Still reeling from the damning indictment of the Hutton Enquiry, the British Broadcasting Corp. is under scrutiny again, this time for its online operations. An independent review, ordered by the government, will study whether the BBC's heavy investment in online publishing conforms to its mandate.

The review, first announced in 2001, covers the chief criticisms aimed at the BBC's online operation. Critics argue that the service exceeds its mandate, is active in areas it should not be and has an anti-competitive budget. They accuse the BBC of being neither transparent nor accountable. They charge that because players in the United Kingdom's online publishing industry have no idea what the BBC will do next, investment and development there have stalled.

In 1997, the U.K. government allowed the BBC to test new Internet services. The BBC promised to focus on news, education and public information for the test and spend just ?21 million ($38.5 million) on the project. It was next allowed to launch new services under vague guidelines: to act as an essential resource, forge a new relationship with BBC license-fee payers and to become a trusted Internet guide. No budget was set.

In November 2003, Tessa Jowell, minister at the Department of Culture, Media and Sport (DCMS), appointed Philip Graf, a former newspaper executive with the Trinity-Mirror group, to head up an independent review of the BBC's online operations. Graf is due to report sometime in April.

(Editor's note: The BBC refers to its new media operation as BBCi, the "i" standing for interactive. It develops online and interactive services, although up to last year BBCi focused the majority of its efforts on the Internet. OJR refers to BBCi -- as does the independent review -- as BBC Online, to distinguish electronic publishing from other BBC services.)

BBC Online has become a phenomenal success. It is one of the U.K.'s most visited Web sites; welcomes over 9 million U.K. visitors a month, with another 11 million turning up from around the world, and has won numerous new media industry awards. Approximately 7 million hours of audio and video content are downloaded to the site each month. The BBC receives a million message board posts a month and a million e-mails a week.

That success comes at a cost. In 2002/2003 BBC Online spent ?100 million ($182 million), and of that ?75 million ($137 million) went for content and ?25 million ($45 million) for infrastructure. It runs 30 broad categories, covering everything from world news to antiques, and its online traffic leads in major sectors in the U.K., such as news and sports.

"The BBC has created category killer Web sites in the Web's most important sectors: news, sport, children's activities and education," said Mike Butcher, editor of the mbites blog and a U.K. media reporter.

So far, so good, but the BBC is publicly funded. For 2002 it received ?2.6 billion ($4.75 billion) from the compulsory TV license fee levied on TV ownership. It costs ?116 ($212) a year for a colour TV license. Is the BBC's use of that public money damaging the market? Does it need regulation?

A seminar, run last November by the Westminster Media Forum (WMF), brought all the participants in the debate together to discuss the question. Competitors said the BBC makes the development of private online business impossible, the BBC retorted that it is simply doing its job. The U.K. government is about to decide who's right.

Here are arguments for the prosecution and defense. You may weigh the evidence and compare your verdict with the official outcomes:

The BBC's Critics

BBC Online is under attack from content companies, think tanks, newspapers and politicians. The British Internet Publishers' Alliance (BIPA) was founded to campaign against the BBC's competitive practices. "At no stage did the BBC provide any budgetary information or spending ceiling other than that of the ?21m ($38 million) per annum relating to the trial period," wrote BIPA in its submission to the review. "It's extraordinary that this figure rose to over ?100m ($181 million) ? without any transparent approvals process, and without consultation with commercial Internet publishers."

Hugo Drayton, BIPA chairman, argues the BBC has exceeded the spirit if not the letter of its online mandate and that it is competing unfairly. "What BIPA wants is to see the BBC with a proper remit, and a proper approvals process for any services the BBC wants to develop within that remit. They've gotten away with doing stuff that makes no sense, but once a site is up it's very hard to get it down," Drayton told OJR. For example, what is the public purpose and value of BBC Online's Celebdaq, the game where players use a virtual stake to buy and sell stock tied to the notoriety of celebrities?

In any case, no rival company can match BBC Online's resources. Though the BBC offers no breakdown of how much is spent for each of its new media services, John Grogan, MP for Labour and chair of Parliaments' All Party BBC Group and a supporter of the BBC, told the WMF seminar that ?20 million ($36 million) a year is spent on BBC News Online. This investment has made it the most popular news site in the U.K.

By comparison, estimates put the budget of the U.K.'s next most popular news Web site, Guardian Unlimited, between ?3 million ($5.5 million) and ?5 million ($9 million) a year. Add the opportunities for cross-promotion between the BBC's broadcasting and radio arms, and you get an unbeatable online operation, critics say.

Moreover, private companies have no idea where the BBC will develop services next. Investment suffers as a result. "If you want to raise commercial money to develop a Web service, it's bloody difficult if you don't know what the BBC is going to do next," said Peter Ibbotson, a former director of programming with the BBC and now a media consultant working with BIPA.

The BBC puts pressure on the business plans of other online operations. U.K. newspapers, for example, find it hard to develop an online subscriptions business to compete with the BBC's excellent, comprehensive and -- above all -- free content

Some impartial observers believe the BBC gets blamed unfairly. "Many sites would go bust whether the BBC was there or not, and some sites have found the BBC a good excuse," said Jamie Cowling, research fellow at a left-leaning think tank, the Institute for Public Policy Research and co-editor of the recently published book "From Public Service Broadcasting to Public Service Communications".

But he acknowledges room for criticism. "The BBC's Web services have developed in quite an ad hoc way. The BBC should take more content from independent suppliers and it needs more ex ante (prior) regulatory scrutiny before it launches new services," said Cowling.

Critics say the BBC distorts the market and undermines fair trade, although empirical evidence may be arguable. A BBC-commissioned, KPMG report, Performance against Consent (PDF) concluded that BBC Online had little impact on Internet companies. The report said the BBC diverts just ?5 million of advertising that would otherwise be spent in the commercial sector. Furthermore, it said that private investment in electronic publishing would only be "marginally" greater if the BBC, and its ?100m budget, did not exist.

Predictably, critics have little time for this conclusion. "It's a complete piece of nonsense," said Drayton. The Guardian's director of digital publishing, Simon Waldman, said the BBC and KPMG discussing online business is like virgins discussing the Kama Sutra.

Last year Chris Goodall, a partner in Enders Analysis, provided an independent analysis of the KPMG report for the WMF seminar. His figures suggest that the BBC costs between ?15 million and ?25 million in lost advertising and makes it difficult for online subscriptions to develop. "It's hard to imagine how the BBC could not have a negative impact on the market," said Goodall. "The BBC may be a good or a bad thing, but it is not the insignificant thing that KPMG's report maintains it is."

Furthermore, as the BBC and Guardian budgets indicate, the BBC invests far more in electronic publishing than does private enterprise. Given its public money and governance, it is immune from the economic realities of shareholders, dividends and market plunges.

The BBC's Defense

Ashley Highfield, director of New Media and Technology at the BBC, made a comprehensive defense of BBC Online last year at the seminar held by the Westminster Media Forum.

" ? I want to say that we at the BBC welcome this review. It is not something we are ashamed of and we don't see it, as some elements of the media have portrayed it, as a test -- something dreadful we have to face as a punishment for our past wrongdoings," he said.

"We have absolutely met all the requirements of the original terms of consent laid down for us by the DCMS [Department of Culture, Media and Sport] in 1998," he continued. He added that BBC Online had not exceeded the terms, " ? but then we do acknowledge that the consent, written as it was in the infancy of the dot.com revolution, was couched in very broad terms."

(Editor's note: OJR attempted to interview Highfield but was told that he would not be available until August.)

He endorsed KPMG's figures, emphasized the popular success of BBC Web sites and underlined the corporation's responsibility to licence-fee payers. Specific services like chat rooms, he said, provide a forum for the audience when market leaders such as MSN pulled out of free services. He pointed out that "20 million people worldwide log on to bbc.co.uk for a high quality trusted, impartial viewpoint in a market that is increasingly going the way of Fox."

In short, BBC Online argues that any market impact is negligible and is far outweighed by substantial benefits. BBC Online now constitutes a national resource that could, in the future, be of enormous value to license payers and other digital businesses. And that resource could be bigger than ever imagined. The BBC is currently planning to provide part of its back catalogue of broadcast content online, free to download for personal use.

In fairness to BBC Online, critics would probably be equally damning if its services were unsuccessful and would claim it was wasting money. For example, the BBC's digital TV services recently came under fire when one channel failed to register any viewership for 55 days.

A Summation for the Jury

BBC Web sites have undoubted value. "In one sense the whole point of the BBC is to influence and distort the market. If it was banned from doing so, we would be left with BBC Parliament (an obscure BBC channel covering debates in Parliament)," said John Grogan, MP for Labour, chair of the All Party BBC Group, at last year's WMF seminar. The BBC Online is also a source of national pride: "? it delights my soul to see BBCi taking on the likes of U.S. giants Google, Microsoft and Yahoo," said Grogan.

Even would-be critics are impressed with the service. Julie Kirkbride replaced John Whittingdale as shadow spokeswoman for Culture, Media and Sport in the Conservative Party. She is more cautious than her predecessor, who threatened to close sections of the online service.

"Well, I wouldn't close the News Web site," said Kirkbride. "But we are concerned how the BBC online services may be crowding out the private sector, and we look forward to the conclusions of the Philip Graf review. I would want to consider which services were anti-competitive and which ones are OK."

Furthermore, the services are responsible for encouraging 2 million British people to take their first steps into the online world, according to one poll. "The BBC's online services are a great showcase of British online talent," said the mbite blog's Mike Butcher. "And it shows others what's possible."

And users love it. "The BBC has established itself as one of the most important Web sites for our readers and I suspect many U.K. Internet users," said Andrew Craig, deputy editor of Web User magazine. "Its depth of content is outstanding, the quality of the content is also very good. For a lot of our readers, and myself as well, it's a daily must-visit."

But the issue goes far beyond either surfers or online services. "The issues which are key for Online are key for the whole corporation," said Emily Bell, editor-in-chief of Guardian Unlimited. "Governance, accountability, approvals for extensions to service and the wider impact on the commercial market are absolutely central to Phil Graf's review and I believe they will all be central to the wider issue of the BBC's future."

That future is also under review on two fronts. Ofcom, the UK's super-regulator is to define Public Service Broadcasting. This may determine how BBC justifies its broadcast output. Meanwhile, the BBC Charter, the mandate for all the corporation's services, will be renewed in 2006. Negotiations are underway to establish the BBC Charter's terms, and Graf's recommendations will have an impact.

"Given the rate at which its online enterprise is growing, and given what it will be able to do with a complete digitisation of its archive," the pending Online review "is probably more important than even the DCMS originally thought. It goes beyond what we private-sector online providers might think of the BBC and actually to the root of what the BBC is and should be over the next 10 to 20 years," Bell said.

Graf's recommendations in April could run from closing down the BBC Online, making the BBC answerable to Ofcom, charging subscriptions for overseas visitors, or including advertising on pages reached by the overseas audience.

We are unlikely to see BBC Online closed down, but we may see it radically altered, and whatever Graf says will set the tone for the Charter Review.