Subscription is the BBC's best hope of salvation; The licence fee is obsolete and leading the Beeb into decline, but former Panorama producer David Graham offers a way out

It is time to reform the BBC. That might seem strange from a former BBC producer. Let me explain.

I worked on Panorama in the late 1970s with an extraordinarily talented peer group — the novelist Robert Harris, Jeremy Paxman, Tom Bower, author of many biographies. Roger Bolton was a courageous, committed editor.

As the economic crisis known as the "Winter of Discontent" unfolded in 1979, my role was to make programmes about it. This took me far and wide and my research told me something obvious: private enterprise pays for the welfare state, and our private sector wasn't working very well.

Later in my career I became an independent producer and set up a company called Diverse, making programmes for Channel 4. I learnt that independence meant intense competition, staying on budget or going bust.

Fast forward to September 1987 when I was asked to attend a Downing Street seminar, chaired by Margaret Thatcher, to discuss introducing more competition into the broadcasting market. I remember her saying: "The old guard want to keep what they have and the new ones want to get it all for themselves."

Since then, it seems, the wheel has come full circle. We are at another moment when our country should ask all its institutions, public and private: "Are you doing enough?" The BBC is a national asset, with both a public service and an "enterprise" role, but the mechanism by which it is funded, the TV licence fee, does not properly reflect this duality of roles. I believe that the licence fee is obsolete and that it is in the interest of the BBC to act now, before the system begins to break down.

For a start, the system criminalises the poor, often young single mothers. More than 150,000 people get hauled into magistrates' courts each year and are prosecuted for non-payment of the fee. Yet there are commercial services they could have been watching that get no funding from the fee.

Resistance to payment will accelerate as technology undermines the very basis of the fee and as the BBC's competitors become more hostile to it. Any household that receives a broadcast TV signal has to pay the fee. But the law did not reckon with high-speed broadband. If you download content from servers and watch it on a computer the fee does not apply. The BBC will get short shrift if it proposes a broadband fee.

And the problems go deeper. The BBC's strategy for maintaining the licence fee is to make sure that as many people as possible tune in every week. That means it must compete aggressively with an advertiser-funded channel such as ITV1.

People call this "dumbing down". The BBC's competitors see things in a more brutal way: the BBC is a subsidised entertainment firm with noncommercial obligations.

If the BBC persists with its funding model it faces decline. I do not rule out the idea that it should seek to raise revenue by being allowed to accept advertising, but subscription is the better route.

Subscription or pay-TV is now TV's largest, most dynamic and fastest-growing revenue stream. Subscription offers membership. I am a member of my county cricket club. I can visit games whenever I want, often for short periods, without paying a full daily entrance fee. I feel part of something I value. That feels the right model for the BBC.

Subscription allows for different services for different interests and can sell at different prices. As a film costs more in the cinema than on DVD, a TV programme could cost more on first release than on repeat.

HBO, the American channel that is often used as an example of a successful subscription channel, is not a model for the BBC, but it illustrates an important thing: how a small number of American homes, willing to pay a bit more for something they could not get on "network" channels such as NBC or CBS, conjured out of HBO a stream of excellent work, including dramas such as The Sopranos and The Wire.

I am not the first person to argue that subscription is the right option for the BBC, but its moment may now have come. If some people don't want to pay for TV, they should have the right to some free public service programmes and to free programmes funded by advertising.

Most people watch the BBC and I expect most people to subscribe at today's cost.

Just a few weeks ago I heard a minister in the previous government say, with some passion, that the BBC wants the "rewards of the private sector without the risks". I sensed regret that she had not pushed for reform. I hope the new government does so. It has the chance to create a dynamic media industry and to offer the public the chance to make its own choices.

David Graham is chief executive of Attentional, a media consultancy.

The Adam Smith Institute publishes his paper, Subsidy Junkie or Global Player: Decision Time for the BBC, tomorrow