Response to BBC Strategy Review
May 2010
BBC strategy review
Executive summary
1) UK-made content is vital to public service broadcasting and other services, representing, challenging and, at its best, uniting our society in a way that imported programmes never can. However, investment in UK programmes by commercial sector broadcasters is under severe pressure. Over the current Charter period, from 2005 to the end of 2009, overall investment by the five main networks is likely to have declined by over 16% in real terms, according to analysis by Oliver & Ohlbaum Associates (O&O) for Pact. Across all broadcasters, O&O projects a £250m drop in annual commissioning of new UK content between 2007 and 2009.1 2) This is likely to have two negative effects: reduced quality and range of content for UK audiences as broadcasters move to cheaper genres and imports (the BBC is already a near monopoly broadcaster of UK-made programming for older children, for example); and an undermining of the recent growth of the UK content sector on a global level (exports of UK television programmes have risen by 39% since 2003,2 but initial investment by a broadcaster through a commission is vital to enabling the producer to generate further export sales). 3) We therefore broadly welcome the focus in the strategy review on UK content, in particular the commitment by BBC Management to maintain a level of content spending and, through allocating a set proportion of resources to content, a capping of non-content spending. We also welcome the principle of reducing and capping spending on foreign acquisitions as part of a focus on UK-made content that fulfils public service values. In light of the market conditions that we have highlighted above, the proposed focus on content is particularly relevant to the BBC’s fulfilment of its Public Purpose under the Charter of stimulating creativity. 4) However, the BBC’s proposals do raise a number of issues that Pact requests the Trust and Management consider and, if appropriate, address. These fall into the following areas:
1 2
Oliver & Ohlbaum Associates for Pact Annual Export Figures, TRP for Pact/UKTI 2
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Clarity over figures and definitions: Several headline proposals in the strategy paper lack detail in key areas that risk potentially misleading industry and the licence fee payer, and raise difficulties in measuring the implementation of the proposals, and thereby holding BBC Management to account. In this area, we propose that the BBC should: • • • • • • • • •
• •
Clarify the time frame for achieving its 90% target for spending on content/distribution. Guarantee a level of spending on first-run originations. Adopt a definition of content consistent with that used by Ofcom. Break down planned spending on television, radio and online content. Measure the target of 90% on content/distribution against income. Make public the cost of in-house and external commissions per hour, as well as by service. Clarify whether dividends paid to the BBC by BBC Worldwide will be included in its 90% target for content/distribution. Make public BBC spending on content/distribution as a proportion of total group expenditure (or preferably income). This would include BBC Worldwide. Only buy imports where there is a clear public service rationale and where the BBC does not have to compete against the market to acquire such content. To ensure this it should only buy overseas series after their first season has aired in their domestic market. Clarify why it has set its proposed reduction in imports at just 20%, and look to reduce imports further. Benchmark spend on imports against other UK broadcasters and BBC originations.
Putting quality at the heart of commissioning: the BBC strategy proposals have rightly considered how much and on which type of programming the BBC should invest, but they do not look at whether the BBC’s commissioning framework ensures it commissions programmes on a meritocratic and costefficient basis, regardless of whether they originate in-house or externally. Inhouse currently benefits from a 50% guarantee of all qualifying BBC commissions, plus BBC news, despite the case for this guarantee being in our view fundamentally flawed, and despite the fact that the guarantee increasingly risks distorting commissioning by placing an artificial restraint on BBC commissioners that prevents commissioning from external companies after a fixed point – potentially preventing them from commissioning the best ideas on merit.
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In this area, we propose that the BBC should: •
•
Review whether current commissioning structures are optimal on a strategic basis, with a view to removing the in-house guarantee or setting it an appropriate level as soon as possible. Demonstrate publicly why the in-house guarantee should be maintained and at what level.
Online: the strategy paper does not consider the negative impact of proposed cuts in online investment on the nascent online content sector, which is likely to undermine the BBC’s fulfilment of its Public Purpose under the Charter of stimulating UK creativity. In this area, we propose that the BBC should: • Limit negative market impact through a clear remit, not cutting 25% of spending. • Introduce an online WOCC of 25%, in addition to the 25% external quota. • Address concerns over the inclusion of services in the external quota; if this is not possible, it should introduce a 50% WOCC.
Content priorities: The BBC strategy review has rightly indentified UK children’s content as one of its five content priorities, but its proposals do not in our view address this issue in a meaningful way. In feature film, the BBC is required under the Charter Agreement to have “a film strategy” in place,3 yet this is not addressed in the strategic review. The Trust is in the final stages of a separate review of BBC Films’ strategy and, in being mindful of BBC Charter requirements, this overarching strategy review should take account of its findings.
In this area, we propose that the BBC should: Children’s: • Increase annual investment in first-run originations by £50m. Film: • Increase the share of revenues from the BBC corridor to the producer. The majority of these revenues could be placed in a “lock-box” so that they can be accessed only for future development and production. • Reduce the overall licence period for film and the exclusive window to five years. • Over time double the annual budget of BBC Films to around £20m.
3
BBC Charter Agreement, 8 (2) (a) 4
BBC strategy review
Introduction
1) Pact is the trade association that represents the commercial interests of the independent production sector. We have more than 600 member companies, involved in creating and distributing television, film and interactive content. 2) The independent production sector creates around half of all new UK television programmes each year,4 as well as acclaimed UK films. The sector’s turnover is £2.2 billion per year5 and it employs 20,950 people – more than the terrestrial broadcasting and the cable and satellite sectors respectively.6 3) For further information, please contact Pact’s director of policy, Adam Minns, at adam@pact.co.uk or on 020 7380 8232.
4
Ofcom, Communications Market Report, 2008 Pact Census 6 Employment Census 2006, Skillset 5
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Section 1: Prioritising content
1) Pact welcomes in principle the strategy review’s commitment to content through the five content priorities and related proposals. As the trade association for the independent production sector, Pact has consistently championed UK-made content as crucial to delivering the public service values enshrined in the BBC Charter and highlighted in the strategy paper – i.e. informing, educating and entertaining audiences through high quality, original and cost-efficient programmes and content. 2) In recent years, the BBC has emphasised digital projects and infrastructure, such as the build out of the digital terrestrial network, developing a satellite service, and relocating to Manchester and Glasgow. The strategy paper points out that a larger share of licence fee income has come to be used for digital projects and infrastructure, and the “amount able to be used for the BBC’s primary purpose of informing, educating and entertaining has been reduced in proportion.”7 3) With the culmination of digital switchover and the BBC’s geographical restructuring, it is timely for the BBC’s strategy review to focus on content. Content is clearly a priority for the licence fee payer: the BBC’s consumer research for this review found that, amongst licence fee payers who valued the BBC highly, the top reason for supporting the BBC was “great programmes and content”.8 4) Crucially, it is UK-made content, as opposed to imports, that is at the heart of delivering public service broadcasting, and should be at the heart of the BBC’s commitment to content. UK content represents, questions and, at its best, unites our society in a way that imported programming never can. We welcome in particular the strategy paper’s inclusion of “originality” and “building on British talent” as two of the four characteristics by which it seeks to define the distinctiveness of BBC output. The strategy paper’s emphasis that this entails a commitment to “original production providing range and depth; fresh and new ideas,” and “focusing on content made for the UK...and helping support UK creative industries across the country.”9 5) We see this commitment to UK content as absolutely consistent with – and indeed fundamental to the delivery of – the BBC’s Public Purposes under the Charter, notably: 7
BBC Strategy Review, Proposals, March 2010, page 32 Ibid, page 20 9 Ibid, page 24 8
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• Sustaining citizenship (e.g. through UK-made news and factual content). • Promoting educating and learning (e.g. through factual content that explores and reflects diverse UK culture and history). • Stimulating creativity and cultural excellence (e.g. stimulating creative growth and the best UK talent by commissioning the best ideas on a meritocratic basis, whether they come from in-house or external suppliers). • Representing the UK (e.g. through a wide range of genres, drawn from creators across the country, reflecting the diversity of UK culture and society). • Bringing the UK to the world and the world to the UK (e.g. representing world events them in a way that is accessible to UK audiences; supporting a UK content sector that is globally competitive and able to exploit its programming internationally). • Delivering the benefits of digital technology (as part of this, high quality UK content can help drive the take up of new services providing the appropriate rights to that content are made available on a reasonable basis).
6) The importance of UK content in a public service context was also confirmed by Ofcom’s consumer research for its recent Public Service Broadcasting Review, which found that UK-made content was crucial to reflecting UK cultural identity and representing diverse viewpoints.10
The market context for public service content
7) The strategy review’s commitment to high quality UK content is important at a time when commercial sector broadcasters are reducing recent investment in home-grown content. The review rightly notes this, stating that its commitment to content is, in part at least, a response to certain market trends:
10
PSB Review Phase 1: The Digital Opportunity, Ofcom 7
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“Perceptions of what the BBC should provide are clearly also shaped by what other broadcasters supply. On television, advertising-funded broadcasters are under greater pressure than ever, while subscription revenues to pay television – although growing strongly – provide relatively little payback to the UK creative sector.”11 8) To put the BBC’s review into context, over the current Charter period, from 2005 to the end of 2009, overall investment by the five main networks is likely to have declined by over 16% in real terms, according to analysis by Oliver & Ohlbaum Associates (O&O) for Pact. Across all broadcasters, O&O projects a £250m drop in annual commissioning of new UK content between 2007 and 2009, as shown below. Figure 1: Total network originations spend, 2005 to 2009 (real terms)* £m – 2009 prices 3000
2616
2572 2475
2500
2435 2213
2000
1500
1000
500
0 2005
2006
2007
2008
2009E
*Figures are in real term s using 2009 prices; excludes regional spend; includes news & sport Source: Oliver & Ohlbaum, Attentional, OFCOM Comm unications Report, PACT
9) This decline in investment in UK content is expected to increase, with Ofcom forecasting that the annual funding gap could double by 2020, hitting £500m.12 10) The impact of such a fall in investment for original commissions is likely to be twofold. Firstly, audiences are likely to experience reduced quality and range in programming, with many broadcasters placing increased emphasis on cheaper genres and 11
BBC Strategy Review, Proposals, March 2010, page 24 Second Public Service Broadcasting Review, Phase 2: preparing for the Digital Future, Ofcom, September 2008, page 5
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imported content. Core public service genres are already under particular pressure. ITV has already made widely-reported cuts in public service programme budgets such as programming from the devolved nations and English regions. In some areas, such as programming for school-age children, the BBC is already close to a monopoly provider of first-run originations, and the quality and breadth of its output is therefore all the more important. 11) Secondly, decreased commissioning in the domestic market may undermine the UK creative content sector’s successful growth on a global level. In recent years, the UK television content sector has been one of the success stories of the creative industries, with an increase in overseas exports of UK television content of 39% (external and in-house programmes).13 The success of the UK television content sector in the global market is closely linked to the public service broadcasting system in the UK – and the BBC in particular as the single biggest commissioner of UK content. A BBC commission will typically represent only a portion of the production budget, but it enables the producer to raise the remaining production funding through exploiting IP rights in secondary and ancillary markets around the world. In this way, the independent sector raises up to £190m per year in investment in the development and production of UK content.14 In effect, therefore, BBC commissioning of domestic content acts as seed capital for driving export growth. 12) Any significant reduction in overall levels of funding provided by public service broadcasters - over and above that which can be absorbed by content producers from rising secondary and ancillary rights revenue – would be likely to reduce the competitive advantages of the UK content sector in the global market place. In the current climate, the role of the BBC as an engine for the growth of the content sector is likely to become increasingly important as original commissioning by broadcasters in the commercial sector comes under more and more pressure. 13) There are already signs that the independent content sector is under pressure, with producer margins remaining flat or falling as broadcasters decrease their payments for programmes and production companies raise more of the production costs from other sources. As we have noted, O&O is projecting a £250m drop in total new UK content commissioning between 2007 and 2009. According to O&O, growth in rights income will not be sufficient to make up for this loss in new content spend, with the whole independent sector declining by £100m between 2007 and 2011 in real terms, as shown below. 13
Annual export figures, TRP for Pact/UKTI, indicate that total television exports have risen by 39% since 2003. 14 Pact Census 9
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Figure 2: Total TV revenues of UK independent sector (real terms), 2008 to 2011 £m
2000
2,060 22 39
1,998 17 32
1,986 17 31
1,960 16 30
369
371
373
70 115
70
71
121
126
1395
1376
PRIMARY UK COMMISSIONS 1343
2009
2010F
2011F
285 64 109 1500
OTHER UK PRE-PRODUCTION OTHER INT’L INCOME* INT’L SALES OF UK FINISHED PROGRAMMES* UK RIGHTS INCOME*
1000
1540
75%
69%
500
0 2008
*Definitions: ‘Other international income’ - revenue from companies overseas operations and any primary commissions received from non-UK broadcasters; ‘Int’l sales of UK finished programmes’ - sales of first run UK programming sold as finished product abroad; ‘UK rights income’ – UK secondary sales, publishing, formats, DVD sales etc.; 2009 prices Source: Oliver & Ohlbaum analysis, PACT census
14) We therefore broadly welcome the focus in the strategy review on UK content, in particular the commitment by BBC Management to maintain a level of content spending and, through allocating a set proportion of resources to content, a capping of non-content spending. We also welcome the principle of reducing and capping spending on foreign acquisitions as part of a focus on UK-made content that fulfils public service values. In light of the market conditions that we have highlighted above, the proposed focus on content is particularly relevant to the BBC’s fulfilment of its Public Purpose under the Charter of stimulating creativity.
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15) However, the BBC’s proposals do raise a number of issues that Pact requests the Trust and Management consider and, if appropriate, address. These fall into the following areas: • Clarity over figures and definitions: Several headline proposals in the strategy paper lack detail in key areas that risk potentially misleading industry and the licence fee payer, and raise difficulties in measuring the implementation of the proposals, and thereby holding BBC Management to account. • Putting quality at the heart of commissioning: the BBC strategy proposals have rightly considered how much and on which type of programming the BBC should invest, but they do not look at whether the BBC’s commissioning framework ensures it commissions programmes on a meritocratic and cost-efficient basis, regardless of whether they originate in-house or externally. In-house currently benefits from a 50% guarantee of all qualifying BBC commissions, plus BBC news, despite the case for this guarantee being in our view fundamentally flawed, and despite the fact that the guarantee increasingly risks distorting commissioning by placing an artificial restraint on commissions that prevents them from commissioning from independents after a set point, even if that means not commissioning on a meritocratic basis. • Online: the strategy paper does not consider the negative impact of proposed cuts in online investment on the nascent online content sector, which is likely to undermine the BBC’s fulfilment of its Public Purpose under the Charter of stimulating creativity. • Content priorities: The BBC strategy review has rightly indentified UK children’s content as one of its five content priorities, but its proposals do not in our view address this issue in a meaningful way. The proposal to increase investment in children’s by £10m per year represents less than 2% of the total proposed content re-prioritisation of £600m, and may not even replace declines in BBC investment in children’s over recent years, let alone the market failure in the wider commercial sector. In feature film, the BBC is required under the Charter Agreement to have “a film strategy” in place, yet this is not addressed in the strategic review. The Trust is in the final stages of a separate review of BBC Films’ strategy and, in being mindful of BBC Charter requirements, this overarching strategy review should take account of its findings.
16) We detail our concerns and proposals in this order in the subsequent sections. 11
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Section 2: Clarity issues
1) As we have outlined in the preceding section, Pact welcomes in principle the BBC’s commitment in the strategy proposals to prioritise funding for high quality UK content that meets public service values. However, there are several areas of the BBC’s proposals that lack clarity, making them potentially misleading for industry, and indeed for the licence fee payer, and creating difficulties in measuring progress and holding Management to account. Commitment to original content 2) As we noted in the preceding section of this paper, we welcome the strategy review’s inclusion of “originality” and “building on British talent” as two of the four ways of defining BBC distinctiveness. The level of spending on first-run originations, as opposed to repeats and imports, should therefore be an explicit part of the BBC’s public commitment to spend 90% on content/distribution. We note that the BBC’s commitment to broadcast a minimum level of original content under the Charter Agreement is based on hours, not value.15 Definition of content and distribution 3) We are concerned that the BBC’s strategy paper does not offer a clear definition of either content or distribution, despite these two being at the heart of key proposals. Ofcom’s analysis of spending on content by broadcasters, based on figures supplied by broadcasters including the BBC, excludes spending that is not directly part of the programme production costs – such as costs for interstitials and promotions, support and IT. We understand that the BBC does not do this. For example, in the BBC Trust’s review of the service licence for its children’s channels, it presented a “Breakdown of the expenditure of CBBC and CBeebies content.” Of the total spend of £114.3m, around 15% went on areas not directly related to programme production. £6.8m went on “presentation”, including interstitials, and £10.7m on “other costs”, including support staff and IT.16
15 16
BBC Charter Agreement, Programming quotas for original productions, 49 (1) (a) Review of children’s services and content, BBC Trust, February 2009, page 49 13
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4) The different definitions of content used by Ofcom and the BBC have led to confusion around BBC spending in children’s. According to Ofcom figures, BBC spending on first-run originations of children’s programming fell by 20% from 2004 to 2008, from £97m to £77m.17 Even factoring in the increase of £25m over three years (around £8m per year) that the BBC announced last year would mean BBC spending on firstrun children’s originations had fallen substantially over this period, based on Ofcom’s figures. Yet the BBC has stated in the media and to Pact that it has never spent more on children’s programming, including first-run originations. 5) To be clear about the BBC’s spending on content, the BBC should provide figures that are consistent with those of Ofcom (and thereby with the rest of the industry). For the same reason, the BBC should also provide more details as to what will constitute distribution spending. Clarity on investment by content area 6)
We call on the BBC to clarify what proportion of its content spending it proposes investing in each of television, radio and online going forward. This would help provide certainty to respective sectors, encouraging companies to develop their businesses accordingly and invest on a strategic basis. This might be done via threeyear business plan commitments to industry. Income, not expenditure
7) The BBC is proposing to benchmark spending on content/distribution against expenditure rather than income. Total group income in 2008/09 was £4.6 billion, while expenditure was more than £100m lower, at just under £4.5 billion.18 In addition to the lack of clarity that this creates, we are concerned that pegging content/distribution spending to expenditure would enable the BBC to reduce the proportion of spending that is eligible for the 90% target without this being immediately transparent. This could create uncertainly in measuring performance going forward. To be clear to industry and the licence fee payer about the proportion of BBC activities classified as content/distribution, and hold BBC Management to account fully, the BBC’s target of 90% should be measured against income.
17 18
Public Service Broadcasting: Annual report 2009, Ofcom PSB report, July 2009, page 147 BBC annual report and accounts 2008/09 14
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Comparing in-house and external value for money 8) The BBC’s accounting for production costs creates difficulties in monitoring and demonstrating efficiency in commissioning. The BBC does not disclose programmeby-programme costs for in-house commissions, meaning it can allocate backroom and fixed costs for production staff to departmental budgets even though they may not be directly involved in on-screen production. This means that it is impossible to compare in-house production and external commissioning costs. The BBC should make public the total cost of in-house and external commissions on a per hour basis. BBC Worldwide dividends 9) We would welcome clarification as to whether the proposed 90% target for content/distribution would include the annual dividends returned to the BBC by BBC Worldwide. While BBC Worldwide’s investment in programmes at production stage by definition goes on content, it is not clear where its annual dividend (£85m in 200919) is spent. This is income generated on the back of licence fee investment, as the Trust acknowledged in its recent report on the BBC’s commercial operations, which concluded: “We recognise the significant return for licence fee payers delivered by BBC Worldwide on those assets which have been paid for from the licence fee.”20 BBC Worldwide expenditure 10) As a point of clarity, the BBC Trust should make public BBC spending on content/distribution as a proportion of total group expenditure (or preferably income). This would include BBC Worldwide expenditure (£799m in 200921). It is not justifiable to argue that BBC Worldwide expenditure represents the cost of generating a dividend and programme investment for the BBC and therefore should be excluded. The dividend returned to the BBC represents only part of BBC Worldwide’s remit, as set by the Trust. The 2009 review of BBC commercial operations by the Trust strengthened BBC Worldwide’s focus on building an international brand for the BBC and the UK creative industries, and on pursuing the Public Purpose of bringing the UK to the rest of the world. This is not to say that such activity does not contribute to the dividends returned to the BBC, but neither is it the only purpose or even necessarily the most effective means of generating a dividend on BBC assets (which might, for example, be best achieved by selling a BBC programme directly to a US network, rather than broadcasting it on BBC America). 19
BBC Worldwide accounts BBC Commercial Review, introduction to final report, BBC Trust 2009 21 BBC accounts 20
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A clear strategy on imports 11) The BBC is proposing to cut its annual spend on imports of £100m by 20%, but has not explained how it has reached this figure. We suggest that the majority of the BBC’s spending on imports is on high profile, sought-after dramas and Hollywood films. In acquiring US drama Harper’s Island last year, for example, the BBC outbid Channel 4. In contrast, foreign films and drama such as The Wire or the original Swedish-language Wallander have public service value but are relatively low cost. We note also that imports achieved a very low rating in the BBC’s consumer research for this review.22 12) In our view, given the current financial pressure on broadcasters in the commercial sector, the BBC should only buy imports where there is a clear public service rationale and where the BBC does not have to compete against the market to acquire such content. To ensure this it should only buy overseas series after their first season has aired in their domestic market, such as occurred with the BBC’s acquisition of The Wire. 13) The BBC has historically said that it could not collude with other broadcasters to distort the market, but a blanket policy of not acquiring series until their second season would not constitute any such distortion. Indeed, there is a likelihood that the BBC is currently driving up prices by entering into the market for imports in direct competition with other UK broadcasters, raising concerns that the licence fee may be distorting the market. 14) The BBC should seek to reduce spending on imports further. At the very least, however, the BBC Trust should require BBC management to provide clear details as to why it has set its proposed reduction in imports at just 20%. The Trust should also seek to benchmark what the BBC spends on imports with comparable acquisitions by UK broadcasters in the commercial sector, just as it requires BBC Worldwide to benchmark programme prices for BBC in-house content against the wider market. In addition, the BBC should compare and make public the cost per hour of its originations compared to its acquisitions, in order to establish value for money. We note that Channel 4 has been subject to similar scrutiny: analysis of the cost of imports compared to original commissions was an integral part of LEK Consulting’s financial review of Channel 4 for Ofcom.23 22 23
BBC Strategy Review, BBC Trust, March 2010, page 20 Financial Review of Channel 4, LEK Consulting for Ofcom 16
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Summary of proposals regarding clarity • We would welcome clarification of the time frame for achieving the target for spending 90% on content/distribution. • As part of a commitment to invest in content, the BBC should guarantee a level of spending on first-run originations, as opposed to repeats and imports. •
The BBC should adopt a definition of content that is consistent with that of Ofcom (and thereby with the rest of the industry). The BBC should also provide more details as to what will constitute distribution spending.
•
To provide clarity and security for the content sector, the BBC should break down planned spending on content by television, radio and online.
• The BBC’s target of 90% should be measured against income. • The BBC should make public the total cost of in-house and external commissions on a per hour basis, as well as by service. • The BBC should clarify whether dividends paid to the BBC by BBC Worldwide will be included in its calculation of spending towards its proposed 90% target for investment in content/distribution. • The BBC Trust should make public BBC spending on content/distribution as a proportion of total group expenditure (or preferably income). This would include BBC Worldwide expenditure. • The BBC should only buy imports where there is a clear public service rationale and where the BBC does not have to compete against the market to acquire such content. To ensure this it should only buy overseas series after their first season has aired in their domestic market. • The BBC Trust should require BBC Management to explain why it has set its proposed reduction in imports at just 20%, and look to reduce spending on imports further where appropriate.
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• The Trust should benchmark what the BBC spends on imports with comparable acquisitions by UK broadcasters in the commercial sector, and against BBC originations.
Section 3: Putting quality first in commissioning
"[W]hat the WOCC has done is raise the creative bar. Ultimately the real winners are the audience” Jana Bennett, BBC Vision, 2010
1)
Pact broadly welcomes the BBC’s proposed commitment to high quality, UK-made public service content as part of its strategy review. Yet, while the BBC rightly considers the level of its investment in UK content, and in which genres it invests, the strategy paper does not review how the BBC commissions – whether it is genuinely commissioning the very best ideas, no matter where they come from, and whether it is doing so on an efficient basis. This is crucial to delivering both creative quality and value for money for the licence fee payer.
2)
For several years, the BBC failed to demonstrably commission on a meritocratic basis. The BBC’s vertical integration (ownership of both broadcast and in-house production) skewed commissioning towards in-house production departments. This was because the BBC needed to justify and manage its in-house production capacity, and maintained a commissioning structure aligned to in-house production. As a result, the BBC regularly failed to meet or exceed the statutory independent quota, which requires that “not less than” 25% of qualifying television programmes be commissioned from independent producers.24 As BBC director general Mark Thompson told the House of Lords Select Committee during the last Charter review, the 25% independent quota was regarded as ceiling, not a floor.25
3)
In a purely commercial environment this might have been acceptable, even desirable, but the undue marginalisation of external suppliers is not in the interests of the licence fee payer, as it dampens creative competition, potentially restricts the range and quality of ideas, and raises concerns over value for money from in-house
24
Communications Act 2003, 277 (1)
25
House of Lords Select Committee on the BBC Charter Review, First Report, Section 254
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suppliers. As Mr Thompson also noted to the Lords Select Committee: "It is in the interests of the licence payer that investment should go to the best ideas and the best talent."26
The WOCC’s success in affecting “a real shift in culture”
4)
In recent years, the introduction of the Window of Creative Competition (WOCC) has been arguably the biggest shift in how the BBC approaches commissioning. As 25% of qualifying commissioning, the WOCC represents in total around £200m in commissioning by value. In its first full year (2007/08), external suppliers (including non qualifying independents) achieved their biggest share ever of BBC commissions, winning three quarters of the WOCC and 43% of qualifying BBC hours overall. In year two (2008/09) – the latest available – the external supply sector maintained this overall level.
5)
In initial assessments, the new system was judged to be successfully encouraging the BBC to commission the best ideas regardless of whether they came from external or in-house producers. The first biennial review of the WOCC, carried out by the BBC Trust in July 2008, found on the whole that the WOCC had done much to encourage a meritocracy in commissioning. A report by PricewaterhouseCoopers (PWC) for the Trust stated that: “In general the procedures and structures in place suggest that ideas from independents and in-house commissioners are treated equally. Commissioners have clear incentives to pick the best ideas, no matter where they came from. In general we detected no obvious bias towards accepting in-house ideas over independent ones or vice-versa.”
6)
The Trust’s final report endorsed PWC’s overall finding, stating that the new system had started to affect a real change in BBC commissioning: “The introduction of the WOCC and the associated structural and staffing changes has been a significant step for the BBC and the evidence from this first biennial review suggests that a real shift in culture is being achieved.”
26
Mark Thompson oral evidence to House of Lords Select Committee on the BBC Charter Review, First Report, Section 255
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7)
We note that PWC’s report found that, although adapting to the new system may not have been easy, the WOCC had improved performance amongst in-house producers by exposing them to increased competition. PWC noted increased performance and a new focus on efficiency at in-house production departments: “The introduction of the WOCC has been a spur to in-house producers...We noted in our interviews that in-house producers were focusing not only on innovation and quality, but also on costs and overheads. These are encouraging signs.”27
8)
Commenting on the second year of the WOCC, Jana Bennett, Director, BBC Vision, said: "[W]hat the WOCC has done is raise the creative bar. Ultimately the real winners are the audience – who benefit from the increase in creativity and quality that this drives. You only have to look at the range and distinctiveness of our output over the last year from both in-house and independents to see evidence of this heightened creativity."28 The flawed case for the in-house guarantee
9)
Although the WOCC has led to increased creative competition within 25% of qualifying BBC commissions, by far the biggest proportion of BBC commissions is now guaranteed to in-house production, which has a 50% guarantee for qualifying commissions and, in addition to this, provides all BBC news. It is important to bear in mind that the in-house guarantee, put in place at the same time as the WOCC, effectively caps potential commissions from external suppliers at 50% (the total of the independent quota and WOCC combined). Previously, although independents won little more than the minimum 25% quota in practice, they could in theory have won 100% of BBC commissions.
10) In the five years since the WOCC was designed (it was launched in the last Charter but conceived prior to that), the external supply sector has grown in scale significantly, with annual turnover increasing by 40%.29 Over the same period, commissioning of UK content by commercial broadcasters has declined. Competition amongst external suppliers for commissions from the BBC, the only stable source of investment for UK programming over this period, has therefore intensified. This raises the risk of the in-house guarantee distorting commissioning decisions in favour 27
The Operation of the Window of Creative Competition (WOCC): First Biennial Review, BBC Trust, page 11 28 BBC press release, Monday 10 May 2010, “BBC WOCC continues to stimulate creative competition between in-house production and the independent sector in 2008/09” 29 Pact Census 20
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of in-house production departments by placing an artificial restraint on commissioners’ ability to commission from external suppliers – thereby potentially restricting commissioners’ ability to commission the best ideas regardless of where they come from. 11) In 2004/05, when the levels of the in-house guarantee and the WOCC were planned, the BBC’s position, as set out in the Tipping Point Analysis carried out as part of the BBC’s Content Supply Review in 2004/05, was: • Only BBC in-house production could guarantee a pipeline of content, particularly in core PSB genres and programming from the devolved nations and regions. • Only BBC in-house could deliver its high level of training. • BBC in-house needed a guaranteed critical mass of 50% (plus news) to ensure economies of scale, manage costs, retain talent and guarantee a flow of strong ideas. • BBC in-house was vital to supply the BBC with the IP rights it needed for innovative new services in the digital era. • BBC in-house internalised profit margins and recycled the resulting investment into programmes. 12) If such arguments were ever well founded, the significant developments in the market over the last five years at the very least raise serious questions over the inhouse guarantee. We examine each of the justifications for the in-house guarantee below, then look at concerns that growth in the external supply sector has led to the risk of the in-house guarantee now distorting commissioning by placing an artificial restraint on commissioners.
“Only BBC in-house production could guarantee a pipeline of content” 13) BBC in-house clearly does not have a monopoly on PSB programming. The independent sector consists of hundreds of companies, based across the UK, offering a variety of view points and specialisms. Many of the BBC’s most acclaimed productions, in a rich mix of genres, come from the independent sector, including Life On Mars, Britain From Above, Question Time, Who Do You Think You Are?, Himalaya With Michael Palin, and Wallace & Gromit. The independent sector has successfully supplied publisher-broadcaster Channel 4 with a distinctive mix of innovative content, and regularly dominates awards for content made for a wide variety of broadcasters, feature film, and online. At the last television Bafta awards, 21
BBC strategy review
external producers won 17 out of 20 awards. Slumdog Millionaire, produced by Celador for Film4, won eight Academy Awards last year, while Pact members won two out of three international digital Emmys, the digital industry’s equivalent to the Oscars. 14) In the run up to launching the in-house guarantee/WOCC, the BBC commissioned the Work Foundation to analyse the creative role of in-house production.30 The report identified two approaches to fostering creative excellence in programming: an environment of competition for commissions, as created within the WOCC; and the relative stability of in-house, where programme-makers could take risks and develop ideas over a period of years without the pressure of a commercial environment. 15) Pact accepts that different talent responds to different environments, and a longer term approach is important for some genres or programmes. Yet we reject the assertion that maintaining an in-house guarantee is the only way, or even the best way, to achieve this. Many independent producers have well established track records in producing high quality current affairs content and documentaries, such as Wall To Wall, Mentorn, Lion, and Darlow Smithson. Many of these belong to large commercial groups with shareholders, but nevertheless are acutely conscious that their reputation is vital to winning future commissions (and thereby generating future revenues). In fact, the scale of such groups can mean they are less reliant on the success of a single programme idea, as their revenue streams will be based on a portfolio of commissions across multiple programmes, genres, and broadcasters. 16) Another BBC-funded report, From the Cottage to the City: the Evolution of the Independent Production Sector, argued that larger independent producers are not interested in making public service programming. Larger companies will of course seek to work in genres where margins are potentially higher, but to suggest that this necessarily excludes public service genres is a simplification not borne out by market reality. For example, the last tendering process for Question Time saw an array of larger independent companies compete against each other in what is a core public service genre. The list of 15 bidders included such “super indies” as Lion TV (part of the All3Media Group), Cheetah TV (Endemol), Ten Alps, Mentorn (Tinopolis), and Tiger Aspect (IMG), along with smaller companies. 17) The key to the competition around Question Time is that the commission covered three years. Companies are able to develop their businesses strategically around such a commission, investing in talent and creating related content such as documentaries. In this context, current affairs can be a perfectly viable business 30
The Tipping Point: How Much Is Broadcast Creativity At Risk?, The Work Foundation for the BBC 22
BBC strategy review
opportunity for a larger company. Indeed, preparing a proposal as part of the tendering process for Question Time cost a significant sum, particularly as part of the final shortlist. Companies were willing to invest risk capital in an effort to win this tender. 18) Although it may have been commissioned under the independent quota rather than the WOCC, Question Time also illustrates the creative benefits of opening up commissioning to a wider range of suppliers. To win the commission companies had to compete with each other creatively, as well as financially, to deliver the most innovative and compelling proposal. George Entwistle, the BBC's then head of current affairs, said of the tendering process for Question Time: “It was a very tough and rigorous selection process. All four shortlisted companies came up with strong proposals both for the linear programme and for developing multi-platform offerings.”31 19) If the BBC is concerned that larger suppliers are not keen to compete for public service commissions, the BBC should consider longer term contracts and tenders across different genres. The external supply sector has evolved and it is far preferable for the BBC to evolve with it rather than use a rigid approach that dampens competition to provide the best content for the licence fee payer. 20) We note that S4C recently awarded longer term contracts in another core public service genre, children’s. S4C this month announced that it had awarded two independents contracts worth more than £7m to produce children’s content over the next three years. 21) A key factor in ensuring a flow of public service content – and one that historically has been all but ignored in the BBC’s justification for the in-house guarantee - is that BBC commissioners should be the most important element in the process of bringing an idea to the screen, not in-house producers. The BBC should ensure commissioners are empowered with a clear remit, coupled with a flexible approach towards the types of contracts they award. Independents will seek to offer a commissioner what the commissioner wants. Winning commissions is the life blood of independents – everything else in the business model of an independent company flows from the initial commission. “An in-house guarantee ensures Out of London programming”
31
George Entwistle, the BBC's then head of current affairs, on the tendering process for Question Time, MediaGuardian, March 8 2007
23
BBC strategy review
22) The BBC’s original justification for the 50% guarantee argued that in-house production is vital to ensuring a sufficient flow of Out of London programming. Yet there is evidence that the external supply sector outside London has spare capacity. From a high in 2006, network hours produced by Out of London independents dropped by 17% in 2007, the latest available year.32 This appears to be mostly due to declines in Out of London commissioning by ITV. We note that Out of London producers can excel in public service genres – 81% of commissions from independent production companies in Scotland are in factual, for example.33 23) We also note that the WOCC is open to external companies that do not qualify as independents, such as STV in Scotland. 24) In addition, commissioning from Out of London external suppliers delivers benefits that cannot be achieved through in-house. Companies that secure BBC commissions are able to build their expertise and infrastructure, helping them win commissions from other broadcasters. Channel 4 has, for example, publicly called on the BBC to commission more from external producers in the developed nations and regions in order to help build the supply base so it can raise its own Out of London commissioning from 30% to 35%. “BBC in-house is vital to delivering high quality training” 25) The BBC’s annual investment in training of around £40m from the licence fee is valuable and can and should be safeguarded regardless of the scale of in-house production at the BBC. We see no reason why this investment could not be spent on training initiatives delivered through the external supply sector rather than in-house. Indeed, this is already the case for some BBC training, and exclusively the case for Channel 4’s production training programmes, such as its research schemes (which are match-funded by companies in the independent sector). Indeed, it is possible that developing and running such training in closer partnership with the external supply sector could make BBC training more relevant to the wider market. 26) The BBC-commissioned Tipping Point report also argues that companies in the external supply sector need to recruit former BBC staff as they supposedly do not have the skills themselves to make high quality public service content. It might just as 32
Pact’s latest Production Trend Report (November 2008) found that total network hours commissioned from independent companies in 2006 amounted to 3,811, but fell to 3,152 in 2007. 33 Survey of Television Production Scotland 2006, Ekos for Scottish Enterprise and the Scottish Broadcasting Commission, January 2008, page 12 24
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well be argued, however, that such recruitment practices are testimony to the BBC’s tendency to commission from “familiar faces”, a practice which the WOCC was aimed at changing. “BBC in-house is necessary to managing costs” 27) In-house production clearly does not guarantee that costs will be contained. We note the recent reports by the Public Affairs Committee and the National Audit Office concerning costs associated with BBC in-house’s production of sports and music events, along with BBC overspending on major buildings. The Culture Select Committee has also recently criticised BBC in-house for talent payments. 28) At the time of the last Charter, the BBC argued that any advantage in external suppliers being more cost efficient was offset by the need to factor in profit margins for commissions in the external supply sector. At the time of the Charter profit margins in the independent sector had indeed experienced an initial surge following the introduction of the Terms of Trade in 2004. As the sector has grown, however, profit margins have remained flat, or declined amongst some companies, as shown below. Figure 3: Independent sector profitability, aggregated and by turnover band %
%
10%
12% 9.3%
11.0%
9%
8.5%
8.4% 8.0%
9.9%
10%
8% 7.0% 7%
8%
6%
6.1% 6%
5.5%
5.4%
5%
5.6% 2008
4.9%
2009 4%
3.7%
4%
3%
3.6%
3.3%
2.2% 2%
2% 1%
0% less than £1m
1-5m
5-10m
10-25m
25-70m
0% 2004 2006 (2005 Census) (2007 Census)
2007 (2007/2008 Census)
2009 2008 (2010 Census - (2010 Census restated) restated)
(1.2%) -2%
Source: Oliver & Ohlbaum analysis, PACT census
25
70m+
BBC strategy review
29) Arguments in favour of high levels of BBC in-house production in order to internalise profits are misguided, as the UK television content sector has built its global success on being incentivised to and effective at selling IP rights in order to raise investment that can be re-invested back into UK programme budgets, reducing the price to the broadcaster, as we will detail later. 30) Reports commissioned by the BBC during the Charter review raised concerns that it would increasingly be at the mercy of larger independents when negotiating terms. We reject this is in principle: for the most part the UK networks are sufficiently differentiated in their mood, demographic focus and genre mix to avoid head to head competition for individual programmes. The limited competition between buyers combined with any specific project’s dependency on the initial commission for financing gives leading commissioners such as the BBC significant power. 31) Although the independent sector has grown substantially in the five years since the Charter, this has not translated into market power. For this to have occurred, we would expect to see one or both of two factors occurring: •
The share of independent commissions from the five main networks, as opposed to commissions won from digital channels, would have had to decrease significantly; and/or
•
The share of commissions from one broadcaster won by any individual company would have had to have increased substantially.
26
BBC strategy review
32) Analysis of market power in the content supply sector commissioned by Pact from O&O indicates that, five years into the Charter, the five main PSB networks and their spin-off channels still account for over 90% of commissioning, as illustrated below. Figure 4: Share of originations spend by networks, spin offs and thematics, 2005-2007*
% OF TOTAL ORIGINATIONS SPEND 100% 4% 90%
5%
5%
11%
10%
11%
84%
85%
84%
2005
2006
2007
80%
70%
60%
50%
40%
30%
20%
10%
0%
*Excludes regional spend; includes news and sport spend **Includes GMTV and excludes S4C Source: Oliver & Ohlbaum Analysis
33) Nor is there any evidence that any single independent producer has achieved sufficient market share to exert significant influence in the negotiating process. In contrast to continued buyer power in the commissioning market, only one external supplier to the main network channels accounted for more than 20% of their commissioned output (excluding sport and news) in 2008 (for Channel 4) – a situation that has remained largely unchanged over the last three years despite independent sector consolidation, as shown overleaf.
27
BBC strategy review
Figure 5: Top three independent suppliers by broadcaster, 2008* % OF ALL ORIGINATED OUTPUT HOURS 100% 2%
3%
4%
7%
11%
6%
90%
80%
70% 62%
57%
42%
61%
60%
65%
50% 6% 40% 14% 30% 23% 20%
10%
19%
27%
3% 3%
2% 5%
8%
5%
2% 4% 4%
BBC1
BBC2
ITV
0%
3% 4%
28%
19%
C4
FIVE
*Excludes news and sport Source: Oliver & Ohlbaum , Attentional, BARB
34) O&O’s analysis found that primary commission prices paid by broadcasters across the sector were largely flat in nominal terms.34 Furthermore, a significant sign that broadcasters still enjoy significant bargaining leverage can be seen by their ability to push through primary price reductions over the last 12 months, as shown by O&O’s Policy Survey of independent producers for Pact. The figure overleaf shows the extent of this reduction over the last 12 months.
34
The Economics of UK content supply, May 2009, O&O for Pact 28
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Figure 6: Response to Q: How have primary prices per hour changed in 2009/10 compared with 2008/09? % of all respondents who have received a UK commission
08/09 0% 1%
WEIGHTED AVERAGE DECREASE/INCREASE 2008/09: (3.2)%
23%
20%
56%
RETURNING STRANDS 09/10 0% 2%
2009/10: (4.4)%
27%
36%
35%
+20% Increase of 10%
08/09 0% 3%
Increase of 5%
Decrease of 5%
28%
34%
NEW STRANDS
No change
Decrease of 10%
35%
2008/09: (4.8)%
34%
2009/10: (5.1)%
+6%
09/10 1% 0%
0%
35%
30%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: Oliver & Ohlbaum analysis, PACT policy survey Q15
35) Instead of the growth of the production sector over the least five years leading to price inflation for the BBC, the opposite seems to have occurred, with increasinglywell capitalised companies in the external supply sector able to take on risk by part funding production themselves, so offering broadcasters price flexibility. Independent producers are investing a total contribution of £190m directly into the upfront creation of UK programming35 – more than the comparable figure from BBC Worldwide. 36) We also note analysis by PKF for the DCMS during the last licence fee settlement process which suggested that, far from increasing prices for the BBC, the emergence of larger companies in the independent sector might generate cost efficiencies that, in a competitive market for commissions, could be passed onto the BBC, and ultimately to the licence fee payer in terms of value for money. PKF stated that: “Taken together this may offer the opportunity to reduce costs.”36
35
Pact Census
36
Review of the BBC Value for Money and Efficiency Programmes, PKF for DCMS, April 2006, page 20
29
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37) PKF’s conclusions challenged BBC Management’s argument that independent commissions were more expensive, questioning whether examples put forward by Management were like for like. PKF concluded that prices at other broadcasters indicated that independents could produce programming at relatively low costs: “[W]hat the data for broadcasters B and C suggest is that it may be possible to commission relatively low cost independently produced programmes for most genres.”37 “Only in-house can provide the BBC with the necessary rights” 38) In terms of the BBC’s strategic need for rights in order to launch innovative new services, Pact and the BBC have been able to promptly negotiate an agreement under the Terms of Trade that allows the BBC to retain the rights it needs in such cases. On the iPlayer, for example, the BBC was able to secure on-demand rights to independent productions at no additional upfront cost. 39) Nor is it the case that not having 100% of IP rights when commissioning independents has led to any increased cost for the BBC. As we have noted above, independents use their IP rights to raise investment to help fund programme production, with the result that broadcasters including the BBC have been able to pay only for those rights they require. The Digital Britain review concluded that costs per hour to broadcasters of commissioning had dropped by 25% as a result.38 40) The question of rights does, however, raise the question of what the BBC should be expected to deliver to the licence fee payer – this applies equally to programmes made in-house and externally. In the digital era, funding for creating UK content has inevitably become more fragmented, with producers (in-house and external) seeking investment from a variety of sources to raise the production budget, a process which will often involve selling off rights. The result is that the licence fee payer is no longer paying 100% of the production costs – this creates value for money in enabling the BBC to secure programming at a lower price, but raises difficulties if the BBC is expected to make that content available across all potential outlets in the digital era. The licence fee payer cannot as a rule expect all rights if the BBC is not meeting 100% of production costs. This does not mean that the BBC should not be universally available via certain key services – it may just not be available via every service. 37 38
Review of the BBC Value for Money and Efficiency Programmes, PKF for DCMS, April 2006, page 76
Digital Britain, final report 30
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“In-house production protects future supply of content”
41) We have already outlined our views and analysis as to why we consider that BBC inhouse does not have a monopoly on creating high quality public service content, or value for money. The BBC’s argument that it requires a critical mass of 50% in-house production in order to retain talent and an efficient infrastructure is in our view unfounded - and sets the in-house guarantee at an arbitrary level. BBC in-house is by far the UK’s largest television content producer. BBC in-house production accounts for approximately 34% of all original commissions in the UK, with its nearest competitor, ITV Studios, on 12%. The BBC is therefore arguing that it needs to maintain a guaranteed level of production that is significantly more than twice the scale of its nearest rival, as show below. Figure 7: Estimated share of total UK first-run TV commissioning spend by producer*, 2007 Percent 40%
35%
34%
30%
25%
20%
15% 12% 10%
5%
4%
4%
3%
3%
3%
3%
2%
1%
1%
1%
0%
*Fremantle data not available Source: OFCOM Com munications Report, ITV, Oliver & Ohlbaum Analysis
31
BBC strategy review
Risks associated with the in-house guarantee 42) In addition to the case for an in-house guarantee being in our view fundamentally flawed, there is also evidence that the current in-house guarantee carries certain significant risks, potentially: • Distorting commissioning by preventing BBC commissioners from commissioning the best ideas regardless of their origin. • Distorting competition between external and in-house producers by enabling inhouse to cover fixed costs through the guarantee and win commissions through the WOCC on a marginal cost only basis, driving down prices for independent commissions on an undue basis. • Restricting the growth and economic spillover benefits of the UK creative content sector by guaranteeing the single largest share of commissioning investment to inhouse, despite a lack of analysis of the economic benefits of commissioning inhouse, compared to externally. • Risking reducing audience choice through the continued incentive created by vertical integration of restricting the availability of content on third-party services in order to protect existing BBC services. 43) We deal with these issues in more detail below. The risk of distorting commissioning 44) In certain genres, BBC spending with external suppliers is already approaching or exceeding 50%, suggesting the in-house guarantee is placing an artificial constraint on external commissions and preventing commissioners from commissioning the best ideas regardless of their source.39
39
The statutory level of the in-house guarantee – set at 50% in the Charter Agreement – applies only in aggregate, averaged across all genres, leaving the BBC free to set levels of external and internal commissions in each genre. External suppliers win around three quarters of commissions in the WOCC, but over 50% in many individual genres. This is counter balanced by the BBC setting a relatively high guarantee for in-house in other genres, ensuring that the overall 50% in-house guarantee is achieved. 32
BBC strategy review
45) This is the situation that PWC warned against in its initial report on the in-house guarantee/WOCC for the BBC Trust. PWC expressed concerns about the in-house guarantee eventually distorting commissioning decisions as the independent sector grew, stating: “At some point in the future the continued growth in independent production may be capped by the in-house guarantee set at the individual genre and sub-genre level. There is a risk that changes to the in-house guarantee at these levels may not be consistent with the principle of ideas being commissioned on merit, whatever the source.”40 46) In the five years since the WOCC was conceived, the market has changed dramatically in two relevant ways. Firstly, the capacity of the external supply sector has grown substantially, due to growth spurred by the Terms of Trade that resulted from the 2003 Communications Act and, since 2007, increased commissioning from the BBC under the WOCC. Sector turnover has grown by 40% since 2004, as shown below. Figure 8: Independent producer revenues by TV and non-TV activities, 2004 to 2009 REVISED METHODOLOGY
CAGR
£m 2,500
2,136 1,952
2,000
2,190
2,223
175
225
2,016
1,999
NON TV-REVENUE
2004 - 07
2008- 09
15.7%
1.5%
51.8%
28.8%
12.7%
(0.8%)
242
199 1,597 1,500
105
1,000 1,753
1,894
TV REVENUE
1,492 500
2004 (2005 Census)
2006 (2007 Census)
2007 (2007/2008 Census)
2008 2009 (2010 Census - restated) (2010 Census - restated)
Source: Oliver & Ohlbaum analysis, PACT census
40
BBC Window of Creative Competition, Report for the BBC Trust, July 2008, PWC, page 2 33
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47) Secondly, commissioning of UK content from broadcasters in the commercial sector has fallen, due to fragmenting advertising revenues and an advertising downturn. As we have noted, annual commissioning of new UK content is expected to have dropped by £250m since 2007.41 48) These factors have led to a situation where there is increased capacity on the supply side, but shrinking demand. As a result, competition has increased for BBC commissions, a relatively stable and sizable source of commissions in an otherwise decreasing market. In older children’s content, for example, the BBC has become an almost monopoly buyer, and external suppliers have won markedly high levels of children’s commissions under the WOCC, at times exceeding 50% of overall BBC commissions. 49) There is now in Pact’s view a risk that the in-house guarantee is distorting commissioning decisions by placing an artificial limit on the amount of external content commissioned by the BBC. Were this to be the case, the BBC would not necessarily be commissioning the best ideas on a meritocratic basis across its entire output. 50) The issue of whether the BBC is genuinely commissioning the best ideas is in addition to concerns that maintaining an in-house guarantee distorts competition between the BBC in-house and individual external suppliers. The 50% guarantee enables BBC in-house to cover fixed costs from the guarantee and charge for commissions won under the WOCC on a marginal cost only basis, forcing down prices for commissions from the independent sector on an undue basis. Risk to UK creativity
51) In recent years, core investment in UK content by UK public service broadcasters has been coupled with the emergence of entrepreneurial independent production businesses of some scale. As we have illustrated, independent production sector turnover has increased by 40% since 2004, as we have noted. This growth has been founded on investment in the form of the primary licence fee from broadcasters, but increasingly independents have leveraged this initial investment to generate further sales. Such secondary sales, for example from exports, now account for around a third of sector turnover.42 Export growth has created a virtuous circle, enabling 41 42
O&O for Pact Pact Census 34
BBC strategy review
independents to raise investment from international sales for the creation of UK content. As we have outlined, independents now raise around £190m in investment for UK television programming through a variety of means.43 52) As we have mentioned, the BBC has helped foster this growth, and Deloitte’s report for the BBC as part of this review confirms the substantial positive impact that BBC investment through commissioning has had on the independent sector. In considering the case for an in-house guarantee the BBC should look at whether commissioning in-house delivers the same spillover benefits as commissioning from external suppliers. We note that the Deloitte report detailed at length the BBC’s positive impact on the wider economy through its investment in the independent sector and corresponding spillover benefits, but made no reference to in-house production (other than the preface) and its comparative spillover benefits. 53) For example, as we have mentioned, commissioning from Out of London external suppliers delivers benefits that cannot be achieved through in-house. Companies that secure BBC commissions are able to build their expertise and infrastructure, helping them win commissions from other broadcasters. Channel 4 has, for example, publicly called on the BBC to commission more from external producers in the devolved nations and regions in order to help build the supply base so it can raise its own Out of London commissioning from 30% to 35%. Danger of reducing audience choice
54) Analysis commissioned by Pact from Oliver & Ohlbaum last year indicated that the risks inherent to vertical integration - where corporate groups combine broadcast and production – are likely to become more pronounced in the digital era. As broadcasters face increasing competition for audiences through digital television and the growth in on-demand delivery, the incentive increases to slow, stop or, perhaps, skew the nature of competition they might face on these new platforms through either commissioning in-house (and therefore owning all rights) or any control of the secondary and ancillary rights to their commissioned programming. 55) It is worth noting that the BBC, despite its public service remit and launch of new services such as then iPlayer, still requires that it retain exclusive use of on-demand rights for multiple years on popular shows (through holdbacks on returning series)
43
Ibid 35
BBC strategy review
when commissioning from independent producers, preventing third-party services from making that content available even alongside BBC services. 56) Furthermore, broadcasters with significant in-house production activities such as the BBC have an added incentive to squeeze independent producer Terms of Trade and/or divert key programming to their own in–house activities in order to both weaken the independent sector as a whole (and its appeal to top off screen and on screen talent) and to secure key secondary and ancillary rights to all programming – in-house and independent – to slow down competition on new platforms. 57) While commercial broadcasters will see rights control as a way of retaining influence over new platform and revenue models, the BBC will see it as a way of guaranteeing reach in a more fragmented environment, even though this may entail restricting the availability of content on alternative services.
Summary of proposals for ensuring meritocratic commissioning • The BBC Trust and Management should review whether current commissioning structures are optimal on a strategic basis, with a view to removing the in-house guarantee or setting it an appropriate level as soon as possible. • As part of this review, and in light of significant market developments, BBC Management should demonstrate publicly why the in-house guarantee should be maintained and at what level, in order to show that BBC commissioning is delivering value for money in and commissioning the highest quality programmes on their merits across all of its output.
36
Section 4: the BBC’s impact online
1) The BBC’s proposed cut of 25% to online spending is in Pact’s view misguided. A spending cut alone does not deliver the BBC’s stated goals of efficiency or a tighter remit. Instead, it is likely to damage the BBC’s fulfilment of its Public Purpose under the Charter of fostering creativity, in terms of the BBC’s investment in the nascent digital production sector. 2) In Pact’s view the best ways to achieve the BBC’s goals are through a clear and well enforced remit for online, and, in terms of efficiency in commissioning, greater transparency and competition. 3) Indeed, it is a key concern for Pact that the Trust and Management address longstanding problems in online commissioning, which has for several years treated the 25% quota for external suppliers as a ceiling rather than a floor, as occurred in television prior to the WOCC. We urge the BBC to ensure meritocratic commissioning in online, both as a way of delivering value for money for the licence fee payer and ensuring that the best content is provided to the public. In addition, opening up commissioning would be expected to help stimulate growth in the external supply sector, potentially offsetting the negative impact on the sector from the 25% cut.
Ensuring meritocratic commissioning online
“Healthy and fair competition and a diverse supply base encourage excellence as well as improved value for money. Using external suppliers also provides positive externalities for a healthy and vibrant UK production sector.” BBC Management, 2007
4) As the Trust is aware, the Graf review called for an online quota for external commissioning that stimulated genuine creative diversity in content. Graf stated that: “A higher level of contribution from external suppliers will promote the diversity, plurality and quality of content offered by BBC Online, and will help drive innovation
BBC strategy review
and creativity, much as it has done in the TV sector.” 44 In their response, the BBC Governors confirmed the BBC’s commitment to “the development of the wider new media production sector.” 5) The new service licence for bbc.co.uk confirms the BBC’s role in stimulating the digital production sector, requiring BBC online to “make an important contribution to”45 the BBC’s Public Purpose under the Charter of stimulating UK culture and creativity. We note, however, that the BBC Trust’s service licence review concluded that bbc.co.uk was under performing in this area compared to delivery on other Public Purposes. The Trust stated that: “bbc.co.uk’s contribution to the culture and creativity purpose is weaker than its contribution to the other purposes.”46 6) This is a missed opportunity. Clearly the BBC must be mindful not to have a negative market impact, but equally it has perhaps unrivalled potential to encourage growth, innovation and creativity in the UK’s new media sector. As a source of investment in online content, the BBC is second only to government and local authorities. bbc.co.uk is the UK’s biggest content-based website,47 while the BBC is the only UK company amongst the top 20 new media players in the UK, providing “a vital foothold for UK content on the internet.”48 7) A key way of unlocking this potential is through a genuinely meritocratic and competitive commissioning policy, open equally to in-house and external suppliers. A meritocratic commissioning process delivers two benefits:
• It offers positive externalities by encouraging industrial growth through a potential increase in external commissions, mitigating the negative effect of the proposed overall cut of 25% to online; and • For the licence fee payer, it delivers creative excellence, innovation, value for money and diversity by encouraging competition.
8) This view was shared by BBC Management in its submission to the BBC Trust for last year’s service licence review of bbc.co.uk, which stated: “Healthy and fair 44
Report of the independent review of BBC Online, Philip Graf for DCMS, page 77 BBC Online Service Licence, BBC Trust, page 5 46 Ibid, page 36 47 Ibid, page 5 48 Review of bbc.co.uk, BBC Management’s submission to the BBC Trust’s review, December 2007, page 6 45
38
BBC strategy review
competition and a diverse supply base encourage excellence as well as improved value for money. Using external suppliers also provides positive externalities for a healthy and vibrant UK production sector.”49 9) As part of this, external suppliers can help address the two specific areas of weakness cited by the BBC Trust in regard to bbc.co.uk’s fulfilment of the Public Purpose of stimulating creativity. These were a perceived failure to be “a highly creative destination” and an emphasis on information over entertainment. As we have noted above, competition in commissioning can encourage creative excellence and innovation. In addition, external digital suppliers excel in entertainment, such as Endemol’s The Gap Year, the UK’s first online only reality show, which registered 19 million visitors on Bebo; and Company Pictures’ Skins, which recorded more than 150,000 friends on MySpace and was the number one download on iTunes.
Repeating the failures of the television quota for independent commissions 10) Since the first full year of the BBC online external quota in 2006/07, commissioning from external suppliers has been flat, at around £20m per year, and even fell last year, despite total eligible spend and total service licence spend rising substantially. Excluding the first reporting year for the WOCC (which was not a full year), commissioning from external suppliers online has never been lower since the quota was introduced, as shown below. Figure 9: Performance of external online quota
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
in-house spend external spend 17.3
29.6
31
26
Source: BBC executive, adjusted data 49
Review of bbc.co.uk, BBC Management’s submission to the BBC Trust’s review, December 2007, page 53 39
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11) In its submission to the Trust’s review of bbc.co.uk, BBC management acknowledged that “there is scope to improve further the relationships between the BBC and the independent sector.”50 It is two years since and external suppliers’ share of commissions has gone backwards. The latest Out-turn figures show that external suppliers’ share of commissions is just 26% - less than at any time since the first year the quota was introduced, when the BBC was not reporting on a full year.
12) This alone would raise concerns that the BBC is treating the online quota as a ceiling, not a floor, just as it did in television commissioning prior to the WOCC. But in fact external online producers are only winning around 11% of total online spending, as the BBC has consistently excluded more and more online spending from being eligible for commissioning. Since the introduction of the 25% external online quota in 2005, whilst total online spending has more than doubled, the level of spend eligible for the external quota has risen relatively modestly. As a result, although the BBC hit its target for the online quota last year, external suppliers were actually competing for just 37% of total online spending last year, as illustrated below. Figure 10: Spend eligible for external quota as a proportion of total online spend 200 180 160 140 103
120
non eligible spend (£m)
100 58
80 60
43
eligible spend (£m) actual external spend (£m)
28
40 20 0 2005/06
2006/07
2007/08
2008/09
Source: BBC, adjusted data
50
Review of bbc.co.uk, BBC Management’s submission to the BBC Trust’s review, December 2007, page 53 40
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The role of an online WOCC
“Expanding the principle of the BBC’s WOCC to online commissioning has the potential to inject a further £20m-£30m per annum in the independent content production.” Analysys Mason, 2009
13) In broadcasting, as we have outlined, the WOCC has been a notable success in opening up commissioning and ensuring that the BBC commissions the best ideas, whether they are in-house or external. Such a meritocracy is vital to delivering the Public Purpose of stimulating UK creativity, and should in Pact’s view be at the heart of the BBC’s approach to commissioning. 14) We support the recommendations of the Analysys Mason report and the Perspective Associates report, both for the Government as part of the Digital Britain review, that the BBC Trust should consider introducing a 25% WOCC for online commissioning (on top of the 25% external quota). Perspective Associates suggested that the BBC Trust should: “give consideration to the applicability of the WOCC to online as well as television commissioning.”51 15) Analysys Mason stated: “There remains a need for the BBC to use its tremendously popular online presence to the benefit of the larger sector of the UK content industry, by linking out to independent content providers where possible and appropriate. In addition, expanding the principle of the BBC’s WOCC to online commissioning has the potential to inject a further £20m-£30m per annum in the independent content production sector based on the BBC’s current online spending. As the BBC invests more online, this figure will also grow, ensuring plurality of supply through the development of the sector.”52 Potential benefits of introducing an online WOCC
51
Digital Britain: Assessing the policy framework for Public Service Rights, Perspective Associates for DCMS, page 4. 52 Fostering creative ambition in the UK digital economy, Analysys Mason for DCMS, page 34. 41
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16) Providing the licence fee payer with the best content: In broadcasting, the WOCC has been a notable success in opening up commissioning and ensuring that the BBC commissions the best ideas, whether they are in-house or external. In its review of the WOCC last year, the BBC Trust found that: “the procedures and structures put in place when the WOCC and the in-house guarantee were implemented had led to ideas being treated equally and commissioning decisions being treated on merit. Commissioners had clear incentives to pick the best ideas.”53 Such a meritocracy should in Pact’s view be at the heart of the BBC’s approach to commissioning. 17) In-house responds by ‘raising its game’: the Trust’s report went on to find that the WOCC had not only benefited independents by opening up commissioning, it had had a positive impact on in-house, acting as “a spur to in-house producers”. The report said that in-house producers and commissioners were “raising their game and rising to the challenge of increased competition.”54 The Trust concluded:
“The evidence from this first biennial review suggests that a real shift in culture is being achieved.”55
18) Range and diversity of content: In opening up commissioning, the BBC is able to choose from a broader range of ideas from external and in-house teams across the country. 19) Increased focus on efficiency: The Trust’s review of the WOCC last year found that not only were BBC in-house teams raising their game creatively as a result of the WOCC, they were also more aware of “costs and overheads”.
20) Stimulating external supply sector: bbc.co.uk represents a significant source of investment for digital media companies and can play a role in stimulating the growth of the digital media sector, particularly in the devolved nations and English regions, by increasing the amount of investment in content that is potentially available for external suppliers. Analysys Mason’s report for the Government as part of the Digital Britain concluded that an online WOCC could inject up to £30m per annum into the independent content production sector.56 53
The Operation of the Window of Creative Competition, First Biennial Review by the BBC Trust, page 10 Ibid, page 11 55 Ibid, page 10 56 Fostering creative ambition in the UK digital economy, Analysys Mason for DCMS, page 34 54
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Potential risks in introducing an online WOCC 21) Supply side capacity: The BBC may have concerns about an online WOCC on the grounds that there is supposedly not enough capacity in the online content creation sector. We reject this, but if this were the case, the WOCC is not a minimum threshold the BBC must reach. It is merely a mechanism used to encourage the BBC to do what it should be doing anyway: treating the external quota as a floor, not a ceiling. If no strong ideas emerge from the external supply sector, the BBC will simply commission in-house. 22) Compliance costs: Total spend through bbc.co.uk is far smaller than in broadcasting, and compliance costs should be proportionate. We propose bbc.co.uk adopts a simplified version of the television WOCC. The BBC Trust might consider an online WOCC that is measured simply by the level of eligible external and in-house commissions (value only, not hours), and need not be monitored against genres, range and diversity of content, geographical location or size of producer, as occurs under the television WOCC.
Focusing on content, not services
“The BBC Trust should address the way the quota for bbc.co.uk is composed, and ensure that it meets fully the goals set out in the Graf review and accepted by the BBC Governors.” Perspective Associates, 2009 23) The service licence for bbc.co.uk allows technical services to be eligible for the external quota. This means that purely technical or operational services with no discernable contribution to creative diversity are being awarded a significant amount of spend under the external quota. While we understand that BBC Management has taken some steps towards addressing this, the latest Out-turn report indicates that a substantial level of external spending went on areas that encompass, entirely or in part, non creative work. The primary reason behind the Graf review’s original call for a quota for external content – stimulating the creative competition that can deliver more innovative, more imaginative and more varied ideas for the licence fee payer – is therefore being watered down. 43
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24) Our concerns were supported by the Government in the Digital Britain report, which stated that: “the definition of qualifying eligible spend includes significant technical and operational activities, contrary to the spirit of the Graf Review recommendations.” 25) This followed Perspective Associates’ report for Digital Britain, which suggested that the BBC Trust should address concerns over the inclusion of services in the quota. The report stated: “The BBC Trust should address the way the quota for bbc.co.uk is composed, and ensure that it meets fully the goals set out in the Graf review and accepted by the BBC Governors.”57 26) We therefore ask the Trust to remove “services” from the definition of spend that qualifies for the external quota under the BBC online service licence. If BBC management cannot adequately distinguish between services and content, we would suggest that an online WOCC of 50% be introduced, over and above the current minimum 25% quota for external. While this WOCC would continue to apply to content and services, the increased level of spend should provide more opportunities for investment in truly creative activity.
Summary of online proposals • The BBC should limit any negative market impact through a clear and well enforced remit for online services, not simply cutting 25% of spending. • The BBC should drive efficiency and creative excellence in online content through the introduction of an online WOCC of 25%, in addition to the 25% external quota, as a matter of urgency. • The BBC should address widespread concerns over the inclusion of services as part of the external quota; if this is not possible, it should introduce a 50% WOCC in order to provide increased opportunities for suppliers of creative content.
57
Digital Britain: Assessing the policy framework for Public Service Rights, Perspective Associates, page
4 44
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Section 5: Content priorities
Children’s 1) In considering the appropriate level of investment by the BBC in UK-made children’s content it is important to bear in mind that, according to Ofcom’s figures, there is a £20m annual funding gap in BBC spending on new UK children’s programming. Ofcom’s report on public service broadcasting last year found that BBC spending on first-run original content for children had dropped by 20% from 2004 to 2008, from £97m to £77m.58 2) As we have noted previously in this submission, there is a lack of clarity between BBC statements and Ofcom figures as to the level of current BBC children’s spending. However, based on Ofcom’s figures, recent commitments by the BBC to increase spending would, at most, replace this £20m (these commitments include the increase of £25m over three years that the BBC announced last year, plus this review’s proposal for additional £10m). 3) To put this in context, as the BBC acknowledges in this review, funding for UK-made children’s programmes faces a well-documented crisis, with Ofcom estimating last year that annual commissioning of new children’s content by PSB broadcasters (including all BBC channels) has fallen by more than £50m since 2004.59 Investment in UK children’s content by non PSB broadcasters has remained flat at around 10% of the market. 4) Ofcom’s review of public service content for children and its subsequent PSB review confirmed a market failure in programming for older children, particularly in core public service genres such as drama and factual where domestic programming can powerfully represent the lives UK children live today. This issue was also acknowledged in the Digital Britain review, which led to proposals to re-allocate licence fee funding from the BBC to children’s services in the commercial sector, such as a new Channel 4 service.
58 59
Public Service Broadcasting: Annual report 2009, Ofcom PSB report, July 2009, page 147 Ibid 45
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5) At the same time, public service children’s content is valued highly by parents. The BBC’s research for this review shows that parents rank home-grown children’s content on the safe, advertising-free services of the BBC highly.60 Ofcom’s consumer research for its reviews found that: “78% of consumers believe that it is important to have a wide range of high quality, UK-made programmes for children.”61 6) Therefore, whilst we welcome in principle that this review has identified children’s as one of five content priorities, to genuinely deliver on this commitment the BBC should be aiming to substantially increase spending compared to recent years. The BBC’s current proposal in this review of an additional £10m a year represents less than 2% of the proposed £600m re-prioritisation. 7) The BBC has an opportunity here to offer its supporters and critics alike a unique public service that the licence fee payer values highly and that the market cannot or will not provide. We understand from BBC Management that the BBC’s strategy proposals will over time generate up to £200m per year in new investment for UK content over time. In order to genuinely prioritise funding for UK children’s content, the BBC should in our view aim over time to invest an extra £50m per year into new UK children’s content on television and online, eventually filling the funding gap identified by Ofcom. This £50m would include the immediate investment of roughly £18m a year (committed through this review’s proposed £10m increase and last year’s pledge of £25m over three years, or £8m per annum), plus a further commitment to increase annual spending by another £32m as soon as possible. All of this investment should be spent on first-run original content. 8) In the strategy paper, BBC Management states that it faces two particular challenges in children’s. Firstly, Management argues that it faces increasing competition from high quality imported children’s shows broadcast by US networks in the UK; this is true, but in Pact’s view is a compelling reason for the BBC to raise its own investment in new UK children’s content in order to compete. It is widely acknowledged that the UK has an exceptional talent base, based on a distinguished track record of classic children’s shows, that will provide high quality shows if investment is available to create programming. Secondly, management argues that economic pressures make it more difficult to raise third-party funding for production. It is difficult for Pact to comment on in-house production’s experience in the current markets, but the independent production sector has demonstrated its effectiveness in raising financing 60
BBC Strategy Review, BBC Trust, March 2010, page 20 The Future of Children’s television Programming, Annex 10 to Phase 1 of Ofcom’s second review of Public Service Broadcasting, page 14
61
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from third-party sources even in tough economic conditions – the independent sector now invests up to £190m per year in the development and production of UK content (all genres), more than the total dividends and programme investment returned to the BBC by BBC Worldwide this year.62 The initial investment by the BBC is, however, a vital stimulus for raising further funding from third-party sources in the UK and around the world. It would be helpful in analysing Management’s stated concerns if the BBC provided a breakdown of cost per hour of independent commissions compared to inhouse in the children’s genres, as we have requested on a general basis elsewhere in this submission.
Summary of proposals for children’s • The BBC should genuinely prioritise UK children’s content by increasing annual investment in first-run originations by £50m (including £18m from current and recent commitments).
Film 9) The BBC is required under the Charter to have a strategy in place for film as part of delivering the Public Purpose of stimulating creativity and cultural excellence.63 The BBC’s review of its overall strategy should therefore encompass film, taking account of the current review of BBC Films’ strategy being carried out by the BBC Trust. 10) As we have outlined in response to the BBC Films review, there is scope for BBC Films’ current investment UK films to provide not just development and production funding – as important as that is - but also to address problems in the business model for UK film production, and thereby stimulate UK creativity on a more strategic basis. The current business model for UK film production makes it difficult for a producer to secure a share of revenues generated by successful films, or to retain Intellectual Property (IP) rights in films that they create. As a result, the UK film industry has historically been typified by “cottage industry” companies, working for
62
Pact census indicates that independents invest up to £190m per year in the development and production of UK content; BBC Worldwide annual accounts show BBC Worldwide returned £153m to the BBC in dividend payments and programme investment in 2008/09. 63 BBC Charter Agreement, 8 (2) (a) 47
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fees on a project-by-project basis, rather than genuine businesses that can generate a profit, raise investment and develop library assets through IP ownership. 11) BBC Films can help address this but there are several aspects of its current strategy that limit its potential positive effect. On the one hand, the BBC Films’ strategy paper states that it is not set up to be “a profit centre.”64 But at the same time BBC Films takes a majority share of recoupment revenues until it has recovered its investment, and then continues to take 50% of any further revenues - i.e. profit. 12) Furthermore, BBC Films takes a 15-year exclusive licence (with a possible nonexclusive arrangement after five years only if the BBC has no plans to transmit the film), which is far in excess of the exclusive period for television commissions (where the BBC takes a five-year licence which becomes non-exclusive after six months) and digital media commissions (where bbc.co.uk can take a five year licence on external content). 13) Film is of course an expensive genre, yet it is worth noting that Ofcom’s figures show that the cost per hour of first-run originated films across PSB channels (i.e. the BBC and Channel 4, as ITV and Five do not commission original films) has dropped by a third since 2003, and is now substantially less than the comparable figure for television drama. As the Trust is aware, drama is commissioned under the Terms of Trade, with the BBC taking a five year licence with a six month exclusive period within that.65 14) Pact accepts that value for money for the licence fee payer is important, but we are concerned that the BBC is demanding a substantially greater revenue share and a far longer licence period even compared to a genre such as drama where costs are greater. This would appear to potentially conflict with the requirement in the Charter to have a strategy for stimulating UK film. 15) Furthermore, it is unclear where the BBC reinvests any revenues that it derives from the exploitation of films. Revenues may be invested in completely different activities, or go towards overheads costs. Rather than the BBC supporting a healthy film industry, the film production sector is therefore potentially underwriting BBC investment in areas with no relation to film. We note that the UK Film Council until recently maintained a similar policy, but as part of its current consultation on its strategic plan has committed to reinvesting all revenues from the exploitation of films that it has invested in back into its National Lottery development and production fund.
64 65
BBC Films strategy, October 2009 Figures supplied to Pact under FOI request, available on request. 48
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16) In addition to our submission as part of the Trust’s recent review of BBC Films, we have recently published a report on public funding for film commissioned from Olsberg SPI, which is available on request. Our proposals in the submission and the Olsberg report call for a greater share of revenues from successful films that accrue to public sector and publicly-owned bodies, including the BBC, to be returned the production sector, thereby encouraging investment and the development of the sector. We stress that the majority of these revenues should be placed in a “lock-box” - so that they can be accessed only future development and production of UK films by the producer. 17) In addition to proposals relating to developing the business model for the production sector through changes to the recoupment chain and rights exploitation, we propose that the BBC should substantially raise its investment in UK films – which at £10m per year we see as relatively modest (and possibly far smaller than BBC spending on Hollywood imports). We call on the BBC to double the annual budget of BBC Films to around £20m over time, achieving this through reducing spending on Hollywood movies.
Summary of proposals for film •
Increase the share of revenues from the BBC corridor to the producer, even if the UK film tax credit is separately treated as producer equity. The majority of these revenues could be placed in a “lock-box” so that they can be accessed only future development and production of UK films by the producer.
•
Reduce the overall licence period for film and the exclusive window to five years, with “use or lose” conditions, so that producers can take advantage of digital opportunities by exploiting the IP to their films.
•
Over time double the annual budget of BBC Films to around £20m. This is a relatively modest rise of £10m per annum in the context of the BBC’s proposed £600m re-prioritisation and could probably be delivered through reducing spending on Hollywood movies.
49