Saturday, July 17, 2010

BBC - Don't Starve It, Flog It

There must be some people who'd pay to watch this

At last, a Tory government that's going to grip the BBC. Kultur Kommandant Jeremy Hunt says cutting the Telly Tax is under active consideration.

Hurrah. It has long been obvious that the BBC is a major roadblock to smaller government and serious public sector reform, and however much it squawks, it has to be tackled.

But cutting the licence fee on its own is not such a great idea. All that will do is starve the beast of funds and weaken it. Far better to keep it healthy and drive it to market soonest.

Consider a few sums.

The BBC's total annual revenues are currently running at £4.6bn (2008-09), of which the telly tax comprises £3.5bn, and further government funding (the World Service) comprises £0.3bn. So total tax funding is £3.8bn.

Let's assume the BBC is privatised and the tax funding ends. The question then is how much of that £3.8bn would the BBC be able to recoup from subscriptions and advertising revenue?

In truth, nobody has the faintest idea. But for many, the BBC is a compelling brand, and so we'll assume it can hold on to half the total. In which case, its total revenue would be about £2.7bn pa (ie its existing £0.8bn non-tax revenue plus half its existing tax revenue).

The next question is how much could we raise from flogging a big established media company with revenues of £2.7bn pa?

Assuming the BBC could match BSkyB (and if not why not?), it would deliver a net profit margin approaching 20%. Which in the BBC case would be around £500m pa. And applying the current BSkyB market multiple to those earnings - its 19x ratio of market price to earnings - we can get a rough valuation for the BBC.

And that valuation is getting on for £10bn.

Could the Exchequer use £10bn right now?

You know, I rather think it could.

Don't starve it, flog it!

PS We've contacted BOM's man on the Wharf with the gigantic company valuation spreadsheet to check the numbers. Doubtless he'll say we've misinterpreted the fine print of BSkyB's financials, at which point we'll amend our figures. But meanwhile £10bn it is.

Update BOM's Wharf correspondent has now reported back. He reckons our estimated £10bn price tag is far too optimistic. He points out that the BBC's gold plated pension scheme has generated an unfunded debt of £1.6bn (Sky has no pension debt) which any buyer would lop straight off the price. Moreover Sky's profit margin is actually closer to 10% rather than 20%, so we've overegged the BBC's likely profitability. Plus a few other things. So his bottom line is £4bn.

And just for the record, here's what he says:

"If you somehow dump the pensions on the government, flog off all the real estate, move everyone to Manchester AND match Sky's margins while keeping 25m licence fee payers on board you are talking real money. If somehow you can also start charging for premium content and advertising as well the BBC could be worth over £25bn, but frankly none of these things are going to happen.

The firm has a culture of complacency and entitlement so margins (and pensions) will stay the same. I am reliably informed that many BBC staff don't like the idea of moving up north so they are quitting the BBC payroll, starting media consultancies and charging the BBC for the same work they did before, still based in London. So while assets may get sold costs will go up possibly drowning out the effect of the disposals. Compulsion is the only reason people pay for the BBC. I would expect a 50%+ fall in licence fee payers if the rate stays the same. ITV1-4, C4/E4/M4/F4 and Sky News are all free so why pay? People pay for Sky because it has hundreds and hundreds of channels and premier league football. They will not pay for documentaries about how grim it is up north, etc. The BBC doesn't have any premium content other than Eastenders, some sport, arguably Doctor Who & other kids shows and the external stuff not bid for by Sky, ITV or C4. Advertising would be politically impossible even after privatisation. It would probably be a condition of the sale.

The BBC may be huge but Sky has 40% as many subscribers and juices 3.5x the money out of them before you even get to costs (partly due to phone and broadband). They have a similar amount of invested capital on the balance sheet and NO PENSION DEBT. Frankly I would expect them to be worth much more than the BBC. No wonder Murdoch Sr. is trying to buy out the free float."

Yes, well... we can't really argue with that.

We'd still do it though. And for all those commenters who say they don't want telly with ads, we'd trust the market to develop a subscription based service with no ads.


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