Wrestling with the arguments for advertising on the Beeb

Should the BBC carry advertising? And what would happen to the rest of the British media if it did?

Fifteen years ago that question was asked – and answered – by the Peacock Committee on the financing of the BBC, which concluded that trying to find the 1bn, which the BBC then cost, out of advertising expenditure would be catastrophic for other media. There simply wasn’t enough advertising to go round.

For its part, the BBC wanted an “all or nothing” scenario. It didn’t want to be “a little bit pregnant”, taking some advertising in addition to its licence fee. That would force it to behave like a commercial animal without the rewards of substantial profits.

Now that theme has been taken up again in a study by consultants McKinsey, commissioned by the BBC, of the state of public service broadcasters in other countries.

McKinsey finds that those state broadcasters funded by a combination of advertising and licence fee, like RAI in Italy and RTP in Portugal, have been forced by increased competition to go commercial themselves or see their revenue from ads decline. Their schedules are full of entertainment shows and movies; “public service” programming is reduced or pushed to the margins of the schedules.

McKinsey also says state broadcasters funded by government grant, such as PBS in the US, have been kept on too tight a financial leash and forced to specialise, concentrating on distinctive public service programming at the expense of popularity and market share.

You won’t be surprised to hear that it’s only those broadcasters – like SVT in Sweden and the BBC itself – funded by licence fees increased in line with inflation which are able to combine ratings success with public service programming – and encourage commercial competitors to raise their game into the bargain.

McKinsey was commissioned because the questions asked by Peacock are once again being asked by a government committee, a “BBC funding review panel” chaired by the millionaire economist and friend of New Labour Gavyn Davies.

Cue not just McKinsey but another consultants’ report, from London Economics, which revisits the question of advertising and sponsorship on the BBC.

London Economics concludes that the BBC could raise about 1.65bn if it took ads on BBC1 and 2. The downside would be a changed perception of the BBC, an Italian-style focus on commercial programming and a 20 per cent cut in the revenue both of ITV and Channel 4 and of other display media.

Limiting commercials to offpeak would raise less money (880m) but would still leave the BBC a quasi-commercial animal and would raise problems with the European Commission, which thinks broadcasters enjoying both licence fee and advertising revenue are effectively state-subsidised competitors for their commercial rivals.

Putting ads only on the BBC’s new digital public service channels, News 24 and BBC Choice, would raise only trivial amounts: just 1m a year to start with, London Economics reckons, growing to 80m a year by 2005.

Nothing can ever be ruled out, but the arguments against advertising on the BBC are much the same now as they were when the Peacock Committee decisively ruled against it. And one of the most powerful arguments in favour (that ITV then enjoyed a monopoly of TV airtime, to the detriment of advertisers) no longer holds good.

What about sponsorship, then? The Culture Secretary, Chris Smith, has suggested sponsored programmes on News 24 and Choice. But London Economics reckons sponsorship revenue is growing only slowly, more because of lack of demand than supply, and could raise at best only 40m-50m for the BBC, with many of the same disadvantages as advertising.

And subscription? The BBC has set its face against wholesale replacement of the licence fee by subscription, because that would breach the principle that its services are universally available.

London Economics looks only at subscription as a supplement to the licence fee. It doesn’t say what the Beeb’s current subscription services – the UKTV joint venture with Flextech, and the Animal Planet joint venture with Discovery – now make, but it does say their revenues are “low” and forecasts the most popular channel, UK Gold, might make only a modest 29m by 2005.

There doesn’t seem to be a magic wand that Davies and his team can wave, miraculously boosting BBC revenue from some other source. They may have to concentrate instead on raising more from the licence fee itself, perhaps by indexing it above RPI or introducing a supplementary fee for those with digital sets (just as a special TV licence was once introduced for those braving the new world of colour).

That’s what the BBC would prefer. It has told the panel that its own best efforts – reducing licence fee evasion, improving overall efficiency and raising commercial revenue – won’t give it the “buoyancy” it wants to invest in digital TV and radio, online and interactive services, and keep its standards up.

There are political problems with indexing the licence fee above inflation: it hits the poorest hardest and might set a precedent for other parts of the public sector. Likewise, a supplementary digital fee would add to the barriers faced by the “information poor” and might act as a brake on digital expansion, making it unpopular with Sky, ONdigital and receiver manufacturers.

Raising more money for the BBC, by whatever route, is fraught with practical and political problems. In the end, Davies’ panel may conclude the BBC will just have to learn to live within its existing means.