Analyst: Licence fee alternatives would underfund BBC

In light of the ongoing UK governmental review of the potential decriminalisation of the BBC licence fee, and ahead of the next Charter review, Ampere Analysis has explored four possible alternative funding models which all have been mooted as possible replacements for the licence fee. Ampere has found that each of these would present unique challenges for Britain’s public broadcaster.

The four funding mechanisms include:
1)     A shift to a subscription model, akin to Netflix or Sky
2)     A move to fund BBC programming purely through advertising revenue
3)     A levy on Internet Service Providers such as BT and Virgin Media
4)     An income tax model

Ampere’s analysis indicates that each of these models – with the exception of an income tax model – would struggle to generate sufficient income to cover BBC activities, necessitating a scaling-back of output or quality. Many would also have detrimental effects on other components of the UK media and communications economy.

The BBC in light of Covid-19

But in light of Covid-19, the BBC has found a renewed importance amongst the public, with a recent Ofcom study finding 82 per cent are using BBC as a source of news*. The BBC has responded to the current lockdown situation by providing entertainment for viewers at home, as well stepping up their education and health services. The broadcaster has been ramping up its commissioning slate, increasing its box set selection on iPlayer and prioritising education. Each of these responses will improve sentiment among consumers and political audiences, helping to address the effects of the last few divisive years in UK politics and its ramifications for the perception of the BBC.

Hannah Walsh, Senior Analyst at Ampere Analysis said: “There’s no question that during the current COVID-19 pandemic it has become crystal clear just how important the BBC is for the population of the UK. The broadcaster has been quick to act, ramping up commissioning and amending its schedule. We’ve seen the daily updates on the current situation by the Prime Minister and Government health advisors, but there’s also advice clinics on the radio, and specialised children’s content, including educational programmes, BBC Bitesize online and child-friendly news updates.”

What are the options for alternatives to the licence fee?

1. Subscription fee – consumers voluntarily pay a monthly fee in order to access BBC programming, as they might for Sky or Netflix

• If the subscription takes the form of an online service, enhanced devices capable of dealing with encrypted signals, and/or universal broadband and connected device coverage would be required for consumers to access channels. Encrypted radio access would be a challenge.

Fundamentally however, Ampere believes it is unrealistic for the BBC to match current income levels through a subscription fee. The BBC would need to sign up nearly 24 million households for a whole year, each paying £13 per month, to mimic current funding levels. Current market leaders Sky and Netflix have less than half this number of subscribers apiece.

2. Advertising – the BBC introduces commercial breaks, as per Channel 4 and ITV

• The BBC is one of 19 public broadcasters across Europe which employs a licence fee model, but only one of three (UK, Denmark and Norway) where the licence fee is not supplemented by advertising.
• However, the introduction of advertising on BBC channels would have multiple side-effects. A positive for consumers would be the fact that they would no longer need to pay for access to the BBC, and for advertisers, costs would likely fall as more inventory is opened up.
• But Ampere’s latest wave of its regular Consumer tracker found that one in eight BBC viewers were highly intolerant of advertising, indicating that such a move would also result in some consumers switching off entirely.
• Another major problem is that as the channel’s funding model would mirror ITV and Channel 4, it would lead to a loss in revenue for these broadcasters competing for ad spend. In addition, it would leave little clear distinction between the roles of Channel 4 and the BBC – with the former already fulfilling extensive public service obligations under an ad-funded model.
• Furthermore, feasibility in terms of replacing licence fee revenue is questionable. Ampere’s analysis has found that the UK TV ad market would need to grow by 86 per cent for the BBC to replace its current licence fee revenue without driving a loss in revenue for competing commercial broadcasters. In the light of the current size of the UK ad market, this is extremely unlikely – and would also leave public broadcasting vulnerable to economic shocks like the current Covid-19 pandemic.

3. Levy on Internet Service Providers (ISPs) – ISPs would pay an additional tax, which is then used to fund public broadcasting

• A line of argument is that ISPs indirectly benefit from media consumption, which drives consumers’ online activity. One suggested model for funding public broadcasting is that ISPs should pay a fee to support the creative industries which could fund the BBC.
• While this is more realistic than a voluntary subscription model, UK ISPs would need to cover an additional £138 per broadband subscriber to match the current TV licence fee.
• However, this is not without risks, as fees will be passed onto consumers in their monthly communications bills, and it will thus act as a disincentive for low income groups to access communications services – potentially isolating already-vulnerable groups. In addition, it may impact telcos ability to invest in communications network upgrades compared to the current situation, unless the full cost of the fee is passed to consumers.

4. Income Tax – above a specified threshold, citizens would pay a tax to support the BBC

• The BBC could opt to follow Sweden, Croatia and Finland with an income tax. On average, every full-time employed person aged 16 to 64 would be taxed £116. Those under a defined income threshold would not pay. This is, in Ampere’s view, the most realistic alternative to the current model, and represents a more egalitarian and progressive funding structure.
• One significant potential disadvantage of this model is the risk of the BBC being perceived as a Government communications vehicle if it was explored, careful thought would need to put into ensuring the funding and output was sufficiently distanced from Westminster.

Walsh concluded: “The BBC has said it is willing to consider alternatives adopted by other European broadcasters such as income tax and advertising to compensate for the loss of the licence fee. Ultimately, however, it cannot match the current income levels generated through the fee via most alternative funding mechanisms. Many of these models would have to be coupled with alternative funding support and would not work alone to support current output or quality. However, in the aftermath of the Covid-19 pandemic, the BBC may be seen as an institution we simply can’t afford to lose – even by those who thought they didn’t need it. It will be interesting to see how the broadcaster and government progress this debate when discussions re-open.”