BBC faces significant strategic financial challenges
25 January 2021: A National Audit Office report says the BBC must develop a strategic response to its financial challenges, with declining income from the licence fee and an insufficient contribution from its commercial activities raising questions about its long-term financial prospects.
The National Audit Office (NAO) has issued a report on the BBC’s strategic financial management that looks at how it is responding to declining licence fee income, with commercial revenues that are not yet at a position to make a significant contribution to the BBC’s public broadcasting mission.
The BBC lost £119m in the year ended 31 March 2020: licence fee income was £3.5bn, down £310m since 2017-18. The fall in income from the licence fee is primarily as a result of the phased withdrawal of government funding for free licences for the over-75s with the £253m received in 2019-20 seeing the end of this element of revenue.
The BBC opted to reintroduce fees for over-75s not receiving pension credit from 1 August 2020 (two months later than originally planned), but this will not be sufficient to stem its losses. The BBC will still need to find savings to cover free licences for those on pension credit as well as cutting costs in its broadcasting operations. This would be made even more difficult if the proposal to decriminalise licence fee evasion is implemented by the UK Government, as it is estimated this might have the effect of reducing income by more than £1bn over five years from 2022/23 to 2026/27 inclusive.
More fundamentally, the BBC has to address the trend in audience viewing away from broadcast television to streaming and online viewing on demand. Not only does this require the BBC to adapt in response but decreasing viewer numbers for its traditional services will make it harder to justify the licence fee. The decline in younger audiences whose continued use of BBC TV channels is important to the future of the BBC is a particular concern.
The NAO comments on the constraints faced by the BBC in its unique role as the UK’s national public broadcaster, with regulation limiting how it can diversify its activities, and caps on borrowing restrict its ability to invest in its commercial operations.
The BBC has funded the losses arising in recent years from a combination of its reserves and a sale and leaseback of its estate, but this is not sustainable in the long run. A savings programme established in February 2017 that aims to save the BBC £800m annually was broadly on track until the arrival of the pandemic, and the decision to continue to offer free licences to some of the over 75s. There are challenges to remaining on course to deliver these ongoing savings, particularly as cost cutting is likely to involve redundancies that will not be easy to deliver.
The cost of producing content has remained consistent at about £2.7bn a year but this will become increasingly difficult to maintain due to high levels of inflation for programme content in areas such as high-end drama, where Netflix and others have driven up prices. With greater financial challenges there will be an increased focus on the accuracy of estimated project costs – an area which the BBC has not excelled at in the past. The BBC says it recognises this and has put in place extra governance for its critical projects and applied lessons learned from earlier projects.
To supplement the licence fee the BBC seeks to generate revenues through commercial activities, which generated £1.5bn in external revenue in 2019-20. Unfortunately, the contribution to the bottom line was less than 6% of its licence fee income.
The NAO identifies a number of actions that the BBC should take in developing its strategic response for its longer-term financial future:
- a long-term financial plan for the next stage of savings and how the BBC’s new strategic priorities can be funded;
- a plan to reach underserved audiences and to make significant changes to operations in the UK’s nations and regions;
- a clear strategy for technology and personalisation of services;
- monitoring of the BBC’s wider economic value on a more regular basis; and
- tracking savings achieved in order to more effectively identify further savings.
The NAO concludes: “As it prepares for upcoming licence fee negotiations and subsequent mid-term Charter review, the BBC faces significant strategic financial challenges. In addition, its financial position as at the end of 2020 has been unexpectedly weakened by the impact of COVID-19, although not to the extent experienced by some other broadcasters. Despite its purpose of being a universal broadcaster and still being the most used media brand in the UK, the BBC has seen a notable drop in audience viewing times.
“In parallel, its principal source of income, the licence fee, has also declined, and the BBC now faces considerable uncertainty about the income it will receive from the licence fee at a time when its net commercial income is not yet at a level to make a significant contribution to its overall income position. The BBC believes its ability to overcome these financial challenges through its savings programme will be tested as it seeks to deliver the remaining savings which it considers most challenging.
“In recent years, many of the BBC’s competitors have swiftly moved ahead in the global marketplace in terms of size and scale of services offered, gaining audiences and investing in technology. For its part, the BBC has introduced new initiatives to capitalise on the opportunities offered by this new marketplace including, most recently, BBC Sounds and improvements to the iPlayer service. To take further advantage, while continuing to meet its obligations as a universal public service broadcaster, the BBC will need to overcome certain challenges. These include continuing to make savings while investing in new technology and addressing an underlying lack of pace when implementing change. More immediately, as the BBC enters into licence fee negotiations, it needs to be able to articulate its current wider value to the UK economy.”
Alison Ring OBE FCA, Director for Public Sector at ICAEW, commented: “The BBC faces significant financial challenges as it seeks to deliver on its public broadcasting mission in the context of a competitive and fast changing environment. The withdrawal of government funding for licence fees for the over-75s and insufficient commercial income have resulted in losses that have eaten into the BBC’s reserves.
“The NAO has identified a number of sensible recommendations that the BBC needs to implement if it is to return to profitability in the short-term. However, the BBC’s board and management team will be acutely aware that the long-term viability of the licence fee model is under question and that more fundamental strategic questions will need to be answered if the BBC is to be confident of its future when it celebrates its 100th anniversary in 2022.”