The licence fee should be scrapped and the BBC governors abolished, experts advising the Conservatives have said.
The £116-a-year licence fee is the BBC's main funding mechanism
The Broadcasting Policy Group, headed by ex-BSkyB and Channel 5 executive David Elstein, was asked by the Tories to examine the BBC's future.
It said the BBC should be run like Channel 4 and start subscriptions for some digital television channels.
The BBC's charter comes up for renewal in 2006 in the wake of Lord Hutton's criticisms of its journalism.
The report is being officially handed to the Conservatives on Tuesday. The party said it is not bound by its findings.
Julie Kirkbride, the Conservatives' shadow culture secretary, said it would be examined in detail before any policy decisions were made.
Her Liberal Democrat counterpart Don Foster said if Conservative leader Michael Howard backed the report, "the Tories would at last support pulling the plug on the BBC".
He said: "The abolition of the licence fee in other countries, such as New Zealand and America, has shown the crucial role of public service broadcasting diminish rapidly."
In a statement the BBC said it welcomed all contributions to the debate over the future of the public service broadcasting.
It said: "Radical ideas are welcome. They can help test conventional wisdom and move the debate on.
"But in the end public service broadcasting exists to serve the public and proposals of the kind put forward here must be judged on whether they would deliver better results for viewers and listeners."
Mr 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.
The BBC is overwhelmingly funded by the £2.3bn a year it receives from TV households paying the licence fee, which the group says is at the root of the BBC's problems.
Abolishing the board of governors
Splitting the BBC into separate units
Starting subscription charging for BBC television services
Abolishing the television licence fee
Creating new public broadcasting authority to share out funds to public service broadcasters
"The ceiling imposed on the licence fee by political acceptability will gradually cause the corporation to fall behind rivals with access to what BSkyB has shown to be the deep pockets of consumers," it says.
From 2007, some BBC digital television services should be gradually funded by subscriptions - starting at about £130 and eventually falling to about £50, said the group.
Ministers plan to switch off analogue broadcasting signals in 2010.
The experts predict it will be technically possible to charge all viewers and so abolish the licence fee.
In the meantime, cash raised by the fee should go to the Treasury, rather than the BBC, says the report.
It would then be for a newly-created public broadcasting authority, independent of government, to share out the money.
"Broadcasters, including the BBC, would be invited to compete for funding to pay for public service output," says the group.
Mr Elstein: BBC must be freed up
Programme producers would also take part in this "contestable funding" system.
The group says the change would strip the government of its ability to "punish" the corporation by curbing its income.
"The BBC must be free up to take full advantage of the new commercial opportunities which will increasingly present themselves," said Mr Elstein.
"It must, however, also be equipped to meet social and civil needs to the highest standards without fear of interference from government."
BBC One's Panorama is holding a debate about the future of the BBC at 2215 GMT on 7 March.