The BBC and market success - is the licence fee a tax that grows the economy?
James Heath
Director of Policy, BBC
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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