To the anti-BBCers
The TV license is used to pay for all the BBC's UK services - TV as well as radio. At some point in future they may be able to adopt a subscription model, but because they're still the UK's premier PSB, they could only do so if free subscriptions were handed out to the poor / elderly etc. who couldn't afford the £200+/year (accounting for inflation and a bit extra for those that decide not to subscribe) - besides which, you can't easily do encryption on analogue services.
As for the alternative - allowing advertising - one of the reasons those who like the BBC like the BBC is that programming isn't interrupted every 10 minutes by 5 minutes of advertising. OK, so they fill the space between programmes with about 5 minutes of trailers, but that's a policy also followed by the majority of TV / radio channels - including non-BBC commercial offerings (e.g. 4Music / TMF).
The BBC currently has to walk a very narrow tightrope between PSB commitments (which politicians like but only attract a small audience share) and populist programming (which politicians hate but attract a much larger audience share) - hence the recent 'brainwave' of wrapping science documentaries up in dramatic reconstructions, thus killing two birds with one stone. But one thing the BBC can do much more quickly than a commercial broadcaster is interrupt the schedules when there's an event of major (inter)national importance (e.g. WTC attacks, Di's death), because they don't need to worry about losing revenue from the adverts in between programmes that have been dropped.
With the recent controversy over BBC Worldwide (err...how big is Lonely Planet's market share amongst travel books? How could the BBC owning it impair competition, when competition presumably wasn't impaired when it was in other hands?) they could perhaps stop advertising BBC Worldwide publications on air, and / or if necessary increase the price of some magazines to make them less competitive (e.g. the Radio Times is significantly more expensive than most other listings magazines - but then again it is a more weighty tome than most...)
Bear in mind that the license currently costs a meagre £11.88 / month or 39p / day - significantly cheaper than most subscription packages, and you get 9 TV channels, 10 national radio stations, 9 regional radio stations, and numerous local radio stations.
Although controversy and non-payment could be significantly reduced if it was possible to buy a license to cover all residents in a house of multiple occupation (e.g. student halls of residence) - evidently the cost would be higher than a standard license but it could be recouped by an extra few pounds on the rent :)
And just before I sign off, another potentially good idea: charter renewal should be carried out by a completely independent body rather than the government of the day. The BBC is supposed to be independent of government interference, but as its charter is renewed by the government of the day, it tends to toe the government line in case their charter is meddled around with too much at renewal time (e.g. forcing them to hand over part of the license fee to rivals - the fee is already subsiding digital switchover).