: If I can give you an example of my Worldwide, separating out what are specific own obsession, football, in Middlesbrough, Teeside, activities that are legitimate within the commercial and there was a lot of discomfort when the BBC took operations of Worldwide and what potentially risk over the exclusive commentary. I think they got all foreclosing markets or distorting markets. This is a the big three north-eastern clubs. What would you particular concern for us from a radio and audio like to see happen other than that? We cannot give perspective going forward because of the potential preference to stations just because they are small. I opportunity the BBC has to monetise their very very rarely listen to anything other than the BBC. extensive audio archives that go right back to, for Having switched on LBC by mistake a few mornings example, the beginnings of popular music and so on ago and heard Nick Ferrari lying to his listeners, I do and the opportunity to distort markets as they then not think I will ever listen to it again, frankly. Is it a potentially make that content available for sale. good thing to protect small stations? I like competition. I always worked in the private sector before I came to this strange place so I understand Q68 Alan Keen: There is going to be an even bigger competition. If it is good to have competition—and debate than we are having now about the BBC over it is—what can we really do? The BBC is the next few years. First of all, would you elaborate magnificent. You have heard the last panellists all a little further, Andrew, on how you feel the BBC saying it is wonderful but it hurts them. This debate should run itself when you are looking at is very important. What would you like to see us competition with your aYliates. recommend to try to protect these small radio Mr Harrison: The commercial radio sector is a very stations? small sector, quite a fragile part of the UK media Mr Harrison: If you take, for example, the football landscape. For perspective, the total turnover in the rights, which is a very interesting point, the vast sector is about £600 million, not much more than majority of Premier League football rights in the £500 million when you take away the commission we UK are owned by the BBC, as you will know. They need to pay for advertising revenue. So we are a very can broadcast two matches live on a Saturday at small sector. That small sector is made up of around 3pm on Radio Five Live and Radio Five Live Sports Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Andrew Harrison, Ms Sly Bailey, Mr Paul Vickers and Ms Santha Rasaiah

Extra, as well as matches at other times. The only Q71 Paul Farrelly: This is the local online video national commercial sports station, talkSPORT, services that have caused quite a lot of controversy. also bid for those Premier League rights but it could I come from Newcastle-under-Lyme, which is in only aVord to bid for one of seven packages which StaVordshire, and I must say that the BBC’s were oVered by the Premier League. Local radio experiment with ultra-local TV in StaVordshire then has the chance to bid for the local rights for came and went without many people, including each of its sports teams. For example, on Teeside myself, noticing. This seems to be the same proposal that may well be TFM competing for the rights for in a diVerent guise, just streaming it through the Middlesbrough Football Club or Sun FM internet. The question for both radio and print is competing for Sunderland or Metro competing for why should people not welcome this as another Newcastle United. In a lot of instances those local source of local news and content, particularly if the rights are then also secured by BBC Local because BBC is as good as its word in not attracting they have the resources to bid for those local rights advertising? and, of course, each local club will go to the station Ms Bailey: It is a broader point than that. We do not oVering the most money. So you have a double mind competition. You have heard that from many jeopardy, if you like, that on a national basis it is speakers this morning. It is unfair competition that very diYcult to compete and then additionally on a we are objecting to. We all love the BBC. Again, we local basis it is very diYcult to compete. Some have heard that numerous times this morning. The intervention that gives the opportunity where there question is, would we love it quite as much if it were is commercial demand for rights holders to be given the only thing that we had? A test might have come an opportunity to bid for those rights without the and gone but we are now talking about £68 million distortion of the BBC, with guaranteed funding, that of public money and 65 regional websites containing can outbid commercial operators securing all the local video. Again, we have heard this morning that talent and content on exclusive long-term deals. video is an integral part of success on the web but it is diYcult to monetise it. Our business online is driven by advertising revenue and to generate Q70 Chairman: I am slightly concerned that we are advertising revenue we have to have eyeballs. If the straying a little way from the commercial activities. BBC come in and distort the market for eyeballs, Obviously, this is a core BBC activity. In terms of then there is not an audience there for us to Worldwide, the BBC is dominant in the radio sector, monetise. That is really in essence what we are with a 56 % or thereabouts audience share. It complaining about. I think it goes further than that obviously has a lot programme content which is because, in addition to these new 65 sites with video, valuable. You presumably would accept that that what the BBC are also proposing to do is to launch a content should be made available through map-based news service. This is the real killer blow. podcasting and CD sales and downloading. Is it They are doing it without reference to further your argument that the BBC should not be doing consultation, because apparently—and we do not that? understand how this is able to go through—they are Mr Harrison: No, not at all. We fully accept that. I doing it within the terms of their existing licence. It think the diYculty comes when the BBC’s market is a map-based news service that allows the user to dominance and access to content, either archive or eVectively personalise that content down to their potentially in the future on an exclusive basis, risks local postcode area, which competes directly with foreclosing nascent markets or setting market levels the regional press both in print and online. You that make it very diYcult then for the commercial heard from Carolyn this morning that we are radio sector to make a return. For example, any essentially all saying that digital is crucial to the audio podcast that, for example, Classic FM may success of local journalism. It is not a “nice to have”; want to launch to support its own revenues will be it is a “must have”, and we are all going as far as to dictated by market price that, for example, would be say that the regional newspaper industry will not whatever Radio Three is also oVering on podcasting survive without a successful digital future. Yet, once facilities and so forth, and inevitably that means that again, we have an example of the BBC coming in some nascent markets are foreclosed or the market with an enormous amount of resource, an enormous pricing is not suYcient for the commercial sector to amount of investment, that simply dwarfs what be able to generate a return. So you end up with a anyone else is able to do. That will distort the market vicious circle almost, that the BBC has access to and it will preclude us from investing. Therefore we great content, can launch into a market and, with a are back to plurality of voice and the role that we potentially dominant role, it then forecloses the know these great brands, these great institutions market. A commercial competitor cannot make a play in our community. They are honest, they are viable return, therefore does not enter the market, so apolitical, they are responsible and they are accurate you end up with the BBC as the sole provider. I sources of news, and we should be very fearful about suspect that is not what any of us want in terms of losing them. the plurality of provision and diversity of service in Ms Rasaiah: Can I just stress that that is not just a the market. It is when they use their market power concern of Guardian Media Group and Trinity potentially to distort or foreclose nascent Mirror. It is a concern of the entire regional commercial markets for smaller operators. newspaper industry, from the big groups to the Chairman: I think we had better move on to the issue family-run titles. They all share the same problems which I know all of you are keen to raise. and the same concerns. It threatens all of them. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Andrew Harrison, Ms Sly Bailey, Mr Paul Vickers and Ms Santha Rasaiah

Ms Bailey: The point as well is that our concern is to aggressively compete in areas where it simply does not theoretical. It is about real jobs, real businesses not need to be. All organisations need parameters and real people. and they all need targets. Coming back to Worldwide—and I have a lot of experience in Q72 Paul Farrelly: I can understand the concerns. dealing with Worldwide in my previous company, They need to be put very forcefully to the BBC, as IPC Media, where, as a magazine publisher, we indeed the questions about their ultra-local TV competed directly with BBC Worldwide as a service. The reality for many of us, as Members of magazine publisher. I also sat on the Lord Burns Parliament, around the country, is that in terms of Charter Review panel in 2004–05. The problem we regional newspapers, one newspaper typically in are seeing with the BBC right now is, in its quest to many areas has a monopoly and therefore serve all audiences, it is clearly without parameters sometimes it is very diYcult—and I am a journalist as a result of that. I would say to you that the by background—to see the best standards management are out of control and the Trust are not sometimes in journalism if there is a monopoly in control. We have ended up almost with the worst supplier. So many of us welcome the presence of of all worlds. If you think about what the Burns BBC radio and independent radio as an alternative Committee proposed, which was a board of outlet. Indeed, some of us have set up websites with directors made up of executives and non-executives public funding through Parliament to be able to that very much complies with the Combined Code have an outlet for news that the papers not might not and that sets the strategy, the performance, the day- choose to cover or choose to cover when it suits to-day governance issues, and then sitting behind them. Why should this, in terms of plurality for the that, to regulate, we have the Public Service consumer of access to local news, not mean that Broadcasting Commission. If you look at what we actually the BBC’s initiative is welcomed? are seeing right now, with the Trust and the board, Ms Bailey: The point is that it is a fallacy to think clearly it just is not working. that we have monopolies in our markets if you think about who we now compete with. The world is now multi-platform. Consumers and advertisers readily Q74 Paul Farrelly: I want to ask about radio in a move across platforms for their sources of news and moment. Are you saying that, in terms of information. So on the one hand, we are competing commercial also, were you to try and enhance the with Google and Right Move both for content and websites of your regional papers in the way the BBC advertising, with radio, with other websites. All sorts is doing it, it simply would not be commercially of plurality is there. What I would say to you—and viable for you to do that? let us not overlook this—is that the regional Ms Bailey: What I am saying is these are new newspaper business is going through a fundamental businesses, they are embryonic businesses and they process of transformation to allow it to be able to are fragile. They need lots of nurturing. They need compete successfully in the future, and that is multi- lots of development. We carry approximately five media. It is a very diYcult transition for us to make videos on our site today. We are continuing to and we are all doing the very best that we can at it. address that. That will continue to grow but the BBC The pressures that we have are both cyclical—the will immediately come in with something that current economic situation that we are facing—and dwarfs our ability to do that because they do not structural, which largely comes from digital. This need a commercial return. We have to be able to year so far we have closed 44 local newspapers generate a commercial return to make money to stay because we simply cannot find a way to sustain them. alive—it is as simple as that—and they do not, but it They are simply not going to be profitable going is not just the video. We absolutely should not forward. This will just add to the tensions and the overlook this map-based news service which is pressures in the market and our ability to continue coming in underneath the radar, which is a real to invest in local journalism, where we are going to threat to regional media. have to invest online because that will be an integral part of the future of local media. I think the important thing is to think about what we are doing Q75 Chairman: Can I just challenge you on one as local media, not just local newspapers and point? You have talked about the lack of therefore who the competition really is here. parameters, the lack of boundaries. A lot of the evidence we had earlier this morning was about how Q73 Paul Farrelly: Would any of your concerns be the BBC is getting into areas which have no relation lessened if, for example, the BBC were forced to give to programming, far removed from the core a commitment that it would not simply aggregate purpose. Ofcom’s PSB2 research shows that the type local news stories out of newspapers in the way that of public service broadcasting that the viewers most some of the online products do already from other value is local news. Local news has always been companies, or secondly, that they should, as a local absolutely core to what the BBC does. Arguably it service, provide prominent links to websites of local is going to become more important because ITV is newspapers? getting out of it. Is it not arguable that, if people Ms Bailey: No, I think they should not be doing this. want to access video content via the Web rather than We have heard this morning that the BBC has lost through scheduled television, the BBC needs to sight of its strategy. It has lost sight of its purpose. It adapt to that behaviour and needs to make available is too big, too unwieldy, and it is using public money its local news on the Web? 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4 November 2008 Mr Andrew Harrison, Ms Sly Bailey, Mr Paul Vickers and Ms Santha Rasaiah

Ms Bailey: We cannot look at the BBC just in Mr Harrison: They decided not to. isolation. We have to look in following that strategy and allowing that to happen at the consequences on Q78 Chairman: I want to come back to Sly’s point. the rest of the media market. I say again, we all love I have seen a demonstration of it and I agreed with the BBC but would we love it quite as much if it were you. From your point of view, if I were sitting in all we had? That is a very real prospect that we will your chair, it is the map-based system which is really be facing in regional media. scary but, even with the map-based system, I looked Ms Rasaiah: Also, I think it is debatable that it has at stories around my constituency. There were likely actually been core, the local news service of the BBC only to be probably two stories ﬂagged within a ten- to date. In fact, the BBC is being encouraged to go mile radius of where I live. Two stories compared to into the regions and localities, almost to colonise the number that appear in a local newspaper—there those with services. is no real comparison. A local newspaper provides The service that the BBC is oVering is not just local far greater depth of coverage and a far bigger video. Let us not forget it is also news, sport, number of stories than anything that is going to entertainment, user-generated content, which is the appear on the BBC site. most local of things. The BBC describes it in terms Ms Bailey: But are we really sitting here and of local, personalised service, whether by postcode thinking, with £68 million and 300 journalists, once or mapping and so on. That is the intention of the we have the search parameters eVectively at that BBC, to go in there. level of personalisation and that ball starts rolling, It is not the case in the past that the BBC has been where that will be in one, two or three years time? I able to launch the equivalent of local and regional do not sit here and think that will be two stories at newspapers in print. Why should it be allowed to do that point. I think this will be a major plank in so online, and why should it be allowed to do so their strategy. using public funds?

Q79 Chairman: You know the BBC has given Q76 Chairman: It is not launching the equivalent of undertakings about not going down any closer? a newspaper. It is making available its video local Ms Bailey: But the users will do that for them. Once news online rather than simply on television. you have a map-based news service, it will happen. Ms Rasaiah: If you actually look at the service That is what makes it hyper-local. description, it is not only local news video online. There are also huge swaths of user-generated content which is local news supplied by local people; Q80 Chairman: They have also said there will not be sport, which is also local and regional news; more than a few stories. They have actually said they entertainment, what is going on in the area, which is will put a cap on the number of stories. also local and regional information; and also it will Ms Rasaiah: Those limits do not actually work. If be duplicating areas, for example, that local you look at the limits, yes, they are saying there is a newspapers already deal with in terms of news, cap but, ﬁrst of all, there are all kinds of exceptions, sport, entertainment, local government coverage for whether it is the Welsh and English language example. To answer your question in terms of why services, whether it is the London service. The BBC should the BBC be allowed to do these things, it is will also be allowed to update stories constantly. not actually oVering anything new in those areas. In There are also whole sections of the service which are respect of local government coverage for example, outside those caps; for example, user-generated local and regional newspapers are already content, which is essentially news stories provided developing services with local authorities, from from the localities, exactly what local and regional webcams to questions and answers over the online newspapers are doing. Those are outside those caps. services. The BBC is not oVering new services. It is Also, of course, if you actually look at the way those actually competing head-to-head with the services caps are going to be regulated, it is retrospective, already oVered by newspapers. over a year. What kind of checks are there going to Ms Bailey: It is not distinctive. It is absolutely not be to ensure that they are kept within the limit? distinctive. There are all kinds of loopholes in terms of live Mr Vickers: You say they are currently providing streaming, emergencies, special events. We really do local television and local news. It is not as though doubt that even those caps are going to be at all they are taking what they are currently doing and eVective. just releasing it on a diVerent medium. They are going out, spending £68 million of new money, Q81 Paul Farrelly: If we made a brave assumption hiring 300 new journalists. It is a completely new that those journalists the BBC are recruiting for strand, a new service. To take up one of the points these new local services are not going to be chasing that Mr Farrelly made earlier on, he said they tried cats up trees or chip pan ﬁres in small villages, is ultra-local video and failed. This is just coming back there an argument to say that actually competition through the back door, trying to do something that drives quality and sets a challenge in terms of quality they were not allowed to do before. for the regions that they, like the national press, should rise to it? Q77 Chairman: It was not that they were not allowed Ms Bailey: We are inundated with competition, to do it. It was that they decided not to proceed quite frankly, online. We are absolutely inundated with it. with competition. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Andrew Harrison, Ms Sly Bailey, Mr Paul Vickers and Ms Santha Rasaiah

Q82 Alan Keen: We have had people sit in front of service. That is not being done. There has been us who have said the BBC should not be allowed to unilateral change to the timetable, which prevents have a website at all. They should stick to radio and regional newspaper companies—and others TV. But they have produced it and it is a wonderful interested—from actually considering the market service. I have always looked at the local papers, and impact assessment and the public value assessment I still read them in my constituency but to go down before the BBC Trust’s provisional finding is to the shop and buy it, and it is static, that does not published, in order to be able to make comments on compare with the internet. Mirror Group have to them, or to be able to comment on Ofcom’s market move into that very seriously. How long do you impact assessment and make those points to Ofcom think local papers can survive? They cannot survive before they are taken into account by the BBC Trust. for more than ten years, can they? Finally, the point that has already been made really, Ms Bailey: They can survive in pursuing a multi- that the BBC Trust should be taking care that there platform strategy where newspapers can then sit should be public confidence in the integrity of the eVectively alongside online and mobile. In our Test and that it does actually conduct an objective company we now publish over 300 websites and Public Value Test. circa 150 newspapers. So look at the investment already. In your own constituency we have an award-winning online site, the website of the year in Q84 Chairman: You have also criticised Sir Michael fact. This is a hugely important part of what we are Lyons for making public comments in support of the doing, and we should not underestimate how service before the Trust has completed its review. important our ability to do this is in what is already Ms Bailey: In a speech he made an astonishing a very competitive environment. We understand attack. It was an absolutely astonishing attack from that, we live with that and that is the way of the someone who is supposed to be regulating, not world. What we are objecting to is this level of unfair championing the BBC. He actually said, “Nobody competition, which will squash what we are can be satisfied with the quality of local news in most attempting to do and therefore the future and the parts of the UK.” It sounds to me as if his mind is plurality of local media. already made up in terms of going through that process, and that the public value test is a sham. Mr Harrison: May I come back to Mr Farrelly’s Q83 Alan Keen: This is really interesting. We are original question? You asked why almost from a here to represent our constituents. We want to take licence fee perspective or from the public’s a major part in this debate. Give us a chance. Give perspective, the consumer perspective, should we us some advice. Without saying to the BBC, “You not be pleased about this potential intervention can’t do it any more. We’re going to regulate you. because of the benefits of plurality. I think the case You can’t have websites any more,” tell us how. Do I would make from the commercial radio perspective we tell them to do it badly instead of in an is just to highlight the very real dangers that I think excellent way? this could lead to from plurality, because I think it Ms Bailey: I think it is back to purpose. It is back to could lead directly to the closure of a number of intent. It is back to strategy. The point is in a radio stations which are designed to reinforce that multimedia world the BBC can literally roar around plurality. Remember that local radio is quite heavily the world, it seems to me, as we have heard this regulated. In each local area there are regulations morning, doing pretty much anything they want to. around the provision of two local services plus the Yesterday through the Newspaper Society we BBC. So in your constituency Signal in Stoke and launched a legal challenge to the Trust because we there are a number of other services round about. feel also, not just in terms of looking at the potential outcome but the process that they are going through is fundamentally flawed. Q85 Paul Farrelly: It is a great station, Signal. Ms Rasaiah: Yes. First of all, the point that has been Mr Harrison: I am delighted to hear it. There are, I made before: on the one hand, you have the BBC think, three reasons that this is very concerning to Trust encouraging the BBC to extend these local the commercial radio sector and I think are very services with taxpayers’ money. On the other hand, germane to this debate. The first is the size and scale it is supposed to be acting as the independent of the intervention. It has been talked about quite regulator that is going to determine whether there is clearly and vociferously and elegantly from the a public value in, and the market impact of, the newspaper perspective but it touches on something I service. said earlier on. Commercial radio is a small sector. The Committee has been circulated the letters from The total turnover of commercial radio is smaller the Newspaper Society’s lawyers to the BBC Trust than Trinity Mirror Group. As a result, when you and Ofcom which are questioning the process. have an intervention of £68 million, £23 million Information is being asked of the BBC which ongoing, that is huge in scale compared to local regional newspaper companies consider imperative radio. that they have in order to assess its impact. That is not being given. Ofcom’s market impact assessment is expected to look at the eVect on the local Q86 Paul Farrelly: It will be spread fairly thinly, will markets—each individual local market—of the it not? Processed: 31-03-2009 23:30:03 Page Layout: COENEW [O] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Andrew Harrison, Ms Sly Bailey, Mr Paul Vickers and Ms Santha Rasaiah

Mr Harrison: It is £1 million across 60-plus diVerent Q87 Paul Farrelly: Sly’s point I understand. It drives sites. To take the context, £23 million a year worth eyeballs away from the growing website activities of of investment is three times the market capitalisation the regional newspapers and by extension of The Local Radio Company which is the biggest potentially away from traditional print form. Is your local radio company outside the major groups. The argument that it is driving eyeballs away from your small local radio companies that service local websites or ears as well from your radio? communities are either part of regional newspaper Mr Harrison: I think both are true. Self-evidently, if groups, like Kent Messenger Group, like Tindle, like you have this major investment in a new local media CN Group, which are small, self-standing, form, the BBC is going to be driving licence fee independent groups. This absolutely dwarfs the payers and consumers to want to interact with that scale of investment those stations could make but it site. Every minute they are interacting with that site has two critical knock-on eVects, which is where I is a lost opportunity for them to be consuming the think there is a real risk to ongoing plurality. The local radio, particularly when a large part of the first is that the media base for radio in the UK has reason to listen in and tune into local radio is what been worked out over the last few decades and exists is the latest news, what is it about school closures, in fairly close harmony. The BBC traditionally has what is the traYc situation, the very stuV that is been licensed to have national services, Radios One, going to be pumped through in real time on its Two, Three, Four and Five and so on. The website. So we will lose listeners and the same commercial sector has only ever, by and large, been argument then follows as Sly articulated, around licensed on a small local basis. Traditionally BBC losing listeners means we will lose revenue but the Local has targeted the over-fifties audience and left longer-term impact in many ways worries me most, the under-fifties, which is the audience that is which is around the plurality and diversity of the attractive to the commercial sector, pretty much journalistic base in a local market, in 60 local alone in terms of the way the ecology has evolved. markets.2 If you are an aspiring young journalist just This proposal, very clearly, in the BBC’s submission, out of college, it is pretty obvious: where are you is designed to tackle audiences under the age of 45. going to apply for a job? Where are you going to For the very first time BBC local radio’s footprint want to work? Are you going to work for the will start to go much lower. Remember that the 65 organisation that has this guaranteed funding, the services the BBC are proposing are based on their ability to cover ten new local stories a day in video local radio footprint. It brings the audience much and post them online. The opportunity for plurality younger and it begins to oVer a service directly and diversity of news coverage and journalistic designed to appeal to younger people, directly excellence I think will be completely swamped by designed to take audiences to BBC websites as the such a huge intervention in the marketplace so initial portal rather than to the websites that we are quickly, and particularly, of course, at the present trying to take our own listeners to and on which, as time. The chances of the commercial sector doing Sly has touched on, we depend for revenue. There is anything to try and match this and replicate it right a real risk that the site and the scale and the audience now is non-existent. It genuinely risks putting a large distortion will threaten the viability of the fragile number of small local commercial radio stations out economy of local radio. The final point, however, of business. It will have the complete opposite eVect which I think is critical is also around plurality. This on plurality that I think is potentially an unintended is an extraordinary intervention in local markets to consequence. One of the concepts that we have been journalistic resource. All local radio stations, as part trying to articulate with the Trust and with Ofcom as of their licence format, are committed to provide we have talked about this is considering the net local news. They are required to be based in their public value that is the result of these proposals. local service area. They are required to employ local Whether or not you agree there is public value at all, journalists covering local stories. All of a sudden you and clearly the newspaper groups have articulated have a licence fee-funded intervention whereby up to their position, this is clearly a proposal where there ten stories a day can be covered with local video. is a tension between some potential public value on That is an extraordinary number of stories. With 65 the one hand and some clear market impact on the 1 sites you are talking about 650 diVerent stories. other. This will be a diYcult decision. We Most local news, with the best will in the world—and understand that, but the net public value that we we have talked about cats up trees and chip pan would argue is going to be generated by this fires—ten stories is a diVerent lead item on the news proposal is clearly very negative. If the BBC ends up every hour between eight in the morning and six at spending a large amount of public money launching night. That is every story that will ever have happen a new service that in the end reduces plurality in local in a town covered with a local video link by the BBC, areas, reduces journalistic competition, takes with cross-promotion from the radio station audiences away from local radio stations and directing consumers to the website. In terms of a deprives local radio stations of the opportunity to small local radio station’s ability over time to both build nascent online businesses themselves, that net attract journalistic talent, train and develop that public value is severely detrimental to the overall talent, and provide a competitive service to compete plurality of the media ecology in the UK. with the BBC on an ongoing basis, that will quite clearly be impossible. 2 Note by Witness: The BBC is proposing 65 sites in 60 areas. The 5 Welsh areas will have sites in both English and Welsh. 1 Note by Witness: The BBC is proposing 65 sites in 60 areas. This explains the disparity with the “65 sites” figure The 5 Welsh areas will have sites in both English and Welsh. quoted above. Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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4 November 2008 Mr Andrew Harrison, Ms Sly Bailey, Mr Paul Vickers and Ms Santha Rasaiah

Q88 Chairman: In local markets, do you accept there Q89 Chairman: The assurances that the BBC have is any validity in the charge that newspapers have given that they have no interest in getting into the been pretty slow oV the mark, and actually in large areas which generate your revenue, like classiﬁed part the content available online is still pretty advertising and dating and selling cars and inadequate? advertising jobs, do not make it any better? Ms Bailey: Newspaper website of the year, 300 Ms Bailey: It is a red herring because it is the eyeballs launches so far? No, I do not. Clearly, we do have to that generate the revenue and their particular focus make a commercial return, so we are not able to will be news and sport, and those are absolutely the enter markets in the same way that the BBC does heartlands of regional media. because we have to make that commercial return, Chairman: You have given us plenty to raise with the but I would say that that is absolutely false. BBC in two weeks’ time. Thank you very much.

Supplementary memorandum submitted by FremantleMedia During the oral evidence session last week, you requested further information to support the points we raised, particularly in relation to the benchmarking issue. In this note I have taken the opportunity to cover: 1. Benchmarking: BBC programmes put onto the open market (attachment). 2. Points of clariﬁcation to our oral evidence. 3. Response to the BBC’s written evidence (attachment).

1.Benchmarking: BBC Programmes putOnto theOpenMarket During the discussion of the benchmarking process you asked if I would send across a list of BBC programmes being handled by distributors other than BBC Worldwide. Please find a list attached (see Appendix).131 We have tried to make it as complete as we can, but there may well be programmes that have escaped our research. However, it supports the point we wanted to make, which is that the few BBC- produced programmes to find their way onto the open market are those of limited international commercial potential. Although the list contains programmes of the highest quality, none of these programmes has substantial international value. A benchmarking process which relies on market values established on the basis of the prices achieved for these programmes will significantly underestimate the overall value of the BBC’s output. A small proportion of commercially successful projects will create the majority of the value; these shows are not represented on this list. Transfer prices will be set much too low on the basis of these benchmarks. Amending or improving the benchmarking process cannot resolve this problem, because benchmarking can never capture the results of an auction and relies on the availability of information relating to the prices paid for the BBC’s most popular and commercially attractive shows, like Blue Planet, Jane Eyre or Dr Who. None of these shows has been oVered to the open market, so there is no information on which to base benchmarks. The only way to establish the true market value of commercially attractive shows is to allow the market to bid for them.

2.Points ofClarification I thought it might be helpful if I clariﬁed our response to a couple of the points raised during Tuesday’s discussion.

The “net loss” issue Helen Southworth raised an important issue when she asked whether there would in fact be any net loss to the BBC even if BBC Worldwide’s initial bids were low, since in the end the value is determined by the total revenue generated, and this all eventually returns to the BBC. It’s an astute point, and deserves a clear response. There is a potential net loss, because diVerent distributors will generate diVerent levels of revenue from the same project. We discussed Merlin on Tuesday; let me use that as an example. One of the reasons Fremantle’s distribution division (FID) was able to bid successfully for the rights to Merlin (which was produced by an independent production company, Shine, and therefore the rights were open to bidding) was that FID believed it could make a US sale to a broadcast network, whereas BBC Worldwide would have based a bid on the value of a US sale to the BBC’s cable channel BBC America. In the event, FID was able to make a sale to NBC: the revenue generated from that sale was somewhere between three to ﬁve times the revenue that would have been generated from a sale to a cable channel like BBC America. More importantly, the prestige value of a US network sale has a very signiﬁcant knock-on impact on further international sales

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and on ancillary exploitation on the US. This enabled FID to conclude international sales with top tier broadcasters and US home entertainment deals at greatly improved rates. This eVect is very significant: we estimate it doubled or even tripled Merlin’s overall distribution and ancillary value. We do not wish to suggest that other distributors will always be able to generate more revenue than BBC Worldwide; however, diVerent distributors have diVerent strengths and weaknesses, which will be revealed in a bidding process. The BBC will turn first to its own channels, like BBC Entertainment and BBC America, to sell programmes from its catalogue. In some cases, such as Merlin, this will constrain the revenue the BBC will be able to generate. On a catalogue of material as large as that produced each year by the BBC, increasing returns on even a small proportion of projects can make a very significant diVerence.

Underpaying and overpaying—the common theme Philip Davies raised the question as to whether there is a conflict between our assertions that BBC Worldwide may be both underpaying and underpaying for rights. The circumstances are diVerent in each case: — BBC Worldwide may be underpaying when it buys programme rights internally from the BBC. — BBC Worldwide may be overpaying when it buys programme rights from third parties, such as independent producers. The common theme linking under and over payment is growth: both of these behaviours are fuelled by the desire to expand the scale and scope of BBC Worldwide’s sphere of operations. Both these assertions are consistent with the broader picture of BBC Worldwide that emerged during the course of the morning’s session. The picture was of an organisation pursuing a path of energetic growth, but not subject to the same restraining forces as other players in the marketplace. On one hand, BBC Worldwide is not as constrained as its commercial competitors by the need to generate a market level of return on its capital, and on the other it is not greatly impeded by regulatory or remit constraints. The result is an organisation focused on building itself. In the hands of energetic management, public sector bodies which are given access to publicly-funded assets tend to be subject to this temptation. The purpose of our submission to the Select Committee is to find a way of steering BBC Worldwide’s dynamism in directions which benefit the licence fee payer, but which also do not distort the marketplace and undermine competition to the detriment of the sector as a whole.

3.Response to the BBC’sWrittenEvidence I attach a brief response to the BBC’s written evidence, (printed at Ev 201) focusing on four areas of concern to FremantleMedia: — Investment in overseas production. — Interpretation of the remit for BBC Worldwide. — Commercial eYciency—the relationship between the BBC & BBC Worldwide. — Fair trading and governance. October 2008

Supplementary memorandum submitted by Radio Centre

BBC ExclusiveContentRights Whilst giving oral evidence to the committee on 4 November 2008, Alan Keen MP asked me for my views on the BBC’s approach to securing radio commentary rights for sports fixtures. In responding, I outlined the diYculty which Commercial Radio stations face in competing against the BBC for content and rights at both a local and national level. This note supplements my oral evidence with a proposal regarding the BBC’s approach to securing content rights on an exclusive basis. Commercial Radio supports the role that the BBC can play in sustaining competition and plurality in the UK radio market. However, the dominant position which the BBC occupies within radio (around 58% of industry revenue in 2008 and 55% of listening) reflects a growing advantage in terms of scale and funding versus the commercial sector. This gives the BBC an advantage in securing broadcast rights for valuable content strands. Football commentary rights oVer a good example of the eVects of the BBC’s advantageous position. In 2007, talkSPORT became the first Commercial Radio station to secure national commentary rights for Premier League football. However it did so as much by default as through any heightened purchasing power. The same European Commission ruling which ensured that Sky Sports could no longer monopolise television rights for football (facilitating Setanta’s entry to the UK market) ensured that at least one of the Processed: 31-03-2009 23:30:03 Page Layout: COENEW [E] PPSysB Job: 418648 Unit: PAG1

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seven packages of rights had to be awarded to a bidder other than the BBC. Where rights remain in a single package, such as the recently awarded FA rights for England international and FA Cup matches, the BBC is able to retain all the rights. The BBC’s advantage in bidding for sports rights arises from its superior ability to pay for rights which are oVered by the rights holder on an exclusive basis. OVering rights exclusively allows a rights holder to play oV rival bidders against each other and so maximise income. This also has the eVect of driving up the cost of sports coverage for Licence Fee payers. One solution to this would be to prevent the BBC from bidding for the most appealing rights. However, this solution is not necessarily practical or desirable. A more eVective remedy would be for the BBC should adopt a policy of refusing to sign exclusive rights deals, where this is possible. This would have a number of benefits: — allowing Commercial Radio stations to carry appealing content without preventing the BBC from acquiring the same content rights; — broadening the potential reach for coverage of sporting events; — catering to a wider range of listeners than those identified in the BBC Radio Five Live and Local Radio Service Licences (male-focused and over 50s respectively); — reducing the cost of rights, and so improving value for money for licence fee payers without impairing the BBC’s ability to secure those rights; — increasing competition between BBC and Commercial Radio and so stimulating the overall quality of radio output; and — strengthening plurality of viewpoints and editorial perspectives within radio. In summer 2008, the BBC Trust released a report on the Economic Impact of the BBC, including analysis from PwC. This identified the BBC’s impact on Commercial Radio as a key area for scrutiny, and stated that the Trust would “ask the BBC Executive to examine how it can improve co-operation with the radio industry”. A change in BBC policy on securing rights represents a key way in which the BBC could deliver this and so help to sustain the growth of the Commercial Radio sector. November 2008 Processed: 31-03-2009 20:29:46 Page Layout: COENEW [SO] PPSysB Job: 419632 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 75

Tuesday 18 November 2008

Members present:

Mr John Whittingdale, in the Chair

Janet Anderson Alan Keen Philip Davies Rosemary McKenna Mr Nigel Evans Mr Adrian Sanders Paul Farrelly Helen Southworth Mr Mike Hall

Statement submitted by the BBC Trust

Introduction The Trust’s role with respect to the commercial activities of the BBC is distinct from that of the BBC Executive. This statement sets out that role and explains how the Trust has fulﬁlled its responsibilities for oversight of the BBC’s commercial activities in practice over its ﬁrst 18 months of existence. A separate submission, prepared by the BBC Executive and agreed by the Trust, containing further information about the operation of the BBC’s commercial services is also attached.

Context The BBC has undertaken some activities on a commercial basis through most of its history. Successive Governments have encouraged it to generate as much income as it can on behalf of the licence fee payer. The most recent charter review reaYrmed this principle but also established a clear framework for control.

TheTrust’sRemit The Trust is the guardian of the public interest in the BBC. It is responsible for ensuring that licence fee payers get the best value from the BBC’s services and it holds the BBC Executive to account for its delivery of the BBC’s public purposes. It takes a close interest in audience opinion, engaging directly with audiences and also through the Audience Councils to assess, from the perspective of licence fee payers, how well the BBC is fulﬁlling its public purposes. Through its purpose remits and service licences the Trust has set the broad strategic direction for the BBC’s public services and established mechanisms for performance measurement. It assesses new public service proposals (such as iPlayer) using its Public Value Test framework and keeps existing services under regular review (it is currently reviewing the provision of childrens’ services). The Trust has an overarching duty under the BBC Charter1 to have regard to the competitive impact of the BBC’s activities on the wider market. The BBC Agreement2 sets out in more detail the regulatory framework which applies in the case of the BBC’s commercial activities and the Trust’s remit. Under the Charter and Agreement the Trust’s general functions include: (i) setting the overall strategic direction of the BBC within the framework set by the Charter and Agreement; and (ii) approving high-level strategy and budgets in respect of the BBC’s services and activities in the UK and overseas (Charter, Article 24(1)(a) and (b)). These general functions apply across the full range of BBC activity, including its commercial services. Article 3(3) of the Charter provides that the BBC may maintain, establish and acquire subsidiaries through which commercial activities may be undertaken to any extent permitted by the Agreement. The Agreement requires: — that a commercial strategy to be adopted by the Executive Board and approved by the Trust (Clause 72); — that the commercial services should be organised separately from the “core” BBC (Clause 68); — that BBC commercial services should be provided through commercial subsidiaries, not directly by the BBC; and

1 http://www.bbc.co.uk/bbctrust/assets/ﬁles/pdf/regulatory framework/charter agreement/royalchartersealed sept06.pdf (Article 23(e)) 2 http://www.bbc.co.uk/bbctrust/assets/ﬁles/pdf/regulatory framework/charter agreement/bbcagreement july06.pdf (Clauses 68–74) Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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— that all of the BBC’s commercial services must comply with four criteria (Clause 69). It also sets annual reporting requirements (Clause 74).

GovernanceStructure The BBC Worldwide Board is accountable to the BBC Executive Board, which is in turn accountable to the BBC Trust. Under the BBC’s commercial governance framework there are three independent non-executive directors: Etienne de Villiers (also Chairman), Simon Clift and Thomas Geitner. In addition, the public service non- executive directors, Jana Bennett, Nicholas Eldred and Zarin Patel, represent the interests of the BBC. BBC Worldwide communicates regularly with the BBC, its ultimate parent company, and the Trust. It presents its strategy, ﬁnancial results and budgets to the BBC and Trust for review and approval and certain other matters are referred to these bodies for approval and authorisation. The non-executive directors share responsibility for carrying out the Board’s duties, although their participation is largely supervisory. They bring an external dimension to BBC Worldwide’s corporate governance and provide independent advice. Their responsibilities include: — providing strategic and operational advice and direction to the Board; — reviewing performance of the Board and eVectiveness of the directors; — ensuring appropriate standards of conduct and ﬁnancial probity; ensuring a robust and appropriate internal controls environment is embedded in the business; and — compliance and governance.

TrustOversight of the BBC’sCommercialStrategy The Trust has adopted and published a protocol3 which explains its role in relation to setting the strategy for the BBC’s commercial services. The protocol explains that whilst responsibility for developing and gaining approval for the BBC’s commercial strategy lies with the Executive Board, the Board must ensure that this strategy is developed and presented according to the Trust’s requirements. In this way the Trust maintains appropriate distance from the operational work of the BBC Executive and maintains the independence that is necessary for it to hold the Executive Board to account for the performance of the BBC’s commercial arm. In deciding whether to approve the draft strategy, the Trust takes account of the following factors: (i) The objective that the BBC should relieve pressure on the licence fee by seeking to maximise commercial revenue within appropriate areas and by returning value to licence fee payers by reinvesting profits in the BBC’s Public Services. (ii) Assurance that the strategy fits with the framework for determining what commercial activities it is appropriate for BBC to engage in, as set out in the Charter (Article 3(3)) and the Agreement (Clause 69). (iii) Whether the strategy covers an appropriate period taking into account the need for stability, planning in relation to the financial contribution that the commercial business is expected to make to the BBC’s public service funding, and the pace of change in the market. Trust approval of the BBC’s overarching commercial strategy does not signal agreement to items within it of individual strategic significance, or in any way limit the discretion of the Trust in relation to its decisions on proposals requiring its approval. These are considered on a case by case basis once suYciently developed. In accordance with the above arrangements the Trust approved a commercial strategy for BBC Worldwide in March 2007. This strategy responded to the challenge set by the BBC to maximise commercial revenue, in appropriate areas, to reinvest in programming and talent to the benefit of licence fee payers. The main growth areas were digital business and increasing BBC Worldwide’s operations outside the UK. Following earlier scrutiny by the Trust’s Finance and Strategy Committee the strategy also included specific analysis of merger and acquisition opportunities. Updates on progress against the strategy are required at least annually, and changes to the plan require Trust approval. In February this year the Trust instigated a review of the BBC’s commercial activity, the aim of which is to reassess BBC Worldwide’s strategy and governance arrangements. Terms of reference were agreed with the BBC’s Executive Board and the BBC Executive, which is conducting the review, is expected to report its findings to the Trust in November. Similar principles apply in the case of the BBC’s other two active commercial subsidiaries—BBC World and BBC resources.

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BBC World BBC World is subject to a separate business plan which sets out its strategy, budget and targets. The four commercial criteria apply to BBC World’s activities and any new service propositions must be subject to assessment against those criteria. In the case of BBC World, the assessment of commercial eYciency must be made against the ﬁnancial targets set in the business plan agreed by the Governors. BBC World performance is monitored through quarterly ﬁnancial reporting arrangements.

BBC Resources Whilst the principles in this protocol apply to BBC Resources, the activities of this business are, at present, subject to separate governance arrangements. The Trust agreed to a sale process for the business and, in March 2008, agreed that the Outside Broadcast part of the business should be sold. It was agreed that two other parts of the business, Studios and Post Production facilities, should not be sold at the present time. BBC Resources’ performance is monitored through quarterly ﬁnancial reporting arrangements.

Arrangements forAssessingProposedChanges to BBC CommercialServices The Trust has set out arrangements for governance and scrutiny of new service proposals and changes to existing services in a separate protocol. This sets out the basis on which it will be determined whether Trust approval is required, and also the framework of criteria against which the Trust will make its assessment of such proposals. A new or changed commercial service proposal is subject to approval from the Trust itself where it: (i) Involves an investment or divestment in excess of £50 million; or (ii) Falls outside the strategy for the BBC’s commercial services as approved by the Trust; or (iii) In the UK, represents entry into a wholly new market sector for the BBC’s commercial services. In addition the BBC Executive Board must consider referring any proposal for consideration by the Trust where it believes that (i) matters of wider strategic signiﬁcance for the BBC may be raised; or (ii) the good reputation of the BBC may be jeopardised. Most proposals do not require Trust approval. They are subject to the same requirements and assessment criteria as those referred to the Trust, but decisions are taken, depending on the scale of the proposals, at executive or main board level in BBC Worldwide, BBC World and BBC Resources with input in many cases from the BBC Executive. The framework against which all proposals are assessed, whether by the Trust, the BBC Executive or the relevant commercial subsidiary, is the four criteria, set out in the Agreement. No new/changed commercial service proposal should be approved unless it: (i) Fits with the BBC’s Public Purpose activities; (ii) Exhibits commercial eYciency; (iii) Does not jeopardise the good reputation of the BBC or the value of the BBC brand; and (iv) Complies with the principles set out in the Fair Trading Policy and with the Fair Trading Guidelines, and in particular, avoids distorting the market. In all cases the relevant commercial subsidiary must secure sign-oV from the relevant specialists in the BBC Executive against each of the four criteria.

TrustConsideration of“Kangaroo”Proposal The Trust has not, at this stage, considered detailed proposals for BBC participation in the proposed “Project Kangaroo” joint venture. It did, however, give its approval in principle in June 2007 for the BBC to proceed with the development of such proposals with joint venture partners. At that stage the Trust made clear that the proposals, once fully formed, would be subject to approval by the Trust. The framework against which the Trust will need to evaluate any ﬁrm proposition if it is put forward by the BBC Executive is the four criteria, set out in the Agreement, that apply in the case of commercial services. Since the proposals were referred by the OFT to the Competition Commission at the end of June, the Trust has maintained contact with the Commission and oVered its assistance. Whilst most of the Commission’s work has focused on the proposed joint venture partners, the Trust’s Chairman has agreed to meet with the Commission. If the BBC Executive decides to bring forward ﬁrm proposals for Trust consideration, the Trust will require the Executive to submit their assessment of the proposals against the four criteria. The Trust will consider this as part of the evidence on which it would base any decision. Whilst we do not anticipate the BBC Executive being in a position to make such a submission until the Competition Commission has Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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published its ﬁndings, we are working to ensure that the Trust is kept informed as the deal proposals evolve so that, should it have diYculty with what is emerging it will have an opportunity to say so before the Commission reaches its conclusions. October 2008

Memorandum submitted by the British Broadcasting Corporation (BBC)

ExecutiveSummary Commercial activity by the BBC began as long ago as 1923 with the introduction of Radio Times. Successive Governments have encouraged the BBC to increase commercial revenues in order to relieve pressure on the licence fee. Government research has found that our commercial activities are supported by the clear majority of licence fee payers. The BBC’s primary commercial subsidiary, BBC Worldwide (BBCW), has the size and brand recognition required to compete on an international scale, maximising the benefit to licence fee payers and opening doors for other British businesses overseas. We ensure that, as the Charter and Agreement require, all BBC commercial activities: — Fit with the BBC’s public purposes; — Exhibit commercial eYciency; — Do not jeopardise the BBC’s good reputation or the value of the BBC brand; and — Comply with the BBC’s fair trading guidelines, in particular by avoiding market distortion. These rules (the four commercial criteria) are enforced through the BBC’s governance framework overseeing all commercial activities (see section 5 below). BBCW seeks to fully realise the commercial and cultural value of the BBC’s audiovisual archive, thereby maximising the financial benefit to licence fee payers and contributing directly to the BBC’s public purposes. BBCW has no access whatsoever to licence fee income. However, over the last three years BBCW has provided the BBC with dividends of over £200 million and direct programme investment of over £260 million while also developing its own capacity to deliver sustainable returns to the BBC in the future. It creates value equivalent to nearly £9 for each licence fee.4 The BBC’s commercial operations are a key component in delivering our fifth public purpose: “bringing the UK to the world and the world to the UK” and in promoting Britain’s image overseas. They also support the BBC’s other public purposes. Upfront investment in BBC programming as a result of the sale of programme rights enables BBC programmes to be made which would never otherwise have got oV the ground. Landmark examples include Planet Earth, Cranford, Doctor Who and In the Night Garden. International distribution of both BBC branded television channels and websites is increasing the reach of BBC content significantly. But BBCW cannot simply export UK content without taking account of local audiences and so the local production of proven BBC TV formats is an important enabler of this opportunity. The international scope of the market for UK content is widening. We continue to serve our established markets in Europe, but we are now investing to deliver revenue and profit growth in USA, India and Australia, and making initial moves to enter the emerging markets of China, Latin America, Eastern Europe and South Africa. The BBC’s commercial activities provide the BBC and the wider UK creative community with an internationally recognised export platform—enabling us to foster and promote the best of UK talent, both from the BBC and the independent production sector. In this way we are fulfilling our aim, as described in the Charter Review Green Paper, “to showcase the widest possible array of UK talent and secure the best possible deal for UK plc”. In addition, BBC commercial operations result in significant returns to the UK creative economy: over the past four years, as a result of the activities of BBCW, around £1 billion has been generated and invested back into UK creative talent (see subsections 2.7–2.20 below). The BBC exploits appropriate commercial opportunities through its own in-house distribution arm (BBCW). The main alternative would be to license content directly to unconnected third parties, and seek to build in the necessary safeguards into the terms of those contracts. With its unique public purposes and dependence on its reputation for high editorial standards—the BBC has judged in-house distribution to be the most eVective means of safeguarding and promoting those purposes and standards while capturing the full value of BBC IP. It is worth noting that every other major media group favours in-house exploitation of commercial opportunities (see subsections 4.18–4.20 below).

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Despite its preferred supplier status, BBCW is required to bid at market rates. Its eVectiveness in exploiting rights has been recognised by the wider industry: BBCW has been voted by its peers the best programme distributor in three out of the last four years in the annual Broadcast survey. BBCW must also work within a strict Fair Trading framework to ensure stewardship of the BBC brand and to protect against market distortions. Compliance and wider governance arrangements are in place to ensure these obligations are met. BBCW’s current ﬁve year strategic plan aims to ensure that BBCW remains a signiﬁcant commercial enterprise renowned for high quality, trustworthy and distinctive content that sets it apart from its major international competitors. Like all similar strategies, this is subject to periodic review. A major review of this type took place in 2004 and another review, instigated by the BBC Trust with terms of reference agreed between the Trust and Executive Board, is ongoing.

1. Introduction 1.1 This is the response of the British Broadcasting Corporation (BBC) to the issues set out in the 18 July 2008 announcement by the Culture, Media and Sport Select Committee (the Committee) that it was launching an inquiry into the commercial operations of the BBC (the Inquiry). 1.2 The BBC welcomes the opportunity to respond to the questions contained in the Committee’s first call for evidence and is pleased to engage with the Committee on the broader topics raised by those questions. 1.3 The BBC recognises that the Committee’s principal focus will be on BBC Worldwide (BBCW) and so this submission reflects the BBC’s views as BBCW’s “parent company”. 1.4 This submission is structured so as to respond directly to the various issues that the Committee has raised: (i) Section 2 demonstrates how the BBC in practice meets the four criteria agreed with the Secretary of State (the four commercial criteria); (ii) Section 3 gives an overview of BBCW’s business and strategy and briefly explains how the BBC invests the revenues and profits from BBCW; (iii) Section 4 sets out the BBC’s view of the potential benefits and risks from the BBC engaging in commercial activities of the kind undertaken by BBCW; (iv) Section 5 outlines the framework of checks and balances which ensure that the BBC meets the various criteria agreed with the Secretary of State; and (v) Section 6 concludes by providing a summary of the future for BBCW over the coming decade. 1.5 This submission also briefly addresses (at Section 7) the BBC’s other commercial activities, BBC World and BBC Resources.

2. The BBC’sRecord inMeeting theCriteriaAgreed with theSecretary ofState(TheFour CommercialCriteria)

This section demonstrates how the BBC in practice meets the four criteria agreed with the Secretary of State and also highlights how much of the BBC’s success in meeting the specified criteria is attributable to BBCW’s status as a controlled BBC subsidiary 2.1 The BBC has engaged in commercial activity since the launch of Radio Times in 1923 and the Government’s support for that activity also has a long history. BBCW’s predecessor, BBC Enterprises, was set up in March 1979 with the support of the then Labour Government. Support for commercial activity continued under successive governments; support typified by the Rt Hon Virginia Bottomley MP when, in 1996, she wrote to the Chairman of the BBC that “The BBC must take full advantage of the new commercial opportunities which are now available.” In 2000, the Rt Hon Chris Smith MP wrote to the Chairman of the BBC in 2000 arguing that “[. . .] faster gains in eYciency and commercial activities will be needed [. . .] it should be possible for the BBC to [. . .] increase commercial revenues.” Support for BBC commercial activities continues today, with DCMS Minister, Gerry SutcliVe MP, stating this year that “The BBC should seek to maximise commercial revenue in appropriate areas and reinvest it in programming and talent to the benefit of licence fee payers.”5 2.2 BBCW’s core business is the commercial exploitation and export of the BBC brand and BBC content. Yet BBCW’s scale and capabilities as a global media business also give rise to opportunities to distribute non-BBC content and thereby earn additional revenues for the licence payer. The most recent BBC Charter Review encouraged BBCW to develop these opportunities:

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The BBC should not restrict itself to the sale of BBC programmes. It should look to work closely in partnership with other UK broadcasters in developing its programme sales strategy. It should use the scale and power of BBC Worldwide to showcase the widest possible array of UK talent and secure the best possible deal for UK plc.6 2.3 Licence fee payers have also expressed their support. Government research to inform the latest BBC Charter Review gave an overwhelming endorsement for the BBC to use “all responsible methods” to oVset the licence fee. In findings subsequently confirmed by the Government’s Green Paper consultation, 90% of those surveyed agreed that the BBC should raise as much money as it can from selling its programmes and other products.7 Clear support for the BBC continuing to undertake commercial activities beyond just TV sales was also confirmed by other responses. 92% of participants thought that the BBC should continue to sell programmes, and 93% said it should continue to sell other products like books, DVDs and magazines. 2.4 But Government and the BBC have always been conscious that the BBC’s commercial activities must be consistent with the BBC’s public service mission. Speaking in the House of Commons in March 2005, for example, the then Secretary of State Tessa Jowell said: “We want the [BBC] to maximise its income from commercial services, but we also want to see a clear link between those services and its public purposes.”8 2.5 The BBC’s commercial services are therefore now governed by the requirements set out in Clauses 68–74 of the BBC’s Agreement with the Secretary of State (Cm 6872). Those clauses require that the BBC’s commercial services must: (i) Fit with the BBC’s public purposes; (ii) Exhibit commercial eYciency; (iii) Not jeopardise the BBC’s good reputation or the value of the BBC brand; and (iv) Comply with the BBC’s fair trading guidelines, in particular avoiding market distortion. 2.6 A full explanation of how the BBC discharges its duty to ensure the above criteria (the four commercial criteria) is provided in Section 5 below.

Fit with BBC’s Public Purposes 2.7 The BBC’s public purposes are set out in Article 4 of the BBC’s Royal Charter and are as follows: (i) Sustaining citizenship and civil society; (ii) Promoting education and learning; (iii) Stimulating creativity and cultural excellence; (iv) Representing the UK, its nations, regions and communities; (v) Bringing the UK to the world and the world to the UK; and (vi) In promoting its other purposes, helping to deliver to the public the beneﬁt of emerging communications technologies and services and, in addition, taking a leading role in the switchover to digital television. 2.8 By exploiting BBC content commercially and exporting UK content around the world BBCW generates investment in the UK and takes Britain to the world. BBCW’s direct contribution to the BBC’s public purposes focuses on two of the purposes, as follows.

Stimulating Creativity and Cultural Excellence BBCW fits with the BBC’s purpose of stimulating creativity and cultural excellence by: giving an international platform to other UK creative content; supporting independent production companies—in particular smaller entities who harbour significant talent yet are finding it increasingly diYcult to develop and grow in this concentrated sector; and facilitating the development of creative talent.

6 March 2005 Green Paper: A strong BBC, independent of government http://www.bbccharterreview.org.uk/have your say/ green paper/gp roleofbbc.pdf 7 What you said about the BBC, DCMS (2005). 8 House of Commons OYcial Report, 2 March 2005, Col 959. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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BBCWW: Dividends, Programme Investments and Other Payments (£m)

300

250

104 88 200 Programme Investments (BBC, indie 94 for BBC and third-party 150 Dividends Paid 76 75 78 100 57 Other rights acquisitions and 16 i nvestments in talent 50 77 76 90 91

0 2004–05 2005–06 2006–07 2007–08

2.9 In the coming year, BBCW will invest around £150 million in UK produced programmes via partnerships with co-producers, dividend payments to the BBC and other acquisitions. These levels of investment enable the BBC to create the large scale or high risk projects like Planet Earth and Cranford for which we are famous. The UK production community benefits directly from this investment. 2.10 Gaining upfront investment in programming in exchange for programme rights is standard practice among all major media players (including, for example, ITV in the UK, NBCU, Disney-ABC and TimeWarner in the US and ProSieben in Germany). It is an essential way of broadcasters spreading the considerable risks inherent in programme production, above all, the diYculty of predicting audience successes at the stage of commissioning. As well as oVsetting risk to the distributor (which in BBCW’s case has a carefully balanced portfolio of investments of varying degrees of commercial risk), upfront investment brings other benefits. First, it allows the distributor to maximise revenues through activity (eg. publishing a programme-related book) at the time of the programme’s Public Service broadcast. Second, it commercially incentivises the distributor to work harder at monetising programmes in order to recoup the advance payments it has made. Importantly, upfront investment does not negate possible future commercial returns to the BBC; rather both the BBC (as producer) and the distributor benefit in the longer term from commercially successful programmes through profit-sharing or BBCW dividend payment arrangements. 2.11 Since the introduction of the new Terms of Trade for Independent Production in 2004 (as a result of the Communications Act), the market for rights owned by independent producers has become increasingly competitive. BBCW competes openly for these rights (including rights in programmes commissioned by the BBC) with other distributors, including ITV Worldwide, Fremantle and RDF. All rights in independent productions which BBCW acquires are as a result of an active choice by a producer to use BBCW as a distributor. 2.12 BBCW plays an increasingly important distribution role for the “long tail” of smaller independent producers who exist outside the group of a dozen “super-indies” such as IMG, All3Media, Endemol, Shine, Hit Entertainment, Talkback Thames/Fremantle, RDF, Shed, and Tinopolis. According to PACT figures, super-indies now generate nearly 70% of the sector’s total £2.14 billion revenues, and 87% of the sector’s growth. They also increasingly conduct their own distribution. Smaller players without their own distribution facilities value BBCW’s role as distributor and supporter of their business, as BBCW allows them to gain international exposure that otherwise would not be open to them: — First, BBCW has access to an extensive network of overseas broadcasters, who like dealing with BBCW as a single selling point for a variety of high quality content. These customers recognise BBCW’s ability to gather a wide range of quality content across a range of genres and respect the BBC’s good name. — Second, BBCW acts as a “platform” for both in-house and independently produced shows. Channels (like BBC America, BBC Entertainment) carry a wide range of UK content, including programmes from “super indies”. Exposure to contemporary UK programmes on BBC America has been the catalyst for programme formats to be purchased by US networks and re-made as local versions—such as The OYce and Ramsay’s Kitchen Nightmares. And the US networks have also subsequently gone on to purchase content directly from Indies—a “pull through” eVect that is clearly of benefit to the UK’s creative industry as a whole. JeV Zucker (President and CEO, NBCU) has called BBC America “a terrific test tube for American tastes”. The Times recently reported “the pace of Britcom remakes (in the US) is picking up—Pegg’s Spaced, The Vicar of Dibley and Little Britain USA are in the pipeline. Life on Mars has been switched [. . .] to New York. Critics compare the remakes with originals on BBC America.” Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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2.13 More than 50 UK independent production companies (all PACT members) currently choose to have an on-going distribution and/or programme development relationship with BBCW. 2.14 Consolidation among the independent sector has also been the motivation for BBCW providing seed investments for minority stakes in a handful of small, independent UK production companies (Left Bank, CliVhanger, Hardy & Son, Clerkenwell and Baby Cow). The companies value not just BBCW’s cash but also the other opportunities brought about by aYliation with BBCW: “BBCW brings a wealth of commercial expertise and phenomenal global presence to the venture”— Paul Marquess, Managing Director, CliVhanger. “BBCW will help open doors for us.”—Hardy & Sons Creative Director Justin Hardy. “We looked at number of options to move Baby Cow forward and BBC Worldwide was head and shoulders above the rest in terms of understanding what we do and how to build upon it. I’m very excited about working closer with BBC Worldwide and bringing to Baby Cow the vast expertise and experience they can oVer.”—Baby Cow Joint MD, Henry Normal. 2.15 In all these instances, the case for BBCW’s investment has been driven by the excellence of the production talent, the modest sums involved in BBCW’s investment and the resulting prospect of considerable ﬁnancial and “cultural” returns for the licence fee payer at manageable levels of risk. The total sum invested in the independent production sector since 2006 is between £350 million and £400 million.9 BBCW’s share of this investment is tiny but consistent with Ofcom’s stated aims that “diversity through a plurality of players in the market” is important in the UK production market.10 BBCW has always been encouraged to invest in BBC programming, which carries a similar level of commercial risk. 2.16 In Broadcast magazine’s annual survey, BBCW was named “best distributor of the year” by its peers in 2005, 2006 and 2008 as well as “best development partner” by indies in 2006. This year, BBCW’s DVD subsidiary, 2entertain, won a Queen’s Award for export in recognition of its £150 million in export revenues (BBCW as a whole won the same award in 2002). By supporting other public service broadcasters and promoting diversity among the independent production community in these ways—especially the smaller, yet excellent, operators—BBCW’s activities ﬁt with the BBC’s public purposes of stimulating creativity and cultural excellence.

Bringing the UK to the world and the world to the UK 2.17 BBCW’s international businesses, across all seven Divisions, support the BBC’s public purpose of “bringing the UK to the world”. BBC content is the key brand feature of BBCW’s international businesses. Yet those businesses also stimulate and showcase the rest of the UK creative community. BBCW’s international importance has been explicitly recognised in the industry magazine, Broadcast: BBC Worldwide is important in exporting UK plc around the world. The success of Dancing With the Stars has been crucial in leading the (British) charge into the US. BBCW has the clout to get into markets that smaller outfits could have a tough time negotiating. Emily Booth, Editor, Broadcast, August 2008. 2.18 More specific measures of international success are as follows: (i) BBCW’s BBC-branded and Joint Venture (JV) channels reach 285 million homes globally. (ii) BBCW is the largest exporter of TV programmes in Europe (with turnover in excess of £213 million). BBCW’s catalogue includes 30,000 hours of programming (of which 22% is made up of titles from independent producers). (iii) BBCW’s commercial websites draw 26 million11 visitors globally per month. (iv) BBCW has succeeded in establishing Top Gear and Planet Earth as global brands. (v) BBC World News is now available every day in 153 million homes and for more limited periods in a further 118 million homes. Every week 78 million people watch BBC World News thereby complementing the radio and online reach of the BBC World Service. 2.19 As part of its mission to showcase the best of British creative talent around the world—and to maximise financial value in the process—BBCW is developing a network of international production oYces that can better serve international audiences. Rather than merely licensing formats such as Strictly Come Dancing, BBCW earns greater revenues and profits—and can more eVectively safeguard BBC brands—by taking control over production. BBCW’s move up the value chain in this way therefore secures important financial and editorial benefits. BBCW’s approach is also entirely consistent with the industry model adopted by other large distributors such as Disney-ABC, Fremantle, and ITV Worldwide. 2.20 BBCW is placing particular focus on “bringing the UK to the world” in the USA, Australia and India. These countries have potential to realise greater value for licence fee payers. BBCW has achieved significant growth in the US recently and the launch of BBCW channels in India has already resulted in a 10 fold increase in the number of hours of British content available in that market.

9 OFCOM Communications Market Report (2008) and BBCW research. 10 OFCOM Review of the Television Production Sector (2006): http://www1.bsc.org.uk/consult/condocs/tpsr/tpsr/ 11 ComScore Worldmetrix, excluding UK—Jan-Jun 2008 average. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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2.21 In some limited cases, BBCW has sought to build the BBC’s reputation internationally by partnering local companies as a means of securing both value and market presence in key markets. In all cases, BBCW retains full control over the BBC brand.

Commercial eYciency 2.22 While BBCW has always sought to maximise its commercial eYciency (as it is now obliged to do under the most recent BBC Charter and Agreement), the period since the 2004 Commercial Review has been marked by significant and sustained improvements in performance. 2.23 As a result of this renewed focus: — BBCW has trebled its profits since 2004; — BBCW’s 2007–08 performance—both in terms of revenue and PBIT—exceeded both budget and its five year plan targets that had been approved by the BBC Trust; and — the extent of BBCW’s financial upturn is such that BBCW is now recognised as performing comparably in PBIT/EBITDA terms with Fremantle, Five, Channel 4, RDF and ITV.

BBCWW PBIT & Revenue Growth Pre and Post Commercial Review (£m)

Pre commercial review Post commercial review

2001–02 2002–03 2003–04 2004–05 2005–06 2006–07 2007–08

2.24 In order to continue to ensure best value for licence fee payers, BBCW is: — Diversifying its business internationally in key identified territories—particularly the USA, Australia and India; — Growing its online activities and revenues, to meet growing consumer demand for these services; and — Recognising that its growth strategy can be delivered by means of carefully selected and structured partnership and acquisition opportunities, as well as via organic growth. 2.25 The above factors were all reflected in the acquisition of a majority stake Lonely Planet (LP). As a profitable company which nonetheless had an under-developed online and magazine presence, LP oVered BBCW a rare opportunity to significantly increase by acquisition the value it can achieve for licence fee payers. In particular, the LP website with 5 million unique users has the potential to benefit from BBCW’s digital expertise and contribute towards its target of generating more than 10% of revenues from digital activity by 2012. Matching so closely BBC editorial values—such as accuracy, integrity, impartiality, quality and creativity—LP is well placed to help the BBC make much more of its archive of 3,000 hours of travel and world culture related programming. It oVers a clear fit with the BBC’s public purpose to take the “UK to the World and the World to the UK” with its trusted educational and cultural content, particularly among the 25–45 demographic who tend to be less familiar with the BBC brand but for whom LP is very popular. 2.26 BBCW’s commercial eYciency creates significant financial benefits for the licence fee payer. BBCW’s balanced strategy of continued focus on core activities, targeted product/service growth, managed international diversification and eVective cost control across the business reduces the overall level of operational and financial risk to the BBC from BBCW’s activities, thereby maximising the prospects for continued strong dividend performance in years to come.

Maintaining the BBC’s good reputation and the value of the BBC brand 2.27 BBCW enhances the BBC’s good reputation and the value of the BBC brand, in three respects: ﬁrst, BBCW’s activities by their very nature extend UK audiences’ experience of BBC content; second, in the way that BBCW packages and delivers BBC content across these media, BBCW employs editorial standards that are entirely in line with the BBC brand; third BBCW builds new properties for international audiences that puts BBC content into a local voice but wholly consistent with BBC editorial values. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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2.28 BBCW’s activities extend the BBC’s relationship with its audience in the UK—from public service broadcasting into multichannel TV, magazines, DVDs, CDs and online. BBCW’s focus on oVering BBC brands in multiple formats is demand-driven: people expect to be able to experience their favourite brands beyond just TV. For example, Top Gear fans want to see the brand not just on the BBC’s PSB channel but they also want to see episodes repeated on multichannel TV, to buy the magazine, DVDs, games (eg Gran Turismo via Sony PlayStation), toys (eg Scalextric) and so on. Other examples of similarly passionate fans are there for Doctor Who, Planet Earth, In The Night Garden, Teletubbies, Gardener’s World and many other BBC properties. 2.29 BBCW is developing properties that take the core Licence Fee funded content and re-format them for local audiences. For example, BBCW wholly funds BBC World News America as part of its channel BBC America; re-makes programmes such as Top Gear for Australian audiences and will be investing in BBC.com to make the service more relevant to local audiences. By oVering bespoke content, BBCW can address a much wider market than simply exporting content solely in its original form and expecting international audiences to like it. 2.30 It is a core requirement that BBCW respects and honours the integrity, reputation and value of the BBC core brand. BBCW’s obligations are underpinned by an extensive set of editorial guidelines and internal quality controls which touch every aspect of BBCW’s business. In the last reporting period, there were no editorial complaints upheld by the Editorial Complaints Unit. Nor were there any identiﬁed breaches of any relevant branding guidance issued by the BBC. Moreover, Section 5 outlines how the BBC and BBCW regularly review editorial processes to ensure eVective brand management—in particular by conducting “deep dive” editorial reviews into sample businesses (most recently: 2entertain, BBC Magazines and BBC.com).

Compliance with Fair Trading Guidelines and avoidance of market distortion 2.31 Section 5 below contains information on the BBC’s and BBCW’s structures and processes to ensure full compliance with the BBC’s Fair Trading Guidelines; and BBCW’s excellent track record of compliance in practice. 2.32 As regards “avoidance of market distortion”, this is assured by two factors: — First, BBCW bids on for BBC rights on a commercial basis. BBCW’s processes in evaluating and bidding for BBC rights are exactly the same as those BBCW adopts when bidding for third party rights for commercial exploitation. — Second, BBCW’s activities do not foreclose third party distributors from the sector as a whole. There are many other major companies distributing intellectual property rights in all relevant downstream markets. Annex 2 demonstrates BBCW’s small size—both in absolute terms and compared to its commercial peers.

3. Overview of BBCW’S Business andStrategy

Section 3 provides an overview of BBCW’s business and strategy and briefly describes how the BBC invests the revenues and profits from BBCW 3.1 BBCW is a wholly owned and controlled subsidiary of the BBC. While always meeting the commercial criteria set out in Section 2 above, BBCW’s strategic vision is to optimise commercial eYciency and thereby maximise revenues for the licence fee Payer through: — Being a consumer-focused, brand-led, global consumer entertainment business; and — Being renowned for high quality, trustworthy and distinctive content that sets BBCW apart from its major international commercial competitors. 3.2 BBCW aims—and is required—to ensure that all of its global services are consistent with the BBC’s core values and editorial policies and as such are an eVective representation of the BBC, globally. 3.3 BBCW operates through the following divisions (latest financial data from 2007–08):12 — Global Channels (sales £184 million, profit £13 million): operates TV channels internationally that reach 285 million homes (channels include BBC America and BBC Knowledge). In the UK, Global Channels manages the JV with Virgin Media relating to UKTV; — Sales and Distribution (sales £213 million, profit £47 million): wholesales television programmes to channel operators (and is currently Europe’s biggest exporter of programmes). Key properties are BBC programmes covering a range of genres; — Magazines (sales £178 million, profit £17 million): an established UK magazine publisher. Titles include Radio Times, Top Gear, Gardener’s World, BBC History and Good Food;

12 BBCW Annual Report 2007–08. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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— Home Entertainment (sales £228 million, profit £41 million): comprises a range of businesses oVering consumer products and services. Key formats include DVDs (commercialised predominantly via 2entertain, a 60:40 joint venture with Woolworths plc), audio books and music CDs; — Content and Production (sales £69 million, profit £14 million): works both with the BBC and independent producers to secure new programmes and properties for BBCW. The business increasingly develops, licenses and produces TV formats (such as Top Gear and Dancing with the Stars) for broadcasters around the world; — Digital Media (sales £22 million, profit £(11) million): is developing a network of strong BBC- branded sites (eg TopGear.com); distributing BBCW content widely across the web to users who are unlikely to come directly to BBCW’s (eg via YouTube) and managing BBC.com (an ad-funded version of BBC.co.uk for ex-UK users); and — Global Brands (sales £23 million, profit £(2) million): a new business area to manage properties that have global reach. Top Gear and Lonely Planet are currently managed by this division. 3.4 The BBC’s use of an in-house distribution arm—BBCW—to commercialise its content is entirely consistent with the approach taken by other major media groups such as TimeWarner, ITV, Disney-ABC and NBC. In-house distribution strikes a good balance between revenue maximisation and eVective, long term stewardship of the content owner’s brands and media properties. This brand protection and promotion is particularly important for the BBC with its unique public purposes and its dependence upon its trusted reputation. 3.5 BBCW receives no funding from the licence fee. BBCW has a direct debt facility with the European Investment Bank (£50 million on normal commercial terms) and benefits from intercompany loan facilities with its parent company within the BBC commercial group. This parent company itself has a £350 million facility from a group of seven commercial banks which is on standard commercial terms and which oVers no direct recourse to, or support from, the BBC. Other than these loan facilities, BBCW’s other principal sources of liquidity are the funds flowing from trading operations; dividends from its joint ventures and other associated undertakings; and periodic disposals. BBCW receives no cross-subsidy from public funds or any other unfair advantage in the terms on which BBCW acquires content from the BBC; BBCW is obliged to pay market rates for BBC rights. 3.6 The overall net debt limit for all the BBC commercial subsidiaries combined is £350 million agreed by HM Treasury. To this limit are attached several restrictive covenants designed to further ensure safety levels in all commercial investments. 3.7 More details on BBCW’s business activities are contained in BBCW’s 2007–08 Annual Review (see Annex 3). 3.8 The BBC maximises the financial benefits for licence payers from BBCW’s operations, as follows: — requiring BBCW to pay full market rates to acquire the rights in BBC programmes; and — the BBC ensures that BBCW dividends are passed directly into content production and that any surplus is used by the BBC to pay for production talent retention, programme development investment (ie generating new ideas), and innovation (eg developing high definition versions of BBC programming). Annex 1 illustrates the scale of programme investment and dividends flowing to the BBC over the past four years.

4. TheCommercialOpportunitiesOpen to the BBC andAssociatedBenefits andRisks

This section provides an overview of the major commercial opportunities open to the BBC as the BBC sees them over the next decade, outlines the beneﬁts that can be realised, and provides an assessment of the risks of the alternative routes by which the BBC could seek to exploit these opportunities. It describes the potential beneﬁts and risks from the BBC engaging in commercial activities of the kind undertaken by BBCW.

Introduction 4.1 There are a range of potential beneﬁts and risks from the BBC engaging in commercial activities. This section describes: (a) The commercial opportunities open to the BBC; (b) The beneﬁts that can be realised from eVective exploitation of those opportunities; and (c) The potential risks of BBC commercial activity and the BBC’s rationale for using an in-house distribution arm (BBCW). 4.2 The BBC’s assessment of BBCW’s performance to date and its compliance with the four Commercial Criteria are discussed in Section 2 above. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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Scale and Breadth of Commercial Opportunities

4.3 The demand for high-quality BBC and wider UK intellectual property is increasingly global, which presents significant opportunities to BBCW to achieve better value for licence fee payers and further deliver on its mission in “bringing the UK to the world”. A key part of BBCW’s strategy is particularly to grow its activities internationally for the benefit of licence fee payers. 4.4 Global Channels: (i) The television channels’ market is currently estimated to be worth $200 billion globally (and nearly $70 billion in the US alone).13 This represents over 10% of the entire global media market and is the second largest media sector. The market is forecast to grow at 6% annually until 2011. (ii) BBCW has built a strong position in the UK multichannel market via its UKTV joint venture with Virgin Media. The recent launch of BBCW’s BBC-branded channels (eg BBC Knowledge) will extend BBCW’s channel activities into new international markets. This strategy to build branded channels is adopted by all other major media companies (eg Disney, NBC, Discovery, News Corporation, Viacom, TimeWarner) which use their own branded channels to build their brands internationally and allow the export of their content around the world. So far, BBCW has launched (or re-launched) its new channels in North America, Latin America, Asia and Australia. Other deals are in negotiation. Crucially, these BBC-branded channels ensure maximum credit is attributed back to the BBC and the UK broadcasting sector more widely for the high-quality British programmes BBCW airs overseas. 4.5 Sales and Distribution: (i) According to a recent industry survey, the UK is the second largest exporter of television content (behind the US).14 DCMS estimate that the value of this essential component of the UK creative economy was about £400 million in 2006. BBCW’s exports accounted for almost one-third of this total. (ii) There has been a significant increase in interest relating to British content from international broadcasters in recent years (either as locally re-made versions or in their original form—or both). British content and talent is—therefore—currently in high demand. BBCW plays an important role in stimulating this increased interest in British content to the benefit of the wider UK market as well as licence fee payers through BBCW sales (it already sells content directly to over 100 countries). (iii) As emerging markets mature, they are opening up for imported television—particularly India, Asia, Latin America—and BBCW is already established in these markets (eg BBCW’s annual sales event in Brazil, established oYce in Hong Kong and Singapore and broad presence in India) allowing a rapid increase in the volumes of content sold into these markets (eg BBCW recently signed a deal to sell 100 hours of content to Paraguay). Digitisation is also opening up new customers who want to build on-demand services around the world. And High Definition services are launching in mature markets which present further opportunities for the BBC’s HD output (including Planet Earth). BBCW’s activities are helping to expand the share of the growing market that is taken by British content. 4.6 Magazines: (i) Although magazines are a mature market in the UK, BBCW has still been able to serve increasingly well the demand for its high-quality magazines in both the UK and internationally. The magazine market is worth $100 billion in annual turnover and is growing significantly in emerging markets such as China, India and Brazil.15 The industry is forecast to grow at an average of 3% over the next five years, with significantly higher growth rates in emerging markets. (ii) BBCW continues to increase its magazine circulation (the latest ABC numbers show an increase of 3.2% in the first half of 2008).16 BBCW is also oVering new titles based on BBC programmes such as Who Do You Think You Are? (based on the indie production company Wall to Wall’s format) Countryfile, Match of the Day and Cbeebies Art. BBCW’s Radio Times still sells about one million copies each and every week as well as over two million copies every Christmas. (iii) BBCW is well positioned to benefit from both established and emerging markets. International demand for BBCW magazines is strong with titles now launched in over 57 countries (including editions of Top Gear in Australia, China, India, Italy, Poland and Malaysia). In some key markets BBC has established joint ventures with key local partners to publish a wider range of BBCW titles (eg India and Australia). New opportunities are being pursued in Africa, North America and Asia.

13 PWC, 2007. 14 Rights of Passage 2007, Television Research Partnership (July 2008). Commissioned by PACT and sponsored by UKTI, Granada International, BBCW and All3Media International. 15 PWC, 2007. 16 ABC (Audit Bureau of Circulations), 2008. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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4.7 Home Entertainment: (i) The home entertainment market is worth $90 billion annually and is forecast to grow at an average rate of 5% over the next five years.17 BBCW produces a range of products that allow customers to buy original programmes (eg on DVD or CD) as well as a broader range of products associated with favourite programmes (eg children’s toys, games, general merchandising etc). (ii) Home entertainment products sell most successfully when they are related to programmes that reach large audiences. For example, the DVD of Planet Earth (a programme seen by millions of viewers in 180 countries) has sold three million copies around the world and was amongst the Top 10 best selling DVDs in the US in 2007. More recently, Cranford has already achieved sales of over 1.5 million units on DVD.18 4.8 Content and Production: (i) Up to 90% of the television content shown in international markets is locally made.19 The spending on television production in the US, Germany, France and the UK alone is nearly $35 billion each year.20 Despite its role as a significant exporter of UK programmes overseas, the domestic production of television programming is a far larger market than that of the import content. BBCW is therefore using its experience to maximise the commercial returns available to licence fee payers throughout the value chain by establishing its own production capability to produce BBC formats in a “local voice”. (ii) The results have been very successful. For example, Dancing With the Stars, which is based on the Strictly Come Dancing format has been licensed to nearly 40 countries. In the US, it is the nation’s second most watched TV programme and the most watched programme on the US broadcaster ABC.21 Top Gear is being made as a local version in Australia (with other deals currently in negotiation) as well as programmes such as Yes Minister, The OYce, Weakest Link, Generation Game and Life on Mars. BBCW uses both licensing and its own in-house capabilities to produce its formats. However, if BBCW simply licenses out all its formats to third-parties its income would be much lower. BBCW could only charge format licence fees (which are usually lower than the income derived from production fees and any other associated revenues). The then PACT Chair Alex Graham acknowledged this point in November 2006 when he wrote: “Producers can make significantly higher margins by producing programmes themselves [rather] than by simply licensing the format for an agreed fee”. This same strategy has been very successfully adopted by companies such as Endemol, Fremantle and Sony. BBCW’s relatively new Content and Production division has rapidly grown to sales of £70 million. By retaining control of its productions, BBCW is able to ensure they come up to the required editorial standard (and are compatible with BBC Editorial Policy). BBCW is also able to retain more rights relating to programmes allowing it to benefit from additional revenue streams. 4.9 Digital Media: (i) Digital media already represents a total market of $240 billion in annual revenues (including the revenues generated by the provision of access to the Internet).22 The market is forecast to grow at over 13% each year until 2011 (by far the fastest growing sector). (ii) Like all media companies, BBCW is rapidly growing its internet activities in a number of ways, including the management of BBC.com (the BBC’s internet pages outside the UK) and the development of a targeted range of websites to build individual brands (eg Good Food). BBCW has led in the field of online partnerships, as the first UK media player to partner with iTunes, MySpace and YouTube. These deals have resulted in tens of millions of users being able to watch and buy BBC content. (iii) BBCW will need to embrace the opportunities oVered by the growth of the Internet, not least because BBC programmes are already appearing to the disbenefit of licence fee payers on illegal sites as a result of piracy. But BBCW also faces a complex challenge to manage the transition from a “linear” environment to a fully “on demand” one. By retaining rights to all its activities, BBCW is able to judge when it should make the transition from one method of content exploitation (eg DVD) to another (eg VOD). 4.10 Global Brands: (i) A number of BBCW’s properties, such as children’s programmes and Dr Who, have global appeal across a multitude of formats. As a result, BBCW manage a number of brands (eg Top Gear and Lonely Planet so far) to ensure that the returns are maximised across both formats and territories. For example, BBCW manages the full range of products to ensure that they reflect the ethos of the brand as well as maximise the opportunities that are available.

17 PWC, 2007. 18 BVA (British Video Association) data, 2008. 19 http://www.socialreport.msd.govt.nz/cultural-identity/local-content-nz-television.html 20 OFCOM, http://www.ofcom.org.uk/research/cm/icmr06/tv.pdf 21 Nielsen Media Research, 2008. 22 PWC, 2007. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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(ii) EVective exploitation of all the opportunities outlined above can realise signiﬁcant beneﬁts to the BBC, licence fee payers, the UK creative industries and indeed the UK more widely.

Potential financial benefits 4.11 Profits from the exploitation of the BBC’s content through its commercial activities are made available for re-investment directly in new programming and/or as dividend to the BBC for wider use. BBCW’s contribution to individual programme budgets can be over 70% of the total (made up of both direct investment from BBCW and the co-ordination of investment from international co-production partners). Landmark programmes such as Planet Earth, Cranford, Doctor Who and In The Night Garden simply would never have got oV the ground without the support and investment provided by BBCW. This constant stream of funding can facilitate the BBC’s investment in new content and, in turn, help nurture UK talent and expose it to national and international audiences. 4.12 The potential income from eVective exploitation of the emerging commercial opportunities over the coming decade is considerable. BBCW’s current five Year Plan is targeting double digit annual revenue growth to over £1,200 million by 2011–12. The BBC’s commercial activities, over the coming decade, will be an important source of finance for our core Public Service activities and a real opportunity for the UK media industry to succeed internationally.

Potential benefits to the BBC’s reputation 4.13 Less tangibly but equally importantly, the commercial opportunities outlined above oVer the potential to enhance and extend the BBC’s reputation through new markets and across a wide range of emerging new technologies and channels. 4.14 A series of studies carried out since 2007 show that BBCW’s activities have built strong awareness in key markets such as India, US and Eastern Europe. BBCW has also communicated core elements of the BBC brand to international markets as it is recognised globally as “consistent, positive, trusted, knowledgeable, intelligent, objective and quality”. International media companies also recognise that BBCW—via the BBC brand—brings tangible value to customers outside the UK as it stands for quality content. The BBC has a remarkably positive profile internationally that goes beyond Britishness and taps into valuable and respected brand attributes.23 4.15 As well as the indirect benefit to the nation, this can only further enhance our ability to deliver the very best to licence fee payers. The BBC competes for talent (both creative and leadership) in a global market, in competition with many other global media brands. Extension and development of the BBC’s reputation across global markets and new and emerging media channels will be an increasingly important element of the BBC’s ability to attract and retain top talent for the benefit of UK licence fee payers.

Potential benefits to UK creative industries 4.16 The BBC is not the only industry stakeholder which can benefit from its commercial operations. The fruits of its commercial operation can benefit: — UK talent, which can not only derive financial benefit from BBCW’s activities through royalty payments, but which can also gain international exposure and recognition to opportunities for UK talent across film and international television, for example: — Steve Coogan recently said: “At the moment the only people who recognise me in America are the cool people. People who’ve found me on BBC America.” — Ricky Gervais’s website states: “The OYce has become an international phenomenon, with deals by BBC Worldwide in 70 territories around the world [. . .] The show broke new ground in the US following its hugely successful transmission on BBC America; Ricky Gervais became the first British actor ever to win a TV comedy-acting award at the Golden Globes 2004. Following its success on BBC America, the show’s format has been licensed [. . .] to NBC for a US version that is currently in production. BBC Worldwide, in consultation with the writers, is also exploring opportunities around the world for local versions of the show”. — John Barrowman: “The funny thing is, Doctor Who is now playing on BBC America, as Torchwood has been and that’s watched by a very big audience, so I’ve actually been recognised more [. . .] when I go to the States than I was on all the network TV stuV I did over there for NBC and CBS.” — Simon Pegg: “It used to be that you guys knew us from (Monty) Python and Benny Hill. Nowadays with BBC America and [. . .] increased access. We’re closer than we used to be.”

23 Roper Global Media Brands Study 2007; Flamingo Global Consumer research Nov 2007; Henley Qualitative Research; Synovate US; Brand Driver consumer research 2008; BBC Worldwide Customer Satisfaction Survey 2008. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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— Other distributors which can license content to BBCW’s global channels (eg BBC America; UK.TV in Australia) and thereby gain an international platform that would otherwise not be available. — Independent production companies (Indies), which either: (i) owing to their size, do not have their own distribution capability;24 (ii) want to benefit from BBCW’s scale and expertise in international distribution; or (iii) simply do not have magazine, DVD, licensing or book publishing capabilities. — The large numbers of UK and international media companies with whom BBCW shares commercial operations, including by way of example long-standing joint ventures such as UKTV (with Virgin Media) and more recently the BBC Books venture with Random House. — These economic benefits can also have an impact in individual regions. BBCW’s Indie Unit supports and works with regional producers (on the development, production and distribution of content), for example in: (i) Scotland: Tern TV (which has active oYces in Aberdeen, Glasgow and Belfast); (ii) Wales: Indus Films, Fulmar TV; (iii) North West England: Red Productions, Jelly Legs (both in Manchester); and (iv) The Unit also works with regional film funds. For example: — Screen Yorkshire—recent programmes with regional funding supported by BBCW are Unforgiven, Casualty 1906 and 1907 and Spooks: Code 9. — Long term partner of BBCW, Baby Cow, have a subsidiary called Baby Cow North which opened in Manchester with the support of North West Vision (a regional film fund), and amongst other titles, Ideal was made out of and with support from that region. — 2AM Films’ new series PAs and Hat Trick Productions God on Trial were both wholly produced in Scotland.

Contributing to the delivery of the BBC’s public purposes See Section 2 above.

Potential risks in BBC engaging in commercial activities 4.17 There are three major risks which face the BBC in engaging in commercial activities: — failure to protect the BBC brand or operate in line with the BBC’s public purposes; — failure to maximise returns for the licence fee payer; and — failure to trade fairly. 4.18 Risk 1: Failure to protect the BBC brand or operate in line with the BBC’s public purposes. The commercial opportunities open to the BBC over the coming decade must be exploited in ways which not only cause no damage to the BBC brand, but enhance it and contribute directly and positively to the BBC’s public purposes. The BBC acknowledges that unduly aggressive, inappropriate or purely short-term ﬁnancially-driven commercial activities could risk adverse consequences (or adverse perception) in this regard. 4.19 The BBC has considered whether adequate protection of the BBC brand and reputation could be secured through contractual obligations if we were to adopt the third party distribution option. We believe that such controls could be eVective, although they would require signiﬁcant oversight to ensure compliance. However, while such controls can work eVectively to prevent undue brand damage, there is a risk that they would be less eVective in promoting the positive impact we seek and in encouraging proactive brand development. Promoting of the BBC’s public purposes is also not at the heart of a third party distributor’s business and would need again to be secured through contractual obligations and commitments which would often require the distributor to take decisions that they might see as being against their commercial interest. Nor would a third party distributor be incentivised to maximise credit attributed by audiences back to the BBC and thereby the wider UK creative sector. 4.20 The BBC recognises the need to apply adequate controls on the activities of BBCW to ensure that the risks associated with the in-house route are carefully and rigorously managed. BBCW’s performance to date against the four Commercial Criteria is described in Section 2 (above) and the full array of governance obligations, controls and compliance requirements that we apply are outlined in Section 5.

24 This can be a particular beneﬁt for the smaller independent production companies, who are already facing strong competition from the increasingly concentrated groups of “super-Indies”, which together now account for the lion’s share of revenue and growth in this sector eg Annual revenue RTL (owner of Fremantle) £4,500 million; NBC Universal (owner of Carnival) £8,000 million; IMG £222 million; All3Media £203 million and Endemol UK £160 million (total Endemol revenues are c £720 million). Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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4.21 Risk 2: Failure to maximise returns for the licence payer. One of the biggest risks is the risk of failing to maximise the value of BBC licence fee funded content. The market opportunities outlined earlier are substantial, but they require focussed development to ensure they are exploited to the full—beyond simple deployment of the BBC’s most commercially attractive content. Technology is changing rapidly; new markets and channel opportunities are opening up and changing constantly. Full and eVective exploitation of the opportunities will require proactive building of the BBC’s market position for the long term. 4.22 The BBC has considered carefully the extent to which this can be achieved through contract with external third parties, by eVectively inducing or requiring third parties to behave in the same way that an in-house distribution arm would act. Investment obligations, long term rights deals, franchise arrangements and other contractual terms are used in other industries. While this can work well in markets where the future opportunities are suYciently well known, we are concerned that this will be much more diYcult and complex to achieve in the evolving markets in which we plan to operate. It is not an environment that is well suited to the level of detailed contractual speciﬁcation that will be required if the BBC relied solely on third party distributors. It is for these reasons that almost every other major media company (for example TimeWarner, Disney-ABC, 20th Century Fox, NBCUniversal, ITV Worldwide and Bertelsmann) has elected to adopt an in-house model to exploit the commercial potential of their content. The BBC would need to see considerable additional advantage to the third party route to justify departing from the usual industry practice. 4.23 There are, however, also risks associated with the in-house option. The BBC will not realise the full commercial potential if our chosen in-house arm proves to be operationally and/or commercially ineYcient. Any such ineYciency would constitute a failure by the BBC to meet a fundamental element of its obligations deriving from the BBC Charter and Agreement. For this reason, the BBC will continue to require BBCW to pay the full market rate for content, and will continue to subject BBCW to the rigour of competitive tendering. If the BBC believes a third party is able, through greater eYciency or better evaluation of the market value, to pay more for BBC content rights, then BBCW will lose the bid. And this can and does happen for programmes as diverse as Extras; The Passion; Criminal Justice; Vanity Fair; Heston Blumenthal and Mitchell and Webb. We believe that this will exert the required discipline on BBCW to ensure continued cost eYciency. 4.24 Risk 3: Failure to trade fairly. Section 5 below sets out the rigorous fair trading regime to which BBCW is subject.

5. The Governance Framework Regulating the BBC’s Commercial Operations

This section outlines the framework of checks and balances which ensure that the BBC meets the various criteria agreed with the Secretary of State. Two recent case studies are discussed

The BBC and BBCW’s institutional arrangements to meet its governance obligations

BBCW’s structures and procedures 5.1 BBCW’s current corporate governance framework was fashioned following the 2004 Commercial Review with a view to creating an eYcient and low-risk commercial environment in which BBCW could meet the ambitious growth objectives set for it. The framework was based upon commercial models and is supplemented by BBC-speciﬁc regulatory requirements, such as compliance with the 4 Commercial Criteria (the 4CC). Key highlights include: (i) Budgeting, reporting, forecasting and business planning procedures for BBCW’s commercial activities, in line with commercial best practice; (ii) Clear internal investment approval guidelines to ensure that all proposals deliver BBCW internal targets and are compliant with the 4CC; (iii) A framework for transactions to be considered at every approval point, from divisional boards (eg Magazines) to the full BBCW Board, against the 4CC; (iv) Full and eVective scrutiny of all signiﬁcant projects by BBCW’s Board of directors comprising BBCW executives, independent non-executive BBCW directors (including Chairman) and BBC non-executive directors; (v) The right for any non-executive director to refer a proposal to the BBC Trust where they are concerned that it may not be 4CC compliant; (vi) Monthly reviews between the COO and the Trust Unit to discuss current and potential business proposals; (vii) Monthly reviews between the “4CC Guardian” (BBC General Counsel and BBCW non-executive director), the BBC Controller of Fair Trading and the COO to review current developments within BBCW; and (viii) A range of established processes to spread the compliance culture throughout BBCW, including training, advice and regular meetings with fair trading representatives. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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5.2 As with any commercial company, the governance framework is centred around the board of directors. As part of the 2004 Commercial Review it was decided to supplement the BBCW Board to provide additional external scrutiny through the appointment of three independent non-executive directors, including an independent Chairman, and three non-executive directors from the BBC parent company. 5.3 The BBCW Board operates under Terms of Reference set by the BBC in early 2007, which deﬁne its remit. In addition to the standard systems of approvals and controls for which it is responsible within BBCW, the BBCW Board is in particular accountable to the BBC’s Executive Board for compliance with the Protocols set by the BBC Trust (in particular Protocol D6 which provides further guidance on the approvals process for commercial services) and speciﬁcally with the 4CC. 5.4 In addition to delivering to the BBC the standard commercial business plans, reports and accounts expected of any commercial operation, the BBCW Board is also responsible for delivering BBCW’s annual reports which cover 4CC compliance and Fair Trading each year for approval by the BBC and the Trust. 5.5 BBCW’s governance framework and its Board structure were set up in a manner informed by commercial models and in particular the Combined Code on good corporate governance (issued by the Financial Reporting Council for UK publicly listed companies). 5.6 The BBCW Board has in turn developed a system of internal approvals to ensure that all decisions are taken at the appropriate level within BBCW, centred around the internal investment approval guidelines. In addition to delivering a rigorous commercial decision-making framework, this system is designed to ensure that BBCW continues to meet its 4CC compliance obligations.

The BBC’s Fair Trading structures and procedures 5.7 As set out in Section 2, the BBC Agreement (clauses 69–74) sets out the 4CC against which all BBC commercial services need to be assessed. The BBC Trust has published Protocols with guidance on the approvals process for new and significant changes to existing commercial services. The BBC has subsequently produced Executive Procedures in order to assist in the establishment of satisfactory systems for compliance with the 4CC. The framework set out above was developed in conjunction with the Protocols and Procedures. 5.8 In addition to 4CC compliance, the BBC Executive monitors Fair Trading compliance of its commercial activities through the Executive Fair Trading Committee, a sub-committee of the BBC’s Executive Board. It does this through, inter alia, the following measures led by the BBC’s Controller, Fair Trading: (a) A central compliance function which manages the Fair Trading systems and procedures, and provides systems and compliance advice. (b) A central team of Fair Trading Advisers which support all parts of the BBC (including BBCW) with advice, approvals, information and analysis. (c) An extensive Fair Trading awareness and training programme. (d) A network of ‘Fair Trading champions’ with responsibility for promoting and supporting the Fair Trading regime throughout the BBC. 5.9 The Trust also reports annually to the Government and the licence fee payer on the eVectiveness of the BBC’s Fair Trading Policy. The Trust commissions an annual, independent Fair Trading audit undertaken by external auditors (currently PwC). The BBC has always achieved an unqualified Fair Trading audit opinion. 5.10 The appropriateness and eVectiveness of the BBC’s and BBCW’s internal structures and processes that make up the governance framework have been externally validated by the BSI Group, which has awarded an ISO 9001:2000 accreditation for the Fair Trading regime. The BBC is subject to biannual assessment by BSI Group to maintain its accreditation. 5.11 External validation for the substance of the BBC’s Fair Trading framework (as opposed to the BBC’s internal processes to ensure compliance with those policies) stretches back to Professor Richard Whish’s April 2001 review of the BBC’s (then) “Fair Trading Commitment” and “Commercial Policy Guidelines”. In his report to the Secretary of State, Professor Whish concluded that the governance framework was appropriate to ensure that the BBC does not distort competition in commercial markets. Professor Whish also commented: “I am familiar with the compliance policies of many public and private sector undertakings, including several that occupy positions not dissimilar to that of the BBC. In my view the fair trading policies of the BBC compare favourably with those of other undertakings. Indeed, I am not aware of any organisation that is subject to as much scrutiny—internally and externally—to ensure compliance with Competition Law”. 5.12 The scope of the Fair Trading regime was widened further in 2007 to incorporate the 4 Commercial Criteria and, specifically, a test for market distortion. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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5.13 As a result of this rigour, the BBC Fair Trading framework is internationally respected and is often used as a best practice case study by overseas broadcasters and policymakers. In recent years, the BBC has given presentations on the framework to parties such as the Norwegian Broadcasting Corporation, WDR (the German PSB), the EC Director of State Aid and the EBU Finance Assembly.

A Culture of Constant Review

5.14 BBCW is subject to considerable financial scrutiny with frequent reporting required and clear financial thresholds to ensure proper scrutiny of key investment decisions. The BBCW board (including the non-executive directors), the BBC’s Group Finance Director and the BBC Executive Board jointly review and approve BBCW’s annual business plan and budget. Performance against budget and quarterly forecasts is reported on a monthly basis to the BBCW Board and the BBC Executive Board (within the BBC’s finance report). The BBC’s finance report is also submitted to the BBC’s Trust Unit and the BBC Trust receives quarterly updates on performance. 5.15 The projected profitability, internal rates of return and payback periods of any proposed new BBCW commercial initiative are examined on a transaction by transaction basis. 5.16 BBCW’s new investment projects are subject to approval by diVerent bodies depending on a number of factors, including transaction value. Transactions with a value of over £50 million automatically require approval by the BBC Trust. This threshold is low in financial terms compared to the equivalent “shareholder consent” requirement for publicly listed companies. 5.17 The BBC Executive Board, acting through its non-executive directors on the BBCW Board (or otherwise) may itself refer decisions to the BBC Trust where they represent reputational issues or matters of wider significance for the BBC.

Other Governance Requirements

BBCW is subject to the BBC Editorial Guidelines in the same way as any part of the BBC Public Service. A BBCW television programme made in the USA or India is made according to the standards laid down in the BBC Editorial Guidelines. Similarly, any programme broadcast by a BBCW commercial channel in Australia, or any book published by BBCW, must meet the appropriate standards set. They form the quality benchmark against which any creative content is judged, and they also apply to marketing, and to editing and re-versioning existing content. 5.18 In addition to the BBC Editorial Guidelines the following guidance relates speciﬁcally to the commercial activities of BBCW: (i) BBC Online Services Guidelines (for all online content); (ii) BBC Magazines Commercial Guidelines (for all BBCW Magazines); (iii) BBC Advertising and Sponsorship guidelines for BBC branded broadcast and online presence; (iv) Advertising and Sponsorship guidelines for sale or distribution of BBC content to third parties eg International Broadcasters, YouTube, UKTV; and (v) BBC Brand and Design Guidelines. 5.19 Adherence with the BBC Editorial Guidelines is a core contractual obligation for all BBCW staV. StaV also attend the two-day BBC Upfront Induction course in which editorial policies are covered extensively. 5.20 Since May 2008, over 500 staV have taken part in the BBCW’s version of the Safeguarding Trust programme, which focuses on BBC editorial standards. A range of other editorial training is undertaken with business areas. For example, all staV employed by BBC Magazines complete an online Legal training course and all staV who sell advertising complete an online Advertising Policy training course.

5.21 BBCW Commercial Policy is a department with four full-time staV devoted to advising the business about compliance with the Four Commercial Criteria including issues of editorial standards and reputation. This team includes the Editorial Standards Adviser recruited from the BBC’s Public Service division to advise on a range of editorial issues and ensure compliance with the BBC Editorial Guidelines. Commercial Policy hold regular meetings with editorial leads throughout the business to ensure the BBC Editorial Guidelines are being followed. The team also liaise with the BBC’s Editorial Policy department to seek further advice (as necessary). Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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Editorial Control within BBCW Divisions 5.22 In the BBC Magazines division, a series of Editorial Advisory Boards provide oversight of the editorial standards of each publication. These EABs include BBCW magazine editors, and subject experts from the BBC Public Service, as well as distinguished experts from outside the BBC. 5.23 For BBC.com an Editorial Guardian is responsible for ensuring that all advertising meets the BBC advertising standards and an Advertising Governance Committee brings together key stakeholders from the Public Service Divisions to agree the commercial policies applied for the BBC website outside the UK. 5.24 For broadcast services, a series of Compliance OYcers review all programming to ensure BBC Editorial Guidelines and, where appropriate, the Ofcom Broadcasting Code, are followed. In addition, the BBC advertising guidelines set out a number of referrals to Compliance OYcers to ensure sensitive commercial areas are dealt with in line with BBC policy. 5.25 Where signiﬁcant BBC brands, such as Dr Who, are involved, BBCW has appointed a Brand Guardian who is responsible for liaising with BBC Public Service to ensure that our activities do not create the potential for brand damage. 5.26 Partners, such as UKTV and 2E, are contractually obliged to meet the BBC Editorial Guidelines. BBCW Commercial Policy holds regular meetings with staV at JVs and provide training and advice on editorial and fair trading issues. 5.27 For each new project launched by BBCW, the Four Commercial Criteria process requires substantial interaction with BBC Editorial Policy, Fair Trading and relevant Public Service programme makers. This helps to ensure that the project will comply with BBC Editorial Guidelines and not pose a reputational risk to the BBC brand.

BBC’s views on the appropriateness and eVectiveness of this governance framework 5.28 The governance framework works and has resulted in BBCW’s remit being changed and BBCW exiting from or otherwise reducing its exposure to businesses that were proving non-core or otherwise underperforming. For example, as a result of the Commercial Review in 2004 a number of non-core magazine titles were sold (eg Eve); trailing of BBCW products on BBC public service channels was stopped and under-performing activities were restructured (eg majority shareholdings in general book publishing and formal learning products were sold and BBCW high-street shops were shut down). 5.29 It is for the BBC Trust ultimately to decide on the governance of the BBC’s commercial subsidiaries but the BBC Executive acknowledges that it is appropriate that BBCW should operate under a more complex system of governance controls than its commercial counterparts. This is inevitable, given that BBCW operates within the constraints of the BBC’s “public purposes” and fair trading obligations. 5.30 BBCW’s controls ensure the eVective scrutiny of any proposed new projects. For example, the recent acquisition of Lonely Planet (LP), as a potential commercial activity for the BBC, underwent detailed analysis to ensure that it fitted with, and was appropriate for, the BBC’s public purposes; and that LP was connected, other than merely in financial terms, with the ways in which the BBC promotes its public purposes. The acquisition was then analysed specifically both in terms of the six aspects of the BBC’s public purposes and the 4CCs. Independent external advisers supplemented the internal teams to ensure that all aspects of the transaction were fully analysed, from valuation to competition law compliance, across the territories where LP operated. 5.31 The appraisal process involved an escalation of reviews: initially, BBCW management prepared its “Commercial Criteria Assessment”. This was approved by BBCW Executive Board (including external non- executive directors) and then sponsored by the BBC’s COO before final approval by the BBC Executive Board (again including external non-executive directors). Additionally, the BBC Controller of Fair Trading was required to approve the Assessment. 5.32 LP is subject to all Fair Trading procedures and will not receive Public Service promotion nor access to the BBC archive, other than on market terms and under written agreements approved under the Fair Trading regime. Further, the regime is audited annually by external auditors to ensure that the regime is functioning properly. 5.33 Similarly, the development of BBC.com, the internationally tailored commercial version of bbc.co.uk, was approved by the BBC Trust in 2007. Concerns were raised about the financial and operational separation between the BBC’s public service activities and BBCW’s commercial activities, and about ensuring fair transfer pricing between the BBC’s public service activities and its commercial activities. BBCW was able to resolve these issues by working closely with BBC Fair Trading, its Global News Division and Future Media & Technology along with the BBC’s Editorial Policy and Regulatory Legal divisions. Additionally, the BBC commissioned external consultants to undertake a review of market practice to identify the appropriate rights payments regime between bbc.com and the BBC for access to bbc.co.uk content. This demonstrates the degree of rigour that the BBC employs in relation to assessing significant new projects by BBCW. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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5.34 The eVective governance regime similarly extends to the investigation of instances of alleged non- compliance with Fair Trading Guidelines by the BBC. There were ﬁve Fair Trading complaints brought against BBCW in the last year. The Executive Fair Trading Complaints Panel, which includes three of the BBC Non-Executive Directors, investigated and rejected all of them. 5.35 As regards “editorial standards”, the protection of the BBC’s reputation and brand is a prime consideration for BBCW. Accordingly: (a) BBCW has implemented a wide-ranging and extremely detailed set of editorial policies and rules. These operate right across BBCW’s divisions and in all geographies where BBCW is active to maintain day to day control over all BBCW-distributed content. (b) BBCW undertakes internal sampling to test the eVectiveness of its governance procedures as required under the Fair Trading Guidelines. (c) BBCW has provided details of the editorial processes in place, as well as evidence of their operation, to BBC Editorial Policy. 5.36 The BBC keeps the suite of governance and compliance controls and processes under regular review, to ensure that they remain ﬁt-for-purpose. The BBC Executive Board, in discussion with BBCW and the Trust, are currently undertaking such a review. We will make adjustments considered necessary, in the light of changes to the commercial opportunities open to us and BBCW’s activities, to enhance the control and assurance we need.

6. TheFuture of BBC Worldwide

This Section provides a brief summary of the future that the BBC sees for BBCW over the coming decade

Vision 6.1 The scale and scope of the commercial opportunities open to the UK media industry raise signiﬁcant challenges for BBCW which we believe must remain a signiﬁcant commercial enterprise renowned for high quality, trustworthy, and distinctive content that sets it apart from our major international commercial competitors.

Ethos and business rationale 6.2 BBCW will be held to account by the BBC Executive and Trust against its performance, in line with the 4CC, against three objectives: — to maximise the long term financial contribution to the BBC’s core Public Service operation, for the benefit of UK licence fee payers; — to contribute directly to the BBC’s public purposes, in particular “bringing the UK to the world”; and — to enhance the BBC brand and reputation. 6.3 The BBC is confident that these objectives are consistent and self-reinforcing—put simply, the business will only maximise the long term financial contribution it makes if it adheres closely to the BBC’s values and public purpose ethos on which our reputation for quality, trustworthy and distinctive content has been built. These objectives will pervade BBCW’s culture, values and decision making at every level.

BBCW’s position in the wider market — BBCW can best promote the BBC overseas and ensure maximum attribution back to the BBC for its high-quality programming as a direct-to-consumer business, with direct relationships with mass audiences in our target markets and through our target media channels. The business will operate across a broad range of countries, products and services. — BBCW will operate under the BBC brand in the UK and internationally. At the heart of the commercial oVering will be the BBC’s audio-visual archive, supplemented both by content generated by BBCW itself and by acquired rights from third parties where needed to exploit fully the value achievable on behalf of licence fee payers. — Future of BBCW by division. 6.4 The focus of the BBCW’s growth plans over the next few years in its current divisions will be: — Global Channels—a key vehicle for “bringing the UK to the world”, this is a high priority and presents a strong growth opportunity to maximise returns for licence fee payers and penetrate more deeply BBCW’s target markets. — Sales and Distribution—in this important sector of the UK creative economy, BBCW is already Europe’s biggest exporter of programmes, but there is further growth potential in newly emerging markets. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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— Magazines—an established UK business which helps extend the reach of BBC programmes and genres, this division has scope to extend internationally on the back of our planned growth of audio-visual output to a wider consumer base, particularly in target markets. — Home Entertainment—a similarly established UK business focussed on DVDs, audio books and music CDs and with similar growth potential internationally. — Content and Production—this division has the opportunity to build on recent successes in developing, licensing and producing TV formats for broadcasters around the world. — Digital Media—an emerging opportunity to help future-proof and generate further revenue on behalf of BBC licence payers from web-based media distribution. — Global Brands—a relatively new business area to manage internationally acclaimed properties that have global reach (eg Top Gear) into which we will place new brands as they emerge for focused development.

Financial targets 6.5 BBCW’s current five year strategic plan has as its base case: — double-digit revenue growth to over £1,200 million by 2011–12; — a target that overseas activities should account for around 60% of revenues by 2011–12. To this end BBCW is currently committing significant investment to achieve major revenue and profit growth in the USA, India and Australia; — a doubling of operating profits over the same period, from £88 million to £175 million, a CAGR of 15%; and — a projected annual dividend to the BBC of £77 million in 2011–12, taking the seven year cumulative total dividend to £467 million (the total direct investment in UK content production—including co-production—is forecast to be nearly £600 million over the next five years). 6.6 These plans and targets are reviewed annually in addition to the broader periodic reviews of the BBC’s commercial strategy. One such broader review, instigated by the BBC Trust with terms of reference agreed between the Trust and Executive Board, is currently underway.

Conclusion 6.7 The BBC faces a challenging and exciting decade ahead as we seek to maximise our commercial revenues through appropriate activities in a fast-changing world, as charged by successive Governments. We have the potential to deliver substantial ﬁnancial returns for the licence payer, contribute signiﬁcantly to the public purposes of the BBC, and enhance the BBC brand and wider reputation of the nation and its creative industries. The BBC therefore sees BBC Worldwide as an important part of our future and expects the company to build strongly on its successes of recent years. Exploitation of the commercial opportunities open to us will be managed in a controlled, well governed and appropriate way to deliver long term and sustainable value to the licence fee payer. 6.8 The BBC welcomes the Select Committee’s review of our commercial activities, as part of the process of public scrutiny that is central to our business. We are grateful for the opportunity to provide this submission and look forward to discussing it with you.

7. BBC WorldNews and BBC Resources

This ﬁnal Section provides a brief summary of the BBC’s other commercial subsidiaries, BBC World News and BBC Resources — BBC World News: Like Worldwide, the BBC’s commercially funded, international 24-hour news channel acts as an ambassador for the UK overseas. Governed separately from Worldwide as part of the BBC’s Global News division (alongside the World Service), World News brings the latest English-language news and information to more than 200 countries and territories around the globe. Although BBC World News has not enjoyed the same levels of commercial success as some parts of BBC Worldwide, it is moving rapidly towards achieving proﬁt (losses halved in last year alone and advertising revenues have increased by more than 20% annually for the past six years). Importantly, audience research also indicates that the public value delivered by BBC World News is substantial. Like all of the BBC’s commercial subsidiaries, its commercial value and other contributions to the BBC’s aims are the basis of periodic review. — BBC Resources: During 2007–08 BBC Resources was oVered for sale either in whole or in part and, as a result, the Outside Broadcasts business was sold to SIS Outside Broadcasts Limited on 1 April 2008. The stock of the Costumes and Wigs facility was also sold to other suppliers. At present, both Studios and Post Production remain as commercial businesses within BBC Resources Ltd while a review of the BBC’s future requirements is completed. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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Annex 1

BREAKDOWN OF BBCW RETURNS FROM 2004–05 TO 2007–08

BBCWW: Dividends, Programme Investments and Other Payments (£m)

300

250 104 88 200 Programme Investments (BBC, indie 94 for BBC and third-party) 150 Dividends Paid 76 75 78 100 57 Other rights acquisitions and 16 investments in talent 50 77 76 90 91

0 2004/05 2005/06 2006/07 2007/08

BBCW: Dividends, Programme Investments and Other Payments (£m)

1,000 900 800 361 700 Programme Investments (BBC, indie 600 for BBC and third-party) 500 Dividends Paid 227 400 300 Other rights acquisions and investments in talent 200 104 88 94 334 76 75 78 100 16 57 77 76 90 91 0 2004/05 2005/06 2006/07 2007/08 TOTAL = 921

BBCWW: 2004/05 to 2007/08 Dividends, Programme Investments an d Other Payments (£m)

227

334 Dividends Paid

Programme Investments (BBC, indie for BBC and third-party) Other rights acquisitions and investments in talent

361 Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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Annex 2

BBCW MARKET SHARES Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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Annex 3

BBCW ANNUAL REPORT 2007/08 Available on request or see: http://www.bbcworldwide.com/annualreviews/review2008/documents/ BBC WORLDWIDE AR 2007-08.pdf

Witnesses: Sir Michael Lyons, Chairman, BBC Trust, and Mr Mark Thompson, Director General, BBC, gave evidence.

Q90 Chairman: Good morning, everybody. This is in a Sunday newspaper did steadily the number of the second session of the Committee’s inquiry into complaints begin to grow, many of them prefaced the BBC’s commercial operations, and we are with the comment, “I haven’t listened to this, but I delighted to welcome Sir Michael Lyons and Mark am oVended”. Now, here is the challenge, and again Thompson to give evidence. Since the let me say again that this material was unacceptable, announcement of the inquiry, there has been a little should never have been broadcast and should never publicity about other matters aVecting the BBC and have been recorded, but there is a dilemma here we thought that the Director General and the about how you read a situation where the audience Chairman would not want this opportunity to pass concerned, and we will not know if they enjoyed it, without having the opportunity to address some of but they do not appear to have been oVended by it, the questions raised by the Russell Brand and but actually another part of the licence fee public Jonathan Ross broadcast and subsequent matters clearly was oVended. Now, my view is very clear on raised to that. If I might begin, when the story first this, that the BBC needs to certainly take account of broke about the Ross/Brand telephone call on the views of licence fee-payers more generally, but Andrew Sachs’s answering machine, it was the most important issue here though was that this suggested by the BBC that this had only led to two lay beyond the boundary of what the BBC believes complaints and, therefore, it was not a matter of it should broadcast. great importance, and indeed, even since then, there Mr Thompson: Perhaps I can just say, on my own have been suggestions by some that actually this was behalf as Director General, that I am in no doubt a hysteria which was largely whipped up by The that this was a very serious editorial lapse. There is a Daily Mail and other newspapers. Do you think that debate, and I think it is an interesting and important the reaction was disproportionate? debate, about the boundaries of taste and how the Sir Michael Lyons: I am going to answer that BBC and other broadcasters should strike the right question, Chairman, but I just want to start by balance between creative freedom for given underlining the basis on which we answer your programmes and the reasonable expectations of questions today. This is still not complete in terms of diVerent audience groups in terms of content, and the Trust’s inquiries and we are receiving a full we know, and the Committee will know from other written report at our board meeting this week, and work you have done, that there are very diVerent that will inevitably mean that there are some areas of expectations from diVerent audience groups, so information that we are not able to share with you there is that broader debate, and, if you want to ask this morning, but that will all be made public once questions about that, we of course can tackle them. the Trust has reached its final conclusions on this This is, it seems to me, an example of a really serious matter. Let me turn to the specific question though editorial lapse which is not close to some boundary of these events and preface anything that I might say where you can debate it. It is absolutely the wrong about the handling of it or the decisions made with side of the line in terms of invasion of privacy and in a very clear statement, and it is not for the first time terms of a lapse, eVectively, of a duty of care to some made both by the Director General and myself, as of the individuals, Andrew Sachs and his Chair of the BBC Trust, that the events reflected in granddaughter being the central figures there, and I that programme should not have taken place, they would not say that the press comment about this was should not have been recorded and, most important illegitimate, therefore. I think it was a serious of all, they should not have been broadcast. There is editorial lapse and it was entirely appropriate, no question of the BBC saying anything other than bluntly, that the rest of the media should point to that the contents of that programme lie beyond the that. In answer to your question, and, as Sir Michael boundary of what is acceptable for the BBC to says, it is an ongoing process and he had a meeting broadcast and lie beyond its editorial standards, and this week, do I think that the actions so far, namely it is important that I underline that to begin with. the actions announced by the Trust and also the Now, let us talk about the handling of it. It is a actions which I announced and indeed the matter of fact that, when this was broadcast on the consequences for some of the people who were 18th to an audience of almost 400,000 people with an responsible for the broadcast, do I think they were average age of 55, there were only two complaints disproportionate? No, I do not. The senior and those two complaints do not even approach the management knew about this programme on most oVensive issues raised by the programme. A Sunday 26 October and, by the following Thursday, week later, after a further roughly 50% extra people we had been able to prepare an interim report for the had listened to the programme either by podcast or BBC Trust and to make recommendations for pretty through the iPlayer, there were still only five strong, but, what I believe was, proportionate complaints. Only after the publication of an article action, and I believe that the actions we have taken Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Sir Michael Lyons and Mr Mark Thompson were an appropriate response to what was a serious Q94 Chairman: But it was not less than a week from editorial lapse. I accept that there are some licence- the programme, it was less than a week from a payers, and some of them have written to me, who Sunday newspaper. believe it is an overreaction. I believe that what we Sir Michael Lyons: Chairman, I absolutely have done is proportionate, given the seriousness of understand that and I have conceded that point, but what happened. what we have to focus on are the two separate charges: the failings before management became aware of this, for which people have been held to Q91 Chairman: You have both talked about how account in the most severe way; and the actions of serious a breach this was. If it is obvious to you that the BBC management and the Trust following this was a very serious breach, and I think it is publication of the Sunday article. obvious to all of us that this was a very serious Mr Thompson: I do not want to prejudice the report breach, why, when it was drawn to the attention of that is yet to come to the BBC Trust, but perhaps it the BBC, did they not immediately say, “This is a is helpful if I say the following: that the nature of the very serious breach”, instead of, “Well, we’ve only compliance failure was that the gatekeepers, the had two complaints”? senior editorial managers on Radio Two, who would Sir Michael Lyons: Well, Chairman, let us go to have been expected to address the issues raised and what the BBC actually did. On the Monday morning essentially to ensure that the programme is not at 11 o’clock, it published a full apology, making it broadcast, made errors of judgment and believed the very clear that this was unacceptable. Now, I do not programme was suitable for broadcast and, know what— therefore, it was broadcast, but also, in the aftermath of the programme being broadcast, those people, as it were, whom we would normally have Q92 Chairman: But not on the morning after the expected to be monitoring the output and broadcast. considering whether it was appropriate, were the Sir Michael Lyons: No, let me be very clear. The people who had decided that the programme was broadcast on Saturday 18th, there is a proper issue to suitable for broadcast. The audience of The Russell account for and the Trust is looking into this in some Brand Show clearly also did not find the programme detail and it already has a pretty good picture of the unexceptional, and it is only at the weekend at the events between the 18th and the coverage of this in a publication of The Mail on Sunday that the detail of Sunday newspaper just over a week later, and it is on what was broadcast in this edition of The Russell the basis of that that you have seen the actions Brand Show became clear to the rest of the senior reported, both those taken by the Director General, management of the BBC, but the point I am making the consequences for those who were directly is that the character of the compliance failure, that responsible for the actions over that period and the quite senior people with a specific responsibility for further request that the Trust has made to editorial standards and compliance made errors of investigate further and put precautions in place for judgment in relation to this programme, not only the future. Therefore, that period up until the had the eVect of allowing the programme to go out, publication of the Sunday newspaper, following the but it meant it was days after the broadcast before publication of the Sunday newspaper article, both the detail of what was in the programme became the Trust and the senior management of the BBC clear to us as well. became aware of this lapse for the first time and the apology was issued the very next morning. Q95 Mr Evans: Before I start, can I pay tribute to BBC News’s coverage of this particular incident which I thought was absolutely superb. Now, as you Q93 Chairman: Is it not extraordinary that you had reflect back on your own reactions to this story, how to wait for The Mail on Sunday to tell you about it? do you judge your own reactions, both of you? Sir Michael Lyons: Well, Chairman, that might be Any regrets? the case, and I am not trying to excuse the processes Sir Michael Lyons: Well, in these circumstances within the BBC over that seven-day period, but there are always lessons to learn, are there not, and indeed let us be clear, that the real oVences lie in the Trust, as I said in my opening comments, th allowing this programme to go out on the 18 . That continues to focus on what are the right lessons to is where the real problems lie. Now, is it right to learn. I will come to the issue of personal reactions, expect the Director General or any other part of the but we are still examining the way that the BBC BBC’s management team to be aware of every single handled this, the nature of the apology, whether or programme that is broadcast? No. They rely on not that should have been followed up by a stronger other folks within the organisation and those folks sort of personalisation of that message in the first have been held to account and in a way, frankly, that few days as well as getting to the root of “How could you do not see very often in any organisation in this you have had such a serious editorial lapse that country. Within less than a week of the matter involved such senior and experienced people within coming to our attention you had not only the the BBC?” We are trying to do this in a way which immediate apology, but also a series of actions is more surgical. What we do not want is something which demonstrate clearly that in the BBC there are which assumes that this is a problem endemic across consequences for those people who let the public the whole of the BBC. 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Ev 100 Culture, Media and Sport Committee: Evidence

18 November 2008 Sir Michael Lyons and Mr Mark Thompson considerable work over the last year to tighten up on we did act, we would do it fairly and editorial standards, and the examinations that we proportionately, knowing what had actually have commissioned again seem to suggest that they happened. have had their eVect, so we need to get to the bottom of that. Now, in terms of what might have been done diVerently here, well, I certainly do not think we Q96 Mr Evans: Do you accept though, both of you, could have got the apology out any earlier. Could that you were lamentably slow in your reactions? Sir that apology have been worded diVerently? Well, it Michael, you were duVed up on the Today was clear that it was both an apology to Andrew programme for being slow. Do you accept that? Sachs and that it underlined that the material was Sir Michael Lyons: Well, it was put to me. I do not unacceptable. Might it have embraced other people regard myself as having been duVed up. I was very who were oVended, not least particularly Ms Baillie? clear that there was no lack of speed from the Yes, it might have done. Was there a case for the Sunday. This is a mythology which I just do not Head of Audio, Tim Davie, to be out a little earlier accept. There was no lack of speed following the on the airwaves? Yes, there was. What was the publication, but much to account for in the Trust’s role in this? I read The Mail on Sunday preceding week and indeed the failure to control this article. The Trust was engaged with the BBC programme properly, much to account for, and in management from that point onwards. We were the Trust, from the moment when it became aware clear that this was a serious matter, that it needed to of this, on that job. I refute and reject any suggestion be investigated, and the inquiry started on the that there were further actions that the Trust should Monday, and we were clear that this was a matter for have taken over that period, as I did when John our Editorial Standards Committee to look at and I Humphrys interviewed me that morning. personally accelerated that process on the Tuesday to make sure that we could deal with it at the meeting Q97 Mr Evans: Even Lord Carter himself said that planned for the Thursday. Are there lessons to learn? the BBC was lamentably slow, and, Mark, you only Almost certainly, as there are from every one of came out of hiding when the guns started to train on these crises, and of course they are always diVerent you instead of Ross and Brand. Do you not accept in nature, are they not? that you should have acted? You say you received a Mr Thompson: My story is that I was away out of the phone call on the 27th. Is that not when you should country over the weekend and out of telephone have made the statement, not on the 29th. contact. I got a phone call on the evening of Monday Sir Michael Lyons: To be clear, Mr Evans, we had 27 October, this was the day after The Mail on already made a statement of unreserved apology. Sunday was published, and was told that there had been a serious editorial breach on Radio Two, that the BBC had already, early that morning, issued a Q98 Mr Evans: No, you. You talk about the comprehensive and unreserved apology, that an gatekeepers and you are both gatekeepers of the inquiry into what had happened and how this breach BBC as well, so do you not accept any blame at all had occurred had already started and was likely to for your lamentable slowness? When you made the be able to produce interim ﬁndings by as early as, I statement, Mark, it was a good statement, but it was think at that point, maybe Thursday and that there slow in coming. was likely to be a meeting of the Editorial Standards Sir Michael Lyons: Mr Evans, this might be a Committee of the BBC Trust on that Thursday. I convenient story, it may even be one which has been thought that those actions sounded appropriate. If I given wide circulation, but the problem is that it had heard about that, as it were, as I opened The actually just is not true. The failings that need to be Mail on Sunday on the Sunday that those were the focused on are those that occurred before The Mail actions, given the moment some of the transcript of on Sunday article and particularly those around the the programme was read out to me on the phone and events of the recording and broadcast of the it was quite clear to me that we were dealing with a programme on the 18th. We are here making it very serious editorial lapse, then the immediate issue of clear that both the Trust and the Director General an unreserved apology and an immediate accept that that is an issue which we must be held to investigation, I have to say, I felt then and still feel, account for, and the Trust is doing its job of holding were the right things to do. Although I absolutely the executive to account for that and you will get a appreciate, and you might say it is ironic for the full report and it will be in the public domain. One Head of a news organisation to say this, that the of the problems here of course is that it is very news cycle is very demanding of comment and faces, diYcult to criticise the fact that the BBC has actually the idea that BBC senior management demonstrably taken action that has had should focus as quickly as possible on understanding consequences for those who were involved. Now, exactly why this programme had gone out and trying that is so exceptional in our society that people have to weigh quite closely the respective roles of the on- to look for a diVerent story to tell. I do not believe air broadcasters, the producer, the independent that we have anything to account for in terms of production company and some of the senior ﬁgures speed of action either in terms of the Trust or the on Radio Two who are charged with maintaining senior management. There are lessons to learn about editorial standards on Radio Two, it meant talking how we might manage our public messages more to them, weighing evidence, exploring the eVectively in the future and we will learn those paperwork, the email and paper traYc so that, when lessons. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 101

18 November 2008 Sir Michael Lyons and Mr Mark Thompson

Q99 Mr Evans: Do you not think they were both sort of get cover. You say that the big problem is that guilty, Mark, of gross misconduct, Ross and Brand? this went out, but do you not think that there is a Mr Thompson: I do not think I want to go any bigger problem that you two are directly responsible further than the public statements we have already for, that you preside over the culture of the BBC, made about all of the parties. I made it very clear you set the parameters for the BBC of the kind of that I thought the behaviour of the on-air thing that is acceptable? Do you not feel personally broadcasters was unacceptable in this case. responsible that people within your organisation thought, under your leadership, that this type of Q100 Mr Evans: You would not go as far as gross thing might even be acceptable? Do you not think misconduct for what they did? that is a personal failure of both of your leadership? Mr Thompson: I have said that I believe that what Sir Michael Lyons: Well, no, I do not. What is the was broadcast was utterly unacceptable and I believe right test of leadership? It is not that there will not be that for the broadcasters, Russell Brand and mistakes. Now, that would be an extraordinary state Jonathan Ross, as we have said already and as I have to aspire to. It is not that you will not from time to said and I have made it very clear to Jonathan Ross time find members of your organisation doing things whom I have spoken to personally about this, that which you would not approve of, indeed which you this was completely untoward and unacceptable have categorically disapproved of and sought to behaviour. control. It is how you respond when those circumstances come about. What is a hallmark of Q101 Mr Evans: If this had happened in any other the BBC under its current leadership? Firstly, that it walk of life, they would have been sacked does not flinch from apologising when it has got immediately. Why did you not sack them, Mark, things wrong; secondly, that it does not rush, as and show real leadership? some might have encouraged it to do, to defend Sir Michael Lyons: Mr Evans, can I help you what, it subsequently becomes clear, is indefensible, because we do want to be as helpful as possible, but but it looks for the evidence before it makes I did say in my preface to this that we were not here decisions; and, thirdly, and most importantly of all, to disclose information which had not yet been fully it holds to account the people who had the relevant considered by the Trust and which will all be made responsibilities. The Trust is holding the Director public later. Let me just help you a little bit on this General to account and he, in turn, has held staV and issue by reflecting one of the issues which the Trust performers to account. Now, I think that is the sign has already received some information on, but has of a healthy organisation, but we are here to answer not yet finished its deliberations before you bandy your questions. around terms like ‘gross misconduct’. There can be Mr Thompson: It is worth saying that the scale of the no doubt at all that you should not expect BBC’s operations and the many, many tens of performers to either use the language or insult thousands of hours that we broadcast on television people in the way that they did on that programme. and radio and the millions of pages on the web However, the BBC has a duty of care in terms of means that, even with, as I believe we have in the allowing that material to be broadcast. The primary overwhelming majority of the BBC, very good and failing, and the failing that the Trust has focused on, strong compliance procedures in place, there will is not the antics of performers, it is the fact that that sometimes be human error. It is the nature of any was allowed to go out over the airwaves, and we activity and, I think rightly, in the way we did, as Mr must not avoid that responsibility; that is the thing Evans mentioned, with BBC News where BBC News to focus on. Now, it will have been contributed to, is charged with independently, objectively and fairly and there are a number of things which we are reporting what happens, including what happens in seeking to explore, one of them being whether it is the BBC. We have done a great deal over the last right to leave a young producer implanted in a four years to strengthen the professionalism and the company owned by one of the performers. That is independence of our journalism and I think we have one of the things the Trust is seeking to explore and made enormous progress, but in journalism, as we have made that exploration public, but, until we elsewhere, you will sometimes get errors. If I have finished this work, I would just be careful about believed there were a pattern of a weakening of terms like ‘gross misconduct’ which have compliance across the BBC, I think that would be contractual implications. absolutely a really serious systemic fault. I have to say, I believe, and I think there is good evidence and Q102 Mr Evans: But will you come back to this the Trust has done its own work to look at the Committee— compliance culture inside the BBC, that this has Sir Michael Lyons: When you have had a chance to been a period where actually across journalism, read our published results, if you want to discuss it across non-journalism, in the matter of some of the further, we will, as ever, make ourselves available to other areas that have been the focus in recent years, take your questions. for example, the conduct of competitions and phone voting, we have seen a progressive, widespread Q103 Philip Davies: Just following on from this and tightening and improvement and the BBC’s editorial your responsibilities here, in a bloated bureaucracy guidelines are far more central to operations in the like the BBC the advantage for people like you is BBC now than they were five years ago. Now, that that there is always someone else to blame. You can is not to say that we should not learn lessons from always sort of hang a few people out to dry and you individual serious lapses, but you cannot have the Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

Ev 102 Culture, Media and Sport Committee: Evidence

18 November 2008 Sir Michael Lyons and Mr Mark Thompson scale of television and radio broadcasting in doubt, of any which you and your colleagues have journalism and beyond journalism that the BBC been involved with, that it is a routine measure to does and not expect that sometimes we will get it check the nature of an apology before it is broadcast. wrong. There is much, believe me, that the BBC gets right, and we are at the moment a few days after Q105 Philip Davies: Well, I would have thought it Children in Need, we have Little Dorrit on the air and was. I think we had superb coverage of the US elections Sir Michael Lyons: Well, let us not go into this. Let on our airwaves. This is a very uncharacteristic, me just say that I concede that in these circumstances utterly unacceptable, but genuinely exceptional, that might have been a good idea. lapse, in my view. We need to find out why, we need Mr Thompson: It is just worth saying about this final to put in place measures to make sure we absolutely apology, and it was an apology required by the BBC minimise the chance of it happening again, but it is Trust to be broadcast, that the first version of the not typical of the BBC and it is not typical of the way apology absolutely repeated the full and unreserved our compliance systems work. apology to Andrew Sachs himself and indeed to Sir Michael Lyons: Mr Davies, can I just come back Georgina Baillie, his granddaughter. When Andrew on the closing part of your question which was about made it clear that he also wanted his wife and other the culture because there, I think, you do have a members of his family to be included in the apology, point which the Trust itself is interested in. Let me we absolutely— just underline that we are on alert as a result of this Sir Michael Lyons: We immediately agreed. incident to whether there have been specific Mr Thompson:—were happy to agree to that, and problems of editorial control and compliance in the second broadcast of the apology included other audio and radio, and that is where we have focused family members. That was the distinction between the Director General to do more work for us, but we the first version of the apology and the second. have also asked him to draw together all of his senior editorial staV to make sure, because, without going Q106 Philip Davies: Finally on this, you talk about into all of the details, there is evidence there of senior systemic failings. Before, the BBC have been here members of staV not being clear of what falls outside because of The Queen and the fact that things were of the editorial controls, so we asked him to draw rigged on The Queen to make sure the programme together his senior staV to be clear that there are broadcast was not as it appeared, and we have had public expectations here which prevail across the the thing about Blue Peter and all of the phone-ins. entire spectrum of content of the BBC, and that is an This seems to me like systemic failure of compliance exercise which we are looking at. I am very careful within the BBC. Last time, we were told there were with the word ‘culture’. It is used very widely to a load of training courses because obviously the staV capture those things which are not easily defined in of the BBC need to be trained on how not to lie to rules and procedures, and I am absolutely clear that their viewers and how not to jiggle their there are important issues there, but we have to be competitions! Are we now going to have a new careful in regarding that as a sort of black box training course on the BBC on how not to launch though. The Trust wants to be surgical and that is into oVensive messages on people’s answerphones? the only way that we are going to bring about Sir Michael Lyons: Let me, if I can, just elevate this changes to give us all confidence in the future. to a slightly more strategic level just for a moment. It is in the nature of the BBC in the work that it does that it takes risks. Which stories it chooses to cover Q104 Philip Davies: But the point is that you were with its journalists, how it seeks to interpret those talking earlier about how only two viewers were stories, which programmes it decides to commission oVended and five by the end of the week, but surely or make, which artists it decides to retain, every day, that is irrelevant. It was not about whether the every day the BBC makes thousands, possibly viewers were oVended or not, it was about whether hundreds of thousands, of decisions which are Andrew Sachs was oVended or not. Presumably, the inherently risky and which could prove to be wrong. viewers, the people listening to it, may well have Either the story is wrong, and it has possibly been presumed that Andrew Sachs was part of it and in on broadcast wrongly, information has been this particular joke and they could not believe that assimilated wrongly or a performer goes beyond the the BBC would do anything so crass otherwise, yet, bounds of what you might expect, so there are even when you apologised, you did not even check inevitably risks. We cannot come to you and say, or your apology with Andrew Sachs to make sure that there is no regime that the Trust can impose, nor can he was happy with the wording of the apology that the Director General impose, that actually gives you was broadcast on Radio Two. How can you preside a guarantee that we will not take risks in the future over such an arrogant organisation that does not and that things might fail, and it is important that we even check with the person who has been oVended all recognise that, otherwise, it would be very whether they are happy with the apology that is diYcult for us to have a civilised dialogue. In terms being broadcast? of the way that this particular failing has been Sir Michael Lyons: Well, Mr Davies, I concede that responded to, it has certain hallmarks. As soon as it would have been better if that final and very the BBC Trust and the senior management became fulsome apology had been checked with Mr Sachs, aware of it, it was dealt with. It has consequences for but let me say that it is not the practice of any people within the BBC who have let the organisation organisation that I have been involved with, or, I and the public down, consequences which, I would Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 103

18 November 2008 Sir Michael Lyons and Mr Mark Thompson purport, more clearly demonstrated than we find unacceptable behaviour by the performers, but at across most parts of the British economy and the same time it would be, I think, letting audiences certainly public organisations. We are here down if we left a message that we were in any way explaining to you not only that those actions were going to discourage risk-taking or innovation in the taken, but reflecting your view on the fact that there BBC. Of course, putting those two messages are lessons to learn perhaps in our press-handling of together can sound contradictory to some, and that the future. Yes, there are further steps to take to is exactly the line that we are trying to tread here of ensure tighter editorial control. All of our being clear that the BBC is not losing its nerve, it discussions so far suggest that they are not pan- absolutely has to serve all audiences, that is its BBC, but need to be focused particularly in audio requirement, that is its Charter requirement, and the and music, that is where the Director General is Trust regards that as its primary responsibility, but focused, and your proper comment about maybe that does not mean that anything goes. We have there is a wider issue of understanding culture is also standards, and it is quite appropriate for us to listen addressed in the instructions that the Trust has given carefully even to people who have not listened to the Director General. programmes if they feel their licence fee is being used Mr Thompson: The public tell us very strongly that inappropriately, but Mark really ought to have a they want us to take risks, they want original, chance to come back on the issue of nurturing talent, challenging and brave programming, and that is a if you are happy, Chairman. fact of life. The second thing I would say, Mr Davies, Mr Thompson: I think actually that what Sir is that it is genuinely diYcult to predict every single Michael has said covers the main point. It is diYcult possible editorial issue that could come up, and we to satisfy possibly everyone in the room, let alone currently have a debate about John Sergeant’s everyone in the country, but we have to act dancing in Strictly Come Dancing and whether he proportionately when we discover problems and should be continuing in the competition or not, and ‘proportionately’ means pretty firmly and in some the scenario of whether political correspondents or cases, I am afraid, it does mean parting with indeed politicians and their dancing abilities shows important and able colleagues, but at the same time up an underlying issue with the diVerence between we have to figure out a way within the creative the judgment of the judges on the programme and culture of the organisation of making sure that the public at large is a new topic. Our duty, I think, people think they can take legitimate risks, and, I is, when a set of issues arises and, yes, when we make have to say, in the end I believe that the clarity about mistakes, to try and understand why, to try and put the standards the public expect and about the BBC’s things in place to make sure that those things do not editorial guidelines actually, done in the right way, happen again and to keep as alert as we can across can encourage the right kind of creativity; it brings the entire spectrum of editorial matters, but to a kind of freedom when you understand where the recognise that sometimes a particular issue, the boundaries are. leaving of an oVensive message on an answerphone, will, to some extent, pose new questions for us. Q109 Helen Southworth: Will you be bringing in some of your big talents to get that message across? Q107 Helen Southworth: We have explored in quite Mr Thompson: We will be talking to everyone, some detail some aspects of the situation the BBC is including on-air talent, of course. finding itself in at the moment, but could I ask you if you could explore some other aspects of it which, I think, are extremely important to the viewers and Q110 Helen Southworth: But will they be giving that listeners, and that is around the high level of message out as well? creativity that we expect from the BBC. When we Mr Thompson: I expect, as we go through the have had evidence from you previously, one of the process both of the broader discussion about the things that you have lauded about the BBC in terms boundaries of taste, but also in the more detailed of its national and international position has been work of trying to learn the lessons from this the way it brings on new talent, that it is able to take particular incident, that key on-air talent will be a risks in bringing on new talent— part of that, helping us to come up with the rights Sir Michael Lyons: Yes. answers, but also helping to promulgate it, yes. Sir Michael Lyons: If I could just add a very short PS to that, the Trust will be ensuring that this is not just Q108 Helen Southworth:—and that has given the a debate within the BBC, but actually it is a public UK some exceptional performances and some debate as well because it is very clear, if you look at exceptional performers. How are you going to make the letters column over that particular week of, I do sure that you actually continue to do that and that not know the right term for it, hysteria may be not you protect your talent during those processes in a right, but over that week there were many people proper way? showing actually quite diVerent views about how Sir Michael Lyons: I feel that is a good and searching one should react to these circumstances and what it question for the challenge that faces the BBC and, in should mean for the future. part, conditions how we respond to these failings. I think at one and the same time, and you have had this in public comments both by the Director Q111 Helen Southworth: If I can just ask you about General and myself, we need to be very clear that one final point, you have been discussing how you there is unacceptable behaviour here, including are going to manage pre-recorded shows and what Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

Ev 104 Culture, Media and Sport Committee: Evidence

18 November 2008 Sir Michael Lyons and Mr Mark Thompson the editorial responsibilities and duties are going to The only diVerence is that at that point The Mail on be around those, but how are you going to manage Sunday did not feel it was under attack from the live shows? BBC Local and, therefore, did not broadcast it Sir Michael Lyons: Well, clearly, if this could disproportionately to its readership and actually stir happen with a recorded show, then we have to be it up more than perhaps it deserved to be stirred up. absolutely clear that the controls around live Mr Thompson: I think what I want to say, almost to recordings are even more stringent. I have to say, state the obvious, is that every editorial lapse that the although I do not want to have the final word on BBC or any broadcaster makes at some level this, but, from what I see, actually the controls tend represents a failure, small or big, in the compliance to be tighter around live shows because the risk is process, and the scale of what the organisation does clearly understood, and that is something which we means that some editorial lapses, I am afraid, with are looking at again in more detail and we will the best will in the world and with the best systems publish our findings. in the world, are inevitable. What we try and do with our compliance procedures is progressively improve Q112 Mr Sanders: Was this not clearly an incident them and strengthen them. Clearly, it is just waiting to happen, given how much free rein you disheartening, having spent so much work on give your best-known performers in allowing them compliance, that an error of this size, the size of The to run production companies that employ the people Russell Brand Show, should happen, but, as I have who are supposed to censor them, and is it not said to you, I think that, although we are going to unrealistic to expect the star to actually be held in look at the topic again, and I know this is about check by somebody that they themselves employ? television as well as radio, already we have Does that not actually go to the heart of this? identified, partly because of one or two issues in the Mr Thompson: Well, as you have heard, we are going past, that there is a need for a special care on to look specifically at whether we need to bring in compliance on these programmes. As I say, I believe additional safeguards or whether we change our that across television and radio that compliance is practice in relation to this particular scenario of generally working very well and that manifestly, in programmes which are commissioned by a the context of this edition of The Russell Brand production company where the stars either own it or Show, the compliance system did not work well. have an economic interest. What I would say though Sir Michael Lyons: Can I just add a short postscript is that the existing protocols and compliance which might be helpful to you, Mr Sanders, which is arrangements recognise that this adds potentially to that one thing that you probably heard me say back risk and that, therefore, the compliance procedures in the autumn of last year when we agreed the six- need to be followed particularly carefully in the year plan is that the BBC should do nothing that it context of a programme made by an independent cannot do well. Now, this issue, I think, comes back production company where the artist has an to this hearing. If it is the case that the organisation economic involvement, and there is already across is stretched and that we find any evidence that these television and radio particular programmes and failings are because actually it is too stretched, then these programmes are regarded naturally as of the lesson will be taken to heart very clearly that the potentially higher risk because of that and, because BBC will have to do less, that it can only do what it of that, the compliance procedures are intended to can control, and comply with, adequately. be stricter. Indeed, on the programme in question, The Russell Brand Show, there is good evidence of tight compliance procedures for previous editions of Q114 Rosemary McKenna: I think the most this programme. The programme had been running important debate out of this will be about taste and for two years and won a Sony Gold Award because the balance of taste. As we have seen, I think, this of its quality and had proceeded for a long time morning and over the last few weeks, the BBC without any issues, so literally, if you just look at The performed a spectacular own-goal for its enemies, Russell Brand Show, although, my goodness me, it and there are many to attack the BBC, but I think has got some quite edgy material in it, the the BBC can be held to account and that is really compliance procedures seem to be working. Now, important. I would contrast that with the hypocrisy the compliance procedures in this episode of The of the print media who actually have continued to Russell Brand Show failed and they failed at a senior report in detail the actual events that have dragged level, and there are lessons to learn from that, but all the life of the young woman at the centre of these I would say is that, even if you look at The Russell awful events through the gutter in fact, and she is the Brand Show and the management of this show, I do real victim in all of this and I have a great deal of not think you can go back, as it were, through the sympathy for her. I think we have to put the whole audit trail and say, even of this programme, that it event into perspective, I think it has got out of hand, was obvious that it was an accident waiting to but how do we address the concerns of the vast happen. number of people who say, “Yes, we have concerns about broadcasting”, and they are principally Q113 Mr Sanders: But have you not actually been around taste, they are around the use of bad here before in 2007 with The Green Guide to Life language, swearing, and storylines? How do we programme when Ofcom ruled that it exposed a balance that? How do we get that debate going in weakness in the broadcaster’s compliance public without it being used to kick the BBC all over procedures? That was almost an identical scenario. the place? Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 105

18 November 2008 Sir Michael Lyons and Mr Mark Thompson

Sir Michael Lyons: Well, I absolutely agree with were also evident in our inquiry into controls over you, and this is not something that you have from companies running quiz shows. If I can just turn to time to time, but I think there has to be a continual Mark, Mark, you are the Director General, but do debate about what we, as a community, as a nation, you think there has been a witch-finder general in the as a group of nations, are willing to see broadcast in pursuit of this aVair? our name, and that is a particular responsibility for Mr Thompson: I do not quite understand the the BBC because of the licence fee and the fact that question. Are you suggesting that I might have acted it makes a universal charge. We cannot dismiss the as the witch-finder general or that somebody else interest of any part of the licence fee-paying public, has? but I think you have put it in the right terms, that it is important that this is a debate that reflects all Q116 Paul Farrelly: Well, is there a feeling within the views and is not hijacked by a particular view, and I BBC that some of the coverage of this aVair has been think that is the challenge for us here, to make sure pursued as a broader witch-hunt against the BBC? that the BBC continues to be open to all opinions, Mr Thompson: To be honest, I think that is, if I may understands its responsibilities to the nation as a say so, for others to judge. What I would say is that whole, does not falter in its need to serve all we come here, I come here today to reflect on a audiences and, inevitably, takes risks in doing that. serious editorial lapse for which I have personally Mr Thompson: But within a context of one or two apologised publicly, the organisation has apologised very, very clear principles, for example, the publicly and I have also apologised personally both watershed, which is a rather old-fashioned way by telephone and in writing to the key people who perhaps of thinking about this issue. It is really were the victims of it. I think how that happened and important to households up and down the country what we are going to do to try and make sure it does and they find it very, very useful, the idea that before not happen again, that is what, I said, helps here. I nine o’clock, in the matter of strong language, they think the broader debate about the BBC and about can have a very high confidence that programming the various understandable agendas of the rest of the will be suitable, in the case of television, for children media and how they might play into all of this is to watch in a family context. We have tried even with really for others to comment on. I have said that I do initiatives like the iPlayer. There are quite not think it was unreasonable for newspapers, in sophisticated parental controls on the iPlayer again particular The Mail on Sunday, but subsequent to give families a chance to make their choice about newspapers, to point to this as an editorial error what, in particular, they want their children to see because it manifestly was. I think it was very and hear, so I think there are quite strong controls in extensively covered on our own news bulletins. I was place and, if there is going to be strong material in, interviewed and, I have to say, anybody who thinks for example, a late-night programme on Radio Two that the Director General gets an easy ride from or, for that matter, on BBC Two, we would again be BBC interviewers really should wake up and smell very carefully warning the public, and we do try and the coVee. I was interviewed and Michael also had warn the public, about what they are likely to his moment and doubtless will again. I thought, I encounter on a programme. Now, I am not saying have to say, speaking personally, that I was that closes the debate oV. I think the right thing for interviewed fairly, toughly but fairly, and I think us is to listen to the public and to enter into the that, if other people get treated in the way I was debate, and the Trust will certainly have a view on treated by my colleagues both on the BBC, Sky, ITN all of that, but I think you should see, and it is not and so forth, they would have little to complain always perhaps covered in the print media, that this about. is not some sort of Wild West where anything goes, Sir Michael Lyons: Could I just say that I think the but there are already widespread and careful BBC should aspire to better standards, higher controls in place. standards, than others. I think that is part of its Sir Michael Lyons: Could I just add a short contract with the public, that is the basis on which I addendum to that, and it is very important that this and the Trust work and I believe that is the basis on debate is not just conducted in terms of which which the Director General works. In the same ten- expletives are permissible and at what time of the day hearing, the discussion about whether our day because, frankly, if you had taken this apology was adequate or not, two other media programme and taken all of the expletives out of it, oVences, one by a newspaper and one by television, it still would have been way beyond the boundaries, in one case dating from 2006 and one from 2007, and the danger with just focusing on the expletives, both were dribbled out into the public domain. I do and to some extent that is the story that we might not think it is possible for the BBC to believe that it unfold here, is that actually you miss the much could work in the same way. We need to expect to bigger oVence of a lack of respect for both the wider account for what we do and for it to be a matter of audience and for individuals. public debate in this country.

Q115 Paul Farrelly: Mistakes were deﬁnitely made Q117 Chairman: It is worth observing, and I think and resignations followed pretty swiftly both at the you would probably agree, certainly in terms of the senior level and at broadcast level, and, Sir Michael, expressions of anger which were expressed you have highlighted some structural problems in afterwards rather strongly that some of the strongest terms of standards and controls when independent which came to me, and, I suspect, to you, were from production companies are involved, and those issues employees of the BBC. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Sir Michael Lyons and Mr Mark Thompson

Sir Michael Lyons: There is no doubt that, as with level for talent. Last Friday, we had Children in earlier transgressions, folks who observe the rules Need, a record year, and we went over £500 million and understand the public expectations of them feel raised for charity by Children in Need. If you look at desperately let down, and I think it is absolutely Children in Need or Comic Relief and not just the right that both the Trust and the Director General programmes, but the whole way in which the BBC understand that, and that is why in our gets behind it, I think it is too simplistic to separate communications we have both emphasised a oV comedy or entertainment or popular drama from message internally to recognise that this is not a the BBC’s public service mission. I think if you spent brush which should tar every BBC employee or Friday evening watching what we do on Children in even most. Need, you can see how these household names and their commitment and their passion, from Sir Terry Wogan down, makes a big diVerence to the British Q118 Mr Evans: Since it came out that Jonathan public, and the public, although understandably, Ross was earning £6 million a year, I have not come when you ask them the question, “Is anybody worth across one person who thinks he is worth that X now?”, I think there is a lot of support from the money; quite the contrary. Do you think that it is public for the idea of a BBC which has got right that the BBC pays £6 million for one of its entertainment alongside information and education stars, Mark? as part of what it does. Sir Michael Lyons: Well, I will have the first crack at that because my answer is, surprisingly, yes. One of the things that I do, as Chairman of the BBC Trust, Q119 Mr Evans: Do you think the public might which is actually, if anything, slightly more testing think you were a bit out of touch, both of you, for than coming in front of yourselves, is regularly to thinking that he is worth £6 million a year? hold public meetings, and in the middle of a debate Sir Michael Lyons: Well, the answer to that of course in the South West where there were many, many is that the public has many and varied views, as people railing against the Jonathan Ross salary as reflected in this Committee. being inappropriate, actually there were people who were willing to stand up, even in that context, and Q120 Chairman: I would like to put one final point say that he was the reason that they watched the to you. Last week it was announced by Radio 2 that BBC. Now, I only tell you that because you have Jonathan Ross would be back on air from 24 asked a question which needed a precise answer and January next year. Is it not somewhat premature to let me now go into the payment of large salaries in make that announcement before you have had a the BBC. As you know, the Trust responded to chance to consider the report and decide whether or public concern which was very widespread, I not further action is needed? absolutely acknowledge that, about the payment of Sir Michael Lyons: That is a straightforward what is referred to as ‘top talent’, and Oliver and statement of when the period of suspension comes to Ohlbaum did that piece of work for us. The primary an end. Let me be clear, the Trust has not finished its question was: is the BBC paying more than it needs deliberations and all of these matters are subject to to pay for this talent? There was a clear and our final decisions. unequivocal response from the research that no, it is not, and sometimes it pays less than competitors, but Q121 Chairman: It was an announcement by Radio nonetheless, the Trust gave the Director General a 2 of the specific date when he will “be definitely back very clear message that he should manage these for the show”. contracts into the future to absolutely make sure Sir Michael Lyons: Chairman, I have heard that and that we do not pay any more than we need to, that I am giving you my answer that there is nothing that we need to bring on extra talent so that the BBC is ruled out from the final deliberations of the BBC always has choice, and, I have to say, I was pleased Trust. That is what you need to hear from me today. to hear his comment in public last week that in diVerent economic circumstances it will be possible for the BBC to drive a much harder bargain still in Q122 Chairman: Would you not agree that it would terms of recruiting talent to our screens and have been better to have waited until after you had airwaves. had your meeting? Mr Thompson: The only thing I would add to that is Sir Michael Lyons: I think it would. There are many that I think the public do want outstanding aspects of this aVair which I would like to have seen entertainment talent on the BBC’s airwaves and, handled diVerently. That is the case we are although we do seek to get, and the evidence of the exploring. I hope we have left you with a very clear Trust is that we succeed in getting, good value and message of our intent to get to the bottom of it and typically to get top talent for less than even other to make sure there is no recurrence. public service broadcasters pay for them, if the BBC is to have top talent, I think you have to accept that, Q123 Chairman: So even in the last week the BBC although, I hope, the market is going to change in has done something which in your view it should not the next couple of years, you are going into a labour have done. market where there is intense competition. Even Sir Michael Lyons: Do you know, I can go a little when you grow your own talent, amazingly quickly further than that: I am sure in the last week the BBC of course other people are on the phone and you are has done a few things that I wish they had not. It is having to pay something which relates to the market a big organisation serving the whole country. 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Q124 Chairman: We are discovering more and more disagree with that, but what BBC Worldwide is now lessons to be learned by the minute. I think we doing goes way beyond the BBC’s core activities and should now move on to the question of BBC a lot of its activities bear no relation to BBC Worldwide. You will be aware of the evidence that programmes at all. we received two weeks ago and also the more general Sir Michael Lyons: I might quibble with the scale of concern that has been expressed about the that, but there is a continuum which I absolutely increasingly ambitious growth strategy of BBC accept. It is, in part, why the BBC Trust was Worldwide. It was previously the case that interested in exploring matters at this stage. commercial activities should plainly arise from and support BBC programmes. That appears no longer to be the case. Do you see any boundaries to BBC Worldwide’s activities? Q126 Chairman: You think they might have gone Sir Michael Lyons: Chairman, I wrote to you, when too far. you first announced that your Committee wanted to Sir Michael Lyons: I have said already that the Trust look at this area of the BBC’s activity, to make you is of the view, on the basis that this work is not aware of the fact that the BBC Trust had in June of finished, that there is a case, and we intend to move this year decided to look very closely at the mission forward with tightening the boundaries around boundaries and governance of BBC Worldwide and Worldwide activity. The detail of that will be shared that we had charged the Director General and the with you once we have finished the inquiry. Executive Board, as the parent company, to do Mr Thompson: First, should the overwhelming exactly that. That debate is well advanced. Why did majority of the activity of Worldwide be based we decide to do that? Because we were concerned, in around BBC intellectual property? Yes, it should part—let me not shrink from that, but it was not the and it is. only issue—at public debate about the risk to the BBC brand from a growing media collection of programmes, stations, and media products. We had an interest to explore whether there were adequate Q127 Chairman: Why not all? controls in place to avoid BBC branding being Mr Thompson: Let me give you an example. We have damaged. We were interested in the relationship a cable network in the United States called BBC between the BBC’s commercial activities—and America. It is a showcase, and it really is the only earlier questions from Mr Sanders touched upon British branded showcase for high quality British this—and the straightforward public service content in US households. The showcase is one of activities of the BBC. We raised some big questions. the reasons that artists like Ricky Gervais and others Whilst I am not able to go into detail on all of that began to get into American media. It has been a real here, I can say that the Trust is already of the view success for the BBC. The decision was taken some that we need to tighten both the mission and the years ago, both economically but also in terms of guidelines around BBC Worldwide. But none of this—none of this—detracts from an showcasing British talent, that it would not acknowledgment that since 2004, led by Etienne De necessarily be a problem if some Channel 4 and ITV Villiers and John Smith, both of whom you will be programmes were available to be seen on BBC able to question later on, BBC Worldwide has been America as well; indeed, a proportion of the remarkably successful in doing the job it was set up schedule of BBC America includes programming to do, which was to exploit BBC intellectual made by Channel 4 and ITV. In terms of the four property rights and to bring a return to licence fee criteria set out in the Charter and Agreement under payers in terms of both a dividend (this year of £117 which BBC Worldwide and everything BBC million) but also a contribution back to the Worldwide must operate—you will recall that the programme making, so that the BBC is able to do activities must fit with the public purposes of the programmes that frankly it could not do without BBC; must be commercially eYcient; must not investment from Worldwide. I would add to their damage the brand and reputation of the BBC; and achievements the fact that they have—I have no must comply with all appropriate fair trading and doubts at all about this—helped the British economy competition regulations and law—the idea of adding substantially in the promotion of British talent, not some high quality programming made by other only in on-screen talent but in technical skills as well. British broadcasters and BBC America is This is in the context of an absolute and unequivocal reasonable. In other words, as Sir Michael said, commitment to the BBC being right to seek to there is a continuum. The overwhelming majority is exploit its intellectual property rights for the benefit straightforward BBC IP. If you look at the of its licence fee payers and, second, an breakdown of the turnover and the profits of BBC acknowledgement that Worldwide since 2004 has Worldwide, that is the case. But the idea that there been an extraordinary success story. Nonetheless, it is now appropriate to review the boundaries. We are are certain occasions where you might go further, I of the view that they need to be modestly contained would not knock out of . . . That does not mean you and the detail of that we will make public once we cannot debate individual topics. It does not mean have finished our inquiry. that the particular project will necessarily be BBC branded, but I think what is absolutely critical is that Q125 Chairman: You have said that BBC everything fits in with the purposes. Sometimes that Worldwide should exploit the intellectual property can mean working with high quality programmes rights of the BBC, and I would not necessarily from other British broadcasters. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Sir Michael Lyons and Mr Mark Thompson

Q128 Chairman: Mark, with respect, I think that is Sir Michael Lyons: I absolutely agree with you that being a bit disingenuous. We are not talking about this is a complicated process. First, the BBC has the making available ITV programmes or Channel 4 same regulators for taste and decency as any other programmes on BBC America. broadcaster. It has the same regulators governing Mr Thompson: Would that not be an example of any matters of competition. It has the same BBC Worldwide working with non BBC IP? regulators in terms of fair trading. Parliament decided issues of accuracy and impartiality should Q129 Chairman: It is one which I think people would remain within the BBC. Why did Parliament decide argue was pretty close to the core purpose of the that? It decided that because it felt that if you had BBC, which is making available good programmes, external regulation it would not be long before the but there are other activities, such as publishing external regulator became an influence on the magazines or putting up websites, which bear no editorial decisions of the BBC. It is quite a relation to the BBC’s programmes. Those are the complicated model but it is one carefully determined areas which are causing real concern. by Parliament to reflect the status of the BBC as an Sir Michael Lyons: I think I can help you because organisation which is funded by universal levy, the actually there is not a distance between us here. The licence fee, but where the most important principle only thing I took exception to in your question—and was to protect its editorial independence Mark has dealt with this, I think—was that you were suggesting this was a bigger proportion of Q132 Mr Hall: Could I put it to you in a slightly Worldwide’s activities than I believe it to be. But the diVerent way. What is your primary task? Is your question of where the boundaries are in terms of primary task just to regulate the BBC or to speak up going beyond BBC IP is a real question. It was on its behalf? included in our June list of issues to be explored, and Sir Michael Lyons: My primary task is to represent I can assure you is going to be tested very fully and licence fee payers, to make sure that the BBC is I do not think you will be disappointed with the focused on their interests and delivers against those conclusions that are reached. interests. There is a series of aspects to that. It is to hold the Director General to account, it is to Q130 Mr Hall: You have said in evidence already discharge such regulatory functions as exist, and it is that in the Russell Brand and Jonathan Ross also to give the licence fee payers an assurance not broadcast there were serious editorial lapses. Does it only when the BBC has got things wrong but when not also shine a very bright spotlight on a serious after careful reflection the Trust is convinced that it dichotomy at the heart of the governance of the got things right. BBC? We have BBC Worldwide accountable to the BBC Executive Board and the Executive Board Q133 Janet Anderson: The BBC’s Fair Trading accountable to the Trust, and yet here, in evidence Guidelines state that the BBC’s commercial services this morning, you are almost indivisible. must maintain clear and separate management Sir Michael Lyons: The art of our presenting to structure from the BBC’s public service activities. you—and whether we have got it right or not is How do you therefore defend the fact that the Chief probably for you to judge—is to show you that you Executive OYcer of BBC Worldwide sits on the BBC have in front of you the Chairman and the Chief Executive Board? Do you not think that that kind of Executive of the BBC. There is no doubt about that cross-directorship gives an unfair advantage to BBC at all. As a result of the last Charter we have a quite Worldwide over other commercial competitors? sophisticated governance arrangement, not a Sir Michael Lyons: Perhaps I could answer that million miles from that being demanded by, for question in two parts and Mark may want to say instance, Sir Adrian Cadbury’s report of many other something about how it works in practice. How has companies: a clear separation of governance and that cross-membership come about? It has come day-to-day management. That exists at the BBC and about in an attempt to balance both the commercial you see that reflected in our comments. That has imperative for Worldwide against those four tests been added to in the Charter by the requirement that that Mark mentioned. Perhaps the most important the Trust, as the governing body, should conduct its one is the fact that the BBC’s reputation should not scrutiny and challenge in a transparent and open be damaged. This cross-membership is about how way. What you get is the same sort of debate that you manage editorial control over what is done you should have in any organisation, but much more through Worldwide. That is the first part of my open and transparent as a result of a governance answer: it is a rational attempt to respond to these decision that the BBC needs to be fully accountable tensions. Is it right? Should it continue into the to licence fee payers. The short answer is that we are future? Again I would like to give you an assurance both of the BBC, we have diVerent jobs there. I that this is on the list of issues which the Trust has would hope that is reflected in our commentary and set for the Director General and the Executive Board answers to you this morning. to explore and we are well advanced in our thinking on this. I am not going to disclose our decision Q131 Mr Hall: Correct me if I am wrong, the BBC today, because the Trust has not yet reached formal Trust are charged with two things: they set the decisions, but I can assure you that this will be strategic direction for the BBC and they are also the included amongst the matters that we address and regulator for the BBC. There is clearly a we will make our findings public in the not too dichotomy there. distant future. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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Q134 Janet Anderson: So one of the options that Q135 Chairman: I would merely point out that the may be considered is a clear separation of the two. body representing the industry gave evidence to us Sir Michael Lyons: Maybe. But I do want you to be two weeks ago, PACT, and they did make it clear alert to the tension: you might say commercially and that they had quite a lot of concerns. in fair trading terms there should be clearer Mr Thompson: A survey is published every year separation, but then you come back to the fact that which includes many, many PACT members. brand management and protection of reputation OYcials of PACT are absolutely entitled to their requires very close working. That is the dilemma. view. I will send you a copy of the survey. PACT Mr Thompson: What is the most important thing? members, comparing the BBC as a distributor with The most important thing for the BBC is the delivery all the other distributors in the UK market, of its public services and public service mission to the repeatedly say it is their favourite distributor. UK licence payer and then the world service round the world. We must not be in a position where, Q136 Janet Anderson: Surely you can understand through a lack of co-ordination or an understanding why people do consider that this kind of cross- of what commercial operations are, you end up with directorship gives Worldwide a commercial the commercial interests of BBC Worldwide advantage over their competitors, because they are becoming more important now or overtaking or clearly going to have, in advance, information that becoming divergent from the absolute clarity of our others will not have. central mission, which is to do with serving the Sir Michael Lyons: Let me say again that we have British public with the right services and the right heard that criticism and we are looking at that issue programmes. That argues for quite close co- amongst others. I would ask you to recognise from ordination, which is why we have public service my earlier comments that there are two sets of Directors on the Worldwide Board and why tensions here. We have to balance both those certainly today I believe it will make sense to have tensions. I do hear your comment that this appears the Chief Executive of Worldwide there co- to look a little too close. I am clear that the Trust, ordinating, to make sure that we have the since it was created in 2007, has taken a number of commercial operations of the organisation seen in steps to strengthen the fair trading process that the context of the total mission of the organisation. operates both at the level of the Trust and at the level Our current system is intended to try to make sure of the Executive Board. On the issue of transparent that the actual trading interface, where rights from fair trading processes: absolutely, the Trust is the public service are acquired by Worldwide, is fair committed to that. Is this an issue that we should and objective and can work. I would say two or three look at? Yes, it is. Are we looking at it? Yes, we are. things about that. First, this is not the only potential Mr Thompson: A final postscript is to assure you conflict that we have to manage. I believe that over that the kind of detailed programme information— the last four years, despite the fact that we have a “So-and-so is making a programme about X”— powerful in-house production arm, we have never ever occurs inside the Executive Board. In succeeded in convincing the independent sector that other words, I do not believe there is, as it were, we can run a completely fair commissioning process market sensitive programming or talent specific because of the arm’s length way in which in-house information to which John Smith, as Chief production is held and the fact that the Executive of Worldwide, has access in the Executive commissioners genuinely decide freely, programme Board, bluntly because the discussions in the by programme, whatever the source. We have Executive Board are strategic ones, which do not attempted to get the fair trading boundary between involve the kind of fine-grained intelligence that you Worldwide and the public services BBC to work in would need, even if you were minded to get some exactly the same way, so there is strategic alignment competitive advantage. but within that boundary—and as I am sure you know from evidence so far, BBC Worldwide does Q137 Chairman: There are lower bodies. I not get all the rights the BBC oVers. Something like understand every public service contract division 15 and 20% is acquired by other distributors. BBC has a commercial board attached to it, where public Worldwide sometimes, to fill out its catalogue, is service representatives meet with commercial also acquiring rights from other broadcasters, and representatives. It is not just at the Executive Board we can look at the market rates it is paying when it that this kind of dialogue is taking place. is acquiring rights from other broadcasters or other Mr Thompson: Sure. Of course those boards will independent producers. BBC Worldwide has often meet with other distributors and other repeatedly been voted the distributor of choice by commercial interests as well. the industry. In relation to the idea that there is some kind of funny business at the heart of this, I do not see how Worldwide would be so successful in Q138 Chairman: BBC Worldwide has no advantage. acquiring other rights, nor why they would be voted Mr Thompson: I think this has been tested in this so frequently the distributor of choice by the review process, but the current arrangements are industry, if the system was not working in practice. designed to ensure there is a level playing field given But, of course, part of the practice of review should the particular context at the BBC. 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18 November 2008 Sir Michael Lyons and Mr Mark Thompson be made clearer? Is there a way of building on the other, believe me, there is a very, very confidence by explaining and setting out the system powerful incentive on the part of those people who more eVectively as well? That is another possibility. are trying to get their programming made to ensure Sir Michael Lyons: Chairman, perhaps I could oVer that they are getting the best possible value out of you one comment to elevate this to the most strategic any distribution or co-production arrangement, and level. There is a real set of challenges here. As we so there is a naturally appropriate kind of market reflect on the job that Worldwide has done very operating, where the people on the public service eVectively since 2004, not only for the BBC but for who are trying to get distribution want to get as the British economy, I think we do need to reflect on much money as possible, want to try to persuade the part that it might play in cooperation with other Worldwide distributors that the programme is organisations into the future. The tension between a worth as much as possible, while at the same time transparent fair trading process but co-operation colleagues in Worldwide and all the other with some parties will always be a tension, so I just distributors are, understandably by and large, trying want to recognise that you cannot wish away some to buy rights for us at a price which they think is of these tensions. commercially eYcient. There is a natural and Chairman: I understand that. healthy debate that plays out through the market. But, as I say, a significant proportion of the rights do Q139 Helen Southworth: Can you give us an not go to Worldwide. assurance that there is no cross-subsidy within BBC Worldwide because BBC Worldwide is paying less Q141 Helen Southworth: Beyond that market for its BBC entitlement to programmes and is operation there is a duty on the BBC specifically as therefore able to bid higher in the open market? the public broadcaster, paid for by the taxpayer Sir Michael Lyons: I can give you a categorical through the licence fee process, that does expect a assurance of the framework in which it works. There better and more extensive form of scrutiny and a is a statutory prohibition on any subsidy to the better confidence within senior governance at the commercial arm from the licence fee payer income. BBC— In the complicated world of negotiations, of rights Sir Michael Lyons: Absolutely. and how they are exploited, this is quite a complicated area. This is why the Trust has Q142 Helen Southworth: —and that you are strengthened the fair trading arrangements and is at confident that those things are happening because this moment looking at whether they might be you have systems in place not because the market strengthened further—particularly the issue of operates. wanting to assure ourselves that the BBC does get Sir Michael Lyons: Absolutely. If I have failed to the very best value from its rights through the combine the confidence that we have in the current current arrangements, particularly the first-call arrangement with the proviso, as you have rightly proposition. These are all matters that are being established, that one cannot know what is explored in this review. Let me say that at the happening in every job in every detail but are we moment we have no reason to be anxious that the confident that the processes are strong enough, then BBC is not getting fair value. they are working well. Might they be stronger? That is a continuing dialogue, led by the Trust but on Q140 Helen Southworth: I think you have learned which the Director General and his colleagues are over the past few weeks that you need something focused, and it is included in this review. I want to beyond not needing to be anxious. You actually give you assurance on that. Again, this is something need to have systems in place to make sure— which, when we reveal our work, you will see Sir Michael Lyons: That is right. That is exactly why, reflected in the work that has been going on since first, we have strengthened and will continue to June. review the fair trading arrangements and, second, Mr Thompson: The topic is already taken very the Trust felt back in the early months of this year seriously within the organisation. that we should look closely at Worldwide and have Sir Michael Lyons: Absolutely. reached an emerging conclusion that the boundaries Mr Thompson: Which is why we had this annual need to be tightened. independent audit, which is why we have a Fair Mr Thompson: There is also, it should be said, an Trading Committee on the Executive Board as well annual independent fair trading audit. That is as Trust oversight and a powerful fair trading already in place. Within the public service there are advisory function in the organisation. We recognise very powerful incentives for programme makers to that it is a very important topic. get the maximum commercial revenue they can. For Planet Earth, for example, the big natural history Q143 Paul Farrelly: We are going to get to Lonely programme, something like 70% of the budget for Planet very shortly. It has, in large part, prompted that programme was raised through UK and this inquiry and I am sure in your own review you are international commercial revenue. It is a very talking about it. I want to explore the expensive relative to the kind of money any UK appropriateness of your £50 million threshold channel would pay to be able to show the approval which you talked about when you were last programme. In terms of the trading relationship here. Before that, I still do not have a feel for how the between programme makers and public service Trust exercise oversight over BBC Worldwide. commissioners on the one hand and any distributor Could you briefly explain? In Trust papers—I have Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Sir Michael Lyons and Mr Mark Thompson not seen them—is there a standard agenda item in Q147 Chairman: We will come on to that. which some Trust activities are reported for Sir Michael Lyons: We will come on to that. I am information? Is there a separate sub-committee of sure we will. In the case of bbc.com: after very careful the Trust that considers BBC Worldwide more deliberation and dramatic strengthening of the actively? Are there any particular actions of BBC editorial controls around bbc.com, an approval for Worldwide, apart from Lonely Planet, that you can that to go forward but under close monitoring and name that have been specifically remitted in your scrutiny. In the case of Kangaroo: not a decision to time there to the Trust for approval rather than just agree to this but a decision that the Executive could information? conduct further discussions with partners prior to Sir Michael Lyons: Let me start by going over the bringing a detailed case back to the Trust. There structure. The BBC Trust, of course the parent body were two reasons for that: first, an a priori decision of the BBC, in this context is probably best seen as that given the success of the iPlayer it was legitimate the Supervisory Board. The Executive Board is the to discuss whether there might be a commercial parent company for Worldwide. Of course variant with partners, and therefore it was legitimate Worldwide has its own competent and strong Board for those discussions to take place, but, second, the itself. What are the respective responsibilities? The proposition would be shaped by the discussions and responsibilities of running the business, like the therefore there was quite understandably a concern Board chaired by Etienne De Villiers—and you will on the Trust’s part not to make a decision before the have a chance to speak to him later— form of the proposition became clear. Chairman: We may come on to Kangaroo in due course. Q144 Paul Farrelly: We know all this. I wonder if you could briefly address the oversight. Sir Michael Lyons: But it is very important that I do Q148 Paul Farrelly: Again, before £50 million— go into this, because if I were to concentrate only on Sir Michael Lyons: I missed out the role of our the things that the Trust does from week to week, Finance & Strategy Committee as well, Chairman. from year to year, you might miss this underpinning structure which is very important. Of course the Q149 Paul Farrelly: Given that you have this in your Executive Board is focused as the public service memo, are there examples when you have looked owner of Worldwide and therefore manages fair more closely at what BBC Worldwide has been trade intentions and reputation, the four tests that doing where you wish the Trust had been given that need to be applied. Where does the Trust come into particular decision for formal approval? this and how does that feel on a year-by-year basis? Sir Michael Lyons: Let me underline that this work The Trust approves annually the annual report of is not finished. Indeed, one of the things I am eager Worldwide, which is detailed in terms of plans—and to do is to make sure that your own deliberations of course even over a year opportunities come up, feed into that before we do reach a final conclusion, but nonetheless that is a detailed plan for the year and so I am here, in part, in listening mode today. ahead. Any investment that either involves an But I do not start from the presumption that the expenditure of £50 million or above, or is in a novel right way forward is for the Trust to introduce a area of activity, has to be referred to the Trust. In whole set of more detailed controls. I believe that it addition to Worldwide, there have been two other does have the right role in terms of the strategic cases in the period that I have been Chairman. direction of Worldwide and that is why a review of Perhaps the one on which I should focus is the this nature is quite appropriate. It should set decision about bbc.com, the decision whether guidelines and expectations, but frankly the future advertising should be allowed on the worldwide that I aspire to is one where all of Worldwide itself website as a means of drawing income for, amongst has clearer direction on the expectations of it, clearer other things, to invest in BBC World TV service. guidelines on where the little boundaries are, and it That gives you a sort of feel of the issue. is therefore able to operate as an eYcient commercial operation within those rules. The notion that this is some form of organisation where we are constantly Q145 Paul Farrelly: What is the other example? pulling it back will not deliver the best for licence Sir Michael Lyons: Kangaroo is the other issue. fee payers. Neither of those came up against the £50 million ceiling but were both matters which automatically came to the Trust—it was not a question of being Q150 Paul Farrelly: I understand that. referred—because they were matters of novel Mr Thompson: The Executive Board and its non- activity. executive Directors play a significant role in pre- examining and weighing up of Worldwide proposals: measuring them against the Four C’s— Q146 Chairman: There are not any examples where indeed we report against the Four C’s—looking at you have said no. the financial hurdles—commercial eYciency is very Sir Michael Lyons: Yes. Let me just mention that in important—and looking independently and those three examples there were quite diVerent scrutinising proposals to ensure that the financial decisions. In the case of Lonely Planet: a clear yes— challenges that we set (for example, for an always with qualification, so in the case of Lonely acquisition like Lonely Planet) are credible, have Planet very clearly that this had to demonstrate that been independently evidenced and verified, and so it really did exploit BBC intellectual property rights. forth. There are plenty of occasions of conversations Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Sir Michael Lyons and Mr Mark Thompson about proposals that one might consider but which, service scrutiny to all of these proposals. We are in the view of the Executive Board with its non- regularly tested by the Trust on that. If I may say so, executive Directors, it is decided for whatever reason in exactly the same way we would look at a much does not make strategic sense, does not fully comply broader range of proposals below the £50 million with the Four C’s, does not feel like the right thing and ensure that the entire direction of travel for to do, and therefore should not go forward to the Worldwide both makes commercial sense but also Trust. Plenty of proposals fall by the wayside. makes sense in terms of our obligations under the Charter and Agreement. I would say that in some Q151 Paul Farrelly: Clearly you want to make sure ways there is a danger of a slight misapprehension of that you are not in the position of being perceived by what is going on here and I think you should look the broader reach of the BBC operations as the quite closely in terms of governance at the extent to doting old granddad who they slip things by while which the Executive Board and its controls pass you are preoccupied with the likes of Jonathan Ross. muster in relation to other plcs. You want to have a measure of— Sir Michael Lyons: A reason for not being Q154 Paul Farrelly: I was just trying to get a feel preoccupied unduly, for not making mistakes that for that. lead to energy being consumed by such things. Mr Thompson: I would hope that in relation to the Guardian Media Group the Executive Board of the Q152 Paul Farrelly: Is the £50 million threshold BBC would go through a very similar process. I too low? would just say that I would be careful of assuming Sir Michael Lyons: No, I do not think it is, but let me that the equivalent in our system is BBC Trust versus again say that these matters are open for review in Guardian Media Group. The Scott Trust I do not this process. I can only say that because of the other think looked at any investment proposals at all. We controls that are in place. Let me just come back on have the Executive Board which is, inside the something. As I was going through the diVerent Charter and Agreement, intended to operate not in checks and balances that are in place, I omitted the all ways, but in many ways, to the level of and with role of our Finance & Strategy Committee which the same kind of controls in place as a plc board and each quarter receives a report from the Executive with Directors of the calibre to do that. board outlining exactly the process that Mark has shown to you. That has been a very searching set of Q155 Rosemary McKenna: Can we briefly cover the discussions. If you want to test whether the Trust is issue of compliance with the four commercial alive and awake on this role, Mr Farrelly, the real criteria. What is the purpose of BBC Worldwide? Is question is that less than two years into its life it is it to bring the UK to the world? You argue that “the doing a substantial job of looking at the guidance, BBC’s commercial operations are a key component boundaries and expectations of Worldwide, not in delivering our fifth public purpose: ‘bringing the because of the discussion around Lonely Planet, but UK to the world and the world to the UK’.” frankly much more about a more foresighted view of However, the agreement between the BBC and the the diYculties that might entail from running a very Secretary of State says that “’commercial services’ substantial international business with the risks that means services which are provided or other activities we inevitably see on our own patch magnified across which are undertaken, not primarily (or at all) in the world. That is really what the Trust has been order to promote the BBC’s Public Purposes, but focused on here. There is nobody asleep on the job. with a view to generating a profit . . . .” Sir Michael Lyons: I am clear on this; the Trust is Q153 Paul Farrelly: The £50 million the BBC has clear on this. The primary purpose for BBC claimed is “low in financial terms compared to the Worldwide existing at all is to exploit the rights equivalent ‘shareholder consent’ requirement for generated by the BBC’s work in the United publicly listed companies.” The answer to that is Kingdom. There is a dividend in two parts from that: that it is, up to a point, low copper, but it is not with one literally coming out of the profits generated by respect to the size of BBC Worldwide, is it? Worldwide, and the second from the monies that Sir Michael Lyons: I think you will find that it is with Worldwide is able to invest in BBC programmes— respect to the size of BBC Worldwide. What we have and therefore we are able to do more than we would here is not a gap between Worldwide and the Trust, do just with licence fee payers’ money. Our estimate where the only things that are considered are those is that the value of those two things taken together which are either involved in investment for more at the moment is something like £9 for every licence than £50 million or are new areas of venture. You fee payer—so not insignificant. The primary have in the middle, as we have outlined, the role of function is to draw some income back so that the the Executive Board, with very close scrutiny and BBC can do more and so that the pressure on the engagement of Worldwide and at a much more licence fee payer is moderated. But we have to detailed level. That is as it should be. recognise and welcome and celebrate that Mr Thompson: In the Executive Board we have Worldwide has a bigger contribution. It contributes absolute plc-calibre non-executive Directors. The to the promotion of British talent. It also enables the senior non-executive Director, for example, is BBC’s programmes to be seen across the world, Marcus Agius, the Chairman of Barclays. We would either directly or in terms of local versions developed expect to apply the full “plc board level” to both out of BBC ideas. It is right to say that it contributes financial but also strategic, and, as it were, public to that fifth purpose, charged on the BBC as a whole, Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Sir Michael Lyons and Mr Mark Thompson of taking the UK to the world and the world to the proposition coming forward, the primary reason on UK. It contributes to that but its primary— which it was approved, was that it was seen to be a primary—purpose is to secure a financial return on clear opportunity to explore a very considerable the BBC’s intellectual property rights. amount of intellectual property the BBC holds Mr Thompson: It is worth adding that it is not some within its archive and within current programmes sort of optional extra. Since the Thatcher which relate to travel and international aVairs. It Government of the 1980s put a requirement on the seemed a natural extension of the purpose of BBC to regard its commercial activities as important Worldwide which is to seek to exploit the intellectual in supplementing licence fees, it has formed a part of property of the BBC. Did it look as if it was a good successive licence fee settlements and Charter and commercial proposition? Yes, it did—not least Agreement settlements under the present settlement. because the owners had approached BBC One part of the settlement depends on a significant Worldwide as their preferred buyer. It is pretty rare, increase on the commercial revenues which the BBC I have to say, but any company that is approached can derive. We are tasked with doing this. It is by a strong organisation as their preferred buyer is interesting that one of the four criteria is around in a strong position as the buyer. We were satisfied commercial eYciency, of running the commercial on the basis of that, and took detailed external businesses in a commercially eYcient way. advice as we worked our way through those Sir Michael Lyons: Chairman, could I alert you to deliberations. You are right to ask what has the fact that I do have a journey to make to CardiV, happened since then. We have received a number of where we are holding the Trust Board meeting reports on progress. What is my judgment on those tomorrow. You may say I should give you shorter reports? Things have developed, as we have answers. Perhaps we can compromise. expected, but it still remains a matter for further Chairman: That is exactly what I am saying. reflection whether this merger will deliver all of the benefits that we expected for this purchase. Does Q156 Paul Farrelly: Could we turn to Lonely Planet. that surprise me at this point in the life of the Every business in its growth is a mixture of organic purchase? No, it does not. But the case is still to be growth and acquisition. Some would say that British proved. businesses are too balanced, like Americans, in favour of acquisitions. When it comes to the likes of Q157 Paul Farrelly: The notes from the BBC Trust Lonely Planet, which is a brand on its own—it is not Unit are hardly unequivocal as to whether it fitted a brand that is unheard of that you can develop BBC Worldwide and the BBC’s remit. Essentially, because you think the name is good—with respect to what was wrong with the BBC brand? Why did you non-related businesses, such as Hello and Grazia have to go out and buy an established brand? with The Times of India that we have heard about, Sir Michael Lyons: This was not the first time with respect to spoiler productions, such as other Worldwide had acquired other organisations as part publishing houses often launch, or with respect to of its purpose at getting the best value from BBC IP. independent production houses, whether in the UK This was not founded on: Do we want a travel or somewhere else, that have first rights of refusal, magazine? You might want to query with John there is a bit of discomfort that the BBC should be Smith and Etienne de Villiers later on the other behaving in that sort of way. Sir Michael, in terms of things that are brought to them which they reject. the Trust, what assessment have you made so far of the acquisition strategy of BBC Worldwide and This was seen as a very interesting vehicle to whether its returns have been reasonable? To what promote BBC’s IP and its brand. It is not a question extent do you believe it is part of your role to do of independence of its brand. It is the BBC and its that? intellectual property rights and its brand. That was Sir Michael Lyons: You properly capture—and I the test. thank you for that—that any commercial Mr Thompson: We have many, many powerful organisation will inevitably, if it has any energy, if it international brands like BBC News, CBeebies, is encouraged by its shareholders to maximise a TopGear, Dancing with the Stars and so forth. We return, get out and explore the boundaries. I do not did not have a compelling category brand in travel. shrink from that as both inevitable and desirable. We did have literally thousands and thousands of We want a commercial wing that feels that it has the hours of BBC IP content about travel and about confidence to go out and look for new opportunities other countries—their history, natural history, and that is what you see reflected in that summary. geography and so forth. The commercial judgment Do we feel that from time to time it is necessary to made would be that the Lonely Planet brand would review the guidelines? For a number of reasons, be a very eVective, potentially multimedia vehicle, particularly focused on those four principles, how particularly with growth potential on the web, for a you protect the BBC’s reputation, how you avoid a large body of the catalogue which did not sell situation of complicated funding arrangements that particularly well internationally and getting it away go beyond the existing capital allocation of the BBC, in a much more commercially eYcient way. And the yes, I do think it is appropriate to review those. Let test of course will be whether we can achieve that me turn now to your specific question on Lonely over the coming years. Planet. This was considered in detail and at length by Sir Michael Lyons: Absolutely. the BBC Trust and it was approved. It was approved Mr Thompson: That is, if you like, the logic behind against the four criteria. The primary reason for the the purchase. 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18 November 2008 Sir Michael Lyons and Mr Mark Thompson

Q158 Paul Farrelly: It is a hard argument to sell, Mr Thompson: I would not want you to think that given the power of the BBC brand. You mentioned there was not an extensive due diligence process with outside advice. What procedure did you go through multiple independent studies. I am very happy right to satisfy yourself that the price was fair and now to take you through it if you like. reasonable? Paul Farrelly: We will move on to the management. Sir Michael Lyons: We took external advice on this. Chairman: Sir Michael’s train is going to have to wait a very long time if we get into that, so let us go to Helen Southworth. Q159 Paul Farrelly: From whom? Sir Michael Lyons: BBC Worldwide of course took advice on this matter. I am happy to give you the Q162 Helen Southworth: Could I move on to online detail of that, but I am eager to keep to the time that video services. We have had some extensive concerns we have— through the local newspaper industry that there is an already crowded market and that the BBC is intending to invest to such a degree in local online Q160 Paul Farrelly: Very quickly, how did the Trust services that they have dwarfed the budgets that the satisfy itself that the price was fair and reasonable? local press has to maintain their own websites and Let me give you an example. I had the misfortune that this would have an eVect of forcing many of years ago to be the appointed the person advising the them out of business. Can you explain to us what British Government in 1986 on the disposal of the there is that is diVerent about what the BBC bring, National Bus Company. When the National Bus and also what you are going to do about making sure Company negotiated disposals, we were tasked with that you are absolutely and scrupulously fair. providing a letter to the Government along these Sir Michael Lyons: Let me address the second of lines: that the price was fair and reasonable and we those issues and ask Mark to go into the nature of would make certain recommendations, such as the proposition. The BBC Trust has developed a charges on properties, clawbacks on future sales and public value test which is to test all new service the like. The Government mostly ignored that in its proposals for the BBC. It is in two parts. One part is rush to privatise, but the mechanism was there. an examination of the likely public benefit of the new What mechanism did you have in place to satisfy service and its second part is a market impact yourself that the price was fair and reasonable? assessment, recognising that it is likely that any new Sir Michael Lyons: If you do not mind, I am going surplus will have an impact on competitors or others to beg your indulgence to give you this in writing, so who invested in the area. That is conducted on our behalf by Ofcom although we commission it. That is that I can give you meticulously the process, exactly exactly the model that we have applied to this which advices were used at which point. It was a proposition, the local video proposition, which itself detailed process over some months—and I am is an attempt to respond to a gap that the Trust happy to share that with you—but I am confident identified in some of its early work—and it is quite a that we took all the advice that we needed and took strong finding—of an appetite for more local a process of very careful deliberations with the material from the BBC. Coming back to the public Executive Board and Worldwide before agreeing value test, that test has been running for five months that this matter could go ahead. now. At our meeting in CardiV on Thursday of this Mr Thompson: There was a due diligence process, week, we will have the provisional conclusions of the shape of which was agreed with the BBC Trust, that process and they will be, in keeping with all of all of which was open book to Trust and which our previous PVTs, put into the public domain for a involved— second round of consultation before making a final decision. These issues are being weighed. I absolutely understand that local newspapers are Q161 Paul Farrelly: We must press on. We are going anxious—and this is a long-term issue and it has to come to the management, but I am quite been aggravated by current market conditions— surprised, given that you have only named three about how they will survive with reduced advertising instances, that you cannot, oV-the-cuV, give me income, particularly given the impact of commercial those salient details. Could I say as one marker that websites upon them. I absolutely understand the the level of disclosure in the notes of BBC concern and that is exactly what we are balancing: Worldwide for an acquisition of this size is not the Would there be a net public gain from the new BBC level of disclosure that I would expect from a public service that outweighed any market impact or not? listed company in a Super Class 1 or other Mr Thompson: I am sure you know, but for the acquisition document. avoidance of doubt let me say, this is not part of Sir Michael Lyons: Rather than suggesting for a BBC Worldwide’s activities; this is a proposal for the moment that you might not have a point there, I can use of the licence fee to provide an enhanced local oVer a willingness to have a side correspondence service for licence payers in the UK without with you which can be shared with Members of the advertising or any other form of monetisation. It is Committee to test that proposition about whether really important that the service is distinctive. What the levels of disclosure are less than you would does that mean? By far the biggest part of this is expect of a plc in this setting. If you have a point, going to be about enhanced provision of news. We then that is something that the Trust will want to have given an undertaking which if the service is to take on board. go ahead I am sure we will be tested on by everyone, Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Sir Michael Lyons and Mr Mark Thompson by the Trust but also by the outside world, that at issue. That is why we have the public value test least 20% of that news should be specifically devoted process, so that this is not just, you know, it is . . . .” to local politics and local public policy. This is an I am sorry, reading this verbatim just shows that this opportunity potentially for councillors, for other was not the most nuanced answer. But let me read it interest groups, for community leaders, to get access verbatim, as I have started. “ . . . . you know, there to the public in a way which I have to say I do not is very clear evidence of the Trust having established believe happens in my experience of other local sites machinery which really does test the underlying or the plans of other local sites that I see. The issues. Let’s just put the two sides of the book in intention—rather in the way that BBC local radio front of us. There is nobody who can be satisfied currently in England does pursue a diVerent agenda with the quality of local news in most parts of the and has a diVerent relationship with its audience United Kingdom. The local press has nothing like from commercial local radio—is that our local the strength that it would want to have. In the city in websites, which already exist, also could do a which I know well it is not the same proposition that diVerent job with this additional video content. it was 15 years ago. So, you know, that is not a However, on behalf of BBC management I recognise steady state situation. Would the BBC’s intervention that this proposal, which is over four years old— make it better or worse? That is exactly the issue to indeed, it predates my arrival as Director General— be explored and challenged.” I was seeking to say has become a much more focused, much more there—maybe less expertly than I would have hoped modest proposal than that which was originally for—that the PVT will take account of these issues, envisaged, which was ultra local television and so was designed to take account of these issues, but I forth. This is an enhancement of existing local was equally saying that the newspapers themselves websites around content which I think most people are clear that they are facing diYcult times and that would regard as being punctiliously public service, that has been a trend over some period, not just one and, in my view, at least distinctive from what else is that has emerged in the recent past. Only a week available. However, I think people would recognise after Sly Bailey came and gave evidence to you, there that the market context has changed enormously was, at the Society of Editors’ Conference, a very over the last four years and particularly in recent robust response to her from one of her former months. I think one of the benefits of the process that colleagues, acknowledging publicly the diYculties of we have in place is that the BBC Trust, by regional newspapers and, indeed, challenging her commissioning a Market Impact Assessment from that they need to do better for their customers. This Ofcom, can make a decision which reflects the is a public debate. It is important that we do not understandable concerns of other media players as shrink from that. well as the potential for public benefit from the BBC’s proposals. Like everyone else, I will wait to Q164 Janet Anderson: Sir Michael, you have see what they come up with. Many people, for acknowledged that local newspapers are facing a example, would regard better access to local diYcult time and indeed they are. ITV also has its democracy as a good thing, but weighing these own service, itv.com. Do you not accept that if you potential benefits against the potential disbenefit of launch this service you are going to put them in an impact on other media players is precisely what the even more diYcult position than they are in now? process is intended to achieve. Sir Michael Lyons: I do not think there is much to Sir Michael Lyons: And it will all be public—all of add to my comments really. I absolutely the underpinning evidence. acknowledge those diVerences and I have underlined that they will be balanced in the PVT process and Q163 Chairman: Sir Michael, you, as Chairman of that is what it is designed to do. The longer term the Trust, will be conducting a public value test and issue, of course, with all these issues of market deciding whether or not the BBC should go ahead impact that you have to balance, is that the primary with these proposals, You will be aware that your responsibility of the BBC is to respond to the needs comments to the Broadcasting Press Guild lunch, and interests of its licence fee payers. It must take that “nobody can be satisfied with the quality of account of those impacts and make sure that the gain local news in most parts of the UK” have been really outweighs them, but there are always likely to strongly contested by the local newspaper industry, be some market impacts and the thing to judge, but more to the point they see that as you having particularly in a dynamic situation, is whether we are made up your mind before you have even conducted facing a temporary problem that can be righted by the test. those organisations or are instead facing a Sir Michael Lyons: That was a slightly compressed fundamental change in the way that news and version of my comments. In fact I have the text of advertising are delivered locally. These are issues to what I said here. It might be useful if I read that to be debated. I do not have the final wisdom on that. you. Ben Fenton from the Financial Times, who was That is why we have this very careful measured certainly here earlier on and may still be here, asked, process, which is completely transparent, which will “BBC Local. I mean, you know it is a very real threat balance the eVects, and all of its results will be open to the newspaper industry in this country and it is for public scrutiny. not the fault of the BBC but the BBC’s activities in working on local video, which have yet to actually Q165 Janet Anderson: I think most of us would have any eVect, will not make that better.” My accept that we are facing a fundamental change in response was: “It is a real issue. Absolutely, a real the way people access local news. Most of us do it at Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Sir Michael Lyons and Mr Mark Thompson least some of the time online. But if you conclude regional and local newspapers and also in ITV and that by going ahead with this service you are going commercial radio, and in relation to our services in to make things more diYcult for these people and if Scotland, Wales and Northern Ireland and our you also conclude that you are not going to provide regional television in England and our website, I something that is not already provided, will you then think we generally do a good job. This at least means not go ahead? that the public during this period do have access to, Sir Michael Lyons: If we were to conclude that the in my view, good news and current aVairs and debate market impact was so severe that it was stronger about local issues and about what is going on in their than the public value gain, then, unequivocally, we part of the world. The reason it is an interesting would not go ahead. Unequivocally, we would not decision for the Trust to have to make is that there go ahead. are very powerful beneﬁts out there which are paid for by the licence fee and which we know that Q166 Mr Evans: Finally, how important do you audiences are very grateful for. Indeed, when you consider it that the competition that Janet has just ask audiences what would they most like the BBC to been talking about is not in receipt of any public do more of, their biggest concerns are about money whatsoever—local newspapers, ITV—and improving local services. That is the number one in the BBC is in receipt of huge sums of public money the list pretty much. and that therefore this is just a distortion of Sir Michael Lyons: My only reason to make any competition? comments at that lunch, apart from underlining the Sir Michael Lyons: Mr Evans, absolutely that is why robustness of the BBC process, was also to we have to do the test. It would not be a test that I acknowledge that the BBC had not gone into this would have to apply if I were the Chairman of because it had nothing else to do. It was responding Trinity Mirror. That is a commercial organisation to a clear public demand for more local material. I competing and, therefore, other than observing the think that challenge remains. Whatever the outcome competition requirements that we laid down by of the BBC, that challenge remains, and arguably regulation, they would not have to consider these not for the BBC alone. issues. The BBC is in a diVerent position and quite Mr Thompson: It is not a new debate. In the 1920s properly has been charged under the new Charter. It the local and regional newspapers ran a successful is a duty attached to the Trust to reﬂect on market campaign to persuade the BBC not to broadcast any impact and balance it against expected public gain news before seven o’clock, so that the evening papers and that is what we are doing. could be sold before you got the news on the radio. Mr Thompson: This issue of market impact in So we have been here before. relation to BBC Local is incredibly important and the process is dealing with that. I want to say more Q167 Chairman: We have kept you for some time. broadly, though, that the BBC has been in a number Thank you for your patience. of diVerent ways investing outside London, Sir Michael Lyons: I will take your good wishes to investing in regional news, thinking hard about local the Welsh Assembly. services. I talk to my colleagues frequently in Chairman: Indeed.

Witnesses: Mr John Smith, Chief Executive, Mr Etienne De Villiers, Non-Executive Chairman, BBC Worldwide, Ms Zarin Patel, Director of Finance, and Ms Caroline Thomson, Chief Operating OYcer, BBC, gave evidence.

Chairman: I would like to welcome to the second half time when the BBC’s Charter was being renewed of this session the Chairman of BBC Worldwide, Mr four years ago, much of the debate was centred Etienne De Villiers, and the Chief Executive, John around a belief in some quarters that the company Smith, together with the BBC’s Chief Operating was underperforming in all sorts of ways, had loss- OYcer, Caroline Thomson, and Director of making businesses and so on. We have spent four Finance, Zarin Patel. I am sorry that we have kept years collectively addressing the concerns that were you waiting. I should say that it is not necessary for then in the air: that underperformance, that the role each of you to answer every single question or we of the Chairman and the Chief Executive had not will be here until supper time. Nigel Evans is going been separated and that there were no non-exec to start. Directors and things like that. Those concerns have all been addressed and the company over the last four years has been growing. That growth has led to Q168 Mr Evans: Good afternoon. BBC Worldwide an almost doubling of its turnover and a tripling of I know is tasked with making money but it also its proﬁts. Of course success means that we are doing appears to be making enemies along the way. Are more things now than we were doing four years ago, there any barriers whatsoever to your operations? and the more we do, the more inevitably competitors Mr Smith: It is fair to say that we are obviously in who occupy similar spaces ﬁnd what we do a the middle of a debate about Worldwide at the problem. I think there is an inevitability about it. In moment and this Committee is rightly looking at it. answer to your question, Mr Evans, about the These debates are cyclical and it does come round boundaries, I think the previous session touched on from time to time. Indeed the very last time, at the this a little bit but let me just say a little bit more. The Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson key boundaries are those that are very clearly laid Worldwide is contributing about 20% of the out in the Charter. The four commercial criteria that Group’s total turnover. These are quite important were mentioned earlier—and we can go through relationships as parent and subsidiary, and I think it again if you would like—are laid out in the Charter is for that reason—and it is not my decision of as an absolute prohibition on doing anything which course, it is Mark Thompson’s decision—that he has is outside of those four criteria. There are other asked me to sit on his Executive Board. In a straight controls obviously. For example, there is a answer to your question as to what we talk about borrowing ceiling imposed on the company by the around the Executive Board: we never talk about Treasury which imposes a restriction on the amount programming issues. Indeed, in so far as BBC Vision of money that can be borrowed and therefore that (who produce the programmes of the BBC that we can be invested. That acts, in a way, as a sort of fifth then buy) are going to make any commissioning criterion on top of the four. On top of that, the decisions, their commissioning strategy is published strategy of the company must be approved—and for all distributors and all suppliers, for them all to indeed was approved by the Trust—before we are see at the same time, and we at BBC Worldwide get then able to come forward with any individual it when independents or anybody else would get it. proposals for doing anything new. It is safe to say That never happens at the Executive Board; it there are quite a lot of controls in that process and happens in other ways. they are all laid out in the Charter. Q170 Chairman: The Head of BBC Vision does not Q169 Janet Anderson: There was a bit of a discussion sit on the board of any other independent in the earlier session about the cross-directorships. production company. You and Mr Smith sit on BBC Executive Board and Mr Smith: No. Forgive me, Chairman, I was it is claimed to us that that did not give you an unfair answering the question about my own position on commercial advantage because the Executive Board the Executive Board, although we could talk about did not discuss forward schedules in advance and so that as well. The kinds of things we talk about on. Could you just tell us a bit about what you are around the Executive Board, as Mark Thompson privy to on the Executive Board, so that we can have said, are strategic. They are about the long-term a clearer idea on that. direction of the BBC, the issues facing it, the long- Mr Smith: Most definitely. I think the best way of term funding issues, the role Worldwide will answering this question is to think that there are two contribute in that regard, et cetera, et cetera. They relationships that BBC Worldwide has with the are that kind of thing. They are not anything to do BBC. One is a vertical ownership relationship, with individual programming. whereby 100% of the shares of the company are owned by the BBC public service. As you would Q171 Janet Anderson: Are you satisfied that that expect in any group structure with a subsidiary, horizontal relationship, as you describe it, is carried there are issues to do with that relationship that need out fairly at the moment? Do you think it is done to be handled. The other relationship is a horizontal fairly? one, in that the BBC provides some of the product Mr Smith: Yes, I am. I would say, as was said earlier, which Worldwide then exploits around the world— the panoply of controls that are around it are really indeed, the majority but not all of it, as was very, very substantial. I would love to be judged, mentioned earlier—and there are issues around that personally, based on the performance of a company horizontal relationship. I think the point that was with people crystal clear that there is no unfair being made earlier is that the crucial thing that the advantage being given, than through some peculiar Trust needs to ensure in relation to the fair trading and rather unwelcome or unwanted help that is system is that the way in which product is passed given because of that system not working. We have over that trading relationship, the horizontal one, is to bid for the rights to every programme that the done entirely fairly, with all the appropriate checks BBC makes in order to try to win that programme and balances, observing the Fair Trading Guidelines, from the BBC. There is a first-look agreement, which with the independent audit and all those things that we will explain in a minute, but basically we have to were mentioned earlier, such that there could be no bid a market rate for every programme that the BBC unfair advantage given to the company in the is supplying. We pass on some because we look at acquisition of those programmes, the acquisition of them and decide we do not want to bid on them— that product, for Worldwide to then exploit around because it will not fit with our catalogue or we do not the world with some kind of inherent advantage. On think we can make any money out of it—but we bid the other hand, as a subsidiary of a company on the vast majority. We do not win all the bids. We whereby the shares are owned entirely by the BBC, lose 15-20% of all the programmes that are oVered there are issues to do with the BBC wanting to have because we have not bid enough or, alternatively, control of its subsidiary and to know what it is because we have decided not to bid at all. And then doing, and also wanting the subsidiary to know the BBC oVers those programmes out to the rest of broadly speaking what the parent is doing. After all, the market and other people end up getting them. do not forget that both companies share benefit from There are plenty of examples of programmes where and build the BBC’s brand all around the world. we are not winning bids, we are not oVering a bid They both have exactly the same brand, and it is very that is good enough. That system is designed to important from that point of view. In addition—and ensure that we are regularly tested on the amount of maybe Zarin Patel will say more about this—BBC money that we are paying for the individual Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson programmes against the amount that other people in the Trust in fulfilling that role to the licence fee the market-place are willing to invest. Of course payers. I do come to this with an independence and there are some times when we overbid and an objectivity. I believe it is fundamental that we sometimes when we underbid, but, broadly meet the commercial criteria that we have speaking—and I am just going to stray because I established and which I believe to be reasonable, and think it is important to answer another question that we have very healthy debates. This is an organisation I think the Committee may have—the way of which—I think by virtue of the iconoclastic nature judging whether or not we are paying the right kind of British education and the BBC—no one is afraid of price for these programmes is are we making a to talk back to the boss, and so we do have very decent return? If you look at our annual report—and healthy debates. We try to make new mistakes. I indeed we are willing to give any more information think this is a creative industry and people only that is necessary—the return we are making at the stumble when they move forward. This is what I did moment is 13% return on sales across the entire at Disney. I did this for 15 years. We did it by group. That is a good return in the context of the building a small, heavily subsidised international media industry, and we can only be doing that if we television business of some $16 million turnover in are paying a relevant price for the programmes. We 1986, to north of $1 billion. In doing that we created could not do it if we were overpaying for the local programming on a weekly basis of over 250 programmes, as some people were suggesting. hours. We spread Disney branded product reaching 250 million viewers. We did that with a far more Q172 Janet Anderson: Zarin Patel, I know you sit on fragile brand than the BBC brand is. It is very clear the Worldwide Board. Do you see any conflict there? from my accent that I am not from these parts, but Do you have any problems with that or do you feel one of the reasons why I live here and one of the comfortable? reasons why I love being here is because of what the Ms Patel: I do feel comfortable. My role as Group BBC meant to me as a young South African growing Finance Director of the whole BBC is to manage up and listening to BBC World Service and then financial risk and to control financial risk—the being exposed to what the BBC stood for in the late control relationship that John Smith talked about. 1960s and early 1970s as a student. I get what this Worldwide is a significant commercial operation. It brand is and I get what managing brands are. I can has significant overseas revenues, for example, so it say with hand on heart that this is a group of people I has much more risk than, say, the licence fee income am incredibly impressed by. I am impressed by their would have and therefore it is important that the abilities, I am impressed by their diligence, I am Group Finance Director is in a position to be able to impressed by their kindness, I am impressed by the control the activity. You will also find that in public responsibility that they feel towards the brand and limited companies where there is a significant they feel towards the licence fee payer. In answer to subsidiary, perhaps a quoted one, the group CFO a very short question I have given a very long will sit on the subsidiary’s board. The objective answer, but we have had at least 30 initiatives that assessment of commercial eYciency is also another we have squelched. Some have never come to the part of my role. As a non-executive Director you can Board. challenge that much more from the inside and understanding how the whole company is run, than through papers from outside the company. In Q175 Chairman: We being whom? essence, I do not take part in the commissioning Mr De Villiers: BBC Worldwide. decisions. I do not take part in the role of the commercial agency which tests market value. Q176 Chairman: Where have the initiatives come Neither do I take part in the initiating or shaping from? things from the Worldwide perspective either. That Mr De Villiers: The initiatives have come from is the management team’s job. within the system. Because the staV and the executives have a very real understanding of “If you Q173 Janet Anderson: In both cases does your do not stand for something you will fall for remuneration reflect the fact that you sit on both? anything” these people stand for something, so they Ms Patel: My remuneration does not absolutely have a clear idea of what would be compatible, what reflect any of my non-executive Directorships within would be consistent, and what would make sense. I the BBC. think over 50% of those initiatives were stopped Mr Smith: My remuneration is determined by the before they even came to the Worldwide Board. Of performance of BBC Worldwide. the number that came to the Worldwide Board, we did debate the number of them and we rejected a Q174 Chairman: As non-executive Chairman, how number of them. I think it is a very healthy system. often do you feel it necessary to rein back John There are checks and balances. We have the internal Smith from pursuing various options because you reporting systems which Sir Michael and Mark feel they may be straying too far beyond the remit of talked to, but I am comfortable that this is not over the BBC? controlled. This is appropriately controlled, but it is Mr De Villiers: As Chairman of any company, and more controlled than Disney ever was. Disney was especially this one, I am tasked with the fiduciary monomaniacal about maintaining its brand. It is duty to shareholders to act with due care and such a tenuous connection between what their concern and loyalty to those, so I really act to help programming stood for and the confidence that Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson mothers and care-givers had when leaving their Ms Thomson: Yes. children in front of the television set. We all make Mr De Villiers: Yes. mistakes but hopefully very small ones. Q181 Chairman: Including the one that is stopping Q177 Chairman: This is slightly diVerent. The it distort the market. concern here is market distortion and whether or not Mr De Villiers: Yes. it is appropriate and whether there is a proper separation between the main BBC and Worldwide, which is not a consideration which applies to an Q182 Chairman: Despite the fact that we have organisation like Disney. The BBC said to us that publishers of trade travel magazines who are saying the non-executive Directors have the right to refer a they will go out of business if it goes ahead. proposal to the BBC Trust if they have concerns that Mr Smith: Caroline has said that the Four C’s it may not be compliant with the commercial process has been gone through and we have satisfied criteria. Have there been any occasions on which that process—that it complies and therefore does that has happened? not distort the market. I think the trouble in the commercial world is that if you enter any market Mr De Villiers: As you have heard from Sir Michael, space it is easier to say that entering the space itself one of the four that have been referred to the Trust is going to distort the market. If you take magazines in the time that I have been there met the threshold, as a specific sub-set of the things that BBC and three of those were referred because there were Worldwide does, indeed it is where Worldwide sensitivities. I know I have that right at any point. If began. You will recall the whole company began in I felt that Worldwide was going down a path that I 1923 with the publishing of Radio Times. That was a felt uncomfortable with, I would go and refer to the magazine which, by the way, does not carry the Trust. In fact, the publishing of the Lonely Planet BBC’s brand on it. It started its life as a magazine magazine was an issue that Nicholas Eldred, who is publisher all those years ago—we have been doing it the General Counsel of the company, the BBC, as for 80 years—and now publishes about 60 well as the guardian of the Four C’s (the four magazines in various sub-sections of the magazine commercial criteria), felt that the Trust should be market; for example, food, cars, and so on. If you aware of and so he went into the system in order to take a sample of those sub-sections—and recently raise it as potentially a concern. In addition to that, we have launched a Match of the Day magazine into the COO of this company will meet on a monthly the football market for the football magazine basis with the Trust Unit to discuss commercial market, and we have magazines in food and those criteria. There is an ongoing formal and informal other sectors—what tends to happen—and we can system, therefore, that ensures that any issues that provide the evidence for this—is that the overall might be of concern will be raised. None to date is market in that sector grows as a result of our arrival, the answer, because we have never got to that point rather than shrinking. Whereas people fear that we where we felt— are going to stifle competition, that does not happen at all. More magazines occur as a result of the Q178 Chairman: You have said that the Lonely magazine growing, because more people have an Planet magazine had been referred up to the Trust. interest in it. I will add, if I may, Chairman, that Mr De Villiers: It was put into the process. I would when we watched the evidence being given a couple need to have Caroline explain the distinction. of weeks ago to you, we were surprised by and did Ms Thomson: It has not, as far as I am aware, been not know that Wanderlust magazine—which I must referred to the Trust. When Lonely Planet was say is a great magazine and I read it regularly—was acquired, one of the key strategic aims of it, as my having its tenth anniversary on the day that we were colleagues will tell you, was to be able to launch a proposing to launch the Lonely Planet magazine. We magazine along with a much revamped website. just did not know that. In deference to Wanderlust— When the decision to launch the magazine came up and I have contacted the lady since the day of the to the Worldwide Board, it was felt by one of the evidence—we have put back our launch because we public service non-executive Directors, Nicholas absolutely do not want to stifle competition. It is not Eldred, who is our General Counsel, that it had to in our interests at all to stifle competition. We want have a separate compliance process, which it would the competition to be healthy and fair and cause the not normally have had, to see whether it met the market to grow and not to find companies like that Four C’s. So the non-executive Directors on the suVering as a result. We have moved our own Worldwide Board invoked a Four C’s compliance launch. If there are more things we can do to help process, which otherwise would not have happened. Wanderlust in its mission, bearing in mind its values are similar to our own in the travel space, we will do it. Q179 Chairman: Has that been completed? Ms Thomson: It has been completed. It has not had to go to the Trust because it was completed Q183 Chairman: We are going to return to this in satisfactorily. greater detail but I cannot resist pointing out that Wanderlust’s concern was not that you were launching on the same day as its tenth anniversary Q180 Chairman: The Four C’s you think have been but that you were launching at all. satisfied by the Lonely Planet magazine. Mr Smith: I sought to answer both— Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson

Chairman: If you really want to help them I think that programme. If they bid the same sort of level as they would say that the best thing you could do is not the Commercial Agency has made the assessment, to go ahead. We are going to come back to that in then they get the programme. If they do not, then the more detail. But I will bring in Helen Southworth programme is put on the market and it will go to the ﬁrst. distributor who bids more.

Q184 Helen Southworth: How do you ensure that Q185 Helen Southworth: There is a little series of when you are purchasing the rights to BBC questions that I want to ask which moves from place programmes that you are paying a fair market price? to place, I am afraid. How do you ensure that you do not have any form of cross-subsidy, perhaps from Mr Smith: Chairman, I think there are two angles to something on which you have made more money that answer. There is what we do as BBC Worldwide through the BBC or on which you have made a to bid the right amount, and then what the BBC does better bargain through the BBC, to enable you to to make sure it is receiving the right amount. Let me overbid for other programmes that that you are deal with the first and maybe Caroline will deal with buying on the open market? The allegation could be the second. We have a process which by the way is that you are using licence fee payers’ funding in identical whether this is a BBC programme or a order to allow you to overbid in the market. programme coming from the independent sector. It Mr Smith: On a point of clarification, taking the very is absolutely the same. We essentially ask our sales last point first: there is no licence fee payers’ money force who are out in the field around the world, in involved in this at all. That is very, very important. lots of oYces in lots of countries, selling programmes All of this is commercial money that is being all the time, and our other businesses who may well invested to buy the rights in order to then exploit benefit from buying a right (for example, DVD or them around the world. That is very, very important. selling the programme on to UKTV in the UK or our channels around the world or our magazines or whatever bit of the business is likely to benefit from Q186 Helen Southworth: This is why I say there is a buying the programme) what they think they can little sequence of things. If you were to buy from the make from this particular programme in the market. BBC when you have a preferential bidding process Often we have not seen the finished product, so we at a reduced rate, that would be a subsidy. are exercising that judgment before we have even Mr Smith: That would be. seen it, but on the basis of our understanding of the Ms Thomson: The first check is at the BBC end, the talent, the director, dah-de-dah, we take a view public service end, at my end and at Zarin’s end of about how much money we think we are going to be it. We make sure that they are not able to underbid able make from it. When we have done that, we then because we benchmark and market test the prices discount it, take a view about how much money we they pay. That is the first level of security, that you think we need to make by way of profit from it and are not able to make an unreasonable profit. then make a bid. Sometimes we get it wrong, sometimes we get it right, but we try to do it exactly Q187 Helen Southworth: The second one would be fairly across independent and in-house, across all that you would use your commercial weight or the genres, in exactly the same way. The net eVect, as I fact that you have a preferential buy-in from a huge have already mentioned, is that overall our portfolio supplier to distort the market by overbidding. of activities we are earning a 13% return on sales. Mr Smith: If we were overbidding, we would not be Ms Thomson: Obviously the mirror of that is how able to earn a 13% return across everything that we does the BBC make sure it is getting the right money do. If we were overbidding, we would not make from Worldwide or indeed from the other any money. distributors. Worldwide is our preferred partner, but, as we were saying earlier, some 15-20% of our Q188 Helen Southworth: If you were cross- output goes out to other distributors as part of this subsidising, you could still overbid, and that would process. The crucial thing is that the process at the have the eVect of distorting the market for those public service end is run by something called the people who did not have that huge supply. That Commercial Agency, which is part of BBC Vision. It would enable them to bid above what they thought is part of the public service side. It has no managerial might be the market price for a specific programme relationship with Worldwide at all. It is run entirely they particularly wanted to get because it would give independently. It is a team of some 28/30 people. them market share when they were selling it. They are employed for their expertise in Mr Smith: We are just one of the distributors in the understanding the markets. They are run by a market-place. We are a big distributor. By UK former Managing Director of NBC in Northern standards we are the biggest. But, as Mr Thompson Europe and they employ people who are experts in said earlier on, if you ask the independents from certain markets. When they get a programme and whom we buy a good proportion of our total they want to sell it, they make an assessment of what catalogue how they feel about having us as their they think is the correct market price. They analyse distributor, whenever they are asked voluntarily— the returns from previous exploitation of similar and I am not talking about Pact, the trade body, I programmes by Worldwide, they look at what they am talking about the companies themselves and we have got in the market from selling similar deal with 210 of them—they regularly vote us as the programmes to other distributors, and they make an company they would most like to have distributing assessment. Worldwide have the first right to bid for their programmes. That has been the case in three Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson out of the last four surveys carried out each year. So As I have already mentioned, we lose about 20% of we are a big distributor and they like dealing with us, the stuV because we are not bidding the right but we are not big by, let us say US media company amount. The reason why you have a first-look standards. In the context of any of the big US giants, agreement is because, by having a preferred we are absolutely tiny. We are bigger than other distributor, that preferred distributor is given the distributors in the UK but we are not big on a global incentive and the means to make the big investments scale by any means. We have ambitions to be bigger, necessary to build brands over a long period of time; of course, but we are relatively small in the context for example, launching a suite of BBC branded TV of the world media stage. But we are judged, I am channels around the world. Mark Thompson judged, based on the financial performance of BBC mentioned BBC America. In America, indeed in Worldwide; that is, the amount of profits I am America tomorrow, CBeebies in the Hispanic making. For me to overbid would depress my profits language will launch a BBC branded channel for and that would mean that I would not get the success pre-school children in the American market-place— that I am judged on, and my success is judged based the first time that has happened. You only make on the amount of profitability I am producing. Do investments like that knowing that it is going to be not forget that all of this is done for the TV licence several years before they reach profitability. Because fee payer, every single penny. Every single penny of you believe that, you can continue to replenish the profit that is made here goes back ultimately to the product supply. You can continue to have great BBC. You have seen the calculation: we are programmes—in the case of CBeebies programmes generating about £9 for every TV licence in Britain like Teletubbies and In the Night Garden and so on— from what Worldwide makes out of its activities. because you are going to be in a situation where you Mr De Villiers: It is important to understand that can bid for the rights, and if you bid the right although I am not part of that process—it is done at amount, you will win them, and then the channels a level below that at which I am involved—this is a are continuously refreshed and eventually the process which I am familiar with. You bid on channels make money. The first-look agreement is programmes by establishing your ultimates: how designed to create a distributor, where the much you believe that particular programme will distributor is given the incentive and the means to earn in its various levels of exploitation. You never make the big investments necessary in order to do know upfront. Nobody knows anything in the film that kind of long-term, big branded thing that you and television system until after the event, and then would not do if, instead, you just fragmented your we are all geniuses. But you try to do your very best, rights around the market-place. Perhaps I might say and you make a programme. Some work, some do not. It is humbling to most. You need to have a one other thing. I know you have had system that measures against that, so that if you are representations. People complain about the fact that consistently overestimating certain tracts of we have built some of these brands. I am going to revenues you need to learn from that. This is done on mention, briefly, Dancing with the Stars – which in a case-by-case basis. I know, because John and I talk the UK is known as Strictly Come Dancing but about this and he gets annoyed with me, that we keep everywhere else in the world as Dancing with the pushing to see whether we can do it better. Can we Stars. TBI magazine rated it as probably the world’s 1 bid more eVectively? Can we acquire more greatest entertainment brand. It has only got to that eVectively? Within that process it is very hard to see place because we have invested an enormous how a systemic overbidding can occur when each amount of money into building it into a hot property one is looked at on a case-by-case basis, because it in many, many countries, including in the USA just would not happen. where it is still a ratings winner in its fifth or sixth season. We have put the investment into that brand to make it into a global hit because that is what BBC Q189 Helen Southworth: We have had Worldwide does, and it is a hit not just on television representation—I think that is probably the best but there is merchandising, books, DVDs, dah-de- way to put it—during these hearings from people dah-de-dah, live events and so on. If, instead, those who suggested that it would be far fairer if the BBC rights had been fragmented around a whole series of were to allow tenders for the process of sales rather individual distributors who had bid for individual than having a direct and automatic process for BBC amounts, would any of them have been willing to Worldwide should it wish to have its stuV. Why do make the huge investment necessary to build that you not do that? into a global brand? Indeed, would they have had the Mr Smith: The relationship between BBC and BBC capability of building it into a huge global brand? In Worldwide, bearing in mind the companies have the the end, would that be better or worse for the licence same brand, is underpinned by an output agreement, fee payer? by a supply agreement, if you like, which is called the first-look agreement. The first-look agreement is a typical feature of the media industry. If you went to Q190 Helen Southworth: That was a very interesting see any of the majors—and maybe Etienne could answer but it did raise with me the question about speak from the Disney experience—you would the BBC’s role in generating children’s television. expect to have that. All it says is: We give you the For example, it is the BBC which commissions In the chance as Worldwide to bid. That is it. It is a first Night Garden – a wonderful programme which raises look. It is not any advantage in terms of price and there is no guarantee you are going to get it either. 1 Television Business International Magazine. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson my spirits very often—for the British public—not, already distributed by other people. We are able to with all due respect, for the Americans or wherever benchmark what Worldwide pays us against that. else, but for our interest. We do not feel we would get significant commercial Ms Thomson: Yes. It is very, very important that the advantage from doing it any other way and we think BBC carries on making programmes for British we would lose significantly on the asset creation and audiences and that that is the imperative, serving the brand support that we get under this system. licence fee payers. It is what we are all here for. We get £3 billion a year from licence fee payers. That is Q193 Chairman: Caroline, you have suggested that what we are here to do. If we can, having done that occasionally the BBC in-house production, BBC successfully, make money out of it which helps oVset Worldwide, would come to you for first refusal and the licence fee by selling them overseas or exploiting say, “We wish to have distribution rights for this in other ways, then that we are also charged to do. It BBC production” and you would say to BBC is very important that the primary motive in the BBC Worldwide, “No, we do not think you are paying is to make sure that we make programmes which suYcient for them. We are going to put it out to the delight British audiences first, and then John’s market.” activities come second. When we look at how we are Ms Thomson: Yes. going to exploit these programmes, having made them, we have a number of considerations we make in pursuing the strategy of having Worldwide as our Q194 Chairman: Can you give us some examples? preferred supplier. The first is obviously we want to Ms Thomson: It happens in about 20% of maximise revenue, so we have to be convinced that programmes. Mitchell and Webb is one of the that is happening. I have explained how we feel that recent ones. we get the benefits of the market by doing this benchmarking process and by having the Q195 Chairman: These are distribution rights. Commercial Agency, which means that we would Ms Thomson: Distribution rights. We could send not get more benefits from simply fragmenting the you a complete list. Merlin is a recent one, but that sales, but it is very important to the BBC that in is an indie one but we had the rights to it. Vanity addition to that we have a number of other things. Fair. We can give you a longer list. One of the key things is control of the brand and how it is exploited, so that if we are going to have CBeebies channels in Poland and this Spanish Q196 Chairman: It was also suggested to us in the channel and whatever and they are branded BBC, evidence we received that there had been reports that that they live within our values. It is very important producers were threatened by the loss of a as well in the context of printed media and commission if they did not agree to give distribution magazines and so on. Also, of course, the other rights to BBC Worldwide. benefit to us longer term—apart from those John Ms Thomson: If there are reports of that, I would was talking about in relation to how he does the like to see them. That would be wrong. We run the exploitation—is that in Worldwide we are creating system on the basis that that should not happen. an asset with value. That has an additional benefit to Any individual examples of that, send them to us us. We would have to be convinced that we could do and we will investigate them. all those things better by going out to the market and we are not. Q197 Chairman: You do not believe that could possibly happen? Q191 Helen Southworth: One of the suggestions that Ms Thomson: I would very much hope it cannot you2 have made to us was that it would be at no cost possibly happen. It should not happen. to the BBC if we were to put out all these programmes to the highest bidder and that would Q198 Janet Anderson: Is it fair to say that UKTV has then guarantee that you were getting the highest first right of refusal and sometimes less right of price. Can you explore that a little bit with us? The refusal? So that if they said they did not want a evidence we were given at one point was that all the programme and then it went to a third party BBC would need to do was to send an email out. broadcaster, who made a bid, would UKTV get Ms Thomson: Yes, I saw that. another chance to match that bid? Mr Smith: You meant UKTV presumably? Q192 Helen Southworth: That was something that I found a little surprising. Q199 Janet Anderson: Yes. Ms Thomson: Obviously it is an issue for us to make Mr Smith: UKTV is a 50% owned subsidiary of BBC sure that we have a system which is commercially Worldwide, where the other 50% is owned by Virgin eYcient in how we do this. We do not want to have Media. The discussion we have just been having is to have an enormously elaborate infrastructure. As about how the rights arrive in Worldwide in the first I have said, we have about 28 people running our place. We have bought the rights, or, indeed, we may Commercial Agency. Within that, we feel we can have bought them from an indie or in some cases eVectively benchmark. We do not think we could get they may have been self-made. Having got the rights, better commercial returns. 20% of our output is we then supply them to UKTV under a completely separate agreement—it has nothing to do with the 2 Note by witness: Others suggested this, not the BBC. relationship with the BBC at that point, because we Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson already have them—and from that point on it is an I am sure you know, a lot of their magazines are entirely commercial transaction; in other words, number one in their little market sector, but not all there is no public service angle on that trade at all. of them, but they use their expertise and creativity to develop the idea of a magazine, the proposition for Q200 Paul Farrelly: I want to come back now to it, and develop the price point and the exact Lonely Planet, first on the tack that we have just positioning in that sector and so on. Then we will been pursuing. Lonely Planet, the company, I start writing and creating the editorial. They will presume is a 75%-owned subsidiary. commission writers, many of whom are BBC Mr Smith: Yes. presenters—Stephen Fry is a good example: somebody who will appear in the first edition, who Q201 Paul Farrelly: It is one holding company with is currently on TV with his American programme— a number of subsidiaries in the Lonely Planet and other people who are Lonely Planet authors, Group, is it? It can be treated as a 75% subsidiary? independent people and so on. The magazine gets Mr Smith: Yes. put together, and the magazine division will make the profit and they will pay to the people who are contributing to that—for example, brand or Q202 Paul Farrelly: How does the Lonely Planet editorial or clips or other material—an appropriate magazine fit into that arrangement? Will the Lonely market rate on exactly fair market terms within the Planet magazine be vested in BBC Worldwide or the Group. 75% subsidiary? Mr Smith: The only way of answering that is just to explain that in the decision to buy the company in Q204 Paul Farrelly: What will remain within the the first place, to get the 75% stake—and it has 75% subsidiary that you have bought? The guides it already been mentioned earlier on today—the key produces now. It will receive a fee. part of it was the fact that in the travel space we have Mr Smith: Yes. The guides will remain in there, the a lot of programming. We think we have about 3,000 lonelyplanet.com—I do not know whether you have hours of TV programming that is in that zone of visited lonelyplanet.com, but one of our key other pure travel, Palin Goes Around Europe3 or whatever, reasons for buying is because we think we can or travel-based, like Coast or Britain from Above and significantly improve the Lonely Planet website. things like that. We as a distributor primarily are Indeed, it re-launched last week, in a series of re- concerned with getting that material sold to other launches that are going to come for it over the next people or, indeed, into our own channels. When you few months—it has just started really—because we do not have a uniting brand, when you do not have think that we can build what are currently six million a big resonant brand to gear up that sale, you are unique users to that site into an even bigger number essentially selling individual programmes in the and make more money out of it. But that is spotlight. something that sits within Lonely Planet, the company. Those two things crucially stay there. Q203 Paul Farrelly: I understand that. There is also a television production unit within Mr Smith: It is very important though. Forgive me, Lonely Planet which will stay there, and there is a it will sound longwinded, but it is important. The stills and picture images business which will stay idea of Lonely Planet gives us the ability to have the there. Most other activities will probably—and this number one globally respected brand in travel guide is not a hard and fast answer because we might books, which is Lonely Planet, as a lever, if you like, change that—stay in other parts of Worldwide but from which to leverage up our sales of the rest of using the same brand. The eVect of the acquisition what BBC Worldwide does—of which whole TV has an eVect not just within the Lonely Planet programmes is the most important, followed by sale company but also across the whole Group. of clips (of which we think we have about 15,000). In addition to that, there are websites, there is the lonelyplanet.com website, and magazines. We have a Q205 Paul Farrelly: But it is only a 75% subsidiary. division that I have already mentioned which Mr Smith: Yes. publishes 60 magazines. Part of the decision-making in buying Lonely Planet in the first place was the Q206 Paul Farrelly: Will the Lonely Planet group of certain knowledge that, unusually, here was a companies pay any fees for access to any BBC respected brand which shared almost identically the material? brand values of the BBC that would give us a chance Mr Smith: Yes, absolutely. of unlocking our TV archive but, in addition, would benefit each one of our other six divisions—DVDS, magazines and so on, and magazines being one. The Q207 Paul Farrelly: Can you give us some examples? way it will work in practice, having taken the Mr Smith: At the moment there is not any BBC decision to make the investment and looking at the material appearing on our Lonely Planet service, economics of the commission in terms of the eVect apart from the new website which just launched, on the entire BBC Worldwide Group, is the where there are only clips, but they are paying magazine division will then develop the magazine market rates for those clips.4 using their skills and expertise in running magazines. 4 Note by witness: The clips will not appear on the website 3 Note by witness: Not an actual programme title. until the new year. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson

Q208 Paul Farrelly: Particularly at the time of the look into this suggestion that the level of disclosure credit crunch, the BBC is privileged in terms of its is not of a plc. It is certainly not intended that way; access eVectively to public finance. Other people for it is intended to be exactly the same. acquisitions may find it diYcult, particularly in these times, to gain access to that finance. Again there will Q218 Paul Farrelly: I have just asked for the figure. be self-interested moans that the BBC is in a Mr Smith: Yes, but I am just worried about . . . privileged position, which will grow if you make Ms Patel: It is public. more acquisitions. You will appreciate that. Mr Smith: It is not true, of course, Mr Farrelly. Q219 Paul Farrelly: You can adjust it in whichever way you want. Q209 Paul Farrelly: But that is the perception. Ms Patel: Perhaps I could give you the figures. In the Mr Smith: The money is borrowed from the BBC 2007–08 Annual Report and Accounts, in note commercial money markets at commercial rates and 19, we disclose the performance of Lonely Planet. has no BBC guarantee nor government guarantee. For the period up to acquisition, 1 July to 30 September, we had made turnover of £10.6 million, Q210 Paul Farrelly: But that will be the perception, and at that stage it was making a very small loss. so we need some transparency. You have heard me Within the Annual Report and Accounts you will say before that the note in your accounts is not the see the summary of financial statement there. We level of disclosure that I would expect to see— then showed performance post acquisition. If you Mr Smith: I am surprised at that. would bear with me a moment— Q220 Paul Farrelly: I do not have that note in front Q211 Paul Farrelly: -- from a public— of me, but I have a discrepancy with the £10-£50 Ms Patel: May I pick that up? First of all, the BBC million turnover. Annual Report and Accounts at note 19 has full Ms Patel: That is pre acquisition. One of the things disclosure, as required by plc type accounts, of the you are required to do in accounting standards is to Lonely Planet acquisition. Worldwide produces show what the performance of the company was detailed financial statements which are also publicly before you acquired it as well as after you acquired available. That is a summary set of financial it. The figures I have just given you are for the period statements. It is all fully available. before acquisition. For the period after acquisition, on page 25 of the summary financial statement you Q212 Paul Farrelly: Okay. Would you just give me will see what Lonely Planet make afterwards. Their some basic figures and facts to work on? Where is the turnover post acquisition is £20.8 million,5 and it Lonely Planet Group incorporated? made a small loss of £2.1 million which included the Mr De Villiers: In Australia. acquisition cost of Lonely Planet. Ms Patel: In Australia. Q221 Paul Farrelly: It was £10 million before Q213 Paul Farrelly: What was its turnover at the acquisition and a small— time of acquisition? Mr Smith: The turnover is about £50 million a year. Mr Smith: In dollars or pounds? Paul Farrelly: You can choose. Q222 Paul Farrelly: What sort of yardstick did you use for valuations? Q214 Chairman: Which would you prefer? Mr Smith: A large number, as you would expect, not Mr Smith: It is about £50 million. just about the current profitability either—although it is fair to say that the core book business is Q215 Paul Farrelly: On whichever relevant measure extremely profitable—extremely profitable. I think of profitability that was relevant to you, how it is fair to say that if Tony and Maureen Wheeler profitable was it? were here today they would be telling you that they Mr Smith: I am slightly loathe, Chairman, to be are rather pleased at just how profitable they have giving very detailed commercial information out in made the book business, but their various public, although patently the Committee know it. I investments in the online space have not been as wonder whether it might be— successful and their online material was making losses. By the way, not a unique situation: many media companies are having the same problem with Q216 Chairman: We are happy to receive evidence their online business. In our own decision about it, in private. we were looking at a range of diVerent ways in which Mr Smith: Would you mind if we gave it that way. we could make the thing even more profitable for us, We have it but it does not feel right— not from the knowledge that the book business itself is highly profitable already and even there a clear Q217 Paul Farrelly: For an acquisition of this size, view from us about exactly how we would develop were you a public limited company, you would the book business with a launch of new guides. disclose the level of profitability. Indeed, we have already started launching diVerent Mr Smith: In our own note, to be fair, Mr Farrelly, guides. In America, for example, there is a whole the acquisition price and the profitability is there. As Zarin has already mentioned, in the BBC Group 5 Note by witness: This should be £23.1million (split between report there is more. As Mark said earlier, we should Publishing of £20.8million and Digital of £2.3million). 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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson new series of guides that are coming out which we Q229 Paul Farrelly: No, but I would expect that think will become profitable quite quickly. We are information to be shown. What are the terms of the launching in India and China—which are big and put option? Can you describe the terms of the put growing tourism markets, where we think we can option for the remaining 25%? make more out of the book business even than was Ms Patel: Would you like me to read out what we being made before. On the website, we could see how said in the published accounts of the BBC, again in using our own existing skills in the various websites note 19? “In accordance with financial reporting we have had for some time could turn around the standard no. 25, Australian $67.3 million (£29 performance of the websites from what was a loss at million) liability was recognised on the date of the point we bought it into a profit. acquisition in respect of a put option of up to 25% of the share capital of Lonely Planet, which is Q223 Paul Farrelly: What yardstick for valuations exercisable by the minority shareholders for a period do you use? of up to 25 months from the acquisition date.” It Mr Smith: All sorts of diVerent things. There is a then goes on to explain the accounting treatment. mixture. Perhaps I will not bother reading that out.

Q224 Paul Farrelly: Talk me through a few things. Q230 Paul Farrelly: So it is another £29 million. Mr Smith: A mixture of net present value of the Ms Patel: Yes. future cash flow. As you will know, Mr Farrelly, everybody has to do that when making any kind of acquisition at all. To do that, you have to take a view Q231 Paul Farrelly: That is fixed. about what the synergies are going to be. To do that, Ms Patel: Yes. That is recognised in the accounts as you have to then disaggregate whether they are a liability. revenue synergies or cost synergies. To do that you have to take each individual bit of the business and, essentially, do an entirely new business plan of your Q232 Paul Farrelly: It is a fixed cost. That basically own which you believe you can perform, based on seems one hell of a price for a business that was the acquisition when you have got it. We did all of marginally profitable, with the levels of turnover those things. We ended up with a base case, a low either pre or post acquisition that you have just case, a mid case, and a high case. Frankly, the given. amount we bid was lower than our low case. People Mr De Villiers: It may be that I can help here. It was who suggest that we have overpaid or that we did not not. Having come from a world of private equity and know how we were going to make any money out of having made a number of acquisitions in my Disney it, it is just not the case. So DCF first of all, and, life as well, we went through this with significant due second, market— diligence. The multiples, the DCFs, the terminal values, and all of the various scenarios that one Q225 Paul Farrelly: Who were your professional would build into any acquisition planning, all fell advisers? within the acceptable. We were not anywhere close Mr Smith: We had a series of ten diVerent advisers, to where I felt as a non-executive and the other two including Deloitte, who acted as our due diligence non-executives from outside the company with good partner right the way through the transaction on commercial experience felt that we were overpaying commercial, financial, taxation and so on. Our own for the business. We simply were just not project manager was a person who had spent his overpaying. whole life trained in due diligence for acquisitions. Then we asked Lehman Brothers, Investment Bank, Q233 Paul Farrelly: In terms of procedure, finally, to do a validation of the valuation before we on this tack: when you negotiate with your own completed the acquisition. They are just a small professional advisers, what steps do the BBC Board number of a large number— then take to make sure that they are satisfied that it is fair and reasonable independently? Q226 Paul Farrelly: Who acted, just out of curiosity, Ms Patel: That is one of the reasons why the Group for the other side? Finance Director is a non-executive Director of the Mr Smith: They had a variety of diVerent people Worldwide Board. Other than making sure that the helping them as well, Mr Farrelly, including their terms of the due diligence were very searching, were minority shareholders that they had at the time who independent, and were assessed clearly, for both were in the world of private equity. myself and my team, which is separate from Worldwide, but also the Trust team, the key element Q227 Paul Farrelly: I hope you do not feel me to be of evidence for us was the Lehman’s independent nitpicking but I am trying to get a feel for this. fairness opinion letter, where they had access to all Mr Smith: That is fine. of our financial judgments we were making, to all of the due diligence. It was that letter that Q228 Paul Farrelly: Could you explain to me, independently assessed whether we were paying a because I would expect this in a public acquisition fair value that was something that the non-executive circular, the terms of the put option for the last 25%. Directors on the Worldwide Board but also the non- Mr Smith: It is not an acquisition circular, Mr executive Directors on the BBC Board itself and the Farrelly. Trust Unit took account of. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson

Q234 Paul Farrelly: Do you have plans for a Lonely strategy of investing in lifestyle and specialist Planet TV programme? magazines and aiming to publish the market leader Mr Smith: A lot. Indeed, we are just in the middle of in each sector.” We also had the Government producing a new TV series for National Geographic, statement that “Magazines will in future be focused the channel, which is a Lonely Planet branded TV more on brands and subjects that are connected to series based around the travel show, and there is a lot BBC programmes . . . ” Are those two statements more stuV in the pipeline. We are 12 months into the not in conflict? acquisition. We are really pleased with how it is Mr Smith: I do not think they are in conflict, going so far. We have launched a whole series of new Chairman. If you go back to the start of the books in diVerent countries. We are breaking into company and Radio Times in 1923, there is a good new markets. It is putting on share in nearly all of the example of a market leader, Radio Times, which key markets that it works for. We have just re- does not carry the BBC’s brand and neither is it launched the website. We are about to do a completely associated with BBC programmes. It magazine. There is a lot more to come. obviously covers, of course it does—in the editorial and in most things—the material coming from every Q235 Paul Farrelly: Did you appreciate at the time one of the BBC’s competitors, otherwise people and can you understand the sense of the discomfort would not buy the magazine. That is a good example at the acquisition of a major standalone brand in of it. Wind a lot further forward to a magazine like the business. TopGear, which is very specifically related, as you Mr Smith: Yes. would expect, to the TopGear television programme which is very popular, that is without any doubt the Q236 Paul Farrelly: To the extent that some people market leader in car magazines in the UK—and by may feel that it is the commercial side wagging the the way, it is the market leader in most countries of public sector dog. This discomfort is not only shared the world as well as a magazine—and is an example by people who “would say that, wouldn’t they” who where there is a very direct link with a BBC are direct competitors. Can you understand that? programme where we are also market leader. There Mr Smith: Absolutely, Chairman. I can understand are other examples, like Good Food or Wildlife or it. In the end, this whole debate boils down to: Is the music magazines, which are not specifically related, role of the company to make money for the licence and neither do they have to be specifically related, to fee payer? Of course it is, and £9 per licence at the an individual BBC programme, but they are broadly moment. Is it okay, therefore, to then charge the connected to the kind of programming that the BBC company with growing through means that are not does. If you looked at any one of those magazines— simply to do with just making BBC programmes— and, by the way, including Olive magazine—on any not just that but other things as well—providing one month you could highlight the connectivity that they meet the Four C’s? Are the Four C’s a brake, a there is within the magazine to the BBC’s output. It sort of limitation, but within that the idea is to grow is not pound for pound. The magazine is not a as much as possible—with all the checks and printout of what goes out on screen; it is broadly balances and controls and brand discipline and so on appealing to the interests of people who like food, that you would expect—because it is in the licence who like wildlife, who like music, and so on, but it fee payers’ interests? Or is the mission of the is broadly connected to a BBC programme as well. company to not do anything that is going to oVend There is no diVerence there, by the way, to what we competitors? That is quite a tough thing if you are find with Lonely Planet. It is exactly the same. running the company to try to live with. It is a “one or the other” sort of thing. We have been responding over the last four years to the remit of successive Q238 Chairman: It sounds to me as if you can use governments to grow the company as fast as that justification to publish any magazine on any possible. Indeed, having then developed a strategy subject you like. which is very clear—I am sure the Committee would Mr Smith: Chairman, if I have given that agree—and not only clear but approved by the Trust impression, forgive me. I certainly did not intend to. and then published in the Worldwide Annual To counter it and to give an exact example, four Review the year before last in detail and then years ago, when some of these concerns were being summarised again last year, making clear that part discussed, there was a magazine which Worldwide of that strategy will be through acquisitions, published called Eve and there was a series of cross- because, as somebody pointed out earlier, all stitching magazines which were then fuelling quite a commercial companies grow by a mixture of organic lot of fire from people, saying, “What the hell has and acquisitions. Having then done that and then that to do with the BBC?” At the time there was no having had an acquisition that there is then quite a connectivity between those magazines and the lot of concern about it. It feels slightly as though we BBC’s airwaves. There were not really any cross- were told to get on with it, we have got on with it, we stitching programmes on BBC television, and, have done it and then people say, “Hang on, I’m not similarly, there were not any general women’s sure that is what I wanted.” interest programmes on BBC Television at the time which would have made Eve justified. At that point, Q237 Chairman: That may well be so. Can I press part of the review that occurred in the run-up to the you a little more on magazines more generally. In Charter led to Eve and the cross-stitching magazines your report you say, “The business has a long-term being sold because there was not that kind of Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson connectivity. So there has to be that connectivity but Q243 Janet Anderson: Do you think, therefore, that it does not have to be directly a programme to a Time Out and Wanderlust are going to beneﬁt and magazine. their circulations are going to increase because you have acquired Lonely Planet? Q239 Chairman: Let me try another one, Girl Talk, Mr Smith: I could not give that undertaking because which is aimed at young teenaged girls. This month’s I do not run either of those companies and do not edition is a High School Musical 3 special. That may know what plans they would have in the space. I do be connected with Etienne’s previous employer, but not know what the intentions of either Wanderlust or it has nothing to do with his present one. Why does Time Out are for the development of their magazine that ﬁt in with the BBC’s programming? in the future, or, indeed, what other dynamics are at Mr Smith: I need to record being very impressed play for Wanderlust with the travel world and for with your knowledge of our magazine portfolio, Time Out in relation to its information. They are Chairman. both great magazines and I read them both.

Q240 Chairman: We do our research! Q244 Janet Anderson: You cannot claim that the Mr Smith: There are another 59 we would like to market as a whole will benefit. send you. I do not have the current edition in front Mr Smith: All I am saying is that what tends to of me. I have not looked at it, if I am honest. I could happen when we enter a magazine sector—and you not give you a straight answer now on what the can never be sure, of course—is that over time the connectivity is. But that is a good example of where, overall market tends to increase. If you look at the after Eve and the cross-stitching magazines were editorial content of Wanderlust and Time Out and sold, we were quite particular and prickly internally the proposed Lonely Planet magazine, they are very, to ensure that the magazines would regularly have very diVerent. They are operating in a broadly, the connectivity. There was set up and there loosely travel/information sort of space but they are currently exists for every single one of the magazines very, very diVerent. You can appeal to diVerent an editorial advisory board that meets periodically demographics, you can appeal to diVerent types of and we have to produce a formal report which goes interest. Some want a lot more information about to the Trust explaining how that connectivity has the country—which is something Lonely Planet is been carried out and that the editorial in all the very good about—and some want cheap holidays. magazines is carried out entirely in line with the People want diVerent things out of magazines, even BBC’s editorial values. That has been done. I cannot if they are in the same sector. It is by no means give you a specific answer in relation to your certain that when the Lonely Planet magazine does question, but I am happy to do that afterwards. launch it will be operating in exactly the same space as those two magazines. Q241 Chairman: Could I raise one other with you. Here we have Delicious published by the Guardian Q245 Chairman: It is targeting the same advertising, Media Group. It is their Christmas edition and it has is it not? a picture of a Christmas pudding on the front and it Mr Smith: I reacted rather badly when I heard that costs £3.30. Here we have BBC Olive, which was being said—as I did about the launch date, because launched almost in direct competition with it sounded to me as though there was some Delicious. This is the Christmas edition, it costs deliberate intent. I cannot see that at all and we have £3.30 and it has a picture of a Christmas pudding on moved the launch date in deference to that point. I the front. What was the BBC bringing to the market cannot find any evidence of that at all. Indeed, if that was not already there when it launched Olive? anything, the way in which Wanderlust get their Mr Smith: None of the four criteria, to be absolutely adverts is that they tend to go directly to advertisers, clear, says that you cannot do anything in a market whereas in the case of BBC magazines, and certainly because somebody else is already in it. in the case of the Lonely Planet magazine, 90% or more of our advertising is done through agents, so it Q242 Chairman: It does say that you should not is a completely diVerent process anyway. distort the market. So launching Olive did not Ms Thomson: Could I add two things. First of all, distort the market for Delicious? when the Worldwide Board is doing an assessment Mr Smith: The question is whether there is any of whether it should launch a new magazine, clearly distortion occurring as a result of any unfair there are limits because every new product has to fit assistance given by the BBC through breach of the the Four C’s criteria. It has to have a fit with public fair trading laws. Perhaps I could just say something, purposes, so there is not some unbounded world because Olive has been mentioned. The food sector where they can just wander in anywhere. Also, as in magazines is a good example of where at the time part of that process, one of the pieces of assessment we entered that market there were nine food that is done is will the magazine be adding to the magazines available on British newsagent shelves. market. Is there a direct match, is there crossover That was in 2002. Now there are 80. Over the same between readership? That piece of analysis is done as period, the circulation for food magazines has more part of the process. We have been here before. Pre than doubled. What happens when competitors John’s day, when Worldwide launched its History enter a market, as indeed when we enter a market, is Magazine—a very important genre for BBC that the market improves because everybody’s broadcasting, history, and now a successful and product gets better as a result. established magazine—History Today was very Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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18 November 2008 Mr John Smith, Mr Etienne De Villiers, Ms Zarin Patel and Ms Caroline Thomson upset about it and thought it was going to go out of Ms Patel: They are diVerent time periods. business, and yet here we are, five or six years on, I am a subscriber to History Today and it is there, it is Q250 Paul Farrelly: I cannot get a feel for why a vibrant, great magazine still surviving. Lonely Planet has a turnover which has suddenly Mr Smith: And its circulation is more or less the exploded in such a short space of time. same today as it was six years ago. Ms Patel: They are time periods. Ms Thomson: There is obviously anxiety but our experience is that it is misplaced. Q251 Paul Farrelly: Please could you explain. Ms Patel: In total Lonely Planet’s turnover is around £50 million per annum. The figures I gave you broke down the whole year for Lonely Planet, Q246 Chairman: It is your assurance to us that when between the period pre acquisition, which was three the Lonely Planet magazine appears it will look very or four months, and the period post acquisition, diVerent from Wanderlust. which was eight months. Mr Smith: Yes. Ms Thomson: The £10 million figure was only for a three or four month period. That may not have been clear to you.

Q252 Paul Farrelly: No, it was not. So it is £35 Q247 Chairman: In the same way or not as Olive and million. Delicious. Ms Patel: We think it is about £50 million. I Mr Smith: It is Christmas puddings. It is the time of apologise for not having the figures right at my the year, Chairman. fingertips. In total Lonely Planet’s turnover is about £50 million. In the accounts we showed it in two time periods because of the acquisition. We are not saying that after acquisition its turnover suddenly doubled; Q248 Chairman: It is pure coincidence. they are just two separate time periods. Ms Thomson: It is not great original marketing to Ms Thomson: Could we write to you with the set of have a Christmas pudding on the front. figures.

Q253 Paul Farrelly: Yes, it would be interesting to have a breakdown of the figures, the last accounts Q249 Paul Farrelly: Before we wrap up our Lonely and the Lehman Brothers’ opinion. Planet section, there is one thing that has puzzled me Ms Thomson: Could I suggest that we send you the from some of the figures that have been given to me. public figures but also any other breakdown you Lonely Planet we are all familiar with. It has been need. knocking around for years. I used to buy Rough Chairman: The Committee may have a number of Guides, but there is no accounting for taste. What questions. I think you will be relieved to hear that we has puzzled me is that pre-acquisition there was a might put those in writing. May I thank you for £10 million turnover, post acquisition it was mid £20 waiting for so long and for answering our questions. million, and now it is £50 million. We may return to you.

Follow-up questions submitted to the BBC

1. What steps were taken by BBC Worldwide; by BBC Management; and by the BBC Trust to ensure that a fair commercial price was paid for Lonely Planet and what advice was sought to ensure that those calculations were valid?

BBC Worldwide When analysing a case for the acquisition or merger of a business, BBC Worldwide follows typical commercial best practice in terms of valuation assessment. Internal corporate and divisional finance teams make the initial assessments and secure all the supporting expert advice necessary to ensure that the appropriate level of external validation is applied to the internal valuation assessment. In the case of the Lonely Planet acquisition, BBC Worldwide’s assessment of value was underpinned with financial and commercial due diligence work conducted by a range of professional advisors with specific and extensive valuation advice from Deloittes in Australia, the UK and US and Lehman Brothers. In both cases the external advice strongly supported the price paid. BBC Worldwide also employed independent advisors to undertake legal, IT and forensic accounting due diligence in order to ensure that there was no unforeseen liability within the target business which would negatively impact its estimate of value so as to ensure that the underlying business supported the price. This exercise was extensive and was completed satisfactorily. The overall case for the acquisition of Lonely Planet was discussed at eight meetings of the BBC Worldwide Executive Board and by five meetings of the BBC Worldwide Board (which includes six Non- Executive Directors). Detailed information on the valuation and the intended price, using a basket of Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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commonly used measures including multiple analysis, payback period, return on investment, return on net assets, measures of proﬁtability, internal rate of return and net present value calculations were included at each relevant stage and were extensively reviewed by Directors. This analysis, the external professional advice received and the positive outcome of an extensive due diligence exercise led to and validated the Directors’ positive endorsement of the acquisition.

BBC Executive Prior to submission to the Trust the proposals were scrutinised and approved by the BBC Executive Board which, as the Committee will be aware, includes a number of non-executive directors with a range of commercial experience. As part of this approval relevant senior management independently reviewed each of the four commercial criteria and confirmed that, from the BBC Executive’s perspective, the proposals satisfied each of the criteria. The proposals were then subject to an overall assessment by the BBC Executive’s Controller, Fair Trading who provided confirmation that the proposals satisfied the four commercial criteria. The BBC Executive, as shareholder, also received the independent valuation advice supplied to BBCW by Lehman Brothers.

BBC Trust The role of the Trust in such cases is to scrutinise proposals submitted to it by the BBC Executive. The Trust is served by a unit with a range of specialist skills which accounts directly to the Trust and not to the BBC Executive. The unit provides independent analysis to the Trust on a wide range of issues. By the time a proposal reaches the Trust it has already been through detailed scrutiny by both the Worldwide and BBC Executive Boards. The Trust does not as a matter of course commission any further detailed assessment of the business case for new commercial propositions. It takes a view on the adequacy and robustness of the assessment processes that both BBC Worldwide and the BBC Executive have been through including the information they have considered and advice they have taken before making their own recommendations to the Trust. If the Trust is not satisfied with the adequacy or robustness of the processes used by or the advice taken by BBC Worldwide or the Executive Board then it would be open to it to commission its own independent assessments. In the case of the Lonely Planet acquisition the Trust Unit reviewed the BBC Executive’s proposals and gave guidance to the Trust throughout the approval process. The Trust was satisfied that the processes followed and advice commissioned by BBC Worldwide and the BBC Executive were both adequate and robust. Detailed information on the valuation, using a basket of commonly used measures including multiple analysis, payback period, return on investment, return on net assets, measures of profitability, internal rate of return and net present value calculations was included in the documentation of the case that the Trust considered. The Trust was also aware that this analysis was based on independent expert advice commissioned by BBC Worldwide and the BBC Executive, noting in particular that the financial assessments made by BBC Worldwide’s internal teams were underpinned and validated with financial and commercial due diligence work conducted by a range of professional advisors with specific and extensive valuation advice from Deloittes in Australia, the UK and US and Lehman Brothers. In reaching its decision the Trust took account of this advice. In terms of the commercial case it noted that both the “conservative” base case as well as the “upside” financial case were comfortably above the required rate of return for the business. The Trust also took its own independent legal advice to ensure that the procedures it followed and the issues it considered in reaching its decision were consistent with its regulatory obligations. The Trust’s consideration of the price paid formed part of its broader assessment of the proposals against the four commercial criteria (the commercial eYciency criterion in particular). We have given a full account, in our answer to question 2 below, of the procedures used by the Trust in this case.

2. What steps were then taken by the Trust to confirm that the acquisition met the four commercial criteria (“the four Cs”) for BBC Worldwide activities, including market distortion and the relationship to BBC programming given that the prima facie position was that the acquisition failed on both those counts? The Trust sets out here the basis for its decision and explains how the approval process worked in this case. The detailed account of process below demonstrates how the Trust tested the proposition before being satisfied that the acquisition of Lonely Planet was appropriate. The Trust does not agree that “the prima facie position was that the acquisition failed”. The Trust set a series of conditions and called for a considerable amount of additional information in order to satisfy itself that the acquisition was consistent both with the strategy in place and with the four commercial criteria framework. At the end of this process the Trust was satisfied that the acquisition was consistent with the BBC Worldwide growth strategy it had approved for the business in March 2007. This strategy called for annual double-digit profit growth. International expansion was a key element of the strategy. The plan was to increase the proportion of BBC Worldwide’s revenues generated overseas from 40% to 60% by 2012. Australia was one of four priority markets for growth. The plan provided for growth through exploitation Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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of BBC intellectual property but also included acquiring rights from third parties across a broad range of geographies and products and services where there was a good fit with BBC activity. It also sought to exploit the BBC’s unique archive of 750,000 hours of high quality content in the new digital environment. The Trust was also satisfied that the acquisition was consistent with the four commercial criteria framework intended to set the boundaries for the BBC’s commercial activities. The Trust agreed with the BBC and BBC Worldwide’s assessment that BBC and Lonely Planet’s brand values were consistent. It could see clear potential for BBC Worldwide to draw together and promote the BBC’s strong travel and natural history content using the Lonely Planet brand. Crucially, the Lonely Planet brand was associated with audience segments that the BBC had found hard to reach and the Trust agreed with the BBC and BBC Worldwide that there was potential to use the brand to draw these diYcult-to-reach audiences to BBC content through links on the Lonely Planet website and through references in Lonely Planet’s publications and promotional activities. The Trust was also satisfied that the acquisition could help to enrich the experience for audiences for BBC programmes in those genres associated with travel (including natural history and educational genres). The Trust was also satisfied that the proposals complied with the BBC’s fair trading requirements and would not distort the market.

Approval process

The approval process used by the Trust in this case was its procedure for assessing new commercial service proposals. These arrangements were developed at the Trust’s inception to ensure that its regulatory duties relating to commercial activities, as set out in the BBC Agreement, are consistently and eVectively applied. They are set out formally in a Trust Protocol which is attached at Appendix 1.

July 2007

The Trust’s Finance and Strategy Committee, and then the full Trust, considered an application from the BBC Executive for BBC Worldwide to acquire a 75% controlling stake in the Lonely Planet business. The application was referred to the Trust because the value of the proposed investment exceeded £50m. (The proposal had of course been thoroughly scrutinized by the BBCWW Board and the BBC Executive Board prior to its submission by the BBC to the BBC Trust.) The Trust’s frame of reference for such an application requires it to assess proposals against the four commercial criteria. The proposal submitted to the Trust set out the strategic rationale for the acquisition, the commercial terms for deal and an initial assessment, carried out by BBC Worldwide and the BBC Executive, of compliance with each of the four commercial criteria. These require that the BBC’s commercial services should: (i) fit with the BBC’s Public Purpose activities; (ii) exhibit commercial eYciency; (iii) not jeopardise the good reputation of the BBC or the value of the BBC brand; and (iv) comply with the principles set out in the Fair Trading Policy and with the Fair Trading Guidelines, and in particular, avoid distorting the market. Based on all the evidence submitted to it, including the detailed commercial assessment of deal terms made by the BBC Worldwide Board and the BBC Executive, the Trust took an initial view that the proposal was likely to comply with the four commercial criteria, including the assessment of commercial eYciency. The Trust noted that further work was needed to finalise the proposition and approved the proposed acquisition subject to four conditions being met: (i) the Trust asked for a further assessment of the proposal against the four commercial criteria, including additional evidence to demonstrate the proposal’s fit with the BBC’s public purposes— and particularly to show how the proposal would help to leverage extra value from the BBC’s intellectual property that BBC Worldwide exists to exploit (and so fit with the BBC’s public purposes); (ii) confirmation that the due diligence work being undertaken was completed and that it provided assurance regarding the commercial case; (iii) confirmation that external counsel had given final clearance on merger control issues; (iv) confirmation that the BBC Executive’s Controller of Fair Trading had given final clearance on compliance with the BBC’s Fair Trading Guidelines. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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August/September 2007 The Trust received the requested information oZine from BBC Worldwide and the BBC Executive, including their final assessment against theVour commercial criteria. On the basis of the further information provided, the Trust was satisfied that the conditions set in July had been met. There were two areas where the Trust wished to monitor progress after the acquisition in order to remain satisfied that BBC Worldwide: (i) was clear about the ways in which it could make use of synergies with its existing activities to develop and build the Lonely Planet business, and in the process enrich the experience for audiences for BBC programmes in those genres associated with travel (including natural history and educational genres); and (ii) could show that the acquisition would enable BBC Worldwide to leverage extra value from its existing assets. The Trust recognised that while the intentions for the business in these respects were clear, the basis on which they would be achieved in practice was not. It was also clear that the level of detailed information and assurance required could only reasonably be provided after the acquisition. The Trust therefore called for a further report from BBC Worldwide following the acquisition (as part of its formal annual reporting to the Trust on the compliance of its activities with the commercial criteria) on the extent to which the acquisition of Lonely Planet was fulfilling the expectations set out in the checklist in practice.

May/June 2008 Worldwide submitted their initial follow-up report to the Trust in May 2008. Following the report in May, in order to further meet the specific request of Trustees to demonstrate how the acquisition was in practice enabling BBC Worldwide to leverage extra value from its existing assets and attract new audiences to BBC content, a further report was submitted in June 2008. Trustees considered that this update demonstrated suYcient progress over the first 8 months, but noted that the plans had not yet been fully implemented. In particular a fundamental redesign of the Lonely Planet website and the launch of a Lonely Planet magazine, each of which was key to drawing new audiences to BBC content, were substantial initiatives still being developed. The Trust agreed that the actions being taken would satisfy the conditions of approval set out by the Trust. The Trust is continuing to monitor whether Lonely Planet is fulfilling the BBC’s expectations through its ongoing oversight of the BBC’s commercial activities.

3. What BBC programming can BBC Worldwide show is relevant to the publication of Girl Talk magazine, publicised on the BBC website as: “Fancy some fabulous girly fun? Then check out Girl Talk each fortnight, it’s the most gorgeous girls’ magazine ever! Fascinating features, brilliant posters, stunning fashion, top pop stars and tricky puzzles, along with a fantastic free gift every issue, means it’s got everything a girl could wish for and more!” Other than the loose overlap between the BBC’s children’s programming, what is the specific justification for publishing a magazine in an area with a good deal of commercial provision? The BBCs view is that the majority of sectors and interest areas already enjoy a good deal of commercial provision, and often these are areas—eg food, gardening, television listings—where a multitude of magazines have long flourished alongside titles published by BBC Magazines. As such, justification for entering a market cannot be based on whether or not commercial provision already exists—such a premise belies the notion of free and fair competition. Additional demonstrable justifications must exist for BBC Magazines to enter a market—they include oVering the market a diVerentiated product, which extends familiarity with and connectivity to BBC programmes and which clearly applies BBC editorial standards and values. The BBC considers that Girl Talk meets these criteria, as set out below.

BBC Girl Talk BBC Girl Talk is a fortnightly magazine for girls aged 7–12 years. Like all magazines aimed to appeal to girls of this age, it features bright colours, and a friendly informal writing style. However, it aims to oVer a distinctive “BBC voice” in the girls’ magazine market. Girl Talk does this in two ways. Firstly, by demonstrating a close connection with BBC programming (both children’s programming and appropriate family viewing) and secondly, by applying rigorous BBC editorial standards to all content. This is particularly important for parents, who rely on the magazine to deliver responsible material for this particularly impressionable and vulnerable age group. Like all BBC magazines, the magazine is supervised by an Editorial Advisory Board (EAB) consisting of BBC magazine publishers, representatives of the BBC public service, and external experts. In a 2008 review of BBC content, EAB members agreed that Girl Talk reflected and promoted BBC activities, seasons and campaigns; that it reflected the ethos, tone and values of BBC programming; and included editorial featuring on-air talent. Clearly, to be balanced and relevant to the age group, the editorial will also reflect current topics, celebrities and programming from non-BBC sources (for example Disney’s High School Musical or ITV’s Britannia High). However, these will be covered in an appropriate manner consistent with BBC editorial values. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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Connectivity to BBC Programming

Connectivity to BBC content is far more than a “loose overlap”. BBC Magazines monitor the level of connectivity of their magazines to BBC content. A review of the last 12 issues of Girl Talk demonstrates that the proportion of content with a direct connection to BBC programming consistently exceeded the minimum target of 20%, with a clear trend towards even greater connectivity during 2008. To take a very recent issue, Issue 364 (31 December-14 January 2008–09) included articles, quizzes or posters linked to the following BBC programmes: — Dr Who (family drama programme)—time travel quiz; — Strictly Come Dancing (family entertainment programme)—feature on the show’s styling, and a general age-appropriate guide to the programme’s “best bits”; — SMart (art programme for children)—SMart colour search puzzle; — Sam and Mark’s Guide to Dodging Disaster (CBBC entertainment programme)—Sam and Mark’s super sudoku quiz; and — Roar (CBBC animal programme)—photos of readers pets. There were also links to the CBBC news website, and to the recycling section of the CBBC website. A review of any recent issue would demonstrate a similar level of connectivity to relevant programming. These articles serve to build familiarity with the BBC programmes, adding value to their favourite shows, drive loyalty and aYliation to the BBC, and give young girls fun and informative content within a safe BBC space.

Product diVerentiation

The combination of the link to BBC content, and the application of BBC Editorial Guidelines to all content, makes Girl Talk a highly diVerentiated product in the market. Girl Talk’s stories have included sensitive discussions of why some girls might not be able to aVord some leisure activities, why not everybody celebrates Christmas or receives Christmas presents, and why some people prefer activities such as playing the piano which might be perceived as ‘boring’. Such views are certainly underserved in a magazine market which focuses on prettiness, popularity and the ability to consume. The BBC brand is a valuable signpost to the parent, trusting Girl Talk to replicate the quality, and share the values, of the BBC. They expect Girl Talk to provide a safe environment and consistently produce content that they would be happy for their daughter to read—trusting it to be appropriate for the age group. As well as the positive values it espouses, a children’s magazine can be judged by what it will not do. Girl Talk: — does not give away make up; — does not feature models with revealing clothes, highlights, pierced ears or wearing brands; — does not encourage readers to have boyfriends or crushes; — believes that girls should have appropriate role models; therefore it does not feature celebrities smoking, drinking, or wearing revealing clothes; and — does not feature editorial pieces on movies, games or DVDs that are rated 12 or 12!, believing that readers should not be exposed to potentially provocative content, or content that a parent would feel uncomfortable that their daughter was exposed to. Examples of all the above can be found in competitor titles. In summary, while the tone and appearance of Girl Talk might, at a cursory glance, look similar to its competitor titles, the BBC is conﬁdent that its ethos and editorial standards deliver a very diVerent message to seven to 12-year old girls.

4. When will the BBC Trust’s review of BBC Worldwide be published? Are you able to give an indication at this stage about what it will say?

The Trust’s review of strategy and governance for the BBC’s commercial activities will be completed shortly. Although the Trust will not publish a detailed report, it will make public its ﬁndings once the review is complete. The Trust expects to do this in the early part of this year. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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5. On the face of it, the best return to the licence-fee payer would appear to be an open auction system in which all BBC productions were oVered to the market. If the issues concerning the protection of the BBC brand were satisfied in other ways (ie through contractual stipulations) what would prevent the BBC from moving to such a system, either completely, or over time, or for a defined percentage of its output? The nature of the link between the BBC and BBC Worldwide, including the “first look” arrangements, fall within the scope of the Trust’s current review. The BBC believes its relationship with BBC Worldwide delivers value for licence fee payers, ensures the protection and promotion of the BBC brand, creates a global platform for UK talent and is broadly reflective of the market norm. The operating model permits the BBC to accept attractive oVers from third parties, whilst also accepting oVers from a distributor (ie BBC Worldwide) with incentives to invest for the longer term and with interests more closely aligned with the BBC. BBC Worldwide can invest in a critical mass of BBC rights by spreading the risk of acquiring individual rights across a broad portfolio. Furthermore, the ownership link between the BBC and BBC Worldwide means that the BBC receives the entirety of the proceeds generated by rights exploited via BBC Worldwide, whether in the form of up-front investment, profit shares and/or dividend payments. When the BBC licenses to third parties, it loses the profit margin on the exploitation of rights that other distributors are able to achieve. The BBC also benefits from the growth in asset value of its wholly-owned commercial subsidiary. Importantly, the BBC’s arrangements with BBC Worldwide are consistent with market practice. Vertically-integrated and/or first look agreements are a prevalent feature of the industry (eg ITV/Granada International, Time Warner/Warner Bros Distribution, RDF/RDF International and so on). Producers generally value these arrangements for, inter alia, the ability to develop a long-term relationship with a distributor, oVering greater certainty of investment, as well as encouraging the distributor to be more focused on the particular producer—both commercially and culturally. For these reasons, the BBC believes that open spot-auctions are in fact rarely used by its (shareholder-value maximising) competitors. The BBC believes that a system of oVering all BBC productions to the market would lead to unacceptably high risks in terms of potential failure to protect and/or promote the BBC brand. The BBC’s ownership of BBC Worldwide provides a degree of control which can cater for any circumstance that may not have been foreseen at the time the contractual commitments were agreed. This level of control cannot be replicated fully in contractual agreements with third parties. Indeed, no other commercial distributor can mirror the extent of brand alignment between the BBC and BBC Worldwide. The requirement to enhance and not adversely impact the BBC brand is a key obligation of the Fair Trading regime and the C’s specifically. These obligations apply explicitly to BBC Worldwide in a way that they would not to third parties. Further information on this critical issue is provided in our response to Q9. The BBC must strike a balance between oVering an appropriate amount of programming to the marketplace whilst ensuring that the pecuniary and non-pecuniary benefits of its vertically-integrated distribution model are fully realised. The BBC believes that the current arrangements (resulting in approximately 20% of rights per annum being acquired by third parties) represents the optimal outcome for licence-fee payers. This balance is monitored closely by the BBC. The BBC’s Commercial Agency generates a significant amount of benchmark data from its dealings with third parties. In addition, key individuals attend the main rights markets (eg Mip, Mipcom, Showcase, Licensing Fair, London Book Fair etc) to keep across market trends. They have regular meetings with distributors and co-producers to assess their needs and the state of the market. The Commercial Agency also receives regular financial reports from BBC Worldwide and third parties. It is wrong to assume that the Commercial Agency overly relies on past prices paid by BBC Worldwide and a “limited” amount of benchmark data. The Commercial Agency is adequately-resourced and staVed by experienced industry experts, many of whom have worked for third party distributors and/or commercial broadcasters.

6. The Committee would welcome a more detailed breakdown of how the 15-20% estimate was arrived at. What percentage would be arrived at if the calculation was done purely on distribution rights alone? The 15–20% figure holds broadly true for both volume of programming and value of rights made available commercially25 but an accurate split is only really possible using a value metric. This is because there are often a number of deals attached to a particular programme or series, covering diVerent media (eg DVD, book publishing or TV distribution) and diVerent territories (eg North America or Rest of World.) Over the last five years, an average of 18% of all pre-production investment in BBC programming has come directly from third party distributors, co-producers or a combination of both.26 In the last financial year (2007–08), the figures were exactly in line with the five year average and there is no substantive trend over time.

25 The Committee should note that the majority of BBC programming does not receive pre-production commercial investment. Of approximately 1500 hours annually originated by the BBC (ie excluding acquisitions and repeats, and also excluding genres such as News and Sport), slightly more than 50% are made available commercially. 26 Co-producers are broadcast partners who make an editorial contribution to a programme and take deﬁned broadcast rights as well as, in some circumstances, taking some distribution rights. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

Ev 134 Culture, Media and Sport Committee: Evidence

If you consider volume simply by monitoring the number of rights transactions that the BBC has entered into with third parties as opposed to with BBC Worldwide, the five-year average is approximately 21% to third parties (with the remainder to BBC Worldwide). It is also worth noting that in some areas the BBC (as a group) has negotiated long-term strategic relationships with third party partners. One of the most successful of these—creatively and commercially— has been an arrangement with Discovery Communications International (“Discovery”) which grants a ‘First Look’ over certain programming, for certain rights, to Discovery in North America via a joint venture with BBC Worldwide. In the figures quoted, the investment generated by those partnerships is counted within the BBC Worldwide ‘split’ of rights because, BBC Worldwide is a party to these deals. However, the pre-production investment resulting from this JV does not come from BBC Worldwide, and neither does BBC Worldwide earn any commission on the arrangement. In some years, these partnerships have represented up to a third of the BBC’s total pre-production investment. If these figures were excluded, the share of rights value granted to BBC Worldwide in recent years would be lower.

7. Could the BBC provide some recent examples of BBC-produced programmes where the BBC Worldwide bid has been rejected in favour of a commercial bid (for distribution rights). Are there any general patterns or characteristics which apply in such cases. For example, are the properties typically smaller scale, or less attractive to overseas audiences, or is there some other factor?

There are, broadly, two scenarios in which rights are licensed to third parties. In some instances, BBC Worldwide chooses not to bid This is usually because BBC Worldwide does not see suYcient commercial value. In these cases the BBC will endeavour to secure investment from a relevant alternative (and sometimes specialist) distributor. In other instances, BBC Worldwide is simply outbid by a competitor having decided to make an oVer. Owing to commercial sensitivity (and in particular the need to maintain investment levels from third parties who may not be aware that BBC Worldwide is not among their bidding competition) we have not separated out the two scenarios (a breakdown of which scenario is relevant to each example can be provided—on a strictly confidential basis—if necessary). A selection of titles within these categories in the current financial year (rights licensed and distributor are in brackets) includes: — Criminal Justice (World TV Distribution ex UK—Portman, UK/Eire DVD—Acorn); — Francesco’s Mediterranean (World TV Distribution ex UK—RDF); — House of Saddam (World All Rights ex UK television—HBO); — The Passion (World All Rights ex UK television—HBO); — Serious Ocean (World TV, Non-theatric and format ex UK television—All3 Media); — That Mitchell and Webb Look (UK/Eire DVD—Fremantle); and — Caribbean Food Made Easy (World book publishing—Mitchell Beasley). These titles cover a range of genres (Drama, Factual, Children’s, and Comedy) and all deal values (investment levels on this list range from mid-five figures to mid-seven figures) and a range of rights (by both territory and media). They also include both one-oV projects and returning series.

8. In what sense is the BBC brand protected when minority investments are taken in production companies which are not under BBC control? Should the reference to public purposes be used to justify such activities?

The acquisition of stakes in independent production companies by the BBC falls within the scope of the Trust’s current review. The BBC’s current arrangements for ensuring that its brand and reputation is adequately protected when minority investments are taken in production companies that are not under BBC control are set out here:

Partner Selection

A rigorous selection and due diligence process is undertaken to ensure that investments are only made in respected production companies with robust management systems, whose key talent have a proven track record of delivering high quality productions. This process relates both to the business practices of the producer, and crucially to the editorial quality of the productions. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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Contractual Protections By a standard contractual provision included in all BBCW acquisitions of minority stakes in production companies, the production company is prohibited through the shareholder agreement from engaging in any activity “which might reasonably be considered to bring the BBC into disrepute”. There are in addition speciﬁc prohibitions regarding any activity which promotes a political purpose, or any association with pornography. Where there has been a breach of these requirements BBC Worldwide can terminate its relationship with the production company. There has never been an instance where this has been required. The shareholder agreement also allows BBC Worldwide at any time to choose to “distance” or ring-fence itself from those exceptional projects which it either considers may bring the BBC into disrepute, or which might for some other reason be of concern to the BBC. In such circumstances BBC Worldwide will not receive a share of the proﬁts. This safeguard ensures that there is a mechanism available that allows reputational damage to be avoided where termination of the shareholder agreement is not necessary. It exists primarily for circumstances where subsequent events make the production unsuitable for the BBC to have any involvement. Such circumstances would be very rare.

Editorial Guardians A senior ﬁgure from BBC Worldwide is appointed to the production company board and acts as Editorial Guardian (EG). The EG monitors the activity of the production company and ensures that its activities do not jeopardize the BBC’s reputation and brand value. If the production company is producing programmes for the BBC, then these programmes must in any case meet BBC Editorial Guidelines. If a producer is producing a show based on a BBC format, then extensive provisions in the format licence will give protection to the BBC’s brand and reputation. The Editorial Guardian would add an additional level of assurance in these cases, and would be available to advise the production company Where the production company produces programmes for third party channels, then those channels will have their own editorial requirements. Although the producers in which we invest are quality producers who make most of their programmes for large, heavily-regulated broadcasters which themselves impose high editorial standards, the primary protection for the BBC is the Editorial Guardian, The Editorial Guardian will be aware of these projects and it is their responsibility to ensure that they could not, even by a relatively remote association, jeopardise the BBC’s reputation..

Should the reference to public purposes be used to justify minority investments taken in production companies? All of BBC Worldwide’s commercial services (which includes minority investments in production companies) must comply with the four commercial criteria which includes the requirement that the investment in the production company ﬁts with BBC’s Public Purposes. A four commercial criteria compliance assessment is undertaken to ensure that before any investment is approved that it complies with the four commercial criteria. Four commercial criteria assessments have shown that BBC Worldwide’s investments in UK production companies directly support the BBC’s public purpose of stimulating creativity and cultural excellence in the UK creative industry by supporting top UK talent. Investments in foreign production companies have demonstrated ﬁt with the BBC’s Public Purposes because they will amongst other things help bring the UK to the world by exporting BBC and other British (eg ITV/Channel 4) programme formats.

9. Could not the reputation of the BBC be protected through contractual or licensing arrangements? The Agreement requires that the BBC’s commercial services must not jeopardise the good reputation of the BBC or the value of the BBC brand. It also builds in governance and control mechanisms involving the BBC Executive and in some cases the Trust to ensure that the BBC can control and co-ordinate the means of exploitation of the BBC’s assets and brand eVectively. The BBC’s view is that it would be extremely diYcult to duplicate such controls contractually through third party organisations which would not have the protection of reputation and value of the BBC brand as a central part of their corporate remit. The BBC makes two allied points: — taking a coordinated approach to the BBC brand and portfolio of title brands helps to build value. Developing the BBC brand globally requires an understanding and appreciation of the unique values of the BBC. It would be diYcult to ensure this across a large number of licensee agreements, with the risk that the core values associated with the BBC brand could be diluted and fragmented. Such a co-ordinated approach is not unique to the BBC—other organisations with valuable brands are also unlikely to consider the fragmentation and loss of direct control of their brand; and — a clear understanding of the unique BBC brand is important. The relationship between BBC Worldwide and the BBC public service enables this understanding and allows the brand to be marketed around the world with the same care and attention as in the UK. It is more diYcult for Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

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contractual terms to control behaviour or motivation, or indeed cover every eventuality— particularly in a fast moving market place where decisions need to be taken rapidly and from a strongly-informed base on the brand’s values.

10. Does the matching right exist, and if so what is the justiﬁcation for it, given that the return to the licence- fee payer would be identical were it not to exist? There is no “matching right” associated with the BBC’s preferred partnership with BBC Worldwide. The ‘First Look’ obliges the BBC to oVer BBC Worldwide, in eVect, a ﬁrst look and a period of exclusive negotiations to invest in the content that it develops. At the end of this period, the BBC is free—at its sole discretion—to accept or reject any bid made by BBC Worldwide. If it chooses not to accept a BBC Worldwide bid, the BBC will then conduct a form of auction. The BBC may or may not (in its sole discretion) choose to invite BBC Worldwide to participate in this new bidding process and, in either case, treats all distributors (including BBC Worldwide) fairly and provides them with the same information throughout the auction process. On occasion, BBC Worldwide may “win” such a bidding process. Where this is the case, it is on the basis of having submitted the optimal bid through the revised process.

11. Does the BBC wish to argue that BBC Worldwide derives no commercial advantage whatsoever from being represented on the BBC Executive Board? The Trust’s current review of the BBC’s commercial operations, which is still underway, has within its scope the governance arrangements for BBC Worldwide. The specific question posed by the Committee concerning the position of the BBCW Chief Executive on the Executive Board of the BBC also falls within the scope of the review. BBC Executive’s view is that BBC Worldwide representation on the Executive Board does not make it privy to information which gives, or would give, it an unfair commercial advantage over its competitors. They consider that as CEO of BBCW, John Smith plays an important contributory role on the Executive Board. First, he represents BBCW in their role contributing towards the BBC’s delivery of its Public Purposes, in particular the fifth purpose, “bringing the UK to the world and the world to the UK.” Further, he is accountable to the Board for BBCW’s management of BBC content and brand in BBCW’s capacity as the main distributor, and for the performance of BBCW in the BBC’s capacity as shareholder. The Committee have raised the Network Supply Review discussion in February and July 2008 with concerns that detailed planning and modelling, and thinking about production and commissioning may provide BBCW with advantageous information. The Papers relate to the required share of production by nation and region and the operational structures/support necessary to deliver “creative sustainability” and thereby the required production levels. This includes, for example, the location of commissioners and funding for strand moves. Neither location information nor the operational support strategies provide a commercial advantage to BBCW. The BBC does have eVective conflicts of interest procedures in place to deal with potential conflicts in the event that they might arise from time to time. These cover all aspects of the BBC’s business activities and are not limited to the interface between the BBC Public Service and BBC Worldwide. These governance arrangements are treated seriously, are regularly reviewed and seek at all times to ensure that the separation of governance responsibilities is properly maintained.

12. Does the BBC believe that the fourth of the “four Cs” has any value? How is it measured and what eVect should it have on new product launches, especially in the magazine sector? Unlike the public service activities of the BBC, the BBC’s commercial activities do not constitute a “market intervention”. It is both inevitable and intended that BBC Worldwide should have market impact. It could not fulfill its obligation to exploit the BBC’s assets for the benefit of licence fee payers without doing so and it has been encouraged to do so by successive UK Governments to reduce upward pressure on the licence fee. However, BBC Worldwide is not permitted under the Charter and Agreement, or by law, to receive any unfair advantage as a consequence of its ownership or status within the BBC. There is a crucial distinction to be made between market impact—which is acceptable, and market distortion—which is not. The Trust’s position is that BBC commercial activities should not be regarded as distorting the market where they are in compliance with competition law and have not been given an unfair commercial advantage which could unduly and negatively influence the market. In terms of magazines, BBC Worldwide’s data suggests it has had a positive impact in terms of growing markets for magazines when it enters a sector or, as in the case with Food magazines, starting a new sector. We have attached a note from BBC Worldwide which looks at the performance of individual magazine genres, before and after the launch of BBC Worldwide publications. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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13. Why has the Trust encouraged the BBC Executive to present fresh proposals in such a sensitive area after the exhaustive process of the last few months, including a very clear Ofcom Market Impact Assessment that BBC local video services would have “significant negative impact on future innovation in online local news, sports, and weather services by the commercial sector, particularly newspapers”? Would it not be prudent for this area to be left for commercial services to develop in the future? The Trust’s Public Value Test (PVT) into the BBC Executive’s proposals for local video is still underway. The Trust’s provisional conclusion, published in November 2008, is not to approve the Executive’s proposals. Representing the UK, its nations, regions and communities is one of the six purposes laid down in the Charter. In meeting its obligations, the BBC should provide a range of output to meet the needs of diVerent audience groups. Audiences attach a high value to national and regional news and see it as an important part of the BBC’s remit. But in a fast-changing media environment, the eVective fulfilment of the public purposes is under strain. Research commissioned by the Trust in 2007 revealed gaps between the importance audiences attach to this purpose and their view of current performance.27 Whilst licence fee payers may put less weight on this purpose relative to some others, it remains an important part of the BBC remit with a considerable performance gap.28 The perception of underperformance is common to all age and socio-economic groups but this masks regional and demographic diVerences. Groups in Northern Ireland and Scotland are among those with the lowest approval rating. Age and social grade are also factors; lower income groups aged 35-54 tend to rate the BBC poorly. The PVT reinforced the fact that audiences expect better regional representation, and those in underserved areas express frustration with poor local coverage. In theory, there is considerable demand for local news. The concept of a local video, on-demand service has attracted support from a wide range of people. Local news drawn together in an innovative, interactive portal is potentially a powerful proposition. Relevant local news has valuable social currency and may, according to some, allow the BBC to reconnect with underserved groups who currently regard it as too remote. The Trust found, however, that local is a flexible concept for listeners and viewers and opinions diVer widely. Convenience of access to the service is also a critical factor, so too is editorial agenda. Audiences are interested in a wide range of information of which news is only a part; local events, entertainment and listings are all considered part of a well-rounded service with appeal to a broad spectrum of users.29 For these reasons, and despite the Trust’s provisional conclusion not to approve the local proposition, the Trust still believes the BBC has a duty to ensure that audiences see a better reflection of their communities on BBC services as a gap in BBC performance remains in this area. It is important to note that the Trust has not encouraged the BBC Executive to present fresh broadband- only local video news proposals. The Trust came to its provisional decision on the basis of the evidence presented to it during the PVT process. The Trust has instead suggested a number of ways in which the Executive might improve the BBC’s performance. This will require a range of measures, some of which have already been undertaken, including moving a greater proportion of BBC production closer to the audiences it serves and looking closely at how network news represents the nations of the UK. In the Trust’s view a series of smaller, targeted interventions, that take account of the BBC’s current regional provision and are focused particularly on improving the quality and depth of the BBC’s television oVering, could increase public value and contribute to the relevant public purposes. There could also be scope, through meaningful partnerships, for the BBC to contribute more widely to existing regional news providers and potential new entrants. Once the Trust’s final conclusions are published we will expect the BBC Executive to consider carefully what we have recommended and provide a considered response.

14. Is the BBC able inform the Committee how much has been spent, both by the Trust and the Executive, in money and time on the local video proposals? As the PVT process is ongoing we are unable to provide final figures. To date the Trust has spent £195,000 on its part of the PVT process and it has been charged £814,604 by Ofcom. These figures are not directly comparable since the Trust’s expenditure covers external spend and does not include costs for its own staV who worked on the PVT application, but the Ofcom figure includes all staV costs and overheads. The figures

27 BBC Trust purpose remit research, 2007. 28 It is among the largest for any of the BBC’s public purposes. Audience perception of the BBC varies around the UK; in general, approval declines with distance from London. In 2008, the Trust published its impartiality report which revealed shortcomings in the BBC’s coverage of the UK’s nations and regions. It called for the BBC to improve the range, clarity and precision of its network news coverage and to make it more relevant and interesting to audiences. Separately, in April 2008, the Trust approved a supply strategy for network television in order to ensure better cultural representation and appropriate investment in the nations and regions. 29 Rosenblatt research for the BBC Trust, 2008. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

Ev 138 Culture, Media and Sport Committee: Evidence

are not representative of the cost of a typical PVT. Due to the complexity introduced by the need to assess multiple markets, this particular PVT was longer and more complex than usual, resulting in higher costs compared to previous PVTs. There has been no expenditure to date on actual roll-out of the project as the proposal was subject to approval by the BBC Trust. On November 21st the BBC Trust announced that its provisional conclusion was not to approve the Executive’s application to provide a local video service. BBC Executive expenditure on the BBC’s Local Video PVT proposal falls into the following categories: — expenditure on internal resource to support the Local Video project; and — expenditure on external consultancy to support the Local Video project. In relation to expenditure on internal resource, the BBC has employed no staV speciﬁcally to run the Local Video PVT project. As such, in the main work on this project has been carried out by individuals already employed by the BBC who have temporarily dedicated a proportion of their time to the project. It is not possible to provide an accurate ﬁgure for the cost to the BBC of man hours of internal staV to support this project. In relation to expenditure on external consultancy used to support the BBC Executive on the Local Video PVT project, £209,674 was spent with three suppliers on research in relation to the public value of the local video proposal.

15. Does the BBC Trust feel that it is appropriate for BBC management to submit changes to Trust reports which go well beyond the correction of factual errors? Is this a routine occurrence? Will this process continue? There is no question of BBC Trust reports being vetted before publication by Corporation Executives. The Trust takes great care over how it engages with the BBC Executive when conducting reviews. The object of such interaction is to ensure that the factual basis for the Trust’s decisions and conclusions is accurate. Of course the principle of fact checking reports is not a Trust invention; it is best practice used widely by auditors, regulators and review bodies to ensure that reports are fair and accurate before they are published. The Trust’s review of the WoCC was an independent evidence-based report informed by an extensive programme of interviews, conducted on behalf of the Trust by independent consultants, with over 80 stakeholders. The fact checking process—a standard part of our procedure—improved the accuracy and clarity of the Trust’s report but did not alter its ﬁndings. Most of the inaccuracies were quite trivial. In a few instances there was slightly more to it. To take the example in the Telegraph piece, the original draft suggested that BBC staV found the commissioning system “an obstacle course”. When the Executive queried whether this was a representative view, the author went back to the evidence and concluded that it was not, as it represented the views of only one individual, and therefore removed the suggestion. The decision to do so was entirely his and made no material diVerence to any of the report’s conclusions. The BBC’s governance model is explicitly intended to provide for interaction between the two sides of the BBC as the Trust discharges its role as strategic authority and its regulatory functions, but this does not prejudice the Trust’s independence of thought or action.

APPENDIX 1. What steps were taken by BBCW to ensure that a fair commercial price was paid for Lonely Planet and what advice was sought to ensure that those calculations were valid The valuation of Lonely Planet was undertaken as a collaborative eVort between Deloitte and BBCW Corporate Finance. The oVer price was validated in a fairness opinion by Lehman Brothers. The primary means of determining the value of Lonely Planet was through the calculation of discounted cash ﬂows (“DCF”). The various business activities were modelled separately and then aggregated to determine the overall value of the company. The book publishing activities accounted for 87% of the value attributed to Lonely Planet with the balance represented by the online activities. The DCF was cross checked to valuations of other media companies by comparing trading and acquisition multiples. The key multiples used for the comparative analysis valuation were Revenue and EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation). To be consistent, these comparable company valuations also valued the books and online activities independently and multiples were separated into Australian or international companies. Due diligence was undertaken by a number of professional service ﬁrms and independent consultants. Each area of due diligence was managed by a senior BBCW executive with experience in the area being reviewed. Findings from the due diligence exercises were shared within BBC Worldwide and informed the valuation exercise. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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Due diligence was undertaken by the following advisors: Financial due diligence—Deloitte; Legal due diligence—Blake Dawson Waldron; Tax—Deloitte; Operational due diligence—Deloitte; Information Technology—Cap Gemini; Books—Independent Contractor; and Online—Independent Contractor. Due to the potential for a conﬂict of interest in using Deloitte for both Corporate Finance advice and due diligence, PwC reviewed the scope of due diligence work and conﬁrmed that all material areas of the business had been properly investigated.

Response to question raised by Paul Farrelly MP during the 18 November oral session concerning BBC Worldwide’s ﬁnancial disclosures of the Lonely Planet acquisition compared to the disclosures required of a company listed on the London Stock Exchange

The London Stock Exchange listing rules identify four “Class” tests which determine how a proposed transaction is classified. If a proposed transaction is deemed to meet the criteria of Class 1 for example, it must be approved by shareholders at an extra-ordinary general meeting. The four Class tests are: (i) The Gross Assets Test; (ii) The Profits Test; (iii) The Consideration Test; and (iv) The Gross Capital Test. BBCW has calculated each of the class tests for the Lonely Planet transaction assuming BBC Worldwide was a company listed on the London Stock Exchange. If, at the time of acquiring Lonely Planet, BBC Worldwide had been a public company listed on the London Stock Exchange, the transaction would have met the criteria of a Class 2 transaction. Class 2 transactions are those where the Class test ratio calculations are less than 25% but at least one is greater than 5%. A Class 2 transaction requires the acquiring company to issue a press announcement and the Company Announcements OYce of the London Stock Exchange must be notified. A press release was issued by BBC Worldwide on 1 October 2007, announcing the acquisition of a 75% stake in Lonely Planet. The level of disclosure provided by BBCW was therefore no less than would have been required if BBCW was a plc given that the size of the acquisition was equivalent to that of a class 2 transaction.

Note on Reporting of Financial Information re Acquisition and Performance of Lonely Planet (in response to queries raised by Paul Farrelly MP in the 18 November oral session).

BBC Worldwide prepares its financial statements under UK GAAP, in line with the accounts of its ultimate parent company, the BBC. BBC Worldwide is not required to publish its consolidated results under the Companies Act 1985 as BBC Worldwide is an intermediate parent owned by a UK company but voluntarily prepares and files such accounts annually. As a result, BBC Worldwide provides all disclosures required by FRS 6 Acquisitions and Mergers in relation to acquisitions made both as a Group and as a parent company. These disclosures are also replicated in the BBC Group accounts. These disclosures are not limited to FRS 6 requirements but also include a significant amount of qualitative information on the performance, strategy and risks associated with the Lonely Planet acquisition.

Lonely Planet Turnover 1 April 2007—31 March 2008

During the oral evidence session on 18 November Paul Farrelly asked what the turnover of Lonely Planet was and was informed that it was around £50 million. This ﬁgure was given from memory and in fact for 2007–08 the correct ﬁgure was £45.7 million. Nine months of turnover was reported in the BBC Worldwide and BBC accounts under UK GAAP as follows: Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

Ev 140 Culture, Media and Sport Committee: Evidence

£m BBCW 2007–08 BBC 2007–08 Annual Report Annual Report and Accounts and Accounts July 2007–September 2007 10.6 p 71 p 130 (period from Lonely Planet’s previous ﬁnancial year end to the date of acquisition) October 2007–March 2008 23.1 p 49 p 83 (period from the date of acquisition to the end of the BBCW/ BBC’s ﬁnancial year) Total July 2007–March 2008 33.7

The ﬁrst three months of the year (April-June) were not reported as this is not required under GAAP. The turnover for this period was £12 million.

Note from BBC Worldwide on BBC Magazines’Impact on theUK magazine market (1986 to 2007)

Introduction During the recent DCMS Select Committee Inquiry into the commercial activities of the BBC, a number of issues were raised concerning the impact of BBC Worldwide magazines on the overall magazine market. This document shows the changes in total magazine circulation of a number of key sectors.

Core Food Market Prior to the launch of BBC Good Food there were no specialist cookery titles available in the UK—the sector did not exist. Once BBC Good Food had created the core food market, the presence of the title did not block other entrants. Just three years after launch the market had grown by 86% and had increased to three titles. In 2004 there were three further launches and total market volumes continued to show strong growth three years later. UK Core Food Magazines and Total Sector Circulaon

18,000,000 20

16,000,000 18

14,000,000 16 14 12,000,000 12 10,000,000 10 8,000,000 8 6,000,000 6

4,000,000 4

2,000,000 2

0 0

# of Titles RHS Total Sector Circulaon LHS

Homes Market With the launch of BBC Good Homes in 1998 the number of titles in the Homes Market increased from 10 to 15. By 2003 total market volume was up 21% on 1997 levels and with 16 titles then in the market. By 2007 there were a total of 18 titles in the market with circulation at about 27.7m copies—slightly below the peak of 1999 but consistent with previous years. Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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UK Homes Titles and Sector Circulaon 35,000,000 30

30,000,000 25

25,000,000 20 20,000,000 15 15,000,000 10 10,000,000

5,000,000 5

0 0 7 6 5 4 3 2 1 0 9 8 7 6 5 4 0 0 0 0 0 0 0 0 9 9 9 9 9 9 0 0 0 0 0 0 0 0 9 9 9 9 9 9 2 2 2 2 2 2 2 2 1 1 1 1 1 1

# of Titles Total Circulaon of Sector

Motoring Market In the year prior to the launch of BBC Top Gear, the motoring market was showing a YoY decline of 26% with the number of titles reducing from 8 to 6. In 1994 when BBC Top Gear launched, total market volume then increased by 3% with other titles in the market showing YoY growth. A range of titles launched (and closed) over subsequent years. Five years after the launch of BBC Top Gear, market volume was up 34% on pre-launch levels and comprised 12 titles. In recent years the circulation of motoring titles has fallen (as consumers are increasingly using the Internet for news, reviews and classiﬁed sales) but there are still more titles available now than when Top Gear launched. Motoring Magazines and Total Sector Circulaon 30,000,000 20

18 25,000,000 16

14 20,000,000 12

15,000,000 10

8 10,000,000 6

4 5,000,000 2

0 0 7 6 5 4 3 2 1 0 9 8 7 6 5 4 3 2 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1

# of Titles Total Circulaon of Sector Processed: 31-03-2009 20:29:46 Page Layout: COENEW [E] PPSysB Job: 419632 Unit: PAG1

Ev 142 Culture, Media and Sport Committee: Evidence

Gardening Market In the year prior to the launch of BBC Gardeners World in 1991 total market volume was falling. In the year following its launch, the sector volume increased 50% year on year. A range of new titles entered the market between 1995 and 1999, long after the BBC titles had launched. Five years after the launch of BBC Gardener’s World, the market remained 31% up on pre-launch levels UK Gardening Magazines and Total Sector Circulaon 20,000,000 20 18,000,000 18 16,000,000 16 14,000,000 14 12,000,000 12 10,000,000 10 8,000,000 8 6,000,000 6 4,000,000 4 2,000,000 2 0 0 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2

# of Titles Total Circulaon of Sector

Children’s Market In the early 1990’s the children’s magazine sector comprised of a few titles with low circulation. However by 1995—and following the launch of the ﬁrst BBC titles—the children’s market had grown to 12 titles with a total annual circulation of 8.2 million (a growth of 350% compared to 1989). At the peak of Teletubbies- mania the sector grew rapidly to the heights of 46m copies. Although circulation is now down on these highs, the market is still 17 times larger than before the BBC titles were launched. UK Childrens Magazines and Total Sector Circulaon 50,000,000 100 45,000,000 90 40,000,000 80 35,000,000 70 30,000,000 60 25,000,000 50 20,000,000 40 15,000,000 30 10,000,000 20 5,000,000 10 0 0 7 6 5 4 3 2 1 0 9 8 7 6 5 4 3 2 1 0 9 8 7 6 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 8 8 8 8 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1

# of Titles Total Circulaon of Sector Processed: 31-03-2009 20:29:46 Page Layout: COENEW [O] PPSysB Job: 419632 Unit: PAG1

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The BBC’s positive impact of the children’s magazine sector was recently widely reported in the press. Mintel has calculated that the children’s magazine sector has grown by 72% in ﬁve years. Other sectors. Across other niche sectors similar patterns are also identiﬁable: — History: Prior to the launch of BBC History, History Today magazine, (the market leader), was selling an average of 29,269 copies per issue (ABC, 1999). In 2000 BBC History magazine launched with an ABC of 50,082 copies whilst History Today magazine’s ABC remained stable at 29,282, showing that the BBC’s entry into the market had actually increased the total number of magazines sold in the category by an average of 50,000 copies per issue, or 275%. — Genealogy: Prior to the BBC launch of Who Do You Think You Are in September 2007, the family history category was declining by 7% year on year. Subsequently the launch has gone on to grow the category by 8% year on year between September 2007 and May 2008. — Youth football: BBC Match of the Day magazine is still in its launch phase but has so far grown the youth football category by 89.5%.

Conclusion BBC Magazines has been instrumental in creating entirely new magazine sectors (such as cooking/food) that beneﬁt the magazine industry as a whole. Across all magazine sectors where the BBC is active, the BBC’s entry into a market sector is a positive stimulus prompting rival publishers to bring out new titles or to reinvent existing ones. The BBC’s presence does not block out other publishers or lead to an overall decline in the number of titles. The data shows that the clear net result in the period following launch is both an increase in the number of magazines sold and also an increase in the number of titles available in any given sector. Processed: 31-03-2009 20:32:15 Page Layout: COENEW [SE] PPSysB Job: 419608 Unit: PAG1

Ev 144 Culture, Media and Sport Committee: Evidence

Wednesday 10 December 2008

Members present:

Mr John Whittingdale, in the Chair

Janet Anderson Mr Mike Hall Philip Davies Rosemary McKenna Mr Nigel Evans Mr Adrian Sanders Paul Farrelly Helen Southworth

Memorandum submitted by the Department for Culture, Media and Sport (DCMS)

Background 1. The history of the BBC’s commercial activities goes back a very long time and it is a long accepted principle that these activities are in the interests of licence fee payers. 2. The commercial operations and the issues surrounding them were considered recently in the course of the last Charter Review process. The Government took into account the concerns expressed about the commercial activities (see paragraph 5) and balanced these against the underlying principle, backed up by consultation and research, that the BBC should continue to operate commercial services in order to return value to the licence fee payer. The outcome was the approach set out in the 2006 Charter and Agreement, which allows the BBC to continue with its commercial operations but with various measures in place to address the concerns raised. The clauses primarily relevant to the commercial services are 68–74 of the Agreement.

Role of the BBC Trust 3. In relation to the commercial services, the BBC Trust has several roles. The Trust will: (i) hold the Executive Board to account for ensuring that the BBC’s commercial services are operated according to the four criteria which the commercial services must meet (ie the services must ﬁt with the BBC’s Public Purpose activities; must exhibit commercial eYciency; must not jeopardise the good reputation of the BBC or the value of the BBC brand; and must comply with the BBC’s fair trading guidelines and in particular avoid distorting the market); (ii) set and apply the commercial service approval guidelines, including the approval or rejection of proposed transactions as required under the guidelines; and (iii) approve the BBC’s commercial strategy and hold the Executive Board to account for delivering it.

Role of the BBC Executive 4. The Executive Board is responsible for: (i) overseeing the activities of the BBC’s commercial arm and exercising the BBC’s functions in relation to the commercial subsidiaries; (ii) approving targets and budgets, subject to the commercial strategy approved by the Trust; (iii) ensuring that the business of the commercial arm is compatible with (a) the requirements of the Charter and Agreement and (b) high standards of ﬁnancial management and control; and (iv) securing publication of an annual report and accounts relating to the BBC’s commercial services. 5. The evidence is set out by reference to the speciﬁc matters which the Committee is proposing to examine.

The beneﬁts and opportunities oVered by the BBC undertaking a range of commercial activities in the UK and abroad

6. Much of what the BBC produces has continuing value which can be exploited in the interests of licence fee payers. That is why the BBC has been allowed for many years to run commercial services with a view to returning value to licence fee payers—for example, by reinvesting in programmes, thereby reducing pressure on the licence fee. The Government believes that it is entirely right for the BBC to maximise commercial revenue, in appropriate areas, to reinvest in programming and talent to the beneﬁt of licence fee payers. Processed: 31-03-2009 20:32:15 Page Layout: COENEW [O] PPSysB Job: 419608 Unit: PAG1

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7. This policy is supported by the outcome of consultation undertaken during the Charter Review. 90% of people surveyed agreed that “the BBC should raise as much money as it can from selling its programmes and other products”

The potential risks to the BBC, licence fee payers and other stakeholders 8. The risks to the BBC and its stakeholders were fully examined during the Charter Review. Such risks included: — the commercial services being sold or structured in a way that might give them an unfair advantage over competitors, leading to market distortion; — commercial services being prioritised at the expense of the core duties of public service; — the commercial activities having no relation to the BBC’s publicly-funded services; — an absence of fairness and transparency in how the commercial operations were run; — cross-subsidy from licence-fee funded activities; — too much cross promotion of the commercial services by the public services; — whether the income received was being spent in the best way; — whether the arrangements would deliver the best value for money. It could be the case that a sale or licensing of the asset creates better value for money for the licence fee payer; and — a negative implication for the BBC’s brand or values; 9. The Charter and Agreement include several provisions to address these risks. They encompass: — an obligation on the BBC Trust to have regard to the competitive impact of the BBC’s activities on the wider market; — the four criteria which the commercial services must meet (ie. the services must ﬁt with the BBC’s Public Purpose activities; must exhibit commercial eYciency; must not jeopardise the good reputation of the BBC or the value of the BBC brand; and must comply with the BBC’s fair trading guidelines and in particular avoid distorting the market); — an obligation on the Executive to submit a full and open assessment of the performance of the commercial services, including a statement of compliance with the four criteria; — an obligation on the Trust to adopt a statement of policy on fair trading and hold the Executive Board to account for compliance with it; and — an obligation on the Executive to have a commercial strategy which has been approved by the Trust. 10. The BBC is, of course, subject to competition law, including State aid law.

The extent to which the BBC’s commercial activities meet the criteria required of them 11. Clause 69(5) of the Agreement speciﬁcally vests sole responsibility in the Trust for holding the Executive Board to account in ensuring that the commercial services criteria are satisﬁed.

The appropriateness and eVectiveness of the governance framework for the BBC’s commercial activities 12. The Government remains of the view that the governance framework embodied in the Charter and Agreement is the right one. It is not, however, appropriate for the Government to undertake an on-going assessment of how well the arrangements are working now that the Charter is in force.

The future of BBC Worldwide and other BBC commercial subsidiaries 13. Clause 72 of the Agreement gives the Trust the approval powers for the BBC’s commercial strategy generally (which must include the future of BBC Worldwide and other BBC commercial subsidiaries).

How the money returned to the BBC by its commercial operations is invested 14. Under the terms of the Charter and Agreement, this is a matter for the BBC. October 2008 Processed: 31-03-2009 20:32:15 Page Layout: COENEW [E] PPSysB Job: 419608 Unit: PAG1

Ev 146 Culture, Media and Sport Committee: Evidence

Witness: Lord Carter of Barnes CBE, a Member of the House of Lords, Minister for Communications, Technology and Broadcasting, gave evidence.

Chairman: Good afternoon. This afternoon is the exploitation of BBC-owned properties. So if you ask concluding session of the Committee’s inquiry into the question in a slightly diVerent way, if I am the commercial operations of the BBC and we are allowed to do that, and say, “Do I think there is a extremely pleased to welcome the new Minister for value to the UK creative industries and to the Broadcasting and Communications, Lord Carter. broadcasting market in having a highly successful However, the Committee also felt that it was an business which exploits the rights from UK- opportunity to explore one or two other issues originated content around the world, from public falling within the Minister’s brief, so we will service broadcasters in the broad, including the commence with the session concentrating on BBC BBC?” I absolutely do. Worldwide and the commercial operations, but then perhaps looking to one or two other issues more Q255 Mr Sanders: The executives of BBC generally, but to begin this afternoon can I invite Worldwide have quite fairly said to us, “We have Paul Farrelly to start. been told to go out and do as much as possible for the British creative industry and make as much Q254 Paul Farrelly: Lord Carter, we commenced the return as possible, and we are doing it and now we inquiry into BBC Worldwide in part because there are being criticised for it.” Do you think that in order was a feeling in certain instances, not least the to try and resolve the horns of the dilemma on which acquisition of Lonely Planet, that BBC Worldwide they are placed they should be given firmer had overstepped the mark. These cries come from guidelines? For instance, should there be a principle time to time, but there does have to be a balance that there must be a strong link between the BBC’s between revenue maximisation, does there not, and commercial activities and its own programming? the BBC not for ever and a day being the elephant in Lord Carter of Barnes: I do not know is the honest the room in its mainstream or commercial answer to that. Take me a little further before you go operations, simply crowding out the legitimate on with the questioning, if you will. activities of the private sector? Could I just ask you first of all, philosophically, what is the Q256 Paul Farrelly: Let me help you with the Lonely Government’s view of the BBC exploiting its Planet acquisition. It raised considerable disquiet intellectual property and where should the because here is the BBC not buying a small name boundaries to its activities lie? which it could exploit and put its programming Lord Carter of Barnes: You use, I think, a very behind, and launch magazines with, but taking a timely phrase in part of your question around the really well-established brand name out there, which exploitation of intellectual property. I think if you clearly had competitors, putting its resources behind look at the broadcasting industries generally—in the Lonely Planet brand, and there was considerable fact if you look at the creative industries, but we will disquiet because the BBC had not grown that brand. keep it to broadcasting for now—relatively recently, There was a perception that it may have been paying I would say even arguably within the last two or dotcom boom-type prices with a business model three years, we have seen a significant turning point which is diVerent for the BBC from other people, where the exploitation of rights and the exploitation particularly when finance is tight, which allowed it to of the intellectual property has become an ever more buy that for a large amount of money. Is that the sort important part of the business. This has been true for of instance which would make you feel some time, for sure, but as the world has gone more uncomfortable where the BBC may have stepped global and as more and more platforms for over the line? distribution have gone to scale, the value in the Lord Carter of Barnes: I am sorry if I restate the rights, the value in the exploitation of the intellectual same answer to a diVerent question, but I think we property has gone up and up, and up, and that is a legitimately have to try and do two things, but I really significant reality for the entire sector, which I suspect we cannot do the two things with the same suspect we will come back to in other questions. As set of rules. We have to have a necessary set of it relates to your central philosophical question, I am protections, Fair Trading guidelines, Competition not sure I can speak for the entire Government on Rules, whatever else it may be, around the activities this question, but my view of where the BBC is on of an organisation which is by its very nature this is that I think it is on the horns of a dilemma distorting of the market, which is the BBC. We because on the one hand we legitimately want to decide and support the BBC for good reasons, but maximise the returns, if you like, to the BBC we do that with the full recognition that it has Exchequer, particularly for assets which have consequences and we want, where possible, to already been paid for by the licence fee take, but on control the negative consequences so that it does not the other hand we do not want them to go so far that stifle innovation and competition in other areas. But it is market distorting or chills competition, or chills at the same time I am instinctively uncomfortable innovation. So there is a degree of encouragement with taking an idea, which is rights exploitation of and constraint, and that is quite a tricky wicket to high quality UK content, and starting from the play on. My own view is that at a simplistic level it premise of how do we constrain it? I would rather is not particularly helped by being called BBC start from the premise of how do we maximise it? But Worldwide, which is not just an issue of optics or how do we maximise it without having the negative nomenclature. If you actually look at the anatomy of eVects on the rest of the market? That is what I mean their business, a lot of their business is not the when I say I think we are on the horns of a dilemma Processed: 31-03-2009 20:32:15 Page Layout: COENEW [O] PPSysB Job: 419608 Unit: PAG1

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10 December 2008 Lord Carter of Barnes CBE and it could be that because of the shift in the Lord Carter of Barnes: I think first look obligations structure of the market that dilemma is more stark are relatively common practice across the world and now than perhaps it has been for some time. In its there are arguments on both sides as to whether a current form, I think in relation to some of the issues kind of straightforward open auction or a first which you allude to, and other people have alluded look—first look still requires the owner of the first to, it is written very starkly, but as a starter for 10 I look benefit to bid, so it does not necessarily have the do not think it is beyond the wit of man for us to do eVect of diminishing prices, in fact there are many both of those things, to have the protections and also people who would argue that the kind of notion of a to have the maximisation. That is where our favoured distributor means you have an institution thinking is at the moment. or an entity which understands how best to exploit. So I do not necessarily accept the analysis which says that its existence has the eVect of depressing value, Q257 Paul Farrelly: Just a final question. On the which is what I think is behind your question. issue of Lonely Planet, does the BBC’s acquisition of Lonely Planet, rather than using its own BBC name to do what it is planning, leave you feeling that Q259 Janet Anderson: But we do not actually know actually the BBC’s judgment is correct or not how much they are paying? correct? Has it overstepped the line or not Lord Carter of Barnes: You would know better than overstepped the line? Are the concerns of the likes of I. I do not know what the level of transparency is on Time Out justified or not? price paid or disclosure obligations on the Internet. Lord Carter of Barnes: I am sure if I was sitting inside Time Out I would feel passionately that they Q260 Janet Anderson: Pact has pointed out to us were justified. I do not know enough about that that BBC Worldwide does not make public how particular acquisition, or indeed frankly that much its 29 UK and overseas channels pay for particular market, to know but as it relates to case programmes acquired from the BBC, so we really by case acquisitions, I think you have got to leave have no way of knowing.? that to the management and the governing Lord Carter of Barnes: Then that is rightly a structures they have got. What we have got to make question which I am sure you already have put and sure we are happy with is, are we happy with the probably should put again to the management of overall construct? At the moment, all aspects of the BBC Worldwide. On your principal question, as I BBC have to deliver the BBC’s public purposes and say, I think you can argue the case either way, but at the moment BBC Worldwide is making a slightly going back to Mr Farrelly’s question, I do contribution to that. What I think we are seeing at think we need to frame this question in a diVerent the moment is a kind of tension, a conflict between way. In this country we are extremely good at high those two. If you and I were having this conversation quality UK-originated content, extremely good at it. in three or four years’ time, the importance of rights The BBC is very good at it, ITV is very good at it, exploitation is only going in one direction, as you lots of independent production companies are very know as well as I do, if not better. I think the good at it, Channel 4 is very good at commissioning question is, how do we set a set of rules around it. It is something we are very good at. The global transparency, transfer pricing, first look market for that content is growing and growing and arrangements, the commercial opportunities growing, and how do we get the right balance aVorded to this entity in a way which makes other between competitive protections and at the same players in the market feel that they are competing time creating a British success story, or allowing a fairly? I think if we can get to that we could have the British success story to compete in the global necessary protections and the opportunity of this markets? I am not sure the two are essentially at odds organisation to maximise its revenues and that, I with each other. At the moment, you can see the think, could be good for everybody. conflict, but I think that is largely a function of current structures rather than necessarily the Paul Farrelly: Chairman, that neatly moves on to the fundamentals. remaining questions, but I sympathise with the Janet Anderson: Thank you. management of BBC Worldwide, who would Chairman: We are going to jump slightly because probably think, listening to you, Lord Carter, “Well, Helen Southworth is not able to stay because she has thank you, Minister, you have not helped us oV the another meeting and there is a particular issue which horns of that dilemma!” she wants to raise.

Q258 Janet Anderson: Lord Carter, you have talked Q261 Helen Southworth: If I could ask you to focus about the need perhaps for two sets of rules and the some attention on the development of creative kind of dilemma where the BBC on the one hand industries and the BBC’s role within that and to ask wants to maximise returns to the BBC Exchequer, I what you are hoping for from the development of think you described it as, but to avoid market the Media City at Salford in terms of the distortion. Worldwide has exclusive ﬁrst refusal of development of creative industries within the UK BBC programming, which has led Pact and and what opportunities that is going to give us for a Fremantle to argue that the true market value of global market position? BBC programmes may not be obtained. Do you Lord Carter of Barnes: I think there is an awful lot think the interests of taxpayers could be better of evidence to show that the changes over the last— served by an open auction? and it really has only been over the last ﬁve or six Processed: 31-03-2009 20:32:15 Page Layout: COENEW [E] PPSysB Job: 419608 Unit: PAG1

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10 December 2008 Lord Carter of Barnes CBE years, not just with the BBC but also with the asking it to stimulate it to do things which might of independent production process more broadly, itself be in conﬂict with the market. I think the have, to use, I think, a previous Secretary of State’s evidence so far is that the BBC Trust has by and quote, “spread the venture capital for the UK large exercised its judgment on most of those things creative industries more broadly” both in the pretty well, but it is very early days. ownership of it and in the geographical home of it. Rosemary McKenna: Thank you. What does that do? It spreads employment opportunities and it spreads creative opportunities. Q264 Chairman: On some things the Trust has I think there is a reasonable degree of evidence—and clearly taken quite a hard line against the BBC this slightly goes back to Janet’s question—that it Executive, on others the Trust has seen its role to actually creates value, absolute value, because you defend the BBC, and there is an inherent get competition in the market and you get contradiction between those two roles. It is not a organisations and entities which can own their own question of whether or not it is early days, it is assets, and they can grow scale and they can acquire obvious from the start as to whether or not there is and therefore they can invest themselves. So the a contradiction. Is this an issue, do you think, which strategy is, I think, one which has been borne out by bears re-examination in due course? evidence and the Salford move, the expansion of the Lord Carter of Barnes: Well, everything bears re- BBC’s capabilities in Scotland, the extension of the examination in due course. It depends on how long window of creative competition, the transfer of you mean by “due course”. Is it on my agenda? Is it secondary rights, the extension of the regional a burning issue? Do I sense that the collective and quotas, these are all designed, I think, to create a independent objective analysis of the judgments greater level of competition and creativity, and the made which have been bad demand a re-think? No, evidence so far is good. I think it is good. I do not. I do not.

Q262 Helen Southworth: Are you hoping that the Q265 Chairman: So until we come round to the next BBC is actually going to invest signiﬁcantly in charter renewal period, the existing structure is likely making that happen, because it is the big public to remain in place? service body which can make it develop? Lord Carter of Barnes: I would say that is highly Lord Carter of Barnes: I have heard the siren voices likely. Making big structural changes on governance which say, you know, as ever, it could be done no one does lightly. I know you do not mean this, quicker, there could be more of it and it could be Chairman, but it is always in a sense easy to have more eYcient, and it may well be that all of those these discussions at a conceptual level. It is always things are true, but I certainly do not sense any lack worth bearing in mind the eVect on the organisation, of enthusiasm from the BBC senior management for the people who work in it, the organisations which these changes, and I think that is for the good. have businesses that depend upon the BBC, the knock-on eVect in communities. Whilst these things Q263 Rosemary McKenna: Minister, various are important and surely we would always want to organisations and individuals have argued that the get them 100% right, we also want to make them BBC Trust is not a credible check on the BBC’s 100% operational, and I would say the Trust is commercial ambitions. Has the record of the Trust operational as itself well. It is up and running. It has so far lived up to your expectations? quality leadership. There are quality people involved Lord Carter of Barnes: That is a nice googly there, in it. It has set out a framework and a set of Rosemary! Well, it is a relatively new innovation, is guidance. It has created a reasonably eVective—with it not? If there is any place in which you can say these some inherent constructive tension around the edges things, it is probably in this House. Creating in its working relationship with Ofcom, the sector institutions fast is a contradiction in terms because regulator, but it seems to be more than functional you need some time to do that and the BBC Trust is and actually having a bit of tension in that system is still in its relatively early days. Is it an improvement not all bad in a way. So would I rush to make a on the completely integrated governing structure change in the near future? No, I do not think I that there was before? I think on balance, yes. Is it a would. forensically separate structure where accountability Chairman: Thank you. I think we will now move sits clearly in one place and regulatory responsibility slightly beyond the BBC to your more general sits clearly and singularly in another? No, it is not, responsibilities. but it never was. It was always designed to compromise and to balance the conﬂicting Q266 Mr Sanders: Your appointment indicated the challenges of how do you provide the necessary need for convergence at Ministerial level. Is it time degree of common guidance to a market whilst for a converged Department of Communications recognising that the BBC is diVerent? And the BBC as well? is diVerent, on lots of levels, not least around this Lord Carter of Barnes: One of the many fascinating question about how do you have a player which is things about my sector is that it aVects almost every funded largely, in the vast, vast majority, by aspect of what government does because it aVects taxpayers’ money through a licence fee whilst at the almost every aspect of what all of us do, so you might same time encouraging it to do commercial activities end up with a very big department. I think at the in order to put a ceiling on what that is. So there is moment the remit is a remit to look at how best we an almost inevitable tension in there because you are maximise our position as a country. What does that Processed: 31-03-2009 20:32:15 Page Layout: COENEW [O] PPSysB Job: 419608 Unit: PAG1

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10 December 2008 Lord Carter of Barnes CBE mean in terms of citizens, consumers, viewers, been better if it had been called the Strategic listeners, the industry, infrastructure and Communications Authority, because actually that is investment? Machinery of government issues, I have largely what it has become, but I think part of the to say, are not part of the brief. reason why it has become the Strategic Communications Authority is because this has not Q267 Mr Sanders: Are there not areas, though, been an area where Government has been focused. where the two departments might be at odds? There was, I think, a degree to which the Lord Carter of Barnes: I am sure there are. I have to Communications Act was passed, Ofcom was say, I have not seen it yet. As I say, what I have created and the sector was progressing and discovered in two months or so is that it involves inevitably Government has multiple priorities. I more than just two departments. I sit in two think the reason why Government has returned to it departments because that is where, if you like, the with some degree of forensic focus is partly because centre of gravity of activities are, in the Department of what is happening in technology, partly what is of Business and the Department for Culture, but happening in real people’s lives, partly what is there are significant issues which are relevant in the happening in the macro-economy, that we need Department of Innovation, there are significant other sectors which are going to grow and thrive and issues in relation to broadcasting in the devolved succeed. Look around the world. Look at how nations departments, there are significant issues in important the digital economy is to President-elect terms of education and skills and there are Obama’s plans. Look at what the French significant issues in terms of general public service Government is doing and what the German delivery, in the eYciency of public service delivery Government is doing, or go to Asia and spend any using new technology, so trying to tidy it all up in time in Asia, as I am sure many of you have. Building one place, even if one tried to, I think might be an eVective digital economy and having a trickier than it appears at first, but I have not found government position in policy and framework it an obstacle, let us put it that way. planning is a critical part of government leadership, and I think that is where Government needs to be Q268 Mr Sanders: How do you view the job? If and that is what we are focused on doing. My sense something came up which straddled both from the Regulator, in its role as a strategic thinker, departments and required you to take two positions, if you like, is that it is very welcoming of say a leadership role which went down on one side Government regarding this as a priority—and who or the other—or do you see yourself as a referee who would not be?—but there is a very clear recognition just observes and approves one department over the that in Ofcom’s role as the independent statutory other, or do you see yourself getting your hands dirty regulator it continues to exercise its judgments and actually setting one department against the independently, and rightly so. other where there may be conflicting interests? Lord Carter of Barnes: Well, I see myself as a Q270 Mr Hall: So you see this as a very healthy technocrat, to answer your question, rather than as relationship without many pinch points at all and a referee. I think at the moment we are at the stage that both Government and Ofcom are ostensibly of trying to frame the questions and the answers. If working in tandem? it comes to the point of adjudication and the ability to exercise the judgments of Solomon if there are Lord Carter of Barnes: Personally, I think it is a conflicting departmental interests, I think that tripartite relationship between Government, the would be for other people rather than me. My job is Regulator and the industry. to try and bring the analysis into one place, to try and build a common understanding of what our Q271 Mr Hall: Have you got any plans to change digital economy is going to look like in five or six their name to the Strategic Communications years’ time, to understand what that means for the Authority? Will that be primary legislation? big questions both in public policy and in Lord Carter of Barnes: I do not think we would be commercial industrial policy and see how best we using valuable legislative time to eVect a name align them. If there are conflicts, we will take them as change! It was more to illustrate a point. they come, but that is not where we are in the process Mr Hall: Okay. Thank you. right now.

Q269 Mr Hall: You are probably in a very good Q272 Philip Davies: Just in terms of some of these position or place to deal with the relationship conﬂicts which you have not yet identiﬁed, if I could between Government and Ofcom. Both are charged sort of throw one in to see what you think. The with the requirements of policy planning, yet there is “nanny state” fanatics at the Department of Health really a very strong potential for a dichotomy appear to be more and more obsessed with banning between the roles of Ofcom as a regulator and the so-called “junk food” advertising at every single Government as a policy maker. How do you see that second of the day, whereas historically the and how would you resolve that dichotomy? Department for Culture, Media and Sport has taken Lord Carter of Barnes: I used to say when I was at a much more sensible view about these matters, and Ofcom that one of the few mistakes I think were Ofcom appear to be put in the position of referee in made, if I am allowed to say so, in the passage of the this particular dispute themselves. I just wondered Bill into an Act was calling it Ofcom. It would have where you stood on the existing restriction on Processed: 31-03-2009 20:32:15 Page Layout: COENEW [E] PPSysB Job: 419608 Unit: PAG1

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10 December 2008 Lord Carter of Barnes CBE advertising of so-called “junk food” and whether needed a new institution and that it would be wholly there are any plans to extend it, as the Department wrong for that level of public accountability to sit of Health seem so keen on? with the industry regulator. So the BBC Trust was Lord Carter of Barnes: My sense is that those created as a vehicle for that. The question then is discussions have got to a sort of sensible working whether or not accountability and regulatory place where there is now an industry-funded responsibility overlap, and they do overlap in some initiative. It seems to have the support of the areas. As you know, Ofcom has regulatory Department of Health as well as the Department for responsibility for the BBC in a whole range of areas Culture, where there is a commitment to look at the already, but there are some specific aspects of the codes and the self-regulatory rules and obligations BBC’s functions where Parliament decided that it placed on advertisers to sensibly promote, whilst at wanted that to be held in a separate place. It wanted the same time having a kind of common that to be held by the body which was also the body participation in a communications exercise in the that was going to be publicly accountable to broader sense of the word to encourage people and Parliament and to the people. As I said in answer to inform people about healthy lifestyles. So my sense the Chairman’s question, that is a compromise, it is is that the flurry which you refer to has brought not a pure forensic allocation of responsibilities, but everyone together—you could take a view as to the reasons for it were because of the underlying whether it was done as constructively as it could distinction of the BBC. I do not think it was to do have been, but nevertheless it has brought everyone with the view that there was a flaw in Ofcom or a flaw together in a way which has created a degree of in the BBC Trust. common cause. So I do not sense there is the need for another government intervention in this area right Q276 Philip Davies: I am not really trying to get a now. history lesson on the background as to how we have arrived at where we are, I am trying to extract your Q273 Philip Davies: So on any proposal to extend bottom from the fence as to where you think, as a the ban you, as the Minister for Broadcasting, would Minister—not what Parliament thought—these stick up for the broadcasters and point out what a things should best be done! Many people think that devastating impact it would have on their revenues, if Ofcom is good enough to regulate other would you? broadcasters, then it should be good enough to Lord Carter of Barnes: Well, any decision to ban, to regulate the BBC and not just left to the BBC Trust, use your words, or any decision to restrict which rather than being a regulator is more of a advertising is a matter for Ofcom. It is not a matter cheerleader. for the Government, it is a matter for Ofcom. Lord Carter of Barnes: Well, my bottom is not on the fence, it is on the facts, and the facts are that as a Q274 Philip Davies: So you would stand idly by and Minister I am doing what Parliament decided very watch it happen even if you thought it was going to recently, which is living with a structure where there have a devastating eVect on the industry of which is a very clear set of allocated responsibilities. Whilst you are the Minister? I am sure there are many people who are unhappy Lord Carter of Barnes: I do not think I would stand with it, I am sure I could find many people who are idly by, but it is just factually a matter for the very happy with it. Therefore, at the moment, what Regulator to decide, as indeed it was factually a I am saying— matter for the Regulator to decide the amendment to the rules they made, I think a couple of years ago, Q277 Philip Davies: They probably work for the but I do not think it is an issue and I do not sense it Trust, though? is on the agenda. Lord Carter of Barnes: Listen, it is not my job to be a cheerleader for the Trust, but the structure is a new Q275 Philip Davies: Just linking back to the BBC bit, one and by and large it seems to be working, if you obviously you were the Chief Executive of Ofcom are asking my opinion. yet you seemed to be very happy for the BBC Trust to regulate the BBC when it strikes me that the Q278 Mr Evans: Stephen, as the Minister for obvious alternative to do it would be Ofcom. Given Broadcasting, have you taken a view as to whether a the widespread disquiet there has been about the broadcast of an assisted suicide should be shown on BBC Trust’s recent regulation of the BBC, what are television? the faults of Ofcom which either you identified when Lord Carter of Barnes: I have not taken a view on you were there, or with the current regime makes that, although like, I suspect, many other people, I you think they were very good for regulating have read the newspapers and watched the coverage everybody else but not very good for regulating the of it. I have not actually seen the programme because BBC? it has not yet been broadcast. Lord Carter of Barnes: I do not think that was the issue. The issue when the charter was being renewed Q279 Philip Davies: Have you taken a view on was where should accountability for the BBC lie in anything yet? the first instance, not actually regulatory Lord Carter of Barnes: Yes, but you have not asked responsibility but accountability, and the judgment me a question on any of the things that I have taken was made by Parliament that that accountability a view on! You have asked me questions on a lot of should no longer lie with the governors, that you things which have already historically been decided! Processed: 31-03-2009 20:32:15 Page Layout: COENEW [O] PPSysB Job: 419608 Unit: PAG1

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Q280 Mr Evans: You could have a view, Stephen, Q284 Mr Evans: I know that this has clearly been in about the generality of whether an assisted suicide the newspapers today and I am just wondering at should be shown on British television? what point, do you think, particularly with your Lord Carter of Barnes: I could, but I will not. knowledge as former Chief Executive of Ofcom, would it be appropriate for Ofcom, for instance, Q281 Mr Evans: You are the Minister for where this is hugely controversial and highly Broadcasting, Stephen! emotive, and would you expect Ofcom to ask to see Lord Carter of Barnes: Okay, I am the Minister for a preview of that programme, or do you think that Broadcasting. On this particular incident, I have not would be irregular? yet seen the programme, so it is very diYcult to Lord Carter of Barnes: I think that would be highly comment conceptually on a programme which has inappropriate. I think one of the lessons we have not yet been broadcast. learnt in relatively recent history about broadcasting Mr Evans: But you could take a view on the regulation is that you should follow due process, and generality as to whether an execution should be there are very clear processes around how shown on television. You probably would. complaints are handled. We have ceased having the Mr Hall: Oh, Chairman – Regulator as the publisher/broadcaster a long time Mr Evans: No, no, this is the Minister for ago and we have certainly ceased having the Broadcasting and this is an issue which has come Government as the publisher/broadcaster an even up – longer time ago, and those are both very good Mr Hall: You have had the answer. things. If the programme gets broadcast and it Mr Evans: I do not want it oV you, Mike, I am asking breaches the rules—an investigation is done and it is the Minister! judged to have breached the rules—then Ofcom has Mr Hall: Well, you have got to listen to what he says. significant powers as the regulator to both penalise You are badgering! the oVending broadcaster, the involved production Mr Evans: That is what we are here for, is it not? This company and make sure the rules are tightened. I is accountability, Mike. have every confidence that the system will produce Chairman: You can ask another question. the right result if that is the case. Q282 Mr Evans: So tell me, you have not taken a view, as the Minister for Broadcasting, as to whether Q285 Chairman: I have not seen the programme an assisted suicide should be shown on British either, but I have talked to the broadcaster and I television? have every confidence that it is fully within the rules Lord Carter of Barnes: I have not taken a view on and I think actually possibly in the public interest, that. but that is a personal view. Can I ask you about your position? You have very close links to the Prime Q283 Mr Evans: Would you be surprised if a number Minister, given your previous role. Do you have a of people thought that that is rather surprising? sort of direct line to him, or do you answer through Lord Carter of Barnes: I would not be at all surprised the Secretary of State for Culture, Media and Sport, because I think it is a deeply personal and very or do you answer through the Secretary of State for evocative issue. Therefore, I can understand why. Business, Enterprise and Regulatory Reform? Broadcasting also, by its very nature, is an activity Lord Carter of Barnes: I answer through both of which reaches into everybody’s household in a very those Secretaries of State and my reporting line is intimate and personal way. It is one of the reasons equally divided between the two of them. why it is so highly regulated. But given that it is highly regulated, there is quite a lot of rules around what you can and cannot do. Therefore, if we find Q286 Chairman: Therefore, your appointment as a ourselves in a situation where a programme is about sort of Minister straddling the two Departments, is to be broadcast—and I have not seen it—I am that not rather undermined if you then have to go almost 100% sure that the broadcaster in question back to each of the individual Secretaries of State? will have been very, very careful to make sure that they are going through the necessary processes to Lord Carter of Barnes: No, I do not think so. observe the rules. So if we find ourselves in a Certainly the evidence—and it is relatively recent situation whereby we are about to see the broadcast evidence—is that both the relevant Secretaries of of something which many people will find, both State were supportive of the fact of the appointment philosophically and in principle, challenging but and the individual in the role, so I have not had happening in a sector and an environment which is anything other than support from the two highly regulated, so it is not happening by accident Secretaries of State. Going back to the question or in an uncontrolled way, that would lead me to the earlier, I think there is an increasing number of conclusion that the particular programme is likely to overlapping areas, so having a Minister who has be being done in a particularly sensitive manner, as converged responsibilities does actually make an opposed to in a gratuitous manner. But I do not enormous amount of sense. It will be interesting to know, because I have not seen it. Four years as a see, when we get to the point of recommendations regulator have taught me one thing: you never make and conclusions, whether that common consensus a comment on a programme until it has been continues, but as it stands at the moment I think the broadcast. dual departmental structure seems to work. Processed: 31-03-2009 20:32:15 Page Layout: COENEW [E] PPSysB Job: 419608 Unit: PAG1

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Q287 Chairman: There are going to be issues where Committee will be the first—and rightly so—if this the two Departments take diVerent views. You have Report fizzles and dies—to be able to level that very said you have not encountered any. Actually, I think legitimate criticism. But I hope not. Not least I hope there are one or two areas where perhaps it is not, because if we do not do it there will be plenty of emerging. We may come on to, for instance, the other countries around the world that will do it. whole question of the protection of intellectual property against illegal file sharing, where there Q291 Mr Evans: Looking at broadband, Stephen, appears to be a certain diVerence of view. Do you what is your view as to the roll-out and the speeds have a right of appeal over the heads to the Prime available throughout the country? Minister? Lord Carter of Barnes: My view is that we have been Lord Carter of Barnes: I am a Parliamentary Under- through a period in the last couple of years where we Secretary, Chairman! have broadly been quite happy with where we have got to. I think we were rightly, and you yourself were Q288 Chairman: You are a Parliamentary Under- rightly critical of where we were way back at the Secretary but also the former Chief of StaV to the beginning of the decade. That created a mixture of Prime Minister in Number 10 Downing Street and operational focus, access to capital, regulatory there are not many of those around! change, and that created quite a competitive market. Lord Carter of Barnes: No, but people come and go I think there is a sense that we are now at another through Number 10 Downing Street, as you yourself turning point. We have not yet got universal know, Chairman! coverage, and in my view we should have it. The speed rates are variable and in some cases becoming Q289 Chairman: I do not have quite the direct link progressively uncompetitive, and that is an issue, you have! and the level of competition varies significantly Lord Carter of Barnes: So I would not put too much depending upon where people are. Then there is the weight on that. Let us be clear. I think the Prime slightly more macro question about kind of next Minister was the driving force behind the idea of generation technologies. So my sense is that we are having a Communications, Technology and at another one of those points where we need to have Broadcasting Minister. The Prime Minister another re-think and another re-look at how we are commissioned the Report. I think the Prime doing what we are doing and whether or not it is time Minister is passionately of the view that this is an for a fresh approach. That is my sense of where we increasingly important sector and shares the view are. that there is an opportunity for us, partly given where the economy is at the moment, to give it Q292 Mr Evans: On the first one, coverage, not considerably more focus than it has had for a while. having universal coverage, I have certainly got So it certainly comes with Prime Ministerial support, pockets in my patch. Secondly, on the speeds at but I sit within two Departments and those which it is being delivered, are we competitive with Departments, as you and other colleagues around the rest of the world, particularly the countries we the table know, have very clear views about what the wish to compete with on IT stuV? Do you think there priorities for those Departments are, and rightly so. is any role for Government in trying to assist there? Lord Carter of Barnes: I think there is definitely a Q290 Chairman: You have set out your priorities in role for Government. Whether or not that means is the Digital Britain Report, which is clearly the there a role for Government to write a cheque is a flagship. We have been here before. We had the diVerent matter, but I think there is definitely a role Creative Economy Programme, launched in 1995. for Government. We do not have a universal service We then had the Creative Industries Task Force two obligation in this country, in fact we do not have a years later. We then had the convergence think tank, universal service obligation in Europe for which came a few years after that. Is not the Digital broadband, so I think there is a real role for Britain Report just another in a long line of grand Government to take a view and an interest in this. sounding initiatives which actually do not really ever amount to very much? Q293 Mr Evans: Yes, particularly in rural areas Lord Carter of Barnes: I sincerely hope not. Perhaps where we are trying to get people to live and work at cometh the time, cometh the Report, but I think it is home, and the one block to that in many cases is not a very legitimate question: are we suVering from a having access to the fastest range of broadband kind of review ennui? A charitable way of looking at available? where we are is that what has been happening over Lord Carter of Barnes: I agree. the last five or six years is that we have been going through extraordinary technology change and Q294 Mr Evans: Do you think the recession is going service development. That is true. We all sit around to have any impact on this whatsoever? these tables now and have these discussions and Lord Carter of Barnes: I think the recession is going there is a set of assumptions that we now take for to have an impact in many ways in this market, not granted which six or seven years ago we did not, and least in the access to capital for large-scale fibre that is a relatively short period of time. So my sense deployment. It is also going to make, I suspect, is that most or all of those reviews are part of what increased price competitiveness hard to maintain, so has led to the tipping point of getting government I think it is definitely going to have an impact. focus on it and where we are, but I am sure this Having said that, I think it is also an opportunity in Processed: 31-03-2009 20:32:15 Page Layout: COENEW [O] PPSysB Job: 419608 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 153

10 December 2008 Lord Carter of Barnes CBE a funny sort of way because it is going to put home or Freeview where they listen to radio. I am increasing pressure on people and businesses to find sure some colleagues around the table listen to the ever more eYcient ways of doing things and radio on their laptops. So there are multiple forms of broadband is a fantastic enabler for that. So I think digital radio. The digital radio which most people it will have an impact in both ways. refer to is digital audio broadcasting. Could you have digital radio without digital audio Q295 Mr Evans: Looking at the infrastructure which broadcasting? Yes, you could, but do we want to is going to be necessary to deliver universal coverage have a dedicated digital broadcast network for and the speeds, you mentioned money. Do you think radio? Well, I think we do and up until now the there is any role the Government should play in policy decisions have said that we do and we are actually assisting in the delivery of that in certain again at a point whereby if we do I think we need to key areas? push it along a bit, or else I think technology will Lord Carter of Barnes: Public authorities have drive faster. already done that, as I am sure you know. The Scottish Government has done it. There have been Q299 Chairman: Push it along? certain local authorities who have done it. So it is not Lord Carter of Barnes: Improve its coverage. the case that there has been no public money which has participated in the process to date. Q300 Chairman: The commercial sector is under enormous pressure, partially because of the Q296 Mr Evans: I remember a former Prime regulatory burdens you describe, partially because Minister actually talking about Africa, trying to we are going into a recession where advertising ensure that money was invested in Africa to give revenue is falling through the floor, partially because them broadband coverage as well, so there is a of the pressure from the BBC, which is now 56%, if precedent, but I am just wondering what you think not higher, in terms of market share. The the hold up is to doing exactly the same thing in commercial sector is seriously talking about pulling England? out. If you want DAB to continue, is that a case for Lord Carter of Barnes: I think it is only relatively government intervention? recently that we have put our shoulder against the Lord Carter of Barnes: I think there will have to be door marked “Universal service of broadband” and some form of government intervention, even if it is it is not immediately evident to me that we only intervention to look at the regulatory burdens. necessarily require public money to do it. If we do If you mean by “government intervention”, require public money to do it, is that oV the table? I money— do not see that it necessarily should be, but I do not think we need to start from the premise that the only Q301 Chairman: Yes. solution is public money. I do not think so. Lord Carter of Barnes: Again, I genuinely do not know enough yet to be able to answer that question, Q297 Chairman: Can I turn to another of the but there will definitely need to be further challenges sitting on your desk, the radio industry, expenditure on transmission capability to get particularly the future of digital radio and very coverage of DAB national, if that is what we want closely related to it the problems which commercial to do. radio is now going through? To what extent do you think there may need to be intervention to help Q302 Chairman: Is that something which the commercial radio survive? Government might support? Lord Carter of Barnes: To help commercial radio Lord Carter of Barnes: It is definitely something that survive, or commercial radio survive in digital? we intend to have a view on by the end of January. Q298 Chairman: Both. Q303 Chairman: Right. So it is under active Lord Carter of Barnes: Well, radio and commercial consideration? radio is a highly regulated sector. It is probably on Lord Carter of Barnes: It is. any objective measure one of the most regulated sectors of all of the communication sectors. I suspect that is going to have to change because the Q304 Chairman: You would not like to go beyond economics of it are both in absolute terms small and, “active consideration”? secondarily, facing real challenges because the Lord Carter of Barnes: Not this afternoon! amount of advertising revenue to broadcast media Chairman: I did not think you would! All right. That generally is going down and to radio is going down is helpful, thank you. at an accelerated rate because it is a lower priced medium in the first place. So I suspect we are going Q305 Rosemary McKenna: Can we move on, to have to take a fresh look at the regulation of the Minister, to, I think, the important issue in your sector. As it relates to digital radio, that is a multi- remit and that is harmful content on the Internet and layered question really because I suspect there is a in video games, and ask you about the UK Council number of colleagues sitting around this table who on Child Internet Safety? Has the Government met have mobile phones on which they can listen to the timetable to date for implementing all the radio. I suspect there is a number of colleagues commitments in the Byron Review Action Plan sitting around the table who have digital satellite at published in June? Processed: 31-03-2009 20:32:15 Page Layout: COENEW [E] PPSysB Job: 419608 Unit: PAG1

Ev 154 Culture, Media and Sport Committee: Evidence

10 December 2008 Lord Carter of Barnes CBE

Lord Carter of Barnes: I would not like to say clarity and those we are getting to the bottom of. So categorically “Yes” because you inserted the word I think that will be a decision in early January, or “all” into your question, Rosemary, and I am not perhaps even possibly before Christmas. sure I carry all of the recommendations, but my understanding is, broadly, yes. Tanya Byron is on Q308 Rosemary McKenna: But you are working the steering board of this project in order to make with schools. That is important, is it not, that sure that we do (a) stay connected on these through the schools the parents understand that questions, because they are, as you rightly say, they have a responsibility? important, and (b) it is another way really of just Lord Carter of Barnes: There has been a lot of work underscoring the Government’s enthusiasm for done by, I think, the PEGI standard since the Byron making sure the recommendations of the Byron Review. One of the many good outcomes from the Report are embraced and implemented. The Council Byron Review has been to get the retailers, the games is underway. It had its ﬁrst meeting, I think, very manufacturers, schools, parents together in one recently. So my sense is that progress is being made place to come up with the improvements necessary on the agenda. I would not want to give you a to give people the conﬁdence to adopt that as a personal undertaking that all of them have been met single system. because I just do not know for a fact. Rosemary McKenna: Thank you.

Q306 Rosemary McKenna: One of the issues which Q309 Janet Anderson: The video games industry is concerned this Committee most during our very important in this country, but they say they are investigation was the fact that Google and being overtaken by other countries like Canada, YouTube, for example, were not prepared to where they get tax concessions, much in the same undertake to actively monitor what was put on their way we do with our film industry here. Is there sites and the industry in general seemed to think that anything going on in Government about possibly a take-down time of 24 hours for the removal of extending tax concessions to the video games child abuse was an acceptable standard. Would you industry? like to develop what you think the industry ought to Lord Carter of Barnes: I have heard that argument be doing and what we can do to make sure they do it? from the industry, and indeed we have had Lord Carter of Barnes: On that, I do think we are representation in the context of the report, actually, making a lot of progress, not necessarily on the and I certainly share the view that the games specific take-down times but I think we are making industry is a significant form of creativity as well as significant progress, and here I think the UK being an important industry. Most of their focus Council has been a very eVective mechanism for actually, certainly in conversation with me, and I can getting all of the material players in this around the only tell it that way, has been around the table with a common sense of ownership and classification issues rather than around commercial willingness to participate. As I am sure you will have incentives or tax breaks. I think it is also related to heard during the Byron Review—and I think Dr technological capability, to go back to Nigel’s Byron is very compelling on this—there are question around broadband capability, speeds and enormous issues of practicality around eVective take-up. The more that gets enhanced, the greater monitoring and companies are understandably the opportunity to use on-line applications and nervous about signing up to delivering something games and it makes the market more attractive. So I which actually they do not believe is deliverable. have not heard the tax incentive argument as a Where we are at is a point where there is now, I primary argument from the industry. think, a common understanding of shared Janet Anderson: Thank you. responsibility amongst the ISPs and the other players and we are getting to common standards, Q310 Chairman: Can I move to another issue which and I think that is a good place for us to be. I will I referred to briefly earlier which is on your desk, stop there, and we may go further. which is the need to try and support the creative industries by helping them deal with the problem of illegal file sharing. It appears that some progress was Q307 Rosemary McKenna: What about the coding being made towards achieving an agreement on the video games? Is there progress on that issue? between ISPs and content providers about measures Lord Carter of Barnes: There was an outstanding to be taken to combat illegal file sharing, but now it question, I think, on that between the two diVerent appears there is still some gulf between the two standards, about whether you were referring to the diVerent camps. Are you confident that you can PEGI standard and the BBFC standard, and that is, achieve an agreement between the two? I think, due to be resolved either this side of Lord Carter of Barnes: I am not sure I would Christmas or early in the New Year because I think characterise it as a gulf, but there are definitely in the Byron Report it was left as a kind of question significant issues between the diVerent parties to be answered, whether or not you could look at the involved in that. As you know, there is a double standard. I have to say that my instinct on consultation which was put out on a signed and that is that I think clarity is better, to be honest. I am shared Memorandum of Understanding between uncomfortable with dual systems and video games the various parties and I am having a series of quite operate in a diVerent market from films. Having said detailed discussions with all involved parties to see if that, there are legitimate issues of recognition and we can find practical and operational common Processed: 31-03-2009 20:32:15 Page Layout: COENEW [O] PPSysB Job: 419608 Unit: PAG1

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10 December 2008 Lord Carter of Barnes CBE ground. Am I confident? Yes, reasonably confident. Lord Carter of Barnes: I would much rather it was I think we need to be clear as Government as to what solved without legislation, but if we need to have our priorities are, and the truth of the matter is that legislation we have been very clear, I think, from the our priority in this is that it is another area where, very beginning that we would consider that. like in many of these issues, you do have to balance conflicting interests. I personally do not think it is legitimate of the content owners to say, “This is a Q314 Chairman: The content providers are quite problem solely for the ISPs.” I do not. But equally, plainly of the view that there does need to be the ISPs do have some shared responsibility here and legislation. if we are going to accelerate broadband take-up, if Lord Carter of Barnes: I am sure they do say we are going to accelerate broadband provision, if diVerent things to you than they say to me, but it we are going to get faster speed rates, if we are going depends upon which content providers you talk to, on which day and on which business model they are to have mobile broadband with the sort of capacity in. They have diVerent views. Legislation is a we would like, we have to have an environment in marvellous thing, but it is also a fixed thing and I am which content creators can trade their intellectual not sure in this market we necessarily think that property. We just do. It would be the Wild West however cleverly drafted, with however much without it! We would spend an enormous amount of foresight, we could devise a legislative solution money on infrastructure and then there would be no which would be as perfect as a much more eVective, way of monetising the application’s content. It commonly owned self-regulatory notification would not make commercial sense, let alone cultural system shared by the content owners and the sense. So we do have to find it. This may seem like platform operators. quite a technical issue, but it is a very important principle issue for where we are going more generally, I think, in a digital economy. So we are Q315 Chairman: This is essentially a question of the very focused on trying to find a workable solution. I protection of intellectual property. Why are you have said to both parties, or all of the parties (it is not doing it and not the Minister responsible for quite as similar as both parties because diVerent intellectual property? people are in diVerent places), “We very much see Lord Carter of Barnes: Well, I am working intensely this as a shared responsibility so we want to see some closely with the Minister for Intellectual Property, common plans from everyone involved.” and indeed the gentleman who runs what is now, I think, called the UK IP, Ian Fletcher, sits on my steering board. It is slightly going back to the Q311 Chairman: Let me try you on one specific question earlier. It is not two departments. The potential problem. The content providers want the Department for Innovation is a big part of this area. ISPs to take punitive action against their own As for the historical reasons why this was done by customers on the basis of no absolute proof of them BERR rather than DIUS, I just do not know, but it having done anything wrong. That raises potential was taken as a commercial responsibility, I suspect. legal problems. Would you consider providing some kind of indemnity for ISPs who do take action of that kind? Q316 Chairman: Is it not the case that you should Lord Carter of Barnes: I think the question is (if I can take on responsibility for this since it is so much part put it in a diVerent way), can we find a mechanism of the whole area for which you are responsible? It for a system which provides for a clear and visible would make much more sense to put IP under you notification process for people who are clearly as well, would it not? abusing the systems and abusing the content? Lord Carter of Barnes: I do not think that is necessary. I think what is required—and this is what we are doing—is making sure that any of the work Q312 Chairman: When you say “clearly”, it is never we are doing around how do you create a safe going to be entirely clear, is it? environment in the digital economy, particularly for Lord Carter of Barnes: No, it is never going to be creative IP but also for other IP and does not conflict entirely clear, but you can get pretty close to entirely or undermine the broader IP rules and trading clear and if the notification and advisory and environment. As I am sure colleagues around the warning system is done in the right way, I do not table know, intellectual property is not a domestic think that needs to get to the point of individual ISPs matter anyway, it is a regional and global issue. The being responsible for turning oV their own current system, I think, of shared responsibility customers. If I was running an ISP business, I would works and, as I say, David Lammy and Ian Fletcher find that a diYcult thing to do, having spent all the are very, very closely involved in this particular money building the platform and acquiring the technical question. customers. But equally, as I say, there does need to be some shared responsibility for where people cross the line. Q317 Chairman: Can I just test you on another area within your Digital Britain Review? Obviously high up in the list of issues on your agenda is the future of Q313 Chairman: Are you still optimistic that this public service broadcasting. Would it be right to say problem can be addressed and solved without that the Digital Britain Review has now taken over legislation? from the Ofcom PSB Review? Processed: 31-03-2009 20:32:15 Page Layout: COENEW [E] PPSysB Job: 419608 Unit: PAG1

Ev 156 Culture, Media and Sport Committee: Evidence

10 December 2008 Lord Carter of Barnes CBE

Lord Carter of Barnes: No, it would not. I think it Lord Carter of Barnes: I guess “radical” is always a slightly goes back to your comment about review challenging word. At the moment we are looking at ennui. The Ofcom PSB Review is a statutory all of the options. That is what I mean when I say I requirement they are required to do once every five am not sure we should be constrained by what has years by the Communications Act. I think they have already been suggested. If you are trying to come up had two phases of the latest review. I think there was with a long-term solution, you have to come up with a pretty clear sense in the first, let alone the second, a solution which you feel confident will withstand and I am sure again in the third, that there was a need the test of at least five years or so, and that is one of for Government to take this under its own wing the reasons why we are appointing advisers to give because there is a limit on the Regulator’s remit. The us advice on that. Regulator can update and advise, but cannot decide. So I think the Government taking responsibility is a Q323 Chairman: If we are to potentially consider natural next step. really quite radical solutions, this may well require legislation. Do you anticipate a Communications Q318 Chairman: Have you yet reached any views Bill in the near future? between the various options which have already Lord Carter of Barnes: Well, it clearly was not part been set out in the Ofcom Review? of the Queen’s Speech. Lord Carter of Barnes: No, we have not, and I am not sure we would necessarily say that the options in Q324 Chairman: Not much was! the Ofcom Review are the only options. There are Lord Carter of Barnes: I will assume that was not a others. Where we are in process terms is that we are question! At this stage we are looking to see if we can rightly paying attention to what Ofcom has done so come up with answers which in the main do not far in terms of analysis. We are talking to all the require legislation on the grounds that it is quicker parties involved. We are, I think, literally in the and more eVective. Were legislation to be required in process of appointing our own advisers to look at any of the areas of the Digital Britain Report, I just what work has been done by the various parties cannot speak for whether there would be legislative involved and we will try and bring that together as a time, but I think if they are important enough one common piece of work. would hope they would be given due consideration.

Q319 Chairman: What are the options you would Q325 Chairman: But you are also going to be like to look at which are not in the Ofcom Review? looking at options which may be possible to achieve Lord Carter of Barnes: As I recall from the Ofcom through secondary legislation? Phase 2 Review, their options largely revolve around Lord Carter of Barnes: Possibly. In lots of areas I what you might describe as existing institutional think you can do some of where we are going to end structures as opposed to whether or not there is an up through secondary legislation. opportunity for new structures and I think it would be odd to look at the question without looking at it Q326 Mr Evans: I am just wondering, do you really with a blank sheet of paper as well as an existing think the TV Licence as we know it today has got sheet of paper. much of a future? Lord Carter of Barnes: I do, actually. Q320 Chairman: What structures would you like to consider? Q327 Mr Evans: Even after the current duration you Lord Carter of Barnes: I think we would like to know can see it existing, solely funding the BBC? whether or not, if the evidence is there (and it would Lord Carter of Barnes: Yes, I can. I really can. appear that the evidence from certainly Ofcom’s analysis is there), there is public support for public Q328 Rosemary McKenna: Whilst we are on that, service broadcasting (as currently described) being how is it going to be possible when people are able provided by other parties other than the BBC. Is it to use solely their computers to watch whatever they automatically the view that the best places for those want on television? Is it possible to continue to are the two or two and a half existing public service collect a licence fee in those circumstances? broadcasts? Lord Carter of Barnes: If I may, I think that is a kind of collection question, or a technical question. An important technical question, but I was slightly Q321 Chairman: But that is part of the option answering Nigel’s question on a more philosophical Ofcom has come forward with, which is the level, which was if you imagine a world post-2012, competitive funding model, is it not? which I think is certainly the timeframe of the Lord Carter of Barnes: That is more of a funding Digital Britain Report. Let us conceptualise it. We model than a new institution, I would say, have had 100% digital switch-over on television. Let Chairman. us also imagine we have also managed to get pretty close to full digital migration on radio. We have got Q322 Chairman: Okay. Speciﬁcally on Channel 4, diversiﬁed mobile services and we have got, let us say there has been some speculation that you are for the sake of this discussion, two megabytes plus as considering various quite radical options for the a universal broadband service for everyone—let us future of Channel 4. Are you looking at say for everyone—and we have got multiple privatisation? distribution of content on multiple devices. Now Processed: 31-03-2009 20:32:15 Page Layout: COENEW [O] PPSysB Job: 419608 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 157

10 December 2008 Lord Carter of Barnes CBE that, I think, would be a great place to get to. If we second provider of public service content. I have could get there, I for one would be very happy. But always believed that and I think the evidence is still I think what that world is going to highlight even there to justify it. The evidence is clearly there for the more vividly than it does today is the market. That will not be paid for by advertising disproportionate value of high-quality content. So revenues any more. That is as clear as the nose on my own view is that actually we will put an ever- your face. We have been playing regulatory increasing importance on the origination of high- withdrawal from ITV plc as a parlour game for too quality content. So I suspect you might not invent it long. So we have to ﬁnd a way of funding an in the way in which you describe, but will there be a alternative model, and you will forgive me if right clear need to fund it? I think there will be, and I think here, right now, I do not step into the top slicing that will be even more evident when there are more discussion because I think that serves to colour and more platforms and more and more ways of unnecessarily evocatively a debate which we need to distributing it. So the demand for high quality come to some dispassionate recommendations on. I content, I think, is going to increase. It slightly goes think there is clear evidence of a need for it and clear back to the opening question about BBC evidence of support for it, and there is clear evidence Worldwide, which if I may say so is a relatively that advertising funding is not going to be the only narrow question about how it is constructed in way of doing it. Are there other options? There are today’s world. If you take a broader question about lots of other options and we need to come to, I think, how do we maximise the returns through all this in the ﬁrst instance within Government and then to content from a global market, that is an enormous Parliament with some recommendations on what opportunity for UK plc, which we should embrace those are, and we need to do it soon because if we do as much as we can. I think there will remain a not, we will be in the world we have just talked about societal willingness to pay for originated high- and we will look back and think, “Why didn’t we quality public service content. I think there will be a sort that out before we got here?” real demand for it. How you technically do it, that is a diVerent question, Rosemary, but do I think there Q330 Chairman: So you are talking about a second? will be a demand for it? I think there will. So you would be content for there to be the BBC and one other? Lord Carter of Barnes: John, if we could get to the Q329 Mr Evans: And no top slicing of the licence fee BBC and one other, robustly funded with a clear to pay for public service broadcasting on other remit which was distinct and independent, had platforms or channels? Should a portion of it go longevity and was designed in a way which could towards public service broadcasting which may operate in a multi-platform world, that would be a appear on channels other than the BBC? triumph. Lord Carter of Barnes: That one I am going to Chairman: That is interesting. These are issues which answer in a roundabout way. DiVerent people have we will undoubtedly return to again, but can I, on diVerent views on this. I think there is strong behalf of the Committee, thank you very much for evidence that there is both support and a case for a coming this afternoon. Processed: 31-03-2009 23:56:36 Page Layout: COENEW [SE] PPSysB Job: 419629 Unit: PAG1

Ev 158 Culture, Media and Sport Committee: Evidence Written evidence

Memorandum submitted by Radio Teleﬁs E´ ireann (RTE) 1. RTE is Ireland’s largest public service broadcaster, a non-proﬁt making organization owned by the Irish people. RTE is Ireland’s cross-media leader, providing comprehensive and cost eVective free-to-air television, radio and on line services, which are of the highest quality and are impartial in accordance with RTE’s statutory obligations. RTE operates two complementary television channels, RTE One and RTE Two. 2. The Broadcast and Acquisitions department operates within the Television IBD (independent business division) of RTE. Among its responsibilities are the acquiring of international programming, the selling of RTE’s programmes abroad and the commercial exploitation of RTE’s programmes on DVD. The Director of Broadcast and Acquisitions is Mr Dermot Horan, who sits on the board of RTE Television.

TheInternationalSalesMarket

3. The International Programme Sales market is dominated by the American “Majors” as they are described. These six companies (Warner Bros, Twentieth Century Fox, Disney, CBS Paramount, NBC Universal and Sony) produce most of the world’s biggest grossing feature films, and most of the US networks’ major drama and comedy series. 4. As such they have a huge influence in the way that programmes are sold and bought. Their leverage of having both feature films and series to sell, as well as extensive feature film and series libraries, means that they now control approximately 70% of the world’s programme sales revenues. 5. Just to give you an example, Disney in a given year may be selling movies of the calibre of Pirates of the Caribbean and The Chronicles of Narnia: the Lion, The Witch and the Wardrobe, as well as series such as Desperate Housewives, Lost and Grey’s Anatomy. At a recent Disney presentation the company boasted that Lost had been sold in over 150 territories. 6. These programmes and feature films are sold at particular television markets such as Mip TV and Mipcom in Cannes, and the LA Screenings in Los Angeles. However, the US majors also have field oYces in all the major territories, such as London, Paris, Madrid, Hong Kong, Sydney and the like, with local sales people with local broadcasting knowledge to exploit their large catalogues. 7. The LA Screenings, where the US Majors show oV their new drama and comedy series is attended by over 1600 buyers, all of whom choose to fly all the way to Los Angeles at their company’s expense, in order to purchase US series. 8. Mip TV and Mipcom have over 9,000 attendees each, and the US majors erect vast lavish stands in which to conduct their business meetings.

TheUKPerspective

9. It is in this environment that British programming must compete in order to make international sales. 10. The question may be asked as to why British programming, or indeed any other programming needs to sell outside its own market. The answer is that broadcasters cannot aVord to pay for series which they commission in their entirety, particularly those of high production value such as drama and natural history. The deficit funding must be made up through both programmes sales and DVD sales. 11. The absence of a significant programme sales business to a broadcaster means inevitably less commissioned drama, natural history, comedy, documentaries and children’s programmes, all of which to succeed must have expensive production values. 12. Equally that programme sales business can only succeed if it has a through-put of regular high quality product. To compete with the US majors a distributor must have a high volume of high quality content, both new programming and a significant library. The distributor must attend all the key sales markets. 13. There are many distributors which specialise in specific genres, and there are countless smaller distributors. To compete at the highest level, the distributor must carry programming across the key television genres—drama, comedy, documentary and children’s. This gives the distributor the leverage to cut significant deals. For example if a distributor has a weak documentary slate of programmes in a given year, but a strong drama and children’s slate, the strong latter two categories will probably see an overall deal through. Processed: 31-03-2009 23:56:36 Page Layout: COENEW [O] PPSysB Job: 419629 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 159

BBC Worldwide

14. BBC Worldwide is the only British distributor which can compete with the US majors. It doesn’t have the feature film slates which they have, but has a really rich variety of programming across all genres. The US majors sell feature films, drama and comedy, and a little reality. BBC Worldwide sells drama, comedy, natural history, documentaries, and children’s programming including pre-school. 15. It has an ongoing roll-out of programming across all of these genres. This has allowed it to do “output” or “volume” deals with other major broadcasters. These output deals generally last three to five years, and involve a broadcaster agreeing to buy a certain volume of programming in given genres for a given price. These deals allow BBC Worldwide to fund the deficits in the BBC broadcast programmes, with a great degree of certainty. It also allows the broadcaster to commission ambitious projects, such as Planet Earth, secure in the knowledge that the programme has been pre-sold in many territories. 16. The significance of BBC Worldwide can be seen in the success of its own screenings market, BBC Showcase. Every February over 550 buyers from around the world fly into the UK and head to Brighton, where the BBC screens all of its new programming in all genres. The fact that these buyers fly in and book hotels at their own expense demonstrates the pulling power that BBC programming has. 17. If BBC Worldwide were a smaller player, with less programming to sell, this market would not take place, and the significant sales that are generated there would disappear. 18. Latterly not just completed programming has been sold by BBC Worldwide. Popular UK series such as Strictly Come Dancing and The OYce have become hits in the US as Dancing with the Stars and The American OYce. Again the BBC name and brand opened doors in the fiercely competitive US market, and allowed these shows to happen. 19. Smaller broadcasters, particularly public broadcasters, around the world rely on programming from the BBC to fill their schedules. Indigenous programming is expensive, and buying is always cheaper. Combining good locally produced programming with the best from the international market place can produce a potent programme schedule. 20. If most of the UK programming was split across a large number of smaller distributors, the eVect would be two-fold. The programme buyers from around the world would have more leverage, would buy less volume and pay less for UK programming. Also the beneficiaries would be the US majors who oVer a one stop shop for volume acquisitions. 21. The consequence for the British Television viewer would be less British programmes on the UK channels, and certainly less high production series such as film drama and natural history. September 2008

Memorandum submitted by Baby Cow Productions Ltd I wanted to give evidence regarding BBC Worldwide’s business dealing with my TV company Baby Cow Productions Ltd. We are based in London and Manchester and make TV comedy programs mostly for the BBC. I set up the company with the comic actor Steve Coogan nine years ago and we were helped by a two year ﬁrst look deal from the BBC that guaranteed a level of production activity. The BBC extended the arrangement for a further two years and since then we have operated independently as a production company working in TV, Film and Radio. Steve and I had not made a program when we set up Baby Cow and it was a leap of faith for the BBC to back us. Similarly, we owe a great deal to BBC Worldwide who backed us from the start allowing us to gain valuable funds and distribution experience on world sales and the DVD market. Even from the ﬁrst program their terms of trade have proved to be fair and equitable. We were in a very vulnerable position when we began and it would have been easy for someone to exploit that but we were lucky enough to work with people at BBCW (and in more recent times with 2Entertain as well on DVD). It is diYcult to start up and to survive as a TV producer, more so in scripted comedy. I do believe that without the BBC backing and BBC worldwide we could not have built a company. We now employ 14 staV and our turnover last year was over ten million pounds. We have won many awards and I believe most people in the industry would consider us an asset to the TV landscape. In recent years we have pioneered ways of exploiting Comedy TV content and have found BBC Worldwide ahead of the competition in exploring the opportunities that the Internet can now oVer. BBC Worldwide have always shown us great respect for the creative integrity of our shows and this becomes more and more important as we move into increasingly diverse global markets. Over the past two years we have been looking at investment into Baby Cow and have been in discussions with several UK and US producers and Distributors. We recently signed a short form agreement with BBC Worldwide for them to acquire 25% of Baby Cow. I wanted the Committee to be aware that we found BBC Processed: 31-03-2009 23:56:36 Page Layout: COENEW [E] PPSysB Job: 419629 Unit: PAG1

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Worldwide to be the best creative option and that we felt very secure in entrusting our futures to a closer relationship with them. The ﬁnancial terms were not the most advantageous on oVer and it is a tribute to BBC Worldwide that we choose to work with them due to the very good relationship we have achieved and the loyalty and goodwill they have inspired. I hope this helps put a bit of background and context to any mention of BBC Worldwide’s involvement with Baby Cow Production and the recently announced investment. October 2008

Memorandum submitted by Signature Publishing Ltd

SignaturePublishingLtd Signature Publishing Ltd is an independent consumer magazine publishing company, which produces a range of consumer magazines and websites. These titles are available throughout the UK, and some are distributed internationally. The company has private shareholders who own and run the business. It is not supported by any larger corporate company or other external equity holder. By definition it is a small publishing company, but it faces the same issues such as dealing with major supermarkets, paper and print costs, marketing and promotion, as does the BBC. Within the UK, smaller publishers collectively produce a range of specialist magazine markets. It is because of this that the UK magazine publishing market oVers possibly the best quality and most diverse range of titles compared with anywhere else in the world. It is certainly ahead of any other European country, and only the USA can vie with it. Any small or larger publisher in the UK is perfectly happy with the concept and reality of open competition in magazine publishing. However, the primary reason for supplying the attached information to the Commons Committee is to highlight the increasing presence of the BBC in the magazine publishing market; and that the BBC’s primary role is being over-extended into commercial activities, which would not exist if it were not for the funding enjoyed by the BBC in its public service capacity. BBC Worldwide has a privileged position in that its activities are inspired and encouraged by the enormous creative and financial position of the BBC. Without the security of the BBC behind it, BBC Worldwide would not be able to propel its products into the market. Furthermore, the real transfer costs of assets, brands, concepts, celebrities are not passed over at real market value between the BBC and its commercial arm. That means that BBC Worldwide is enjoying a subsidised benefit to progress its commercial activities, such benefit not being available to its competitors. It is noteworthy that all magazines state BBC on the cover, not BBC Worldwide, thereby using the primary licence funded brand!

Summary ofMainPoints 1. A major part of the BBC’s commercial activities is its magazine publishing business. It publishes some 40 magazines within the UK, and has a number of links to international operations, some of which seem to stretch beyond even a reasonable understanding of a connection to the BBC’s role eg a tie in with Hello in India. 2. It is now the UK’s 3rd largest consumer magazine publisher out of some 500 consumer magazine publishers. It is also a part owner of Frontline, the UK’s largest distributor of magazines to wholesalers, and then on to retailers. 3. The BBC brand, and all that those three letters convey, has been created and funded from a combination of the licence payers fees and government subsidies. 4. As a result placing the BBC brand on the front cover of a magazine, and adjacent to its title, provides that magazine with a signiﬁcant advantage over other magazines competing in that sector. No other publisher has the luxury of being able to establish credibility, authority, and the instant understanding of an internationally recognisable and familiar brand, all of which brand assets have been provided and paid for by, in eVect, “compulsory revenue sources” from within the BBC’s primary public service operations of TV and Radio. Any independent commercial publisher has to progressively build up their brand and Intellectual Property assets through, ﬁrstly creating, and then re-investing its company income, generally over a long time period. Processed: 31-03-2009 23:56:36 Page Layout: COENEW [O] PPSysB Job: 419629 Unit: PAG1

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The BBC magazines, by contrast, have this brand value asset instantly and freely available to them for no transfer cost. This gives them a distinct unfair competitive advantage over other magazines particularly in these key areas: A. The true publishing costs of producing and marketing a magazine. B. The improved reception and willingness to listen when a BBC magazine brand is presented to the key major retailers of magazines, all of which are large corporate groups, particularly supermarkets. C. It is inevitable that a new title carrying the BBC logo will gain a “preferred” status over a comparable new but unknown title from another publisher, particularly one from a smaller independent company.

5. In the children’s magazine sector, BBC magazines are the largest publisher with more titles and revenue, and represent some 40% of the entire children’s magazine market. In some retail areas and certain ranges of shops belonging to supermarket chains, the BBC’s market position can increase to over 50% because of the supermarkets range listings policy. This aVects the ability of smaller publishers to ﬁnd suYcient opportunities to be stocked on supermarket shelves, as the range is occupied by large number of BBC titles.

It is not only the smaller publishers, who are competitively aVected. A recent example has been the launch of the children’s football magazine, Match of the Day (MOTD).

A long established title, Shoot, from a major publisher was eVectively closed as a result of the BBC’s launch into this sector of magazines.

Again it is a clear example of a successful TV programme being leveraged by a BBC magazine for no cost, compared to the brand awareness cost that would make it impossible for any competing publisher to match.

The increasing presence and market size of BBC’s children’s magazines is now restricting the range of choice available to the consumer, and it undoubtedly has an unfair commercial advantage which distorts the market.

6. The BBC, through its worldwide involvement in TV, can ensure that it has the top range of current and popular TV characters and cartoons. These characters are then “given” to the BBC magazines without the real cost of acquiring them, or the real licensing cost for them being transferred over to the magazines. BBC CBeebies has a dominant position in children’s TV, and therefore, can provide its magazines with an immense selection of popular characters.

7. This benefit is also reflected in the cover price of magazines such as BBC Toybox, which managed to be kept at 99p until 2008, despite being packed with major branded characters. A cover price that other publishers would find diYcult to match for content cost.

8. It is clear that BBC magazines enjoy a signiﬁcant revenue, cost and marketing advantage over their independently funded competitors. This is demonstrated by the fact that many of its titles are the market leaders in their subject area, or collectively best sellers.

9. The BBC may attempt to claim in its defence that its commercial arm returns proﬁt to the BBC to beneﬁt the licence payer. However, BBC Worldwide appears to be incentivising celebrities to share in the proceeds of its commercial arm. These are the same celebrities whose persona and public awareness was created via BBC TV and who were already paid substantial sums for that work via the licence payer.

Now they are gaining extra income for side deals with BBC Worldwide eg Jeremy Clarkson allegedly being paid over £300,000 for commercial involvement in Top Gear magazine. This level of money, if such proﬁt is there, should be returned to the BBC not giving extra lining to the pockets of a celebrity, who has already been paid for his work on that brand.

10. The purchase of Lonely Planet for some £80 million on a publication turning over £10 million raises substantial question-marks. Not only is the ﬁnancial judgement of such an acquisition there, but also why the need to buy it, and then it is inevitable that a BBC Lonely Planet brand magazine will follow in order to help justify the acquisition, and once again distort the market competition.

11. The BBC’s commercial activities are based on a far lower risk assessment than other commercial publishers. The BBC has a very high level of funding certainty and predictability in total income for a number of years ahead. This is not the case for independent publishers, and the diVerence between the BBC and its “real” commercial competitors has never been as great as now, with the huge economic uncertainty raging. BBC executives do not have to spend every day considering literally tomorrow’s funding—truly commercial operators have to. Thus BBC Worldwide inevitably senses a high degree of safety net within the overall protection of its parent company. Processed: 31-03-2009 23:56:36 Page Layout: COENEW [E] PPSysB Job: 419629 Unit: PAG1

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12. Entrepreneurs have to accept risk, but BBC Worldwide is not an entrepreneurial business. It is a parasite business feeding oV the comparative fat of the BBC. For all the above reasons, that is why BBC Worldwide’s activities need to be curtailed and controlled to allow real and fair competition to exist, not licence payer subsidised competition available to only one organisation. October 2008

Memorandum submitted by Big Talk Productions

Introduction Big Talk was founded in 1995 by the multi-award winning producer Nira Park. It has established itself as one of the UK’s leading comedy producers, with an impeccable track record of developing breakthrough talent, including Simon Pegg, Nick Frost and Edgar Wright. Big Talk produced the seminal award winning television series Spaced, out of which grew the hit ﬁlms Shaun of the Dead and Hot Fuzz. Matthew Justice (Hallam Foe, The Russian Dolls, Blade) joined Big Talk in 2007, to build on the phenomenal track record of the company. Big Talk has a burgeoning slate of projects in production and development, across many genres. Kenton Allen, the award winning comedy producer has recently also joined the business, to concentrate on developing its television activities alongside Nira Park and Matthew Justice. Our ﬁlm and television titles have been exported throughout the world and have earned in excess of £200 million in revenues, across the full panoply of broadcast, exhibition and distribution platforms, and this success has in turn enabled us to develop our company into a leading home for British writing and performing comedy talent.

FactualInformation In August 2008 BBC Worldwide made a strategic investment in Big Talk Productions Ltd, the television production entity under the Big Talk banner. The investment includes a distribution deal for Big Talk Productions television output throughout the World, and support for a business plan to enable the company to grow and expand into new genres, including high quality British comedy drama and export this output into existing and new marketplaces.

Recommendations toConsider Big Talk has enjoyed considerable domestic and international success with the projects it produces. It has achieved this through a careful development and nurturing of writing, acting and directing talent. All of its productions have been created, produced and post produced by British talent working in the UK. We see BBC Worldwide as the pre-eminent distributor of Television content outside of the US Studios. Prior to concluding our arrangements with BBC Worldwide, we were approached by a number of other US and foreign owned suitors. In our view, BBC Worldwide are the pre-eminent UK distributor for taking UK programmes and UK formats into the global marketplace. Given that Big Talk wants to maintain its strong UK identity, getting into business with BBC Worldwide seemed like the most natural progression for its business development. We have assembled an extremely strong creative and production team here at Big Talk, including Nira Park, Kenton Allen, Luke Alkin (previously Head of Drama commissioning at Channel 4), Chloe Moss (producer of seminal teen drama Skins), Simon Curtis (Cranford) and Robert Popper (Peep Show). Together with the skill and reach of BBC Worldwide we anticipate creating, producing and distributing some of the UK’s most exciting and innovative content.

Conclusion Our recommendation would be that BBC Worldwide are continued to be allowed to make small strategic investments in, and distribution deals with independent production companies, to promote the long term health of the UK independent production sector, and thus help prevent the consolidation of this dynamic and wonderfully creative community into a small number of foreign owned entities. October 2008 Processed: 31-03-2009 23:56:36 Page Layout: COENEW [O] PPSysB Job: 419629 Unit: PAG1

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Memorandum submitted by Equity

Introduction 1. Equity is the trade union representing 37,000 actors, performers and other creative professionals working in the UK. Our members work in a range of media and the creative industries including visual broadcasts, sound recordings and film—principally in drama, comedy or entertainment productions. 2. The BBC is the most significant employer of Equity members and it plays an integral role in both the audio and audio-visual industries, as a producer and commissioner of original UK programming, with the freedom to lead the other broadcasters through its standards, innovation and diversity. It also serves an important role in supporting the creative industries, as a key provider of education and training. However, this is only possible because it is supported by unique sources of funding, including the licence fee and its commercial operations. 3. Consequently, Equity believes that successful commercial operations, which maximise the value of UK programming and are able to provide a significant contribution to the BBC’s core activities are in the interests of audiences, citizens, consumers and the wider creative industries.

The benefits and opportunities oVered by the BBC undertaking a range of commercial activities in the UK and abroad 4. There are significant benefits for a range of stakeholders in the BBC operating successful commercial activities, which were acknowledged by the Government as part of the BBC Charter Review process in 2006. in particular, the Government accepted that the BBC should continue to relieve pressure on the licence fee by generating commercial income. However, these operations must fit with the BBC’s public purposes, be commercially eYcient, support BBC brand protection and avoid market distortion. 5. The subsequent improvements in the governance structure of the main commercial operation, BBC Worldwide (BBCW), and its success in increasing its profits to £118 million in 2007–08 (and returning over £150 million back to the BBC by way of dividends and programme investment), must therefore be seen in the context of an organisation delivering on this remit. 6. Moreover, the availability of this source of funding in addition to the licence fee plays an important role in securing the BBC’s ability to continue as the cornerstone of public service broadcasting, enabling it to protect its core funding and deliver on its own obligations under the Royal Charter. 7. The success of BBCW has also enabled it to deliver real value for audiences. Not only does it generate £9 a year oV each licence fee, but its improvements in profitability over the past four years have also led to £921 million being generated and invested back into the UK’s creative economy, both inside and outside the BBC. 8. This means that programmes can be better resourced with higher production values and feature the best in UK talent. This helps the BBC meet the ever increasing demands of audiences who are increasingly able to access content when they want, where they want and on a device of their choice. 9. It is also important to stress the role of BBCW in supporting the international activities of other broadcasters and producers. A significant proportion of the current BBCW catalogue is non-BBC intellectual property, which may well have been commissioned originally for other major broadcasters such as ITV or Channel 4. This demonstrates the benefits of BBCW being able to act in the interests of UK plc and take the best of British programming to a global market. Consequently the exports generated by BBCW account for around 30% of the £400 million of UK exports of finished programmes in 2006. 10. From Equity’s point of view the role that BBCW plays in enabling international television and DVD sales not only raises the profile of British programmes and British talent, but also provides significant financial benefits for actors and performers. As a result, in the last two financial years Equity members received payments worth £22 million (2007) and £24 million (2008). The nature of Equity’s collective agreements with the BBC and other programme makers also mean that the benefit of these sales are shared proportionately amongst the cast, so all featured performers are able to share in the success of a production. 11. Equity does not believe that any other organisation could be better placed or more experienced in maximising the opportunities presented by the sale of UK programmes featuring its members. In the past few years Equity members have seen particularly significant returns from their work on productions such as Jekyll, Mistresses, Primeval, Doctor Who, Torchwood, Cranford, Sense and Sensibility and Oliver Twist.

The potential risks to the BBC, licence fee payers and other stakeholders

12. Equity believes that there are inherent diYculties faced by the BBC in engaging in commercial activities that mean that it is often in a no-win situation. In particular, if BBCW is tentative in its approach and does not maximise the value of its assets successfully it will be criticised for being ineYcient and failing in its duties. Conversely, if it is successful in expanding its sales and activities and in growing its proﬁts, it Processed: 31-03-2009 23:56:36 Page Layout: COENEW [E] PPSysB Job: 419629 Unit: PAG1

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will be condemned by its competitors as an unwelcome presence in the market place. As noted above this ignores the fact that a successful BBCW is in fact in the interests of audiences, the creative economy and in line with the remit set out by successive governments. 13. Nevertheless the success of BBCW presents particular risks and challenges at a time when broadcasting is changing so quickly and fundamentally. The expansion of digital television and new technology has led to audiences fragmenting and reduced advertising revenue. Consequently other public service broadcasters, regulators and politicians charged with finding sources of additional funding are understandably examining all of the options available. Most recently this has included the suggestion of transferring the ownership or profits of BBCW to Channel 4, as outlined in the recent Ofcom review of public service broadcasting. 14. Equity believes that such a measure presents a significant risk for the BBC and licence fee payers, as well as the range of creative organisations and individuals who depend on its success. Quite aside from the significant legal and technical diYculties of arranging a transfer of ownership, Equity would be concerned that such a proposal would undermine the important contribution BBCW makes in funding original programming by the BBC. 15. It is infinitely preferable for BBCW to continue to support the activities of the BBC, licence fee payers and the creative industries by operating in partnership with a range of broadcasters and producers, whilst being subject to the scrutiny and governance of the BBC Trust.

The future of BBC Worldwide and other BBC commercial subsidiaries

16. As noted above, the future of BBCW has been the subject of a signiﬁcant amount of speculation. Most recently this has led to the Ofcom proposals, which are currently under consideration as part of phase two of its consultation on the future of public service broadcasting. 17. However, Equity would argue that the future of BBCW and other commercial operations should not be dominated by further debate over their organisational structure and governance arrangements. These considerations are time-consuming and often fruitless, unless they are able to deliver real value to the operations of the business. 18. At this challenging time for the future of broadcasting Equity would instead emphasise the need to make progress on BBCW ensuring that it can continue to deliver real value to the BBC, licence fee payer and creators. For this reason it must not be diverted by arguments over ownership, but be able to concentrate on enabling UK content to be showcased as widely as possible, using new technology and platforms. 19. As a representative organisation for key rights holders Equity is a crucial partner in making high quality content available legally online—and capable of ensuring payment to these rights holders. This has been achieved successfully in a range of new areas through BBCW in recent partnerships with YouTube, MySpace and iTunes. 20. While new business models are still in relatively early stages of development, it is clear that these will eventually become replacement technologies for the viewing of audiovisual material. Video-on-demand and catch-up television services are currently an addition to linear broadcasts, but are increasingly likely to become the alternative to these broadcasts for many viewers. This means that successful partnerships and ﬂexible approaches to licensing and payment are even more important. 21. The way in which Equity has been able to exercise exclusive rights for the secondary use of performers work is a good example of this approach. This is currently enabling a genuine choice of new media for consumers, while also providing payments to performers. These payments are then distributed by British Equity Collecting Society (BECS), acting as the appointed distribution agent for Equity.

How the money returned to the BBC by its commercial operations is invested

22. As noted above, the money returned to the BBC by its commercial operations is a vital addition to licence fee income, particularly at a time when the BBC is expected to engage in a broader range of activities under its Royal Charter and operating under the constraints of a lower than expected licence fee settlement. 23. Against this background, the fact that these activities are able to depress the cost of a licence fee by £9 is a helpful and impressive contribution. More impressive still is the signiﬁcant investment that has been made directly into BBC programming due to success of BBCW. 24. It should also be noted that the money returned from the BBC’s commercial operations does not go to the BBC alone, with large numbers of the new television programmes sold by BBCW being from independent producers. Processed: 31-03-2009 23:56:37 Page Layout: COENEW [O] PPSysB Job: 419629 Unit: PAG1

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Conclusion 25. Equity is pleased to have the opportunity to contribute this inquiry and hopes that the Committee will consider the points made—particularly in relation to the contribution of the BBC’s commercial activities to programme making; meeting its remit; promoting and rewarding UK talent; the risk of transferring ownership; focussing on future activities; and the importance of this additional investment. 26. The BBC’s public service broadcasting activities provide the bulk of employment for our members. However, commercial ventures such as BBCW are vital, both for the added ﬁnancial security that it gives the BBC and for its investment in the creative economy in its own right. It is essential that BBCW is allowed to be as successful a business as possible so that the maximum amount of proﬁt goes back into quality BBC programme making and investment in talent. 27. We would welcome the opportunity to provide oral evidence to the Select Committee on this issue. As the representative organisation of actors, singers, comedians, and other creative contributors who feature in many of the productions sold and distributed by BBCW, we believe that we could provide a valuable perspective on the inquiry. October 2008

Memorandum submitted by the Musicians’ Union 1. The Musicians’ Union (MU) welcomes the opportunity to contribute to this inquiry. 2. The MU has over 30,000 members who work as full or part-time professional musicians and our interest in this inquiry comes as a result of our desire to protect employment opportunities and income for professional musicians in the UK. 3. The BBC is the single biggest employer of MU members in the UK and is in the unique position of supporting ﬁve full-time orchestras. The BBC orchestras alone employ 382 contract musicians and many hundreds more on a free-lance basis. Virtually all MU members will work for the BBC at one stage of their career. Any reduction in the scope or funding of the BBC would therefore be likely to impact negatively on the employment of musicians and on their income. The BBC’s commercial activities provide additional income for musicians. 4. Our response to this consultation touches on a number of the questions posed in the document, but focuses on the areas that may directly aVect the professional activities of our members.

The benefits and opportunities oVered by the BBC undertaking a range of commercial activities in the UK and abroad 5. The BBC’s commercial subsidiaries provide significant income for musical creators. In 2007–08 BBC Worldwide paid a total of £2.3 million to MU members, up from £1.7 million in 2006–07 and £1.5 million in 2005–06. BBC Worldwide has also helped to raise the profile of some of the BBC orchestras, for example the BBC Concert Orchestra, which was featured on the highly successful Blue Planet documentary series. 6. BBC Worldwide also provides additional income for music writers. A programme format which is sold abroad but retains the same signature tune means that the composer receives royalty payments from the overseas collecting societies. Examples of this include Dancing with the Stars and Top Gear. 7. Aside from the direct financial benefits to musicians, the BBC’s commercial activities also help to secure the BBC’s position. Since the BBC is such a major employer of musicians, it is vital to us that it should be financially stable. The BBC’s commercial activities, therefore, are important because they provide an additional source of funding to the licence fee. It is also important to note that the profit that the BBC receives from BBC Worldwide is far greater than the profit that the BBC could expect to receive if it were to licence to third parties, who would take a much bigger cut. 8. These additional funds would help to make the BBC less vulnerable to a poor licence fee settlement, or a settlement that has been overtaken by economic developments. 9. This safety net is likely to be of real benefit to MU members employed by the BBC because it will protect BBC core funding, which provides so many opportunities for musicians. We believe that the BBC is and should remain the cornerstone of public service broadcasting and that its core funding should be protected in order for it to be able to continue to support original programme making. 10. It is also important to stress that if BBC Worldwide ever fell into financial diYculties, core BBC funding provided by the licence fee would not be aVected, since BBC Worldwide is a stand alone company and could not be supported with licence fee payers’ money. 11. Although it would be impossible for BBC Worldwide to be bailed out by core BBC money, the profits that it makes commercially are of direct benefit to the BBC. The BBC can decide how it wishes to spend this money. Essentially this means that BBC Worldwide’s commercial activities allow for greater artistic ambition and higher budgets for programme making. Processed: 31-03-2009 23:56:37 Page Layout: COENEW [E] PPSysB Job: 419629 Unit: PAG1

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12. Not only does BBC Worldwide help to fund the making of programmes that the BBC on its own may not be able to finance, its existence might also give the BBC the confidence to be more ambitious in its programming. For example, if the BBC is confident that it will recoup a substantial sum from selling a flagship series abroad or from DVD sales etc, it may well decide that it can aVord to increase the budget for that series. This may result in more work for MU members if, for example, the result is to employ a full orchestra rather than a few musicians for the soundtrack. 13. Since the BBC is such a major commissioner of the arts in the UK, its role would be undermined if it had any reduction in its current level of commercial activity. The BBC is also by far the main primary commissioner of new music in the UK and has a strong tradition of investing in talent. It is vital that it retains the funds to be able to do so, and we believe that its commercial activities, particularly BBC Worldwide, help to secure these funds. 14. Although commercial subsidiaries such as BBC Worldwide are just one of the ways in which the BBC can be supported financially,we believe that they are vital. As well as complementing the BBC’s core income, the existence of BBC Worldwide is in itself crucial to performing arts in the UK, both financially and in terms of exposure.

The potential risks to the BBC, licence fee payers and other stakeholders

15. It is possible that the BBC’s commercial activities could be seen to weaken the link between the licence fee payer, the licence fee and the BBC. Because of the unique way in which it is funded, the BBC’s identity is intrinsically linked to the licence fee payer and this makes it an important and respected UK institution. Its commercial activities could therefore, if uncontrolled, damage the BBC’s case for its unique funding, through the licence fee, for public service broadcasting. 16. Should the BBC’s commercial activities expand, it is likely to exacerbate resentment amongst other producers and broadcasters, such as ITV and Channel 4, who do not beneﬁt from the secure funding that the licence fee settlement provides for the BBC. They may well argue that if the BBC is making suYcient money from its commercial ventures then it should not retain sole use of the licence fee funds. 17. The MU believes, however, that the potential risk to the BBC, licence fee payers and other stakeholders is signiﬁcantly reduced by the fact that BBC Worldwide is strongly regulated by the BBC Trust. This regulation ensures that any activity or expansion remains under control.

The future of BBC worldwide and other BBC commercial subsidiaries

18. We support BBC Worldwide in its current form and encourage its commercial activities with the caveat that at all times composers, performers and other freelance contributors should be correctly remunerated and their rights respected through fair and transparent contractual activities. 19. As long as it is conducted in a way which rewards the artists who have contributed, we would also support the expansion of BBC Worldwide, as this can only increase the worldwide audience for quality BBC programming. The BBC should, however, continue to export more finished British programmes and series, rather than selling programme formats and associated expertise, for example exporting the format for series such as Strictly Come Dancing and Top Gear. 20. UK-originated output is an important source of employment and income for MU members and other performers, and exporting the finished product is likely to bring them additional income. Exporting the programme format, on the other hand, will not. 21. The MU is concerned to note a move away from royalty payments for sales of BBC programmes worldwide towards a system of buyouts oVered by the BBC. Whilst we appreciate that this reduces the BBC’s administrative burden, it can have a potentially negative impact on musicians who have been engaged on BBC productions and agreed to “share the risk” by accepting royalties for sales and further uses. If a programme does particularly well commercially and a buyout has taken place, the performers are unlikely to receive as much income as they would have done through royalty payments. 22. We do, however, accept that the sale of certain formats, for example Strictly Come Dancing which has been licensed to 40 diVerent countries, brings in a significant amount of income for the BBC which can then be diverted back into funding quality programming. The MU would merely urge BBC Worldwide to prioritise the selling of finished British programmes and series wherever possible. 23. In addition to ensuring that the future of its commercial subsidiaries involves getting the best deal possible for the performers involved in its programme making, we would like the BBC to ensure that culture and the arts are at the centre of its commercial ventures. Processed: 31-03-2009 23:56:37 Page Layout: COENEW [O] PPSysB Job: 419629 Unit: PAG1

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How the money returned to the BBC by its commercial operations is invested 24. The MU believes that the money returned to the BBC by its commercial operations should be invested in bolder programming budgets, which engage more performers. It should be used to generate high quality content, initially for the UK licence fee payer, but also potentially for a worldwide audience. 25. We therefore hope that the money will go towards commissioning new series and programmes for BBC channels that BBC Worldwide can then take to the world. In theory, the use of this money for commissioning will reduce the burden on core licence fee funded BBC ﬁnance, since less of this funding will be required to create these new programmes. This would leave more of the licence fee payers’ money available to maintain and expand the BBC’s public service broadcasting activity.

Conclusion 26. It is the protection of the BBC’s licence fee income which is the main concern of the MU, since it is the BBC’s public service broadcasting activities which provide the bulk of employment for our members. 27. We also believe, however, that commercial ventures such as BBC Worldwide are vital, both for the added ﬁnancial security that it gives the BBC and for its investment in the creative economy in its own right. It is essential that BBC Worldwide is allowed to be as successful a business as possible so that the maximum amount of proﬁt goes back into quality BBC programme making and investment in talent. 28. The MU would be happy to give oral evidence to the committee if required. October 2008

Memorandum submitted by the Writers’ Guild of Great Britain 1. The Writers’ Guild of Great Britain is a trade union with 2,200 members, representing professional writers working in broadcasting, theatre, ﬁlm, publishing, video games and new media. We negotiate collective minimum terms agreements with the BBC and others which set down the minimum fees and other payments that are made to the writers of television and radio drama and comedy scripts. We estimate that about half our members are either currently working in broadcasting or have previously done so. All these members receive royalty payments when the shows they have written or created are commercially exploited by BBC Worldwide. 2. We note that the Committee has announced an inquiry into the commercial operations of the BBC, and as this has a direct impact on the livelihoods of our members, we should like to submit some comments. We shall arrange these under the headings supplied by the Committee.

(a) The benefits and opportunities oVered by the BBC undertaking a range of commercial activities in the UK and abroad Professional writers benefit from the BBC commercially exploiting television programmes in the UK and abroad. Contracts for writers on drama and comedy shows generally include an initial fee, which covers the first broadcast(s) of the programme, plus the right to further payments if and when the programme is repeated by the BBC; shown on another UK channel; shown on an overseas channel; retailed as a DVD or download. Therefore the greater the exploitation the BBC is able to make, the higher the payments to a writer are likely to be. Moreover the payment structure means that the writer of a popular show will receive significant extra payment, while the writer of a less popular show is likely to receive little more than the initial fee—which introduces a strong element of market fairness. Payments by BBC Worldwide under Writers’ Guild agreements were over £8 million in each of the past two complete financial years. These payments include international TV sales and DVD sales. Some of the biggest sellers were Jekyll, Mistresses, Primeval, Doctor Who, Torchwood, Gavin and Stacey, Robin Hood, Cranford, Sense and Sensibility and Oliver Twist—all with scripts written by Writers’ Guild members. It is worth mentioning that BBC Worldwide does not only distribute programmes made for the BBC—it also handles shows made by independent producers for other broadcasters. The success of BBC Worldwide in selling programmes to other countries not only generates considerable income to this country, but also ensures that UK cultural material is widely available around the world, enhancing the reputation of the UK. The scale of this commercial activity is demonstrated by BBC Worldwide’s annual sales convention, held in Brighton every February,which is attended by over 500 buyers and executives from television broadcasters and distributors all over the world. BBC Worldwide also distributes radio programmes by means of overseas sales and the lively audio books market. Processed: 31-03-2009 23:56:37 Page Layout: COENEW [E] PPSysB Job: 419629 Unit: PAG1

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From the writer’s point of view, this exercise not only brings ﬁnancial rewards but also provides a showcase eVect whereby overseas television producers recognise talent and commission work from UK writers for their own shows—this eVect is particularly noticeable in the United States.

(b) The potential risks to the BBC, licence fee payers and other stakeholders There is a risk in the aggressive commercial exploitation of television shows, which is the risk of over- exposure. If a programme is repeated too often the public may grow tired of it and this could damage the prospects of future DVD or download sales, for example, and could also reduce the chances of further programmes of the same type being commissioned. This could be damaging to a writer’s income and future prospects. In our experience the BBC and BBC Worldwide are aware of this risk and in the main are careful to manage the exposure of individual programmes and series.

(c) The extent to which the BBC’s commercial activities meet the criteria required of them We support the principles governing all BBC commercial services, which are that they must: Fit the BBC’s Public Purposes; Exhibit commercial eYciency; Not jeopardise the good reputation of the BBC or the value of the BBC brand; Comply with fair trading guidelines and avoid distorting the market. We believe that these requirements, and those of the BBC Trust’s Commercial Services Protocol, are adhered to quite strictly. In general terms BBC Worldwide meets the basic requirement put on it, which is that it contributes its annual proﬁts of about £118 million back to the BBC for investment in new programmes. This is money that is not available from the BBC Licence Fee or any other source. This is of value to the UK viewer and to our members alike, as it enables the production of new programmes that otherwise would not be made. Without it there would be less UK original material on BBC screens, and less work for professional writers.

(d) The appropriateness and eVectiveness of the governance framework for the BBC’s commercial activities It seems to us that the governance framework for the BBC’s commercial activities is unusually detailed and strict. That is not to say that it is inappropriate, as it is important that the BBC—funded by the legally imposed licence fee—must be fully accountable to the public, and it is also important that the BBC should not overpower and thus distort the rest of the UK broadcasting and new media market. In this context it is notable that the BBC has, for the past few years, been under constant scrutiny. The revision of the Royal Charter and the renewal of the licence fee settlement this time around were carried out over an extended period and with great thoroughness. All this was in the shadow of the ordeal; of the Hutton report. Currently BBC Worldwide’s plans are also under close scrutiny by the Competition Commission and the OYce of Fair Trading, at the same time as this Committee inquiry. It is not unreasonable to suggest that such constant scrutiny,calling on considerable time and resources, is unique to the BBC and might even tend towards the excessive. The governance arrangements of BBC Worldwide were rewritten within the past two years, and the organisation is now ﬁrmly watched by both the BBC Executive and BBC Trust. We think these new arrangements need at least ﬁve years to bed in and operate consistently before a meaningful review can take place or further reforms are proposed.

(e) The future of BBC Worldwide and other BBC commercial subsidiaries Futurology has suddenly grown much more diYcult in the current economic circumstances. Perhaps if there is a deep and long recession it may be reﬂected in an upsurge in cheap mass entertainment, much as people ﬂocked to the cinemas in the 1930s. This could lead to more popularity for free-to-air services (not just the BBC) and slower growth for paid-for product such as supplied by BBC Worldwide in the UK. However, internationally the demand for programming could improve the opportunities for BBC Worldwide to export UK productions. We do not have any comments to oVer on other BBC commercial subsidiaries.

(f) How the money returned to the BBC by its commercial operations is invested As stated above we understand that the proﬁts of BBC Worldwide are returned to the BBC to fund the development and production of new programmes that would otherwise not be made. We welcome this and would not wish to see these funds diverted to any other recipient or purpose. We do not have any comments to oVer on other BBC commercial operations. Processed: 31-03-2009 23:56:37 Page Layout: COENEW [O] PPSysB Job: 419629 Unit: PAG1

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(g) Other areas of interest There is worldwide concern at the widespread illegal downloading and ﬁle sharing by individuals and mass piracy of TV programmes, ﬁlms, music, video games, etc. BBC Worldwide has entered agreements with YouTube, MySpace and iTunes to make UK content legally available as widely as possible. While this is far from a complete solution to these problems, it is a strategy that reduces the incentive for ordinary people to obtain material by illegal means and maximises the chances of income being generated for the BBC—and for individual writers—by the retailing of programmes and extracts or their support through advertising. 3. The Writers’ Guild of Great Britain hopes these comments will be useful to the Committee in its inquiry.We would be ready to attend and give oral evidence should you wish us to. We thank you for inviting our comments and for taking notice of them. October 2008

Memorandum submitted by PPL By way of background, PPL is a music industry organisation collecting and distributing airplay and public performance royalties in the UK on behalf of over 3,400 record companies and 38,000 performers and we also represent overseas rights holders through 42 bilateral agreements. We are a not-for-profit company that collects domestic and global broadcast, new media and public performance income which is then distributed and paid to record company and performer members. During the public debate for the new Royal Charter for the BBC, we played an active role because the BBC is such a significant player in the creative industries. It is impossible to imagine BBC Radio and TV without music. Music makes up around 60% of radio programming and underscores most TV output. Equally, these channels are eVectively major distribution outlets for performers and record companies. This is particularly apparent overseas, where BBC is arguably Britain’s most successful brand globally. This brand strength, combined with the quantity and quality of output enables BBC Worldwide to compete eVectively with other global media players. Music is an integral part of BBC Worldwide’s oVering which creates a shared interest in exploiting global markets, using BBC Worldwide’s concentrated sales point and accounting facilities. The use of sound recordings on the BBC’s radio and television services (and those of its commercial competitors) is licensed by PPL. The overseas exploitation of sound recordings in BBC programmes is also licensed by PPL and we therefore enjoy a commercial relationship with BBC Worldwide, one which benefits the performers and record companies whose music is broadcast abroad. But, overseas sales do not just benefit rights-holders—they also have an important role in generating a return for licence-fee payers more widely. New technologies increase the scope for mutual benefits even further. As distribution moves increasingly towards digital output the commercial possibilities for UK musical talent grow almost exponentially. Whereas prior to the development of the digital format release of archived material was limited only to output that could sell in suYcient quantities to cover the costs of physical distribution and leave a profit margin, online output oVers greater flexibility to release more music even more widely. Music services that operate through the Internet currently oVer up to 3 million tracks, compared to just tens of thousands in most High Street record stores. Working with the BBC to ensure that content and format work together in the context of new digital technology is a key interest for the music industry in ensuring that artists benefit from this export capacity. It is for these reasons that there is a clear interest for the UK in the ongoing success of BBC Worldwide, not just for musicians and the creative industries, but for licence-fee payers more generally. Finally, we note that BBC Worldwide does not have the same market impact issues as the BBC’s free services domestically. Since Worldwide is operating commercially, it is already on a level playing field with its commercial competitors (provided of course there is commercial transparency between BBC and BBC Worldwide) and, as a result, that continued freedom to operate and innovate commercially should be aVorded to BBC Worldwide. October 2008

Memorandum submitted by the MCPS-PRS Alliance

Introduction 1. The MCPS-PRS Alliance represents 60,000 composers, songwriter and music publisher members as well as the music of the hundreds of thousands of composers, songwriters and publishers who are members of the equivalent royalty collecting societies across the world by virtue of some 121 reciprocal agreements with those societies. This enables the Alliance to oVer its licensees access to the world’s entire repertoire of music. Processed: 31-03-2009 23:56:37 Page Layout: COENEW [E] PPSysB Job: 419629 Unit: PAG1

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2. MCPS is responsible for licensing the recording of music onto audio and audiovisual products, PRS licenses the public performance and broadcast of music and both license the online use of the music. The MCPS-PRS Alliance is an operational alliance between the two organisations and this has enabled them to issue joint licences wherever it is appropriate, including to the BBC. The royalties they collect from such uses are distributed to the copyright owners of the music actually used, directly in the case of their members and via the relevant societies overseas in the case of non-members. 3. The BBC is a major user of music in the UK, reporting some 800,000 uses of music over its television, radio, internet and mobile services per month. This scale of music use makes the BBC the single largest licensing customer of the Alliance. It is rare that a broadcast programme does not make use of music in some way and indeed a programme without music would seem incomplete. Accordingly the demand for music creates a mutual dependency between the BBC on the one hand and the Alliance on behalf of its members on the other hand. 4. In addition to including music in its programming the BBC exploits the economic and cultural potential of that programming, whether through secondary sales abroad or by turning it into other products, some of which are exported. This additional activity is, for the most part, undertaken by BBC Worldwide, putting the BBC as a whole in a unique position and providing essential added value for the Alliance and its members. 5. The Alliance therefore welcomes the opportunity to respond to the Culture Media, and Sport Committee’s inquiry into the commercial operations of the BBC. This paper will confine itself to the aspect of the inquiry on which the Alliance is most qualified to give evidence, namely the benefits and opportunities oVered to its members by the BBC in its undertaking of a wide range of commercial activities in the UK and abroad.

The BBC asPublicServiceBroadcaster 6. The BBC’s public service broadcasting licence is worth some £50 million a year to MCPS and PRS together, accounting for 10% of the royalty income the Alliance collects for distribution each year. The scope and scale of the BBC’s PSB programming provides an extraordinarily important platform for the entire breadth of the repertoire of music represented by the Alliance. The music usages reported by the BBC show that it draws on all genres, on niche as well as commercial music, and that it breaks new music as well as uses existing music, making it an essential outlet for some genres of music which would otherwise only be able to reach very limited audiences. 7. The BBC is also a major commissioner of music for a broad range of uses, ranging from theme music for new programmes to serious contemporary music, so providing important employment to composers and songwriters and encouraging the development of the UK’s cultural life. The BBC’s orchestras play a vital role in supporting composers of newly commissioned music by performing it to the highest standards in live concerts and for inclusion in programmes that are broadcast, so ensuring that the composer’s work enjoys the best possible exposure to audiences. Its role in commissioning, performing and broadcasting serious contemporary music has positioned the BBC at the heart of the British music scene and has created a dependence on the BBC for a culturally important genre of music but one which does not generally have intrinsic commercial value. Whilst the commissioning aspect of the BBC’s role falls outside the scope of the Alliance’s licence to the BBC (with the exception of when new music is broadcast) it has a direct and very important bearing on the lives of the songwriter and composer members of the Alliance, providing them with an alternative and supplementary source of income. 8. The Proms and other live concerts and festivals provide a very important income stream to Alliance members by virtue of a separate performing right licence from PRS.

BBC Worldwide’sAddedValue 9. BBCWW generates valuable additional income for the Alliance and its members through its commercial activities, both as an extension of its public service oVerings and through originating new programming and other commercial activities which make use of music. The value to MCPS of additional licences from these activities is currently worth in the region of £10 million per annum. To the extent that these activities consist of broadcasting abroad, further revenue ﬂows back to PRS from overseas societies.

AdditionalValueFlowing fromPublicServiceBroadcasting 10. BBCWW plays an increasingly important role in maximising both the economic and cultural value of the BBC’s public service broadcasting output which in turn provides a commercial beneﬁt to the Alliance and its members over and above the public service broadcast licence and any commissioning fees to composers, on account of the use of music in the original output. This takes a number of forms including: Processed: 31-03-2009 23:56:37 Page Layout: COENEW [O] PPSysB Job: 419629 Unit: PAG1

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10.1 The sale of programmes to overseas broadcaster: BBCWW acquires a secondary use licence for this from the Alliance and the overseas broadcast of those programmes generates performing right income in the country of broadcast which is then remitted to PRS by the equivalent collecting society in the country of broadcast for onward distribution to the member owning the music in question. 10.2 The manufacture and sale of CDs and DVDs: BBCWW acquires a licence from MCPS. 10.3 The sale of TV programmes to internet services: this entails another secondary use licence from the Alliance. 11. BBCWW originates or invests in channels, many of which beneﬁt from a secondary use of its own public service broadcast programming, including UKTV in the UK and BBC World News and BBC Prime abroad. BBCWW acquires a separate licence from the Alliance for the music on such channels. Alliance members also earn from the broadcast of those channels abroad, the income from which ﬂows back to PRS from the overseas societies. 12. BBCWW sometimes co-commissions programmes being produced for public service broadcasting by the BBC where they are likely to have commercial potential, whether they are being produced by the BBC or other producers.

AdditionalValueFlowing from BBCWW’sCommercialActivities 13. BBCWW has used the resources and opportunities available to it from the BBC and more widely to initiate some innovative projects involving music which few others would be likely to be in a position to risk. An example of this is the BBC Electric Proms in which last year the Kaiser Chiefs performed arrangements of their songs by ﬁlm composer David Arnold, to great critical acclaim. 14. BBCWW’s extensive international reach has the added advantage for British composers and songwriters that their music reaches the widest possible audiences. This aspect of BBCWW’s activities makes an important contribution to the export of British music and British culture generally. The UK is a net exporter of music and BBCWW’s activities help to consolidate that position. 15. Furthermore, the combination of the BBC’s very strong brand with British music and culture, which are each held in very high esteem in their own right abroad, serves to enhance the reputation of our country in ways which are not only measurable in economic terms.

Conclusion 16. Whilst it is accepted that BBCWW could almost certainly not achieve all that it does without the benefit of the BBC Licence Fee and the existence of the BBC, we believe that it is currently using its advantage to benefit and enrich the musical life in the UK and its reputation abroad in ways that no other organisation could. As far as music is concerned the BBC is providing an essential service for the benefit of the 60,000 members of the Alliance and this deserves continuing support and encouragement. October 2008

Memorandum submitted by Left Bank Pictures I am the Chief Executive of Left Bank Pictures, a company which makes both feature films and television drama. We launched the company on 1 July 2007. BBC Worldwide took a 25% stake in the company for £1 million. In exchange, BBC Worldwide have a senior representative on our board and have a first look to distribute all of our programming output for the next five years. Left Bank Pictures was set up to produce quality top end dramas and comedy series for the UK and international market. There was a lot of interest in my new company as I had enjoyed a strong track record at ITV where I had worked for 15 years in jobs that included Controller of Drama, Comedy and Film and Controller of Entertainment. I was also the Producer of the movie The Queen and award winning TV shows that I helped to launch and produce included The Royle Family, Cold Feet, Prime Suspect, Cracker, The Deal and Longford.

1. Why did we go with BBC Worldwide? I had several oVers from a range of diVerent sorts of potential investors. I met with a wide variety of media tycoons, from Martin Sorrell and Richard Branson to many US entrepreneurs such as John Feltheimer at the fast growing Lionsgate. It was clear to me that a programme distributor was the most suitable and preferably a UK one. It simply made the most sense. The business of Left Bank was producing TV shows. The company needed to get its product distributed and distributed well. BBC Worldwide is the best in this country and BBC Worldwide needs more shows to distribute in order for it to continue to grow. Worldwide needs partnerships. I was Processed: 31-03-2009 23:56:37 Page Layout: COENEW [E] PPSysB Job: 419629 Unit: PAG1

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looking for a partnership that made sense for my new business. Worldwide did. I turned down two other distributors who oVered similar but not as good deals and rejected the advances from the US based companies.

2. What did BBC Worldwide oVer? The £1 million investment guaranteed that the company would be solvent for at least a year. The money was just suYcient to launch a team of seven people (myself included) with oYce, overheads and development spend. Worldwide also provide brilliant support. The executive team at Worldwide are terriﬁc. John Smith, Wayne Garvie and Helen Jackson have helped us enormously. We work very closely together and plan productions and the recoupment strategy very carefully. The BBC team combine their selling expertise and worldwide contacts with our considerable production experience. It’s perfect. Raising money for co- productions is one of the most important parts of the business these days. Production companies like ours need a real dialogue and support in order to close the complex deals involved. The numbers are big. Today’s international TV budgets are frequently bigger than movies. Wallander, for example, cost a total of £7.5 million for three ﬁlms.

3. How have we got on? Left Bank secured its first commission from ITV with support from the Irish broadcaster RTE for a four part £5 million thriller within six months. This was followed by confirmation of a major new series (three x 90 minute films) for BBC 1 with Ken Branagh starring as Wallander—the Swedish detective, created by top Swedish crime writer Henning Mankell. We have also secured a six part comedy series called The School of Comedy for E4 and a new six part adult relationship/Cold Feet style series for ITV. Other commissions are in the pipeline. In our first year we achieved a turnover of £2.2 million. Year 2 is predicted to be well over £20 million.

4. Would we have achieved this without Worldwide’s investment and support? I very much doubt it. Worldwide’s deal was simple—the proposition was clear—the partnership works eVectively and without fuss. Worldwide is getting a brand new supply of TV shows to feed their international markets and we are successfully selling shows in both the UK and worldwide and building our business. Who else could have provided this level of support and commitment? No one that I can think of. I did have other oVers when I was setting up the company but none of them came from other UK indie companies and most of the serious oVers were from outside of the UK. The UK based indies who are most vocal to Worldwide’s investments fear the competition from companies like Left Bank in my view. The agenda from the indies that I spoke to was always about them “acquiring me” from day one. They had no interest in helping me to launch as an independent. So I do not believe that the market in the UK would have provided the funds for Left Bank to launch. I think BBC Worldwide have created something original and something very important for our business. They—alone—were prepared to back new start ups in the UK at that time.

5. Why is BBC Worldwide’s investment in indie production companies a good thing? In our case their investment ensured that my company stayed British owned and within the wider ﬁrmament of the BBC. The ﬁrst look deal does not help me to secure any commissions with the BBC but being a part of the wider world of the BBC is both helpful and is delivering real value to all areas of the corporation.

6. Was it a risky investment? I am obviously biased but I would say no—and 18 months into the life of the new company the ﬁgures speak for themselves. I think Worldwide are very clever. They know what they are doing and they are doing it very well. It is clear that some of their opponents are jealous. Worldwide is an easy target as people misunderstand where their money comes from and what their commercial targets are. A strong, successful and independent BBC Worldwide is a very good thing for the BBC and for the UK media business. We should be celebrating their success and their acumen and not constantly undermining it. I can’t help feeling that sheer jealousy lies at the root of some of the critics who are popping up—that’s typically British and very silly. BBC Worldwide are growing their business by being committed and being supportive to small but important and growing UK talent based production companies. Thank the Lord for that. October 2008 Processed: 31-03-2009 23:56:37 Page Layout: COENEW [O] PPSysB Job: 419629 Unit: PAG1

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Memorandum submitted by UKTV 1. UKTV is an independent and profitable commercial venture jointly owned by Virgin Media and BBC Worldwide (BBCW) which has been in operation for a decade providing eight pay TV channels and two free channels to the UK population, which jointly reach 33 people per month. Formed in 1997, the venture has been fully funded by the private sector. 2. Our main contention with regard to the current inquiry is that BBCW is a proactive and committed partner able to take the long-term view of developing and building a sustainable business. Via its relationship with UKTV, BBCW is able to manage and generate value from secondary rights that have been originally funded by the licence fee. Since BBC Vision editorially controls UKTV, this protects the content environment in a way which would be impossible without material control of the channels that schedule that content. Many of the key editorial staV of UKTV report directly to the Director of BBC Vision and I report to a board that consists of three BBCW Executives and three Virgin Media Executives. 3. The raison d’etre of UKTV at its inception in 1997 was to allow the viewer greater access to the BBC archive than was possible on the BBC channels due to both public intolerance to “repeats” on terrestrial channels and, the very practical issue of limited scheduling time. Even with the launch of the BBC portfolio channels, these reasons still hold. 4. The venture delivers sustainable margins to its shareholders and currently employs 155 full time staV from its base in central London and has successfully developed into a provider of high quality channel options for the digital age. Direct management oversight by senior BBC editorial staV ensures that UKTV channels are closely aligned to BBC values—new commissions for example fit the BBC guidelines, as does promotion and marketing activity. In terms of financial scrutiny there are policies and processes in place to ensure good commercial returns, as well as strong governance through regular board meetings, financial committee meetings and editorial and policy meetings. 5. UKTV oVers a complementary viewing experience to the BBC channels, grouping together similarly themed content and hence providing depth as opposed to the BBC’s breadth. UKTV oVers a greater depth of viewing experience with the provision of easy to understand, targeted channel oVerings (eg Food, Comedy, History, Men, Lifestyle, etc) as well as stacking and stripping of content within channels which services a diVerent kind of consumer need. Our research indicates this depth is valued by the consumer. Although not BBC branded, we also know that audiences watch the channels in an environment that fits with the BBC since our channels consistently rate highly in terms of perceived quality within multichannel television. 6. The UKTV joint venture has also created an opportunity to complement BBC archive programmes with commissions. UKTV currently commissions over 800 hours of original content from the UK independent production sector. October 2008

Memorandum submitted by Create Publishing Ltd We are writing to object to the launch later this year of a Lonely Planet-branded magazine by BBC Worldwide, following their acquisition of a majority stake in Lonely Planet last year. We believe that the acquisition of Lonely Planet was contrary to the remit of the BBC, and that launching a magazine using the Lonely Planet brand is compounding this mistake. In this letter we have set out the basis for our complaint, as well as providing an outline of the travel magazine market, in which we have an interest in with our title Real Travel. We have asked the OFT to launch an investigation into the acquisition of Lonely Planet, and in the meantime halt the development of a Lonely Planet-branded magazine by BBC Worldwide, however they have told us they will be taking no action in this instance. Our objections to the launch of a Lonely Planet magazine by the BBC are summarised brieﬂy as follows:

Does not ﬁt with PSB purposes

In the Government’s 2004 Green Paper it was stated that all BBC magazines should have a direct connection with their TV or radio programmes, and while the BBC have produced holiday and travel-related programming in the past, this is not a core area for the BBC, and branding the magazine “Lonely Planet” means there is no direct connection with any of their programmes. The BBC has previously had to dispose of non-BBC branded titles such as Eve, Your Hair and Cross Stitch Crazy (which they acquired from Origin Publishing) and therefore should not now be launching another non-BBC branded magazine. Our opinion is that the launch of this magazine is not about any extension of BBC programming, but more a case of using the resources and content of the BBC to maximise the Lonely Planet brand and its proﬁtability. Processed: 31-03-2009 23:56:37 Page Layout: COENEW [E] PPSysB Job: 419629 Unit: PAG1

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Anti-competitive and distortion of the market

We believe that the resources and marketing that a BBC-produced travel magazine could bring to bear would make it impossible for independent magazines in the sector to compete fairly. The BBC has access to a huge resource of travel-related content (photography, news, comment, features) that are not available to or aVordable by other travel magazines, not to mention the access to “personalities” from their programmes which are a strong selling point for magazines in this sector. The marketing of this magazine will also beneﬁt from access to other BBC audiences and again this is something other travel magazines do not have access to and cannot compete with.

1.TheTravelMagazineMarket

The magazine market into which the BBC are intending to launch a Lonely Planet-branded magazine can be loosely split into two sectors—“holiday” based magazines that focus on mainstream, package-based travel, and the specialist travel magazines that concentrate on the more adventurous, independent style of travel. Magazines that ﬁt into the “holiday” sector include Conde Naste Traveller and Sunday Times Travel, and these are the biggest selling titles in the market. There are several independently-owned travel magazines that ﬁt into the “specialist” travel end of the market, and these include Wanderlust, Adventure Travel, and our title Real Travel. As more niche titles, the circulation and advertising revenue of these titles is smaller than the “holiday” based titles, and therefore their resources are also less. Our magazine Real Travel was launched in March 2006 in response to the growth in independent and “authentic” travel, and incorporates a “user generated” element, where readers own stories and photos appear in every issue alongside the expert editorial from our in-house and freelance writers. The magazine has four full-time staV and as a business Create Publishing has 11 staV working across two magazines.

2.LonelyPlanet

When looking at the Lonely Planet brand in relation to the travel magazine market, the brand can be more closely aligned with the independent, specialist sector of the market as covered by Wanderlust, Adventure Travel and Real Travel, rather than the “holiday” end of the market. Travellers buy Lonely Planet guides to ﬁnd out what hotels to book, what restaurants to eat in, and what activities to do, so by their very nature they are more likely to be independent travellers and not package-holiday tourists. When Real Travel magazine launched in 2006 we worked very closely with Lonely Planet because our two brands were so closely aligned—we cover mounted a Lonely Planet-branded guide on our ﬁrst issue as well as running subscription oVers where subscribers would receive a free Lonely Planet guide—and we even ran Lonely Planet-branded editorial “help” pages written by one of their employees Tom Hall. Clearly, Lonely Planet saw our magazine as a good match for their own demographic. The Lonely Planet magazine therefore will be intended to hit this very same market, rather than the “holiday” sector, and this is backed up by a recent press release from BBC Worldwide: “The magazine will appeal to open-minded, inquisitive people who have a real sense of adventure and a desire to learn about and connect with, the people and places they visit.”

3. BBC andTravel

Travel has never been a core area for the BBC, in the way that gardening, history, food and children’s content have been—and their travel programming has traditionally concentrated on the more mainstream, “package” sector of the market. Programmes such as “Holiday” could in no way be aligned with the type of adventurous, independent type of travel that Lonely Planet stands for. Indeed, when BBC Enterprises launched Holiday 89 magazine, and later BBC Holidays between 1992 and 1995, these titles reﬂected the remit of the TV programme by concentrating primarily on family-oriented package travel. Of course, in many programmes the BBC covers cultural and sporting events from around the world, but this output is so diverse and fragmented that in our opinion it’s impossible to argue that a focused travel magazine branded as Lonely Planet has a direct connection with any one BBC programme. The BBC in response to the Green Paper says itself that “BBC magazines core editorial remit is to extend readers’ appreciation and enjoyment of the BBC’s broadcast output and genres in which the BBC has a recognised expertise”—yet there is no one identiﬁable programme that a Lonely Planet magazine is an “extension” of, and travel is not an area that many people would consider to be an area of expertise for the BBC. Processed: 31-03-2009 23:56:37 Page Layout: COENEW [O] PPSysB Job: 419629 Unit: PAG1

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4.OurObjections In the Department of Culture, Media and Sport Green Paper of 2004, it was proposed that each commercial activity of the BBC should be assessed against four criteria: (a) Fit with PSB purposes—does the activity either support or relate to PSB purposes? (b) Commercial eYciency—does BBC ownership oVer best value for money for the licence fee payer? (c) BBC brand protection—is it compatible with the BBC’s brand and values? (d) Market distortion—are BBC commercial services being sold or structured in a way that might give them an unfair advantage over the competition? We are opposing the launch of the Lonely Planet magazine on points one and four above.

5.ObjectionOne

It doesn’t fit with PSB purposes As outlined previously,travel is not a core area for the BBC. Although in our opinion still tenuous, it could be argued that the BBC could legitimately launch a “holiday” based magazine much like they did in the 90’s with BBC Holidays magazine. However, launching a magazine concentrating on independent, adventurous travel is not consistent with their broadcast output, and launching it with the Lonely Planet branding makes no connection whatsoever with any BBC holiday or travel programme. In fact, launching the magazine as “Lonely Planet” magazine is an admission that while Lonely Planet is very much aligned to this sector of the market, the BBC is definitely not—there’s no one programme that fits into this sector of the travel market, and the BBC is just not known for it generally. There is a precedent for BBC Worldwide publishing magazines that were judged to not fit with PSB purposes, and then having to dispose of them—and that was the acquisition of Origin Publishing in 2005. A number of these titles were disposed of in 2006 as they had no direct connection to BBC broadcast output. As the BBC say in their response to the Green Paper “as part of its review of its commercial activities, the BBC analysed the activities of its magazines and concluded that a number of its titles, such as Eve, Your Hair and Cross Stitch Crazy did not fit with the core editorial remit of BBC magazines. The decision was taken to dispose of these titles.” It is clear in our opinion that a Lonely Planet branded magazine falls into the same category of not fitting with PSB purposes and must therefore not be allowed to launch. It could be argued that there’s justification for launching a BBC-branded holiday magazine, but there can be absolutely no argument that a Lonely Planet-branded magazine fulfils the remit of being “fit for PSB purposes”—it just does not have any direct connection to any BBC broadcast output.

6.Objection2

Market distortion The second point we are objecting on is that a Lonely Planet magazine would gain an unfair advantage on competitors by being produced by the BBC—speciﬁcally in having access to content, and in the marketing it would receive by being under the BBC umbrella. Generating content is a major cost for magazines, particularly travel magazines where quality photography and writing are essential. The Lonely Planet magazine will have access to an enormous amount of content—archive, current and future—that gives it an unfair advantage over its competitors. Such content would be either unaVordable, or just not available, to other magazines, and yet this content will be readily available to (and likely at no cost) to the Lonely Planet magazine. “Personalities” from BBC programmes are also likely to be exploited in the new magazine too—in the form of comment and columns. This is a strong selling point for people buying magazines, yet it is one that other travel magazines will not have access to. In our experience, getting such personalities to write columns is not easy, and if it does happen, is usually prohibitively expensive, yet within their existing BBC contracts it’s likely that TV presenters will make contributions for less than the normal market rate, if at all. In terms of advertising, these personalities are a strong draw for potential advertisers in the travel market—as association with credible TV characters is seen as a strong endorsement of products or services and a proven sales tool. Again, the independent travel magazines will not be able to compete in the advertising market against this, as we have no access to these personalities. Because almost everyone travels, in theory Lonely Planet could use content, columns and comment from any BBC presenters or personalities. The use of “names” is a massive selling point in magazines, yet competing travel magazines are not able to get anything like the access to this that the Lonely Planet magazine will enjoy. Processed: 31-03-2009 23:56:37 Page Layout: COENEW [E] PPSysB Job: 419629 Unit: PAG1

Ev 176 Culture, Media and Sport Committee: Evidence

The other major area the Lonely Planet gains an unfair advantage over the competition is in terms of marketing and promotion. Although the use of TV trailers no longer happens for its titles, BBC magazines enjoy unrivalled promotional opportunities over its competitors. Recent BBC mag launches (eg Countryﬁle) have included promotional adverts in its other titles, including Radio Times which sells over one million copies. This is an opportunity that is just not aVordable or available to the travel magazines the Lonely Planet magazine will be competing with. It’s likely too that experts from Lonely Planet will be featured as “talking heads” on news and current aVairs programmes—and this has already happened on several occasions actually—which is extremely valuable promotion of the brand and magazine to millions of people. The equivalent air-time in the form of paid-for adverts on commercial TV or radio would be prohibitively expensive for any of the independent travel magazines. Another example of Lonely Planet having access to BBC (not BBC Worldwide) audiences was the announcement of the launch of the magazine on www.bbc.co.uk on 5 August 2008. Although this news appeared in the press room, it is still viewable/searchable by the public and bearing in mind this site now receives over 30 million visits every month, then this single item could easily generate more than an entire year’s PR from an independent publisher. Links to the Lonely Planet website have also appeared next to travel news stories on the BBC website—again this smacks of favouritism towards a company that the BBC owns.

7.Summary

To summarise, we are objecting to the launch of a Lonely Planet-branded magazine by BBC Worldwide for the following reasons: 1. The Lonely Planet acquisition itself does not fit PSB purposes, and launching a Lonely Planet magazine compounds this mistake. 2. Travel is not a core area for the BBC, and certainly not “independent, adventurous travel” of the Lonely Planet type. 3. The Lonely Planet magazine will have no direct link to BBC broadcast output and therefore does not fit with PSB purposes. 4. The BBC has previously had to dispose of “non-BBC branded” magazines such as Your Hair, Eve and Cross Stitch Crazy, and therefore should not be launching a Lonely Planet branded title now. 5. The Lonely Planet magazine will gain unfair commercial advantages through access to BBC content and personalities. 6. The Lonely Planet magazine will gain huge and unfair marketing and promotional opportunities through the BBC that are not aVordable or just not available to competing travel magazines. 7. The motives of this magazine launch are not to create an extension of any BBC programme, but to use the resources, content and marketing to maximise the profitability of the Lonely Planet brand and its products. October 2008

Memorandum submitted by Whatsonwhen Ltd I am writing on behalf of Whatsonwhen Ltd, a company of John Wiley & Sons, Inc. Whatsonwhen provide travel guide content via our website and our core business is to syndicate our content to the global online travel business. Our clients range from UK speciﬁc (Lastminute.com, British Airways) to European (Eurostar) and global (Hilton Hotels). Lonely Planet (LP) is a direct competitor of Whatsonwhen both in terms of web traYc to t