bbcYesterday I was at Oxford University presenting at a BBC Trust Seminar on the Economics of Broadcasting hosted by the Reuters Institute for the Study of Journalism. As it turned out, the discussion mainly focussed on the justification for the BBC continuing as a public entity. I hadn’t given that subject much thought considering the BBC to be similar to the Australian Broadcasting Corporation and a publicly funded entity that has to justify itself by enough people continuing to like it politically. That is true of the BBC but its historic funding model makes it a little different.

The BBC started off as a monopoly provider — especially of television. The view apparently was that it would be hard to get people watching the ‘right’ programs if others could broadcast whatever they wanted. It is difficult to see that as anything other than a shared view of the world’s leading dictators. But despite this, the BBC was funded by a license fee. Basically, if you owned a television you had to pay a yearly fee to the BBC. Given that the BBC was the only game in town you were presumed to be watching the BBC and so you should, of course, pay. Of course, as everyone had a television, it is difficult to see this as any different from a publicly funded entity — albiet related to a demand driver.

Fast forward to today and things are looking different. BBC has competitors; lots of them. But it still has a devoted following in the country. 80 percent of people watch BBC channels regularly. 96% consume some BBC content (including radio and web). And what is more, most viewers watch live broadcasts with very few time shifting. So the BBC has withstood the pressures of competition.

But the justification issue still persists. The BBC no doubt crowds out private provision. But I must say that if I had to guess, any of the usual welfare concerns from this seem fairly low. For starters, the BBC is ad-free so if programming went commercial those costs would be felt by consumers. Standard models of media economics suggest the externalities (and yes, they are not fully priced) will not be pretty. In addition, it is not clear that programming would be that much different. Most of what is watched will probably still be broadcast. The usual issue with crowding out is that you get a different mix of goods. The case here does not seem as strong. So it seemed surprising to me to see a debate as strong as the one I encountered.

Nonetheless, the license fee issue presents a dilemma. Young people avoid it and only come back to ‘legitimacy’ when they graduate. What is more, with the ability to view content on computers, the TV metric seems outdated. (Technically you are supposed to have a license to view BBC content live but not time shifted on the web). If you have just a radio and computer, you can get away with all this stuff legally for free.

The license fee is not cheap. It is GBP145.50 or around $20 per month. That is considerably more than a Netflix or Hulu subscription. What it also means is that if you buy a television and expect it to last 7 or so years, unless you get the top of the line one, most of your costs will be the license fee. So if you are able to substitute away, one can only imagine that that will occur. It is the same force that is stopping people from subscribing to cable in the US.

This suggests that the future BBC will face some trouble. Moreover, once people have expended the capital costs to substitute away from TV, there will be no getting them back.

Seen in this light, my guess is that the BBC has a unique opportunity to transition to a voluntary-paid model — still with its public service mission given its public ownership. The basis for this is the revealed preference of the British for BBC content. They like it and if it became partially excludable, they will probably want to pay for it.

So here is how it could do it and it involves taking advantage of the current default that people are actually paying for the BBC. First, and this has already been partly done, encourage people to move to monthly direct debit. That will soften the payment force. Second, announce that in two months, the BBC fee will become voluntary. If you have a TV, you don’t have to pay unless you consume more than BBC Channel 1. Announce also that if you want to keep paying you don’t have to do anything and life will be as before.

My guess is that the vast majority of people will not want to face cutting of the BBC for the next month. This is especially if that month occurs during peak ratings time. After that, they will just continue with the status quo. The significant point is that, if this works, the BBC will be removed from politics even further.

Why risk it? The issue is that there are pressures leading people away anyhow. The ‘voluntary’ regime will actually arise because technology will make it so. Better to manage a transition and take advantage of current strengths than let that happen.

[Update: I originally compared the ABC unfavourably in terms of costs to the BBC. The ABC costs Australian taxpayers much less. I also got a few nuances of the license fee wrong which have now been corrected.]

5 Responses to Thinking about the BBC

  1. Richard says:

    FYI the license fee is per household, not TV set. Also, officially you’d have to pay it if you watch any live television, which could include mobiles, PC’s etc.

  2. Moggio says:

    Please would you know a recent academic survey on the economics of broadcasting, in particular on the economics of radio? Thank you.

  3. Greg Taylor says:

    News of your RISJ talk didn’t reach my part of Oxford, or else I would have liked to attend. Do you have any slides that you would be willing to share?

  4. Mark McCabe says:

    A different approach: In Germany, where free riding poses the same threat to the two main public broadcasters, ARD and ZDF, an annual household license fee is now — as of 2013 — imposed on almost all households, regardless of what media compatible devices they possess.

  5. [...] video stream from the BBC Seminar on the Economics of Broadcasting that I discussed a few weeks ago is now up. You can access it here. My talk is the third on the list and it is entitled (this will [...]

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