MPs: Changing behaviour ‘significant risk’ to BBC commercial performance
July 6, 2018
By Colin Mann
A report from the Public Accounts Committee (PAC) of the UK House of Commons on the BBC’s commercial activities has concluded that the BBC must strike a balance between serving UK audiences and seeking to grow revenue in a challenging global market.
According to the Committee, the BBC is facing increasing challenges from commercial competitors including Netflix, Amazon and independent television channels, so its commercial work which can help fund its public service broadcasting is working in an increasingly competitive market.
“Through its commercial activities the BBC seeks to deliver additional value for licence fee payers by providing extra funding for BBC programmes, by contributing to the BBC’s Public Purposes, and by promoting the BBC brand around the world,” notes the report.
“The commercial performance of these activities has been flat in recent years and the BBC faces significant risks to future performance arising from changing audience behaviour as people spend less time watching TV channels and buy fewer DVDs, while increasingly streaming programmes digitally via subscription video on demand services,” it says.
“The BBC has the challenge of striking the right balance between immediate UK audience needs, which must always be its primary focus, and creating programmes and other ventures that can be commercially successful and appealing to international markets,” it adds.
“The twin roles of the newly-merged BBC Studios commercial subsidiary – both making content for UK audiences and generating financial returns from sales – mean that it is now crucially important to the future success of the BBC as a whole. The licence fee payer, therefore, has a fundamental interest in the value that the BBC’s commercial activities deliver, for which the BBC Board is accountable. [BBC Director General] Lord Hall is clear that quality programmes will ensure commercial survival but this will be severely tested in the next few years,” it suggests.
“This report is the Committee’s first on the BBC’s commercial activities, but we expect to look at them regularly in the coming years,” it advises.
“The BBC’s commercial strategy requires it to compete in an evolving and highly competitive global market,” noted Meg Hillier MP, Chair of the PAC. “Much is riding on the success of BBC Studios – the biggest change the BBC has undergone in a generation. We recognise the need for the BBC to take risks but it must be responsible, not reckless, in doing so. That means acting on the lessons of past mistakes and taking a robust approach to assessing new ventures.”
“That should include improving the quality of information available to the BBC’s Board so that it can, on behalf of licence fee payers, make properly informed judgements. The BBC must remember that licence fee payers’ money is on the line. It should never lose sight of its obligations to UK audiences.”
“There is considerable scope for conflicts to arise. If the BBC decides to extend the availability of programmes on the iPlayer, for example, it may reduce opportunities for commercially exploiting those programmes. A balance must be struck and it is vital the BBC underpins its decisions with sound data and a clear-headed evaluation of the options,” she concluded.
Conclusions and Recommendations
Delivering commercial success in a dynamic market undergoing significant change will necessarily entail the BBC taking commercial risks, not all of which will pay off. The BBC is facing changes in how audiences access its content and increased competition from well-financed companies such as Netflix. In response, the BBC has undertaken new commercial ventures. At least one of these, the BBC Store, which allowed people to pay to download digital content to own, failed soon after opening as demand for purchasing programmes from the BBC archives was lower than expected. The BBC intends to continue trying new ventures to secure future audiences and revenue. With the limited capital at the commercial subsidiaries’ disposal, they cannot afford to be slow in exiting unsuccessful investments, as the BBC now accepts happened after its unsuccessful purchase of the Lonely Planet travel business.
Recommendation: The Committee recognises that the BBC needs to take risks to be commercially successful, but it should learn appropriate lessons from past failings, including the BBC Store, and should establish in advance fixed points at which it will assess whether all new ventures are paying off.
The BBC is increasingly dependent on working with partners in joint ventures and co-productions to deliver its commercial goals, but partners may have different ideas about how the relationship should develop. In order to address the strategic challenges the BBC is facing, its commercial activities have been changing the ways they do business; for example, entering into increasing numbers of partnerships and co-productions. As a result, dependence on the revenue and returns from these partnerships has increased. For example, Worldwide’s share of the profits made by joint venture and associate companies made up 31 per cent of its own total headline profits in 2016-17, compared to 17 per cent in 2012-13. Also, about two-thirds of the BBC’s TV drama is funded by commercial deals. As a result, the potential impact on the BBC’s commercial activities has grown should partners’ strategic interests diverge from the BBC’s. The BBC says that it is very clear about shared editorial values and editorial alignment when choosing its partners in order to mitigate against subsequent divergence in interests, but the market is nonetheless constantly, and often rapidly, evolving.
Recommendation: The BBC should monitor its partnerships for signs of divergence between its and its partners’ interests, and should make contingency plans for when these relationships end in order to minimise unexpected hits to its bottom line.
The BBC’s failure to provide its Board with appropriate benchmarking data means that the Board is not well-placed to judge whether the broadly flat level of performance of the commercial activities in recent years is acceptable. The BBC’s total revenue from its commercial subsidiaries remained broadly unchanged at around £1.2 billion in each of the five years from 2012-13 to 2016-17. In this period only Worldwide made profits, and its profit after tax was 68 per cent lower in 2016-17 than in 2012-13, although this was mainly due to two large one-off costs. According to the BBC, this represents a good level of performance given the changes its commercial activities have gone through in recent years and market conditions. The BBC has undertaken benchmarking of its commercial activities, but has not, as a matter of course, shared the results with its Board, making it difficult for the Board to gauge whether the reported level of performance was acceptable. The BBC intends to include more benchmarking information in Board reports in future, and the Board itself is likely to commission more benchmarking soon as part of a review of the commercial operations that it must complete by the end of 2018.
Recommendation: The BBC should set out how it will provide the Board with better information in future, so Board members can understand how the BBC’s commercial performance compares to market norms. The Board should also publish the results of the commercial review it must undertake by the end of 2018, including high-level information about any benchmarking this generates.
Understanding of the BBC’s commercial performance has been undermined by inconsistent metrics and a confusing target for “financial returns”. The BBC Board acts as the shareholder for the BBC’s commercial companies, and, in this role, is the proxy for licence fee payers, safeguarding their interests. However, we cannot see how the Board could have scrutinised the performance of the subsidiaries effectively while the BBC, in reports to the Board, was using different profit metrics for different subsidiaries. The BBC says that, since 1 April 2018, it has rectified the situation. However, the BBC also now needs to look at how it measures the financial returns delivered by its commercial activities. Its measure of these returns is unique and consists of a complicated combination of up-front investment in BBC programmes and dividends from profits. The measure is further undermined now that Studios and Worldwide have merged, as some of Worldwide’s programme investment has simply become a transfer within the new, merged subsidiary, from its distribution to its production arm.
Recommendation: The BBC Board should assess whether the unique “financial returns” target is fit for purpose. It should also, as a minimum, set sub-targets in future to distinguish between dividends and up-front contributions to programme costs, and should monitor delivery against these.
The BBC could not explain clearly how it reconciles the notable tensions that can arise between its commercial activities and its Public Purposes. It is inevitable that tensions will sometimes emerge as the BBC looks for programmes and ventures that, on the one hand, can deliver commercial returns and, on the other hand, fit with its mission and contribute to its Public Purposes. We heard of two examples. First, if the BBC decides to increase licence fee payers’ access to programmes by extending the period for which they are available on the iPlayer, it may reduce opportunities for the commercial exploitation of these programmes. Second, the Global News subsidiary’s BBC World News TV channel arguably delivers wider benefits for the British taxpayer by boosting the UK’s reputation overseas through its provision of trusted and independent news. However, the market for selling advertising for global news is very difficult, and the future looks challenging, leading the BBC to seek a public subsidy towards Global News operations in Europe and Sub-Saharan Africa. We are not convinced about the extent to which the Board explicitly considers the balance between the delivery of commercial returns and the public benefit when examining both these specific situations and the performance of the commercial activities more broadly.
Recommendation: The BBC should clarify for itself, Ofcom and Parliament how it will resolve tensions between commercial activities and Public Purposes in future, and should develop its ability to quantify the level of commercial performance it is sacrificing due to the Public Purposes. Specifically, the BBC should quantify the commercial income it will forego if it decides to make more series available for longer to licence fee payers via iPlayer. The BBC should also write to us explaining how Global News could continue as a commercial venture if it were to receive a public subsidy.
The creation of BBC Studios and its merger with BBC Worldwide constitute a high-risk strategy to protect the BBC’s position as a programme maker and owner of intellectual property (IP) in future. The BBC established its in-house production arm as a commercial company in April 2017, and then merged it with its commercial distribution business, BBC Worldwide, in April 2018. Establishing BBC Studios represents the biggest change the BBC has gone through in a generation. The new subsidiary’s success – in delivering content for audiences and creating IP which can be exploited to generate financial returns – is critical to the BBC’s future. The BBC expects that accounts later this year will show that the former BBC Studios made a profit in 2017-18, with Worldwide having seen significant growth in profits. Going forward, the BBC expects both the production and distribution arms of the new, merged business to succeed commercially even as they have to compete more intensively than ever for access to the best programme-making talent.
Recommendation: The BBC should set clear expectations for the performance of the merged BBC Studios and should act decisively if the business seriously underperforms. The BBC Board should be kept informed of varying levels of profitability within, and not just between, the subsidiary’s individual lines of business.