The success of the BBC’s commercial activities will be critical to the BBC and licence fee payers in the immediate years ahead, according to the UK’s National Audit Office (NAO) which has published its first report on the BBC’s commercial activities, following an expansion in its statutory powers under the BBC Royal Charter.
These activities generated revenue of £1.2 billion in 2016-17 and employed 4,900 staff in April 2017.
Overall, the BBC’s total revenue from its commercial subsidiaries was broadly stable at more than £1.1 billion in each of the five years from 2012-13 to 2016-17. However, among the subsidiaries, only Worldwide made profits throughout the five years. Its profit after tax was £40.4 million in 2016-17, 68 per cent lower than in 2012-13 (£127.6 million), though this was largely due to two one-off costs incurred in 2016-17.
Between 2012-13 and 2016-17, Worldwide made £450 million of direct payments for programmes shown on the BBC’s Public Service Broadcasting (PSB) channels and other PSB services. It also paid dividends of £423 million, most of which (£312 million) went to supplement licence fee income in the BBC’s PSB divisions. The BBC retained £111 million of these dividends in its commercial reserves and used the reserves to lend to the main commercial subsidiaries to avoid incurring interest costs.
Including its four main subsidiaries (Worldwide, Studios, Global News, and Studioworks), at July 2017 the BBC had 110 subsidiaries of different types undertaking commercial activities. Ninety-three of these were in Worldwide, which generated 90 per cent of the BBC’s commercial revenue in 2016-17. The subsidiaries include those which exist to facilitate commercial operations in financial, legal and regulatory ways that are normal for international media organisations. The total number of subsidiaries has fallen by 23 per cent since March 2012.
The BBC’s main subsidiaries operate in a rapidly changing and increasingly competitive market. Audiences are increasingly accessing content digitally, including via fast-growing global subscription video on demand services such as Netflix. The BBC’s commercial subsidiaries face increased competition and costs to secure the valuable Intellectual Property (IP) that underpins the contemporary media business model. In response, Worldwide has entered into more co-productions, partnerships with other international companies, and other projects. These actions could deliver greater financial rewards for the company, and the BBC as a whole, but also entail greater risks. Simultaneous with these developments, advertisers are spending more of their budgets online, putting pressure on the traditional business model for running TV channels, a development that affects both Worldwide and Global News.
A principal focus for Ofcom, the BBC’s regulator since 2017, will be the relationship between the BBC’s licence fee-funded PSB divisions and its commercial subsidiaries. The BBC is required to ensure that its commercial activities do not, as a result of their relationship with UK PSB divisions, distort the market or gain an unfair competitive advantage. The BBC must notify Ofcom if any commercial line of business is not making a commercial rate of return.
Ofcom can also assess material changes in the BBC’s commercial activities. It is currently considering the BBC’s plan to merge Worldwide and Studios in April 2018. The BBC Board has already determined that this development is not material, but Ofcom may reach a different view. The BBC wants to merge Worldwide and Studios to create a more integrated commercial business in order to compete in the increasingly competitive and consolidated global market.
The NAO highlights a number of challenges and risks the BBC faces. It is developing new BBC-owned IP, primarily in the form of TV series and formats, to drive growth. It will need to manage risk carefully to ensure that the funds it invests in such projects have the greatest impact possible in a crowded marketplace. The NAO has signalled that the BBC may also wish to consider whether Worldwide’s financial returns target, of £1.2 billion over five years, remains relevant, given the planned Worldwide and Studios merger and other changes that have occurred.
The BBC’s Royal Charter permits it to undertake commercial activities, provided these activities fit with its mission and public purposes, are not funded through licence fee income, and are undertaken with a view to generating a profit.
The BBC cannot undertake commercial activities directly, but must do so through commercial subsidiaries. In 2017-18, the BBC has four main commercial subsidiaries of varying size and complexity to manage its commercial activities – Worldwide, Studios, Global News and Studioworks.
The BBC is to merge Worldwide and Studios from April 1st 2018 to create a new commercial entity, to be called BBC Studios, which will unite the BBC’s commercial production and distribution arms.
“The BBC’s expanding commercial activities are undertaken on behalf of licence fee payers and exploit the significant assets that licence fee payers have paid for,” advised Amyas Morse, head of the National Audit Office. “The public interest in holding the BBC to account for these activities is therefore clear. Granting the NAO access to the commercial subsidiaries for the first time is an important step in improving the transparency of the BBC’s operations. We will continue to scrutinise the BBC’s commercial activities to inform Parliament and to help the BBC optimise the value for money it delivers.”