The folly of flogging BBC Broadcast 

7 May 2007

Regular readers of EMC MediaBlog will recall that the BBC decided to spin off BBC Broadcast, its broadcast arm, as a self-contained company. Now called Red Bee Media, the former BBC Broadcast handles playout for BBC television as well as UKTV, the Virgin Media channels, ESPN, et. al.

There are actually sound economic reasons for outsourcing. Payroll is a case in point. If you’re setting up a company that will employ, say, a few hundred staff and need a reasonably sophisticated payroll system, it may well be cheaper to pay someone else to do it than to do it yourself.

How can this be? you might ask. It all comes down to an economic concept called marginal cost. If you provide payroll facilities as a service to third-parties, the average mean cost per client is the total cost of providing the service to all clients divided by the number of clients. However, if you already have a scalable infrastructure in place to provide this service, then the extra cost of adding one extra client to the system will be negligible. This means that the fee you can charge to this new client, even with a generous mark-up, will be substantially less than it would have cost for the client to set up its own system from scratch. The more clients the service provider has, the lower the mean cost per client for running and maintaining the system.

The situation with BBC Broadcast must have been similar, I surmise. I reckon that BBC execs decided that it would cost the Corporation less in the long term to pay a third party for playout facilities than to maintain its own, in-house. Yes, that’s great – on paper. But look at the end result: we are now left with a situation where the BBC’s former broadcast arm is now a private (and, I imagine, profitable) company that absorbs licence payers’ money while returning no profits in support of the licence fee.

To be fair to the BBC, it did get most things right. Giving BBC Broadcast operational independence, allowing it to provide services for third parties, and so on, was quite correct, on the grounds that, as with the payroll example above, the average cost per client decreases as more clients sign up. But the Corporation should have retained ownership of it. If the current owners of what is now called Red Bee saw the potential for a nice net profit (they wouldn’t have bought it otherwise) why didn’t Auntie? A profitable BBC Broadcast, dealing with third parties (for a fee) as well as BBC output, would have supported the licence fee. Instead, in private hands, money is draining from the licence fee to pay for the services that it still requires.

Selling BBC Broadcast was a blunder of the first order, and a betrayal of the Corporation and the licence fee payer.