The BBC should focus on public service broadcasting, an independent panel set up by the government has said.
Culture Secretary Tessa Jowell has said the BBC would remain "strong"
Value for audiences and consistent high quality programming were the priorities, it said.
The panel, headed by Lord Burns, has published a paper on the clarity of the BBC's public purposes and remit, and how it is funded.
It will be discussed on Friday in the last of a series of debates on how the BBC might be run and regulated in the future.
The debates have been held before an invited audience and broadcast over the internet.
There was general support among the panel for the continuation of the licence fee for the next few years.
But following the nation's digital switch-over - scheduled for completion by
2012 - arguments for replacing the licence fee would become stronger, said Lord Burns.
What is the BBC charter?
It lays out the independent, public service role of the BBC, its regulation and funding through a compulsory licence fee
It runs for a 10-year period and expires in 2006
A new charter will be approved by the Culture Secretary
The last charter stipulated the licence fee should be fixed at 1.5% above inflation
"As a charge for the right to watch television programmes, the licence fee
has considerable merits as a way of funding broadcasting," he wrote in the report.
"We agree that the balance of the debate lies in favour of the licence fee
for the time being.
"However, we are impressed with the arguments that suggest it
will become increasingly difficult to sustain the licence fee in the long term
when conditional access is available."
The findings, which follow a major public consultation launched by Culture Secretary Tessa Jowell in December 2003, will feed into a Green Paper due to be published early next year.
A Green Paper is a consultation document issued by the government which contains policy proposals for debate and discussion before a final decision is taken on the best option.
The BBC's existence is based on a Royal Charter which expires at the end of 2006.
Before its renewal the Department for Culture, Media and Sport (DCMS) is undertaking a detailed review and inviting public comment.
The panel's paper also concluded that the BBC's remit needed to be independently defined so it could be "judged in relation to the commercial market".
However the panel said providing public service broadcasting "should not squeeze out what might be loosely termed entertainment programming".
The corporation often provided "cultural benefit that is under-provided in the commercial UK market".
Mark Thompson is to launch the BBC's charter review paper
Funding the BBC would be a choice between the licence fee and another "more mixed" method, the paper added.
The latter was "likely to involve a move to subscription" which would come from users of the BBC, a government grant financed by tax, or advertising.
There was a need for a "robust mechanism for handling complaints, with adequate arrangements for external appeal", the panel said.
Exit 'make-over' shows
And the BBC should play a more complementary role with respect to the public service content of other broadcasters, the report went on.
For example, the BBC would need to be more willing to stop making programmes "which it had originated but which had subsequently become widespread", such as make-over shows and "certain types" of game show.
Lord Burns said the BBC was highly valued, but added: "There is widespread agreement that we need an appropriate system of governance and regulation for the future."
There are three main models for regulation that will be considered on Friday:
Reformed internal regulation - the "Building Public Value" model recently set out by BBC chairman Michael Grade
External regulation by Ofcom
External regulation by a newly formed "Ofbeeb"; or a hybrid of the two - an "Inbeeb"
The BBC set out its "radical" vision in June for how it should operate in the 21st Century as part of its charter review process.
Mr Grade said one of the key changes would be a clear separation between the role of the governors and the management of the BBC.