Today the BBC launches a public consultation on its new policy on distribution – or, in short, on how we get our services to audiences so they can enjoy them. It’s an important issue for us to gather feedback on and it’s a requirement of our Royal Charter & Agreement to do so.

The BBC was founded on a simple, democratic idea: that everybody should have access to the best programmes and services. As the BBC approaches its centenary, its universal public service mission remains unique.

Our starting point for distribution is therefore to ensure as many people as possible can enjoy convenient access to the BBC’s high-quality and distinctive services. But as the number of outlets (or ‘platforms’) on which audiences can get content proliferates, this is not our only consideration.

Indeed, the choices we make over how we distribute our programmes and services will be critical to our success in meeting the BBC’s mission.

Put simply the more effectively and efficiently we distribute services, the more valuable they are to people. The more convenient they are to find, the more they will be used and the better value they deliver for licence fee payers. The more robust and higher quality the delivery, the more audiences appreciate the content. The less services cost to distribute, the more the BBC can spend on British content for everyone to enjoy.

In this Charter period the key question for the BBC’s distribution is likely to be how to harness the internet to deliver enhanced services to audiences.

To remain successful in delivering its mission, the BBC will continue to primarily distribute via services. Services - such as BBC One, Radio 4 or BBC iPlayer – are selections of content which are greater than the sum of their parts. This is thanks to how they are put together – or curated – with the BBC guiding audiences to experience the full range of the BBC’s offer, rather than just the most prominent or most popular shows. It also means we can provide popular extra features, such as ‘live restart’ on BBC iPlayer which allows a user to rewind to the beginning of a programme that is currently being broadcast.

The BBC will also need to be able to access and use data to personalise content recommendations and make improvements in response to feedback from audiences. The BBC’s need for data of sufficient quality and completeness has recently been reinforced by the National Audit Office. Indeed, as the lifeblood of any modern media company, data will be indispensable if the BBC is to continue to inform, educate and entertain all audiences.

The BBC’s future approach to distribution builds on a strong tradition of innovation in which the BBC has helped the whole UK broadcasting industry. For example the early development of BBC iPlayer helped create the market for video on demand (VOD) which we now take for granted. As Netflix CEO Reed Hastings said: “The iPlayer really blazed the trail. That was long before Netflix and really got people used to this idea of on-demand viewing.”

At present over 80% of BBC iPlayer consumption (and growing) takes place on platforms controlled by third-parties such as pay TV operators and the manufacturers of televisions, radios and mobile devices. The UK’s dynamic and competitive platform market extends the reach and convenience of access to BBC services. BBC iPlayer alone is now available on over 10,000 types of device - more than any other VOD service in the UK.

This market-leading availability has been possible because the BBC has developed a highly efficient and cost-effective means of making its content widely available to audiences, via arrangements which are free and fair to third-party platforms. This standard BBC iPlayer product requires minimal work by the BBC or platforms to integrate consistently across a vast range of platforms. To date it has represented the gold-standard of UK VOD services, and the BBC continues to innovate to maintain this quality.

As set out in the policy, the BBC normally expects to distribute via a standard product – and this is the preference of most platforms. But the BBC will apply its policy on a case by case basis – and its approach has not stopped the BBC from working with platforms who offer new ways to access BBC content outside BBC iPlayer. Unlike other large VOD services, the BBC does not operate a ‘walled garden’. Instead, it works flexibly with platforms such as Now TV, BT TV and Virgin Media to make sure that a range of BBC programmes can easily be found within their search and content discovery menus.

In short, the relationship between the BBC and third-party platforms is usually a win/win.

At the same time, third-party platforms, as commercial players, cannot always share the same incentives as the BBC to enhance the overall public value delivered to audiences, or to invest in and showcase British content.

This can present a challenge for the BBC. It is therefore to the benefit of both platforms and the BBC that the BBC includes in the policy the conditions which the BBC judges to be both reasonable and necessary for platforms to meet in order for the BBC to fulfil its public mission. This is the focus of the policy – and also a requirement of the BBC Charter & Agreement.

In summary the seven conditions are as follows.

(a) Prominence – the placement of BBC content and services relative to those of other providers should be in line with audience needs and expectations

(b) Editorial Control – the BBC should retain editorial control of its content and its placement

(c) Branding & Attribution – users should be able to easily identify which content on a platform is provided by the BBC

(d) Quality – users should be able to enjoy a high quality experience of BBC content and services

(e) Data – the BBC should have access to data about the usage of its services

(f) Free Access – users should incur no incremental cost to access BBC content and services

(g) Value for Money – BBC distribution arrangements should maximise cost-effectiveness of distribution to the licence fee payer.

We will work with platforms to ensure they can comply with these conditions.

Before this policy is implemented there is now a chance for the public, stakeholders and Ofcom to comment on it. We will take feedback on board before publishing our final policy later in the year.

It’s important we get this right, for the BBC, for licence fee payers and for the broadcasting industry at large and we welcome your feedback.

Daniel Wilson is Head of UK Policy, BBC

• Read more about the consultation and download the documents
• Read the press release on the Media Centre - BBC launches distribution policy consultation

Yesterday the Department of Culture, Media and Sport published a weighty assessment of the market impact and distinctiveness of the BBC’s services by Oliver & Ohlbaum (O&O) and Oxera.

We have now had time to digest the report. It suggests that in some areas the BBC has become less distinctive - particularly on BBC One - in recent years.

Having gone through the detail of O&O’s analysis we are not sure that the evidence presented supports such a claim.

In fact, one of O&O’s conclusions is that they don’t have the data to check the long-run distinctiveness of BBC One versus ITV1 across all relevant dimensions and “we are not sure how relevant this is to the current or future dynamics of BBC One and ITV1 and its impact”.

The data, in fact, tells rather a different story – a story of BBC One that is not only distinctive compared to ITV1 but more distinctive than it used to be.

Genre mix

For instance, Ofcom’s industry data shows that despite a similar level of spend, BBC One broadcasts in peak-time a much broader range of programming than that offered by ITV.  ITV broadcasts close to double the number of peak-time hours of Entertainment and Soaps (45% to 25%). Almost half of BBC One’s peak-time schedule is allocated to News and Current Affairs and Factual programming, against just 30% on ITV1.

Genre mix on BBC One and ITV (% peak time)

A key theme in the Government’s Charter Review consultation paper is the scale of the BBC and its impact on the media sector. It poses the questions: ‘‘is the BBC crowding-out commercial competition and, if so, is it justified?’’ and ‘‘where does the evidence suggest the BBC has a positive or negative wider impact on the market?’’

It’s best to start with what we know. First, the BBC is becoming a smaller part of the UK broadcasting sector. Its share of broadcast revenues has fallen from c.40% to c.20% today. Its audience reach and share has remained broadly stable but this is a function of audience satisfaction not economic dominance. In online, the BBC accounts for 3% of the total time spent by UK audiences.

Second, few other countries are in better creative shape than the UK. There aren’t many industries where the UK goes toe-to-toe with the US, but the creative industries still can. Britain’s competitive position hasn’t come about by accident but is, at least in part, because of this country’s vision and foresight in creating institutions like the BBC. UK broadcasting is based on competition for quality between public and private institutions with different remits and funding structures. Ofcom’s latest PSB review says the BBC ‘‘remains the cornerstone of the PSB system and is the key driver of investment across the system’’; the licence fee is c.20% of TV industry revenues, but c.40% of what is spent on original British programmes (excluding sport).

So our hypothesis is clear – the BBC makes UK broadcasting and the wider creative sector stronger. To test this further, we need to know how and by how much, the BBC contributes to growth. Or to put it another way, we need to know what would happen to the sector without the BBC or with a diminished BBC?

It’s worth pausing here. I’m not arguing that the primary purpose of the BBC is to promote economic growth. The BBC exists to provide universal access to services that educate, inform and entertain millions of people each day in ways that the market alone wouldn’t. And in doing so, the BBC makes our quality of life better and our culture richer.

At the same time, the BBC’s public service remit requires it to invest in new, home-grown creative ideas and talent, and the licence fee enables it to do so at scale. Economic value is, therefore, a corollary of the BBC’s public purpose.

To answer the how question, we identified, with the help of Frontier Economics, the principal channels through which the BBC supports private sector growth. I’ve written about these in a previous post. The BBC is the largest single investor in TV and radio original content* and provides a ‘shop window’ to the world for UK talent and programme-makers; its investments stimulate output in other creative industries such as music and help make markets as iPlayerdid; and the BBC strengthens the productive capability of the creative sector across the UK by, for example, training some of the greatest professional talent in the world and kick-starting local creative economies such as MediaCityUK in Salford/Manchester.

We’ve asked PwC to quantify some of these effects by modelling the impact on the creative sector and the whole UK economy of changes in licence fee investment. They’ve used the same kind of model that the Government uses to assess the economic effects of tax changes. Importantly, it takes into account the fact that a change in licence fee income will not only change the BBC’s expenditure with knock-on impacts across the creative sector, but could also affect other broadcasters’ spending and household expenditure. It measures the net effects of policy changes.

PwC have modelled two hypothetical scenarios. The first involved a 15% nominal increase over a five year period in the BBC’s licence fee income. Since we’ve agreed our funding with the Government as part of the last Budget, this isn’t a pitch from us – the figures were chosen simply to assess the BBC’s impact. PwC’s analysis suggests the increase would likely boost creative sector GVA by £435 million, total economy GVA by £319m and create 16,200 extra jobs in 2021/22, compared to the counterfactual where the BBC’s licence fee revenues remained unchanged.

The growth is driven by a number of factors. Firstly, the rise in licence fee income results in a net increase in investment in original TV content (£221 million by 2020/21) and the wider creative industries which has a multiplier effect. PwC says it is difficult to predict whether a higher licence fee would ‘crowd-out’ or ‘crowd-in’ commercial activity. To be prudent, they assume that an increase in BBC spending would reduce other broadcasters’ revenues and expenditure to some degree. Secondly, an increase in the licence fee would mean that households have slightly less income to spend on other goods and services.

The analysis concludes that increased licence fee investment would far outweigh either of the downside effects. This is because the licence fee channels resources into one of the most productive parts of the UK economy, the creative industries. Every £1 increase in licence fee income generates an extra 60 pence of economic value. Far from increasing the deficit, this is an area where public investment reduces it.

PwC’s analysis also demonstrates that the effects work in reverse, too. The second hypothetical scenario involved a 25% nominal decrease in licence fee revenues over the five year period. This would likely reduce creative sector GVA by £997 million, total economy GVA by £630 million and lose 32,000 jobs in 2021/22, compared to the counterfactual where the BBC’s licence fee revenues remained unchanged.

The last few years have provided us with a real-life experiment in what happens with a smaller BBC. As spend on the BBC’s UK services has fallen in real terms over the last five years due to the licence fee freeze and external obligations (e.g. broadband), so – as Ofcom’s PSB review highlights – overall investment in original UK TV content has gone down. The market has not filled the gap.

The available evidence supports the hypothesis that the BBC makes UK broadcasting and the wider creative economy stronger. From TV to music, writing to film, the BBC is a key part of why the UK is such a great exporter of creativity. There is a real risk that a diminished BBC would reduce the competitive pressures in broadcasting, leading to a new equilibrium in which investment in a wide range of UK original content is lower than before. The question we should be asking, therefore, is: "How can the BBC do more to support British creativity and the creative economy?"

*BBC invests c.£2.2 bn of licence fee income directly in creative sector; £1.2 bn outside of the BBC, with c.£450m in small and micro creative businesses. 86% of its creative suppliers are small or micro.

James Heath is BBC Director of Policy & Charter

• Read The PwC Report: The impact of a change in the BBC’s licence fee revenue

The government recently published its latest estimates of economic growth, employment and exports for the UK's creative industries. They show a continued strong performance in 2013, despite a small dip in the ‘Film, TV, video, radio and photography’ group.  What's most striking about the data are the comparisons with the rest of the UK economy. Over a sustained period the creative industries have grown much faster than the wider UK economy on all three measures.

The creative industries are where the UK has a definite competitive advantage in the 'global race'. Last year, nine of the top ten biggest selling artist albums were from British acts. This country is the second largest exporter of TV programmes and has many of the most widely used news websites in the world.

Moreover, there is evidence that strong creative industries spur growth in the wider economy and make the UK a more attractive place to do business with. It's likely that most UK economic growth in the next decade will come from cities and we know from places like Manchester/Salford, Bristol, Cardiff and Glasgow, that thriving arts and culture can act as a catalyst for urban renewal.

So the key question for policy-makers is not ‘it’s broke, how do we fix it?’ but ‘it works, how do we sustain it?’ In this post, I want to consider the difference the BBC makes to the creative industries.

I should start by saying that the BBC's primary purpose is public not economic. It exists to provide great content that educates, informs and entertains, and to deliver social, cultural and civic benefits. This is why the BBC is publicly funded and made universally available.

At the same time, this purpose means that the BBC invests in home-grown creative ideas and talent (writers, producers, actors, journalists and musicians), and its funding model enables it to do so at scale and to take risks and innovate across content and technology. Economic value is, therefore, an important side-effect of the BBC's public purpose.

Whether by design or not, the BBC has the effect of a major industrial policy intervention in the UK creative economy and one that, judging by the performance of creative industries, seems to have had a net positive effect. This shouldn't be a surprise as we know markets tend to work best when properly regulated and shaped by smart public policies. A lot of innovation in modern economies is facilitated by what's been called the 'entrepreneurial state' - governments, public agencies and universities. Mariana Mazzacato has written extensively about this; see for example, The Entrepreneurial State. Look at how the internet and subsequently the worldwide web originated in the pioneering work of public agencies, the US government's Advanced Research Projects Agency (ARPA) and CERN (the European Organization for Nuclear Research) respectively.

Previous analysis has looked at the value generated for the UK economy by BBC activity, using multiplier analysis. In 2012, BBC spending generated gross value added of around £8 billion - that's £2 of value for every £1 of licence fee spent. To build on this analysis, we've looked at how the BBC helps to create the conditions - in terms of investment, competition, skills and training, and innovation - for a high growth creative economy. 

The UK's network of creative industries

The UK’s creative industries can be viewed as a complex network, with strong inter-relationships and dependencies between many of the constituent parts. Inter-connections exist both between different creative content sectors - e.g. TV and film, radio and music, and TV/radio and the performing arts and museums and galleries - and between different players within each sector. Many modern academic accounts of the origin of ideas and innovation stress the importance of connectedness. Ideas - carried by people - collide with each other. They come together, producing more than the sum of their parts.

Public-private competition is also a pivotal feature of the creative economy. In broadcasting (as in the arts), 'competition for quality' between public institutions like the BBC and commercial broadcasters like ITV and BSkyB has led to higher levels of investment and better, more varied output. When the BBC performs well, others have to raise their game to compete for audiences, which challenges the BBC to aim higher - in a positive feedback loop. Far from crowding-out commercial investment, I'd argue that the BBC supports overall market growth. This is a dynamic that can be observed in other countries with strong public service and commercial broadcasters.

The BBC's role in the creative industries

The BBC occupies a hub position in the UK’s creative industries, densely connected to many other firms through supply-chain linkages, induced investments and positive spillovers. It is these inter-connections that power the BBC's contribution to growth, jobs and exports. Working with Frontier Economics, we’ve identified a three-stage 'transmission mechanism' through which the BBC contributes to growth in the UK’s creative industries. This is shown in the graphic below (with more detail to follow in subsequent posts):

BBC transmission mechanism

Today, BBC Director of News and Current Affairs, James Harding, spoke at City University about the global challenges and opportunities for online news.

Alongside his speech we are publishing a new report examining how the UK digital news sector might evolve in the future. Increasingly, Britain’s success in news is being recognised around the world – from the popularity of British news websites to the profile of UK journalistic leaders (paid content).[1]

In the UK we have one of the most competitive journalism markets in the world and since the advent of the internet it has gained access to a global audience. There have been well-documented challenges. Yet there are big opportunities too.

This is why we’ve published today’s report by Mediatique. The report finds strong evidence of some of the benefits of digital for both British news businesses and UK audiences.

UK news providers

For UK news providers, total digital revenues are now close to half a billion pounds (see figure 1). They’re growing fast. Digital advertising and subscription revenues for newspapers – which represent the bulk of total revenues – are up by two-thirds in the past two years alone. This growth is accelerated by overseas audiences, who now represent two-thirds of the users of the leading UK news websites.

fig 1:

Source: Mediatique. *Regional and national newspaper titles only, excluding FT; broadcasting sites do not include any share of Sky subscription (bundling Sky News access); new entrant figure is estimate based on review of company announcements. Broadcaster advertising represents the UK advertising revenues accrued by the websites of commercial broadcasters. New entrant advertising represents the ad. revenues accrued by ‘digital only’ news providers in the UK (eg. Buzzfeed, Huffington Post)

Data relates to computer based internet usage only. Source: BBC, comScore MMX

Reading Ryan Bourne's article I was reminded of Procrustes, in Greek mythology, and his habit of altering travellers' limbs so they would fit perfectly into his bed. The critique of the licence fee that is put forward makes the error of forcing the world to fit a particular narrative arc, and is long on assertion but short on evidence.

My argument was that the policy goals (of social value and universality, great programmes at an affordable price, creative sector investment and independence) are best met via the licence fee. Ryan’s starting-point seems to be that the market will deliver an optimal outcome and so there is no longer the need for a licence-fee funded BBC. One way of resolving this is to look at how the UK broadcasting system works in practice and at what the public want as consumers and citizens, and also test the article’s assertions with evidence.

1) Audiences don't want a negatively-defined BBC that only exists to fill gaps left by the market. Quite the reverse - they tell us they want a BBC that brings them breadth, depth and enjoyment across a wide range of genres (not just news, current affairs and children’s programmes that the article suggests). BBC One is a hugely distinctive service – more distinctive than 30 years ago with, for example, zero US imports and more drama, documentaries and news.

2) The crowding-out assumption misunderstands the competitive dynamics at play. Countries with well funded PSBs  investing in quality, diverse content tend also to have strong commercial markets, and the UK is a prime example of this with ‘competition for quality’ between the BBC and commercial broadcasters. I've not seen any credible analysis that suggests the UK creative sector would be bigger - rather than substantially smaller – in a 'no BBC' or 'rump BBC' scenario.

3) The article dismisses the BBC’s role in providing 'shared experiences', just as the World Cup ends and the Commonwealth Games starts. BBC One's audience for the World Cup final peaked at 16.7 million; four times the size of ITV1’s audience for the same game, despite zero switching costs. Big, diverse audiences turn to the BBC at times of public interest, sadness and celebration – for example, 17.7 million at the 2010 general election, or 19.2 million for the Royal Wedding. I would argue that the value of access to a common stock of knowledge, information and cultural reference, as well as spaces to debate our differences, goes up, not down, in a 'more diverse age'. This is not to say that public value is the preserve of the BBC or publicly-funded organisations – but that a move to subscription would undermine the BBC’s role as a national public service broadcaster.

4) ‘‘Everybody believes the BBC is biased against them….’’ The BBC remains by far the most trusted source of news in the UK, with 58% of the public selecting it as the one source they trust the most and 50% as the most impartial source (among the plurality available) – with the latter being an important driver of the former.

5) The article replays the argument that the licence fee is made obsolete by new technology. The licence fee is already device-agnostic - you need one to consume live TV on PCs and tablets as well as on conventional TV sets. The licence fee has continuously adapted to technology change – first to cover TV, then colour TV and, most recently, live TV usage over the internet. The question of whether the licence fee should be modernised to cover on-demand BBC programmes (which it already pays for) is largely independent of the wider policy question of whether the BBC should move to a gated, commercial service.   

6) I agree that survey results on the licence fee are sensitive to the questions asked. But the Whitehouse poll cited in the article actually shows more opposition to a subscription-funded BBC than support for it.  And, as any pollster will tell you, it's the trend that matters and research carried out consistently over the past 10 years shows that public support for a subscription-funded BBC has fallen by over half and is the least favoured form of funding in all types households, including those with pay-TV.

7) The article’s support for contestable funding in broadcasting feels like a solution in search of a problem. As Ryan acknowledges, the BBC isn't a monopoly; it is subject to intense competition in a market where consumers can easily switch between providers. Around two-thirds of BBC activity is already part of some competitive process and we've just announced plans to go further to drive efficiency.

Overall, the fundamental gap in the critique is any real sense of how replacing the licence fee with subscription would make audiences, the creative sector and society, better off. There's an important difference between what is possible and what is desirable. Just because technology has now made it possible to fund the BBC’s TV services (but not radio) via subscription, doesn't mean it is in the public interest to do so. There are different ways of allocating services - it depends on their purpose or point. We've chosen, as a society, to keep some aspects of our lives in the public realm - available to all and serving all. The BBC is one such aspect due to the social, cultural and democratic benefits derived from broadcasting. This is not to say that the BBC is as important as the NHS but that it meets the same kind of public goals.

The BBC and PSB shouldn’t be seen as deviations from an idealised model but rather as central to the effective operation of this sector and to meeting people's interests as citizens and consumers.

James Heath is Director, Policy

• Read James’ other About the BBC blogs, Why subscription isn't the best way to fund the BBC and also Why the licence fee is the best way to fund the BBC

In my last post, I argued that the value the BBC gives the British public and the creative sector is because of the licence fee and not despite it. But could there be a better funding model, or at least one that is more suited to the digital world? What about subscription? Or could a hybrid model of a core licence fee funded service with additional services funded on a subscription basis, deliver the best of both worlds? This post deals with both potential options in turn.

Subscription is not a new idea for funding the BBC. Nearly 30 years ago, the Peacock report favoured it as the best way to give effect to consumers’ preferences. Digital switchover has now made it technically possible (but only at significant cost) to charge households directly for the BBC’s TV services (but not radio) and exclude non-subscribers.

But whether these models are desirable depends on what you think the BBC is for and what impact it should have. In a previous post, I’ve set out what I think should be the ‘tests’ of a good funding system for the BBC; others may have different tests and we are open to debating the counter-arguments. Ultimately, this is a choice for society to make; and the forthcoming review of the BBC’s Charter provides a method for making that choice.

A move to subscription

Even if it were possible to generate the same or greater income (a big 'if'), a subscription model would unavoidably change the nature of the BBC and the UK’s successful broadcasting ecology. The argument I want to make is that subscription is not the answer as long as you want the BBC to be a universal, public service broadcaster that aims to surprise and inspire each and every one of us and to deliver social and cultural benefits at scale. Subscription is also not the answer if you value the current level of overall choice and investment in British content. And it’s not the answer if you wish to maximise the value for money that the public as a whole gets from the BBC. 

Loss of universality

Under a subscription model, the BBC’s incentives would change. Normally, subscription prices are set at a revenue maximising level in order for the services to prosper. Previous research suggests that were it entirely subscription-funded, the BBC would need to charge £20 per month, 65% higher than the current licence fee, for the same number of services. As a result, the BBC would become much less affordable. Our reach among the public would suffer. Subscription channels are very good at serving specific audiences but the social and cultural value of the BBC comes from its universal availability as well as the range and breadth of our output. Take, as an example, the audiences for drama in the UK vs the United States. 1 in 25 of US population watched the biggest episode of Breaking Bad on the subscription channel AMC compared to 1 in 5 of UK population watched Sherlock on BBC1.

Reduction of choice and investment

The BBC's programming choices would also likely change. It would be perfectly rational for a subscription-funded BBC to focus on services and content of appeal to those with the highest willingness to pay. Some audiences would have to be prioritised over others. People’s wants as consumers would take precedence over their needs as citizens.

The mixed funding model in UK broadcasting has meant two things – a bigger overall pot for investment in content, and better, more varied programmes, because of competition for quality (but not funding) between the BBC, advertiser-funded public service broadcasters and subscription-funded channels.

The UK has a very successful pay-TV sector which has largely focused on the acquisition of premium content on an exclusive basis to drive subscription revenues. Subscription broadcasters have so far invested significantly less in UK original content, in total and as a proportion of their revenues. Their growing investment – estimated at £540 million in 2012 by COBA – is very much to be welcomed; at roughly one fifth of total UK original investment it corresponds to the sector's c.55% share of TV revenues. 

We also know that the costs of operating a subscription service would be significantly greater than those of collecting the licence fee (at £100 million per year), thereby reducing the money available to the BBC for content investment. To quote BSkyB: " ... 100 million is nothing compared to what they [the BBC] would likely have to spend on marketing in order to retain their subscribers."

Loss of overall welfare

Because of increased costs and a smaller subscriber base, those paying would have to spend more to get a subscription-funded BBC. The result would be many more losers than winners. Subscription would exclude many who highly value BBC services but couldn’t afford to pay a revenue maximising price. This would be both unfair and sub-optimal given the low marginal cost of making our content available to additional viewers. Many others would pay a higher price (than currently with the licence fee) for a less good service. Against this, those who currently value the BBC at less than the cost of the licence fee could potentially opt-out – but the effect would be to reduce welfare overall. And, as I argue in an earlier post, the loss of universality would erode the external social and cultural benefits delivered by the BBC.

Another way of looking at this is the impact on value for money. Because we virtually all pay for and use the BBC, the cost of its services for the average household, both per week and per viewer hour, is significantly lower than the cost of subscription-funded services. Prof Patrick Barwise has calculated the cost per week of BBC’s TV services at £1.98 vs £7.65 for subscription channels and the cost per viewer hour at 9.2 pence vs 24.9 pence respectively.

Perhaps this explains why the British public shows little appetite for a move to a subscription-funded BBC. Subscription is the least favoured method of funding the BBC (behind advertising) and support for it has, in fact, declined by half over the last ten years.

What about transition costs?

Although subscription is now technically possible it would also face major execution challenges. While pay-TV users have set top boxes or other equipment with 'conditional access modules' (CAM) that enable subscription, pay TV equipment is only in just over 50% of households. Around 11.5m households have free-to-air TV alone, while a total of almost 20m households have at least one 'free' TV set. This equipment would have to be fitted with CAMs or replaced, at an estimated cost of around £500 million. Meanwhile, it is not technically feasible to encrypt the BBC's broadcast radio services and therefore limit consumption only to those paying for it. What would happen to BBC radio?

Is a hybrid funding model more promising?

The prospect of a cheaper 'core' licence fee funded BBC with remaining services available on a subscription basis, has been raised as a potential alternative to full subscription. We have carried out some preliminary analysis of this option; the results should be taken as indicative not definitive.

The first challenge is one of selection. Licence fee payers have different concepts of their 'core' BBC services, hence an attempt to divide into licence fee funded 'core' and subscriber-funded 'non-core' would lead to many feeling under-served by the 'core'. Setting this aside and taking into account technology feasibility, potential commercial viability and the need to still reach large audiences with public service content, we modelled a scenario where BBC Three (current broadcast service), BBC Four, BBC iPlayer, and BBC Online were made available on a subscription basis

The second question is the route to market. For BBC Online, we modelled a pay-wall model. For the TV services and BBC iPlayer, there are three options:

a) Subscription as stand-alone BBC services. Market practice suggests this is an unusual route for mixed genre channels;

b) A more usual approach for BBC-type services is inclusion in a third party pay TV package, where the pay TV provider retails the service and passes a payment per subscriber back to the broadcaster, having covered platform costs and retained a margin. This would restrict initial coverage of BBC subscription services to the 50% of UK households with pay TV, with those using Freeview or Freesat (generally, the less well-off and elderly) excluded ; or

c) Online distribution, such as subscription VOD. This is not yet a mass activity and the entirety of the UK industry’s revenues in 2012 would not be enough to cover the current service costs of BBC Four.

For each of the above options, we examined willingness to pay for each of the subscription services to understand the optimal price point, the number of households that would take the service at this price, and the resulting revenues. This optimal price would necessarily exclude consumers who valued the service, but at a lower price. We assumed that the services would remain advertising-free as this is one of the public’s most valued characteristics of the BBC.

The headline conclusion is that the services would be very unlikely to generate sufficient revenues to cover their service costs. And the challenge is all the greater because moving to subscription would introduce new costs as outlined above, including customer acquisition and retention, platform charges for carriage, and transition costs.

Even if you were to imagine the subscription services were commercially viable, those paying would have to spend significantly more to get the BBC. This is the third problem – loss of consumer welfare. Those wishing to continue receiving all current services would pay double the current licence fee (i.e. c£12.55 per month extra). Even taking just one service on a subscription basis would exceed the licence fee saving.

And how much could households who choose not to subscribe to any of the services save through a lower ‘core’ licence fee? A maximum of c£1.40 per month, assuming all the services covered their costs on a subscription basis, which our analysis suggests is unlikely. We calculate that the total loss of consumer surplus would be over £150m per year from putting BBC Three, BBC Four, BBC Online plus BBC iPlayer behind a pay-wall.

Rather than delivering the best of both worlds, our initial analysis suggests that under a hybrid model some people would pay significantly more for the same number of services and others would pay a bit less for a lot fewer services. Perhaps more fundamentally, the BBC would be erecting a pay-wall around the digital future.

James Heath is Director, Policy

• Read Why the licence fee is the best way to fund the BBC published yesterday on the About the BBC Blog.

This is the first post in a new series of BBC public policy blogs, which set out our thinking, discuss ideas, and stimulate debate on some of the key public policy questions facing the BBC.

Some argue that the licence fee is outdated and should be scrapped; others that it should stay but be distributed beyond the BBC. It's right that these issues are debated and that we engage with the counter-views.

What the BBC is for and how it should be funded are inextricably linked. I think there are four basic tests for the BBC's funding mechanism: universality and social value, great programmes at an affordable price, creative sector investment, and independence. This post examines whether the licence fee still meets these tests. My next post will consider the alternative of subscription funding.

Measured objectively – weekly reach, audience appreciation, investment in new British content, level of public trust, and value for money - the BBC performs well. And the value the BBC gives the British public and the creative sector is, I would argue, because of the licence fee and not despite it.

Like democracy, 'least worst' is a tag that has often been attached to the licence fee as a way of funding the BBC. In fact, it is the best way of funding the BBC. The licence fee works in practice because it works in theory. As long as we want the BBC to be an independent, universal broadcaster, committed to serving everyone and to investing in British creativity, the licence fee will remain a simple but powerful way of paying for its services.

Beware techno determinism. Just because digital technology makes it possible to change the way the BBC is funded (well, for TV at least and only at a significant cost), that doesn’t mean it’s desirable or inevitable. The prior question should be: what’s in the public interest? Changing media consumption is a reason for future-proofing the licence fee so that it applies to on-demand use of BBC TV programmes, but not a justification for scrapping it.

The common good

To determine how a good or service should be provided, you should first determine the purpose of that good or service. The BBC’s Charter and Agreement sets out what the BBC is for. It has an intrinsic purpose: to provide programmes that inform, educate and entertain people as individuals. And it has an instrumental purpose: to deliver external benefits to society through, for example, creating a richer culture, promoting democratic debate and building a stronger sense of community through shared experiences. We know that the market works best when it includes a successful public service broadcaster; far from crowding-out commercial players, public service broadcasting supports their growth.

We should, of course, debate the extent to which the BBC is fulfilling these purposes and challenge it to do better. But for as long as we believe they are important, it is surely socially just that the BBC’s services are universally available to all on equal terms. It is also prudential as the social and cultural value of the BBC is a function of its widespread consumption.

The greatest happiness principle

By virtue of the BBC's purposes and range of services, we all benefit from paying the licence fee. 96% of UK population consume the BBC each week. Our services are actively chosen 140 million times a day, despite the array of media choice and very low switching costs. This probably makes the BBC the most used public service in Britain.

Because of this reach, we are not asking lots of people who do not use the service to pay for it. Compared to many other public services, the level of cross-subsidy in the BBC is low. This is a major reason why people support the licence fee, because it is not merely of value to all – it is of value to them.

And everyone wins from the licence fee because everyone pays. The licence fee is a form of shared investment, akin to the pooling of health risks for mutual security. Because the licence fee shares the cost of the BBC as widely as possible, it keeps down the cost for each individual household. For 40 pence per day, every household gets access to 8 network TV channels, 10 national radio services, and online services.

Last week, BBC Director General Tony Hall unveiled new audience research showing the BBC to be a world beater in quality content.  He outlined that the BBC’s success didn’t come at the expense of others, describing a ‘virtuous circle’, stimulated by public funding.  As illustrated below, when the BBC does well, others have to compete and raise their game, challenging the BBC to aim yet higher.

Last week, the Culture Secretary Maria Miller, announced her intention to undertake an assessment of UK media plurality, informed by a measurement framework to be developed with industry. This is an important subject that the BBC, as the UK’s leading provider of independent and impartial news, is keen to engage with and, in doing so, clear-up some misunderstandings. 

Successive Governments have had two core purposes in this area: to keep the BBC as an independent provider of impartial news locally, nationally and internationally. And to ensure that in news provision, no single voice or proprietor can unduly influence public debate or the political process. Overall, the UK has one of the healthiest, most competitive news markets in the world. For the British public, this means access to an ever wider range of opinions and perspectives.  

Size matters but not as much as values

Yes, the BBC is a large part of the UK news market. In fact, we over-perform, producing 25% * of TV news minutes broadcast while accounting for 73% of consumption. But size is not the main reason why people choose to consume BBC news. It’s because, as the polling consistently shows, they rate the BBC significantly higher than other UK news providers for trust, accuracy and impartiality.

Licence fee payers regard news as central to what the BBC does. This includes the provision of free-to-use, impartial news online. Despite, or perhaps because of, the increase in the use of pay-walls by commercial providers, 82% of the public want the BBC to continue to provide universal access to news on its website. Only 3% of the public disagree. The future of news is digital, so this finding is important.

Impartiality is a core value of BBC journalism. It is also hard-wired into our governance and regulatory system. The BBC is forbidden, under its Royal Charter, from expressing corporate views in its output. The BBC Trust commissions and publishes independent reports into the impartiality of BBC journalism that are designed to challenge and improve performance. Of course those reports include some criticisms, although the most recent review of the BBC’s news output by Stuart Prebble, a former CEO of ITV, concluded that, overall, the BBC ‘continues to reflect an impressive range of opinion’. It is hard to think of another UK news provider that subjects its editorial standards to the same level of scrutiny and analysis.   

The BBC has a pro-plurality impact

Thanks to the security of funding that the licence fee provides, the BBC can invest in areas of journalism that are notoriously expensive, and which tend to be most at risk in purely commercial organisations: for example, newsgathering, undercover reporting and regional/local news. So, for example, keeping open foreign bureaux, employing expert correspondents in every part of the world, gives a reach and a texture to our coverage that is  unmatched. And across the UK, the most popular news bulletin is the BBC’s early evening regional news.

Crucially, the BBC’s success is not stopping other companies investing, nor is it preventing people from finding and using other sources of news. Two of the top three newspaper websites in the world are British. Only a small proportion of people - around 10% - get all their news from the BBC. Most people check in on a number of news sources.  They find different sources offer them different things – whether the impartial reporting of TV news or the editorials and opinion more often found in newspapers and online. Ofcom has found that on average audiences use 4.8 sources of news. This is likely to increase as more consumption moves online where audiences tend to use more not fewer sources of news. Moreover, the BBC accounts for a smaller share of broadcast revenues than at any time in his history – and that share is continuing to decline.

Counted but not capped

We agree, and always have done, that the consumption of the BBC ought to be measured in any analysis of news plurality – that’s common sense. But the inclusion of the BBC in the measurement of plurality is distinct from the question of whether the BBC should be subject to any new plurality regulation or controls. 

It would be perverse if the BBC’s success in fulfilling its public service mission, by reaching large parts of the population with independent and accurate news, were to result in action to constrain its news services. Yes, the BBC should be counted in any review but its news output should not be capped - particularly since there is already a well-established process for regular review of the BBC’s overall size, shape and regulation through Charter Review. 

The BBC is a core part of the UK news ecology but it is fundamentally different to the other parts. This is due to the BBC’s public interest remit, impartiality requirements, and extensive governance and regulation. The views of Ofcom and Lord Leveson on the position of the BBC are worth recalling.

Ofcom, in its advice to the Secretary of State on media plurality, noted that the periodic review of the BBC’s Royal Charter and Agreement:

“is a rigorous and detailed inquiry into the purpose and function of the BBC and requires Parliamentary approval.  This is unique and ensures that the BBC’s aims are aligned with the public interest.” 

Lord Justice Leveson concluded that:

“governance controls in place to ensure internal plurality within the BBC, and the effect of the impartiality requirements meant that its size gives rise to no plurality concerns”.

James Heath is Director of Policy, BBC.

* This figure has been updated since the blog post was originally published on Monday 5 August on account of a typographical error. (Tuesday 6 August 2013)