French President Nicolas Sarkozy’s recent move to ban commercial advertising from state TV channels during peak time adds some colour to the debate about funding the BBC in the UK, albeit in reverse order. When recently asked whether the BBC should be allowed to carry advertising my answer was ‘no’, not because I share Sarkozy’s views on the beauty of ad free state broadcasting, but because such a move would be financially disastrous for the existing commercial broadcasters in the UK. Here’s why:

Firstly, adding the BBC to the commercial airtime market would be catastrophic for existing broadcasters, forcing many into financial ruin. According to Ofcom, the UK TV market was worth around £3.16bn in 2007. Broadly speaking, TV companies aim to take a share of advertising revenue that roughly matches their share viewing. The BBC took a viewing share of around 28.5% share of viewing in December (BARB). So if the BBC were to take a similar share of the UK’s annual TV spend then it would take around £900m in advertising revenue. But the market wouldn’t necessarily grow to accommodate this, in fact all the evidence suggests that the TV market is in terminal decline with Ofcom warning the market could actually dry up by 2020. So the BBC’s £900m would have to come from the existing (and declining) £3.16bn currently being taken by the UK’s commercial broadcasters. Unfortunately, the UK’s traditional terrestrial broadcasters are not in a position to be generous to the tune of £900m. They are enduring tough times. In the last financial year (2007) ITV reported profits of £188m (down 35% on 2006) and Channel Four lost £8.8m (down from £14m in 2006). So you can see that taking £900m revenue from existing UK commercial broadcasters would completely wipe out all existing profits and leave them staring at bankruptcy.

Secondly, the BBC’s potential advertising income falls way too short of its current licence fee income to be a viable alternative. The £900m the BBC might hypothetically generate from its 28.5% share of the TV advertising market is only around one third of the £3.2bn it currently receives in licence fee income. In fact, as we have seen, the total UK TV market is worth around £3.16bn, almost exactly the amount the BBC gets to run itself annually. Even if the BBC ad sales machine were so successful that it were able to generate a level income equating to double its 28.5% viewing share, that would still not be enough to finance the Corporation.

There has been a counter argument to these views stating that allowing the BBC to carry advertising would make advertising cheaper overall therefore encourage more advertisers to use TV and expand the overall size of the TV advertising revenue “cake”. But this is a fallacy for three reasons. First, advertising could not become cheaper because the broadcasters could not survive if their yield (£ income per viewer) and margins fell further; they wouldn’t exist so any cost reduction / market expansion arguments are rendered purely hypothetical. Secondly, there are cost entry barriers to TV advertising. TV commercials are expensive to make the availability of cheap airtime may not bring TV advertising into the reach of smaller advertisers. And thirdly, any ad budgets looking for a new home are likely to find a more than satisfactory reception on the Internet where short term tactical pay back is much higher than on TV.