Focus: Is Auntie selling her soul?

If a deal with one of the world's most feared media barons comes off, last week's upheavals at the BBC will seem trifling

John Birt is at it again. Another rash of structural change at the BBC, more wailing and gnashing of teeth from celebrated journalists and retired executives, an eruption of hastily arranged meetings and angry discussions. Again Mr Birt, the BBC director-general whose mantra once was the "mission to explain", has a lot of explaining to do.

But the creation of five "super-editors" to oversee all television and radio news programmes, announced last week, and promptly delayed after a howl of rage from star presenters, does not mark the high point of Birtism. The echo of CNN in the plans for a 24-hour television news channel is not the sum of the BBC's adoption of American concepts; not by any means.

The bedrock of the BBC's output and its world-wide reputation has been its documentaries, and on these another transatlantic influence will soon be brought to bear. For news read CNN and Ted Turner; for documentaries read Discovery and John Malone.

The BBC is linking up with Mr Malone's Discovery Channel to co-produce programmes and share cable and satellite channels in the US and round the world. The impact of the tie-up has yet to be felt - final agreement has still not been signed - but when the link comes, as both sides predict it will, the changes it will force on the culture of the BBC will be profound. This is the Beeb shaking off its public-service tradition and joining the global media industry. Auntie is going swimming with sharks.

In February 1996 a cluster of BBC executives flew to Denver, Colorado. The head man was Bob Phillis, the corporation's deputy director-general, an energetic, bustling figure who has made no bones about his desire to become director-general when the chance comes.

Ten days ago the man who would be king announced his departure from the BBC to run the much smaller and less grand Guardian Media Group, publishers of the Guardian, Observer, Manchester Evening News and titles such as the Rochdale Observer.

The resignation of a man who was brought in amid much fanfare to develop the BBC's commercial side in 1993 has been the source of considerable speculation inside the BBC. Had he argued with Birt and finally had enough of his ways? Maybe he could not tolerate the heavy hand of the corporation's legendary bureaucracy. There were also suggestions that the problem was the Discovery deal, that it was proving a nightmare.

Bob Phillis's trip to Denver was a secret. Even staff at the BBC's New York headquarters did not know he was there. If they had they might have warned him about the nature of the man he was about to meet.

In the rapacious world of US television, John Malone sits alongside Rupert Murdoch at the top table. He runs Tele-Communications Inc - or TCI - although the acronym could as easily stand for The Cable Industry, such is the dominant position TCI occupies.

In 24 years Malone has built up an empire embracing 4,500 cable franchises. Together with his friend Rupert Murdoch he owns the cable network Fox Sports. In Britain he owns Flextech, the pay-TV channel, and 26 per cent of Telewest, the cable operator. Through TCI's Liberty Media subsidiary Malone owns the biggest single share of Discovery, the US satellite and cable documentary network.

His reputation as a deal-maker was confirmed last November when the heirs of Bob Magness, TCI's late founder, swapped their voting stock for ordinary shares worth $500m - a deal that effectively gave Malone control of the multi-billion-dollar TCI.

This was the commercial predator into whose pool Phillis swam. The power- base of the two could not have been more different: Malone, multi-billionaire, own boss, fixer; Phillis, salaried executive of a publicly funded broadcaster, head of BBC Worldwide, publisher of the Radio Times and Delia Smith's Winter Collection, answerable to a board of governors mostly composed of non-business men and women.

Phillis's mission was to do a deal with Malone. For years the BBC had been seeking ways to boost a revenue base that had always been linked to the licence fee. Magazines and books had provided a handsome income, but compared to the prodigious costs of financing television channels, their earnings were tiny.

The total licence fee income of pounds 1.8bn was not enough to keep pace with the rising cost of making programmes and of bidding for sports events - against the likes of Murdoch and Malone. Worse, the need for cash had grown more acute as television raced towards the digital age.

There were various ways of raising the cash. Better financial management was working, and costs were being scrutinised - a process that led to last week's debacle in the news departments. Another was America, the richest, most developed, television market in the world. The BBC makes some of the best programmes in the world and has a huge, underexploited archive, but it does not have the resources to launch its own channel in the US. The cost of distribution, or "carriage" as TV executives call it, was beyond the corporation. Reluctantly, but with a sense of mounting excitement, the BBC decided it needed a US partner.

In New York the 50 or so staff who worked for the BBC had developed good relationships with some of the biggest TV operators in the country, who regularly bought and co-produced the corporation's programmes, including Cox, Arts and Entertainment Network (AEN) and Public Broadcasting System (PBS) - colloquially known as Purely British Stuff, because of its high BBC and ITV content.

The corporation's staff in New York had also dealt with Discovery, Malone's channel devoted to "factual entertainment". It had not always been a happy experience. "Discovery was often extremely reluctant to accept BBC editorial policy. Because it was investing money, Discovery felt it should get what it wanted. Relations with Discovery could get really bitter," said a former senior executive in New York who left the BBC earlier this year.

From its start-up in 1985, Discovery, which is located in Bethesda, Maryland, had grown from an offbeat, wacky channel showing nature films into a $4bn enterprise with a global audience showing documentaries about virtually anything. Much of that success has been due to Malone's financial muscle and the marketing acumen of Discovery's founder, John Hendricks.

Few media companies know their audience as intimately as Discovery. "We do strongly believe in the power of research," says a Discovery spokesman, proudly. The Discovery producer's bible is the "psycho-break", a breakdown of the psychological profile of his or her target audience. "Discovery Channel is fuelled by the premise that all programmes are not equally appealing to all people," reports the blurb to this crucial company document.

This breakdown, described as a "template" of profiles, is sent to producers, and governs Discovery's thinking about the programmes it makes and shows anywhere in the world. Top of the list is its "Prime Time" audience, billed as "Upscale adults 25-54 with a male skew." (See illustration below.)

In his dealings with Discovery, another documentary-maker says he finds the company to be "fantastically interventionist": "They do not commission unless their research says the market wants it. Working with them is like driving a car by looking through the rear-view mirror. It is mad to make programmes entirely based on marketing. It is very reductive."

While the BBC's New York staff and producers in Britain were conscious of the difficulty in making programmes with Discovery, nobody, so they say, consulted them before the Denver talks. By the time New York got to hear of them, Malone and Phillis had agreed the outline of a proposed deal: Discovery would spend $750m to jointly produce new programmes and launch new pay-TV channels in the US and around the world. The BBC would be an equity partner in the new channels. The new venture would also have access to the BBC library.

In New York they were stunned: "We were really concerned because Discovery had never been respected," says a former senior executive. She continues: "New York was totally frozen out. It was too late - no matter how hard we tried to tell London that they did not know what they were dealing with, they did not listen. There was real hubris and arrogance."

Malone and Phillis may have reached an accord but US industry analysts are clear who is the stronger partner. "The Discovery line has always been, `Since we're putting $750m into this, this is the way it's going to go'," says a New York broadcaster.

When a BBC team went to Maryland to meet Judith McHale, second in command at Discovery and the channel's chief negotiator on the joint venture, she showed them who was boss. "The BBC team were all dressed for the meeting in suits, she was in casual clothes," says an ex-BBC staffer. "It was a statement that said total disrespect. It said `I am one tough broad'."

New York could not understand attitudes in London. "If you're going to war, you want soldiers who know the terrain," says an ex-senior BBC New York employee. "London did not use anyone from the New York office. We would have said, `Choose someone else. Discovery is too tough, they will eat you up.'"

Other, more suitable, stations might have linked up with the BBC. AEN and PBS, through its WGBH station in Boston and WNET in New York, do not meddle when it comes to co-productions but they, like Cox, one of the US's largest broadcasters, were ruled out.

Fears were confirmed when the draft Umbrella Production Agreement between the corporation and Discovery was sent to the BBC's in-house New York lawyer for her views. She sent a 15-page memorandum setting out her fears to London. "It told the BBC, `You are going to surrender editorial control to the US partner because the US partner controls the production budget.' The memo said: `Nothing here gives the BBC a guaranteed credit,'" says someone who saw the document.

Early this year, without any warning, 16 senior BBC employees in New York lost their jobs. They were told it was a consequence of the Discovery deal. Meanwhile, talks between the BBC and Discovery management are now in their 18th month. There is still no final agreement. Sceptical observers say this is because of the dawning realisation inside the BBC of what it has done.

Phillis's diary is too full for him to be interviewed about his talks with Discovery or anything else, says a BBC spokeswoman. He leaves in November, by which time, the BBC spokeswoman confidently predicts, final agreement will have been reached. "The fact is, Discovery offered the BBC the best possible global option," she says. "It offers enormous expertise internationally and also guarantees the growth of the BBC brand internationally. Very few organisations have Discovery's international reach and financial capability."

As for fears about lack of editorial control, they are dismissed by the BBC spokeswoman. "This is a 50-50 partnership editorially," she says. But who has the final word on a programme's content? "It is 50-50."

The "bulk" of the agreement, says the spokeswoman, is in place. It is a mammoth deal, covering 61 separate agreements. Despite the BBC being a public broadcaster, the spokeswoman says, the 61 agreements will not be published. "Would you expect a deal of this size to be published in full?" she asks.

Yes, I would. But John Malone might not approve.