With the BBC’s Charter Review just around the corner, James Heath, Director of Policy at the BBC, sets out the BBC position in a two part series. In the first of this two part series he made a case for maintaining the licence fee and in this second post he argues against subscriptions.

In my last post, I argued that the value the BBC gives the British public and the creative sector is because of the licence fee and not despite it. But could there be a better funding model, or at least one that is more suited to the digital world? What about subscription? Or could a hybrid model of a core licence fee funded service with additional services funded on a subscription basis, deliver the best of both worlds? This post deals with both potential options in turn.

Subscription is not a new idea for funding the BBC. Nearly 30 years ago, the Peacock report favoured it as the best way to give effect to consumers’ preferences. Digital switchover has now made it technically possible (but only at significant cost) to charge households directly for the BBC’s TV services (but not radio) and exclude non-subscribers.

But whether these models are desirable depends on what you think the BBC is for and what impact it should have. In a previous post, I’ve set out what I think should be the ‘tests’ of a good funding system for the BBC; others may have different tests and we are open to debating the counter-arguments. Ultimately, this is a choice for society to make; and the forthcoming review of the BBC’s Charter provides a method for making that choice.

A move to subscription

Even if it were possible to generate the same or greater income (a big ‘if’), a subscription model would unavoidably change the nature of the BBC and the UK’s successful broadcasting ecology. The argument I want to make is that subscription is not the answer as long as you want the BBC to be a universal, public service broadcaster that aims to surprise and inspire each and every one of us and to deliver social and cultural benefits at scale. Subscription is also not the answer if you value the current level of overall choice and investment in British content. And it’s not the answer if you wish to maximise the value for money that the public as a whole gets from the BBC.

Loss of universality

Under a subscription model, the BBC’s incentives would change. Normally, subscription prices are set at a revenue maximising level in order for the services to prosper. Previous research suggests that were it entirely subscription-funded, the BBC would need to charge £20 per month, 65% higher than the current licence fee, for the same number of services. As a result, the BBC would become much less affordable. Our reach among the public would suffer. Subscription channels are very good at serving specific audiences but the social and cultural value of the BBC comes from its universal availability as well as the range and breadth of our output. Take, as an example, the audiences for drama in the UK vs the United States. 1 in 25 of US population watched the biggest episode of Breaking Bad on the subscription channel AMC compared to 1 in 5 of UK population watched Sherlock on BBC1.

Reduction of choice and investment

The BBC’s programming choices would also likely change. It would be perfectly rational for a subscription-funded BBC to focus on services and content of appeal to those with the highest willingness to pay. Some audiences would have to be prioritised over others. People’s wants as consumers would take precedence over their needs as citizens.

The mixed funding model in UK broadcasting has meant two things – a bigger overall pot for investment in content, and better, more varied programmes, because of competition for quality (but not funding) between the BBC, advertiser-funded public service broadcasters and subscription-funded channels.

The UK has a very successful pay-TV sector which has largely focused on the acquisition of premium content on an exclusive basis to drive subscription revenues. Subscription broadcasters have so far invested significantly less in UK original content, in total and as a proportion of their revenues. Their growing investment – estimated at £540 million in 2012 by COBA – is very much to be welcomed; at roughly one fifth of total UK original investment it corresponds to the sector’s c.55% share of TV revenues.

We also know that the costs of operating a subscription service would be significantly greater than those of collecting the licence fee (at £100 million per year), thereby reducing the money available to the BBC for content investment. To quote BSkyB: ” … 100 million is nothing compared to what they [the BBC] would likely have to spend on marketing in order to retain their subscribers.”

Loss of overall welfare

Because of increased costs and a smaller subscriber base, those paying would have to spend more to get a subscription-funded BBC. The result would be many more losers than winners. Subscription would exclude many who highly value BBC services but couldn’t afford to pay a revenue maximising price. This would be both unfair and sub-optimal given the low marginal cost of making our content available to additional viewers. Many others would pay a higher price (than currently with the licence fee) for a less good service. Against this, those who currently value the BBC at less than the cost of the licence fee could potentially opt-out – but the effect would be to reduce welfare overall. And, as I argue in an earlier post, the loss of universality would erode the external social and cultural benefits delivered by the BBC.

Another way of looking at this is the impact on value for money. Because we virtually all pay for and use the BBC, the cost of its services for the average household, both per week and per viewer hour, is significantly lower than the cost of subscription-funded services. Prof Patrick Barwise has calculated the cost per week of BBC’s TV services at £1.98 vs £7.65 for subscription channels and the cost per viewer hour at 9.2 pence vs 24.9 pence respectively.

Perhaps this explains why the British public shows little appetite for a move to a subscription-funded BBC. Subscription is the least favoured method of funding the BBC (behind advertising) and support for it has, in fact, declined by half over the last ten years.

What about transition costs?

Although subscription is now technically possible it would also face major execution challenges. While pay-TV users have set top boxes or other equipment with ‘conditional access modules’ (CAM) that enable subscription, pay TV equipment is only in just over 50% of households. Around 11.5m households have free-to-air TV alone, while a total of almost 20m households have at least one ‘free’ TV set. This equipment would have to be fitted with CAMs or replaced, at an estimated cost of around £500 million. Meanwhile, it is not technically feasible to encrypt the BBC’s broadcast radio services and therefore limit consumption only to those paying for it. What would happen to BBC radio?

Is a hybrid funding model more promising?

The prospect of a cheaper ‘core’ licence fee funded BBC with remaining services available on a subscription basis, has been raised as a potential alternative to full subscription. We have carried out some preliminary analysis of this option; the results should be taken as indicative not definitive.

The first challenge is one of selection. Licence fee payers have different concepts of their ‘core’ BBC services, hence an attempt to divide into licence fee funded ‘core’ and subscriber-funded ‘non-core’ would lead to many feeling under-served by the ‘core’. Setting this aside and taking into account technology feasibility, potential commercial viability and the need to still reach large audiences with public service content, we modelled a scenario where BBC Three (current broadcast service), BBC Four, BBC iPlayer, and BBC Online were made available on a subscription basis

The second question is the route to market. For BBC Online, we modelled a pay-wall model. For the TV services and BBC iPlayer, there are three options:

a) Subscription as stand-alone BBC services. Market practice suggests this is an unusual route for mixed genre channels;

b) A more usual approach for BBC-type services is inclusion in a third party pay TV package, where the pay TV provider retails the service and passes a payment per subscriber back to the broadcaster, having covered platform costs and retained a margin. This would restrict initial coverage of BBC subscription services to the 50% of UK households with pay TV, with those using Freeview or Freesat (generally, the less well-off and elderly) excluded ; or

c) Online distribution, such as subscription VOD. This is not yet a mass activity and the entirety of the UK industry’s revenues in 2012 would not be enough to cover the current service costs of BBC Four.

For each of the above options, we examined willingness to pay for each of the subscription services to understand the optimal price point, the number of households that would take the service at this price, and the resulting revenues. This optimal price would necessarily exclude consumers who valued the service, but at a lower price. We assumed that the services would remain advertising-free as this is one of the public’s most valued characteristics of the BBC.

The headline conclusion is that the services would be very unlikely to generate sufficient revenues to cover their service costs. And the challenge is all the greater because moving to subscription would introduce new costs as outlined above, including customer acquisition and retention, platform charges for carriage, and transition costs.

Even if you were to imagine the subscription services were commercially viable, those paying would have to spend significantly more to get the BBC. This is the third problem – loss of consumer welfare. Those wishing to continue receiving all current services would pay double the current licence fee (i.e. c£12.55 per month extra). Even taking just one service on a subscription basis would exceed the licence fee saving.

And how much could households who choose not to subscribe to any of the services save through a lower ‘core’ licence fee? A maximum of c£1.40 per month, assuming all the services covered their costs on a subscription basis, which our analysis suggests is unlikely. We calculate that the total loss of consumer surplus would be over £150m per year from putting BBC Three, BBC Four, BBC Online plus BBC iPlayer behind a pay-wall.

Rather than delivering the best of both worlds, our initial analysis suggests that under a hybrid model some people would pay significantly more for the same number of services and others would pay a bit less for a lot fewer services. Perhaps more fundamentally, the BBC would be erecting a pay-wall around the digital future.

This post originally appeared on the blog of the BBC on project on 14 July, 2014 and is re-posted with permission and thanks. It gives the views of the authors and does not represent the position of the LSE Media Policy Project blog, nor of the London School of Economics.