THE BOTTOM LINE; OF MONEY, THE BBC AND REHABILITATION

Mathew Horsman meets Bob Phillis, who was under a cloud and in the dark - until he pulled off a huge deal with a cable and satellite channel

What a difference a deal makes. This time last year, the chief executive of the BBC's commercial arm, Bob Phillis, the deputy-general, looked weak and besieged and on the verge of leaving the BBC. Today, flush with the success of the corporation's unprecedented pounds 140m pay-TV deal with the cable and satellite channel packager Flextech and hard at work on the second part of that agreement, an even wider joint venture with Flextech's sister company in the US, Discovery, Phillis's position within John Birt's BBC looks a sight healthier. The rehabilitation of Bob Phyllis has become the talk of the trade.

He refuses to be drawn on the circumstances surrounding his apparent desire to leave the BBC last year, when it became clear that Mr Birt, the controversial director-general, had kept his own deputy in the dark until only days before the official announcement about far-reaching plans to restructure the corporation and to eviscerate the World Service. That was despite the fact that that Phillis had run the World Service when he came to the BBC from Carlton in 1993.

Compounding the tension, Birt made at least two public remarks that seemed to constitute censure of the BBC's rather lacklustre efforts to generate commercial revenues, which accounted for only pounds 70m in "net economic benefit" to the BBC in the most recent results, next to pounds l.8bn in licence fee revenues.

Faced with a flat licence fee, a key part of the Birtian revolution was to cash in on the corporation's brand name and programming acumen in the growing secondary market, not only in the UK but world-wide. But with the exception of the BBC's stable of magazines and its stake in UK Gold, the hits channel currently broadcast on satellite and cable, there have not been many commercial victories.

A long-term programme-licensing arrangement with Discovery helped to make that channel's founder, John Hendricks, a millionaire, but little benefit accrued to the BBC. The same can be said of early programme licensing deals with another US pay-TV channel, Arts and Entertainment. Creating channels has been tried before, even before Phillis's arrival. The biggest disappointments have been BBC World and BBC Prime, the first an advertising- supported channel based on the corporation's reputation for outstanding news and current affairs, and the latter a subscription service featuring drama and entertainment programmes. Neither could get a convincing beachhead in the all-important US market, while a joint venture with Pearson, the media and information giant, to develop the channels in continental Europe has performed well below expectations, Phillis concedes.

Then came Flextech. A year in the making, the deal - officially approved by the Department of National Heritage last week - will lead to the creation of as many as eight new subscription channels for the pay-TV market in the UK (on satellite, cable and digital terrestrial television). Add to that a second joint venture to establish new channels for the international market, involving Discovery and the common parent of both Flextech and Discovery, John Malone's giant cable company TCI, and the BBC looks well on its way toward tripling or even quadrupling its commercial revenues.

"It has not been down just to me," Phillis says of the landmark Flextech deal. "It's part of a collective awareness across the BBC, from the governors on down, that it was not possible to put our head in the sand. We had to recognise that the world was changing. I like to think that some of it was down me in terms of leadership and in terms of drive."

His personal role in making the deal happen is conceded by many - not just at the BBC (where some believe Birt is even a mite jealous of Phillis's apparent success) but at Flextech, TCI and even at BSkyB, the satellite broadcaster 40 per cent owned by Rupert Murdoch, which would dearly have loved to do the deal with the BBC that Flextech has taken on.

On that point, Phyllis denies that a deal with BSkyB would have been politically difficult."I wish people would recognise the reality of the professionalism of the BSkyB team, and forget this talk of 'getting into bed with Murdoch'."

Brave, commercial words from deep inside the Murdoch-wary BBC. So has there really been a revolution in attitudes? Is frumpish Auntie, all 70 years of her, really ready to do battle in corporate boardrooms?

Commercial partners continue to complain about the long delays, the relentless attention to minute details, and the hopelessly fractured decision-making process. The agreement with Flextech took nine months to hammer out and covers a phenomenal three decades. But, it is happening and that surely signals a significant change in the corporate culture of the world's most celebrated public broadcasting service.

The BBC gets editorial control over the new channels (ranging from drama to arts to documentaries), as well as payment at commercial rates for any archive programming sold to the joint venture. Down the road, if the deal generates profits, the BBC is also in line for dividends and a 50/50 split in any asset value the joint venture manages to create.

The grand alliance will also give the BBC a serious partner in the US, South America, Europe and Asia, and will have a strong presence in the pay-TV market in the UK.

Phillis insists he is not empire-building. "You have to put this in perspective," he says. "These agreements are important and valuable, but the results are never going to replace the licence fee."

He will not say it, but you can read the subtext. Fulfilling the BBC's commercial aspirations is akin to a tightrope act. If the BBC is too successful commercially, how easy will it be to justify retaining a universal, compulsory licence fee? "Our focus must always be to serve the free-to-air market and it always will be," he insists. All new programmes developed with the licence fee will be seen on BBC1 or BBC2 first. There will be no advertising on our core public service. If we lose sight of that need, then we will be undermining the case for the licence fee. We do not intend to see that happen"n

Mathew Horsman is media analyst at the City firm of Henderson Crosthwaite.