Compass Lexecon study shows BBC Radio cannot rely on advertising revenues for funding

A Compass Lexecon report, commissioned by Radiocentre, the industry body for commercial radio in the UK, assessed the impact of potential changes to BBC funding models on commercial radio and the UK audio sector. The study shows that advertising revenues would not be sufficient to serve as a funding alternative for BBC Radio and would even have significant negative effects on radio services, as well as on creative industries and the UK economy more widely.

Context

Radio is one of the most used forms of media in the UK. Since liberalisation of the sector, radio listening is split quite evenly between commercial and BBC radio. While commercial radio services are financed by advertising revenue, BBC is a public service broadcaster funded by a licence fee from the UK government.

In the context of the UK government’s Mid-Charter Review of the BBC and discussions on future funding of the BBC licence fee, Radiocentre, the industry body for commercial radio in the UK, hired Compass Lexecon to evaluate the potential impact on the radio sector of a change to the BBC’s funding mechanism.

Our Role

A Compass Lexecon team, including Senior Vice President Ciara Kalmus, Economist Benjamin Dubowitz and John Davies, formerly Executive Vice President at Compass Lexecon and now at the Competition Appeal Tribunal, evaluated the effects of abolishing the BBC licence fee on the UK audio sector. Amongst other funding options, they examined in detail the viability of financing BBC radio services via advertising, but found several reasons why this type of funding is difficult to be successful for BBC radio services, including:

1. the size of the radio advertising market,
2. the fact that advertisers do not value all audiences equally, particularly older listeners who account for a higher share of the BBC radio audience, and
3. the difficulty of financing speech radio through commercial advertising
   

The team also constructed an econometric model to estimate how much advertising revenue each station could attract, given their current listener base and costs. They found that BBC Radio 2 and BBC 6 Music would just break even, and all other radio stations would be heavily loss-making. Overall, BBC radio would face a shortfall in funding of 63%.

Our Impact

The results of our econometric model show that BBC would not be able to finance its existing services based on advertising revenue. Moreover, the estimated shortfall in funding would not only lead to a reduction in BBC radio services, but also in commercial radio services, and would have significant knock-on effects on the overall creative sector, as well as on the UK economy more widely.