The case against the BBC licence fee
26 May 2016
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Economic Theory
Tax and Fiscal Policy
19 November 2024
The BBC Charter is currently under consultation for renewal, so it’s an ideal time to consider if a license fee funded public service broadcaster is necessary or beneficial to modern Britain. Shielded by the compulsory £145 license fee, a regressive indirect tax, the BBC portfolio alone accounted for 32.4% of UK television viewing in 2014. There are good reasons to suggest this privileged position harms UK viewers. Technological innovation means many of the previous justifications for intervention simply no longer exist. Many proponents of a public service broadcaster are really simply making a paternalistic argument for providing the public with content that social elites believe they should want, such as a broad, ill-defined requirement of “quality” defined not by viewers, but editors and bureaucrats.
The economic rationale for public service broadcasting rests on the basis of the existence of a market failure in the market for broadcasting where the full benefits received by consumers are not fully represented in the price they pay and so certain types of content would be under-provided by the market.
In a world where free-to-air television, funded by advertising revenues, is the only model available for mass broadcasting there was a reasonable justification that could be made for government intervention. The issue arises because, in order for the free-to-air model to work, commercial networks need to produce output that maximises audiences in the most cost effective way, leading to a dominance of content that is relatively cheap to produce and has mass appeal, an example being soaps or reality television. Television would be unable to accommodate minority tastes and as people get better at avoiding adverts with ad blockers and personal video recorders, to fund television adverts would have to take up an increasing proportion of broadcast time.
Technological development has, however, alleviated these issues. The switch to digital television exponentially increased the number of channels available, which increased the space for diverse content and created more competition in appealing to consumer tastes. The emergence of new competitors such as Netflix and Amazon Prime, providing services directly over the internet and producing their own content, is increasing this choice even further.
Broadcasters are now also able to charge us directly for consumption, exclude those who don’t pay and are able to discriminate between different types of consumers. Subscription cable and satellite television packages mean broadcasters are able to price discriminate by selling channels in bundles, sport or movie packages for example, facilitating content that delivers large surpluses. Increasingly high-budget drama that would have previously been less profitable in the free-to-air format is finding a home on subscription television, the phenomenal success of HBO’s Game of Thrones is a good example.
The other argument for intervention revolves around citizen concerns, benefits to wider society in the consumption of certain types of content. In the context of broadcasting a good example would be the benefits brought about from the consumption of “fair and well informed debate,” news and current affairs programming. Aside from the utility the consumer gains from being well informed, the consumption also passes on benefits to others whose welfare would not be fully taken into account by the consumer when they are choosing to purchase their TV package. By being well informed the consumer becomes a better voter that can hold the government to account, as well as informing other citizens by interacting with them.
However it is simply not sensible to argue this would not be provided without a public service broadcaster. In the United States there is strong commercial competition between CNN, MSNBC and Fox News, whose subsidiaries also form part the competitive local news environment. The importance of television in the provision of news is also waning. In 2014, 41% of adults used the internet as a source of news and amongst the young, half now consider the internet their most important news source.
There’s also an issue with whether an unelected body, dependent on state funding (even if indirectly via the license fee) can really determine what is “fair and balanced.” The reporting of news and current affairs requires inherent value judgements over how and which stories are covered. Under free market conditions, this would be less of an issue, the plurality of providers would give consumers choice over which current affairs providers they would pay for. Whilst consumers are still free to make this decision, under our current public service broadcasting arrangements they are forced to pay for the BBC’s news coverage and the BBC’s advertising free model gives it a dominant position over rivals. When there are multiple sources of news why do we need a public service broadcaster to inform us?
With increased consumer choice there are now even questions about how many people watch public service content. Competition means consumers have extensive choice between watching public service broadcasting content and programming without such restraints. The emergence of ITV in the 1950s, to challenge the BBC’s monopoly, meant that the BBC had to respond by reinvigorating its schedule and dropping less popular content, such as organ recitals. Competition has continued this trend to the extent it is hard to see the public service aspect of most of what the BBC does. If we look at the most watched programmes on the BBC in 2014 we see New Years Eve Fireworks, The Great British Bake Off, Strictly Come Dancing and Call the Midwife. These programmes crowd out what the commercial sector is already doing, and reduce the audiences available to other free-to-air broadcasters. The BBC today runs nine national television stations, ten national radio stations, over 40 regional radio stations and has a massive online presence with the BBC News Website, the most popular in the UK. The size of its viewing figures is not necessarily a success, in fact, given its privileged position anything else would be failure.
But even if there was a market failure in broadcasting it doesn’t necessarily justify intervention. The existence of a market failure can often drive innovation that leads to a better allocation of resources in the long run. There is even a precedent for this within broadcasting. In the United States, where there was no public sector broadcaster that had an obligation for universal coverage, cable television originated as a way for isolated communities to gain access to a television signal. Its expansion to provide consumers with a wider range of content demonstrates how the motive of above-normal profit can act as a powerful incentive to correct market failure.
In fact, historically, the BBC has been a copycat of more innovative rivals, rather than an innovator. Radio 1 and 2 were created by a reluctant BBC as a result of pressure applied by pirate radio, Sky News pushed the BBC into creating BBC News 24 (again in the face of reluctance from BBC bosses) and the BBC had to catch up with ITV and Channel 4’s success with reality TV voting.
Another of the BBC’s aims is the provision of nationally produced programmes. Let’s ignore some of the protectionist thinking underlying the argument and assume, for the sake of the argument, that there is some intrinsic value in a broadcasting industry with domestic production, in terms of building a sense of national culture from which people derive benefits even if they do not directly consume it. If we accept this premise – does the UK need the BBC, or Public Service Broadcasting in general, to fulfil this function? The UK already has an extensive institutional framework around broadcasting, the UK’s historical legacy also means a great deal of British literature and history is of global significance, creating demand for British actors and locations, and English is one of the most widely spoken languages in the world. In short, it is extremely likely that the UK would continue to have a thriving television industry either way.
But what could the BBC look like going forward? An alternative to a BBC funded by a compulsory license fee would be to be to turn the BBC into a private subscription service, but a subscription service where subscribers have an active say in the governance of the organisation. If the public really do value what the BBC provides, it would continue to provide its services in a competitive environment and would free television viewers who do not view the BBC from paying for it. As a second best solution, if the government determines there is still a role for public service broadcasting it could introduce a system of contestable funding. Broadcasters would bid for funding to subsidise free-to-air available public service content, which would still ensure a more even competitive environment. The independence of any awarding body would still have to be ensured and funding would again be a cause for concern.
Whilst there is public support for the BBC’s output, increasingly the public are dissatisfied with the way it is funded. In 2004 an ICM poll, found only 31% of those surveyed think the BBC should be funded by the license fee, with 31% thinking it should be paid for with advertising and 36% thinking a voluntary subscription model would be more appropriate. One thing that is definite is the BBC has become too large and has extended well beyond what could reasonably be described as public service broadcasting. Change is desirable, not only for the sake of UK broadcasting, as the principles that govern the BBC were designed for different era, but for the pursuit of a free society.
Read the IEA monograph ‘In Focus: The Case for Privatising the BBC’ here.
The economic rationale for public service broadcasting rests on the basis of the existence of a market failure in the market for broadcasting where the full benefits received by consumers are not fully represented in the price they pay and so certain types of content would be under-provided by the market.
In a world where free-to-air television, funded by advertising revenues, is the only model available for mass broadcasting there was a reasonable justification that could be made for government intervention. The issue arises because, in order for the free-to-air model to work, commercial networks need to produce output that maximises audiences in the most cost effective way, leading to a dominance of content that is relatively cheap to produce and has mass appeal, an example being soaps or reality television. Television would be unable to accommodate minority tastes and as people get better at avoiding adverts with ad blockers and personal video recorders, to fund television adverts would have to take up an increasing proportion of broadcast time.
Technological development has, however, alleviated these issues. The switch to digital television exponentially increased the number of channels available, which increased the space for diverse content and created more competition in appealing to consumer tastes. The emergence of new competitors such as Netflix and Amazon Prime, providing services directly over the internet and producing their own content, is increasing this choice even further.
Broadcasters are now also able to charge us directly for consumption, exclude those who don’t pay and are able to discriminate between different types of consumers. Subscription cable and satellite television packages mean broadcasters are able to price discriminate by selling channels in bundles, sport or movie packages for example, facilitating content that delivers large surpluses. Increasingly high-budget drama that would have previously been less profitable in the free-to-air format is finding a home on subscription television, the phenomenal success of HBO’s Game of Thrones is a good example.
The other argument for intervention revolves around citizen concerns, benefits to wider society in the consumption of certain types of content. In the context of broadcasting a good example would be the benefits brought about from the consumption of “fair and well informed debate,” news and current affairs programming. Aside from the utility the consumer gains from being well informed, the consumption also passes on benefits to others whose welfare would not be fully taken into account by the consumer when they are choosing to purchase their TV package. By being well informed the consumer becomes a better voter that can hold the government to account, as well as informing other citizens by interacting with them.
However it is simply not sensible to argue this would not be provided without a public service broadcaster. In the United States there is strong commercial competition between CNN, MSNBC and Fox News, whose subsidiaries also form part the competitive local news environment. The importance of television in the provision of news is also waning. In 2014, 41% of adults used the internet as a source of news and amongst the young, half now consider the internet their most important news source.
There’s also an issue with whether an unelected body, dependent on state funding (even if indirectly via the license fee) can really determine what is “fair and balanced.” The reporting of news and current affairs requires inherent value judgements over how and which stories are covered. Under free market conditions, this would be less of an issue, the plurality of providers would give consumers choice over which current affairs providers they would pay for. Whilst consumers are still free to make this decision, under our current public service broadcasting arrangements they are forced to pay for the BBC’s news coverage and the BBC’s advertising free model gives it a dominant position over rivals. When there are multiple sources of news why do we need a public service broadcaster to inform us?
With increased consumer choice there are now even questions about how many people watch public service content. Competition means consumers have extensive choice between watching public service broadcasting content and programming without such restraints. The emergence of ITV in the 1950s, to challenge the BBC’s monopoly, meant that the BBC had to respond by reinvigorating its schedule and dropping less popular content, such as organ recitals. Competition has continued this trend to the extent it is hard to see the public service aspect of most of what the BBC does. If we look at the most watched programmes on the BBC in 2014 we see New Years Eve Fireworks, The Great British Bake Off, Strictly Come Dancing and Call the Midwife. These programmes crowd out what the commercial sector is already doing, and reduce the audiences available to other free-to-air broadcasters. The BBC today runs nine national television stations, ten national radio stations, over 40 regional radio stations and has a massive online presence with the BBC News Website, the most popular in the UK. The size of its viewing figures is not necessarily a success, in fact, given its privileged position anything else would be failure.
But even if there was a market failure in broadcasting it doesn’t necessarily justify intervention. The existence of a market failure can often drive innovation that leads to a better allocation of resources in the long run. There is even a precedent for this within broadcasting. In the United States, where there was no public sector broadcaster that had an obligation for universal coverage, cable television originated as a way for isolated communities to gain access to a television signal. Its expansion to provide consumers with a wider range of content demonstrates how the motive of above-normal profit can act as a powerful incentive to correct market failure.
In fact, historically, the BBC has been a copycat of more innovative rivals, rather than an innovator. Radio 1 and 2 were created by a reluctant BBC as a result of pressure applied by pirate radio, Sky News pushed the BBC into creating BBC News 24 (again in the face of reluctance from BBC bosses) and the BBC had to catch up with ITV and Channel 4’s success with reality TV voting.
Another of the BBC’s aims is the provision of nationally produced programmes. Let’s ignore some of the protectionist thinking underlying the argument and assume, for the sake of the argument, that there is some intrinsic value in a broadcasting industry with domestic production, in terms of building a sense of national culture from which people derive benefits even if they do not directly consume it. If we accept this premise – does the UK need the BBC, or Public Service Broadcasting in general, to fulfil this function? The UK already has an extensive institutional framework around broadcasting, the UK’s historical legacy also means a great deal of British literature and history is of global significance, creating demand for British actors and locations, and English is one of the most widely spoken languages in the world. In short, it is extremely likely that the UK would continue to have a thriving television industry either way.
But what could the BBC look like going forward? An alternative to a BBC funded by a compulsory license fee would be to be to turn the BBC into a private subscription service, but a subscription service where subscribers have an active say in the governance of the organisation. If the public really do value what the BBC provides, it would continue to provide its services in a competitive environment and would free television viewers who do not view the BBC from paying for it. As a second best solution, if the government determines there is still a role for public service broadcasting it could introduce a system of contestable funding. Broadcasters would bid for funding to subsidise free-to-air available public service content, which would still ensure a more even competitive environment. The independence of any awarding body would still have to be ensured and funding would again be a cause for concern.
Whilst there is public support for the BBC’s output, increasingly the public are dissatisfied with the way it is funded. In 2004 an ICM poll, found only 31% of those surveyed think the BBC should be funded by the license fee, with 31% thinking it should be paid for with advertising and 36% thinking a voluntary subscription model would be more appropriate. One thing that is definite is the BBC has become too large and has extended well beyond what could reasonably be described as public service broadcasting. Change is desirable, not only for the sake of UK broadcasting, as the principles that govern the BBC were designed for different era, but for the pursuit of a free society.
Read the IEA monograph ‘In Focus: The Case for Privatising the BBC’ here.
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