The BBC Trust has approved proposals for the BBC to establish bbc.com, a commercial venture to offer advertising on the BBC's international online service for users outside the UK.
The Trust's arrangements for consideration of commercial service proposals are very different to those that apply in the case of public service proposals. The BBC's commercial activities compete in the market so the Trust must take great care to ensure that its own decision making processes do not disclose commercially sensitive material. Nevertheless, the Trust is mindful of the requirement to conduct its business as openly and transparently as it can. In the case of bbc.com the Trust stated publicly in March that it would publish information on how it had assessed the proposition once it reached its final decision.
Summary of proposal
bbc.com is the proposal to offer advertising on the BBC's international online service for users of the service only outside the UK. Initially this will be limited to advertising on a subset of pages of the existing website, including the home page and selected news, sport, weather and science and nature pages visible only to international users of the site. Advertising will be rolled out to more pages and countries over time. In parallel BBC Worldwide plans to invest in new editorial propositions, including a natural history portal and international versions of the iPlayer and key programme websites, such as Top Gear, so the site provides a much richer BBC offering to international users more tailored to their needs.
bbc.com will be established as part of the BBC's commercial arm under the ownership of BBC Worldwide. Editorial control of the news pages will continue to be the responsibility of News. bbc.com will pay the BBC for the rights and services it uses and given the majority of the international traffic to the website is the news section, News will be the principal BBC beneficiary of these payments. BBC Worldwide has entered into a joint venture with BBC World covering the news, sport and weather parts of the site which means that BBC World will receive a portion of the economic benefits from this exploitation in return for providing its editorial, audience and advertising expertise and on-air cross-promotion.
The proposal has been developed to build on the global success of the website to date and use the revenues earned from advertising to invest in growing the site's international reach and relevance in an environment of increasing competition. The aim is to increase the international reach of the site significantly by investing to keep pace with market trends and to make it more attractive to a broader range of international users. The site is viewed by BBC Worldwide as forming the spine of the BBC's future international commercial offer, which will involve branded TV channels and magazines, each supporting and cross-promoting each other.
The BBC believes that bbc.com will have benefits for its public service as well as its commercial business, enabling a step change in its ability to deliver its fifth public purpose, "Bringing the UK to the world and the world to the UK".
The Trust's role in commercial service approvals
The Trust's role and functions with regard to the BBC's commercial activities are different to those that apply in the case of public services. The bbc.com proposal constitutes commercial activity under the terms of the BBC's Charter and Agreement. The BBC is encouraged to undertake commercial activity with the aim of generating revenue to be reinvested in public service broadcasting. The Trust approves both the overall strategy for the BBC's commercial activities and, in some cases, new service proposals.
The Agreement requires all commercial activities undertaken by the BBC to be organisationally separate from the core BBC, provided through one or more commercial subsidiaries.
The BBC's commercial services must also comply with four criteria. They must:
fit with the BBC's Public Purpose activities;
exhibit commercial efficiency;
not jeopardise the good reputation of the BBC or the value of the BBC brand;
comply with BBC fair trading guidelines and in particular avoid distorting the market.
The Trust has put in place a protocol which establishes the formal framework within which the BBC's commercial services operate and the arrangements for approval. The protocol sets the basis on which new proposals must be referred to the Trust for an approval decision.
Although bbc.com did not fall within those categories set out in the protocol requiring automatic referral to the Trust, the proposals were referred to the Trust in this case because the BBC Executive Board considered that matters of wider strategic significance for the BBC may be raised.
The Trust first considered proposals in February 2007. It requested a significant amount of additional information including further explanation of the strategic benefits to the BBC and the editorial safeguards that would be put in place to preserve the BBC's independence and reputation as a trusted source for news. The BBC submitted this additional information to the Trust in March but suggested that the Trust postpone its decision until further work had been undertaken within the BBC.
Mindful of the requirement to conduct its business in an open and transparent way, the Trust stated publicly at that point that it would publish information on how it had assessed the proposition against the four criteria once it reached its final decision.
A revised proposal, addressing in particular the points raised by the Trust, was considered by the Trust in October.
The Trust had considered and approved in March the overall strategy for BBC Worldwide. In reviewing the final bbc.com proposal the Trust was satisfied that it was consistent with the wider strategy that it had approved.
The Trust also noted that the proposition involved a fundamental change to the business model for the international website and considered whether a commercial approach to a service which had until now been funded on a different basis was appropriate. It noted that under the new BBC Agreement, the BBC is precluded from using licence fee funding to support any service aimed primarily at users outside the UK. It also noted that a range of funding models for the BBC's international services already existed. The BBC World Service was established and is still funded by the Government through Grant in Aid. Subsequent international service launches in English have been commercial models under the BBC brand. The most notable example is BBC World, the BBC's commercially funded international 24-hour news and information channel, broadcast in English in around 200 countries. The Trust accepted BBC management's view that the new business model would allow for a significant increase in investment in the international website, enabling it to keep pace with market and technology developments and grow its reach, and that this increase would not have been achievable under the current funding model.
The Trust also took account of the impact of the proposals on the BBC more widely, including its public services. The Trust noted that bbc.com would have benefits for the BBC's public service as well as its commercial business. In particular the Trust agreed with BBC management that an enhanced international website with significantly increased reach would make a valuable contribution to the delivery of the BBC's international public purpose, "Bringing the UK to the world and the world to the UK".
Assessment of fit with four criteria
The formal procedures for approval of new commercial services require BBC Worldwide to draw up an assessment of the proposal against the four criteria. Under the procedures the assessment is subject to independent approval by the BBC's Controller, Fair Trading, who is not accountable to BBC Worldwide management but to the BBC's Chief Operating Officer who is ultimately responsible for compliance across the BBC. The Trust considered this detailed assessment of compliance with the four criteria which was signed off both by the BBC's Controller, Fair Trading and by its Chief Operating Officer.
1. Fit with public purposes
The Agreement requires that commercial services are both appropriate to be carried on in association with the promotion of the public purposes, and that they are connected, other than merely in financial terms, with the ways in which the BBC promotes its public purposes.
The Trust noted that an international version of the BBC's UK online service is already publicly available, funded through Grant in Aid. The Trust concluded that the proposals were appropriate to be carried on in association with the promotion of the public purposes, and accepted BBC management's detailed assessment of how the proposition was connected with the public purposes, noting links not just to the international purpose but, through increased investment in the site, to other purposes. The Trust also noted that the BBC had discussed its plans with the Foreign and Commonwealth Office, which had confirmed that it was comfortable with the proposals
2. Commercial efficiency
In accordance with the provisions in its protocol, the Trust reviewed the proposals against a range of measures of commercial efficiency including profits generated, return on investment, PBIT margin, break-even point and payback point. The Trust also considered NPV and IRR assessments. Taking all measures together, the Trust was satisfied that the proposition fully satisfied the requirement to demonstrate commercial efficiency.
3. BBC reputation and brand
The BBC's four criteria assessment identified both positive and negative potential effects on the BBC's reputation. It notes that an important aim of the proposal is to develop the BBC's international website and to grow its reach significantly. However, it accepts that there is a risk that advertising, unless properly governed, might damage the reputation and reach of the news section of the site. The Trust noted that the principle of the BBC carrying advertising alongside news was already well established, with BBC World, its commercially funded international 24-hour news and information channel, funded through advertising revenue. The Trust also noted that other international news providers such as The Economist, Financial Times, New York Times and CNN appeared able to manage any potential conflict between advertising and editorial integrity effectively.
The Trust looked in detail at the system of editorial safeguards proposed by the BBC and was satisfied that these were sufficiently rigorous and robust to ensure that the BBC's reputation was not damaged. It had in mind matters the Trust should always consider, in particular maintaining the BBC's independence. It noted that a separate management structure would be established with the result that the Editorial Director of bbc.com would account to the Director, Global News and to the BBC's Journalism Board, chaired by the Deputy Director-General. It considered that this structure and the editorial control processes proposed would prevent commercial considerations from damaging the editorial integrity of the site and the BBC's wider reputation. It was also satisfied that the set of advertising principles developed to safeguard the BBC's reputation and editorial integrity was appropriate, that stringent arrangements had been developed for monitoring compliance and that any change to the principles would require clearance from the Journalism Board. The Trust noted that arrangements had been developed to monitor advertising in real time so that changes to advertising could be made quickly if necessary as a result of a specific story, and that in the event of a major international incident the BBC would have power to withdraw all advertising for an appropriate period.
The Trust decided that these editorial safeguards must be implemented in full prior to the launch of the service, and that the BBC Executive must ensure that editorial performance is closely monitored and reported on to the Journalism Board, which must notify the Trust of any significant failure in editorial control. The Trust's Editorial Standards Committee will also examine further the implementation arrangements for these editorial controls.
The Trust also noted qualitative and quantitative market research commissioned by BBC Worldwide. Whilst recognising that the introduction of advertising for international users of the site would not be welcomed by all and that a minority of those polled in the quantitative research in 2006 had expressed real concerns, the Trust noted BBC Worldwide's research findings that the great majority of international users would want to continue to use the site and, in terms of licence fee payers, most did not hold a strong opinion (82% of respondents said they either would not mind or did not have an opinion).
The Trust attached particular importance to the arrangements for ensuring that licence fee payers accessing the BBC site within the UK would see the existing public service site rather than the commercially funded international version. It noted the intention to use geographical IP location software to minimise the extent to which UK users saw the international version of the site and noted in particular the high degree of accuracy for the selected software. The Trust noted forecasts suggesting that less than 3,000 UK households (0.01% of licence fee payers) would be at risk, and also noted plans to switch those users to the correct site if they contacted the BBC.
The Trust also took into account representation made through a number of public campaigns organised both by a number of BBC staff and by external parties including the National Union of Journalists and the British Internet Publishers Alliance. The Trust recognised the strength of feeling amongst these groups and was satisfied that the issues they raised were given proper consideration in its assessment of the proposals against the four criteria and from a broader perspective including the Trust's duty to secure that the independence of the BBC was maintained.
4. Fair trading and market considerations
All commercial services must comply with the Trust's Fair Trading Policy and with the BBC's Fair Trading Guidelines. Both these documents are published on the Trust's website. The BBC's four criteria assessment reviewed the proposals against the requirements from each of these documents.
The Trust was satisfied that the proposed organisational structure delivered the financial and operational separation between commercial and public service activities that is required under the Agreement. It was also satisfied that the important editorial safeguards which established lines of accountability from the commercial service to the public service were sufficiently tightly defined to deliver the necessary editorial safeguards without undermining the required organisational and financial separation.
In particular the Trust was satisfied that the financial separation arrangements meant that there would be no risk to, or use of, public funds in implementing the bbc.com proposals.
The Trust was also satisfied that bbc.com would be required to meet the full cost of international distribution for its content.
The Trust had access to an independent report commissioned by BBC Fair Trading to assess the arrangements for rights payment between BBC Worldwide and the BBC. The consultants' recommendations were adopted and BBC Fair Trading confirmed to the Trust that the rates negotiated between BBC Worldwide and the BBC fell comfortably within the market range.
In addition to rights pricing, BBC Fair Trading examined and approved the terms on which other editorial and technical inputs required by bbc.com are to be supplied by the BBC.
The Trust was satisfied that appropriate transfer pricing of relevant inputs and services would be applied.
The BBC also confirmed to the Trust that any cross-promotion of the bbc.com service would comply fully with the Trust's competitive impact code on cross and digital TV promotion and the Fair
Trading Guidelines. The code and the Fair Trading Guidelines would preclude the promotion of bbc.com, as a commercial service, through any of the BBC's UK public services. Only editorially justified references can be made. The code is published on the Trust's website.
The Trust's Statement of Policy on Fair Trading states that the BBC's commercial activities will not be regarded as distorting the market where they are in compliance with competition law and the Fair Trading Guidelines, and have not been given an unfair commercial advantage which could unduly and negatively influence the market.
Compliance with competition law
The Trust noted that the conclusions from external competition law and accounting advice that had been taken by BBC Fair Trading underpinned the BBC Fair Trading conclusion that the proposals would comply with competition law.
The Trust was also satisfied that the safeguards in place concerning separation, transfer pricing and cross-promotion meant that bbc.com would not be in receipt of any public funding and that it would not gain any unfair commercial advantage under the arrangements.
The Trust was satisfied that a proper and thorough consideration of fair trading and competition issues had been conducted by the BBC Executive, and supported the conclusion that the proposals would comply fully with the fair trading criteria.
The Trust was satisfied that approving the proposals would not conflict with its Charter duty to secure that the independence of the BBC was maintained. It considered the proposed new business model for the international website to be appropriate, and consistent with the commercial strategy that it had approved in March. It was also satisfied that the proposed structure fulfilled the requirements of the Agreement in terms of separation of the commercial activities of the BBC. The Trust considered the proposition to comply fully with each of the four commercial services criteria set out in the Agreement. Taking these factors into account, the Trust approved the proposal subject to the following conditions:
The editorial safeguards proposed to the Trust must be implemented in full prior to the launch of the service and subjected to final examination by the Trust's Editorial Standards Committee. The BBC Executive must also ensure that editorial performance is closely monitored and reported on to the Journalism Board, which must notify the Trust of any significant failure in editorial control.
The Trust wanted to be kept informed as the site developed and stipulated that any future phases of development above and beyond the introduction of advertising would be subject to additional Trust approval.
Details of the basis on which the BBC must refer cases to the Trust for approval are set out in the Trust's protocol on the BBC's commercial services.
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