Elstein, who headed the Broadcasting Policy Group review panel convened by the Conservative Party, has suggested a "spectrum tax" that could provide a pot of money to fund public service broadcasting. Commercial producers, including Endemol or Hat Trick, or broadcasters such as Five, ITV, Channel 4 could then bid for access to the fund.
It would do away with the £124 annual fee that every house pays, which generates £2.3bn for the BBC. It said the BBC should be run like Channel 4 and start subscriptions for some digital television channels.
However, the abolition of the licence fee in other countries has quickly led to poverty for public service broadcasters.
Elstein said radical change was needed for the charter review. "Arrangements devised in 1926 are not going to be capable of sustaining the world's most important broadcaster in the challenging times ahead," he said.
Ultimately, the report says the licence fee should be slashed to £50 before being abolished altogether, with some subscription charges introduced.
Elstein's report also recommended not renewing the BBC's Royal Charter, up for review in 2006. Instead, the BBC would be turned into a public corporation along the lines of Channel 4.
Other recommendations made by Elstein include the privatisation of some parts of the BBC, including its commercial arm BBC Worldwide.
The report was handed to the Conservatives today but the party said it is not bound by its findings.
It remains to be seen whether the Tories will adopt the review as policy. Other executives on the panel include: David Cox, the former LWT current affairs chief; Geoff Metzger, managing director of the History Channel; and television researcher David Graham.
Julie Kirkbride, the Conservatives' shadow culture secretary, said it would be examined in detail before any policy decisions were made.
At the same time, government television adviser Barry Cox is set to recommend that the BBC's access to state funding is becoming "more and more" absurd, according to a report in The Observer.
Cox, who is also deputy chairman of Channel 4, is to publish a pamphlet called 'Free for All?' this week through left-wing thinktank Demos, which will point out that while the licence fee has risen by more than 14% since 2001, during the same time ITV advertising revenues have fallen by over 6%.
He will say that in an age where people can increasingly pay to view the content that they want to watch, the idea of a compulsory tax to fund one station is absurd.
The current licence fee now stands at £116 annually. The corporation is under increasing pressure to fundamentally change the way it is run following the publication of Lord Hutton's report into the death of Dr David Kelly last month, which squarely blamed the corporation for a "defective" editorial system. Director-general Greg Dyke and chairman Gavyn Davies both resigned following its publication.
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