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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1166-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE CULTURE, MEDIA AND SPORT COMMITTEE
COMMERCIAL OPERATIONS OF THE BBC
SIR MICHAEL LYONS and MARK THOMPSON MR JOHN SMITH, ETIENNE DE VILLIERS, ZARIN PATEL and CAROLINE THOMSON Evidence heard in Public Questions 90 - 253
USE OF THE TRANSCRIPT
5. Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney &
Sons LLP, Hope House, Telephone & Fax Number: 020 7233 1935
Oral Evidence Taken before the Culture, Media and Sport Committee on Members present Mr John Whittingdale, in the Chair Janet Anderson Philip Davies Mr Nigel Evans Paul Farrelly Mr Mike Hall Alan Keen Rosemary McKenna Mr Adrian Sanders Helen Southworth ________________ Memorandum submitted by the BBC
Examination of Witnesses Witnesses: Sir Michael Lyons, Chairman, BBC Trust, and Mr Mark Thompson, Director General, BBC, gave evidence. Q90 Chairman: Good morning, everybody. This is the second session of the Committee's inquiry into the BBC's commercial operations, and we are delighted to welcome Sir Michael Lyons and Mark Thompson to give evidence. Since the announcement of the inquiry, there has been little publicity about other matters affecting the BBC and we thought that the Director General and the Chairman would not want this opportunity to pass without having the opportunity to address some of the questions raised by the Russell Brand and Jonathan Ross broadcast and subsequent matters raised to that. If I might begin, when the story first broke about the Ross/Brand telephone call on Andrew Sachs's answering machine, it was suggested by the BBC that this had only led to two complaints and, therefore, it was not a matter of great importance, and indeed, even since then, there have been suggestions by some that actually this was a hysteria which was largely whipped up by The Daily Mail and other newspapers. Do you think that the reaction was disproportionate? Sir Michael Lyons: I am going to answer that question, Chairman, but I just want to start by underlining the basis on which we answer your questions today. This is still not complete in terms of the Trust's inquiries and we are receiving a full written report at our board meeting this week, and that will inevitably mean that there are some areas of information that we are not able to share with you this morning, but that will all be made public once the Trust has reached its final conclusions on this matter. Let me turn to the specific question though of these events and preface anything that I might say about the handling of it or the decisions made with a very clear statement, and it is not for the first time made both by the Director General and myself, as Chair of the BBC Trust, that the events reflected in that programme should not have taken place, they should not have been recorded and, most important of all, they should not have been broadcast. There is no question of the BBC saying anything other than that the contents of that programme lie beyond the boundary of what is acceptable for the BBC to broadcast and lie beyond its editorial standards, and it is important that I underline that to begin with. Now, let us talk about the handling of it. It is a matter of fact that, when this was broadcast on the 18th to an audience of almost 400,000 people with an average age of 55, there were only two complaints and those two complaints do not even approach the most offensive issues raised by the programme. A week later, after a further roughly 50% extra people had listened to the programme either by podcast or through the iPlayer, there were still only five complaints. Only after the publication of an article in a Sunday newspaper did steadily the number of complaints begin to grow, many of them prefaced with the comment, "I haven't listened to this, but I am offended". Now, here is the challenge, and again let me say again that this material was unacceptable, should never have been broadcast and should never have been recorded, but there is a dilemma here about how you read a situation where the audience concerned, and we will not know if they enjoyed it, but they do not appear to have been offended by it, but actually another part of the licence fee public clearly was offended. Now, my view is very clear on this, that the BBC needs to certainly take account of the views of licence fee-payers more generally, but the most important issue here though was that this lay beyond the boundary of what the BBC believes it should broadcast. Mr Thompson: Perhaps I can just say, on my own behalf as Director General, that I am in no doubt that this was a very serious editorial lapse. There is a debate, and I think it is an interesting and important debate, about the boundaries of taste and how the BBC and other broadcasters should strike the right balance between creative freedom for given programmes and the reasonable expectations of different audience groups in terms of content, and we know, and the Committee will know from other work you have done, that there are very different expectations from different audience groups, so there is that broader debate, and, if you want to ask questions about that, we of course can tackle them. This is, it seems to me, an example of a really serious editorial lapse which is not close to some boundary where you can debate it. It is absolutely the wrong side of the line in terms of invasion of privacy and in terms of a lapse, effectively, of a duty of care to some of the individuals, Andrew Sachs and his granddaughter being the central figures there, and I would not say that the press comment about this was illegitimate, therefore. I think it was a serious editorial lapse and it was entirely appropriate, bluntly, that the rest of the media should point to that. In answer to your question, and, as Sir Michael says, it is an ongoing process and he had a meeting this week, do I think that the actions so far, namely the actions announced by the Trust and also the actions which I announced and indeed the consequences for some of the people who were responsible for the broadcast, do I think they were disproportionate? No, I do not. The senior management knew about this programme on Sunday 26 October and, by the following Thursday, we had been able to prepare an interim report for the BBC Trust and to make recommendations for pretty strong, but, what I believe was, proportionate action, and I believe that the actions we have taken were an appropriate response to what was a serious editorial lapse. I accept that there are some licence-payers, and some of them have written to me, who believe it is an overreaction. I believe that what we have done is proportionate, given the seriousness of what happened. Q91 Chairman: You have both talked about how serious a breach this was. If it is obvious to you that this was a very serious breach, and I think it is obvious to all of us that this was a very serious breach, why, when it was drawn to the attention of the BBC, did they not immediately say, "This is a very serious breach", instead of, "Well, we've only had two complaints"? Sir Michael Lyons: Well, Chairman, let us go to
what the BBC actually did. On the Monday
morning at Q92 Chairman: But not on the morning after the broadcast. Sir Michael Lyons: No, let me be very clear. The broadcast on Saturday 18th, there is a proper issue to account for and the Trust is looking into this in some detail and it already has a pretty good picture of the events between the 18th and the coverage of this in a Sunday newspaper just over a week later, and it is on the basis of that that you have seen the actions reported, both those taken by the Director General, the consequences for those who were directly responsible for the actions over that period and the further request that the Trust has made to investigate further and put precautions in place for the future. Therefore, that period up until the publication of the Sunday newspaper, following the publication of the Sunday newspaper article, both the Trust and the senior management of the BBC became aware of this lapse for the first time and the apology was issued the very next morning. Q93 Chairman: Is it not extraordinary that you had to wait for The Mail on Sunday to tell you about it? Sir Michael Lyons: Well, Chairman, that might be the case, and I am not trying to excuse the processes within the BBC over that seven-day period, but indeed let us be clear, that the real offences lie in allowing this programme to go out on the 18th. That is where the real problems lie. Now, is it right to expect the Director General or any other part of the BBC's management team to be aware of every single programme that is broadcast? No. They rely on other folks within the organisation and those folks have been held to account and in a way, frankly, that you do not see very often in any organisation in this country. Within less than a week of the matter coming to our attention you had not only the immediate apology, but also a series of actions which demonstrate clearly that in the BBC there are consequences for those people who let the public down. Q94 Chairman: But it was not less than a week from the programme, it was less than a week from a Sunday newspaper. Sir Michael Lyons: Chairman, I absolutely understand that and I have conceded that point, but what we have to focus on are the two separate charges: the failings before management became aware of this, for which people have been held to account in the most severe way; and the actions of the BBC management and the Trust following publication of the Sunday article. Mr Thompson: I do not want to prejudice the report that is yet to come to the BBC Trust, but perhaps it is helpful if I say the following: that the nature of the compliance failure was that the gatekeepers, the senior editorial managers on Radio Two, who would have been expected to address the issues raised and essentially to ensure that the programme is not broadcast, made errors of judgment and believed the programme was suitable for broadcast and, therefore, it was broadcast, but also, in the aftermath of the programme being broadcast, those people, as it were, whom we would normally have expected to be monitoring the output and considering whether it was appropriate, were the people who had decided that the programme was suitable for broadcast. The audience of The Russell Brand Show clearly also did not find the programme unexceptional, and it is only at the weekend at the publication of The Mail on Sunday that the detail of what was broadcast in this edition of The Russell Brand Show became clear to the rest of the senior management of the BBC, but the point I am making is that the character of the compliance failure, that quite senior people with a specific responsibility for editorial standards and compliance made errors of judgment in relation to this programme, not only had the effect of allowing the programme to go out, but it meant it was days after the broadcast before the detail of what was in the programme became clear to us as well. Q95 Mr Evans: Before I start, can I pay tribute to BBC News's coverage of this particular incident which I thought was absolutely superb. Now, as you reflect back on your own reactions to this story, how do you judge your own reactions, both of you? Any regrets? Sir Michael Lyons: Well, in these circumstances there are always lessons to learn, are there not, and the Trust, as I said in my opening comments, continues to focus on what are the right lessons to learn. I will come to the issue of personal reactions, but we are still examining the way that the BBC handled this, the nature of the apology, whether or not that should have been followed up by a stronger sort of personalisation of that message in the first few days as well as getting to the root of "How could you have had such a serious editorial lapse that involved such senior and experienced people within the BBC?" We are trying to do this in a way which is more surgical. What we do not want is something which assumes that this is a problem endemic across the whole of the BBC. We have done considerable work, or, rather, we have commissioned considerable work over the last year to tighten up on editorial standards, and the examinations that we have commissioned again seem to suggest that they have had their effect, so we need to get to the bottom of that. Now, in terms of what might have been done differently here, well, I certainly do not think we could have got the apology out any earlier. Could that apology have been worded differently? Well, it was clear that it was both an apology to Andrew Sachs and that it underlined that the material was unacceptable. Might it have embraced other people who were offended, not least particularly Ms Baillie? Yes, it might have done. Was there a case for the Head of Audio, Tim Davie, to be out a little earlier on the airwaves? Yes, there was. What was the Trust's role in this? I read The Mail on Sunday article. The Trust was engaged with the BBC management from that point onwards. We were clear that this was a serious matter, that it needed to be investigated, and the inquiry started on the Monday, and we were clear that this was a matter for our Editorial Standards Committee to look at and I personally accelerated that process on the Tuesday to make sure that we could deal with it at the meeting planned for the Thursday. Are there lessons to learn? Almost certainly, as there are from every one of these crises, and of course they are always different in nature, are they not? Mr Thompson: My story is that I was away out of the country over the weekend and out of telephone contact. I got a phone call on the evening of Monday 27 October, this was the day after The Mail on Sunday was published, and was told that there had been a serious editorial breach on Radio Two, that the BBC had already, early that morning, issued a comprehensive and unreserved apology, that an inquiry into what had happened and how this breach had occurred had already started and was likely to be able to produce interim findings by as early as, I think at that point, maybe Thursday and that there was likely to be a meeting of the Editorial Standards Committee of the BBC Trust on that Thursday. I thought that those actions sounded appropriate. If I had heard about that, as it were, as I opened The Mail on Sunday on the Sunday that those were the actions, given the moment some of the transcript of the programme was read out to me on the phone and it was quite clear to me that we were dealing with a serious editorial lapse, then the immediate issue of an unreserved apology and an immediate investigation, I have to say, I felt then and still feel, were the right things to do. Although I absolutely appreciate, and you might say it is ironic for the Head of a news organisation to say this, that the news cycle is very demanding of comment and faces, actually the idea that BBC senior management should focus as quickly as possible on understanding exactly why this programme had gone out and trying to weigh quite closely the respective roles of the on-air broadcasters, the producer, the independent production company and some of the senior figures on Radio Two who are charged with maintaining editorial standards on Radio Two, it meant talking to them, weighing evidence, exploring the paperwork, the email and paper traffic so that, when we did act, we would do it fairly and proportionately, knowing what had actually happened. Q96 Mr Evans: Do you accept though, both of you, that you were lamentably slow in your reactions? Sir Michael, you were duffed up on the Today programme for being slow. Do you accept that? Sir Michael Lyons: Well, it was put to me. I do not regard myself as having been duffed up. I was very clear that there was no lack of speed from the Sunday. This is a mythology which I just do not accept. There was no lack of speed following the publication, but much to account for in the preceding week and indeed the failure to control this programme properly, much to account for, and in the Trust, from the moment when it became aware of this, on that job. I refute and reject any suggestion that there were further actions that the Trust should have taken over that period, as I did when John Humphrys interviewed me that morning. Q97 Mr Evans: Even Lord Carter himself said that the BBC was lamentably slow, and, Mark, you only came out of hiding when the guns started to train on you instead of Ross and Brand. Do you not accept that you should have acted? You say you received a phone call on the 27th. Is that not when you should have made the statement, not on the 29th. Sir Michael Lyons: To be clear, Mr Evans, we had already made a statement of unreserved apology. Q98 Mr Evans: No, you. You talk about the gatekeepers and you are both gatekeepers of the BBC as well, so do you not accept any blame at all for your lamentable slowness? When you made the statement, Mark, it was a good statement, but it was slow in coming. Sir Michael Lyons: Mr Evans, this might be a convenient story, it may even be one which has been given wide circulation, but the problem is that it actually just is not true. The failings that need to be focused on are those that occurred before The Mail on Sunday article and particularly those around the events of the recording and broadcast of the programme on the 18th. We are here making it very clear that both the Trust and the Director General accept that that is an issue which we must be held to account for, and the Trust is doing its job of holding the executive to account for that and you will get a full report and it will be in the public domain. One of the problems here of course is that it is very difficult to criticise the fact that the BBC has demonstrably taken action that has had consequences for those who were involved. Now, that is so exceptional in our society that people have to look for a different story to tell. I do not believe that we have anything to account for in terms of speed of action either in terms of the Trust or the senior management. There are lessons to learn about how we might manage our public messages more effectively in the future and we will learn those lessons. Q99 Mr Evans: Do you not think they were both guilty, Mark, of gross misconduct, Ross and Brand? Mr Thompson: I do not think I want to go any further than the public statements we have already made about all of the parties. I made it very clear that I thought the behaviour of the on-air broadcasters was unacceptable in this case. Q100 Mr Evans: You would not go as far as gross misconduct for what they did? Mr Thompson: I have said that I believe that what was broadcast was utterly unacceptable and I believe that for the broadcasters, Russell Brand and Jonathan Ross, as we have said already and as I have said and I have made it very clear to Jonathan Ross whom I have spoken to personally about this, that this was completely untoward and unacceptable behaviour. Q101 Mr Evans: If this had happened in any other walk of life, they would have been sacked immediately. Why did you not sack them, Mark, and show real leadership? Sir Michael Lyons: Mr Evans, can I help you because we do want to be as helpful as possible, but I did say in my preface to this that we were not here to disclose information which had not yet been fully considered by the Trust and which will all be made public later. Let me just help you a little bit on this issue by reflecting one of the issues which the Trust has already received some information on, but has not yet finished its deliberations before you bandy around terms like 'gross misconduct'. There can be no doubt at all that you should not expect performers to either use the language or insult people in the way that they did on that programme. However, the BBC has a duty of care in terms of allowing that material to be broadcast. The primary failing, and the failing that the Trust has focused on, is not the antics of performers, it is the fact that that was allowed to go out over the airwaves, and we must not avoid that responsibility; that is the thing to focus on. Now, it will have been contributed to, and there are a number of things which we are seeking to explore, one of them being whether it is right to leave a young producer implanted in a company owned by one of the performers. That is one of the things the Trust is seeking to explore and we have made that exploration public, but, until we have finished this work, I would just be careful about terms like 'gross misconduct' which have contractual implications. Q102 Mr Evans: But will you come back to this Committee ---- Sir Michael Lyons: When you have had a chance to read our published results, if you want to discuss it further, we will, as ever, make ourselves available to take your questions. Q103 Philip Davies: Just following on from this and your responsibilities here, in a bloated bureaucracy like the BBC the advantage for people like you is that there is always someone else to blame. You can always sort of hang a few people out to dry and you sort of get cover. You say that the big problem is that this went out, but do you not think that there is a bigger problem that you two are directly responsible for, that you preside over the culture of the BBC, you set the parameters for the BBC of the kind of thing that is acceptable? Do you not feel personally responsible that people within your organisation thought, under your leadership, that this type of thing might even be acceptable? Do you not think that is a personal failure of both of your leadership? Sir Michael Lyons: Well, no, I do not. What is the right test of leadership? It is not that there will not be mistakes. Now, that would be an extraordinary state to aspire to. It is not that you will not from time to time find members of your organisation doing things which you would not approve of, indeed which you have categorically disapproved of and sought to control. It is how you respond when those circumstances come about. What is a hallmark of the BBC under its current leadership? Firstly, that it does not flinch from apologising when it has got things wrong; secondly, that it does not rush, as some might have encouraged it to do, to defend what, it subsequently becomes clear, is indefensible, but it looks for the evidence before it makes decisions; and, thirdly, and most importantly of all, it holds to account the people who had the relevant responsibilities. The Trust is holding the Director General to account and he, in turn, has held staff and performers to account. Now, I think that is the sign of a healthy organisation, but we are here to answer your questions. Mr Thompson: It is worth saying that the scale of the BBC's operations and the many, many tens of thousands of hours that we broadcast on television and radio and the millions of pages on the web means that, even with, as I believe we have in the overwhelming majority of the BBC, very good and strong compliance procedures in place, there will sometimes be human error. It is the nature of any activity and, I think rightly, in the way we did, as Mr Evans mentioned, with BBC News where BBC News is charged with independently, objectively and fairly reporting what happens, including what happens in the BBC. We have done a great deal over the last four years to strengthen the professionalism and the independence of our journalism and I think we have made enormous progress, but in journalism, as elsewhere, you will sometimes get errors. If I believed there were a pattern of a weakening of compliance across the BBC, I think that would be absolutely a really serious systemic fault. I have to say, I believe, and I think there is good evidence and the Trust has done its own work to look at the compliance culture inside the BBC, that this has been a period where actually across journalism, across non-journalism, in the matter of some of the other areas that have been the focus in recent years, for example, the conduct of competitions and phone voting, we have seen a progressive, widespread tightening and improvement and the BBC's editorial guidelines are far more central to operations in the BBC now than they were five years ago. Now, that is not to say that we should not learn lessons from individual serious lapses, but you cannot have the scale of television and radio broadcasting in journalism and beyond journalism that the BBC does and not expect that sometimes we will get it wrong. There is much, believe me, that the BBC gets right, and we are at the moment a few days after Children in Need, we have Little Dorrit on the air and I think we had superb coverage of the US elections on our airwaves. This is a very uncharacteristic, utterly unacceptable, but genuinely exceptional, lapse, in my view. We need to find out why, we need to put in place measures to make sure we absolutely minimise the chance of it happening again, but it is not typical of the BBC and it is not typical of the way our compliance systems work. Sir Michael Lyons: Mr Davies, can I just come back on the closing part of your question which was about the culture because there, I think, you do have a point which the Trust itself is interested in. Let me just underline that we are on alert as a result of this incident to whether there have been specific problems of editorial control and compliance in audio and radio, and that is where we have focused the Director General to do more work for us, but we have also asked him to draw together all of his senior editorial staff to make sure, because, without going into all of the details, there is evidence there of senior members of staff not being clear of what falls outside of the editorial controls, so we asked him to draw together his senior staff to be clear that there are public expectations here which prevail across the entire spectrum of content of the BBC, and that is an exercise which we are looking at. I am very careful with the word 'culture'. It is used very widely to capture those things which are not easily defined in rules and procedures, and I am absolutely clear that there are important issues there, but we have to be careful in regarding that sort of black box though. The Trust wants to be surgical and that is the only way that we are going to bring about changes to give us all confidence in the future. Q104 Philip Davies: But the point is that you were talking earlier about how only two viewers were offended and five by the end of the week, but surely that is irrelevant. It was not about whether the viewers were offended or not, it was about whether Andrew Sachs was offended or not. Presumably, the viewers, the people listening to it, may well have presumed that Andrew Sachs was part of it and in on this particular joke and they could not believe that the BBC would do anything so crass otherwise, yet, even when you apologised, you did not even check your apology with Andrew Sachs to make sure that he was happy with the wording of the apology that was broadcast on Radio Two. How can you preside over such an arrogant organisation that does not even check with the person who has been offended whether they are happy with the apology that is being broadcast? Sir Michael Lyons: Well, Mr Davies, I concede that it would have been better if that final and very fulsome apology had been checked with Mr Sachs, but let me say that it is not the practice of any organisation that I have been involved with, or, I doubt, of any which you and your colleagues have been involved with, that it is a routine measure to check the nature of an apology before it is broadcast. Q105 Philip Davies: Well, I would have thought it was. Sir Michael Lyons: Well, let us not go into this. Let me just say that I concede that in these circumstances that might have been a good idea. Mr Thompson: It is just worth saying about this final apology, and it was an apology required by the BBC Trust to be broadcast, that the first version of the apology absolutely repeated the full and unreserved apology to Andrew Sachs himself and indeed to Georgina Baillie, his granddaughter. When Andrew made it clear that he also wanted his wife and other members of his family to be included in the apology, we absolutely ---- Sir Michael Lyons: We immediately agreed. Mr Thompson: ---- were happy to agree to that, and the second broadcast of the apology included other family members. That was the distinction between the first version of the apology and the second. Q106 Philip Davies: Finally on this, you talk about systemic failings. Before, the BBC have been here because of The Queen and the fact that things were rigged on The Queen to make sure the programme broadcast was not as it appeared, and we have had the thing about Blue Peter and all of the phone-ins. This seems to me like systemic failure of compliance within the BBC. Last time, we were told there were a load of training courses because obviously the staff of the BBC need to be trained on how not to lie to their viewers and how not to jiggle their competitions! Are we now going to have a new training course on the BBC on how not to launch into offensive messages on people's answerphones? Sir Michael Lyons: Let me, if I can, just elevate this to a slightly more strategic level just for a moment. It is in the nature of the BBC in the work that it does that it takes risks. Which stories it chooses to cover with its journalists, how it seeks to interpret those stories, which programmes it decides to commission or make, which artists it decides to retain, every day, every day the BBC makes thousands, possibly hundreds of thousands, of decisions which are inherently risky and which could prove to be wrong. Either the story is wrong, and it has possibly been broadcast wrongly, information has been assimilated wrongly or a performer goes beyond the bounds of what you might expect, so there are inevitably risks. We cannot come to you and say, or there is no regime that the Trust can impose, nor can the Director General impose, that actually gives you a guarantee that we will not take risks in the future and that things might fail, and it is important that we all recognise that, otherwise, it would be very difficult for us to have a civilised dialogue. In terms of the way that this particular failing has been responded to, it has certain hallmarks. As soon as the BBC Trust and the senior management became aware of it, it was dealt with. It has consequences for people within the BBC who have let the organisation and the public down, consequences which, I would purport, more clearly demonstrated than we find across most parts of the British economy and certainly public organisations. We are here explaining to you not only that those actions were taken, but reflecting your view on the fact that there are lessons to learn perhaps in our press-handling of the future. Yes, there are further steps to take to ensure tighter editorial control. All of our discussions so far suggest that they are not pan-BBC, but need to be focused particularly in audio and music, that is where the Director General is focused, and your proper comment about maybe there is a wider issue of understanding culture is also addressed in the instructions that the Trust has given the Director General. Mr Thompson: The public tell us very strongly that they want us to take risks, they want original, challenging and brave programming, and that is a fact of life. The second thing I would say, Mr Davies, is that it is genuinely difficult to predict every single possible editorial issue that could come up, and we currently have a debate about John Sergeant's dancing in Strictly Come Dancing and whether he should be continuing in the competition or not, and the scenario of whether political correspondents or indeed politicians and their dancing abilities shows up an underlying issue with the difference between the judgment of the judges on the programme and the public at large is a new topic. Our duty, I think, is, when a set of issues arises and, yes, when we make mistakes, to try and understand why, to try and put things in place to make sure that those things do not happen again and to keep as alert as we can across the entire spectrum of editorial matters, but to recognise that sometimes a particular issue, the leaving of an offensive message on an answerphone, will, to some extent, pose new questions for us. Q107 Helen Southworth: We have explored in quite some detail some aspects of the situation the BBC is finding itself in at the moment, but could I ask you if you could explore some other aspects of it which, I think, are extremely important to the viewers and listeners, and that is around the high level of creativity that we expect from the BBC. When we have had evidence from you previously, one of the things that you have lauded about the BBC in terms of its national and international position has been the way it brings on new talent, that it is able to take risks in bringing on new talent ---- Sir Michael Lyons: Yes. Q108 Helen
Southworth: ---- and that has given the Sir Michael Lyons: I feel that is a good and searching question for the challenge that faces the BBC and, in part, conditions how we respond to these failings. I think at one and the same time, and you have had this in public comments both by the Director General and myself, we need to be very clear that there is unacceptable behaviour here, including unacceptable behaviour by the performers, but at the same time it would be, I think, letting audiences down if we left a message that we were in any way going to discourage risk-taking or innovation in the BBC. Of course, putting those two messages together can sound contradictory to some, and that is exactly the line that we are trying to tread here of being clear that the BBC is not losing its nerve, it absolutely has to serve all audiences, that is its requirement, that is its Charter requirement, and the Trust regards that as its primary responsibility, but that does not mean that anything goes. We have standards, and it is quite appropriate for us to listen carefully even to people who have not listened to programmes if they feel their licence fee is being used inappropriately, but Mark really ought to have a chance to come back on the issue of nurturing talent, if you are happy, Chairman. Mr Thompson: I think actually that what Sir Michael has said covers the main point. It is difficult to satisfy possibly everyone in the room, let alone everyone in the country, but we have to act proportionately when we discover problems and 'proportionately' means pretty firmly and in some cases, I am afraid, it does mean parting with important and able colleagues, but at the same time we have to figure out a way within the creative culture of the organisation of making sure that people think they can take legitimate risks, and, I have to say, in the end I believe that the clarity about the standards the public expect and about the BBC's editorial guidelines actually, done in the right way, can encourage the right kind of creativity; it brings a kind of freedom when you understand where the boundaries are. Q109 Helen Southworth: Will you be bringing in some of your big talents to get that message across? Mr Thompson: We will be talking to everyone, including on-air talent, of course. Q110 Helen Southworth: But will they be giving that message out as well? Mr Thompson: I expect, as we go through the process both of the broader discussion about the boundaries of taste, but also in the more detailed work of trying to learn the lessons from this particular incident, that key on-air talent will be a part of that, helping us to come up with the rights answers, but also helping to promulgate it, yes. Sir Michael Lyons: If I could just add a very short PS to that, the Trust will be ensuring that this is not just a debate within the BBC, but actually it is a public debate as well because it is very clear, if you look at the letters column over that particular week of, I do not know the right term for it, hysteria may be not right, but over that week there were many people showing actually quite different views about how one should react to these circumstances and what it should mean for the future. Q111 Helen Southworth: If I can just ask you about one final point, you have been discussing how you are going to manage pre-recorded shows and what the editorial responsibilities and duties are going to be around those, but how are you going to manage live shows? Sir Michael Lyons: Well, clearly, if this could happen with a recorded show, then we have to be absolutely clear that the controls around live recordings are even more stringent. I have to say, although I do not want to have the final word on this, but, from what I see, actually the controls tend to be tighter around live shows because the risk is clearly understood, and that is something which we are looking at again in more detail and we will publish our findings. Q112 Mr Sanders: Was this not clearly an incident just waiting to happen, given how much free rein you give your best-known performers in allowing them to run production companies that employ the people who are supposed to censor them, and is it not unrealistic to expect the star to actually be held in check by somebody that they themselves employ? Does that not actually go to the heart of this? Mr Thompson: Well, as you have heard, we are going to look specifically at whether we need to bring in additional safeguards or whether we change our practice in relation to this particular scenario of programmes which are commissioned by a production company where the stars either own it or have an economic interest. What I would say though is that the existing protocols and compliance arrangements recognise that this adds potentially to risk and that, therefore, the compliance procedures need to be followed particularly carefully in the context of a programme made by an independent production company where the artist has an economic involvement, and there is already across television and radio particular programmes and these programmes are regarded naturally as of potentially higher risk because of that and, because of that, the compliance procedures are intended to be stricter. Indeed, on the programme in question, The Russell Brand Show, there is good evidence of tight compliance procedures for previous editions of this programme. The programme had been running for two years and won a Sony Gold Award because of its quality and had proceeded for a long time without any issues, so literally, if you just look at The Russell Brand Show, although, my goodness me, it has got some quite edgy material in it, the compliance procedures seem to be working. Now, the compliance procedures in this episode of The Russell Brand Show failed and they failed at a senior level, and there are lessons to learn from that, but all I would say is that, even if you look at The Russell Brand Show and the management of this show, I do not think you can go back, as it were, through the audit trail and say, even of this programme, that it was obvious that it was an accident waiting to happen. Q113 Mr Sanders: But have you not actually been here before in 2007 with The Green Guide to Life programme when Ofcom ruled that it exposed a weakness in the broadcaster's compliance procedures? That was almost an identical scenario. The only difference is that at that point The Mail on Sunday did not feel it was under attack from the BBC Local and, therefore, did not broadcast it disproportionately to its readership and actually stir it up more than perhaps it deserved to be stirred up. Mr Thompson: I think what I want to say, almost to state the obvious, is that every editorial lapse that the BBC or any broadcaster makes at some level represents a failure, small or big, in the compliance process, and the scale of what the organisation does means that some editorial lapses, I am afraid, with the best will in the world and with the best systems in the world, are inevitable. What we try and do with our compliance procedures is progressively improve them and strengthen them. Clearly, it is disheartening, having spent so much work on compliance, that an error of this size, the size of The Russell Brand Show, should happen, but, as I have said to you, I think that, although we are going to look at the topic again, and I know this is about television as well as radio, already we have identified, partly because of one or two issues in the past, that there is a need for a special care on compliance on these programmes. As I say, I believe that across television and radio that compliance is generally working very well and that manifestly, in the context of this edition of The Russell Brand Show, the compliance system did not work well. Sir Michael Lyons: Can I just add a short postscript which might be helpful to you, Mr Sanders, which is that one thing that you probably heard me say back in the autumn of last year when we agreed the six-year plan is that the BBC should do nothing that it cannot do well. Now, this issue, I think, comes back to this hearing. If it is the case that the organisation is stretched and that we find any evidence that these failings are because actually it is too stretched, then the lesson will be taken to heart very clearly that the BBC will have to do less, that it can only do what it can control, and comply with, adequately. Q114 Rosemary McKenna: I think the most important debate out of this will be about taste and the balance of taste. As we have seen, I think, this morning and over the last few weeks, the BBC performed a spectacular own-goal for its enemies, and there are many to attack the BBC, but I think the BBC can be held to account and that is really important. I would contrast that with the hypocrisy of the print media who actually have continued to report in detail the actual events that have dragged the life of the young woman at the centre of these awful events through the gutter in fact, and she is the real victim in all of this and I have a great deal of sympathy for her. I think we have to put the whole event into perspective, I think it has got out of hand, but how do we address the concerns of the vast number of people who say, "Yes, we have concerns about broadcasting", and they are principally around taste, they are around the use of bad language, swearing, and storylines? How do we balance that? How do we get that debate going in public without it being used to kick the BBC all over the place? Sir Michael Lyons: Well, I absolutely agree with you, and this is not something that you have from time to time, but I think there has to be a continual debate about what we, as a community, as a nation, as a group of nations, are willing to see broadcast in our name, and that is a particular responsibility for the BBC because of the licence fee and the fact that it makes a universal charge. We cannot dismiss the interest of any part of the licence fee-paying public, but I think you have put it in the right terms, that it is important that this is a debate that reflects all views and is not hijacked by a particular view, and I think that is the challenge for us here, to make sure that the BBC continues to be open to all opinions, understands its responsibilities to the nation as a whole, does not falter in its need to serve all audiences and, inevitably, takes risks in doing that. Mr Thompson: But within a context of one
or two very, very clear principles, for example, the watershed, which is a
rather old-fashioned way perhaps of thinking about this issue. It is really important to households up and
down the country and they find it very, very useful, the idea that before Sir Michael Lyons: Could I just add a short addendum to that, and it is very important that this debate is not just conducted in terms of which expletives are permissible and at what time of the day because, frankly, if you had taken this programme and taken all of the expletives out of it, it still would have been way beyond the boundaries, and the danger with just focusing on the expletives, and to some extent that is the story that we might unfold here, is that actually you miss the much bigger offence of a lack of respect for both the wider audience and for individuals. Q115 Paul Farrelly: Mistakes were definitely made and resignations followed pretty swiftly both at the senior level and at broadcast level, and, Sir Michael, you have highlighted some structural problems in terms of standards and controls when independent production companies are involved, and those issues were also evident in our inquiry into controls over companies running quiz shows. If I can just turn to Mark, Mark, you are the Director General, but do you think there has been a witch-finder general in the pursuit of this affair? Mr Thompson: I do not quite understand the question. Are you suggesting that I might have acted as the witch-finder general or that somebody else has? Q116 Paul Farrelly: Well, is there a feeling within the BBC that some of the coverage of this affair has been pursued as a broader witch-hunt against the BBC? Mr Thompson: To be honest, I think that is, if I may say so, for others to judge. What I would say is that we come here, I come here today to reflect on a serious editorial lapse for which I have personally apologised publicly, the organisation has apologised publicly and I have also apologised personally both by telephone and in writing to the key people who were the victims of it. I think how that happened and what we are going to do to try and make sure it does not happen again, that is what, I said, helps here. I think the broader debate about the BBC and about the various understandable agendas of the rest of the media and how they might play into all of this is really for others to comment on. I have said that I do not think it was unreasonable for newspapers, in particular The Mail on Sunday, but subsequent newspapers, to point to this as an editorial error because it manifestly was. I think it was very extensively covered on our own news bulletins. I was interviewed and, I have to say, anybody who thinks that the Director General gets an easy ride from BBC interviewers really should wake up and smell the coffee. I was interviewed and Michael also had his moment and doubtless will again. I thought, I have to say, speaking personally, that I was interviewed fairly, toughly but fairly, and I think that, if other people get treated in the way I was treated by my colleagues both on the BBC, Sky, ITN and so forth, they would have little to complain about. Sir Michael Lyons: Could I just say that I think the BBC should aspire to better standards, higher standards, than others. I think that is part of its contract with the public, that is the basis on which I and the Trust work and I believe that is the basis on which the Director General works. In the same ten-day hearing, the discussion about whether our apology was adequate or not, two other media offences, one by a newspaper and one by television, in one case dating from 2006 and one from 2007, both were dribbled out into the public domain. I do not think it is possible for the BBC to believe that it could work in the same way. We need to expect to account for what we do and for it to be a matter of public debate in this country. Q117 Chairman: It is worth observing, and I think you would probably agree, certainly in terms of the expressions of anger which were expressed afterwards rather strongly that some of the strongest which came to me, and, I suspect, to you, were from employees of the BBC. Sir Michael Lyons: There is no doubt that, as with earlier transgressions, folks who observe the rules and understand the public expectations of them feel desperately let down, and I think it is absolutely right that both the Trust and the Director General understand that, and that is why in our communications we have both emphasised a message internally to recognise that this is not a brush which should tar every BBC employee or even most. Q118 Mr Evans: Since it came out that Jonathan Ross was earning £6 million a year, I have not come across one person who thinks he is worth that money; quite the contrary. Do you think that it is right that the BBC pays £6 million for one of its stars, Mark? Sir Michael Lyons: Well, I will have the first crack at that because my answer is, surprisingly, yes. One of the things that I do, as Chairman of the BBC Trust, which is actually, if anything, slightly more testing than coming in front of yourselves, is regularly to hold public meetings, and in the middle of a debate in the South West where there were many, many people railing against the Jonathan Ross salary as being inappropriate, actually there were people who were willing to stand up, even in that context, and say that he was the reason that they watched the BBC. Now, I only tell you that because you have asked a question which needed a precise answer and let me now go into the payment of large salaries in the BBC. As you know, the Trust responded to public concern which was very widespread, I absolutely acknowledge that, about the payment of what is referred to as 'top talent', and Oliver Albarn(?) did that piece of work for us. The primary question was: is the BBC paying more than it needs to pay for this talent? There was a clear and unequivocal response from the research that no, it is not, and sometimes it pays less than competitors, but nonetheless, the Trust gave the Director General a very clear message that he should manage these contracts into the future to absolutely make sure that we do not pay any more than we need to, that we need to bring on extra talent so that the BBC always has choice, and, I have to say, I was pleased to hear his comment in public last week that in different economic circumstances it will be possible for the BBC to drive a much harder bargain still in terms of recruiting talent to our screens and airwaves. Mr Thompson: The only thing I would add to that is that I think the public do want outstanding entertainment talent on the BBC's airwaves and, although we do seek to get, and the evidence of the Trust is that we succeed in getting, good value and typically to get top talent for less than even other public service broadcasters pay for them, if the BBC is to have top talent, I think you have to accept that, although, I hope, the market is going to change in the next couple of years, you are going into a labour market where there is intense competition. Even when you grow your own talent, amazingly quickly of course other people are on the phone and you are having to pay something which relates to the market level for talent. Last Friday, we had Children in Need, a record year, and we went over £500 million raised for charity by Children in Need. If you look at Children in Need or Comic Relief and not just the programmes, but the whole way in which the BBC gets behind it, I think it is too simplistic to separate off comedy or entertainment or popular drama from the BBC's public service mission. I think if you spent Friday evening watching what we do on Children in Need, you can see how these household names and their commitment and their passion, from Sir Terry Wogan down, makes a big difference to the British public, and the public, although understandably, when you ask them the question, "Is anybody worth X now?", I think there is a lot of support from the public for the idea of a BBC which has got entertainment alongside information and education as part of what it does. Q119 Mr Evans: Do you think the public might think you were a bit out of touch, both of you, for thinking that he is worth £6 million a year? Sir Michael Lyons: Well, the answer to that of course is that the public has many and varied views, as reflected in this Committee. Q120 Chairman: I would like to put one final point to you. Last week it was announced by Radio 2 that Jonathan Ross would be back on air from 24 January next year. Is it not somewhat premature to make that announcement before you have had a chance to consider the report and decide whether or not further action is needed? Sir Michael Lyons: That is a straightforward statement of when the period of suspension comes to an end. Let me be clear, the Trust has not finished its deliberations and all of these matters are subject to our final decisions. Q121 Chairman: It was an announcement by Radio 2 of the specific date when he will "be definitely back for the show". Sir Michael Lyons: Chairman, I have heard that and I am giving you my answer that there is nothing that is ruled out from the final deliberations of the BBC Trust. That is what you need to hear from me today. Q122 Chairman: Would you not agree that it would have been better to have waited until after you had had your meeting? Sir Michael Lyons: I think it would. There are many aspects of this affair which I would like to have seen handled differently. That is the case we are exploring. I hope we have left you with a very clear message of our intent to get to the bottom of it and to make sure there is no recurrence. Q123 Chairman: So even in the last week the BBC has done something which in your view it should not have done. Sir Michael Lyons: Do you know, I can go a little further than that: I am sure in the last week the BBC has done a few things that I wish they had not. It is a big organisation serving the whole country. Q124 Chairman: We are discovering more and more lessons to be learned by the minute. I think we should now move on to the question of BBC Worldwide. You will be aware of the evidence that we received two weeks ago and also the more general concern that has been expressed about the increasingly ambitious growth strategy of BBC Worldwide. It was previously the case that commercial activities should plainly arise from and support BBC programmes. That appears no longer to be the case. Do you see any boundaries to BBC Worldwide's activities? Sir Michael Lyons: Chairman, I wrote to you, when you first announced that your Committee wanted to look at this area of the BBC's activity, to make you aware of the fact that the BBC Trust had in June of last year decided to look very closely at the mission boundaries and governance of BBC Worldwide and that we had charged the Director General and the Executive Board, as the parent company, to do exactly that. That debate is well advanced. Why did we decide to do that? Because we were concerned, in part - let me not shrink from that, but it was not the only issue - at public debate about the risk to the BBC brand from a growing media collection of programmes, stations, and media products. We had an interest to explore whether there were adequate controls in place to avoid BBC branding being damaged. We were interested in the relationship between the BBC's commercial activities - and earlier questions from Mr Sanders touched upon this - and the straightforward public service activities of the BBC. We raised some big questions. Whilst I am not able to go into detail on all of that here, I can say that the Trust is already of the view that we need to tighten both the mission and the guidelines around BBC Worldwide. But none of this - none of this - detracts from an acknowledgment that since 2004, led by Etienne De Villiers and John Smith, both of whom you will be able to question later on, BBC Worldwide has been remarkably successful in doing the job it was set up to do, which was to exploit BBC intellectual property rights and to bring a return to licence fee payers in terms of both a dividend (this year of £117 million) but also a contribution back to the programme making, so that the BBC is able to do programmes that frankly it could not do without investment from Worldwide. I would add to their achievements the fact that they have - I have no doubts at all about this - helped the British economy substantially in the promotion of British talent, not only in on-screen talent but in technical skills as well. This is in the context of an absolute and unequivocal commitment to the BBC being right to seek to exploit its intellectual property rights for the benefit of its licence fee payers and, second, an acknowledgement that Worldwide since 2004 has been an extraordinary success story. Nonetheless, it is now appropriate to review the boundaries. We are of the view that they need to be modestly contained and the detail of that we will make public once we have finished our inquiry. Q125 Chairman: You have said that BBC Worldwide should exploit the intellectual property rights of the BBC, and I would not necessarily disagree with that, but what BBC Worldwide is now doing goes way beyond the BBC's core activities and a lot of its activities bear no relation to BBC programmes at all. Sir Michael Lyons: I might quibble with the scale of that, but there is a continuum which I absolutely accept. It is, in part, why the BBC Trust was interested in exploring matters at this stage. Q126 Chairman: You think they might have gone too far. Sir Michael Lyons: I have said already that the Trust is of the view, on the basis that this work is not finished, that there is a case, and we intend to move forward with tightening the boundaries around Worldwide activity. The detail of that will be shared with you once we have finished the inquiry. Mr Thompson: First, should the overwhelming majority of the activity of Worldwide be based around BBC intellectual property? Yes, it should and it is. Q127 Chairman: Why not all? Mr Thompson: Let me give you an example.
We have a cable network in the Q128 Chairman: Mark, with respect, I think that is being a bit disingenuous. We are not talking about making available ITV programmes or Channel 4 programmes on BBC America. Mr Thompson: Would that not be an example of BBC Worldwide working with non BBC IP? Q129 Chairman: It is one which I think people would argue was pretty close to the core purpose of the BBC, which is making available good programmes, but there are other activities, such as publishing magazines or putting up websites, which bear no relation to the BBC's programmes. Those are the areas which are causing real concern. Sir Michael Lyons: I think I can help you because actually there is not a distance between us here. The only thing I took exception to in your question - and Mark has dealt with this, I think - was that you were suggesting this was a bigger proportion of Worldwide's activities than I believe it to be. But the question of where the boundaries are in terms of going beyond BBC IP is a real question. It was included in our June list of issues to be explored, and I can assure you is going to be tested very fully and I do not think you will be disappointed with the conclusions that are reached. Q130 Mr Hall: You have said in evidence already that in the Russell Brand and Jonathan Ross broadcast there were serious editorial lapses. Does it not also shine a very bright spotlight on a serious dichotomy at the heart of the governance of the BBC? We have BBC Worldwide accountable to the BBC Executive Board and the Executive Board accountable to the Trust, and yet here, in evidence this morning, you are almost indivisible. Sir Michael Lyons: The art of our presenting to you - and whether we have got it right or not is probably for you to judge - is to show you that you have in front of you the Chairman and the Chief Executive of the BBC. There is no doubt about that at all. As a result of the last Charter we have a quite sophisticated governance arrangement, not a million miles from that being demanded by, for instance, Sir Adrian Cadbury's report of many other companies: a clear separation of governance and day-to-day management. That exists at the BBC and you see that reflected in our comments. That has been added to in the Charter by the requirement that the Trust, as the governing body, should conduct its scrutiny and challenge in a transparent and open way. What you get is the same sort of debate that you should have in any organisation, but much more open and transparent as a result of a governance decision that the BBC needs to be fully accountable to licence fee payers. The short answer is that we are both of the BBC, we have different jobs there. I would hope that is reflected in our commentary and answers to you this morning. Q131 Mr Hall: Correct me if I am wrong, the BBC Trust are charged with two things: they set the strategic direction for the BBC and they are also the regulator for the BBC. There is clearly a dichotomy there. Sir Michael Lyons: I absolutely agree with you that this is a complicated process. First, the BBC has the same regulators for taste and decency as any other broadcaster. It has the same regulators governing any matters of competition. It has the same regulators in terms of fair trading. Parliament decided issues of accuracy and impartiality should remain within the BBC. Why did Parliament decide that? It decided that because it felt that if you had external regulation it would not be long before the external regulator became an influence on the editorial decisions of the BBC. It is quite a complicated model but it is one carefully determined by Parliament to reflect the status of the BBC as an organisation which is funded by universal levy, the licence fee, but where the most important principle was to protect its editorial independence Q132 Mr Hall: Could I put it to you in a slightly different way. What is your primary task? Is your primary task just to regulate the BBC or to speak up on its behalf? Sir Michael Lyons: My primary task is to represent licence fee payers, to make sure that the BBC is focused on their interests and delivers against those interests. There is a series of aspects to that. It is to hold the Director General to account, it is to discharge such regulatory functions as exist, and it is also to give the licence fee payers an assurance not only when the BBC has got things wrong but when after careful reflection the Trust is convinced that it got things right. Q133 Janet Anderson: The BBC's Fair Trading Guidelines state that the BBC's commercial services must maintain clear and separate management structure from the BBC's public service activities. How do you therefore defend the fact that the Chief Executive Officer of BBC Worldwide sits on the BBC Executive Board? Do you not think that that kind of cross-directorship gives an unfair advantage to BBC Worldwide over other commercial competitors? Sir Michael Lyons: Perhaps I could answer that question in two parts and Mike may want to say something about how it works in practice. How has that cross-membership come about? It has come about in an attempt to balance both the commercial imperative for Worldwide against those four tests that Mark mentioned. Perhaps the most important one is the fact that the BBC's reputation should not be damaged. This cross-membership is about how you manage editorial control over what is done through Worldwide. That is the first part of my answer: it is a rational attempt to respond to these tensions. Is it right? Should it continue into the future? Again I would like to give you an assurance that this is on the list of issues which the Trust has set for the Director General and the Executive Board to explore and we are well advanced in our thinking on this. I am not going to disclose our decision today, because the Trust has not yet reached formal decisions, but I can assure you that this will be included amongst the matters that we address and we will make our findings public in the not too distant future. Q134 Janet Anderson: So one of the options that may be considered is a clear separation of the two. Sir Michael Lyons: Maybe. But I do want you to be alert to the tension: you might say commercially and in fair trading terms there should be clearer separation, but then you come back to the fact that brand management and protection of reputation requires very close working. That is the dilemma. Mr Thompson: What is the most important
thing? The most important thing for the
BBC is the delivery of its public services and public service mission to the Q135 Chairman: I would merely point out that the body representing the industry gave evidence to us two weeks ago, PACT, and they did make it clear that they had quite a lot of concerns. Mr Thompson: A survey is published every
year which includes many, many PACT members.
Officials of PACT are absolutely entitled to their view. I will send you a copy of the survey. PACT members, comparing the BBC as a
distributor with all the other distributors in the Q136 Janet Anderson: Surely you can understand why people do consider that this kind of cross-directorship gives Worldwide a commercial advantage over their competitors, because they are clearly going to have, in advance, information that others will not have. Sir Michael Lyons: Let me say again that we have heard that criticism and we are looking at that issue amongst others. I would ask you to recognise from my earlier comments that there are two sets of tensions here. We have to balance both those tensions. I do hear your comment that this appears to look a little too close. I am clear that the Trust, since it was created in 2007, has taken a number of steps to strengthen the fair trading process that operates both at the level of the Trust and at the level of the Executive Board. On the issue of transparent fair trading processes: absolutely, the Trust is committed to that. Is this an issue that we should look at? Yes, it is. Are we looking at it? Yes, we are. Mr Thompson: A final postscript is to assure you that the kind of detailed programme information - "So-and-so is making a programme about X" - never ever occurs inside the Executive Board. In other words, I do not believe there is, as it were, market sensitive programming or talent specific information to which John Smith, as Chief Executive of Worldwide, has access in the Executive Board, bluntly because the discussions in the Executive Board are strategic ones, which do not involve the kind of fine-grained intelligence that you would need, even if you were minded to get some competitive advantage. Q137 Chairman: There are lower bodies. I understand every public service contract division has a commercial board attached to it, where public service representatives meet with commercial representatives. It is not just at the Executive Board that this kind of dialogue is taking place. Mr Thompson: Sure. Of course those boards will often meet with other distributors and other commercial interests as well. Q138 Chairman: BBC Worldwide has no advantage. Mr Thompson: I think this has been tested in this review process, but the current arrangements are designed to ensure there is a level playing field given the particular context at the BBC. This review process is testing two things: could the system be made stronger and could the way the system works be made clearer? Is there a way of building confidence by explaining and setting out the system more effectively as well? That is another possibility. Sir Michael Lyons: Chairman, perhaps I could offer you one comment to elevate this to the most strategic level. There is a real set of challenges here. As we reflect on the job that Worldwide has done very effectively since 2004, not only for the BBC but for the British economy, I think we do need to reflect on the part that it might play in cooperation with other organisations into the future. The tension between a transparent fair trading process but co-operation with some parties will always be a tension, so I just want to recognise that you cannot wish away some of these tensions. Chairman: I understand that. Q139 Helen Southworth: Can you give us an assurance that there is no cross-subsidy within BBC Worldwide because BBC Worldwide is paying less for its BBC entitlement to programmes and is therefore able to bid higher in the open market? Sir Michael Lyons: I can give you a categorical assurance of the framework in which it works. There is a statutory prohibition on any subsidy to the commercial arm from the licence fee payer income. In the complicated world of negotiations, of rights and how they are exploited, this is quite a complicated area. This is why the Trust has strengthened the fair trading arrangements and is at this moment looking at whether they might be strengthened further - particularly the issue of wanting to assure ourselves that the BBC does get the very best value from its rights through the current arrangements, particularly the first-call proposition. These are all matters that are being explored in this review. Let me say that at the moment we have no reason to be anxious that the BBC is not getting fair value. Q140 Helen Southworth: I think you have learned over the past few weeks that you need something beyond not needing to be anxious. You actually need to have systems in place to make sure ---- Sir Michael Lyons: That is right. That is exactly why, first, we have strengthened and will continue to review the fair trading arrangements and, second, the Trust felt back in the early months of this year that we should look closely at Worldwide and have reached an emerging conclusion that the boundaries need to be tightened. Mr Thompson: There is also, it should be said, an annual independent fair
trading audit. That is already in place.
Within the public service there are very powerful incentives for
programme makers to get the maximum commercial revenue they can. For Planet Earth, for example, the big
natural history programme, something like 70% of the budget for that programme
was raised through Q141 Helen Southworth: Beyond that market operation there is a duty on the BBC specifically as the public broadcaster, paid for by the taxpayer through the licence fee process, that does expect a better and more extensive form of scrutiny and a better confidence within senior governance at the BBC ---- Sir Michael Lyons: Absolutely. Q142 Helen Southworth: -- and that you are confident that those things are happening because you have systems in place not because the market operates. Sir Michael Lyons: Absolutely. If I have failed to combine the confidence that we have in the current arrangement with the proviso, as you have rightly established, that one cannot know what is happening in every job in every detail but are we confident that the processes are strong enough, then they are working well. Might they be stronger? That is a continuing dialogue, led by the Trust but on which the Director General and his colleagues are focused, and it is included in this review. I want to give you assurance on that. Again, this is something which, when we reveal our work, you will see reflected in the work that has been going on since June. Mr Thompson: The topic is already taken very seriously within the organisation. Sir Michael Lyons: Absolutely. Mr Thompson: Which is why we had this annual independent audit, which is why we have a Fair Trading Committee on the Executive Board as well as Trust oversight and a powerful fair trading advisory function in the organisation. We recognise that it is a very important topic. Q143 Paul Farrelly: We are going to get to Lonely Planet very shortly. It has, in large part, prompted this inquiry and I am sure in your own review you are talking about it. I want to explore the appropriateness of your £50 million threshold approval which you talked about when you were last here. Before that, I still do not have a feel for how the Trust exercise oversight over BBC Worldwide. Could you briefly explain? In Trust papers - I have not seen them - is there a standard agenda item in which some Trust activities are reported for information? Is there a separate sub-committee of the Trust that considers BBC Worldwide more actively? Are there any particular actions of BBC Worldwide, apart from Lonely Planet, that you can name that have been specifically remitted in your time there to the Trust for approval rather than just information? Sir Michael Lyons: Let me start by going over the structure. The BBC Trust, of course the parent body of the BBC, in this context is probably best seen as the Supervisory Board. The Executive Board is the parent company for Worldwide. Of course Worldwide has its own competent and strong Board itself. What are the respective responsibilities? The responsibilities of running the business, like the Board chaired by Etienne De Villiers - and you will have a chance to speak to him later ----- Q144 Paul Farrelly: We know all this. I wonder if you could briefly address the oversight. Sir Michael Lyons: But it is very important that I do go into this, because if I were to concentrate only on the things that the Trust does from week to week, from year to year, you might miss this underpinning structure which is very important. Of course the Executive Board is focused as the public service owner of Worldwide and therefore manages fair trade intentions and reputation, the four tests that need to be applied. Where does the Trust come into this and how does that feel on a year-by-year basis? The Trust approves annually the annual report of Worldwide, which is detailed in terms of plans - and of course even over a year opportunities come up, but nonetheless that is a detailed plan for the year ahead. Any investment that either involves an expenditure of £50 million or above, or is in a novel area of activity, has to be referred to the Trust. In addition to Worldwide, there have been two other cases in the period that I have been Chairman. Perhaps the one on which I should focus is the decision about bbc.com, the decision whether advertising should be allowed on the worldwide website as a means of drawing income for, amongst other things, to invest in BBC World TV service. That gives you a sort of feel of the issue. Q145 Paul Farrelly: What is the other example? Sir Michael Lyons: Kangaroo is the other issue. Neither of those came up against the £50 million ceiling but were both matters which automatically came to the Trust - it was not a question of being referred - because they were matters of novel activity. Q146 Chairman: There are not any examples where you have said no. Sir Michael Lyons: Yes. Let me just mention that in those three examples there were quite different decisions. In the case of Lonely Planet: a clear yes - always with qualification, so in the case of Lonely Planet very clearly that this had to demonstrate that it really did exploit BBC intellectual property rights. Q147 Chairman: We will come on to that. Sir Michael Lyons: We will come on to that. I am sure we will. In the case of bbc.com: after very careful deliberation and dramatic strengthening of the editorial controls around bbc.com, an approval for that to go forward but under close monitoring and scrutiny. In the case of Kangaroo: not a decision to agree to this but a decision that the Executive could conduct further discussions with partners prior to bringing a detailed case back to the Trust. There were two reasons for that: first, an a priori decision that given the success of the iPlayer it was legitimate to discuss whether there might be a commercial variant with partners, and therefore it was legitimate for those discussions to take place, but, second, the proposition would be shaped by the discussions and therefore there was quite understandably a concern on the Trust's part not to make a decision before the form of the proposition became clear. Chairman: We may come on to Kangaroo in due course. Q148 Paul Farrelly: Again, before £50 million ---- Sir Michael Lyons: I missed out the role of our Finance & Strategy Committee as well, Chairman. Q149 Paul Farrelly: Given that you have this in your memo, are there examples when you have looked more closely at what BBC Worldwide has been doing where you wish the Trust had been given that particular decision for formal approval? Sir Michael Lyons: Let me underline that this work is not finished. Indeed, one of the things I am eager to do is to make sure that your own deliberations feed into that before we do reach a final conclusion, and so I am here, in part, in listening mode today. But I do not start from the presumption that the right way forward is for the Trust to introduce a whole set of more detailed controls. I believe that it does have the right role in terms of the strategic direction of Worldwide and that is why a review of this nature is quite appropriate. It should set guidelines and expectations, but frankly the future that I aspire to is one where all of Worldwide itself has clearer direction on the expectations of it, clearer guidelines on where the little boundaries are, and it is therefore able to operate as an efficient commercial operation within those rules. The notion that this is some form of organisation where we are constantly pulling it back will not deliver the best for licence fee payers. Q150 Paul Farrelly: I understand that. Mr Thompson: The Executive Board and its non-executive Directors play a significant role in pre-examining and weighing up of Worldwide proposals: measuring them against the Four C's - indeed we report against the Four C's - looking at the financial hurdles - commercial efficiency is very important - and looking independently and scrutinising proposals to ensure that the financial challenges that we set (for example, for an acquisition like Lonely Planet) are credible, have been independently evidenced and verified, and so forth. There are plenty of occasions of conversations about proposals that one might consider but which, in the view of the Executive Board with its non-executive Directors, it is decided for whatever reason does not make strategic sense, does not fully comply with the Four C's, does not feel like the right thing to do, and therefore should not go forward to the Trust. Plenty of proposals fall by the wayside. Q151 Paul Farrelly: Clearly you want to make sure that you are not in the position of being perceived by the broader reach of the BBC operations as the doting old granddad who they slip things by while you are preoccupied with the likes of Jonathan Ross. You want to have a measure of ----- Sir Michael Lyons: A reason for not being preoccupied unduly, for not making mistakes that lead to energy being consumed by such things. Q152 Paul Farrelly: Is the £50 million threshold too low? Sir Michael Lyons: No, I do not think it is, but let me again say that these matters are open for review in this process. I can only say that because of the other controls that are in place. Let me just come back on something. As I was going through the different checks and balances that are in place, I omitted the role of our Finance & Strategy Committee which each quarter receives a report from the Executive board outlining exactly the process that Mark has shown to you. That has been a very searching set of discussions. If you want to test whether the Trust is alive and awake on this role, Mr Farrelly, the real question is that less than two years into its life it is doing a substantial job of looking at the guidance, boundaries and expectations of Worldwide, not because of the discussion around Lonely Planet, but frankly much more about a more foresighted view of the difficulties that might entail from running a very substantial international business with the risks that we inevitably see on our own patch magnified across the world. That is really what the Trust has been focused on here. There is nobody asleep on the job. Q153 Paul Farrelly: The £50 million the BBC has claimed is "low in financial terms compared to the equivalent 'shareholder consent' requirement for publicly listed companies." The answer to that is that it is, up to a point, low copper, but it is not with respect to the size of BBC Worldwide, is it? Sir Michael Lyons: I think you will find that it is with respect to the size of BBC Worldwide. What we have here is not a gap between Worldwide and the Trust, where the only things that are considered are those which are either involved in investment for more than £50 million or are new areas of venture. You have in the middle, as we have outlined, the role of the Executive Board, with very close scrutiny and engagement of Worldwide and at a much more detailed level. That is as it should be. Mr Thompson: In the Executive Board we have absolute plc-calibre non-executive Directors. The senior non-executive Director, for example, is Marcus Agius, the Chairman of Barclays. We would expect to apply the full "plc board level" to both financial but also strategic, and, as it were, public service scrutiny to all of these proposals. We are regularly tested by the Trust on that. If I may say so, in exactly the same way we would look at a much broader range of proposals below the £50 million and ensure that the entire direction of travel for Worldwide both makes commercial sense but also makes sense in terms of our obligations under the Charter and Agreement. I would say that in some ways there is a danger of a slight misapprehension of what is going on here and I think you should look quite closely in terms of governance at the extent to which the Executive Board and its controls pass muster in relation to other plcs. Q154 Paul Farrelly: I was just trying to get a feel for that. Mr Thompson: I would hope that in relation to the Guardian Media Group the Executive Board of the BBC would go through a very similar process. I would just say that I would be careful of assuming that the equivalent in our system is BBC Trust versus Guardian Media Group. The Scott Trust I do not think looked at any investment proposals at all. We have the Executive Board which is, inside the Charter and Agreement, intended to operate not in all ways, but in many ways, to the level of and with the same kind of controls in place as a plc board and with Directors of the calibre to do that. Q155 Rosemary
McKenna: Can we briefly cover the issue of compliance
with the four commercial criteria. What
is the purpose of BBC Worldwide? Is it
to bring the Sir Michael Lyons: I am clear on this; the Trust
is clear on this. The primary purpose
for BBC Worldwide existing at all is to exploit the rights generated by the
BBC's work in the Mr Thompson: It is worth adding that it is not some sort of optional extra. Since the Thatcher Government of the 1980s put a requirement on the BBC to regard its commercial activities as important in supplementing licence fees, it has formed a part of successive licence fee settlements and Charter and Agreement settlements under the present settlement. One part of the settlement depends on a significant increase on the commercial revenues which the BBC can derive. We are tasked with doing this. It is interesting that one of the four criteria is around commercial efficiency, of running the commercial businesses in a commercially efficient way. Sir Michael Lyons: Chairman, could I alert you
to the fact that I do have a journey to make to Chairman: That is exactly what I am saying. Q156 Paul Farrelly: Could we turn to Lonely Planet. Every business in its growth is a mixture of organic growth and acquisition. Some would say that British businesses are too balanced, like Americans, in favour of acquisitions. When it comes to the likes of Lonely Planet, which is a brand on its own - it is not a brand that is unheard of that you can develop because you think the name is good - with respect to non-related businesses, such as Hello and Grazia with The Times of India that we have heard about, with respect to spoiler productions, such as other publishing houses often launch, or with respect to independent production houses, whether in the UK or somewhere else, that have first rights of refusal, there is a bit of discomfort that the BBC should be behaving in that sort of way. Sir Michael, in terms of the Trust, what assessment have you made so far of the acquisition strategy of BBC Worldwide and whether its returns have been reasonable? To what extent do you believe it is part of your role to do that? Sir Michael Lyons: You properly capture - and I thank you for that - that any commercial organisation will inevitably, if it has any energy, if it is encouraged by its shareholders to maximise a return, get out and explore the boundaries. I do not shrink from that as both inevitable and desirable. We want a commercial wing that feels that it has the confidence to go out and look for new opportunities and that is what you see reflected in that summary. Do we feel that from time to time it is necessary to review the guidelines? For a number of reasons, particularly focused on those four principles, how you protect the BBC's reputation, how you avoid a situation of complicated funding arrangements that go beyond the existing capital allocation of the BBC, yes, I do think it is appropriate to review those. Let me turn now to your specific question on Lonely Planet. This was considered in detail and at length by the BBC Trust and it was approved. It was approved against the four criteria. The primary reason for the proposition coming forward, the primary reason on which it was approved, was that it was seen to be a clear opportunity to explore a very considerable amount of intellectual property the BBC holds within its archive and within current programmes which relate to travel and international affairs. It seemed a natural extension of the purpose of Worldwide which is to seek to exploit the intellectual property of the BBC. Did it look as if it was a good commercial proposition? Yes, it did - not least because the owners had approached BBC Worldwide as their preferred buyer. It is pretty rare, I have to say, but any company that is approached by a strong organisation as their preferred buyer is in a strong position as the buyer. We were satisfied on the basis of that, and took detailed external advice as we worked our way through those deliberations. You are right to ask what has happened since then. We have received a number of reports on progress. What is my judgment on those reports? Things have developed, as we have expected, but it still remains a matter for further reflection whether this merger will deliver all of the benefits that we expected for this purchase. Does that surprise me at this point in the life of the purchase? No, it does not. But the case is still to be proved. Q157 Paul Farrelly: The notes from the BBC Trust Unit are hardly unequivocal as to whether it fitted BBC Worldwide and the BBC's remit. Essentially, what was wrong with the BBC brand? Why did you have to go out and buy an established brand? Sir Michael Lyons: This was not the first time Worldwide had acquired other organisations as part of its purpose at getting the best value from BBC IP. This was not founded on: Do we want a travel magazine? You might want to query with John Smith and Etienne de Villiers later on the other things that are brought to them which they reject. This was seen as a very interesting vehicle to promote BBC's IP and its brand. It is not a question of independent of its brand. It is the BBC and its intellectual property rights and its brand. That was the test. Mr Thompson: We have many, many powerful international brands BBC News, CBeebies, TopGear, Dancing with the Stars and so forth. We did not have a compelling category brand in travel. We did have literally thousands and thousands of hours of BBC IP content about travel and about other countries - their history, natural history, geography and so forth. The commercial judgment made would be that the Lonely Planet brand would be a very effective, potentially multimedia vehicle, particularly with growth potential on the web, for a large body of the catalogue which did not sell particularly well internationally and getting it away in a much more commercially efficient way. And the test of course will be whether we can achieve that over the coming years. Sir Michael Lyons: Absolutely. Mr Thompson: That is, if you like, the logic behind the purchase. Q158 Paul Farrelly: It is a hard argument to sell, given the power of the BBC brand. You mentioned outside advice. What procedure did you go through to satisfy yourself that the price was fair and reasonable? Sir Michael Lyons: We took external advice on this. Q159 Paul Farrelly: From whom? Sir Michael Lyons: BBC Worldwide of course took advice on this matter. I am happy to give you the detail of that, but I am eager to keep to the time that we have ---- Q160 Paul Farrelly: Very quickly, how did the Trust satisfy itself that the price was fair and reasonable? Let me give you an example. I had the misfortune years ago to be the appointed the person advising the British Government in 1986 on the disposal of the National Bus Company. When the National Bus Company negotiated disposals, we were tasked with providing a letter to the Government along these lines: that the price was fair and reasonable and we would make certain recommendations, such as charges on properties, clawbacks on future sales and the like. The Government mostly ignored that in its rush to privatise, but the mechanism was there. What mechanism did you have in place to satisfy yourself that the price was fair and reasonable? Sir Michael Lyons: If you do not mind, I am going to beg your indulgence to give you this in writing, so that I can give you meticulously the process, exactly which advices were used at which point. It was a detailed process over some months - and I am happy to share that with you - but I am confident that we took all the advice that we needed and took a process of very careful deliberations with the Executive Board and Worldwide before agreeing that this matter could go ahead. Mr Thompson: There was a due diligence process, the shape of which was agreed with the BBC Trust, all of which was open book to Trust and which involved ---- Q161 Paul Farrelly: We must press on. We are going to come to the management, but I am quite surprised, given that you have only named three instances, that you cannot, off-the-cuff, give me those salient details. Could I say as one marker that the level of disclosure in the notes of BBC Worldwide for an acquisition of this size is not the level of disclosure that I would expect from a public listed company in a Super Class 1 or other acquisition document. Sir Michael Lyons: Rather than suggesting for a moment that you might not have a point there, I can offer a willingness to have a side correspondence with you which can be shared with Members of the Committee to test that proposition about whether the levels of disclosure are less than you would expect of a plc in this setting. If you have a point, then that is something that the Trust will want to take on board. Mr Thompson: I would not want you to think that there was not an extensive due diligence process with multiple independent studies. I am very happy right now to take you through it if you like. Paul Farrelly: We will move on to the management. Chairman: Sir Michael's train is going to have to wait a very long time if we get into that, so let us go to Helen Southworth. Q162 Helen Southworth: Could I move on to online video services. We have had some extensive concerns through the local newspaper industry that there is an already crowded market and that the BBC is intending to invest to such a degree in local online services that they have dwarfed the budgets that the local press has to maintain their own websites and that this would have an effect of forcing many of them out of business. Can you explain to us what there is that is different about what the BBC bring, and also what you are going to do about making sure that you are absolutely and scrupulously fair. Sir Michael Lyons: Let me address the second of
those issues and ask Mark to go into the nature of the proposition. The BBC Trust has developed a public value
test which is to test all new service proposals for the BBC. It is in two parts. One part is an examination of the likely
public benefit of the new service and its second part is a market impact
assessment, recognising that it is likely that any new surplus will have an
impact on competitors or others who invested in the area. That is conducted on our behalf by Ofcom
although we commission it. That is
exactly the model that we have applied to this proposition, the local video
proposition, which itself is an attempt to respond to a gap that the Trust
identified in some of its early work - and it is quite a strong finding - of an
appetite for more local material from the BBC.
Coming back to the public value test, that test has been running for
five months now. At our meeting in Mr Thompson: I am sure you know, but for the avoidance of doubt let me say, this
is not part of BBC Worldwide's activities; this is a proposal for the use of
the licence fee to provide an enhanced local service for licence payers in the Sir Michael Lyons: And it will all be public - all of the underpinning evidence. Q163 Chairman: Sir Michael, you, as Chairman of the Trust, will be conducting a public value test and deciding whether or not the BBC should go ahead with these proposals, You will be aware that your comments to the Broadcasting Press Guild lunch, that "nobody can be satisfied with the quality of local news in most parts of the UK" have been strongly contested by the local newspaper industry, but more to the point they see that as you having made up your mind before you have even conducted the test. Sir Michael Lyons: That was a slightly
compressed version of my comments. In
fact I have the text of what I said here.
It might be useful if I read that to you. Ben Fenton from the Financial Times,
who was certainly here earlier on and may still be here, asked, "BBC
Local. I mean, you know it is a very
real threat to the newspaper industry in this country and it is not the fault
of the BBC but the BBC's activities in working on local video, which have yet
to actually have any effect, will not make that better." My response was: "It is a real issue. Absolutely, a real issue. That is why we have the public value test
process, so that this is not just, you know, it is ...." I am sorry, reading this verbatim just shows
that this was not the most nuanced answer.
But let me read it verbatim, as I have started. ".... you know, there is very clear evidence of
the Trust having established machinery which really does test the underlying
issues. Let's just put the two sides of
the book in front of us. There is nobody
who can be satisfied with the quality of local news in most parts of the Q164 Janet Anderson: Sir Michael, you have acknowledged that local newspapers are facing a difficult time and indeed they are. ITV also has its own service, itv.com. Do you not accept that if you launch this service you are going to put them in an even more difficult position than they are in now? Sir Michael Lyons: I do not think there is much to add to my comments really. I absolutely acknowledge those differences and I have underlined that they will be balanced in the PVT process and that is what it is designed to do. The longer term issue, of course, with all these issues of market impact that you have to balance, is that the primary responsibility of the BBC is to respond to the needs and interests of its licence fee payers. It must take account of those impacts and make sure that the gain really outweighs them, but there are always likely to be some market impacts and the thing to judge, particularly in a dynamic situation, is whether we are facing a temporary problem that can be righted by those organisations or are instead facing a fundamental change in the way that news and advertising are delivered locally. These are issues to be debated. I do not have the final wisdom on that. That is why we have this very careful measured process, which is completely transparent, which will balance the effects, and all of its results will be open for public scrutiny. Q165 Janet Anderson: I think most of us would accept that we are facing a fundamental change in the way people access local news. Most of us do it at least some of the time online. But if you conclude that by going ahead with this service you are going to make things more difficult for these people and if you also conclude that you are not going to provide something that is not already provided, will you then not go ahead? Sir Michael Lyons: If we were to conclude that the market impact was so severe that it was stronger than the public value gain, then, unequivocally, we would not go ahead. Unequivocally, we would not go ahead. Q166 Mr Evans: Finally, how important do you consider it that the competition that Janet has just been talking about is not in receipt of any public money whatsoever - local newspapers, ITV - and the BBC is in receipt of huge sums of public money and that therefore this is just a distortion of competition? Sir Michael Lyons: Mr Evans, absolutely that is why we have to do the test. It would not be a test that I would have to apply if I were the Chairman of Trinity Mirror. That is a commercial organisation competing and, therefore, other than observing the competition requirements that we laid down by regulation, they would not have to consider these issues. The BBC is in a different position and quite properly has been charged under the new Charter. It is a duty attached to the Trust to reflect on market impact and balance it against expected public gain and that is what we are doing. Mr Thompson: This issue of market impact
in relation to BBC Local is incredibly important and the process is dealing
with that. I want to say more broadly,
though, that the BBC has been in a number of different ways investing outside Sir Michael Lyons: My only reason to make any comments at that lunch, apart from underlining the robustness of the BBC process, was also to acknowledge that the BBC had not gone into this because it had nothing else to do. It was responding to a clear public demand for more local material. I think that challenge remains. Whatever the outcome of the BBC, that challenge remains, and arguably not for the BBC alone. Mr Thompson: It is not a new debate. In
the 1920s the local and regional newspapers ran a successful campaign to
persuade the BBC not to broadcast any news before Q167 Chairman: We have kept you for some time. Thank you for your patience. Sir Michael Lyons: I will take your good wishes to the Welsh Assembly. Chairman: Indeed. Witnesses: Mr John Smith, Chief Executive, Mr Etienne De Villiers, Non-Executive Chairman, BBC Worldwide, Ms Zarin Patel, Director of Finance, and Ms Caroline Thomson, Chief Operating Officer, BBC, gave evidence.
Chairman: I would like to welcome to the second half of this session the Chairman of BBC Worldwide, Mr Etienne De Villiers, and the Chief Executive, John Smith, together with the BBC's Chief Operating Officer, Caroline Thomson, and Director of Finance, Zarin Patel. I am sorry that we have kept you waiting. I should say that it is not necessary for each of you to answer ever single question or we will be here until supper time. Nigel Evans is going to start. Q168 Mr Evans: Good afternoon. BBC Worldwide I know is tasked with making money but it also appears to be making enemies along the way. Are there any barriers whatsoever to your operations? Mr Smith: It is fair to say that we are obviously in the middle of a debate about Worldwide at the moment and this Committee is rightly looking at it. These debates are cyclical and it does come round from time to time. Indeed the very last time, at the time when the BBC's Charter was being renewed four years ago, much of the debate was centred around a belief in some quarters that the company was underperforming in all sorts of ways, had loss-making businesses and so on. We have spent four years collectively addressing the concerns that were then in the air: that underperformance, that the role of the Chairman and the Chief Executive had not been separated and that there were no non-exec Directors and things like that. Those concerns have all been addressed and the company over the last four years has been growing. That growth has led to an almost doubling of its turnover and a tripling of its profits. Of course success means that we are doing more things now than we were doing four years ago, and the more we do, the more inevitably competitors who occupy similar spaces find what we do a problem. I think there is an inevitability about it. In answer to your question, Mr Evans, about the boundaries, I think the previous session touched on this a little bit but let me just say a little bit more. The key boundaries are those that are very clearly laid out in the Charter. The four commercial criteria that were mentioned earlier - and we can go through again if you would like - are laid out in the Charter as an absolute prohibition on doing anything which is outside of those four criteria. There are other controls obviously. For example, there is a borrowing ceiling imposed on the company by the Treasury which imposes a restriction on the amount of money that can be borrowed and therefore that can be invested. That acts, in a way, as a sort of fifth criterion on top of the four. On top of that, the strategy of the company must be approved - and indeed was approved by the Trust - before we are then able to come forward with any individual proposals for doing anything new. It is safe to say there are quite a lot of controls in that process and they are all laid out in the Charter. Q169 Janet Anderson: There was a bit of a discussion in the earlier session about the cross-directorships. You and Mr Smith sit on BBC Executive Board and it is claimed to us that that did not give you an unfair commercial advantage because the Executive Board did not discuss forward schedules in advance and so on. Could you just tell us a bit about what you are privy to on the Executive Board, so that we can have a clearer idea on that. Mr Smith: Most definitely. I think the best way of answering this question is to think that there are two relationships that BBC Worldwide has with the BBC. One is a vertical ownership relationship, whereby 100% of the shares of the company are owned by the BBC public service. As you would expect in any group structure with a subsidiary, there are issues to do with that relationship that need to be handled. The other relationship is a horizontal one, in that the BBC provides some of the product which Worldwide then exploits around the world - indeed, the majority but not all of it, as was mentioned earlier - and there are issues around that horizontal relationship. I think the point that was being made earlier is that the crucial thing that the Trust needs to ensure in relation to the fair trading system is that the way in which product is passed over that trading relationship, the horizontal one, is done entirely fairly, with all the appropriate checks and balances, observing the Fair Trading Guidelines, with the independent audit and all those things that were mentioned earlier, such that there could be no unfair advantage given to the company in the acquisition of those programmes, the acquisition of that product, for Worldwide to then exploit around the world with some kind of inherent advantage. On the other hand, as a subsidiary of a company whereby the shares are owned entirely by the BBC, there are issues to do with the BBC wanting to have control of its subsidiary and to know what it is doing, and also wanting the subsidiary to know broadly speaking what the parent is doing. After all, do not forget that both companies share benefit from and build the BBC's brand all around the world. They both have exactly the same brand, and it is very important from that point of view. In addition - and maybe Zarin Patel will say more about this - BBC Worldwide is contributing about 20% of the Group's total turnover. These are quite important relationships as parent and subsidiary, and I think it is for that reason - and it is not my decision of course, it is Mark Thompson's decision - that he has asked me to sit on his Executive Board. In a straight answer to your question as to what we talk about around the Executive Board: we never talk about programming issues. Indeed, in so far as BBC Vision (who produce the programmes of the BBC that we then buy) are going to make any commissioning decisions, their commissioning strategy is published for all distributors and all suppliers, for them all to see at the same time, and we at BBC Worldwide get it when independents or anybody else would get it. That never happens at the Executive Board; it happens in other ways. Q170 Chairman: The Head of BBC Vision does not sit on the board of any other independent production company. Mr Smith: No. Forgive me, Chairman, I was answering the question about my own position on the Executive Board, although we could talk about that as well. The kinds of things we talk about around the Executive Board, as Mark Thompson said, are strategic. They are about the long-term direction of the BBC, the issues facing it, the long-term funding issues, the role Worldwide will contribute in that regard, et cetera, et cetera. They are that kind of thing. They are not anything to do with individual programming. Q171 Janet Anderson: Are you satisfied that that horizontal relationship, as you describe it, is carried out fairly at the moment? Do you think it is done fairly? Mr Smith: Yes, I am. I would say, as was said earlier, the panoply of controls that are around it are really very, very substantial. I would love to be judged, personally, based on the performance of a company with people crystal clear that there is no unfair advantage being given, than through some peculiar and rather unwelcome or unwanted help that is given because of that system not working. We have to bid for the rights to every programme that the BBC makes in order to try to win that programme from the BBC. There is a first-look agreement, which we will explain in a minute, but basically we have to bid a market rate for every programme that the BBC is supplying. We pass on some because we look at them and decide we do not want to bid on them - because it will not fit with our catalogue or we do not think we can make any money out of it - but we bid on the vast majority. We do not win all the bids. We lose 15-20% of all the programmes that are offered because we have not bid enough or, alternatively, because we have decided not to bid at all. And then the BBC offers those programmes out to the rest of the market and other people end up getting them. There are plenty of examples of programmes where we are not winning bids, we are not offering a bid that is good enough. That system is designed to ensure that we are regularly tested on the amount of money that we are paying for the individual programmes against the amount that other people in the market-place are willing to invest. Of course there are some times when we overbid and sometimes when we underbid, but, broadly speaking - and I am just going to stray because I think it is important to answer another question that I think the Committee may have - the way of judging whether or not we are paying the right kind of price for these programmes is are we making a decent return? If you look at our annual report - and indeed we are willing to give any more information that is necessary - the return we are making at the moment is 13% return on sales across the entire group. That is a good return in the context of the media industry, and we can only be doing that if we are paying a relevant price for the programmes. We could not do it if we were overpaying for the programmes, as some people were suggesting. Q172 Janet Anderson: Zarin Patel, I know you sit on the Worldwide Board. Do you see any conflict there? Do you have any problems with that or do you feel comfortable? Ms Patel: I do feel comfortable. My role as Group Finance Director of the whole BBC is to manage financial risk and to control financial risk - the control relationship that John Smith talked about. Worldwide is a significant commercial operation. It has significant overseas revenues, for example, so it has much more risk than, say, the licence fee income would have and therefore it is important that the Group Finance Director is in a position to be able to control the activity. You will also find that in public limited companies where there is a significant subsidiary, perhaps a quoted one, the group CFO will sit on the subsidiary's board. The objective assessment of commercial efficiency is also another part of my role. As a non-executive Director you can challenge that much more from the inside and understanding how the whole company is run, than through papers from outside the company. In essence, I do not take part in the commissioning decisions. I do not take part in the role of the commercial agency which tests market value. Neither do I take part in the initiating or shaping things from the Worldwide perspective either. That is the management team's job. Q173 Janet Anderson: In both cases does your remuneration reflect the fact that you sit on both? Ms Patel: My remuneration does not absolutely reflect any of my non-executive Directorships within the BBC. Mr Smith: My remuneration is determined by the performance of BBC Worldwide. Q174 Chairman: As non-executive Chairman, how often do you feel it necessary to rein back John Smith from pursuing various options because you feel they may be straying too far beyond the remit of the BBC? Mr De Villiers: As Chairman of any company, and especially this one, I am tasked with the fiduciary duty to shareholders to act with due care and concern and loyalty to those, so I really act to help the Trust in fulfilling that role to the licence fee payers. I do come to this with an independence and an objectivity. I believe it is fundamental that we meet the commercial criteria that we have established and which I believe to be reasonable, and we have very healthy debates. This is an organisation which - I think by virtue of the iconoclastic nature of British education and the BBC - no one is afraid to talk back to the boss, and so we do have very healthy debates. We try to make new mistakes. I think this is a creative industry and people only snuggle when they move forward. This is what I did at Disney. I did this for 15 years. We did it by building a small, heavily subsidised international television business of some $16 million turnover in 1986, to north of $1 billion. In doing that we created local programming on a weekly basis of over 250 hours. We spread Disney branded product reaching 250 million viewers. We did that with a far more fragile brand than the BBC brand is. It is very clear from my accent that I am not from these parts, but one of the reasons why I live here and one of the reasons why I love being here is because of what the BBC meant to me as a young South African growing up and listening to BBC World Service and then being exposed to what the BBC stood for in the late 1960s and early 1970s as a student. I get what this brand is and I get what managing brands are. I can say with hand on heart that this is a group of people I am incredibly impressed by. I am impressed by their abilities, I am impressed by their diligence, I am impressed by their kindness, I am impressed by the responsibility that they feel towards the brand and they feel towards the licence fee payer. In answer to a very short question I have given a very long answer, but we have had at least 30 initiatives that we have squelched. Some have never come to the Board. Q175 Chairman: We being whom? Mr De Villiers: BBC Worldwide. Q176 Chairman: Where have the initiatives come from? Mr De Villiers: The initiatives have come from within the system. Because the staff and the executives have a very real understanding of "If you do not stand for something you will fall for anything" these people stand for something, so they have a clear idea of what would be compatible, what would be consistent, and what would make sense. I think over 50% of those initiatives were stopped before they even came to the Worldwide Board. Of the number that came to the Worldwide Board, we did debate the number of them and we rejected a number of them. I think it is a very healthy system. There are checks and balances. We have the internal reporting systems which Sir Michael and Mark talked to, but I am comfortable that this is not over controlled. This is appropriately controlled, but it is more controlled than Disney ever was. Disney was monomaniacal about maintaining its brand. It is such a tenuous connection between what their programming stood for and the confidence that mothers and care-givers had when leaving their children in front of the television set. We all make mistakes but hopefully very small ones. Q177 Chairman: This is slightly different. The concern here is market distortion and whether or not it is appropriate and whether there is a proper separation between the main BBC and Worldwide, which is not a consideration which applies to an organisation like Disney. The BBC said to us that the non-executive Directors have the right to refer a proposal to the BBC Trust if they have concerns that it may not be compliant with the commercial criteria. Have there been any occasions on which that has happened? Mr De Villiers: As you have heard from Sir Michael, one of the four that have been referred to the Trust in the time that I have been there met the threshold, and three of those were referred because there were sensitivities. I know I have that right at any point. If I felt that Worldwide was going down a path that I felt uncomfortable with, I would go and refer to the Trust. In fact, the publishing of the Lonely Planet magazine was an issue that Nicholas Eldred, who is the General Counsel of the company, the BBC, as well as the guardian of the Four C's (the four commercial criteria), felt that the Trust should be aware of and so he went into the system in order to raise it as potentially a concern. In addition to that, the COO of this company will meet on a monthly basis with the Trust Unit to discuss commercial criteria. There is an ongoing formal and informal system, therefore, that ensures that any issues that might be of concern will be raised. None to date is the answer, because we have never got to that point where we felt ---- Q178 Chairman: You have said that the Lonely Planet magazine had been referred up to the Trust. Mr De Villiers: It was put into the process. I would need to have Caroline explain the distinction. Ms Thomson: It has not, as far as I am aware, been referred to the Trust. When Lonely Planet was acquired, one of the key strategic aims of it, as my colleagues will tell you, was to be able to launch a magazine along with a much revamped website. When the decision to launch the magazine came up to the Worldwide Board, it was felt by one of the public service non-executive Directors, Nicholas Eldred, who is our General Counsel, that it had to have a separate compliance process, which it would not normally have had, to see whether it met the Four C's. So the non-executive Directors on the Worldwide Board invoked a Four C's compliance process, which otherwise would not have happened. Q179 Chairman: Has that been completed? Ms Thomson: It has been completed. It has not had to go to the Trust because it was completed satisfactorily. Q180 Chairman: The Four C's you think have been satisfied by the Lonely Planet magazine. Ms Thomson: Yes. Mr De Villiers: Yes. Q181 Chairman: Including the one that is stopping it distort the market. Mr De Villiers: Yes. Q182 Chairman: Despite the fact that we have publishers of trade travel magazines who are saying they will go out of business if it goes ahead. Mr Smith: Caroline has said that the Four C's process has been gone through and we have satisfied that process - that it complies and therefore does not distort the market. I think the trouble in the commercial world is that if you enter any market space it is easier to say that. Entering the space itself is going to distort the market. If you take magazines as a specific sub-set of the things that BBC Worldwide does, indeed it is where Worldwide began. You will recall the whole company began in 1923 with the publishing of Radio Times. That was a magazine which, by the way, does not carry the BBC's brand on it. It started its life as a magazine publisher all those years ago - we have been doing it for 80 years - and now publishes about 60 magazines in various sub-sections of the magazine market; for example, food, cars, and so on. If you take a sample of those sub-sections - and recently we have launched a Match of the Day magazine into the football market for the football magazine market, and we have magazines in food and those other sectors - what tends to happen - and we can provide the evidence for this - is that the overall market in that sector grows as a result of our arrival, rather than shrinking. Whereas people fear that we are going to stifle competition, that does not happen at all. More magazines occur as a result of the magazine growing, because more people have an interest in it. I will add, if I may, Chairman, that when we watched the evidence being given a couple of weeks ago to you, we were surprised by and did not know that Wanderlust magazine - which I must say is a great magazine and I read it regularly - was having its tenth anniversary on the day that we were proposing to launch the Lonely Planet magazine. We just did not know that. In deference to Wanderlust - and I have contacted the lady since the day of the evidence - we have put back our launch because we absolutely do not want to stifle competition. It is not in our interests at all to stifle competition. We want the competition to be healthy and fair and cause the market to grow and not to find companies like that suffering as a result. We have moved our own launch. If there are more things we can do to help Wanderlust in its mission, bearing in mind its values are similar to our own in the travel space, we will do it. Q183 Chairman: We are going to return to this in greater detail but I cannot resist pointing out that Wanderlust's concern was not that you were launching on the same day as its tenth anniversary but that you were launching at all. Mr Smith: I sought to answer both ---- Chairman: If you really want to help them I think they would say that the best thing you could do is not to go ahead. We are going to come back to that in more detail. But I will bring in Helen Southworth first. Q184 Helen Southworth: How do you ensure that when you are purchasing the rights to BBC programmes that you are paying a fair market price? Mr Smith: Chairman, I think there are two angles to that answer. There is what we do as BBC Worldwide to bid the right amount, and then what the BBC does to make sure it is receiving the right amount. Let me deal with the first and maybe Caroline will deal with the second. We have a process which by the way is identical whether this is a BBC programme or a programme coming from the independent sector. It is absolutely the same. We essentially ask our sales force who are out in the field around the world, in lots of offices in lots of countries, selling programmes all the time, and our other businesses who may well benefit from buying a right (for example, DVD or selling the programme on to UKTV in the UK or our channels around the world or our magazines or whatever bit of the business is likely to benefit from buying the programme) what they think they can make from this particular programme in the market. Often we have not seen the finished product, so we are exercising that judgment before we have even seen it, but on the basis of our understanding of the talent, the director, dah-de-dah, we take a view about how much money we think we are going to be able make from it. When we have done that, we then discount it, take a view about how much money we think we need to make by way of profit from it and then make a bid. Sometimes we get it wrong, sometimes we get it right, but we try to do it exactly fairly across independent and in-house, across all genres, in exactly the same way. The net effect, as I have already mentioned, is that overall our portfolio of activities we are earning a 13% return on sales. Ms Thomson: Obviously the mirror of that
is how does the BBC make sure it is getting the right money from Worldwide or
indeed from the other distributors.
Worldwide is our preferred partner, but, as we were saying earlier, some
15-20% of our output goes out to other distributors as part of this
process. The crucial thing is that the
process at the public service end is run by something called the Commercial
Agency, which is part of BBC Vision. It
is part of the public service side. It
has no managerial relationship with Worldwide at all. It is run entirely independently. It is a team of some 28/30 people. They are employed for their expertise in understanding
the markets. They are run by a former
Managing Director of NBC in Q185 Helen Southworth: There is a little series of questions that I want to ask which moves from place to place, I am afraid. How do you ensure that you do not have any form of cross-subsidy, perhaps from something on which you have made more money through the BBC or on which you have made a better bargain through the BBC, to enable you to overbid for other programmes that that you are buying on the open market? The allegation could be that you are using licence fee payers' funding in order to allow you to overbid in the market. Mr Smith: On a point of clarification, taking the very last point first: there is no licence fee payers' money involved in this at all. That is very, very important. All of this is commercial money that is being invested to buy the rights in order to then exploit them around the world. That is very, very important. Q186 Helen Southworth: This is why I say there is a little sequence of things. If you were to buy from the BBC when you have a preferential bidding process at a reduced rate, that would be a subsidy. Mr Smith: That would be. Ms Thomson: The first check is at the BBC end, the public service end, at my end and at Zarin's end of it. We make sure that they are not able to underbid because we benchmark and market test the prices they pay. That is the first level of security, that you are not able to make an unreasonable profit. Q187 Helen Southworth: The second one would be that you would use your commercial weight or the fact that you have a preferential buy-in from a huge supplier to distort the market by overbidding. Mr Smith: If we were overbidding, we would not be able to earn a 13% return across everything that we do. If we were overbidding, we would not make any money. Q188 Helen Southworth: If you were cross-subsidising, you could still overbid, and that would have the effect of distorting the market for those people who did not have that huge supply. That would enable them to bid above what they thought might be the market price for a specific programme they particularly wanted to get because it would give them market share when they were selling it. Mr Smith: We are just one of the
distributors in the market-place. We are a big distributor. By Mr De Villiers: It is important to understand that although I am not part of that process - it is done at a level below that at which I am involved - this is a process which I am familiar with. You bid on programmes by establishing your ultimates: how much you believe that particular programme will earn in its various levels of exploitation. You never know upfront. Nobody knows anything in the film and television system until after the event, and then we are all geniuses. But you try to do your very best, and you make a programme. Some work, some do not. It is humbling to most. You need to have a system that measures against that, so that if you are consistently overestimating certain tracts of revenues you need to learn from that. This is done on a case-by-case basis. I know, because John and I talk about this and he gets annoyed with me, that we keep pushing to see whether we can do it better. Can we bid more effectively? Can we acquire more effectively? Within that process it is very hard to see how a systemic overbidding can occur when each one is looked at on a case-by-case basis, because it just would not happen. Q189 Helen Southworth: We have had representation - I think that is probably the best way to put it - during these hearings from people who suggested that it would be far fairer if the BBC were to allow tenders for the process of sales rather than having a direct and automatic process for BBC Worldwide should it wish to have its stuff. Why do you not do that? Mr Smith: The relationship between BBC
and BBC Worldwide, bearing in mind the companies have the same brand, is
underpinned by an output agreement, by a supply agreement, if you like,
which is called the first-look agreement.
The first-look agreement is a typical feature of the media
industry. If you went to see any of the
majors - and maybe Etienne could speak from the Disney experience - you would
expect to have that. All it says is: We
give you the chance as Worldwide to bid.
That is it. It is a first
look. It is not any advantage in terms
of price and there is no guarantee you are going to get it either. As I have already mentioned, we lose about
20% of the stuff because we are not bidding the right amount. The reason why you have a first-look
agreement is because, by having a preferred distributor, that preferred
distributor is given the incentive and the means to make the big investments
necessary to build brands over a long period of time; for example, launching a
suite of BBC branded TV channels around the world. Mark Thompson mentioned BBC America. In Q190 Helen Southworth: That was a very interesting answer but it did raise with me the question about the BBC's role in generating children's television. For example, it is the BBC which commissions In the Night Garden - a wonderful programme which raises my spirits very often - for the British public - not, with all due respect, for the Americans or wherever else, but for our interest. Ms Thomson: Yes. It is very, very important that the BBC
carries on making programmes for British audiences and that that is the
imperative, serving licence fee payers.
It is what we are all here for.
We get £3 billion a year from licence fee payers. That is what we are here to do. If we can, having done that successfully,
make money out of it which helps offset the licence fee by selling them
overseas or exploiting in other ways, then that we are also charged to do. It is very important that the primary motive
in the BBC is to make sure that we make programmes which delight British audiences
first, and then John's activities come second.
When we look at how we are going to exploit these programmes, having
made them, we have a number of considerations we make in pursuing the strategy
of having Worldwide as our preferred supplier.
The first is obviously we want to maximise revenue, so we have to be
convinced that that is happening. I have
explained how we feel that we get the benefits of the market by doing this
benchmarking process and by having the Commercial Agency, which means that we
would not get more benefits from simply fragmenting the sales, but it is very
important to the BBC that in addition to that we have a number of other
things. One of the key things is control
of the brand and how it is exploited, so that if we are going to have CBeebies
channels in Q191 Helen Southworth: One of the suggestions that you have made to us was that it would be at no cost to the BBC if we were to put out all these programmes to the highest bidder and that would then guarantee that you were getting the highest price. Can you explore that a little bit with us? The evidence we were given at one point was that all the BBC would need to do was to send an email out. Ms Thomson: Yes, I saw that. Q192 Helen Southworth: That was something that I found a little surprising. Ms Thomson: Obviously it is an issue for us to make sure that we have a system which is commercially efficient in how we do this. We do not want to have to have an enormously elaborate infrastructure. As I have said, we have about 28 people running our Commercial Agency. Within that, we feel we can effectively benchmark. We do not think we could get better commercial returns. 20% of our output is already distributed by other people. We are able to benchmark what Worldwide pays us against that. We do not feel we would get significant commercial advantage from doing it any other way and we think we would lose significantly on the asset creation and the brand support that we get under this system. Q193 Chairman: Caroline, you have suggested that occasionally the BBC in-house production, BBC Worldwide, would come to you for first refusal and say, "We wish to have distribution rights for this BBC production" and you would say to BBC Worldwide, "No, we do not think you are paying sufficient for them. We are going to put it out to the market." Ms Thomson: Yes. Q194 Chairman: Can you give us some examples? Ms Thomson: It happens in about 20% of programmes. Mitchell and Webb is one of the recent ones. Q195 Chairman: These are distribution rights. Ms Thomson: Distribution rights. We could send you a complete list. Merlin is a recent one, but that is an indie one but we had the rights to it. Vanity Fair. We can give you a longer list. Q196 Chairman: It was also suggested to us in the evidence we received that there had been reports that producers were threatened by the loss of a commission if they did not agree to give distribution rights to BBC Worldwide. Ms Thomson: If there are reports of that, I would like to see them. That would be wrong. We run the system on the basis that that should not happen. Any individual examples of that, send them to us and we will investigate them. Q197 Chairman: You do not believe that could possibly happen? Ms Thomson: I would very much hope it cannot possibly happen. It should not happen. Q198 Janet Anderson: Is it fair to say that UKTV has first right of refusal and sometimes less right of refusal? So that if they said they did not want a programme and then it went to a third party broadcaster, who made a bid, would UKTV get another chance to match that bid? Mr Smith: You meant UKTV presumably? Q199 Janet Anderson: Yes. Mr Smith: UKTV is a 50% owned subsidiary of BBC Worldwide, where the other 50% is owned by Virgin Media. The discussion we have just been having is about how the rights arrive in Worldwide in the first place. We have bought the rights, or, indeed, we may have bought them from an indie or in some cases they may have been self-made. Having got the rights, we then supply them to UKTV under a completely separate agreement - it has nothing to do with the relationship with the BBC at that point, because we already have them - and from that point on it is an entirely commercial transaction; in other words, there is no public service angle on that trade at all. Q200 Paul Farrelly: I want to come back now to Lonely Planet, first on the tack that we have just been pursuing. Lonely Planet, the company, I presume is a 75%-owned subsidiary. Mr Smith: Yes. Q201 Paul Farrelly: It is one holding company with a number of subsidiaries in the Lonely Planet Group, is it? It can be treated as a 75% subsidiary? Mr Smith: Yes. Q202 Paul Farrelly: How does the Lonely Planet magazine fit into that arrangement? Will the Lonely Planet magazine be vested in BBC Worldwide or the 75% subsidiary? Mr Smith: The only way of answering that is just to explain that in the decision to buy the company in the first place, to get the 75% stake - and it has already been mentioned earlier on today - the key part of it was the fact that in the travel space we have a lot of programming. We think we have about 3,000 hours of TV programming that is in that zone of pure travel, Palin Goes Around Europe or whatever, or travel-based, like Coast or Britain from Above and things like that. We as a distributor primarily are concerned with getting that material sold to other people or, indeed, into our own channels. When you do not have a uniting brand, when you do not have a big resonant brand to gear up that sale, you are essentially selling individual programmes in the spotlight. Q203 Paul Farrelly: I understand that. Mr Smith: It is very important though. Forgive me, it will sound longwinded, but it is important. The idea of Lonely Planet gives us the ability to have the number one globally respected brand in travel guide books, which is Lonely Planet, as a lever, if you like, from which to leverage up our sales of the rest of what BBC Worldwide does - of which whole TV programmes is the most important, followed by sale of clips (of which we think we have about 15,000). In addition to that, there are websites, there is the lonelyplanet.com website, and magazines. We have a division that I have already mentioned which publishes 60 magazines. Part of the decision-making in buying Lonely Planet in the first place was the certain knowledge that, unusually, here was a respected brand which shared almost identically the brand values of the BBC that would give us a chance of unlocking our TV archive but, in addition, would benefit each one of our other six divisions - DVDS, magazines and so on, and magazines being one. The way it will work in practice, having taken the decision to make the investment and looking at the economics of the commission in terms of the effect on the entire BBC Worldwide Group, is the magazine division will then develop the magazine using their skills and expertise in running magazines. I am sure you know, a lot of their magazines are number one in their little market sector, but not all of them, but they use their expertise and creativity to develop the idea of a magazine, the proposition for it, and develop the price point and the exact positioning in that sector and so on. Then we will start writing and creating the editorial. They will commission writers, many of whom are BBC presenters - Sir Stephen Fry is a good example: somebody who will appear in the first edition, who is currently on TV with his American programme - and other people who are Lonely Planet authors, independent people and so on. The magazine gets put together, and the magazine division will make the profit and they will pay to the people who are contributing to that - for example, brand or editorial or clips or other material - an appropriate market rate on exactly fair market terms within the Group. Q204 Paul Farrelly: What will remain within the 75% subsidiary that you have bought? The guides it produces now. It will receive a fee. Mr Smith: Yes. The guides will remain in there, the lonelyplanet.com - I do not know whether you have visited lonelyplanet.com, but one of our key other reasons for buying is because we think we can significantly improve the Lonely Planet website Indeed, it re-launched last week, in a series of re-launches that are going to come for it over the next few months - it has just started really - because we think that we can build what are currently six million unique users to that site into an even bigger number and make more money out of it. But that is something that sits within Lonely Planet, the company. Those two things crucially stay there. There is also a television production unit within Lonely Planet which will stay there, and there is a stills and picture images business which will stay there. Most other activities will probably - and this is not a hard and fast answer because we might change that - stay in other parts of Worldwide but using the same brand. The effect of the acquisition has an effect not just within the Lonely Planet company but also across the whole Group. Q205 Paul Farrelly: But it is only a 75% subsidiary. Mr Smith: Yes. Q206 Paul Farrelly: Will the Lonely Planet group of companies pay any fees for access to any BBC material? Mr Smith: Yes, absolutely. Q207 Paul Farrelly: Can you give us some examples? Mr Smith: At the moment there is not any BBC material appearing on our Lonely Planet service, apart from the new website which just launched, where there are only clips, but they are paying market rates for those clips. Q208 Paul Farrelly: Particularly at the time of the credit crunch, the BBC is privileged in terms of its access effectively to public finance. Other people for acquisitions may find it difficult, particularly in these times, to gain access to that finance. Again there will be self-interested moans that the BBC is in a privileged position, which will grow if you make more acquisitions. You will appreciate that. Mr Smith: It is not true, of course, Mr Farrelly. Q209 Paul Farrelly: But that is the perception. Mr Smith: The money is borrowed from the commercial money markets at commercial rates and has no BBC guarantee nor government guarantee. Q210 Paul Farrelly: But that will be the perception, so we need some transparency. You have heard me say before that the note in your accounts is not the level of disclosure that I would expect to see ----- Mr Smith: I am surprised at that. Q211 Paul Farrelly: -- from a public ---- Ms Patel: May I pick that up? First of all, the BBC Annual Report and Accounts at note 19 has full disclosure, as required by plc type accounts, of the Lonely Planet acquisition. Worldwide produces detailed financial statements which are also publicly available. That is a summary set of financial statements. It is all fully available. Q212 Paul Farrelly: Okay. Would you just give me some basic figures and facts to work on? Where is the Lonely Planet Group incorporated? Mr De Villiers: In Ms Patel: In Q213 Paul Farrelly: What was its turnover at the time of acquisition? Mr Smith: In dollars or pounds? Paul Farrelly: You can choose. Q214 Chairman: Which would you prefer? Mr Smith: It is about £50 million. Q215 Paul Farrelly: On whichever relevant measure of profitability that was relevant to you, how profitable was it? Mr Smith: I am slightly loathe, Chairman, to be giving very detailed commercial information out in public, although patently the Committee know it. I wonder whether it might be ---- Q216 Chairman: We are happy to receive evidence in private. Mr Smith: Would you mind if we gave it that way. We have it but it does not feel right ----- Q217 Paul Farrelly: For an acquisition of this size, were you a public limited company, you would disclose the level of profitability. Mr Smith: In our own note, to be fair, Mr Farrelly, the acquisition price and the profitability is there. As Zarin has already mentioned, in the BBC Group report there is more. As Mark said earlier, we should look into this suggestion that the level of disclosure is not of a plc. It is certainly not intended that way; it is intended to be exactly the same. Q218 Paul Farrelly: I have just asked for the figure. Mr Smith: Yes, but I am just worried about ..... Ms Patel: It is public. Q219 Paul Farrelly: You can adjust it in whichever way you want. Ms Patel: Perhaps I could give you the figures. In the BBC 2007-08 Annual Report and Accounts, in note 19, we disclose the performance of Lonely Planet. For the period up to acquisition, 1 July to 30 September, we had made turnover of £10.6 million, and at that stage it was making a very small loss. Within the Annual Report and Accounts you will see the summary of financial statement there. We then showed performance post acquisition. If you would bear with me a moment ---- Q220 Paul Farrelly: I do not have that note in front of me, but I have a discrepancy with the £10-£50 million turnover. Ms Patel: That is pre acquisition. One of the things you are required to do in accounting standards is to show what the performance of the company was before you acquired it as well as after you acquired it. The figures I have just given you are for the period before acquisition. For the period after acquisition, on page 25 of the summary financial statement you will see what Lonely Planet make afterwards. Their turnover post acquisition is £20.8 million and it made a small loss of £2.1 million which included the acquisition cost of Lonely Planet. Q221 Paul Farrelly: It was £10 million before acquisition and a small ---- Mr Smith: The turnover is about £50 million a year. Q222 Paul Farrelly: What sort yardstick did you use for valuations? Mr Smith: A large number, as you would
expect, not just about the current profitability either - although it is fair
to say that the core book business is extremely profitable - extremely
profitable. I think it is fair to say
that if Tony and Maureen Wheeler were here today they would be telling you that
they are rather pleased at just how profitable they have made the book
business, but their various investments in the online space have not been as
successful and their online material was making losses. By the way, not a unique situation: many
media companies are having the same problem with their online business. In our own decision about it, we were looking
at a range of different ways in which we could make the thing even more
profitable for us, not from the knowledge that the book business itself is
highly profitable already and even there a clear view from us about exactly how
we would develop the book business with a launch of new guides. Indeed, we have already started launching
different guides. In Q223 Paul Farrelly: What yardstick for valuations do you use? Mr Smith: All sorts of different things. There is a mixture. Q224 Paul Farrelly: Talk me through a few things. Mr Smith: A mixture of net present value of the future cash flow. As you will know, Mr Farrelly, everybody has to do that when making any kind of acquisition at all. To do that, you have to take a view about what the synergies are going to be. To do that, you have to then disaggregate whether they are revenue synergies or cost synergies. To do that you have to take each individual bit of the business and, essentially, do an entirely new business plan of your own which you believe you can perform, based on the acquisition when you have got it. We did all of those things. We ended up with a base case, a low case, a mid case, and a high case. Frankly, the amount we bid was lower than our low case. People who suggest that we have overpaid or that we did not know how we were going to make any money out of it, it is just not the case. So DCF first of all, and, second, market ---- Q225 Paul Farrelly: Who were your professional advisers? Mr Smith: We had a series of ten different advisers, including Deloitte, who acted as our due diligence partner right the way through the transaction on commercial, financial, taxation and so on. Our own project manager was a person who had spent his whole life trained in due diligence for acquisitions. Then we asked Lehman Brothers, Investment Bank, to do a validation of the valuation before we completed the acquisition. They are just a small number of a large number ---- Q226 Paul Farrelly: Who acted, just out of curiosity, for the other side? Mr Smith: They had a variety of different people helping them as well, Mr Farrelly, including their minority shareholders that they had at the time who were in the world of private equity. Q227 Paul Farrelly: I hope you do not feel me to be nitpicking but I am trying to get a feel for this. Mr Smith: That is fine. Q228 Paul Farrelly: Could you explain to me, because I would expect this in a public acquisition circular, the terms of the put option for the last 25%. Mr Smith: It is not an acquisition circular, Mr Farrelly. Q229 Paul Farrelly: No, but I would expect that information to be shown. What are the terms of the put option? Can you describe the terms of the put option for the remaining 25%? Ms Patel: Would you like me to read out what we said in the published accounts of the BBC, again in note 19? "In accordance with financial reporting standard no. 25, Australian $67.3 million (£29 million) liability was recognised on the date of acquisition in respect of a put option of up to 25% of the share capital of Lonely Planet, which is exercisable by the minority shareholders for a period of up to 25 months from the acquisition date." It then goes on to explain the accounting treatment. Perhaps I will not bother reading that out. Q230 Paul Farrelly: So it is another £29 million. Ms Patel: Yes. Q231 Paul Farrelly: That is fixed. Ms Patel: Yes. That is recognised in the accounts as a liability. Q232 Paul Farrelly: It is a fixed cost. That basically seems one hell of a price for a business that was marginally profitable, with the levels of turnover either pre or post acquisition that you have just given. Mr De Villiers: It may be that I can help here. It was not. Having come from a world of private equity and having made a number of acquisitions in my Disney life as well, we went through this with significant due diligence. The multiples, the DCFs, the terminal values, and all of the various scenarios that one would build into any acquisition planning, all fell within the acceptable. We were not anywhere close to where I felt as a non-executive and the other two non-executives from outside the company with good commercial experience felt that we were overpaying for the business. We simply were just not overpaying. Q233 Paul Farrelly: In terms of procedure, finally, on this tack: when you negotiate with your own professional advisers, what steps do the BBC Board then take to make sure that they are satisfied that it is fair and reasonable independently? Ms Patel: That is one of the reasons why the Group Finance Director is a non-executive Director of the Worldwide Board. Other than making sure that the terms of the due diligence were very searching, were independent, and were assessed clearly, for both myself and my team, which is separate from Worldwide, but also the Trust team, the key element of evidence for us was the Lehman's independent fairness opinion letter, where they had access to all of our financial judgments we were making, to all of the due diligence. It was that letter that independently assessed whether we were paying a fair value that was something that the non-executive Directors on the Worldwide Board but also the non-executive Directors on the BBC Board itself and the Trust Unit took account of. Q234 Paul Farrelly: Do you have plans for a Lonely Planet TV programme? Mr Smith: A lot. Indeed, we are just in the middle of producing a new TV series for National Geographic, the channel, which is a Lonely Planet branded TV series based around the travel show, and there is a lot more stuff in the pipeline. We are 12 months into the acquisition. We are really pleased with how it is going so far. We have launched a whole series of new books in different countries. We are breaking into new markets. It is putting on share in nearly all of the key markets that it works for. We have just re-launched the website. We are about to do a magazine. There is a lot more to come. Q235 Paul Farrelly: Did you appreciate at the time and can you understand the sense of the discomfort at the acquisition of a major standalone brand in the business. Mr Smith: Yes. Q236 Paul Farrelly: To the extent that some people may feel that it is the commercial side wagging the public sector dog. This discomfort is not only shared by people who "would say that, wouldn't they" who are direct competitors. Can you understand that? Mr Smith: Absolutely, Chairman. I can understand it. In the end, this whole debate boils down to: Is the role of the company to make money for the licence fee payer? Of course it is, and £9 per licence at the moment. Is it okay, therefore, to then charge the company with growing through means that are not simply to do with just making BBC programmes - not just that but other things as well - providing they meet the Four C's? Are the Four C's a brake, a sort of limitation, but within that the idea is to grow as much as possible - with all the checks and balances and controls and brand discipline and so on that you would expect - because it is in the licence fee payers' interests? Or is the mission of the company to not do anything that is going to offend competitors? That is quite a tough thing if you are running the company to try to live with. It is a "one or the other" sort of thing. We have been responding over the last four years to the remit of successive governments to grow the company as fast as possible. Indeed, having then developed a strategy which is very clear - I am sure the Committee would agree - and not only clear but approved by the Trust and then published in the Worldwide Annual Report the year before last in detail and then summarised again last year, making clear that part of that strategy will be through acquisitions, because, as somebody pointed out earlier, all commercial companies grow by a mixture of organic and acquisitions. Having then done that and then having had an acquisition that there is then quite a lot of concern about it. It feels slightly as though we were told to get on with it, we have got on with it, we have done it and then people say, "Hang on, I'm not sure that is what I wanted." Q237 Chairman: That may well be so. Can I press you a little more on magazines more generally. In your report you say, "The business has a long-term strategy of investing in lifestyle and specialist magazines and aiming to publish the market leader in each sector." We also had the Government statement that "Magazines will in future be focused more on brands and subjects that are connected to BBC programmes ..." Are those two statements not in conflict? Mr Smith: I do not think they are in conflict, Chairman. If you go back to the start of the company and Radio Times in 1923, there is a good example of a market leader, Radio Times, which does not carry the BBC's brand and neither is it completely associated with BBC programmes. It obviously covers, of course it does - in the editorial and in most things - the material coming from every one of the BBC's competitors, otherwise people would not buy the magazine. That is a good example of it. Wind a lot further forward to a magazine like TopGear, which is very specifically related, as you would expect, to the TopGear television programme which is very popular, that is without any doubt the market leader in car magazines in the UK - and by the way, it is the market leader in most countries of the world as well as a magazine - and is an example where there is a very direct link with a BBC programme where we are also market leader. There are other examples, like Good Food or Wildlife or music magazines, which are not specifically related, and neither do they have to be specifically related, to an individual BBC programme, but they are broadly connected to the kind of programming that the BBC does. If you looked at any one of those magazines - and, by the way, including Olive magazine - on any one month you could highlight the connectivity that there is within the magazine to the BBC's output. It is not pound for pound. The magazine is not a printout of what goes out on screen; it is broadly appealing to the interests of people who like food, who like wildlife, who like music, and so on, but it is broadly connected to a BBC programme as well. There is no difference there, by the way, to what we find with Lonely Planet. It is exactly the same. Q238 Chairman: It sounds to me as if you can use that justification to publish any magazine on any subject you like. Mr Smith: Chairman, if I have given that impression, forgive me. I certainly did not intend to. To counter it and to give an exact example, four years ago, when some of these concerns were being discussed, there was a magazine which Worldwide published called Eve and there was a series of cross-stitching magazines which were then fuelling quite a lot of fire from people, saying, "What the hell has that to do with the BBC?" At the time there was no connectivity between those magazines and the BBC's airwaves. There were not really any cross-stitching programmes on BBC television, and, similarly, there were not any general women's interest programmes on BBC Television at the time which would have made Eve justified. At that point, part of the review that occurred in the run-up to the Charter led to Eve and the cross-stitching magazines being sold because there was not that kind of connectivity. So there has to be that connectivity but it does not have to be directly a programme to a magazine. Q239 Chairman: Let me try another one, Girl Talk, which is aimed at young teenaged girls. This month's edition is a High School Musical 3 special. That may be connected with Etienne's previous employer, but it has nothing to do with his present one. Why does that fit in with the BBC's programming? Mr Smith: I need to record being very impressed with your knowledge of our magazine portfolio, Chairman. Q240 Chairman: We do our research! Mr Smith: There are another 59 we would like to send you. I do not have the current edition in front of me. I have not looked at it, if I am honest. I could not give you a straight answer now on what the connectivity is. But that is a good example of where, after Eve and the cross-stitching magazines were sold, we were quite particular and prickly internally to ensure that the magazines would regularly have the connectivity. There was set up and there currently exists for every single one of the magazines an editorial advisory board that meets periodically and we have to produce a formal report which goes to the Trust explaining how that connectivity has been carried out and that the editorial in all the magazines is carried out entirely in line with the BBC's editorial values. That has been done. I cannot give you a specific answer in relation to your question, but I am happy to do that afterwards. Q241 Chairman: Could I raise one other with you. Here we have Delicious published by the Guardian Media Group. It is their Christmas edition and it has a picture of a Christmas pudding on the front and it costs £3.30. Here we have BBC Olive, which was launched almost in direct competition with Delicious. This is the Christmas edition, it costs £3.30 and it has a picture of a Christmas pudding on the front. What was the BBC bringing to the market that was not already there when it launched Olive? Mr Smith: None of the four criteria, to be absolutely clear, says that you cannot do anything in a market because somebody else is already in it. Q242 Chairman: It does say that you should not distort the market. So launching Olive did not distort the market for Delicious? Mr Smith: The question is whether there is any distortion occurring as a result of any unfair assistance given by the BBC through breach of the fair trading laws. Perhaps I could just say something, because Olive has been mentioned. The food sector in magazines is a good example of where at the time we entered that market there were nine food magazines available on British newsagent shelves. That was in 2002. Now there are 80. Over the same period, the circulation for food magazines has more than doubled. What happens when competitors enter a market, as indeed when we enter a market, is that the market improves because everybody's product gets better as a result. Q243 Janet Anderson: Do you think, therefore, that Time Out and Wanderlust are going to benefit and their circulations are going to increase because you have acquired Lonely Planet? Mr Smith: I could not give that undertaking because I do not run either of those companies and do not know what plans they would have in the space. I do not know what the intentions of either Wanderlust or Time Out are for the development of their magazine in the future, or, indeed, what other dynamics are at play for Wanderlust with the travel world and for Time Out in relation to its information. They are both great magazines and I read them both. Q244 Janet Anderson: You cannot claim that the market as a whole will benefit. Mr Smith: All I am saying is that what tends to happen when we enter a magazine sector - and you can never be sure, of course - is that over time the overall market tends to increase. If you look at the editorial content of Wanderlust and Time Out and the proposed Lonely Planet magazine, they are very, very different. They are operating in a broadly, loosely travel/information sort of space but they are very, very different. You can appeal to different demographics, you can appeal to different types of interest. Some want a lot more information about the country - which is something Lonely Planet is very good about - and some want cheap holidays. People want different things out of magazines, even if they are in the same sector. It is by no means certain that when the Lonely Planet magazine does launch it will be operating in exactly the same space as those two magazines. Q245 Chairman: It is targeting the same advertising, is it not? Mr Smith: I reacted rather badly when I heard that being said - as I did about the launch date, because it sounded to me as though there was some deliberate intent. I cannot see that at all and we have moved the launch date in deference to that point. I cannot find any evidence of that at all. Indeed, if anything, the way in which Wanderlust get their adverts is that they tend to go directly to advertisers, whereas in the case of BBC magazines, and certainly in the case of the Lonely Planet magazine, 90% or more of our advertising is done through agents, so it is a completely different process anyway. Ms Thomson: Could I add two things. First of all, when the Worldwide Board is doing an assessment of whether it should launch a new magazine, clearly there are limits because every new product has to fit the Four C's criteria. It has to have a fit with public purposes, so there is not some unbounded world where they can just wander in anywhere. Also, as part of that process, one of the pieces of assessment that is done is will the magazine be adding to the market. Is there a direct match, is there crossover between readership? That piece of analysis is done as part of the process. We have been here before. Pre John's day, when Worldwide launched its History Magazine - a very important genre for BBC broadcasting, history, and now a successful and established magazine - History Today was very upset about it and thought it was going to go out of business, and yet here we are, five or six years on, I am a subscriber to History Today and it is there, it is a vibrant, great magazine still surviving. Mr Smith: And its circulation is more or less the same today as it was six years ago. Ms Thomson: There is obviously anxiety but our experience is that it is misplaced. Q246 Chairman: It is your assurance to us that when the Lonely Planet magazine appears it will look very different from Wanderlust. Mr Smith: Yes. Q247 Chairman: In the same way or not as Olive and Delicious. Mr Smith: It is Christmas puddings. It is the time of the year, Chairman. Q248 Chairman: It is pure coincidence. Ms Thomson: It is not great original marketing to have a Christmas pudding on the front. Q249 Paul Farrelly: Before we wrap up our Lonely Planet section, there is one thing that has puzzled me from some of the figures that have been given to me. Lonely Planet we are all familiar with. It has been knocking around for years. I used to buy Rough Guides, but there is no accounting for taste. What has puzzled me is that pre-acquisition there was a £10 million turnover, post acquisition it was mid £20 million, and now it is £50 million. Ms Patel: They are different time periods. Q250 Paul Farrelly: I cannot get a feel for why Lonely Planet has a turnover which has suddenly exploded in such a short space of time. Ms Patel: They are time periods. Q251 Paul Farrelly: Please could you explain. Ms Patel: In total Lonely Planet's turnover is around £50 million per annum. The figures I gave you broke down the whole year for Lonely Planet, between the period pre acquisition, which was three or four months, and the period post acquisition, which was eight months. Ms Thomson: The £10 million figure was only for a three or four month period. That may not have been clear to you. Q252 Paul Farrelly: No, it was not. So it is £35 million. Ms Patel: We think it is about £50 million. I apologise for not having the figures right at my fingertips. In total Lonely Planet's turnover is about £50 million. In the accounts we showed it in two time periods because of the acquisition. We are not saying that after acquisition its turnover suddenly doubled; they are just two separate time periods. Ms Thomson: Could we write to you with the set of figures. Q253 Paul Farrelly: Yes, it would be interesting to have a breakdown of the figures, the last accounts and the Lehman Brothers' opinion. Ms Thomson: Could I suggest that we send you the public figures but also any other breakdown you need. Chairman: The Committee may have a number of questions. I think you will be relieved to hear that we might put those in writing. May I thank you for waiting for so long and for answering our questions. We may return to you. |