A NEW AGE OF UK TV CONTENT CREATION AND A NEW ROLE FOR THE BBC A report for Pact Prepared by Oliver & Ohlbaum Associates Ltd August 2014 EXECUTIVE SUMMARY Overview General Conclusions A shift by the BBC towards becoming much more of a publisher broadcaster could yield considerable potential benefits for the UK creative sector and the BBC Licence Fee payer and is, therefore, worthy of full and fair consideration. Continuation of the BBC’s gradual withdrawal from non-news programming making in the UK, which has seen in-house share of output decline from 77 percent in 2000 to c52 per cent in 2013, in an orderly manner would bring significant benefits of specialisation and strategic focus to three British success stories within the global TV sector, namely: UK based and/or centred independent production companies (“indies”) could gain a wider portfolio of programming IP and formats to continue driving this very successful global business specialisation forward, while sourcing its material from a broader spread of regional clusters across the UK; The BBC could focus on ensuring its programming delivers value for money and achieves its public purposes drawing from the widest source of creative organisations without the need to consider: (1) programming sourcing quotas, (2) increasingly compromising internal production guarantees or targets or (3) managing a £0.5 billion production business; BBC Worldwide could continue with its strategic focus on making the most of being the largest global TV distributor outside of the US Studio system and develop the channels and B2C services necessary to maintain and grow the BBC’s brand and reputation in the 21st century globalised TV market. The optimal way of transitioning to more of a publisher broadcaster model would be through a combination of: winding down some production departments; contracting out some long running strands; transferring some production activities to BBC Worldwide (specifically those most useful to its channels and rights distribution strategy); and, spinning off the remaining departments through a series of management buyouts accompanied by output deals and first look rights arrangements where appropriate to help expand the number of strong medium sized independent production companies in the UK to help counter market consolidation. At a very broad level (and subject to more information from the BBC through the planned BBC Trust Review) an initial analysis suggests that a switch of BBC-house production to the external production sector through a combination of these four methods could provide a value boost to the UK TV creative sector of approaching £600m1 including a reduction in the net programming costs to the BBC of current output by £35m per year. Overall, once account was taken of the likely corporate overheads savings at the BBC but the increasing commissioning resources that might be needed to operate as a publisher broadcaster, the BBC licence payer could be £30m a year better off in financial terms or £470m in net present value terms in 2017. Over and above the potential positive financial impact viewers should benefit from a wider range of creative ideas and the likely refreshment of a host of long running strands in the BBC schedule. This would be likely to add significantly to the £30m a year financial benefit to BBC licence payers. 1 This is the net present value of the expected extra revenues and reduced costs from the move to publisher broadcaster. Net present value is takes the extra cash flows in each year based on a projected growth rate and discounts them at an appropriate risk adjusted interest rate to convert them to a value in 2017 that would be the equivalent of these future cash flows if you had to go and “borrow” against them in 2017. Oliver & Ohlbaum Associates Ltd 2 While there are a set of legitimate public service and practical concerns raised by this move towards a publisher broadcaster model, they can be dealt with through specific initiatives and behavioural changes by the BBC as a programme commissioner/buyer. Value to the Creative Sector and BBC Licence Payer To calculate a more precise value of the increased specialisation and focus that a move to publisher broadcaster would bring to the UK creative sector needs greater access to internal BBC performance data and information than was available to O&O for this report, but the areas of monetary benefit for the whole UK creative sector including the BBC are likely to include: Increased global format exploitation export revenue for the UK TV sector and the economy given the indie sectors greater focus on developing and producing local versions of formats with global appeal (current performance suggests an extra £120m in revenue and £12m of profits with a net present value going forward of £140m in 2017); A greater level of third party distributor investment in BBC programmes (either from BBC Worldwide or independent distributors) worth £12m a year in 2017 with a net present value going forward of £185m2; A refocusing on BBC Worldwide investment and resources to channel development, B2C on demand services and acquiring and distributing content rights around the world yield increased margins of £10m a year, with a net present value of £155m in 2017; Reduced programme prices through increased competition and efficiency yielding a £10m reduction in costs to BBC controllers with a net present value of £155m in 2017; Reduced net overheads based on a comparison of independent producer overheads with estimated attributable BBC overheads, worth £15m a year and £240m in net present value in 2017; Adjacent exploitation revenues from exploitation of the IP associated with these formats through new media and ancillary activities at the level already achieved by the indie sector worth another £6m in annual profit with a net present value if 2017 of £80m. This leads to a total of potential gross benefits to the creative sector of £65m a year and a net present value of £955m in 2017. Set against this would be an estimated increase in BBC buy side commissioning capability and costs of £20m a year with a net present value of £380m, leaving a net annual benefit to the creative sector of £45m with a net present value of £575m in 2017. These estimates are set out in Figure 1 below. (Net Present Values are calculated based on the 10 year likely cash flow/profit benefit and a terminal value in year 10 based on the perpetuity value going forward. Each net present value calculation has a different discount rate based on execution risk and likelihood, and a different long term growth rate based on the relevant dynamics of the relevant cost/revenue based activity – more detail is provided in Section 7 of the report). 2 The net present value for this area is higher than the previous area even through the 2017 cash flow benefit is the same due to a different growth rate and discount rate applied Oliver & Ohlbaum Associates Ltd 3 Figure 1: Value Impact Summary – BBC as Publisher Broadcaster Annual Revenue Annual Value Net Present Value net of Cost Value Extra format business development from the in-house A £120m £12m £140m BBC portfolio Extra investment from BBC Worldwide / indie B distribution into BBC portfolio for secondary and £12m £12m £185m ancillary rights Refocus of BBC Worldwide to channels and digital C nil £10m £155m developments from formats and content Reduced prices to BBC commissioning in addition to £10m £10m £155m D (A) & (B) redirecting into more content investment Reduced BBC corporate overheads, recycled into E £15m £15m £240m programmes Adjacent growth of indie sector into related content F £30m £6m £80m areas with BBC portfolio TOTAL BUDGET £187m £65m £955m Increased commissioning and editorial resources (£20m) (£20m) (£380m) NET IMPACT £167m £45m £575m For the BBC, the net benefit per year is likely to be £30m, with a net present value in 2017 of £470m. This includes reinvestment in BBC programming (with lower prices to commissioners) of £35m a year as the additional revenues to the indie sector and BBC Worldwide are shared with the BBC programme buyers, and with the £20m a year of extra spending on commissioning capability offset by a £15m a year net reduction in overheads from the transfer of production to the external sector. Dealing with PSB and Practical Concerns A number of Public Service Broadcasting (PSB) issues and concerns could be raised by a transfer of production to the external sector, namely: Reduced investment in training; A shift of production activity back to London; A lack of long term R&D for bolder and bigger projects and more lateral ideas; A decline in PSB programme making values; An over-emphasis on export potential versus the needs of the BBC licence payer; and A lack of ability to pursue cross media benefits of scope with remaining in house radio and new media production. These potential Public Service Broadcasting (PSB) can be largely met with alternative and more transparent arrangements such as: Oliver & Ohlbaum Associates Ltd 4 Direct funding of training bursaries across the BBC’s supplier base to ensure levels of investment in direct off the job training is maintained (the external sector already invests in a considerable amount of on the job training and talent development); A targeted policy of commissioning from the regions with the aim of establishing a critical mass of indie supply in those regions – going beyond existing Out of London quotas to deliberately establishing creative hubs of independent producers with the critical mass to