Dear Gavyn Davies
2nd March 2000
The Licence Fee Review Panel, under your chairmanship, has made a useful contribution to the debate about the future of broadcasting and how it should be financed. But the government was right to reject your recommendation of a digital supplement to the BBC's licence fee. Instead of welcoming the lively competition between broadcasters and the diversity of supply made possible by the new technologies (digital in particular), your proposal would have entrenched a structure in which public service broadcasting is grossly over-represented. The question raised by the new technologies is whether the licence fee should continue at all in the long run.
When the BBC became the first organisation to introduce a high-definition television service in 1936, it was subject to severe technical constraints. Only one method of production and delivery was feasible, while only one wavelength was available for transmission. This "spectrum scarcity" made a monopoly inevitable. As broadcasting was hugely important to political debate and national culture, a public monopoly was-understandably-deemed better than a private one. Meanwhile no simple and direct means for viewers to pay for one programme rather than another existed. So, payment for television had to depend on tax revenue. In order to protect the corporation from political interference, this took the form not of a grant from general taxation, but of a licence fee collected by a separate agency.
Given the restrictions of the old technology the licence fee was a sensible idea. But the world has changed. Modern science has added at least three new methods of broadcasting, smashing the technical constraints which justified the BBC's monopoly. In addition to the conventional terrestrial method by analogue signals, broadcasts can be made from satellites, via cables and on the internet.
It seems likely that in the long run the internet will be the most potent vehicle for proliferating "channels" and diversifying programme content. Nowadays any company can start a website incorporating a video about any subject that takes their fancy. They can either show the video for free or charge for it. Indeed, the technology already exists for everyone on the planet to own a computer, and to launch their own website and accompanying video. Fantastic though it may sound, such video performances could be live, enabling people to have real-time social events with friends in Sydney, Buenos Aires and Tokyo. Broadcasting and everyday life would thus merge into each other, and the notions of distinct "broadcasting channels" and "broadcasting companies" would collapse.
Instead of broadcasting being an inherently monopolistic activity, it has become-at least potentially-the archetype of free and intense competition between a virtually infinite number of suppliers. Commentators often remark on the almost anarchic nature of the internet. While this may be overstated, there is no doubt that the bulk of the material that appears on the internet derives from the private sector. Similarly, in most countries the companies promoting satellite and cable transmission are predominantly in the private sector. Further, an assortment of payment systems have developed, some relying on the same infrastructure as phone bills, others on credit cards or smart cards, still others on special boxes which allow pay-per-view. In short, broadcasting is totally different from the 1930s and the licence fee is an anachronism.
The revolution now upon us will not happen overnight; I also concede that an underlying demand for the BBC's output remains. But I would claim-even at this early stage in the transformation-that public policy ought to point towards a reduction in the licence fee, with a view to its eventual abolition.
It is only a few years before the market in electronic publishing becomes as competitive as the market in newspaper and book publishing. When that happens, the case for a public subsidy for the BBC would be analogous to the case for establishing a state-owned publisher. That case has never been made, for the good reason that in a society like ours-with its commitment to the free market, freedom of thought and speech-it would be indefensible. No one in modern Britain advocates that the government should run a newspaper group or compete in the book trade.
In these circumstances, I was amazed that your panel proposed not merely the indefinite retention of the licence fee, but a big increase to pay for the BBC's expansion into digital broadcasting. For one implication of the new technology is that televisions and computers will become indistinguishable. Televisions are being advertised and sold with access to the web, while high-quality video images equal or superior to those on televisions will soon be accessible on computers linked to the internet.
Now, if televisions and computers are really one and the same, a tax on boxes which are ostensibly "television sets" must also in fairness be imposed on boxes which purport to be "computers." But how would this work? Would the Television Licensing Authority have a new remit to identify computers up and down the land, to send licence fee application forms to computer owners, and to harass them if they did not pay up? And how would a licence fee work if it applied to mobile phones with both internet access and television capability? Just to ask these questions is to show how problematic the licence fee will become as the boundaries between desktop computers, laptop computers, mobile phones and televisions become harder to draw.
In its 60 years of tax-financed privilege, the BBC has made a great contribution to British culture. But the digital revolution forces us to rethink from scratch how broadcasting should be organised.
Tim Congdon
Dear Tim Congdon
4th March 2000
You argue that the BBC licence fee, which was initially justified by the fact that broadcasting was a monopoly in its early days, is now an anachronism. I am not clear what method you are now proposing for funding the BBC, or indeed whether you believe that the BBC should exist at all, but you argue that any form of compulsory tax should be eliminated quickly.
Last year, my panel spent much of its time grappling with just these issues, notwithstanding the fact that our remit instructed us to assume that the licence fee should remain the key element in BBC funding for the foreseeable future. Thus, it was not open to us to propose the kind of transformation that you have in mind. But in the end not one single member of the panel, from whatever original persuasion, would have agreed with you.
Instead, we proposed that the BBC should receive ?150-200m extra a year from licence-fee funding. The government accepted this proposal. We set out two options for raising this amount of money-a supplement to the licence fee, to be paid only by those with digital television, and/or an increase in the general licence fee. The majority of the panel preferred the first option, while the government chose the second. You like neither.
The core of your argument is that market failure will no longer exist in the broadcasting world of the future because of the new technology. You foresee a world in which programmes or videos can be purchased on an individual basis, downloaded on to a television or a computer, and then watched when desired. With programmes thus purchased at market prices, television becomes analogous to the book trade-and you correctly say that no one would ever argue for a BBC to publish books, funded by a compulsory tax.
In making these arguments, you are repeating the case for subscription television which was put by the Peacock committee in 1986. And it may surprise you to learn that my report does not reject entirely the logic of either yourself or Alan Peacock on this matter. I am enough of an economist to recognise that the case for the licence fee must depend on the existence of market failure, even if the nature of that market failure is changing.
So what is the difference between us? First, I do not see the world changing as abruptly as you do. The BBC ceased to be a monopoly in the 1950s with the arrival of ITV. (The coming of ITV remains by far the most important change in the broadcasting market since the BBC was established-far more important than the internet, so far at least.) By the 1980s, the BBC was subject to competition from dozens of new satellite channels, and from commercial radio. With each of these changes, many people argued that the justification for the licence fee had gone. Yet it remained the key source of BBC funding under governments of both parties, and it has continued to command the broad consent of the electorate.
Now what about the new technology and the future? My panel spent a lot of time examining this and I came away with two conclusions. The first was that no one can forecast exactly how fast technology will progress. Broadband internet access might enable us all to download and watch movies on our lap-tops quite soon, or it might not. Mobile internet devices may become full-service video devices, like today's broadband desktop machines, or they may focus on much cheaper, and more limited, data retrieval services. The uncertainties in this field are immense. Remember that a key mistake made by Peacock was that he wrongly envisaged that all television programmes could be "encrypted," and therefore made subject to charging, within a few years. This has still not happened to the vast majority of what we watch today.
But my second conclusion was that no matter how fast new technologies develop, they will not eliminate the role of broadcast television in my lifetime. That role might diminish with the growth of the internet, but there is nothing to suggest that it will disappear completely. Television has penetrated almost 100 per cent of the population, while computers have reached only 37 per cent.
Without corrective action from the government, I fear that in ten years time, the majority of the population would still struggle even to switch a computer on, still less know how to surf the net to download their chosen video. No one knows whether people will be prepared to pay for anything received over the net, still less whether a way can be found to charge them a market price for video clips. Yet in ten years time I would wager that almost every household in the land will still have one or more conventional television sets equipped to receive broadcast signals. And these television sets will still be widely watched, albeit slightly less than they are today.
People interact with television and computers differently. Television broadcasts are received passively, quite often by groups within a family. Computers are used more actively to retrieve and manipulate information, usually by an individual. There is room for both. Computers will continue to coexist with television well into the future, much as television itself has coexisted with books and radio.
Furthermore, market failure will also survive. This is of a more subtle variety than occurred in the days of the early BBC monopoly, but it is real none the less. Broadcasting is, and will remain, the quintessential public good, like national defence or street lighting. The key problem with public goods is that it is difficult to induce people to pay for them in a free market because people cannot be given exclusive rights to consume them. The marginal costs of disseminating a television programme, once the programme has been made, are zero. So to restrict the numbers viewing the programmes by levying a price is inefficient. Moreover, consumers suffer from lack of information about their possible future preferences in programme consumption (you don't know what you like until you have seen it). And economies of scale lead to a concentrated industry, with a few dominant suppliers.
The BBC has always been able to offset these familiar market failures by providing high quality publicly funded programming. Like few things in Britain, the BBC and its system of funding has really worked over many decades. It has delivered enormous and proven benefits to the nation. Do we really want to throw away all of these advantages before it has been proven, beyond doubt, that the world has been radically transformed?
Gavyn Davies
Dear Gavyn
5th March 2000
I agree that the BBC has "delivered enormous and proven benefits to the nation." But that is largely in the past. Horse-drawn carriages and steam locomotives have also "delivered enormous and proven benefits to the nation," but they are now found only in museums. They are not regarded as deserving recipients of a special tax on cars and high-speed trains.
One big difference between us is about the speed of the technological upheaval. When I say that the licence-fee system will become unsustainable "in the foreseeable future," I mean that its anomalies will be apparent in the next five years. As the government's latest proposals for the licence fee run out in 2006-7, I believe radical rethinking will be necessary at the next review of the system.
I was staggered by your comments that ten years from now, "the majority of the population will struggle even to switch a computer on, still less to know how to surf the net." With 37 per cent owning computers today, the majority of the population are already competent to switch on a computer. Figures for internet coverage vary, but I would guess at least a quarter of households have meaningful access. It would be surprising if this did not at least double in the next ten years.
Your statement that no one "knows whether people will be prepared to pay for anything received over the net" also puzzled me, as there is a large and booming industry which enables net users to download videos for a fee, with payment usually by credit card. The industry is best developed in the US, where the main products are porn videos. If the members of your panel did not know about the online video business, I am reassured about their viewing habits, but worried that they are not up-to-speed with technological change.
You say that Peacock "wrongly envisaged that all television programmes could be 'encrypted' and therefore made subject to charging within a few years." But pay-per-view became a reality, less than 20 years after the Peacock Report. In a risky and expensive move, Rupert Murdoch invested in the new encryption techniques for satellite broadcasting. This caused much wailing at the BBC as he appeared to control the gateway to pay-per-view programming. But it seems that Murdoch has been upstaged by the internet. He is now talking to the internet portal companies to provide outlets for his media products. As might be expected from a state-owned former monopoly still benefiting from public subsidy, the BBC's role in all this has been pathetic. It has tried to restrict progress and entrench its position.
Finally, you still talk about "television programmes." Just as televisions and computers will converge, I suggest that the distinction between "television programmes" and "video clips" is no longer viable. Ultimately there will only be boxes which feed out data, viewable performances which are encoded in the data and an assortment of payment methods which give a return to those who make the performances happen. We do not yet know what the boxes will be called, but the BBC and the Television Licensing Authority need to be warned that everyone will have an incentive to call them something other than televisions.
Tim
Dear Tim
6th March 2000
I am not a technological Neanderthal. But not everything will change instantly. And even in the far-off digital world which you describe, there will remain an important, perhaps dominant, role for the type of one-to-many communication which we call broadcasting today.
Perhaps I used a little poetic licence when I said that in ten years time half of the population might still struggle to switch on a PC. But it will still take a long while before PCs become universally available in the same way that televisions are today. One reason is cost. At present, broadband-capable PCs cost between five and ten times as much as a basic colour television. This will drop fast. But that still leaves the issue of access and usage costs-probably several hundred pounds a year for BT's broadband service. For as far ahead as anyone can see, broadcasting will remain the cheapest way to access programming content.
Another reason is inertia. The pattern of previous technological advances suggests that a third of the population may shift gear fairly quickly, that another third will need to be cajoled over a longer period, and that the final third may be totally impervious to all the enticements of the "new media." That certainly appears to be the pattern with satellite and multi-channel television which, after a decade of intensive marketing, is still struggling to breach the 30 per cent penetration barrier.
After chiding me for my remarks on the slowness of change, your own estimate is that only half of the population "will have meaningful access" to the internet in a decade's time. What about the other half? It is a matter of great public importance that this half of the population-already threatened by information poverty-should not be cast adrift.
A thriving BBC, with a vibrant role in the new worlds of digital television and the internet, is the last best hope for bringing the whole population into the new age. In fact, the expansion of digital television is likely to be the gateway to the internet, e-mail and electronic shopping for the reluctant half of the population. The next generation of television sets will provide all of these functions in more familiar formats than PCs, and will not offer any threat to the licence fee. Take the BBC out of this mix, and you greatly increase the risk of creating a large information underclass.
It is intriguing to note that you believe that Peacock has been vindicated in his expectation that the broadcasting market would quickly switch over to pay-per-view. I would point out that, 15 years later, more than 85 per cent of the viewing done in Britain is still based on the old principle of free-to-air broadcasting. If, as Margaret Thatcher had hoped in 1985, we had abolished the licence fee-and with it the BBC-we would have been making a terrible mistake. We could be making a similar mistake to follow your advice today. But I am still unclear as to what you would like to see happen to the BBC. Let us have your blueprint for the future of the BBC, along with its funding, so that we can judge fairly your vision against mine.
Gavyn
Dear Gavyn
7th March 2000
My Blueprint? I would insist that the BBC has no God-given right to exist. In the end the BBC will have to justify itself as a commercial organisation, with no dependence on government support.
If it cannot survive in this environment, it would have to disappear. I am sure it would survive, as it has a great brand name and superb back catalogue. Indeed, the sooner it is forced to compete on a commercial basis, the better it will perform against CNN, Sky and others. You say that pay-per-view will remain a minority activity. This is not what people in the industry think. Stuart Prebble, of ONdigital, says: "Between ONdigital, Sky and cable, we expect to grow the market for pay-television from just under a quarter of homes to well over a half-perhaps nearer three quarters." Your scepticism about the new technologies may be vindicated in the short term. But this is not what the government wants or expects. Tony Blair proclaims "an internet for the people," including the less well-off, saying that "the knowledge economy is here and now." How does this fit with your defence of the licence fee, which rests on a slow take-up of the new technologies and the need for continued subsidy of the old broadcasting structure?
Yours,
Tim
Dear Tim
9th March 2000
I am not a new technology sceptic, I simply expect that one-to-many broadcasting will remain a crucial part of the new marketplace for an indefinite period, and that significant market failure will persist for just as long.
I happen to love Sky. But I am not impressed by the claim that half the population will be pay-per-view subscribers at some unspecified time in the future. What will they be paying to watch? On past experience, only three things: football; recent movies; and (as you point out) "adult" entertainment. This does not form the basis of a healthy broadcasting ecology. Anyway, since pay-per-view households still watch the bulk of their television on the free-to-air channels, it would still mean that much more than half of the viewing in Britain would be to the BBC and ITV.
I am pleased that you have clarified your vision for the BBC-a private, profit-making concern competing against other media moguls. Yes, the BBC would probably survive and flourish as a private company. But I would not care one bit if, under these circumstances, it faded away. Take away its public purpose, and you remove its special reason to exist.
I welcome your belated conversion to New Labour! But Tony Blair has shown no appetite for BBC privatisation. He sees no problem in supporting the BBC as a means to propagate the new technologies and bridge the "digital divide," and nor do I. This role alone would justify the recent increase in the licence fee.
Yours,
Gavyn
