BREAKINGVIEWS-BBC funding options mostly require it to shrink

By Jennifer Johnson

LONDON, Dec 2 (Reuters Breakingviews) - The BBC is going through one of its periodic crises. The iconic UK broadcasting institution is at the centre of a firestorm over its impartiality, due in part to a spat over the misleading edit of a Donald Trump speech that has prompted its director-general to resign and the U.S. president to threaten a $1 billion lawsuit. But the current rumpus is merely one data point in a much wider discussion of how “the Beeb” funds its 6 billion pounds of annual costs. The real headache is that all the feasible alternatives point to an increasingly shrunken future.

The “licence fee”, an annual charge levied on British households that watch or record live TV, raised 3.8 billion pounds for the BBC last year. Another 2.2 billion pounds came from revenues generated by a unit called BBC Commercial. This is responsible for ad-funded international channels and sells licencing to other media organisations for programming created by the BBC Studios production unit.

This status quo is itself far from ideal. Because the licence fee has failed to keep pace with inflation, the BBC has since 2010 suffered a near-40% cut in real terms. Its commercial and political opponents sense innate bias on issues like Trump, Gaza and transgender rights from what they see as a predominantly liberal-left staff. But sloppy journalism may be explained by enforced cuts to programming budgets.

That hasn’t stopped BBC critics piling in. The Murdoch family, owners of the Fox Corporation, has long claimed the state broadcaster crowds out new and existing rivals. Paul Marshall, the hedge fund boss and co-owner of right-wing upstart GB News, reckons the institution should split into a self-funded drama and entertainment arm and a scaled-back public service news and education content provider. Reform UK leader Nigel Farage, who hosts a chat show on Marshall’s network, has said a Reform government would scrap the licence fee.

On the face of it, Farage’s plan sounds reasonable – viewers who value the BBC, whether because they like its status as a key component of UK soft power abroad, or just because they like shows like “Strictly Come Dancing” – can pay to subscribe. Others can avoid paying 175 pounds a year for a service they dislike. However, if something like this were to happen – far from impossible given Reform’s lead in UK polls and the shaky Labour government – the numbers quickly become problematic.

One workaround would replace the licence fee with advertising – as with Channel 4, another state-owned British broadcaster. But generating up to 4 billion pounds of new ad revenue sounds difficult. The BBC was the UK’s most-watched broadcaster across all age groups last year, per Ofcom data. Introducing commercial breaks across its programming would massively increase the country’s supply of advertising slots – and drive down both the prices of ads and revenue that the BBC and rival UK broadcasters receive.

This could hit Channel 4 and privately funded rival groups like ITV ITV.L, as well as restricting the BBC’s own income. The UK’s TV ad market, not counting streaming services, was worth just under 4 billion pounds last year. Hence the BBC would have to capture all that to match current licence fee takings. Such a big new player might aggravate the pressures that recently drove U.S. group Comcast CMCSA.O to bid to merge its Sky arm with ITV’s media and entertainment arm.

Turning the BBC into a paywalled service like Netflix NFLX.O is no panacea, either. The U.S. streaming giant has around 18 million UK subscribers, according to researcher Ampere Analysis – considerably less than the 24 million licences in force at the end of the BBC’s last financial year. Assume a licence fee-less BBC managed to attract the same 18 million number of subscribers as Netflix. These customers would need to pay around 18 pounds a month to match the BBC’s current licence fee income.

This is considerably more than the 13 pounds Netflix charges for its standard tier without ads, and with much less content. Such a model might see the 3.9 billion pounds of licence fee revenue drop by at least half, one banker told Breakingviews. In all likelihood, the fall would be much greater.

The BBC’s costs would likely rise too. Putting all its programming behind a paywall would require an increase in ad spending to entice new payers to the platform. The group’s commercially funded peers spend more on marketing as a percentage of their content budgets. ITV, for instance, allocated some 300 million pounds towards promotion in 2024, or around a quarter of its 1.3 billion pounds in content costs. In contrast the BBC only spends a single-digit percentage of its public service content budget on marketing, according to the last time it divulged such figures in 2017.

The implication is further cuts to the BBC’s 3-billion-pound annual content budget. These could come from the sixth of that currently spent on radio, the tenth spent on news and current affairs, or even the 1% that goes on the well-regarded BBC orchestras – either way, the upshot is likely to be a reduction in quality and standards. The risk is that potential subscribers or advertisers become less keen to hand over cash for an increasingly contentious or inferior product.

Given the revenue and cost pressures, imaginative workarounds look tricky. Ampere Analysis reckons a partial paywall, where viewers must pay to access certain archival content, may work at the margin. Alternatively, the BBC could try to raise cash by selling BBC Commercial to a third party. But the sums don’t look big enough – that unit made 228 million pounds of EBITDA in 2024. On ITV’s multiple for that year, the unit would be worth only about 1.3 billion pounds.

In the short term, salami-slicing is more likely than massive cutbacks. The base case remains that Britain’s current left-leaning government will decide the funding for the renewal of the BBC’s 10-year Charter, which expires at the end of 2027. It’s unlikely that the current government will buckle under pressure from media barons and subject large swathes of the BBC to commercial forces.

Even so, Culture Secretary Lisa Nandy has indicated she’s open to a hybrid approach that includes a licence fee, as well as advertising and subscription elements. Regardless of whether the cuts come from friend or foe, it looks increasingly difficult for the BBC to do anything other than shrink.

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