BRIAN KENNY: Welcome to Cold Call, the podcast where we dive deep into the groundbreaking ideas in Harvard Business School case studies with the faculty who wrote them. For more than a century, one broadcaster has helped Britain see itself and helped the rest of the world see Britain. Its remit is quintessentially public service to inform, educate, and entertain. But even the grandest institutions eventually face a reckoning. Today, streaming giants compete for audiences and talent. Younger viewers are abandoning broadcast television, and the number of households paying for traditional license fees is falling. That leaves policymakers with a dilemma. How do you preserve editorial independence, cultural influence, and universal public service while building a business model fit for the digital age? Should taxpayers foot the bill? Should advertising play a larger role? Or might the answer lie in that most British of traditions, the mutual, placing ownership in the hands of the people who fund the broadcaster.
Today on Cold Call, we’re joined by Professor Henry McGee to discuss his case, “The Future of the BBC: Public Ownership vs. Privatization.” I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Podcast Network. Henry McGee’s research interests include the governance of nonprofit organizations, particularly in the arts. Before joining the HBS faculty, he had a lengthy career at HBO, where he retired as president of HBO Home Entertainment. Welcome back, Henry.
HENRY MCGEE: Brian, it’s fantastic to be back. Thank you.
BRIAN KENNY: You’ve been away for a while, so we’re glad to have you back in the studio. This is such a fun case, and it’s right up your alley, right in your sweet spot. So thank you for writing it and for being here to discuss it. I’m sure all of our listeners are familiar with the BBC.
They may not be familiar with a lot of the things that we’re going to talk about today, particularly relating to the governance model and the ownership structure of the BBC. Why don’t we just dive right in, and I’m going to ask you, why is the BBC at such an important inflection point where the case starts out, and what made its ownership and funding dilemma compelling to you to write about as an HBS case?
HENRY MCGEE: Great. Well, Brian, one of the challenges that the BBC faces is something that no one ever wants to face, which is it’s got three different clocks all running at the same time. The first is that it operates under a royal charter, which, believe it or not, is going to expire next year.
BRIAN KENNY: Wow.
HENRY MCGEE: So they’re very much up against the gun there. And the government now has to decide exactly what sort of British Broadcasting Corporation do they want to have. The second clock that’s running is that it’s universally acknowledged that the finances of the BBC are in shambles. The current funding model was created at a time when people watched linear television, and the idea was that there would be a license. The British government would require a license fee for each household, and that would fund the BBC. Now we’re in a digital world, and in fact, that’s not the predominant business model that’s operating at present. And so, as a result, the BBC has an antiquated funding model. The government recently ran a survey and found out that, for the British public, that the number one viewing choice is Netflix, followed by the BBC. And by the way, you don’t have to have a license to watch Netflix.
HENRY MCGEE: The third dilemma that they’re facing is one of what I would call governance and credibility. They’ve run into several issues about bias in the reporting. In fact, one of them garnered a lawsuit from President Trump about bias in their reporting. And in fact, in the last year or so, both the managing director, the equivalent of their CEO, resigned, as well as the head of the news division. So that’s really what makes this such a great case. It’s not just a strategy case about how does an incumbent fight off the rival of Netflix. It’s really what’s the right structure for the BBC going forward. It has to be commercially competent, if you will, and compete against its commercial rivals. But at the same time, it has to fulfill a public service mandate that they don’t have, for example, provide educational programming, regional programming, programming in multiple languages, impartial news, and other forms of specialized programming. So the motivating question really for the case discussion is not whether it should be public or private, but what should the corporation look like that will allow it to both produce public value, but also remain financially durable. And in fact, this case comes out of a research project that’s currently ongoing at HBS called The Ownership Project, which is looking at how different forms of ownership can help businesses fulfill their social purpose.
BRIAN KENNY: Yeah. So interesting. And a lot of what you’re describing sounds familiar to me. Living in the United States, these sort of tensions around public broadcasting go back decades in the US as well. So a lot of the same issues that our public broadcasters here in the US are facing sounds like also exist in the UK. You mentioned the BBC’s mission to inform, to educate, and to entertain. I’m wondering what does the BBC provide that a commercial broadcaster might not. And is there an economic value to those public service obligations? Because if they’re under such financial strain, are they handcuffed just by the fact that this is their mission?
HENRY MCGEE: This is my HBO bias, but let me just say a purely commercial broadcaster can produce excellent entertainment-
BRIAN KENNY: Yes.
HENRY MCGEE: …sports and news. But it’s really a question of incentives at HBO and other commercial broadcasters. We’re always going to focus on revenue and profits and allocate our investments accordingly. But the BBC’s mandate, as you alluded to, goes far beyond HBO’s. I think the way to frame it is that the BBC provides public goods with positive externalities. It should provide unbiased news, which create a more informed public.
It provides educational programming that can create a smarter public. And by pumping money into regional productions, it can help create and sustain a large media ecosystem. And as the UK sort of focuses on what they want the BBC to be, there could be a bias towards using commercial measures like ratings and revenue and similar benchmarks. But to date, one of the BBC’s core mandates that they’ve been successful at is to provide the sort of services that actually the commercial market would never support.
BRIAN KENNY: Okay. I was not aware of the license model that the BBC has used really since its inception. Can you talk a little bit about that license model? And you’ve mentioned about some of the things that might be driving the decline, but the decline is pretty severe. The case notes the fact that license fee payers have fallen by nearly two million over five years. So it sounds like you’re not required to pay the license?
HENRY MCGEE: In fact they have a fairly large enforcement mechanism, which a lot of people complain about. You typically find if they’ve discovered that you are taking in a signal without paying it. And in fact, a number… each year they throw a few people into jail-
BRIAN KENNY: Really?
HENRY MCGEE: … just to make the point. And that’s actually one of the issues that’s raised that the people who end up going to jail for nonpayment are the people who can least afford it.
BRIAN KENNY: Yes. Yeah, that’s amazing. The losses that are cited in the case, about 5.4 billion in income, but a 234… This is… These are pounds. 234 million-pound operating loss, which leads me to wonder how much of the case is about the funding problem versus the broader organizational problems that you delve into.
HENRY MCGEE: Yeah. By the way, the figures have only gotten worse this last year. They recently, a few months ago, they reported the last fiscal year, the number of license fee payers dropped by, are you ready for this? Over another half million licensed-fee payers.
BRIAN KENNY: Wow.
HENRY MCGEE: So to answer… directly answer your question about is it a funding problem, or is it a strategy problem? Regrettably, it’s both, but there’s a distinction I want to make. The costs are certainly rising. We see that worldwide. Production inflation is high. Quality drama costs more. Sports are expensive. The list goes on.
And while the BBC has been trying to cut overhead, they’ve had great many layoffs, they’re not going to be able to cut themselves to success. So it’s certainly a cost and funding problem, but it’s also a strategy problem. And that is, the BBC is becoming increasingly culturally irrelevant to a younger audience, which is spending much more time on YouTube and other streaming services.
And so, in fact, I think they made a very, very smart move earlier this year when they brought in a new head of the BBC, a fellow by the name of Matt Brittin, who was head of Google’s operations for Europe, the Middle East and Africa. And I think he will bring that digital savvy to that. But I think here’s a way to think about this is that while new funding and fixing the funding will buy time, it’s really going to be a new strategy they need that will determine whether that time is well spent.
BRIAN KENNY: Yeah. And I’m also wondering, just from your observation of the entertainment space and the way things have changed really since the advent of, probably, Netflix, I guess, the quality of the programming coming out of all of these streaming organizations is really pretty remarkable. It’s like you’re watching mini movies from week to week in these series. How does an organization like the BBC hope to be able to compete without the deep pockets that places like Netflix have?
HENRY MCGEE: That is a question that Mr. Brittin is going to wrestle with, but I think that they’ll have to pick their spots. One thing that they won’t have to do is… While, they’ll have sports. They won’t get involved in the same sort of sports bidding that’s in the billions… for them would be in the billions of pounds. But that is a competitive issue that has to be addressed in a, excuse this, but, can they really compete in the world of (Game of) Thrones?
BRIAN KENNY: Yes. Yeah, yeah. That’s a reasonable question, I think. So I should mention-
HENRY MCGEE: Which, by the way, is filmed. A lot of it is filmed in the UK and Ireland.
BRIAN KENNY: I know. I’ve seen some of the sites. I was a huge Thrones fan. So the protagonist, by the way, in the case is Lisa Nandy. And I didn’t mention, but I should mention upfront, this is a library case, right? So this was written—
HENRY MCGEE: Yes.
BRIAN KENNY: … with sources that you were able to find on your own, and not going into the executive suite of BBC, which doesn’t make it any less relevant or accurate. I just think we should let our listeners know that. So the case looks at several different alternatives to the license fee approach: general taxation, direct government funding, advertising and sponsorship, or even privatization. What does Lisa have to think about as she compares these models? And really, I think the tension here is between financial stability and independence, right?
HENRY MCGEE: Right. Well, let’s talk about Lisa Nandy, who actually is the Minister of Culture and Sport, which is a real-life job in the UK. And her mandate is to oversee the BBC, and the government were looking to her for the recommendation. So that’s why she is the protagonist, because at the end of the day, she has to really come forward to Parliament with a recommendation of what the BBC should be as the Minister of Culture. I think if she asks me, I think that there’s four things that she has to look at for the BBC going forward. And the first would be, it is a British Broadcasting Corporation. So universality, is it broadly available to every citizen in the country? She should really think about that. This may be tough for the government, but they have to really think about independence more. Right now, the Royal Charter comes up once every 10 years, and so whoever is in government at that particular time may have a particular set of recommendations. Nandy, who is Labor, is going to put forth her point of view. If the Conservatives were in power, who knows what they would present.
So as you go forward, I think that independence is important. I think fiscal soundness has got to be a key criterion. They can’t continue on this downward slope where people are not subscribing. And then I would say the fairness of the funding mechanism. So is it universal? Is it fair? Is BBC independent? And is what she’s come up with fiscally sound would be the four things to look at.
BRIAN KENNY: Sustainable, right? I mentioned in the introduction, the British tradition of mutualization. I wasn’t very familiar with this, but you give some great examples in the case of mutualization. Can you maybe describe that for our listeners? Because ultimately, what we’re talking about there is putting ownership in the hands of the British people, the licensed payers, right?
BRIAN KENNY: What are some of the pros and cons of thinking about mutualization?
HENRY MCGEE: Mutualization came up during the… goes a long, long British tradition dating back to the Industrial Revolution, where, in fact, the ownership of the company really rested both with the customers and the workers. It was sort of a mutual society. And because they were focused on benefits to the owners rather than shareholders, they could offer great deals.
The challenge with mutualization, of course, as you can imagine, is governance. The more members you have, the more voices you have. But that sort of co-op is… that nature is embedded in the UK. It has had its problems for one reason. For example, because you have shareholders, you can’t go into the market and raise new capital to expand. So let’s switch to the idea of mutualizing the BBC. What if you turned over the ownership to the people who are actually using the service? The more people have looked at that, and that’s gotten some examination since I’ve written the case, is it is seen as a call… increasingly for call for input from the public as opposed to outright public ownership and the challenge of governing. And you can see a situation, for example, where if you had a board of directors that was running, you could see people changing editorial policy in order to get their point of view and so on. And then you also have the issue of, ultimately, again, of funding. You’re going to have to return to your owners to come up with capital. But what’s I think is going to survive, and hopefully we’ll get a chance to talk this a little bit later, about what things they’re looking at. I think what will survive from that is that the public right now feels very distant from who’s making the decisions at the BBC and why they’re making them. And so the call for mutualization is as much a call for input into the decision and a sense of fairness.
BRIAN KENNY: And is that sort of an attempt to maybe strengthen their public service mission? I mean, what were they… what kind of input would they be hoping to gather in a situation like that?
HENRY MCGEE: I think that the cry right now is just a sense of, well, two things. One is bias in the media. And then the second, which the BBC has been working on, is the idea that a lot of this all happens in London, and we’re actually paying taxes in Wales and Scotland and what are we getting out of it?
BRIAN KENNY: It sounds to me like mutualization would be a very difficult thing to govern, and building consensus around programming would take time. And the one thing they don’t seem to have is time. If you’re competing against the likes of Netflix and HBO and Amazon and Prime, all these other folks that are creating content, how do you sort of balance the scales on that? Mutualization would seem to be a very difficult route to go.
HENRY MCGEE: Indeed, it would be. And so that is what they’re wrestling with right now is: what is the right business structure?
BRIAN KENNY: And I know the case mentions British Telecom, British Rail as a couple of other examples where they have used mutualization with pretty good effect. Is that fair?
HENRY MCGEE: I’m going to differentiate between mutualization, which is ownership by the workers and by the customers and privatization.
BRIAN KENNY: Oh, that was privatization. Okay.
HENRY MCGEE: So let’s talk about privatization, which the British, for better or for worse, have a lot of experience in as well. As you can see, they are actually very willing to experiment with different-
BRIAN KENNY: Sure.
HENRY MCGEE: … forms of ownership. The central difference in British… I use British Telecom and the rail service because they couldn’t be more different, is that it really depends on what industry you’re talking about. So if you start with British Telecom it’s a service that has very low switching costs between consumers. There’s incentive for companies to invest capital in digital technologies and improve customer service in order to gain market share and increase profits. And that’s been quite successful. So you can have private capital come in, bring the digital service, put phone stores in every corner, compete against one another, and really improve the service as opposed to a big national bureaucracy. So contrast that with the railroads, which is generally considered to be a complete disaster.
BRIAN KENNY: Which I was surprised to hear, by the way, because I’ve traveled through the UK quite a bit and I’ve always thought their rail system was pretty good.
HENRY MCGEE: It’s pretty bad if you live their schedule. They’ve got safety issues, they’ve got on-time issues, reliability issues. And that’s because the way they decided to do it was to break it up into its parts. So one company owns the rail carriages. Another owns the actual rolling stock.
BRIAN KENNY: Ah.
HENRY MCGEE: And so coordinating all of that has turned out to really be a disaster.
BRIAN KENNY: Okay.
HENRY MCGEE: And so the challenge for you, and you put your finger on it, Brian, the challenge for the BBC is it’s a hybrid. Unfortunately for it, it has to compete in a market where the switching cost for consumers is very low.
BRIAN KENNY: Yes.
HENRY MCGEE: Not unlike the phone service. So it has to have a commercial discipline, but it also has to provide key public services like emergency broadcasting, national news service, and other public goods. And so when I think about it, I think the key takeaway for me from looking at mutualization and privatization is that the BBC is not going to solve its challenge through ideology. It’s really back to Clay Christensen’s fundamental questions: What’s the job to be done, and what’s the best structure of the business to tackle it?
BRIAN KENNY: And what are your insights on that? What do you think?
HENRY MCGEE: Well, if I were to talk with Minister Nandy-
BRIAN KENNY: If you were advising the minister.
HENRY MCGEE: I guess my recommendations would fall into two categories with both financing and governance, which has been sort of a theme of our talk here today. In terms of financing, I would actually go to what I would call a universal media levy, if you will, and then provide income-based subsidies to ensure that everyone had access to all. And so this gets back to, again, the co-op model. I think that it’s very different when you tell people you have to pay a license fee, and if you don’t pay that fee, the consequence is a fine, and non… failure to pay the fine could lead to jail-
BRIAN KENNY: Yes.
HENRY MCGEE: … as opposed to a membership fee or membership dues, if you will. So a lot of it is in the…
BRIAN KENNY: It’s just the language.
HENRY MCGEE: It is the language, but you can see the people feeling distant, right.
BRIAN KENNY: Of course.
HENRY MCGEE: We have to pay a license fee as opposed to I’m paying my membership dues.
And one of the ways you could think about it and it also has to be understandable, because right now, when they want to price increase, they’ve got to go to Parliament back and forth. Is it a tax?
BRIAN KENNY: Sure.
HENRY MCGEE: On and on and on. It’d be much better if it’s clearly stated what it’s going to be. There are clear criteria for moving it forward. So, for example, we know in the United States that Social Security is increased each year along with inflation. So if you told the British people, “Look, this is the base membership fee. It’s going to increase by inflation.” And similarly, again, the idea is what do you get out of it? So again, like Social Security, if you will, we understand that we pay into it. We understand what the benefit is and how that benefit’s going to increase over time. I think a similar, if they began to think about it in that way, it would help.
BRIAN KENNY: So better packaging, better marketing.
HENRY MCGEE: But also I think that would increase the income. So you wouldn’t have this fall-off. Think you wouldn’t have this… I don’t want to minimize the fact that in a single year they lost over half a million subscribers. If they could recapture the audience through a fair funding mechanism, that I think would go a long, long way. I don’t think that they should accept advertising or any form of support that might skew either the content choices that they make. They do not want to turn into an HBO.
BRIAN KENNY: Yes.
HENRY MCGEE: As fine an organization as that is, or compete against privately owned companies in any way. And I think that that funding mechanism, that universal, fair, predictable funding mechanism, would give Matt Brittin the time that he needs to develop a new digital-forward audience growth strategy and also provide funding for the public service.
In terms of funding the World Service, which we didn’t really talk about, but that is an important I think that it would be a great relief to the British public if that were taken over entirely by the government.
BRIAN KENNY: Interesting.
HENRY MCGEE: With the understanding that the BBC would then have to figure out a way to assure the rest of the world that it was independent, if you will, editorially, of the government and not the spokespeople. Because right now it’s seen as the voice of the British people collectively and unbiased, as opposed to whoever’s living in 10 Downing Street at the time.
BRIAN KENNY: Right. But from a brand perspective, and some things are difficult to measure economically, right. Is there some intrinsic value in having the BBC World continue to sort of represent sophisticated news coverage, unbiased news coverage? There’s got to be some brand value there.
HENRY MCGEE: Absolutely. So I’m talking about funding. I think they remain linked hand in glove. I think that to relieve the British membership fee from paying it would be important.
BRIAN KENNY: You mentioned at the onset of our conversation that the Royal Charter expires in a couple of years. I’m wondering what the implications are for that. What’s the benefit of having a Royal Charter versus not having a Royal Charter?
HENRY MCGEE: Well, that was one of the things I think they need a longer charter, which is up every 10 years. And I think that was political. In fact, one of the great issues that they face is that it’s seen as political. The chair of the board of the BBC is appointed by the culture secretary.
And the government has a great many seats on the board. And so, in order to sort of underline its independence of any political party, they need to give it a much longer charter. Hand in hand with that, less political influence over board appointments. And then, again, back to this idea, grabbing some of the parts… the best parts of mutualization. I think they’ve got to have some mechanism for greater public participation, not deciding what’s going to be on Sunday at 8:00 or whether there’s going to be a new kids’ program. But a sense that I’m a member and I’m paying my membership dues and you should listen; I should have a role. Of course, the big pushback I get whenever I bring that up is that is, at the end of the day, a compulsory fee is not going to go down well.
BRIAN KENNY: It’s going to be… Yeah.
HENRY MCGEE: And so you’re actually telling a British public that, and I talked earlier about the fact that Netflix is now more popular than the BBC. That, “Oh, that Netflix that you used to get for free, here’s our great idea. You’ll be paying for that.”
BRIAN KENNY: Right. Right.
HENRY MCGEE: “You’ll be paying for that now.”
BRIAN KENNY: Well, what’s interesting on that note is that Netflix and Amazon Prime and Hulu, they all routinely raise their fees every year, it seems like. And nobody really pushes back because you’re kind of a captive audience, right?
HENRY MCGEE: Well, but also because you can come in and out.
BRIAN KENNY: Yes.
HENRY MCGEE: And see that I think, fundamentally, it needs to be corrected. You may say this is a marketing issue. But I think it really cuts to the heart of why there is a British Broadcasting Corporation, and that the British public, for various reasons, really fundamentally understands what they are funding through the license fee, which is regressive and needs to be reformed. But what’s being funded? The BBC is not just another bundle service like Disney+.
It’s so much more than that. And it’s a news institution. It’s an emergency broadcast service. It’s a cultural asset. It does so many more things than Disney+. And so, at the end of the day, the only way this is really going to work is for the British government, and the BBC management, to convince, people that it’s not… the choice is not, “I’m going to have Netflix or I’m going to have the BBC,” but the BBC is a fundamental government institution like our schools, like our libraries, and it needs to be funded because of all these things it does. And we’re going to reform it so that it is unbiased, but it’s too important a part of British culture to let go. And so what the case asks the students to wrestle with is, what are the different forms of ownership? What are the different structures that can have an institution operate in a way that is both financially sound and culturally impactful?
BRIAN KENNY: Yeah. I feel like this is a problem that public broadcasters in the United States would love to have because they are… on the scale of relevancy, they have really fallen far and fast and become so politicized that they’re in a very different place and one that’s more difficult, I think, to come out of. So great conversation as I knew it would be. Henry, I have one more question for you, which is just if you’d like our listeners to remember one thing about the BBC case, what would it be?
HENRY MCGEE: The one thing I’d like them to remember is that business is not always organized as profit or nonprofit, and that it’s important to examine what the business is trying to accomplish and fit the structure to the purpose.
BRIAN KENNY: Yeah, that’s a great message. Henry, thanks for joining me on Cold Call.
HENRY MCGEE: Brian, thank you.
BRIAN KENNY: If you enjoy Cold Call, you might like our other podcasts: Climate Rising, The Founder Mindset, IdeaCast, Managing the Future of Work, Skydeck, and Think Big, Buy Small. Find them wherever you get your podcasts and check out our video episodes on the Harvard Business School YouTube Channel.
We want to hear from you! Email us at: coldcall@hbs.edu. Thanks again for joining us. I’m your host Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR Podcast Network.
