The Committee deliberated.

Draft Report (A public BBC), proposed by the Chairman, brought up and read.

Ordered, That the Chairman's draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 19 read and agreed to.

Paragraph 20 read, amended and agreed to.

Paragraphs 21 to 29 read and agreed to.

Paragraph 30 read, amended and agreed to.

Paragraphs 31 to 34 read and agreed to.

Paragraphs 35 and 36 read, amended and agreed to.

Paragraphs 37 to 43 read and agreed to.

Paragraphs 44 to 47 read, amended and agreed to.

Paragraph 48 read and agreed to.

Paragraphs 49 and 50 read, amended and agreed to.

Paragraphs 51 to 54 read and agreed to.

Paragraph 55 read, amended and agreed to.

Paragraph 56 read and agreed to.

Paragraphs 57 and 58 read, amended and agreed to.

Paragraphs 59 and 60 read and agreed to.

Paragraph 61 read, amended and agreed to.

Paragraphs 62 to 64 read and agreed to.

Paragraphs 65 to 68 read, amended and agreed to.

Paragraph 69 read and agreed to.

Paragraph 70 read, amended and agreed to.

Paragraphs 71 and 72 read and agreed to.

Paragraphs 73 to 75 read, amended and agreed to.

Paragraph 76 read and agreed to.

Paragraphs 77 and 78 read, amended and agreed to.

Paragraphs 79 to 85 read and agreed to.

Paragraph 86 read as follows:

"In front of the Committee the BBC Director General affirmed the case for an increase in funding for British films depending on the quality of supply. Following his appearance Mr Thompson wrote to the Committee undertaking to investigate the pros and cons of an increased investment into original UK feature film production. We recommend the BBC publish a strategy for promoting UK films, and should do so in concert with the UK Film Council. We further believe there is an overwhelmingly strong case for a substantial increase in BBC funding for both feature films and short films."

Amendment proposed, in line 5, to leave out from the word "Council" to the end of the paragraph. —(Mr Nick Hawkins.)

Question put, That the Amendment be made.

The Committee divided.

An Amendment made.

Paragraph 86, as amended, agreed to.

Paragraph 87 read as follows:

"BBC Worldwide Limited aims to exploit BBC content and intellectual property in the UK and overseas. It licenses programme formats, sells rights, publishes programme-related materials and operates commercial channels such as UKTV; a joint venture with Telewest. BBC Ventures Group Limited is an umbrella company for four commercial companies providing broadcast services; one of these, BBC Technology, has recently been sold following approval by the Secretary of State. The BBC should retain its commercial subsidiaries, but must compete on demonstrably fair terms with the profits used for the benefit of public service broadcasting. This recommendation goes further than the Director-General's assurance that 'the BBC will not continue to run businesses without demonstrable public benefits'."

Amendment proposed, to leave out paragraph 87 and insert the following new paragraph:

"The BBC has recently announced the results of its review of commercial services although the details and timetable is subject to further analysis of the executive's proposals by the Governors. The Corporation seems to be aiming at the divestment of its commercial subsidiaries where activities are not central to the BBC's public service remit. BBC Technology has already been sold. BBC Broadcast will be similarly disposed of (potentially freeing it to become a service provider for the whole of the industry) as will BBC Resources. A downsized BBC Worldwide seems likely to be retained to look after the channels, a reduced number of magazines and sales of programmes. The production of books, videos and DVDs and audiotapes will be sold off. We believe that all the BBC's commercial subsidiaries should be sold off by 2008. We note Ofcom's demarche that the returns generated by the sale of such public assets should not be assumed to automatically end up in the BBC's coffers. We would at least be concerned if the sales of these assets—necessarily one-off gains—were presented, uncritically, as part of the BBC's self-help programme of efficiency savings."—(Derek Wyatt.)

Question put, That the Amendment be made.

The Committee divided.

Another Amendment proposed, at the end of the paragraph, to insert the words, "We recommend that the Director General of Fair Trading conduct an inquiry into the BBC's use of cross-subsidy and cross-promotion and any detrimental impact of these on the commercial sector."—(Mr Nick Hawkins.)

Question put, That the Amendment be made.

The Committee divided.

Paragraph 87 agreed to.

Paragraph 88 read, amended and agreed to.

Paragraphs 89 to 94 read and agreed to.

Paragraph 95 read as follows:

"On BBC Three and BBC Four, Barwise recommended that 'the top priority' was to increase their audience impact (and value for money). He concluded they should both be reclassified as mainstream mixed-genre channels, a view motivated by "evidence that television is a mass medium, not a niche medium." That evidence is presumably informed more by the analogue experience than by any great understanding of what can, and should, be offered in a digital world. It betrays a failure to understand the complementarity of broadcasting and narrowcasting. The latter can provide depth to programming of wider appeal. The Secretary of State referred to the extraordinary popularity of BBC Four 'among its devotees'. While both BBC Three and BBC Four could certainly be improved, it will be an increasingly important feature of public service broadcasting to cater for niche, as well as generalist, tastes. They should remain as targeted channels, and not recast as clones of BBC One and BBC Two, as foolishly recommended by the Barwise review."

Amendment proposed, in line 8, to leave out from the word "devotees" to the end of the paragraph.—(Mr Nick Hawkins.)

Question put, That the Amendment be made.

The Committee divided.

An Amendment made.

Paragraph 95, as amended, agreed to.

Paragraphs 96 and 97 read and agreed to.

Paragraph 98 read, amended and agreed to.

Paragraphs 99 and 100 read and agreed to.

Paragraphs 101 and 102 read, amended and agreed to.

Paragraphs 103 to 105 read and agreed to.

Paragraph 106 read, amended and agreed to.

Paragraphs 107 to 110 read and agreed to.

Paragraph 111 read, amended and agreed to.

Ordered, That the second reading of the Chairman's draft Report, paragraph by paragraph, be resumed, at paragraph 112, on Wednesday 8 December at 10.00am.

[Adjourned till to-morrow at 10.00am

Second reading of the Chairman's draft Report (A public BBC), paragraph by paragraph, resumed [pursuant to the Order of the Committee, 8 December 2004].

Paragraph 112 read, amended and agreed to.

Paragraphs 113 to 117 read and agreed to.

Paragraph 118 read as follows:

"Top-slicing the licence fee, even what Lord Currie termed an "augmented" licence fee, is problematical. It may lead to additional bureaucracy and blurred lines of public accountability. Furthermore, it would lead to uncertainty in planning finances and future budgeting. We recommend that top-slicing the licence fee to fund public service provision by any body other than the BBC should be rejected."

Amendment proposed, to leave out paragraph 118 and insert the following new paragraph:

"Funding other public service broadcasting provision from resources collected via the licence fee is not 'top-slicing'; this is a term used by the BBC and others to help cement the Corporation's claim to the entirety of licence fee revenue. However, the licence fee does not belong to the BBC but to public service broadcasting; services, and/or programmes, with a dimension that the market would not provide. We recommend that the licence fee be used to generate revenue for both the BBC and for a fund from which local community television and radio stations, Ofcom's Public Service Publisher and any shortfall in Channel 4's income over the longer term (and into the digital world) can be resourced."—(Derek Wyatt.)

Question put, That the Amendment be made.

The Committee divided.

Paragraph 118 agreed to.

Paragraph 119 read and agreed to.

Paragraph 120 read, amended and agreed to.

Paragraphs 121 to 129 read and agreed to.

Paragraph 130 read as follows:

"The lack of advertising is a key attraction of the BBC; to carry advertising would impact significantly on existing commercial broadcasters. An inescapable conclusion is that the existing market could not sustain the freedom of the BBC to offer advertising time on its channels. Funding the BBC via a direct government grant could lead to uncertainty over long-term funding, and act as a break on creative risk taking and innovation."

Amendment proposed, to leave out paragraph 130 and insert the following new paragraphs:

"The BBC used to be able to say that a key attraction of its services to many viewers was that its programmes were not interrupted by advertising. Now, however, to the declared irritation of many viewers, BBC programmes are separated by breaks with up to three or four "adverts" for other BBC programmes or services. These, in many cases, amount to improper "cross-subsidy", or "cross-promotion"; an abuse of the Corporation's dominant market position about which commercial broadcasters complained to us. Public opinion surveys have consistently shown a relatively low level of support for the licence fee and rather more for the BBC to be financed by advertising."

"We recommend a fresh look at the BBC's approach to advertising. The BBC's UKTV joint venture already takes advertisements as well as subscription. The Peacock report proposed, over 20 years ago, that voluntary subscription would be the most equitable and efficient way of responding to consumer preference and funding the BBC; but that was before there were any prospects of homes having the equipment which would make such a system possible. Today nearly 50 per cent of homes already have equipment which is actually, or potentially, capable of adaptation to allow for subscription and it is expected that this will rapidly grow towards 100 per cent (with Government encouragement). Therefore it is perfectly possible in the foreseeable future for BBC television to be funded either by advertising alone or by a combination of subscription and advertising. We believe that the BBC has, so far, deliberately sought to frustrate any potential for developing a subscription-based funding model by seeking to introduce technology without the potential for conditional access or a 'return path'."—(Mr Nick Hawkins.)

Question put, That the Amendment be made.

The Committee divided.

Paragraph 130 agreed to.

Paragraphs 131 and 132 read and agreed to.

Paragraph 133 read as follows:

"Some of the objections to the licence fee can be tempered by a common belief that the BBC contributes to the raising of standards across the broadcasting sector. Furthermore, when the BBC is able to return, with digital switchover, to universal service provision then the case for public funding of some kind would be reinforced."

Amendment proposed, to leave out paragraph 133.—(Mr Nick Hawkins.)

Question put, That the Amendment be made.

The Committee divided.

Paragraph 133 agreed to.

Paragraph 134 read as follows:

"We wish that there were a viable and credible alternative funding mechanism for the BBC which would ensure the current universality of access; but there is not. Accordingly, though reluctantly, we are persuaded that, for the time-being at any rate, there is no option but to continue with the licence fee; however unsatisfactory that clearly is."

Amendment proposed, to leave out paragraph 134 and insert the following new paragraphs:

"We believe that the licence fee is a fundamentally flawed means of funding the BBC: its regressive nature penalises viewers on low incomes; it provides for no connection between viewer preference and BBC output; and it provides no incentive for the Corporation to increase its efficiency, effectiveness and economy—except in relation to collection which results in ever more "brutal" campaigns seeking to frighten people out of evasion (and the victimisation of those without televisions). We note that Ofcom has already suggested that the Government consider subscription to fund any future expansion of BBC services. We conclude that a mix of advertising and subscription should be deployed to fund BBC television and that the complacency of those who claim the licence fee is the "least worst option" be challenged."

"We also recommend that BBC radio services be operated independently with funding from general taxation. BBC Radio Five Live and BBC Radio Two are examples of how BBC radio has managed to increase audience share by providing what the public really want. This approach has to be spread more widely across the rest of the Corporation. In our view the standing of BBC radio with the public in general is higher than that of BBC television and it would help to retain that quality if the BBC radio and the high standards of Radio 2, 3, 4 and 5 are retained by a funding system of direct grant rather in the same way as the BBC World Service has been funded, again retaining its high quality and standing. By contrast, BBC World TV is of very poor quality when compared with its US, and other international, competitors and exhibits many of the worst examples of what has gone wrong with the BBC over the last 30 years; especially in its concentration on putting out an editorial line of narrow "political correctness" and refusal to promote Britain to the world. It is also full of exceptionally irritating musical breaks and interludes."—(Mr Nick Hawkins.)

Question put, That the Amendment be made.

The Committee divided.

Another Amendment proposed, to leave out paragraph 134 and insert the following new paragraph:

"The licence fee remains, as our predecessor committee stated, the least worst way of funding the BBC. While it is regressive and unfair on the disadvantaged in society, the evidence we received clearly indicates that there is no other viable and credible alternative which would ensure the current universality of access."—(John Thurso.)

Proposed Amendment made.

Paragraph 134, as amended, agreed to.

Paragraphs 135 to 138 read and agreed to.

Paragraph 139 read as follows:

"In order to ensure a robust financial model in the more distant future, Ofcom suggests that the Government should consider the case for the BBC to supplement its income with limited subscription services to fund any future expansion. While recognising that some BBC goods and services, such as magazines and DVDs, are already available on "subscription", we do not believe this should be extended to broadcast or online services."

Amendment proposed, to leave out paragraph 139 and insert the following new paragraph:

"We believe that the replacement of the licence fee by subscription and advertising revenue would make the BBC more accountable to its customers, more transparent in its finances and more independent of Ministers in Government who will lose the power to determine its income. The BBC would also have to become more flexible and responsive in its offerings of different channel packages to customers and become more efficient (especially if Ofcom regulated, as it should, the BBC's pricing policies to ensure that it did not abuse its dominant position in the pay-TV market)."—(Mr Nick Hawkins.)

Question put, That the Amendment be made.

The Committee divided.

Paragraph 139 agreed to.

Paragraph 140 read and agreed to.

Paragraph 141 read, amended and agreed to.

Paragraphs 142 to 145 read and agreed to.

Paragraph 146 read, amended and agreed to.

Paragraph 147 read and agreed to.

Paragraph 148 read, amended and agreed to.

Paragraphs 149 to 151 read and agreed to.

Paragraphs 152 and 153 read, amended and agreed to.

Paragraphs 154 to 160 read and agreed to.

Paragraphs 161 to 164 read, amended and agreed to.

Paragraphs 165 to 177 read and agreed to.

A paragraph—(Mr Nick Hawkins)—brought up and read, as follows:

"We believe that the BBC should not compete gratuitously with existing specialist provision and that its cross-promotion of programmes and services represents an abuse of its powerful, privileged and publicly-funded position."

Question put, That the paragraph be read a second time.

The Committee divided.

Paragraph 178 read, amended and agreed to.

Paragraphs 179 to 182 read and agreed to.

Paragraph 183 read, amended and agreed to.

Paragraphs 184 and 185 read and agreed to.

Paragraph 186 read, amended and agreed to.

Paragraphs 187 and 188 read and agreed to.

Paragraph 189 read, amended and agreed to.

Paragraphs 190 to 213 read and agreed to.

Paragraph 214 read, amended and agreed to.

Paragraphs 215 to 217 read and agreed to.

Paragraph 218 read, amended and agreed to.

Paragraphs 219 to 245 read and agreed to.

Paragraph 246 read, amended and agreed to.

Foreword and summary read and agreed to.

Resolved, That the Report, as amended, be the First Report of the Committee to the House.

Ordered, That the Chairman do make the Report to the House.

Ordered, That the provisions of Standing Order No. 134 (Select Committees (reports)) be applied to the Report.

Several papers were ordered to be appended to the Minutes of Evidence.

Ordered, That the Appendices to the Minutes of Evidence taken before the Committee be reported to the House.

[Adjourned till Tuesday 14 December at 10.00am