Abi Watson [email protected] BBC licence fee settlement Tom Harrington [email protected] Further cuts will wound the Gill Hind [email protected] sector +44 (0)20 7851 0900 30 November 2020 • The BBC’s licence fee settlement process for 2022 to 2027 is now underway. This time there seems to be greater transparency than the previous negotiations in 2010 and 2015 which led to outcomes that effectively reduced licence fee income by c. 30% • It comes at a pivotal time for the BBC, and by extension the creative community across the UK which it supports. Recovery of this important sector relies heavily on the ability of the BBC to operate in the way that its remit requires: with investment, skills, intellectual property and talent flowing to the wider environment Related reports: • But with £1.6 billion falling due over the next decade on The BBC - Benefiting the UK creative its pension obligations and its Nations & Regions economy [2020-016] footprint alone, there is little room for manoeuvre if Subscription BBC [2020-008] there are further reductions in revenues or top-slicing. The result will be less investment on the screen and a How could the BBC ever fund the over-75s [2019-063] wound to a struggling sector On 10 November, Oliver Dowden, Secretary of State (SoS) for the Department for Digital, Culture, Media and Sport (DCMS) wrote to the BBC to confirm the scope and the timing of the next licence fee settlement , which will cover the period from 2022 to 2027. Previous settlements, conducted without public pressure or scrutiny, have left the BBC with more obligations and less to spend on them, at a time when licence fee income is already around 30% lower than it would have been had it kept pace with inflation and not been given additional spending obligations. In response, the Corporation has undergone extensive programmes of cost-cutting and rationalisation of resources. While this has made the BBC leaner in an operational sense, there is now little fat to absorb further cuts to income. With the commitment to fixed long-term obligations such as its pension deficit, the threat remains that there will be less to spend on local and quality content, tech, regionality, and diversity, and as such, it cannot be expected that the BBC will continue to return the same kinds and volumes of value to the wider creative economy, as it is structured for. If Lessyour company on content is an Enders Analysis subscriber and you would like to receive our research directly to your inbox, let us know at www.endersanalysis.com/subscribers Related reports: The BBC’s revenue streams: less flowing to PSB The BBC’s UK public services and the BBC World Service are funded by the licence fee, along with some government grants and income in the form of dividends from the activities of its commercial operations, predominantly BBC Studios,1 which incorporates television production, distribution and the broadcaster UKTV. The vast majority (over 92%) of the income that the Public Service Broadcasting (PSB) Group (which is responsible for the BBC’s public service broadcasting activities) receives comes from the licence fee. The amount the BBC receives through this mechanism and its obligations on what to spend it on has repeatedly been altered to the broadcaster’s detriment. The latest intervention was the withdrawal of the over-75s concession—which granted this group free licences, the value of which was instead paid to the BBC by the government—this financial year. Outside of the licence fee, in fiscal 2020, BBC Studios remitted its highest ever income to the BBC, returning £276 million, including investment in programming and its declared dividend, off the back of its best ever year for content sales. This increase, however, is largely attributable to the consolidation of UKTV (after the full-acquisition in June 2019), a feat that will be impossible to replicate in 2021 (the first full year of consolidated results). These revenue streams must now provide for more than in the past. The obligation on the Corporation to fund the BBC World Service is relatively new; up until April 2014, it had been funded by the Foreign and Commonwealth Office (FCO), but the BBC is presently obliged to spend at least £254 million per annum on the service, at least up to the end of March 2022 (actual spend in 2019/20 was £261 million). While the BBC received a grant from the FCO of £291 million between 2016/17 and 2019/20, this was to fund the World Service expansion,2 so the net impact of this grant was relatively neutral. The BBC cannot cross-subsidise its commercial activities through its PSB Group or grant-funded activities. Figure 1: BBC PSB income (£m) 4,500 4,034 4,145 4,017 3,927 3,925 3,823 4,000 3,500 613 622 630 655 468 253 3,000 2,500 2,000 1,500 3,122 3,121 3,157 3,175 3,222 3,267 1,000 500 0 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Licence fee payments Over-75s concession Government grants Commercial content Intra-group income Commercial other Commercial dividend* *Commercial dividends excluded from total PSB income disclosed in the acounts as they are eliminated on consolidation. These were downgraded for 2019/20, following the COVID-19 outbreak in order to retain cash in the commercial entities. [Source: company reports, Enders Analysis] The licence fee will exist until at least the end of the current Charter, which expires in 2027. The current financial settlement runs to the end of March 2022, and while the core mechanism and operation of the 1 Other commercial activities include Global News, BBC Studioworks and BBC Children’s Productions. 2 The World Service expansion introduced 11 new language services and the expansion of existing services. For details of the World Service Expansion, see: BBC World Service announces biggest expansion 'since the 1940s' BBC Licence Fee settlement: Further cuts will wound the sector [2020-114] 2 | 9 licence fee cannot be changed, the level of funding must be set for the period from April 2022 to the end of 2027. On 10 November, the SoS for the DCMS, Oliver Dowden, wrote to the BBC to confirm the scope and the timing of the next licence fee settlement, which will commence on 1 April 2022 and run for at least five years. This in itself is a step forward for transparency given that the last two settlements were reached without any consultation and with little to no transparency. In 2010, the government initially intervened in the licence fee settlement, firstly freezing the licence fee for the remainder of that Charter period ending in December 2016, and secondly through top-slicing, ensuring the BBC had set obligations to financially support local TV, rural broadband rollout, BBC Monitoring, the BBC World Service and S4C. The 2015 licence fee settlement was negotiated by the newly-elected Conservative government and the BBC in less than a week, with no public debate. This led to the BBC agreeing that the responsibility for the over-75s licence fee concession would be transferred to it from the Department for Work and Pensions, a burden that would not be compensated by the government’s agreement to increase the licence fee in line with the CPI and closing the "iPlayer loophole".3 As can be seen in Figure 2, the BBC would have c. £1.3 billion more to spend on its PSB services in the current year if the government hadn’t intervened in 2010 and 2015. Figure 2: BBC licence fee income with/without interventions (£m) 5,000 4,500 4,000 £1,3bn 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Actual licence fee income Note: CPI average 12 months to September. Additional spending requirement for BBC Monitoring, Local TV, S4C, Licence fee - no government interference BBC World Service, broadband rollout. Licence fee less additional spend requirements [Source: Enders Anaysis based on BBC annual reports} Over the ensuing years the BBC has implemented many cost-saving measures, including its Delivering Quality First cost-cutting initiative, which commenced in 2012 and reaped £712 million of sustainable (i.e. yearly, ongoing) savings as it looked to cut 20% of the Corporation's cost base after the licence fee freeze. Since 2016/17, the BBC has made a further £618 million of cumulative savings to date, including £199 million of additional savings made in 2019/20 with £99 million saved in 2019/20 on the BBC’s major strategic contracts and further savings of £66 million on the purchase of goods and services. However, while cost savings go some way to mitigate the impact of the removal of the over-75s concession, these were in motion prior to the 2015 licence fee settlement and, as we noted in How could the BBC ever fund the over-75s? [2019-063], the shortfall in licence fee income would still have to be partly funded by cuts in programming expenditure. We note here that a further £125 million of further savings are required to offset lost income and additional expenditure incurred as the result of COVID-19. 3 After 1 September 2016, people who watch BBC programmes only on iPlayer were required to buy a TV licence to view the content. Previously a licence was only needed to watch live broadcasts, so catch-up content was technically exempt from the £145.50 annual fee.