Scrap the Licence Fee and Privatise the BBC

The logic behind a nationalised broadcaster was never perfect. In the age of subscription television and the internet it is indefensible

Time and technology wait for no organisation, no matter how revered. The next two years will see a lively debate over the future of the British Broadcasting Corporation, with the current Royal Charter due to run out at the end of 2016. The early talk is of an extension of the licence fee for a further decade to 2026, but of possible reductions in its value and certainly of freezing it in real terms. According to an ICM poll in the Sunday Telegraph last month, 70 per cent of voters believe that the licence fee should be abolished or cut.

A huge and very public intellectual brawl seems certain. Already a former BBC director-general, Greg Dyke, has quarrelled openly with Grant Shapps, the Conservative Party chairman, over Shapps’s suggestion that after 2016 licence fee money ought not to given exclusively to the BBC. The debate so far has tended to take for granted both the survival of the licence fee in some form and the Beeb’s status as a nationalised organisation. But can a case be made that the licence fee is now obsolete as well as unpopular? And what would the ending of the licence fee mean for the structure of British broadcasting? With the licence fee scrapped, should the BBC remain in public ownership? Or should the BBC be privatised, so that it can compete on a level playing field with the global media giants that are now emerging? 

A potted history of the licence fee and its place in British broadcasting is needed to answer these questions. In the early days of television in the 1940s technology imposed tight constraints. The transmission of programmes “over the air” from land-based masts and towers was limited by a shortage of spectrum. Only one channel was readily feasible. Further, if programmes were broadcast “free to air” from the masts, any household with a TV set could watch. Pay per view and subscription for a particular channel were impossible. Although payment could have been by advertising, the postwar Attlee government was unenthusiastic about capitalism, consumerism and marketing jingles. The introduction of the BBC licence fee in 1946 was almost inevitable, given the contemporary political and technological context. Paul Samuelson, the Nobel-prize-winning American economist, advanced the concept of “public goods” in his classic 1954 paper “The Pure Theory of Public Expenditure”, demonstrating that such goods had to be financed by taxation and could not be left to the free market. The hostility to advertising meant that broadcasting was the textbook paradigm of a “public good”.

Still benefiting from the halo conferred by its wartime role, the BBC was by far the most influential broadcasting service in the world. Further, with the UK accounting for almost 10 per cent of world output in the late 1940s, its state-owned monopoly was a vast broadcasting business by international standards. The BBC may not have been part of the British constitution, but it was undoubtedly a “national champion”. However, its special status was already being undermined. Spectrum scarcity — the original rationale for monopoly — was being overcome. In 1954 the Conservative government under Winston Churchill passed the Television Act, so that independent broadcasting financed by advertising could compete with the BBC. For the next 20 years British broadcasting was a highly regulated duopoly of Auntie Beeb and the profit-hungry (and indeed very profitable) “independent” television companies. 

Advertising is sometimes demonised by left-wing commentators as capitalism without taste or shame, and as free enterprise at its selfish worst. As long as advertising was the only alternative means to finance broadcasting, the licence fee was safe. But by the 1980s satellites with programme transmitting capability could be launched into space, promising a new world of satellite-based broadcasting. At first two businesses were envisaged, Sky Television and British Satellite Broadcasting, but they merged in 1990 to form BSkyB. The plan of the entrepreneurs behind BSkyB, notably Rupert Murdoch, was that viewers would pay for TV channels by subscription, usually on a monthly basis. 

All being well, profits could be made despite free-to-air competition from the BBC and the independent companies. For most of the 1990s BSkyB lost money. Murdoch had embarked on an ambitious long-term gamble, even if it was one that secured strong backing from the UK’s big institutional investors. Ironically, BSkyB’s investors became involved in this forward-looking and risky venture just as left-of-centre economists started to criticise the City of London for the alleged “short-termism” of its time horizons and the supposed caution of its decision-taking. At any rate, after 15 years of red ink subscription revenues first ran ahead of expenses in 2003. For the last decade BSkyB has operated in the black, with profits reaching over £1 billion a year for the first time in 2011.

In the last few months the Murdoch media have had a bad press, with the phone-hacking scandal at the News of the World receiving huge coverage. But that has been a distraction from the serious debate on the future structure of British broadcasting which must soon begin. It has been so easy to condemn the practices in one part of the News Corporation empire that commentators have overlooked the astonishing transformation that Murdoch and his backers have wrought. In an article in the Sunday Telegraph accompanying the ICM poll Rob Harris, Conservative MP for Reading West, used the word “dominance” to characterise the BBC’s position in news and current affairs broadcasting. Many analysts continue to see the BBC as “dominant” with an entrenched, almost unassailable position on the UK media scene.

A changing landscape: Subscriptions have become the largest revenue stream for British television 

The actual position is far more even-handed and complex. As the growing unpopularity of the licence fee has constrained the BBC’s revenues, TV advertising spend is now about the same size as the total money collected by the licence fee and well above the portion of this money devoted to television. (See graph, above. Remember that the licence fee has also to meet the costs of radio.) But the truly spectacular development of the last few years is that both total advertising spend and the licence fee money have been surpassed by BSkyB’s subscription revenue. As BSkyB also picks up advertising revenue on its channels, its annual income is well above the BBC’s. To be more specific, in their last complete years — to March 31, 2013 for the BBC, and to June 30 for BSkyB — the BBC’s income was £5.1 billion, of which £3.7 billion came from the licence fee, while BSkyB’s income was £7.2 billion, of which about 80 per cent derived from subscriptions. BSkyB has therefore overtaken the BBC in terms of market presence and the BBC has ceased to be dominant even in Britain itself. The BBC does have an international arm, BBC Worldwide Ltd, with an avowedly commercial remit, but  its sales are small compared with CBS, the Hearst Corporation and Murdoch’s US-based 21st Century Fox. 

So British broadcasting today is utterly different from its situation in 1946, when the licence fee began and the BBC enjoyed both massive prestige and a monopoly position. On the face of it, three forms of payment are jostling with each other in the UK television market: the semi-tax licence fee money exclusively for the BBC, and advertising spend and subscription revenues for the other two types of participant. No participant is dominant, but in simple money terms BSkyB is first among equals. Just after the Second World War UK broadcasting was the paradigmatic public good; for a long time it was a regulated duopoly. Today it is a confusing oligopoly with a mix of public and private ownership. Even if technology could somehow be stabilised for all time, the original case for the licence fee would have to be reformulated. The private sector businesses, led by BSkyB and ITV (much the largest of the remaining “independent” companies), have carved out strong market positions, but they have done so only after taking great commercial risks and defying the blatant government subsidy given to the original state-owned industry leader, the BBC.  

But technology cannot be stabilised for all time. On the contrary, new payment structures and transmission arrangements are being conceived every few months. Such is the degree of flux at present that no one can give reliable long-term forecasts of the relative importance of different transmission and payment mechanisms. BSkyB, ITV and every other shareholder-owned media organisation in Britain face intense competition not only from other such organisations with a known commitment to a particular technology, but also from new organisations with distinctive and unexpected technologies. Transmission by means of cable has been available for a long time. But the most exciting of the new technologies is internet broadcasting and the most menacing of the new competitors are the telephone companies which own the transmission capability (the copper wires or mobile frequencies). 

Telephone companies have a huge, in-built advantage with internet broadcasting. Precisely because they own the equipment that transmits internet material, including streamed programming, they know the identities of the people and companies who benefit from that equipment. It is a relatively simple matter for them to add TV programming to the telephone package and to charge for the extra services. British Telecom’s acquisition of rights to broadcast football matches to its broadband customers is as direct a challenge to BSkyB as could be imagined. Not that BSkyB has been surprised by BT’s invasion of its turf, which in this case is a particularly apt word. For some years it has wanted to persuade its TV subscription customers to choose BSkyB for telephone services as well. Both BSkyB and BT are seeking to market not just broadcasting options, but the so-called “triple play” of television (to be received on “TV sets”), broadband (on “computers”) and telephony (on “phones”). To adorn such familiar objects as televisions, computers and phones with quotation marks may seem odd, but it has become necessary. As will soon be made clear, the differences between these devices have been blurred by the advance of technology and this blurring has vital implications for the structure of the UK’s media market. 

Of course, BT could charge its telephone users a fee for broadcasting material on top of the phone bill. On November 11 BT announced that it had bought the rights to screen 350 top football matches with exactly that intention in mind. The threat to BskyB’s business model is so obvious that its share price fell by almost 10 per cent, and its market capitalisation by over £1 billion, within minutes of the announcement. It had not been expected that BT would attack BSkyB so directly and so soon. A big competitive battle is now under way. 

However, a key point must be noticed. The internet now has other quite well-established ways of charging “viewers”. All providers of content via the internet, and not just BT or another telephone companies, can restrict access to their material by using widely available software. They can then allow viewing of the material only to people who pay, typically by means of a credit card. The internet therefore becomes the vehicle not so much of broadcasting as of “narrowcasting”, understood as the channelling of specialised content to a well-defined and limited market. Technology is advancing so quickly that the “narrowcast” material no longer has to be pre-recorded, but can be live and sent out in real time. So the big broadcasters are not only competing among themselves, they are also competing with a range of internet-based rivals (bloggers selling advertising space, porn channels charging subscriptions, price comparison websites for antiques being financed by auctioneers, and so on). 

In short, “broadcasting” may ultimately cease to exist as a category distinct from “communication” in general. Performances of all sorts are conveyed to customers by an assortment of technologies and financed by a number of payment arrangements. Broadcasting may have begun as the most obvious example of a public good that was also a “natural monopoly”, but new technologies changed that monopoly into a duopoly and then an oligopoly, and now they are changing it again into an extreme example of chaotic, undisciplined and vibrant competition. 

What is the meaning of this unleashed anarchy of market forces for the BBC? The question is not new, because-as we have seen-the technological shifts have been under way for decades. It was realised in the late 1990s that they amounted to a veritable “digital revolution”, with digital logical circuits being widely incorporated in equipment and creating far more technical options than analogue signals. In 1999 Gavyn Davies, then the chief economist for Goldman Sachs in London, chaired a committee to review the financing of the BBC in the digital era. The review argued that the licence fee should not only remain, but be increased by 20 per cent to help to pay for the BBC’s move into the new technologies. Soon dubbed the “digital poll tax”, it encountered vigorous opposition from the UK’s commercial media interests, and was quickly rejected by the Culture, Media and Sport Select Committee of the House of Commons. The government did grant a real terms increase in the licence fee in 2001, but it was much less than the Davies Committee had recommended. 

The larger problem was that the Davies Committee pointed policy in entirely the wrong direction. Certainly, the case for a licence fee was compelling in the early days of broadcasting. But that was 70 years ago. By the late 1990s it was easy to conjecture that within one or, at most, two decades technology would have progressed so fast that a competitive broadcasting market had to emerge. That is indeed what has happened. In an aggressively competitive market government subsidies are difficult to defend. Even worse for BBC traditionalists, the licence fee has become a silly way to collect money in a digital economy. 

Opponents of the Davies Committee conclusions pointed out that TV programmes could be transmitted over the internet by sufficiently powerful personal computers. That may seem obvious in 2013, but it was less obvious at the turn of the century because most households did not have a computer loaded with enough gigabytes. But a committee of the great, the good and the well-informed ought to have recognised that, once the nation’s stock of PCs had been replaced two or three times, all suitably enabled computers would be able to receive TV broadcasts (as well as blogs, porn stations, price comparison websites and so on). In future the licence fee would therefore to be levied not just on TV sets, but also on computers. Did it have to be pointed out that, in a nation supposedly embracing the digital era, a tax on computers would be mad?

In the last few years the proposal for a digital enhancement to the licence fee has become even more ridiculous, for two main reasons. First, the miniaturisation associated with the digital revolution has made it possible to receive broadcasts over small devices, such as smartphones and tablets. Incredibly, the Blair government did decide in the 2004 Communications Regulations that the licence fee should be imposed on households with computers that might be construed as televisions. But no one has yet been barmy enough to advocate that the licence fee be extended to smartphones and tablets, because logically officialdom would then have to check the reception ability of everyone’s mobile phone and indeed landline connection. The notion of including phones in the licence fee “tax base” is clearly untenable. 

Furthermore, broadcasting is being globalised. In the 1950s old-fashioned transmission from masts and towers was specific to a particular locality, but nowadays satellites can be positioned for any country and the internet is in principle wholly international. In the new circumstances broadcasts transmitted from one nation can be received in many nations, smudging the borders of the specific jurisdictions in which a tax or fee can be collected. Further, media giants targeting the global market are now emerging and the concept of cross-border “trade” in broadcasting has become valid. In a world of this kind broadcasting will increasingly be subject to the prohibitions on state subsidy found in the World Trade Organisation’s rules, and that means prohibitions on such relics of national broadcasting as the BBC licence fee. 

The argument can now be pulled together. Licence fee money finances less than a quarter of the UK’s television output; it is less important than advertising revenue and much smaller than the subscriptions collected by BSkyB. In the digital era, and particularly now that iPhones and Android devices have become commonplace, the licence fee no longer has a readily defined tax base and is increasingly impractical to collect. Moreover, in the run-up to its financing review the BBC is being criticised by many politicians for bias of one kind or another, and the licence fee does not command the popular support that it once did. On top of all these domestic UK arguments against the licence fee, sooner or later international pressure against state subsidies will lead to its attenuation or abolition. To summarise, the licence fee is unsustainable in the long run. Public policy needs to be organised now, ahead of the next Royal Charter and “licensing round”, to promote a healthier 100 per cent market-based system of financing British broadcasting. Indeed, perhaps the very ideas of a Royal Charter and a licensing round should be thrown into the dustbin of history. 

Let us suppose that the licence fee is scrapped in due course. What, then, is to become of the BBC? At present the licence fee represents about 70 per cent of the BBC’s total income. Unless the BBC is to contract dramatically, that money will have to be replaced by a combination of subscription money, advertising revenue and other income-generating sources. Obviously, a transitional period in which the BBC receives a government grant is to be expected. Also obviously, that government grant would be unfair on BSkyB, ITV and other broadcasting businesses if it were to persist for any length of time. Eventually, all the UK’s broadcasting businesses and also — let us not forget — all its up-and-coming narrowcasting businesses must compete on the same level playing field. 

Could the BBC remain in public ownership? Could it be a publicly owned entity subject to market pressures and required to generate a decent return on capital, and still somehow operating with the remit of a “public service broadcaster”? In theory that could be envisaged. However, in practice the notion is almost as obsolete and ludicrous as the licence fee is fast becoming. As a nationalised industry, with an implicit state guarantee on its debts, the BBC would have an advantage over its privately owned competitors in fund-raising. On the other hand, its nationalised status would make it answerable to the government of the day in a financial sense and to parliament in more general terms. Its management would not have the same freedoms — to buy and sell other businesses, to hire and fire staff, to expand or contract in foreign jurisdictions — as its commercial rivals. Once the licence fee has gone, the privatisation of the BBC must inevitably follow. 

For the time being, the conclusions just drawn — that the licence fee is finished and that the BBC must be privatised — are not part of the established policy consensus. However, the main lines of the analysis are so straightforward that they must be familiar to the key decision-takers in Ofcom and the BBC itself. In a speech in the BBC Radio Theatre on October 8 the current director-general, Lord Hall, highlighted the corporation’s move into the tablet era by praising the BBC’s iPlayer, which is to be “reinvented” in 2014 and made “more bespoke” so that it becomes “the best in the world”. The BBC’s news audience, now put at 250 million people, is to be doubled to 500 million by 2022. Hall applauded “the UK’s amazing array of arts and science institutions” and said that it would be the BBC’s job “to reach new audiences across the globe” for these institutions. The BBC is even apparently to move into corporate finance, as it offers “risk capital to the UK’s creative industries”. In an earlier and yet more eye-catching announcement at the end of August, Hall had eulogised Google and California’s Silicon Valley for their speed of decision-taking.

All of which is excellent, except that it cannot be reconciled with the BBC in receipt of a state subsidy and hamstrung by Royal Charter commitments as a public service broadcaster. The BBC has itself acknowledged that the owners of devices using the iPlayer do not have to pay the licence fee. That may be the thin end of a wedge, but it is a massive wedge that has been opened up. Any loudly-proclaimed ambition to be “best in the world” must be of interest, and perhaps concern, to unsubsidised broadcasters in other countries. No doubt the BBC still has a great reputation internationally for the impartiality of its news broadcasting, but how is the broadcasting of news to hundreds of millions of people outside Britain to be financed?

Is the money for the reinvented and bespoke iPlayer, and for the half-billion-strong global news audience, to come from advertising, from subscription, from pay per view or from another new and magical source so far wholly unknown to analysts of the broadcasting sector? Big plans and brave words are fine, and Britain is lucky to have someone of Hall’s vision and audacity as the BBC’s director-general. But Hall’s ambitions cannot be financed by licence fee money. The BBC cannot simultaneously be in receipt of a state subsidy heading towards £4 billion and chuck hundreds of millions of “risk capital” at greedy creative-industry entrepreneurs. Either the BBC is a profit-seeking, privately owned, risk-taking and slimline enterprise or it is a state-subsidised, state-owned, publicly accountable and rather bureaucratic behemoth. It cannot be both. At present it is state-subsidised, state-owned, publicly accountable and rather bureaucratic, and it has a lot of catching up to do. 

This article opened with the statement that time and technology stand still for no organisation. As far as the BBC is concerned, the guardians of its heritage and reputation have done a lousy job in the last 30 years. They have totally failed to anticipate how technology would alter the BBC’s position in British and international broadcasting. Time is running out. BSkyB, which has the US 21st Century Fox as the dominant shareholder, is leaving it behind even in its home market. Much more seriously, unless it is privatised soon and given the freedom to compete, the global media companies will outmanoeuvre and outgun it in international competition. The notion of the BBC as our “national champion” will be a joke. As a lumbering bureaucracy in public ownership and dependent on state subsidy, the BBC will go the same way in the 21st century as British Leyland and British Shipbuilders in the 20th.

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