Gavyn Davies: Where the consensus is wrong about the BBC's new charter

At the halfway point of the two-year public debate on the renewal of the BBC's charter, a consensus is emerging among policymakers about the future role and structure of the corporation. This consensus is by no means hostile to the BBC. Indeed, much of the venom which normally comes from the BBC's many enemies appears to have been spent during the Gilligan affair last year. But there are several respects in which the BBC is not yet in safe territory, and where its supporters need to make themselves heard.

At the halfway point of the two-year public debate on the renewal of the BBC's charter, a consensus is emerging among policymakers about the future role and structure of the corporation. This consensus is by no means hostile to the BBC. Indeed, much of the venom which normally comes from the BBC's many enemies appears to have been spent during the Gilligan affair last year. But there are several respects in which the BBC is not yet in safe territory, and where its supporters need to make themselves heard.

The first component of the policy consensus is a strong belief, typified in recent Ofcom reports, that the future role of commercial broadcasters in providing public service broadcasting (PSB) in the UK will be a shrinking one. This must be true. ITV has no great desire or ability to maintain the burdensome demands being made on it by regulators and it is gradually shifting towards an outright commercial model. Channel 4 is also getting squeezed by intensifying competition for its traditional youthful audience. Channel 5, Sky and the digital channels have never made any great pretence at public service. So, the consensus says, the responsibility placed on the BBC will be greater than before. And on this the consensus is right.

The second component is that the BBC must shift towards a less commercial mix of programming if it is to fill the emerging PSB gap. Policymakers believe that the BBC became too aggressive in its pursuit of audience share during Greg Dyke's reign, and have greatly welcomed Mark Thompson's blueprint for future output. This involves fewer repeats and less derivative output, and a greater emphasis on "excellence", notably in drama, comedy, music and current affairs. It is hard to take issue with the new director general over this, though my own view is that programme quality improved markedly during Greg's tenure. Audience appreciation surveys - not just the size of audiences - certainly demonstrated this for long periods of time, and much of the perception among the elite about "dumbing down" under Greg was just a myth.

Admittedly, such myths can be dangerous to the future of the BBC, and they do need to be addressed. The problem, though, is that the policy consensus greatly underweights the importance of sheer audience numbers to the security of the BBC's future. Typically, policymakers tell the BBC to worry about audience "reach", not share; and to take account of softer measures of performance, such as press reviews and the mix of genres at prime time. This is all well and good, but a healthy BBC can never forget that it is the public that pays its bills, not the politicians.

Fortunately, it normally finds a way of appealing over the heads of the political classes directly to the licence payers. It is all a question of balance, but if it shifts its focus too far away from market share, it will find that the current public support for the licence fee will quickly dissipate. To judge from recent audience figures, this may already be rearing its head as a danger. Of course the middle class will remain the heartland, but the Dykian determination to improve the BBC's appeal to under-served groups, such as the North and ethnic minorities, should not be de-emphasised by the new regime.

Part three of the policy consensus is that there is still life in the licence fee system, though not indefinite life. No one has put forward an alternative funding system which commands widespread support right now. In part, this reflects the fact that about 17 million of Britain's 23 million households place a greater value on the BBC's services than the annual cost of the licence fee. On my calculations, this implies that the BBC, as presently funded, creates about £2bn of surplus public value each year, a figure which explains why there is not the least sign of a public campaign against the licence fee system. However, many believe that the justification for the licence fee is likely to wane after the UK has gone fully digital during the next 10 years.

This belief is hinged on the fourth component of the policy consensus, which is that new technology in broadcasting and broadband is gradually undermining the case for a publicly funded BBC. On this, I contend that the consensus is completely wrong. In a pamphlet published by the Social Market Foundation this week, The BBC and Public Value, I argue that broadcasting will remain a classic "public good", even in a fully digital world. Public goods tend to have two characteristics. First, they are "non excludable", in the sense that once they are provided for any individual, they are automatically provided for everyone. National defence is an obvious example. Second, they are "non rivalrous", in that any individual can consume them, without this undermining the ability of anyone else to consume them. Street lighting is a typical case. Microeconomists have for many decades argued that there is a sound case, in dry economic terms, for providing this type of service in the public sector.

Old-style analogue broadcasting fulfils both requirements for being labelled a "public good". Digital broadcasting will not, since it will be possible to exclude parts of the audience by devices such as the Sky card. But a fully digital BBC will still be non-rivalrous, in the sense that the marginal cost of providing its services to extra viewers, once the programmes have been made, will be close to zero. It follows that there should be no marginal charge (i.e. a subscription) made at the point of use for such programmes. A licence fee system is superior.

The fifth component of the policy consensus is that the annual uprating of the licence fee in the next five years should be a great deal less than in the recent past, and certainly no higher than inflation. On this, I would simply make two observations. First, if this is the out-turn, the BBC will continue to shrink in relative size in the next decade, especially relative to Sky. Does the nation really want this? And second, no other public service in the UK - not the health service, not the schools, not the Army, and definitely not the police - would ever contemplate accepting a decade-long settlement in which its income is frozen in real terms. Yet the BBC is expected to be grateful for such "generosity".

The sixth and final part of the consensus is that if the BBC is to be "trusted" with £3bn of public money each year, then its governance system needs to be reformed in the direction of greater transparency and outside control. There is no consensus in favour of Ofcom regulating the BBC, but there is strong agreement that self-regulation has had its day. I regret this. The old system may not be new-fangled, but it did protect the BBC very well against political interference, and it allowed programme makers to serve the public, without worrying about upsetting the BBC's commercial rivals. This, I believe, is where the Department for Culture, Media and Sport (and maybe even the Prime Minister) is now most hostile to the traditional BBC model. In their eagerness for something new, let them not throw the baby out with the bath water.

Gavyn Davies is the chairman of Fulcrum Asset Management

gavyn.davies@fulcrumasset.com