Analysis of the BBC Licence Fee settlement for the 2007-2013 period, written by Grant Goddard in February 2007.

1. THE BBC LICENCE FEE
SETTLEMENT FOR 2007-2013
by
GRANT GODDARD
www.grantgoddard.co.uk
February 2007

2. 
The government’s settlement of the Licence Fee fell £2bn short of the
BBC’s bid for the 2007-2013 period, but is unlikely to herald substantial
cuts to the Corporation’s proposals.

The settlement guarantees the BBC an income less than half a per cent
below the anticipated Retail Price Index, while revenues of its commercial
competitors are forecast to fall more significantly for at least the next two
years.

The competitive position of commercial television, radio and local
newspapers in relation to BBC offerings is likely to be eroded further.

During the remainder of the decade, the widening disparity between
resources available to the BBC and to its commercial rivals is likely to
precipitate a re-evaluation of the Licence Fee as the suitable funding
mechanism.
January 2007 has been a momentous month for the BBC with regard to its
future funding and public service role in the digital age. Developments include
the licence fee settlement for the six-year digital switchover period running
from April 2007 to March 2013 and the publication of the two key determinants
of future on demand strategy; Ofcom’s Market Impact Assessment (MIA) and
the BBC Trust’s Public Value Assessment (PVA) of the BBC iPlayer. These
last two items will jointly feed into the BBC Trust’s Public Value Test, due for
publication in three months time.
And, as if nothing more were needed, Ofcom has also published in January
2007 its PSP (Public Service Provider) review, which addresses the shape of
public service media contributions in the post digital switchover era.
Although the BBC is the organisation most directly affected, recent
developments will also profoundly influence the outlook for the commercial
media: newspapers as well as television and radio. In this, the first of two emails, we consider the impact on other, commercial media of the licence fee
settlement.
The BBC originally pitched for an increase of 1.8% per annum above the RPI,
instead of which it has been granted annual increases averaging 2-2.5%
against the current baseline value of £131.50 for a colour TV licence. On a like
for like basis, the net average annual increase works out at 1-1.5%, taking into
account the £1.2 billion in extra commitments associated with the Salford
studios and digital switchover aid and offsetting them against the extra £0.6
billion or so in net licence fee revenues accruing from population growth.
The BBC has expressed “real disappointment” with the settlement, which it
says leaves it with a six-year funding gap of £2 billion for delivering its vision of
the future. Yet, if the BBC feels hard done by, the question for the commercial
sector is whether the settlement has been anything like tough enough, given
the bleakness of the present advertising climate. Quite simply, the issue is the
potential growing disparity of funding between the public service and
The BBC Licence Fee Settlement 2007-2013
©2007 Grant Goddard
page 2

3. commercial media. On the one hand, the BBC is being guaranteed increases.
On the other hand, not only did television, radio and newspapers experience
substantial declines in advertising spend of several percentage points or more
in 2006, but also significant further declines appear likely in 2007 and possibly
beyond, partly as a result of specific factors to each medium and partly due to
the growth of internet budgets at the expense of the traditional display media.
In the case of television, the lower than asked for settlement may well
compromise the BBC’s commitment to bolster its peak time schedule with
more original drama productions and fewer repeats. If that is indeed the case,
the main beneficiary is likely to be BBC1’s main competitor ITV1, which still
holds on to a precarious lead in peak time viewing. However, lest anyone at
ITV get carried away, we must observe:
 ITV1 is substantially underperforming the rest of the TV advertising
market in terms of advertising outlay. In a neutral or slightly negative
advertising climate, this may be expected to place an acute strain on its
ability to maintain programming budgets at current levels
 It is widely accepted that the BBC bid was well padded out
 In a depressed TV advertising market, it is doubtful whether the upward
pressures on talent costs will be nearly as high as the £1.4 million
anticipated “super-inflation” that the BBC projected in its settlement bid
 The BBC plans also contained a significant “self help” component,
whereby part of the peak time revamp was to be funded out of 15%
efficiency savings.
Taking these factors into account, Michael Grade looks to be in for a very
testing time in the run up to digital switchover if he is to prevent further net
audience drift from his ITV channels over and above the losses due to digital
platform growth. Perhaps the scale of the net loss to the BBC over the next
three to four years will not be as great as in the period 2000-2002, which saw a
dramatic increase in BBC1 entertainment budgets. But, it looks a real risk
nonetheless after a four-year stint in which the Channel 4 group has appeared
the main net beneficiary at ITV1’s expense.
In our view, the divergent fortunes of the BBC and its commercial counterparts
are likely to have moved so far apart by the arrival of digital switchover as to
precipitate a fundamental shift in thinking about the future funding of the BBC.
It is no coincidence that 2012 is the year that Ofcom chief executive Ed
Richards would like to launch a new Public Service Publisher to develop video
and audio content for new media distribution.
For the radio sector, the impact of the settlement will be similar, in that BBC
radio is now guaranteed a level of income almost at par with inflation, whereas
commercial radio is facing the prospect of revenues continuing to decline in
real terms. Our opinion is that the Licence Fee settlement is unlikely to have a
significant impact on the BBC’s plans. Network radio consumes only 11% of
Licence Fee revenue, compared to network television’s 57%, and the BBC has
already completed the greater part of its investment in the national digital
multiplex and its portfolio of new digital stations.
The BBC Licence Fee Settlement 2007-2013
©2007 Grant Goddard
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4. Although the commercial radio industry has complained bitterly that the BBC
distorts the market and proffers unfair competition to its services, our opinion is
that much of the blame for commercial radio’s ailing performance can be laid at
the door of the sector itself. For example, commercial radio’s inability to offer
presenter salaries of comparable size to the BBC’s Terry Wogan appears to be
more a product of the relative lack of success of its three national stations
(share of listening 4.2%, 1.8% and 1.5% for Classic FM, TalkSport and Virgin
Radio respectively) compared to the BBC (15.8%, 11.1% and 9.7% for Radios
Two, Four and One) than it is related to the Licence Fee. Similarly, we believe
that the BBC’s greater share of radio listening (54.4%, compared to
commercial radio’s 43.2%) can be attributed more to the commercial sector’s
recent lack of innovation and lack of investment in content than to the BBC’s
funding by Licence Fee.
The settlement is likely to create some casualties. In the past, local radio has
often borne the brunt of contractions and expansions in BBC radio budgets,
making it likely that plans to use part of the settlement to launch new local
radio services in Cheshire, Bradford, Dorset and Somerset will be postponed.
Similarly, a proposal to distribute each BBC local radio station by satellite will
easily be scrapped. In reality, how many people in Edinburgh really want to
listen to BBC Radio Jersey, and why can they not use the existing internet
simulcast? On the other hand, the plan to add 160 new transmitters to extend
Digital Audio Broadcasting [DAB] reception from 85% to 95% of the population
will go ahead, given the BBC’s commitment to universality and the imperative
to keep pace with commercial radio’s greater coverage achieved with its own
national multiplex.
The shortfall provides the BBC with a perfect excuse to scrap its plans to
develop “ultra-local” TV services in 66 cities and counties, but more from
political expediency than from economic necessity. Ever since the idea was
included in the BBC’s 2004 manifesto “Building Public Value”, it has attracted a
barrage of criticism from local newspapers and local commercial radio stations
alike, whose readership/listeners (and hence revenues) are already under
considerable pressure. There followed considerable back-peddling by BBC
mandarins (“We are not setting out to create TV versions of local newspapers”)
that culminated in a conciliatory speech last November by director general
Mark Thompson to the Society of Editors, in which he even suggested the
Corporation might be willing to pay local newspapers for their content.
Thankfully, the settlement offers the BBC a graceful way to extricate itself from
a misconceived idea that has drawn fire from politicians and business interests
in equal amounts.
BBC plans to launch on-demand TV and radio services have proven just as
controversial for the commercial sector. Despite the reduced outcome of the
settlement, the BBC is certain to pursue its stated plan to implement the
iPlayer service at an annual cost of £226m, which will help it achieve its
objective of transforming “radio” into on-demand “audio” content over the next
six years. We believe that this activity, more than any other to be funded by the
Licence Fee, will substantially impact the commercial radio sector which,
without a coherent competitive strategy, will lose listening to the iPlayer’s
The BBC Licence Fee Settlement 2007-2013
©2007 Grant Goddard
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5. ability to offer a diverse range of BBC content as and when it is desired by
increasingly demanding consumers.
Grant Goddard is a media analyst / radio specialist / radio consultant with thirty years of
experience in the broadcasting industry, having held senior management and consultancy
roles within the commercial media sector in the United Kingdom, Europe and Asia. Details at
http://www.grantgoddard.co.uk
The BBC Licence Fee Settlement 2007-2013
©2007 Grant Goddard
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