The Centre for Policy Studies (CPS) paper said the government had missed an opportunity for serious reform in its charter review earlier this year.
The report, authored by Martin Le Jeune, argues for the removal of services that are not “distinct” and are provided by competitors.
It said this could save half of the £3.6bn licence fee. The CPS said a BBC that costs less than £1bn a year is “perfectly possible”.
The paper argued that the BBC should be directly funded by the government in the same way as the Arts Council and the NHS. It said: “As the government already determines the licence fee level, the alleged threat to editorial independence is spurious.”
The report has been released on the day the iPlayer “loophole” – which enables viewers to watch BBC programming online without a licence – has been closed, meaning it is now illegal to use the catch-up website without paying the annual rate of £145.50.
Le Jeune said: “The BBC should no longer seek to be bigger and to provide everything to everyone. There is no reason for providing that universal service via a compulsory tax, when people could choose instead how to spend their own money on what they really want.
“It should instead specialise in what no-one else can do. In doing so it will become not only a smaller organisation, but a better one – providing a genuinely necessary and distinctive service. Nearly everything the BBC provides is now provided to the same or better standard by other organisations which have to compete with one another and fight hard for every consumer penny. That competition is the spur to improvements in quality, service and innovation.”
A BBC spokesperson said: “The recent government consultation on the future of the BBC showed huge support from the public for the BBC and what it does, with very few people wanting the BBC cut back. The BBC and the licence fee represents excellent value for money.”