Scrap the licence fee and privatise the BBC

The logic behind a nationalised broadcaster was never perfect. In the age of subscription television and the internet it is indefensible

Biased and just begging to be privatised
Tim Congdon
On 27 November 2013 20:59

Time and technology wait for no organisation, no matter how revered. The next two years will see a lively debate over the future of the British Broadcasting Corporation, with the current Royal Charter due to run out at the end of 2016. The early talk is of an extension of the licence fee for a further decade to 2026, but of possible reductions in its value and certainly of freezing it in real terms.

According to an ICM poll in the Sunday Telegraph last month, 70 per cent of voters believe that the licence fee should be abolished or cut.

A huge and very public intellectual brawl seems certain. Already a former BBC director-general, Greg Dyke, has quarrelled openly with Grant Shapps, the Conservative Party chairman, over Shapps's suggestion that after 2016 licence fee money ought not to given exclusively to the BBC.

The debate so far has tended to take for granted both the survival of the licence fee in some form and the Beeb's status as a nationalised organisation. But can a case be made that the licence fee is now obsolete as well as unpopular? And what would the ending of the licence fee mean for the structure of British broadcasting?

With the licence fee scrapped, should the BBC remain in public ownership? Or should the BBC be privatised, so that it can compete on a level playing field with the global media giants that are now emerging? 

A potted history of the licence fee and its place in British broadcasting is needed to answer these questions. In the early days of television in the 1940s technology imposed tight constraints. The transmission of programmes "over the air" from land-based masts and towers was limited by a shortage of spectrum. Only one channel was readily feasible.

Further, if programmes were broadcast "free to air" from the masts, any household with a TV set could watch. Pay per view and subscription for a particular channel were impossible. Although payment could have been by advertising, the postwar Attlee government was unenthusiastic about capitalism, consumerism and marketing jingles. The introduction of the BBC licence fee in 1946 was almost inevitable, given the contemporary political and technological context.

Paul Samuelson, the Nobel-prize-winning American economist, advanced the concept of "public goods" in his classic 1954 paper "The Pure Theory of Public Expenditure", demonstrating that such goods had to be financed by taxation and could not be left to the free market. The hostility to advertising meant that broadcasting was the textbook paradigm of a "public good".

Still benefiting from the halo conferred by its wartime role, the BBC was by far the most influential broadcasting service in the world. Further, with the UK accounting for almost 10 per cent of world output in the late 1940s, its state-owned monopoly was a vast broadcasting business by international standards. The BBC may not have been part of the British constitution, but it was undoubtedly a "national champion".

However, its special status was already being undermined. Spectrum scarcity — the original rationale for monopoly — was being overcome. In 1954 the Conservative government under Winston Churchill passed the Television Act, so that independent broadcasting financed by advertising could compete with the BBC. For the next 20 years British broadcasting was a highly regulated duopoly of Auntie Beeb and the profit-hungry (and indeed very profitable) "independent" television companies. 

Advertising is sometimes demonised by left-wing commentators as capitalism without taste or shame, and as free enterprise at its selfish worst. As long as advertising was the only alternative means to finance broadcasting, the licence fee was safe. But by the 1980s satellites with programme transmitting capability could be launched into space, promising a new world of satellite-based broadcasting.

At first two businesses were envisaged, Sky Television and British Satellite Broadcasting, but they merged in 1990 to form BSkyB. The plan of the entrepreneurs behind BSkyB, notably Rupert Murdoch, was that viewers would pay for TV channels by subscription, usually on a monthly basis. 

All being well, profits could be made despite free-to-air competition from the BBC and the independent companies. For most of the 1990s BSkyB lost money. Murdoch had embarked on an ambitious long-term gamble, even if it was one that secured strong backing from the UK's big institutional investors. Ironically, BSkyB's investors became involved in this forward-looking and risky venture just as left-of-centre economists started to criticise the City of London for the alleged "short-termism" of its time horizons and the supposed caution of its decision-taking.

At any rate, after 15 years of red ink subscription revenues first ran ahead of expenses in 2003. For the last decade BSkyB has operated in the black, with profits reaching over £1 billion a year for the first time in 2011.

In the last few months the Murdoch media have had a bad press, with the phone-hacking scandal at the News of the World receiving huge coverage. But that has been a distraction from the serious debate on the future structure of British broadcasting which must soon begin.

It has been so easy to condemn the practices in one part of the News Corporation empire that commentators have overlooked the astonishing transformation that Murdoch and his backers have wrought. In an article in the Sunday Telegraph accompanying the ICM poll Rob Harris, Conservative MP for Reading West, used the word "dominance" to characterise the BBC's position in news and current affairs broadcasting. Many analysts continue to see the BBC as "dominant" with an entrenched, almost unassailable position on the UK media scene.

The actual position is far more even-handed and complex. As the growing unpopularity of the licence fee has constrained the BBC's revenues, TV advertising spend is now about the same size as the total money collected by the licence fee and well above the portion of this money devoted to television. (See graph, above. Remember that the licence fee has also to meet the costs of radio.)

But the truly spectacular development of the last few years is that both total advertising spend and the licence fee money have been surpassed by BSkyB's subscription revenue. As BSkyB also picks up advertising revenue on its channels, its annual income is well above the BBC's.

To be more specific, in their last complete years — to March 31, 2013 for the BBC, and to June 30 for BSkyB — the BBC's income was £5.1 billion, of which £3.7 billion came from the licence fee, while BSkyB's income was £7.2 billion, of which about 80 percent derived from subscriptions. BSkyB has therefore overtaken the BBC in terms of market presence and the BBC has ceased to be dominant even in Britain itself.

The BBC does have an international arm, BBC Worldwide Ltd, with an avowedly commercial remit, but its sales are small compared with CBS, the Hearst Corporation and Murdoch's US-based 21st Century Fox. 

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