This is taken from The Observer, May 17, 2009:

At the heart of a cultural storm

As our most powerful cultural institution, the BBC is increasingly drawn into fierce debates about politics and morality, as well as its growing dominance of Britain's media. In his first major interview since the Sachsgate furore, BBC chief Mark Thompson speaks frankly to Observer editor John Mulholland about Jonathan Ross, taste and decency, political rows and the the long-term future of the BBC.

In a small office on the third floor of Broadcasting House in central London, Ed Williams, the BBC's director of communications, is reviewing the morning's press cuttings with director general Mark Thompson. Williams is picking his way through a large dossier and highlighting the major themes of the day. Thompson, delayed on his train into London from his Oxfordshire home, is on speakerphone, no doubt listening intently for the first sign of trouble.

The daily briefing is a sort of early warning system, designed to highlight any potentially contentious issues.

But today the coast is clear. The review lasts barely 10 minutes. No political storms brewing, no obstacles sighted, nothing worrying on the horizon. The political and cultural waters that sometimes rise up and engulf the BBC are calm. Williams's press cuttings on this morning run to about 100 pages. And this is a quiet day.

There are not too many quiet days at the BBC. The Corporation is under almost constant and forensic gaze. This is not altogether surprising, given that the BBC receives £3.5bn of public funds via the licence fee each year. It is one of the largest and most visible public institutions in the country. Fierce public scrutiny has always dogged it, but there are new factors conspiring to make life even more difficult. And, in some ways, it only has itself to blame.

The BBC has become a victim of its own incredible success. It has emerged as a hugely powerful player over the last 10 years across national and - increasingly - international media. During this time it has raced to increase its number of TV and radio stations and has managed to establish a dominant position in online news. Its commercial arm, BBC Worldwide, has grown from strength to strength, boasting an ever larger profit from its spin-off magazines and sale of programmes abroad.

And the more visible and influential it becomes, the more it is dragged into highly charged national debates about culture, language and acceptable levels of taste and decency in Britain. The Sachsgate affair last October caused a firestorm, and illustrated how swiftly the Corporation can be drawn into these rows over morality and culture. It has left many within the BBC complaining of a "culture of fear" that suppresses innovation and creativity.

But Thompson does not sound like someone operating in a climate of fear. "I mean, if we set up a programme strategy based on never offending anyone - which is sometimes a world that some of our critics would like - well, you wouldn't broadcast any news programmes, for example. It is inevitable that, given the sensitivity of multiple topics in the news, when simply broadcasting reasonable programming which most people would think was entirely appropriate and proper, there may well be individuals - even entire groups - who will find some of what we do offensive. That's part of what happens."

And with the BBC's increased economic power and dominance has come a new level of scrutiny, criticism and often anger from Britain's commercial media. They resent the BBC's growth, built on a public subsidy, just at the point where they are experiencing a calamitous collapse in advertising revenues and are further threatened by an explosion in digital media which, in some cases, is eroding traditional business models.

Where once the money available to commercial broadcasters (from advertising) was broadly equivalent to the money the BBC recouped from the licence fee - and hence a level playing field existed between the two broadcast tribes - that has now changed. The gap is now increasing each year as ad revenues decline and the BBC pockets its guaranteed income.

As Emily Bell, Guardian News & Media's director of digital content, noted last year, "This has been the dilemma ever since [ex-BBC director general] John Birt both invented the internet for the BBC and secured long-term funding for the corporation with his above-inflation licence settlement in 1996. From that point onwards, not only did Birt's vision save the BBC, it set it on a path which could ... squish dozens of other media businesses, from magazines to daily newspapers, to local radio stations, to rival terrestrial broadcasters. The ecology of some parts of the UK media is now so uncertain and fragile that it can be depleted by a single blow from the end of the BBC's tail as it rolls over in its sleep."

And last week, Emma Duncan, deputy editor of the Economist, highlighted the specific threat that the BBC's online news service poses to newspapers: "The Corporation has a fantastic website. That's hardly surprising since it spends £145m a year of licence-fee payers' money on it. Britain's national newspapers put together spend around £100m on their online efforts. If the BBC is allowed to go on dominating online news it will undermine other news providers' ability to survive on the internet, and thus threaten the diversity of news sources that is crucial to a democracy. If its freedom or funding is cut, the quality of its service will decline, but others will have a chance to grow."

Thompson is aware of the criticisms but, before moving to address them, is keen to stress that the really surprising thing about the BBC is not that it's powerful and relevant but that it has managed to avoid becoming irrelevant and obsolete, as was predicted not that long ago.

"What public-service broadcasters feared most coming into this decade was irrelevance. Obsolescence and irrelevance. There are a few market diehards who say, 'You should be shut down tomorrow', and they think the world would be a much better place. But actually very few people are accusing the BBC of impending irrelevance. On the contrary, I think we're too horribly relevant for our own good. And I think this debate will continue until such time as media in this country restabilises in a new shape."

The BBC is also starting to feel the political pressure. Two weeks ago the Conservative leader, David Cameron, said he would force a Commons vote to prevent a rise in the licence fee by 2% to £142.50. The Commons is due to debate the proposed rise this week. With the prospect of a Tory government after the next election, will the current funding model enjoy the same protection?

Meanwhile, over at the industry regulator, Ofcom, there is beady vigilance. They have made plain that some of the BBC's more ambitious technological plans should be subjected to regulatory scrutiny to see whether they negatively impact the commercial media sector. Late last year Ofcom quashed the BBC's proposed expansion of local news websites - something which would have made life even more difficult for the country's struggling regional newspapers.

And then there's the press, never shy in coming forward and delivering a serious bruising to the Corporation. Most recently it unleashed its considerable firepower during Sachsgate, sparking a heated debate about taste and decency both within the Corporation and the country at large. No sooner had that furore died down than a huge controversy raged in the media over the BBC's decision not to broadcast the Disaster Emergency Committee's Gaza Appeal.

But it was Sachsgate that proved to be one of the most intense and bitterly fought culture wars to hit Britain in recent years. The press showed little mercy. This, from Charles Moore in the Telegraph, was not unrepresentative: "The Ross-Brand affair was part of a pathology. It was like the moment when a well-known alcoholic, normally just about in control of himself, is suddenly sick on the floor at a party. Terrible, but not surprising - eventually, indeed, inevitable."

And so we are at a particularly delicate time for the BBC. It has never been more powerful but this has, paradoxically, made it more vulnerable. It is attracting more scrutiny, criticism and anger than ever before. It is in danger of becoming caught in a perfect storm of politics, economics and culture. And by the time the storm has blown over, what might the BBC look like?

Thompson, after the train delay, arrives at his office overlooking Regent Street a little after 9.30am. He bounds in, grabbing notes from his PA, saying his hellos and giving a fair impression of someone who is ready to hit the ground running. He'll have been up at 6.30am, listening to the Today programme at home, where he lives with his American-born wife, Jane Blumberg, and their three children. Blumberg is an academic and has also written books, including one on Mary Shelley. Every morning Thompson cycles to the train station in Oxford. He arrives at Paddington, where he is picked up and ferried to the office by 9am.

The day we meet is packed with a punishing schedule of meetings. From 10am he (and the Observer, who shadow him throughout the day, prior to a three-hour interview a few weeks later) will be in meetings virtually all day, apart from a brief stop at Pret a Manger to grab a tuna sandwich and a juice. This must be something of a comedown for a man who counts cooking as one of his passions. A friend of Raymond Blanc, he is by all accounts the go-to man for tips about entertaining and catering around Broadcasting House. However, this particular snack is devoured in his office during a 20-minute break before we're off again. The back-to back meetings illustrate the kinds of issues the BBC is facing: Olympics 2012 coverage; the planned move by Five Live and BBC Sport to Salford; an ambitious new archive project which will digitally showcase BBC treasures; Project Canvas, the Corporation's next big technological development which would bring a range of on-demand and interactive services via the TV set (think iPlayer+, but via the TV and not a PC).

It is an exhausting schedule but Thompson, 51, rarely draws breath. He shows an impressive range, an eye for detail and an easy grasp of the technical, emotional and political challenges that each issue presents. He is affable and inquisitive, lighting on details and asking for clarifications.

A keen cyclist - and not just to the station and back - Thompson appears to be someone with abundant energy and a relentless appetite for work. Here is a man clearly enjoying being at the head of one of the largest cultural institutions in the world.

"I mean, honestly, it's very engrossing, this particular role ... in a good way but sometimes in a bad way. I mean it's inescapable. I dream about David Dimbleby. I'm in my own 24/7 digital environment day and night. It's an amazing privilege to happen to be sitting in the middle of this thing as it unfolds."

It's a privileged and immensely powerful position, and all the more surprising since the Corporation had been consigned to the dustbin of broadcast history a little over 20 years ago. An all-powerful BBC bestriding the media plains? It was never supposed to be like this.

In 1986 Professor Alan Peacock, in a report commissioned by the then Conservative government on the future financing of the BBC, made some extraordinarily radical proposals on the future funding of the BBC. His proposals suggested the end of the licence fee. On the day his report came out Peacock went on Newsnight to explain his proposals.

The Newsnight editor remembers talking to him in advance of the programme about the major themes of the report: "The expectation was that every aspect of the BBC's traditional broadcast model hadn't worked. The feeling was that the analogue broadcast model would naturally just give way to a world of much more programming and stations and therefore much less influence for the BBC. All of the same arguments that we hear today were absolutely alive then - Peacock's presumption that digital inevitably meant the end of the licence fee and very possibly the BBC, certainly within a decade, and probably within five years. And here we are 20 years on, and it doesn't quite feel like that." The Newsnight editor that night was Mark Thompson.

It was 10 years after that Newsnight assignment that Thompson announced himself as a serious player in the broadcast firmament. At the annual Cambridge Television Festival in 1997 delegates were waiting for the keynote speech to be delivered by Alan Yentob. All the senior players in UK television were there to hear of the BBC's latest digital plans. Minutes before he was due to speak, Yentob broke a tooth on a toffee and Thompson was summoned to give an off-the-cuff speech with 10 minutes' notice.

He arrived on stage looking a little like a suburban accountant, and not a very stylish one at that. There was nothing too memorable about his slacks, and, if memory serves correctly, a none-too-fetching jumper.

But Thompson went on to deliver a passionate and powerful defence of public-service broadcasting. This was unvarnished but emotive and articulate. Here was someone who clearly held the old Reithian notions dear to his heart and expressed those values with clarity and vigour, suggesting that real public-service broadcasting was an essential part of Britain's cultural DNA. It was a hugely impressive performance and seemed refreshingly at odds with the technocratic atmosphere that had built around his then boss John Birt. That evening his speech was the talk of the festival.

Thompson then rose swiftly through the ranks, defecting to C4 as chief executive before returning as director general after the departure of Greg d**e in the wake of the Hutton Report. And while Sachsgate didn't quite reach the same pitch and intensity as the furore over Hutton, it got mighty close.

The row clearly demonstrated how much power has accrued to the BBC in some unexpected ways. As respect for other national institutions (politics, church, traditional family hierarchies) recedes, the BBC has assumed more cultural influence. It has become the place where national debates about moral, political and ethical disputes are increasingly being aired. Only last week the appointment of a Muslim as head of BBC religious affairs output provoked apoplectic headlines in some quarters.

But it was the furore over Sachsgate that brought into sharp relief the manner and frequency with which the BBC is increasingly being dragged into the culture wars. The BBC found itself both provoking and, in some cases, leading the debate about acceptable level of taste and decency in the UK. But is the BBC equipped as an institution to perform this role? The Sachsgate affair suggested that this balancing act would place a huge pressure on the Corporation. Can it really cope?

Mark Thompson is in no doubt. "What, to be a place where those debates take place? Absolutely. Where the whole of the UK can bump into each other and be confronted with their differences as well as celebrating the things they hold in common? I think all of that is very do-able. Obviously the challenge is when people have expectations, not just that the BBC should be a place where these things can be debated and discussed, but where people have an expectation that the BBC should take a lead or should, on behalf of one part of the audience or another, exclude content. Once you start getting drawn into the debate yourself, as you inevitably are, that's when life gets complicated."

Thompson admits the BBC got it wrong over the Russell Brand-Jonathan Ross incident and that the material should never have been broadcast. But he is determined to make clear that the BBC can and should be in a position where it will sometimes have to challenge the views and cultural mores of certain sections of society if it is to fulfil its role as a national broadcaster. "It would be foolish to believe you could go into this space without sometimes upsetting some people. There isn't an entirely anaesthetised pain-free version of dealing with the complexity and the contradictory expectations that people have."

More important, Thompson recognises that the debate about "taste and decency" has become too simplified, and he's keen to challenge some of the assumptions that fuel the highly charged exchanges between the BBC and the rest of the media. Whose taste, and whose decency? Increasingly, in a more culturally fragmented, less homogeneous Britain, your taste might offend my decency. Or vice versa.

The BBC will shortly advance this debate further when it publishes a report on taste and standards later this summer. The report came out of a set of recommendations the BBC Trust made to the executive in the wake of Sachsgate. The BBC Trust, concerned about the ferocity of the debate, asked the executive to have a formal investigation into British taste and standards in the UK. Among those overseeing the project were some of the BBC's most senior people - Jana Bennett, Alan Yentob and Roly Keating. It consisted of in-depth research involving several thousand people, making it one of the most comprehensive studies on taste and standards in British broadcasting. It is due to be presented to the BBC Trust this week.

Although the details will not emerge until later in the summer when the full report is published, sources at the BBC say it shows that British audiences have a very sophisticated view of the balance broadcasters try to strike between creative edginess and causing offence. Those questioned recognised that it is a tricky and complicated thing to do - for the the Corporation to attempt to marry these two potentially difficult issues while ensuring that a basic standard of decency is upheld.

There will always be absolute limits around racism, sexism and religious intolerance but, beyond those generally accepted norms of behaviour, what is and isn't acceptable? Thompson says: "We absolutely do need sometimes to declare that in the interests of creative freedom of expression and also of the public's right to hear and see, and to make up their own minds about things, and also in the interests of reflecting a full width of reality, that we will have to push boundaries. There are absolute boundaries which we have to keep within. And with the Russell Brand show, I felt it shouldn't have been broadcast. But the fact that there are absolute boundaries, and that an invasion of privacy and a kind of bullying behaviour is not acceptable, doesn't mean that we shouldn't be brave about content."

The fallout from Sachsgate within the BBC is keenly felt. There is a widespread view that the Corporation is running scared about broadcasting edgy or difficult material. Numerous BBC people spoken to for this article say they are beset by a new tier of "compliance officers" who baulk at the first sight of material likely to cause offence. There is, they say, a new "climate of fear", stifling creativity and responsible for creeping self-censorship. When speaking to senior creative figures within the organisation I was struck by how strongly they felt about how, in their eyes, the Corporation had buckled after Sachsgate.

Here, in no particular order, is a selection of some of the questions which leading producers and entertainers were keen for Thompson to answer:
• Do you think there are occasions when the BBC should broadcast things even though they will lead to complaints?
• Would Jerry Springer - the Opera be broadcast in the current climate?
• Have changes in compliance rules at the BBC been made because you feel that the British public is genuinely becoming more puritanical?
• If so, is it right that the BBC should defer to that?

And on they went.

Thompson denies that a "climate of fear" has taken hold: "I understand why you might fear that: maybe that means that when it comes to the edgy piece ... people will lose their nerve. But in my view the right thing to do is to make sure you comply programmes properly ... but to continue to take significant creative risks. I'm hoping we can convince people by our broadcast actions that the climate of fear is not to be worried about."

So is it reasonable for a senior executive, post-Sachsgate, to come to you and say, "This will attract complaints but we should broadcast it"?

"Absolutely," says Thompson. "And that is a conversation I have, if not daily, then several times a week. There's an expectation most weeks that we will broadcast some things which are likely to raise somebody's eyebrows, if not actually offend them.

Interestingly, and to no great fanfare, one of the newspaper groups that was most vociferous in its moral outrage at the BBC managed two serious apologies of its own within weeks of the Sachsgate affair. One involved substantial libel damages for claiming a world class footballer had used "vile racist language". He hadn't. The same newspaper followed this just weeks later with an apology to a chief constable over suggestions he had wrongly claimed for expenses. He hadn't.

We all make mistakes, but when the BBC makes them, we all want a slice of the action. Preferably a really big slice.

The kind of severe media battering that the BBC endured during Sachsgate would suggest that it has begun to lose the affection of the great British public. There is certainly a feeling that the BBC has lost ground with its heartland, that we no longer have the same degree of trust for Auntie. "There's very little evidence that underlying public support for the BBC is significantly changed," Thompson says. "You can get a blip when you have an editorial problem like the phone competitions we had a couple of years ago, or there is something like the Russell Brand show, but when we look at the overall support for the BBC it's very solid. It benchmarks well against other big public institutions. There's no evidence that it's declining."

The BBC will be pleased to put the Sachsgate affair behind it, but it is not always helped in these efforts by one of the main protagonists. Last month the Ofcom ruling on the affair was broadcast before Jonathan Ross's Saturday morning radio programme. Ross couldn't quite resist the opportunity to undermine it. On air. The ruling was broadcast, and finished thus: "The material that was broadcast was exceptionally offensive, humiliating and demeaning. It was also a gross infringement of privacy." It ended: "For a copy of Ofcom's decision, visit www.ofcom.org.uk"

As soon as it ended Ross joked, "You can never find a pen when you need one, can you?", and followed this by playing Fun Boy Three's The Lunatics have Taken Over The Asylum. Cue more outraged headlines ("Unrepentant Ross mocks Ofcom ruling").

Some people, even those who respect Ross's talent, might be losing patience with his displays of arrogance, and the BBC's tolerance of the same. Is the director general?

"My belief about Jonathan is that in all of the essential ways that matter most, I think Jonathan - and I personally took a very, very tough line on this whole incident - did serve his time. And I think Jonathan does and has recognised the seriousness of what happened. I do believe that. If I didn't believe that I wouldn't say it. But you also have to recognise about Jonathan Ross that to some extent the reason that he is so popular and the reason that he is sufficiently in demand that we pay well for his services is precisely because he's an unpredictable, edgy, entertaining entertainer. If we announced in front of every edition of Friday Night With Jonathan Ross that we could assure the public the programme had been fully complied, and we guaranteed that Jonathan was not going to do anything which was in any way going to be risky or edgy, I think your personal enjoyment of the programme would probably be diminished rather than enhanced."

But it's not only the culture wars that have bruised the BBC of late. Critics argue that the publicly funded institution is distorting the market for its commercial competitors. The level of animosity and frustration levelled at the BBC is more pronounced than ever before. Is it right that a public-service broadcaster should be having such a negative commercial impact on rivals across a whole range of different media? Mark Thompson, not for the first time during our three-hour conversation, doesn't accept the premise.

"I think there's two basic things. One of which is the scope of the BBC's public services. Around the edges I absolutely accept there's a debate, for example about the proposals which were turned down by the BBC Trust to significantly enhance our local web offering. But actually, by and large, we think we've made the BBC's public services rather more distinct and different from the market, whether you're talking about BBC1 or Radio 1 in recent years. And actually we get rather less criticism about those than we used to. The main area of debate at the moment is around Worldwide, the BBC's commercial arm."

BBC Worldwide is now at the centre of negotiations between the BBC and C4 which would see the two organisations set up a partnership designed to raise sufficient sums of money to subsidise C4's public-service commitments. An agreement is now in prospect between the two broadcasters, though it would require government approval to proceed.

This arrangement would come as a source of some relief to the BBC, since the alternative - giving C4 a slice (so called "top-slicing") of the licence fee revenues to subsidise its public-service programmes - is something the BBC has been strenuously resisting.

But Thompson is keen to deflect the notion that it is the presence of a large super-funded public body like the BBC that is causing all of the problems for the commercial media sector in Britain. "Some people, the enemies of the BBC, say that the responsibility for market failure in the commercial media sector lies with the BBC ... well, we're seeing market failure in the US, and there is no equivalent to the BBC over there. And newspapers are in a terrible state in America - probably worse than in the UK. Their network TV is experiencing huge problems ... and these things are happening in a country where there is no large institution like the BBC. What we are seeing is global disruption caused by digital."

To ease the pressure from the commercial sector, the BBC is advancing a "partnership agenda" where other media would have access to BBC content, which they could use on their own websites or channels. "For instance, for our regional news programmes and our local radio we generate a lot of content. And if potentially some of that content could be made available to other media groups so they can enrich their websites, then it gives them a greater chance to make the transition into this new world with richer websites. It seems to me that those arguments [that the BBC is sparking market failure by its sheer size] fade away if the BBC is helping others to make this transition to a digital age."

The BBC knows it has to play nice with the commercial sector, and the partnership agenda is unquestionably part of that process. If it doesn't come to the table with help of some sort for beleaguered commercial colleagues, it knows the political heat will rise.

And yet, even with a change of government a real possibility at the next election, Thompson is optimistic that support for the BBC can be maintained. "I think the odds are that a British government of whatever political colour will decide in the end on a BBC of scale and scope funded by the licence fee. I think the British public will want to continue to pay for an institution which provides high quality news you can trust, great education programmes and high-quality culture and entertainment. From the mid-teens of this century to the mid-20s - ie, the BBC's first 100 years - it feels that by far the most likely policy option is to have a BBC of scale and scope."

Watching Thompson operate throughout the day, and seeing the types of technical, political and strategic challenges he wrestles with, it's easy to assume that the role of DG has become technocratic, removed from the cut and thrust of programming. But Thompson insists that he is still, at heart, a programme-maker. Asked to nominate his desert island TV programmes, his choices are surprisingly mainstream and, for someone renowned for his intellect and slightly academic bent, surprisingly, well, normal.

"If I had to choose just five? Well, the comedies would have to be there. The new BBC film In The Loop is absolutely fantastic, and I think Armando Iannucci's The Thick of It would have to be part of the mix. The Royle Family, The League of Gentlemen would be there. Some of the great dramas - Boys from the Blackstuff, The Singing Detective, Our Friends in the North. I'm over five already. But of course what I'd also want is daily access to the BBC's news and current affairs, so I'd need quite a lot of equipment on my desert island."

There is no sign that Thompson is set for his desert island any time soon, although there must have been times over the past year - with rows over excessive salaries, Sachsgate and the Gaza appeal furore - when it seemed an attractive proposition. "Well, it felt quite noisy for a few days didn't it? But if you want to be and feel as an organisation that you are at the centre of British national life, then you have to accept that... it's going to get bumpy."

As the BBC places itself firmly at the centre of British cultural life, there is no prospect of those rides getting any less bumpy, or any less frequent.

• Do you think the BBC is too powerful? Email review@observer.co.uk

Corporation man

Personal life Born in London 1957, he grew up in Hertfordshire and took a first in English at Oxford. He is married to Jane Blumberg, an American academic, and has three children.

Career
1979 Joined the BBC as a production trainee.
1981 Helped launch consumer strand Watchdog
1988 Editor of the Nine O'Clock News
1990 Editor of Panorama.
1996 Controller of BBC2.
1999 Appointed director of national and regional broadcasting.
2000 BBC director of TV.
2002 Left the BBC to become chief executive of Channel 4.
2004 Appointed director general of the BBC.
2007 BBC investigated for compromise of accuracy and honesty values, and Thompson's directorship criticised for dumbing down television.
He says "There is no point having a BBC which isn't prepared to stand up and be counted."