Back-door privatization? 

8 April 2008

Of all the BBC’s directors general, John Birt must rank as among the most controversial. To his fans, he saved the Beeb from Mrs Thatcher’s privatization drive and what some believe to have been the then British Prime Minister’s desire to throw Auntie to the highest bidder. To his critics, he trashed morale, drove colleagues to distraction with his management style (when interviewed by Brian Walden just after joining the BBC, his reply to Mr Walden’s first question began, “Ah, Brian, my answer to that comes under three headings,” leading John Humphrys to quip, “We should have known there and then that it was time to head for the hills”) and introduced an internal market that, among other anomalies, caused departments, on cost grounds, to go to the local HMV rather than the BBC’s in-house audio library for music.

Mr Birt’s changes were both a corrective and an over-reaction to perceived inefficiencies at the Corporation that had prevailed until his tenure as Director General. Greg Dyke, another ex-DG and former boss of London Weekend Television (LWT), recounts in his autobiography, Inside Story, of when, during his time in charge at LWT, he attended a working breakfast at Bush House, home of the BBC’s World Service. Staff had been laid on for a full-blown silver-service feast. Mr Dyke was the only non-BBC person and he was puzzled at what seemed like unnecessary extravagance. Who’s paying for the waiters? he asked. A pause. Er… the BBC, of course. Yes but who? Out of whose budget is the money coming? Which department is footing the bill? Nobody knew. The main item on the agenda was: find ways to modernize the BBC. And they didn’t even have in place a proper system of internal accounting. Mr Dyke’s verdict? Until we know who is paying for them, this meeting is a waste of time.

Peter Bazalgette, reviewing John Birt’s autobiography The Harder Path in The Observer, says that he, Mr Bazalgette, was a BBC employee in the 1980s. “We were a pretty unaccountable rabble,” he remarks. “We’d make programmes that stitched people up with a negligible risk of any comeback. We had little or no idea what our programmes cost and didn’t really care.” This couldn’t continue. Out went Alasdair Milne; in came Michael Checkland, an accountant, with Mr Birt as his deputy. Before long, Mr Birt was elevated to the top managerial job. The Corporation echoed to the sound of knives being sharpened.

In preparing London Weekend Television for the 1991 franchise round, Greg Dyke and Chris Bland found that, like the BBC, they had no idea of the cost of running the station. Sure, they knew their outgoings and incomings, but they didn’t know the individual cost of different areas. So they took stock. Each part of the business was to be run as a proper profit-centre in its own right. In general terms, the company’s studio and resources arm was spun off as The London Studios, the broadcasting division became LWT Broadcasting, and the programme production operation became LWT Productions. This explains why, in the early 1990s, LWT programmes such as London’s Burning mysteriously acquired a second production slide: they were now LWT Productions for London Weekend Television. Apart from internal accounting, the move was partly defensive, as if LWT lost its broadcasting franchise in the 1991 round, it would still have a chance of life beyond ITV as a resources house and independent production company. (It might even have kept its identity as ITV transformed itself into a single company, jettisoning long-loved and long-established brand names like Yorkshire and Central as excess baggage.)

One of the consequences of the new regime at LWT was that the company’s programme makers had to negotiate prices for the studios, camera crews and other facilities that they needed. According to Mr Dyke, they discovered that as a business in its own right The London Studios was losing £16m a year. Previously, the resources division’s accounts were amalgamated with those of the rest of the business, and so long as the business overall was healthy nobody bothered that much if one part was subsidising another. In any case, in an era in which ITV contractors were paying a marginal tax rate of over 80%, there was little incentive for efficiency. In the post-1993 structure, the rules had changed. Efficiency mattered.

It was essentially these principles that John Birt was trying to establish at the BBC. The idea behind Producer Choice, the name under which Mr Birt launched his reforms, was that each part of the Corporation would be run as a profit-and-loss operation. Programme producers requiring, say, outside broadcast units or studios, would be responsible for purchasing them from their own budget, and they could obtain them either from the BBC or from the commercial sector, whichever was cheaper.

In one respect it was a crazy system. The BBC has a lot of permanent staff on its books, and if a production team went outside the Corporation for resources, the BBC’s own staff, who as a result were standing idle, still had to be paid. The upshot was that the BBC would be paying for everything twice: real cash was going outside the Corporation to the commercial sector, which would not be offset by a reduction in internal costs.

As another example of this, and again referring to Mr Dyke’s autobiography, the former DG says he cancelled plans to move Blue Peter to Manchester after taking over. Granada was offering a good deal at Quay Street, and Blue Peter would save money by using Granada’s studios instead of Television Centre. Yes, the Blue Peter budget would benefit, but the BBC overall would lose out as it would be paying for the studios at Television Centre whether Blue Peter used them or not. If Blue Peter came from Manchester, the Corporation would still be paying for its now idle studios in Television Centre, in addition to whatever Granada had demanded.

Producer Choice might have worked financially had the BBC been prepared to go the whole hog and switch permanent staff onto a system of payment per project, where in-house staff were paid only for the work they actually did and the Corporation paid either its in-house team or an external contractor, but not both. It is, perhaps, a mark of the humanity shown by the great and the good at the BBC at that time that it did not go down this path.

What Mr Birt did get right was an insistence on knowing how much everything cost. Perhaps. Or perhaps not. Because, although the bell finally tolled for Producer Choice (it was shut down in 2006), the process of selling off the family silver seems to have gathered pace.

In 1997, the BBC’s transmission infrastructure was sold to Castle Transmission Services (since rebranded Crown Castle and now, as National Grid Wireless, owned by Arqiva). Incidentally, a similar process happened with ITV. The NTL brand became well-known (notorious might be a better word) around the turn of the century to cable television and internet users, although it actually started life as the engineering division of the then Independent Television Authority, moving to Crawley Court in 1973. When the IBA was split up in 1991, the technical and engineering operations were spun off as a company called National Transcommunications Ltd (NTL). The new company retained responsibility for the work it had done previously as part of the IBA, but, as a private company, it now had the freedom to spread its wings. NTL’s rise to the top of the cable business and its merger with Telewest and transformation into Virgin Media have been well documented, although it is worth mentioning that NTL, by this time with bigger fish to fry, sold off all its terrestrial broadcasting operations to Macquarie, who adopted for it the name Arqiva. So if ever you’ve wondered why so many television transmitters feature both the Arqiva and Crown Castle (or National Grid, or whatever they’re calling themselves this week) insignias, it’s because the BBC and ITA co-located their transmitters on the same masts, and because they sold them off to private companies with the inevitable corporate re-branding.

BBC Technology was the next to go: Siemens snapped it up in late 2004 and some 1,400 BBC Technology staff now found themselves working for Siemens Business Services Media Holdings Ltd. A ten-year contract to ensure business as usual with Auntie Beeb might have been some small consolation. BECTU, a trade union, had fought the plans for a year. One of its spokesmen claimed that it was “not just the BBC selling off one of its Crown Jewels, it’s a case of handing its central nervous system over to the private sector.” Three years after the sale was completed, the House of Commons Public Accounts Committee (PAC) found that savings to the BBC as a result of outsourcing BBC Technology were 38% below the BBC’s forecast, according to a newspaper report. This report also suggests that BBC staff have condemned the new arrangements as “inefficient, overly expensive and unable to deliver in some crucial areas.”

Next up for auction was the BBC’s play-out operation. BBC Broadcast was sold to Macquarie in 2005, and re-branded Red Bee Media. BBC Broadcast was set up in 2002 to bring together a number of technical functions related to the presentation and play-out of BBC channels. One of the likely reasons behind the sell-off might have been that, as a private company and without the BBC name acting as a possible millstone, it would stand a better chance of getting play-out contracts from companies who might be rivals of, and leery of doing business with, the BBC. Perhaps, although this “millstone” didn’t prevent the subsidiary from making a profit of £7m a year or two prior to its sale; nor did it stop it from rebranding ITV. Yes, the current ITV identity was the work of the BBC. And, granted, its turnover has risen from £108m in 2004 to an estimated £150m, boosted by contracts with Channel 4, but what was there to stop BBC Broadcast from doing the same? After all, in 2004, according to The Guardian, its remit included “branding, promotion, channel marketing and commercials for clients including Ikea, McDonald’s and Renault.” Profits from its commercial contracts were helping to bolster the licence fee. Now they’re going to an Australian bank.

This leaves BBC Resources and BBC Worldwide as the Corporations two remaining commercial arms. At the time of writing (January 2008) Resources was up for sale, and it was expected that by March 2008 its staff and equipment would be transferred to the private sector. Resources’ remit is to provide costumes, outside-broadcast facilities, post-production and studio facilities. Presumably the BBC thinks it is better not to own such assets itself; better instead just to buy in what it needs, when it needs it. Other planned disposals include the sale of the iconic Television Centre in White City, and the Elstree complex in Borehamwood. The mock-up of Albert Square, as seen on Eastenders, is also to be rebuilt elsewhere, perhaps at Pinewood.

Worldwide looks safe for now; a review in 2004 of the BBC’s commercial activities concluded that it should remain part of the corporation. However, as part of the fashionable theory that it should focus more on its core activities, some magazines were sold off and BBC Books was transferred to Random House. Also, BBC Video, a label under which BBC programmes are sold in the retail market, was merged with VCI and re-branded as 2 entertain Ltd, although the BBC retains all rights to BBC output.

Assuming the sale of BBC Resources goes ahead, this means that in little more than ten years the Corporation will have been stripped of its transmitters, studios, technology, broadcast systems and more. The BBC used to be, to use the language of economics, vertically integrated: it owned, or at least controlled, all the stages involved in the process of broadcasting: the wardrobe departments required to dress actors, the studios in which they perform, the cameras and outside-broadcast units to film them, the editing and post-production units to compile what the cameras saw into a finished programme, the gallery and play-out unit that play-out to the transmitters the right programme at the right time, along with presentation and continuity, and the transmitters that deliver the finished result to the viewer’s home.

The trend now is a shift to what is called horizontal integration, in which, instead of a broadcaster owning its own play-out facilities, for instance, it pays to use the facilities of a dedicated play-out provider, which will probably provide the same services to any number of other broadcasters. If, as seems likely, the process is taken to its logical conclusion, the end result is that the Corporation will become just another broadcaster (albeit, hopefully, one still too big to be ignored) in an overcrowded sea.

Is this disaggregation a bad thing? Possibly not. A typical case study in favour of out-sourcing, about which this correspondent blogged last year, is payroll. A proper payroll system can be expensive to set up, but once in place it is relatively inexpensive to add another client (organization) to it. For this reason, it can prove to be cheaper for companies to out-source payroll rather than provide it in-house. A dedicated company runs an operation that can handle any number of companies. Its clients gain because they save money by not having to run their own systems; the provider company gains because what the clients do pay is still enough to generate a net profit. In other words, win-win. This is a good example of horizontal integration.

Many technical facilities required by broadcasters are expensive to run and maintain, and to justify their existence they need to be used as efficiently as possible. If some of the BBC’s in-house resources were under-utilized, it might have made sense to sell them off to a private company who could find other clients to use them in a way that the Corporation itself could not. But then, you have to ask yourself: the sale of BBC Technology and BBC Broadcast attracted a number of big, corporate, hard-nosed bidders. If they thought there were profits to be made from the assets on the table, why didn’t Auntie? Red Bee Media is a big and profitable company; it serves a number of broadcasters, including the BBC, and it generates handsome returns for the Australian bank that owns it. The proceeds from the sale could be realized only once; at the same time, the BBC is handing over licence payers’ money each year and gaining nothing in return. It should have remained in-house, with its profits supplementing the licence fee, rather than in effect swallowing licence payers’ money for the benefit of Macquarie’s share-holders. In the long term, the Corporation would have to have been relieved of a massive total cost of ownership of BBC Broadcast to make a net saving, but then, would any commercial company have bought such a liability?

The only real reason in favour of flogging BBC Broadcast, the above paragraph notwithstanding, is the possibility that the BBC sees the writing on the wall for the traditional broadcast model. The internet, video on demand and other delivery platforms could well number the days of the traditional broadcaster, to the extent that in ten or twenty years time the conventional channel with a pre-determined weekly schedule of programming is rendered obsolete. It must also be said that the financial calculations underpinning the decision to sell were not made available to the public. Conveniently for the BBC, its leaders can plead to the public to trust them, that their decisions are justified by data that they are duty bound not to reveal, and who is anyone else to say they’re wrong? They don’t have all the facts.

This spate of sell-offs amounts to the disintegration of the Corporation. It may be true that Mr Birt saved the Corporation from outright privatization; however, what has taken place recently amounts to at least a partial privatization by the back door. More significantly, though, it amounts to nothing less than completing the reforms started by John Birt. This article notes above that Producer Choice might have worked had money spent outside the Corporation been balanced by savings within; by selling off the sort of resources that were the subject of the Birt-era internal market, the BBC is now compelled to go to the commercial sector to use what it no longer owns, with the side-effect that it is no longer benefiting as it once did from the proceeds of profitable businesses and lucrative contracts with the commercial sector. It may be correct to say that Producer Choice was abolished in 2006; in its place was left an alternative that, if anything, was even worse: no choice at all.

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