The report says Channel 4 or E4 may do better at attracting young audiences
The BBC must undergo a radical overhaul and Channel 4 should be privatised, a think tank has said in a report on the future of UK broadcasting.
The centre-right Policy Exchange said the BBC should cut the amount it spends on sports rights, popular entertainment and shows for 16 to 35-year-olds.
It also urges the government to drop its controversial "broadband tax".
The BBC Trust said any proposed changes must not put the public value of the BBC or its independence at risk.
The report by the free-market think tank said public service broadcasting was under strain and needed radical reform if it was to survive in the digital age.
It said the BBC should put quality before ratings and leave sport and popular entertainment to commercial channels.
It highlighted the reported £6m a year salary of Jonathan Ross, who announced he was quitting the BBC last week.
"The problem was not so much what the BBC paid, but what the BBC was doing in the bidding ring in the first place," the report said.
It recommended licence fee money should be spent on Channel 4 or E4, rather than BBC Three, in order to reach 16 to 35-year-olds.
But BBC Three controller Danny Cohen said it was the only channel "focusing on young people in the UK which makes serious current affairs for young people - a really important public service genre".
"Young people pay their licence fee too and I don't quite understand why young people who pay just as much as other parts of the population shouldn't get just as much value out of their licence fee as everyone else," he told 5 live.
Young people were "the future of the BBC, the future of the licence fee", he said.
"If they're not watching, enjoying, engaging with the BBC, why would they want to pay the licence fee when they're older?"
The report also called for BBC Worldwide, which is the corporation's commercial arm, to be privatised and the BBC Trust to be scrapped.
Policy Exchange said a Public Service Content (PSC) Trust should be set up to promote public service broadcasting across all TV, radio and broadband.
It would lead the way in tasks such as monitoring the delivery of BBC services and reviewing the effectiveness of the BBC's co-funding obligations.
The report also said government plans for a "broadband tax" to fund super-fast broadband should be scrapped and funded from general taxation, if it is shown to be necessary.
Meanwhile, Channel 4 should be privatised in 2012 but retain a public service broadcasting licence for at least 10 years.
The report said it should receive extra digital capacity, reallocated from ITV and perhaps the BBC.
Channel 4 should also be granted cross promotional and linked access to BBC new media services such as www.bbc.co.uk and the iPlayer.
The BBC Trust said any proposed change must not put the public value of the BBC or its independence against inappropriate political or commercial influence at risk.
Mark Oliver, the author of the report called Changing the Channel, was previously the BBC's head of strategy and has advised the government.
He said: "The current UK broadcasting system was set up in the 1950s and now struggles to keep up with the extraordinary changes of the digital age.
"It is clear that the 20th Century analogue institutions that were created are now worryingly out of date.
"We need a dramatic rethink if we are to continue to deliver public service broadcasting in an entirely new age."