Mr Grade accused the BBC of editorial dictatorship with more centralised control and said it was guilty of 'political appeasement . . . which can lead to terminal decline'.
BBC officials rushed to dismiss Mr Grade's passionate criticism of its policies, governors and senior managers, calling his speech a caricature. But the mood of his audience was quite different.
Television producers - many from the BBC - left the Kirk of St Cuthbert in Edinburgh, where the speech opened the International Television Festival, welcoming the criticism and the call for a public debate on the corporation's future.
Bill Cotton, managing director of Noel Gay Television and a former BBC managing director, said: 'It wasn't just Michael grabbing the headlines - he was sending out a clear message to the people who make the policy in the BBC. They should consider what he said very carefully.'
Marmaduke Hussey, chairman of the BBC Board of Governors, issued a low-key statement defending the corporation. He said that Mr Grade had failed to consider how broadcasting was going to change. 'Michael Grade charges that the BBC would pay any price to defend the licence fee. Not so. But as a publicly funded, public service broadcaster, the BBC must ensure that its programmes are original and distinctive, alert to what the public needs and wants. It must also ensure its programmes are efficiently made,' he said.
But Linda Agran, a drama producer whose successes include London's Burning and Minder, said Mr Grade was right. So did Paul Jackson, director of programmes for Carlton Communications, who produced programmes such as The Young Ones for the BBC.
Sir George Russell, chairman of the Independent Television Commission, who travelled to the festival simply to hear the speech, said it was the best Mr Grade would ever make. Peter Ibbotson, of Carlton Television, added: 'The speech was from the heart, and it struck a real chord with the audience.'
Sir George said he was particularly pleased that Mr Grade had proposed abolition of the system of governors and the creation of a single television commission to license all channels. This also won support from independent producers at the conference.
The aim is to separate powers so that the BBC is no longer dealing directly with the Government, making it less susceptible to bullying. Mr Grade also struck home with his denunciation of the BBC's apparent move from broadly based entertainment towards less popular programming.
He argued that popular soap operas such as Neighbours should be retained and the corporation should not be ashamed of entertaining programmes.
'It is the BBC that keeps us all honest,' he said, adding that if it no longer competed with ITV, standards might decline.
Mr Grade is the first person of any stature in the television industry to challenge Mr Hussey. There are indications that his speech will be the opening shot in a wider campaign against the BBC's proposed new structures.