BBC Commercial Operations - Culture, Media and Sport Committee Contents

4  Programme sales

52. A major element of BBC Worldwide's business is the sale and distribution of television programmes. Worldwide is Europe's biggest exporter of programmes, and this part of its business delivered profits of £46.7 million in 2007-08, accounting for 40% of Worldwide's entire profits.[105] Worldwide acquires the rights to programmes from two sources: from the BBC itself, and from independent producers. We shall deal with each of these in turn.

BBC Programming

53. BBC Worldwide has an exclusive "first look" option on the rights to all BBC programming.[106] When new rights become available, Worldwide makes an assessment of their value and the return on sales they would be likely to generate. Based on this assessment, it may choose to submit a bid to the BBC's (public service) Commercial Agency, which itself makes an estimate of the value of the rights. If Worldwide's bid is at "the same sort of level" as the Commercial Agency's estimate, then Worldwide acquires the rights.[107] Under such a scenario no other distributors would have a chance to bid, and, as the BBC readily admits, in this sense Worldwide is its "preferred partner".[108]

54. If Worldwide's bid for the rights to a particular programme does not match the value attached to it by the BBC, or if Worldwide simply chooses not to bid, the programme is put on the open market and sold to the highest bidder. As a result, the BBC estimates that 20% of its output is sold to other distributors.[109] Recent examples include House of Saddam, which was sold to HBO, and the DVD rights for That Mitchell and Webb Look, which went to Fremantle.[110] However, it is worth noting that if Worldwide's initial bid is unsuccessful, it may still make a further bid during the subsequent competitive bidding stage.[111] The BBC insists that Worldwide has no "matching right" during this stage; if Worldwide is successful, it is purely on the basis of having submitted the optimal bid.[112]

55. All witnesses agreed that the issue of primary importance is obtaining maximum value for the licence fee payer from the sale of the rights to the BBC's programmes. Where opinions differed was on the best means to achieve this. Independent producers and distributors, including the trade association Pact, argued that the current "first look" arrangement enjoyed by Worldwide fails to achieve the best price for the BBC. The BBC denied that that was the case, but due to commercial sensitivities refuses to make public the price it receives for particular programme rights.

56. The BBC's Commercial Agency makes its assessment of an acceptable price for the rights to a particular programme via the process of benchmarking. The BBC's Chief Operating Officer told us what this involves:

    "They [the Commercial Agency] analyse the returns from previous exploitation of similar programmes by Worldwide, they look at what they have got in the market from selling similar programmes to other distributors, and they make an assessment".[113]

57. This process may generate a figure that the BBC considers a fair rate, but, as Pact explained, it does not represent a "market rate".[114] Pact told us that this can only ever be established by actually putting a product out to the market: "then the market will bid for it and you will arrive at the best price you can get from the market".[115] The Chief Executive of Fremantle explained the problem further:

    "We regard benchmarking as totally inadequate. The reason for that is, when you bid for a very big property, like a big drama, a big documentary, or a big entertainment show, in the open market those amounts are not disclosed; they are confidential. I do not know what my competitors would have bid when they have been successful. It is not bench-markable, and that is why we do not buy benchmarking as a replacement for a market mechanism".[116]

58. Fremantle has, in fact, recently acquired the rights to Merlin[117] which, because it was independently produced, was sold on the open market (as explained in the next section). Worldwide had been outbid for these rights, thereby indicating that in this instance, via open market competition, the production company had achieved a better deal than it would have if Worldwide had been the only bidder. Both Pact and Fremantle therefore argued that the very same benefits are available to the BBC itself, if it opened up its programming to the free market.[118]

59. The BBC defended the "first look" arrangements on several counts. The principle behind having a preferred distributor is that Worldwide is given "the incentive and the means to make the big investments necessary to build brands over a long period of time".[119] The BBC also claims its relationship with Worldwide ensures the protection of the BBC brand, something it believes would be "extremely difficult" to duplicate via contractual or licensing arrangements.[120] Furthermore, the ownership link between the BBC and Worldwide means that the BBC receives the entirety of the generated proceeds. When the BBC licenses to third parties, it loses the profit margin on the exploitation of rights that other distributors are able to achieve.[121] Finally, the BBC questioned whether selling on the open market would be commercially efficient.[122] It made this claim despite the existence of its Commercial Agency which could arguably undertake the task, and Pact and Fremantle's insistence that it would not require particularly onerous processes.[123]

60. The BBC also pointed out that "first look" agreements are consistent with wider market practice, citing the relationships between ITV and Granada International, and Time Warner and Warner Bros Distribution.[124]

61. The BBC's arrangements were, however, criticised by the media regulator Ofcom, which had examined the BBC's approach in considering the BBC's fair trading guidelines. Ofcom set out its view to us as follows:

    "The preferred partnership status enjoyed by BBC Worldwide would appear to undermine many of the perceived regulatory benefits resulting from the system of pseudo-separation operated by the BBC. Whilst it may be theoretically possible to detect price-based forms of discrimination through conventional means, such as benchmarking and cost-based pricing, such methods are unlikely to be effective for the detection of non-price methods of discrimination. As we understand it, the preferred partnership relationship incorporates a close operational relationship, providing scope for both price and non-price forms of discrimination".[125]

62. One possible solution to the discrimination identified by Ofcom would of course be to require the BBC to allow a free bidding system for the rights to all its productions. The BBC did accept that it "must strike a balance between offering an appropriate amount of programming to the marketplace whilst ensuring that the pecuniary and non-pecuniary benefits of its vertically-integrated distribution model are fully realised".[126] It believes the current 80-20 split in rights between Worldwide and third parties represents the "optimal outcome", but one which is "monitored closely".[127] In its interim statement, the BBC Trust insists that the rationale in favour of the "first look" arrangement "remains strong", reiterating the view of the BBC that it enables it to control the BBC brand.[128]

63. The BBC must aim to obtain as much value as possible from its programme sales in order to benefit the licence-fee payer. Yet it is difficult to judge whether it is generally obtaining the maximum value. The benchmarking process it uses is inadequate in comparison to competitive auctions which can drive up the value of programme rights. At the same time, Ofcom has raised serious doubts over the fairness of a system which grants BBC Worldwide preferred distributor status. We believe the solution to both these issues is to make the BBC's process for programme sales more transparent, and increasingly open up the market for the BBC's programmes to competitive bidding. We reject the BBC's suggestion that a competitive bidding process would be commercially inefficient. The BBC already has in place a Commercial Agency which must surely have the capability successfully to oversee such a process. The same Agency could also arrange licensing and contractual arrangements with successful bidders, so as to mitigate any possible damage to the BBC brand. What we propose here would not spell the end for BBC Worldwide's sales and distribution business. Clearly, given its background and track record, it would still stand a good chance of acquiring many programmes. However, it would ensure that Worldwide always paid the full market value to the BBC and hence the licence fee payer. We accept that the BBC will not be able to effect this transformation overnight, but we recommend that it now begins a steady migration away from the "first look" arrangement by opening up an increasing number of programmes to competitive bidding. We urge the BBC Trust to reconsider its interim judgement on the "first look" arrangement.

Non-BBC Programming

64. BBC Worldwide also bids to acquire the rights to programmes from independent producers. Fremantle told us that in these type of transactions, they had witnessed Worldwide making surprisingly high bids.[129] Evidently, this was not the case with respect to its bid for Merlin, the rights to which were acquired by Fremantle (as outlined in Paragraph 58). Pact and Fremantle alleged that Worldwide may, on occasion, deliberately overbid for programme rights. They suggested its motives could be to:

  • Drive sales of its catalogue (new high profile programmes are essential to a distributor);[130]
  • Ensure that high profile programming broadcast by the BBC is not distributed by anyone else.[131]

65. The result, Fremantle contends, is that commercial competitors are forced out of the market because they cannot compete with the "uneconomic rates" BBC Worldwide may be paying.[132] Although distribution rights are in theory controlled by independent producers, in reality the BBC has significant leverage because of its power over commissioning decisions. Fremantle states that it is "aware of reports of overpaying and of reports by producers that they were threatened by the loss of a commission if they did not give rights to BBC Worldwide".[133] We have been unable to substantiate these claims. It may be that this fear of reprisals makes independent producers and distributors who are heavily reliant on business with the BBC unwilling to go "on the record".

66. The Chief Executive of Worldwide countered these accusations by insisting: "the return we are making at the moment is 13% return on sales across the entire group. That is a good return in the context of the media industry, and we can only be doing that if we are paying a relevant price for the programmes.".[134] However, Pact told us that due to the lack of transparency in Worldwide's accounts, it is impossible to know whether Worldwide's profits are as high as they should be.[135]

67. The Committee has insufficient information available to determine the truth of the claims that Worldwide may be overpaying for programme rights from independent producers. However, we do recommend that the Trust satisfies itself that Worldwide is not overbidding and, to balance things out, potentially undervaluing rights to the BBC's in-house productions.

105   BBC Worldwide, Annual Review 2007-08, July 2008, p 27: £46.7 million out of a total profit of £117.7 million Back

106   Ev 136 Back

107   Q 184 Back

108   Q 184 Back

109   Ev 133 Back

110   Ev 134 Back

111   Ev 136 Back

112   Ev 136 Back

113   Q 184 Back

114   Q 11 Back

115   Q 11 Back

116   Q 14 Back

117   A drama series first shown on BBC television. Back

118   Q 9 Back

119   Q 189 Back

120   Ev 135 Back

121   Ev 133 Back

122   Q 192 Back

123   Ev 19; Qq 21-23 Back

124   Ev 133 Back

125   Ev 184 Back

126   Ev 133 Back

127   Ev 133 Back

128   "BBC Trust review of the commercial activities of the BBC-interim statement", BBC Trust press release, 4 March 2009 Back

129   Ev 4; Qq 4, 11, 15 Back

130   Ev 4 Back

131   Ev 4 Back

132   Ev 4 Back

133   Ev 4 Back

134   Q 171 Back

135   Q 7 Back

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Prepared 7 April 2009