The report, by the centre-right think tank Policy Exchange, calls for the BBC to place quality before ratings, and to stop spending huge resources on sports rights, programmes for 16 to 35 year olds and popular entertainment, which other channels would deliver anyway.

Instead of crowding out commercial schemes, the BBC management should spend up to 5% of total licence fee income on co-funding PSB programmes on other channels, the report says.

The proposals in the report, Changing the Channel, include the following points:

Reforming the BBC

Introduce a level of contestability to BBC resource allocation. First, there should be more internal contestability with a list of BBC in house proposals for achieving given reach, quality and distinctiveness being shared with regulatory bodies.

Second, there needs to some third party contestability with external channels and content providers able to put a rival case for public funding or public co-funding to the body charged with determining the size and shape of the BBC.

In the next licence fee settlement, likely to run from 2013 to 2018 or 2020, the BBC management should be set a target level of third party output and service funding of 5% of total licence fee income by 2018.

Quality First, Reach Second

The BBC needs to focus its assessment of new and existing services on quality and differentiation rather than reach. It needs to stop expending significant resources on sports rights, 16 to 35 targeted services, popular entertainment talent, and acquisitions with the sole or main purpose of extending reach.

Abolish the BBC Trust and replace it with a BBC Joint Board.

The way the BBC Trust has been set up has not enabled it to hold the BBC to sufficient account and has forced it to take a narrow institutional approach to the delivery of PSB in the UK.

Establish a Public Service Content Trust to promote PSB across all TV, radio and broadband.  The PSC Trust will be the lead body for monitoring the delivery of BBC services in line with its licence fee settlements, Charter and Agreement. It will also review the effectiveness of the BBC’s co-funding obligations .

Allow ITV1 and Five to opt out of the PSB system after 2012 – two years prior to the end of their licences but after digital switchover.

If they did opt out they would no longer have to keep any of their specific PSB commitments, they would keep their high reach digital terrestrial access but they would have to pay for the digital terrestrial frequency they had previously been gifted.

Prices for this capacity would be set by regulators with regard to its opportunity cost. The proceeds would be re-allocated by a new Public Service Content Trust (PSC Trust).

Both ITV1 and Five would retain their right to remain on top slots in all electronic programme guides.

Channel 4 should retain its PSB status, be allocated more access privileges and be privatised.

Channel 4 should be privatised in 2012 but retain a PSB licence for at least 10 years.

Channel 4 should retain most the proceeds from privatisation so long as it remains a PSB. It should receive extra digital capacity, reallocated from ITV and perhaps some from the BBC. It could choose to use or sublease this but retain the income from it.

Channel 4 should also be granted cross promotional and linked access to BBC new media services such as www.bbc.co.uk, the iPlayer and Project Canvas.

Channel 4 would be allowed to merge with Five under a more relaxed ownership and competition regime, but should it do so, the combined entity must be required to make a minimum level of investment in new programming in order to prevent consolidation leading to less UK programming investment.

Channel 4’s PSB licence and allocation of frequencies would be administered by the PSC Trust which through its Public Access Division would control all the currently gifted digital terrestrial spectrum. As a PSB broadcaster, Channel 4 programming would also have a “most favoured nation” status for BBC co-funding and PSC Trust public funding. Such funds would still have to be bid for on a contestable basis, but Channel 4’s high reach, PSB licence and access privileges would make it a favoured outlet.

The need for £3.5 billion to build out high speed internet infrastructure to the whole UK is not yet proven but if the need does materialize it is likely to be a major benefit to all parts of the UK economy, including the public sector. In this case it should be funded out of general taxation, not a telecom tax.

Author of the report Mark Oliver said: “The current UK broadcasting system was set up in the 1950s and now struggles to keep up with the extraordinary changes of the digital age. It is clear that the 20th century analogue institutions that were created are now worryingly out of date. We need a dramatic rethink if we are to continue to deliver public service broadcasting in an entirely new age.”

Anna Fazackerley, editor of the report and head of policy exchange’s arts and culture Unit, added: “The UK needs to prepare a new system of public service broadcasting. We now have the ideal opportunity to address it as a whole - without waiting until 2014 which is the timescale the Government is largely operating on.

“The BBC is a highly regarded public institution and recently has done well out of PSB.  Commercial PSB channels, however, have not fared so happily.  We need a number of reforms to alleviate the strains in the system, including the introduction of contestability to BBC resource allocation.  There should be a particular target of spending 5% of the BBC licence fee income supporting third party programming.”

ITV1 has seen its audience share fall from 40% in 1992 to 20% over the last 20 years, and has not been allowed to increase its ad prices to compensate for falling audiences (as many leading networks in the US and Europe have done), due to the Contract Rights Renewal (CRR) system imposed in 2003. A beleaguered ITV has already dropped some of the public service obligations with the highest opportunity costs: namely UK children’s programming and smaller regional news opt outs.  Going forward it is seriously considering walking away from most of its remaining specific PSB requirements or handing back its PSB licence.

Channel 4 has seen its high margins on key acquisitions and popular programme formats like Big Brother being eroded while the opportunity costs of its more heavily public service programming have risen. While the launch of free to air spin-off channels such as E4 and More 4 have helped it maintain its share of audience over the last 5 years, and its young audience demographics and the imposition of the CRR on ITV1 have helped it maintain its advertising yields, the core PSB network is no longer profitable.

Five has only been profitable in three of its thirteen years of trading and has been hit very hard by the recent downturn as it lacks the “must have” status of Channel 4 and ITV in advertisers’ budgets. It is generally recognized that Five’s only sustainable long term future is a merger with either Channel 4 or ITV and it too is cutting its programming budget and its overheads and biding its time.

This pressure on the main commercial PSB networks has led to a 17% reduction in their spending on originated UK programming from 2006 to 2009 (a 25% reduction in real terms). While there has been some programming investment by the new spin-off channels, it has not been sufficient to bridge this gap. In practical terms, this has meant more entertainment programming and global format reality and lifestyle programming and less originated drama, comedy and documentaries across commercial network TV.