Ad-funded BBC ‘can lead to market failure’

A BBC that is funded by advertising “would be bad for everyone”, according to new research.

Radiocentre, the industry body for commercial radio, commissioned competition economists at Compass Lexecon to conduct a study on the impact of advertising-funded BBC radio and audio services on audiences, advertisers, commercial radio and the BBC itself.

In March, the BBC announced its intentions to start advertising on some podcasts and on-demand audio content in the UK. The news comes ahead of the government’s upcoming review of BBC funding.

The BBC’s move has led to “concern” in the industry that advertising across all BBC radio would be “the next logical step” as the corporation’s future funding and position is challenged.

The economic modelling, based on confidential industry data, suggested that advertising “would not support” the majority of BBC radio stations in their current form, with most BBC radio services making losses and likely to be forced to close.

In addition, if the BBC decided to introduce advertising across radio, the financial impact on commercial radio would be “devastating”, with a 36% forecast decline in revenues.

The study said: “A purely commercial market funded by advertising can lead to market failure: services that are highly valued and important to certain listeners may go under-provided.”

Shortfall in funds

Compass Lexecon calculated that BBC radio taking on advertising would result in an estimated shortfall of 63% in funds required to run existing services.

Radio 2 and 6 Music would be the only stations to “break even”, as long as they retained their current audience after introducing advertising.

Radio 1 would “need to change fundamentally” and reduce costs by 25%, while Radio 4 would need to slash its budget by 50%.

Many other services, including all of BBC local radio, which has already been impacted by job cuts and restructuring, were estimated to “not be viable at all” with advertising and would “most likely have to close down”.

The conclusion is that the BBC “in its current form is not commercially viable” — and this is down to the fact the BBC currently serves “a very different audience” to that in commercial radio and this audience is “less commercially attractive” to advertisers. The costs of BBC services was also cited as a factor.

‘Devastating’ for commercial radio

Radiocentre CEO Matt Payton said the study demonstrates that introducing advertising on BBC radio and audio services is “a dangerous road to go down and will ultimately be bad for everyone”.

He explained: “It would have a devastating effect on the BBC and commercial radio, as well as a huge impact for audiences, with the disappearance of public-service radio as we know it and less choice available in future.

“While we recognise this is only one scenario, even partial advertising would have a significant negative impact. These findings are stark and we hope that both the government and the BBC will take them into account.”

Compass Lexecon took into account three types of radio advertising — national advertising through media buying agencies, local advertising booked directly with a radio sales team and digital and internet protocol-targeted advertising — in its analysis.

The results of the study have been shared with the government and are being discussed for the first time at The Future of Audio and Entertainment on Thursday.