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The BBC is under the cosh again. This time the subject of scrutiny is not Auntie's journalism, but her internet activities. Last week Tessa Jowell, secretary of state at the Department of Culture, Media & Sport (DCMS), appointed former Trinity Mirror chief executive Philip Graf to review its enormously popular interactive division, BBCi.

Announcing the review, Jowell said: "We want to look at quality and value for money, how the online services fit with the BBC's public service remit, the services' impact on competition and the general development of the BBC's online services."

The review applies specifically to BBCi's web sites. A look at the division's more limited interactive and digital TV and radio presence follows next year.

In internet terms, BBCi is a behemoth. The guaranteed income stream afforded by the licence fee has cushioned it from the collapse in online investment and it can afford to employ 1100 people and operate literally thousands of sites. Its budget is £113m, of which £72m is spent on web interests - accounting for £3.15 of each annual licence fee.

Since BBCi is well-resourced and a by-product of arguably the world's most trusted media brand, its output is, not surprisingly, good quality. And its network of sites are the country's most popular. According to Nielsen//NetRatings, its news coverage alone clocked up 5.23 million individual users in the three months to the end of July, while BBCi overall attracted 12.125 million users (see table).

Market impact

Graf's brief is threefold: to consider whether BBCi is in line with the corporation's public service remit of providing services the commercial sector is unable to deliver; to produce an assessment of the market impact of BBCi; and to consider what role it might have within the BBC's overall charter, which comes up for renewal in 2006. Graf reports his findings in the spring.

So what is he likely to unearth? Specifically on the second point, has BBCi in its present form damaged the UK's commercial web sector?

"There is always an enormous amount of squabbling over numbers," says Simon Waldman, Guardian Newspapers' director of digital publishing. "The BBC has huge armies to police these things."

Reliably enough, BBC director of new media Ashley Highfield reels off the statistics: 9.1 million users access BBCi, representing 43% of the online population, while 65% of people who have the BBC as their home page go on to other sites - a figure far higher, he claims, than the commercial generalist portals such as AOL.

"We've aided commercial players by introducing up to two million people to the internet. From a marketer's point of view it would cost a huge sum to get that kind of volume," Highfield says.

"The BBC has given people a confidence and a comfort zone through which to enter the internet," acknowledges Danny Meadows-Klue, chief executive of the Interactive Advertising Bureau (IAB).

The BBC has anticipated the government's statutory review by getting its retaliation in first, commissioning KPMG to report on the issue. It found that BBCi had not damaged the market and has had "relatively little commercial impact to date". But it did concede that "in BBCi's absence, some news sites may have experimented sooner with paid-for content or invested earlier to increase consumers' willingness to pay". The report reckoned the total amount of ad revenue BBCi takes away is a modest £4m.

"There is no shortage of commercial inventory and opportunities for smart advertisers to do smart things," says Waldman. "Nobody complains about the shortage of TV and radio minutes as a result of the Beeb's existence."

What Waldman does bemoan is BBCi's lack of links from its multifarious web pages to other relevant commercial sites, which would live up to the corporation's self-proclaimed mission to be a 'trusted guide to the web'. Highfield counters that BBCi has links to 31,000 third-party sites but Waldman says: "I want to see every BBC content site's remit to be to link to other sites of similar genre, in order to be truly representative of what's on the net. BBCi should see itself as a benefactor to the rest of us."

Promotional advantage

What irks the commercial sector more is the corporation's ability to promote its web output on its TV and radio stations. "From a commercial publisher's perspective, the fact it trails its sites is rage-inducing," says Hugo Drayton, director of Hollinger Telegraph New Media and chairman of the British Internet Publishers Alliance (BIPA). "The fault lies with the government for not being clear about its remit."

Highfield's riposte is that KPMG found 76% of people think it is important it reminds viewers of what is on offer online through traditional media.

But since the KPMG review was commissioned by the BBC and has been used as pre-emptive ammunition to defend its case, it will carry little weight once the government publishes its findings.

"A lot of dotcoms that collapsed in the UK could have survived if it wasn't for the BBC, especially the sports sites," says Waldman. Sport is an example, he says, of the BBC producing something more than adequately provided for by the online commercial sector. It's not that you would expect BBCi not to offer sports content, but as Drayton says, its sports coverage goes beyond basic reporting to offer the in-depth, often quirky pieces in which ambitious but defunct dotcoms such as Sportal strived to carve out a niche. The BBC's brand heritage and cross-promoting prevailed.

Highfield, however, maintains that "there is no hard evidence to suggest the BBC caused any dotcom to go out of business".

But the BBC has been accused of abusing its funding privileges, no more so than in the media arena itself. One former online publishing chief recalls that at the height of the internet frenzy, the BBC was poaching its journalists with salaries 30% to 40% higher than market rates.

"The very scale of what the BBC does on the internet has undermined the fragile economics of online publishing," says the IAB's Meadows-Klue. The BBC's online audience is not far off that of the commercial online publishers put together. Its existence on the internet is a massive market distortion."

Publishers' core product of general news will have to remain free as long as the BBC has a net presence. However, all have been forced to start charging for specialist services such as crosswords and archives. Drayton says BBCi has undermined ad revenues in the publishing market, but adds that it is impossible to put a figure on the shortfall.

So what does the commercial sector need the report to clarify? At the extreme end of the spectrum, shadow culture secretary John Whittingdale, following Jowell's announcement last week, called for BBCi's web sites to be shut down completely, arguing the same services are provided by commercial operators.

"BBCi needs a clear remit," says Drayton. "It has prospered doing what the hell it has liked because of a lack of clarity of its purpose." He also wants to see an approvals process to assess the commercial impact of any fresh BBCi initiative.

"Graf needs to look less at the past and more at the details of the BBC's plans online," says Waldman. "Greg Dyke has mooted putting its entire radio and TV archive on the web, but that would severely damage commercial broadcasters." He also wants to see the BBC made to share its in-house software with the commercial sector if it is to the benefit of consumers.

Exploiting assets

Meadows-Klue believes in a slimmed-down BBCi that would cease as a content provider, but auction off online commercial rights to broadcast properties.

However, Drayton cautions against this. Despite his criticisms, he is in favour of keeping the licence fee. "This is our public patrimony and there should be no artificial separation between what are publicly-funded assets and the commercial exploitation of them," he says.

Whatever Graf's findings, there is little doubt that the BBC brand has helped bring the UK online. The commercial sector seems to be asking for the report to define BBCi's role in contributing to a thriving web economy, and put the squabbling to a rest once and for all. For many its publication cannot come soon enough.