Review of the regulatory frameworks for broadcasting distribution undertakings and discretionary programming services

Mr. Robert A. Morin
Secretary General
Canadian Radio-television and
Telecommunications Commission
Ottawa, Ontario
K1A 0N2

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Dear Mr. Morin:

1. Friends of Canadian Broadcasting welcomes the opportunity to comment on selected submissions of other parties in response to the Notice. FRIENDS is a watchdog for Canadian programming supported financially by 100,000 Canadians. The following comments should be read in conjunction with our October 19th and January 25th submissions.
2. In the first phase of this process, broadcasting distribution undertakings (BDUs), with considerable endorsement from the Dunbar-Leblanc report and, to some extent, the Commission's own call, argued for virtually total BDU deregulation. In essence: let market forces (in our view a euphemism for BDU operators) decide what is in the public interest. Get rid of the access rules, as well as the tiering and linkage rules that have, until now, ensured that less popular but nonetheless important services continue to form a part of the fabric of a diverse Canadian broadcasting system. Then allow BDUs to bring in any American service that they wish, excepting only those that compete directly with existing Canadian services.
3. All this would have the effect of ensuring that there would be absolutely no chance for the proven successful model of Canadianizing popular US networks to remain viable in future years. At the same time, the BDUs have advocated a move to a simple preponderance test for the carriage of Canadian channels. On most systems this would likely lead to a significant drop in the number of Canadian channels carried and a substantial drop in Canadian program spending.¹ Even the long-standing practice of simultaneous substitution, which the Commission developed decades ago, has been called into question.
4. When, on November 5th, 2007, the Commission opened up the hearing to include a further discussion on fee for carriage and on November 30th, distant signals, we noticed that the gloves came off.
5. As might be expected, BDUs abhor the thought of an additional fee that would increase the cost of their product to the subscriber while not dropping to their bottom line. Bell Canada, Rogers Communications, and Telus Communications partnered in the creation of an economic impact study (authored by Suzanne Blackwell and Steven Globerman) which purports to demonstrate the economic impact of implementing fee-for-carriage. This study concluded that fee for OTA carriage would lead to the virtual demise of the industry. This scare tactic brings to mind cable's "Death Star" predictions from 1993 when they told the Commission about the forthcoming demise of their business should DTH satellite technology be permitted in Canada.
6. Some of the key conclusions of the Blackwell/Globerman study:
7. "…a fee for carriage is expected to cause at least 565,000 to almost 1.8 million subscribers to cancel their BDU services, many of whom could shift to unregulated sources of video content including black/grey market satellite and the internet."²
8. "Among those subscribers that retained their BDU services, a significant proportion would likely downgrade their service. The Canadian survey results reviewed in Section III (C) indicate that a price increase of $5 in basic services will cause more than one-third to one-half of BDU subscribers to downgrade their existing BDU services. The impact analysis assumes that 30% of remaining BDU subscribers will downgrade by an amount sufficient to offset the price increase from a fee for carriage."³
9. "Consumer disconnections and downgrades would result in substantial revenue losses for BDUs, ranging from more than $400 million to more than $1 billion annually. Specialty and pay services would suffer revenue reductions as a result, ranging from $140 million to almost $350 million annually. These negative impacts would far outweigh the $360 million to $580 million that a fee for carriage could bring to OTA broadcasters."⁴
10. Bell, Rogers and Telus also sponsored a Harris-Decima poll examining subscribers' response to a $4.00 increase in their monthly BDU bill for payment to local privately owned over-the-air (OTA) channels and $1.00 per month for the CBC/SRC. As might be expected, the survey concluded that that 84% of those surveyed opposed paying for additional fees for the private services that they currently receive without charge, and 75% opposed paying additional fees for CBC/SRC.
11. We have reviewed the methodology underlining two surveys submitted by interested parties, and offer detailed comments in the Appendix to this submission. In summary, we note that the Harris-Decima online survey published a margin of error which we believe to be contrary to ESOMAR⁵ standards and the soon to be adopted Marketing Research and Intelligence Association (MRIA)⁶ rules.
12. Such margins in online surveys are generally considered to be false and misleading. Also, owing to the online sample, there is a significant built-in bias, particularly in questions regarding Internet use and online media. Using an online panel can be counted on to bring out a higher level of favourable responses to Internet use-related questions than will other methodologies. Further, consumers will always oppose any price increase, regardless of product or sector, when they are presented with no context in which to evaluate an increase, such as any benefits, reasons or alternatives.
13. Two-thirds of those who indicated they would discontinue service said they would do so in favour of alternative media, such as the Internet – this from an online survey! But people who say they will discontinue rarely do. The question is therefore flawed. Discontinue to what? When placed in context, with the benefits or reasons for the increase, or the available alternatives, or even due to sheer resignation, we submit that subscribers will rarely follow through to discontinue.
14. While BDUs state that they do not believe that there is a financial crisis in OTA television, they have also asked the Commission not to consider the financial results of OTA broadcasters separate and apart from the corporate results of the major players, citing the fact that many of them also have a significant interest in specialty services.
15. The introduction of specialty channels in Canada has created significant diversity and viewing choice while at the same time, in the case of Canadian specialty services, creating hundreds of millions of dollars of additional Canadian program spending, as well as many thousands of hours of incremental Canadian programming. US specialty services have been well received by Canadian viewers and, as various submissions to this proceeding have concluded, very little US specialty programming is not currently available in Canada as part of Canadian specialty schedules. It should also not be forgotten that the introduction of specialty services has dramatically transformed the BDU business and fuelled significant increases in profitability, as the Commission's data make clear.
16. For their part, the OTA broadcasters have pointed to the fact that BDUs have made enormous profits by reselling their signals. They have also pointed to declining profits which have occurred primarily as a result of the introduction of new services, time shifting and the existence of multiple same-time-zone viewing options, all of which have fragmented audiences. They also point out correctly that the advent of specialty services has been extremely profitable for the BDU sector and, even though cumulative digital specialty losses are in the hundreds of millions of dollars, BDUs have certainly benefited significantly from the introduction of digital services.
17. OTA broadcasting profits are in decline largely because of audience fragmentation, but also because programming costs, especially foreign acquisition costs, are rising as a result of increased competition for programming rights. This increased competition has resulted from the creation of more services bidding for the same programming. So, while diversity has increased, it has done so at a cost. It is in no Canadian party's interest to see expenditures on the acquisition of foreign programming rise. However, most recognize that this foreign programming generates the vast majority of OTA revenue.
18. OTA broadcasters also correctly state that BDUs are, and have for some time, been generating profits that far exceed those of the broadcasters whose signals they sell to their customers. In addition to not being compensated for local carriage, the broadcasters correctly assert that time-shifting and the addition of alternative same-time-zone viewing options have significantly and negatively impacted their business.
19. These are complex issues which should be viewed through the lens of the Commission's announced goal of ensuring a strong Canadian presence in the Canadian broadcasting system. While FRIENDS has consistently supported the strong presence of priority programming in Canadian OTA services, we have also spoken out for the presence and importance of local programming, which today consists largely of local news.
20. We recognize that local programming depends on the existence of revenue streams to fund it. For this reason, we support BDU access to local advertising, provided the incremental revenues are allocated to additional community channel spending – as a Condition of Licence. We support this proposal because we have observed that, in many smaller and mid-sized communities, the only local TV news is that which is available through community channels. In larger centres, the cable community channel adds to diversity of voices.
21. But it is for this same reason that we support fee-for-carriage, because we recognize that without a healthy revenue base, the desired programming result will not occur. Furthermore, it seems patently unfair that BDUs should be able to continue to profit from the resale of OTA signals without compensation, especially when only 11% of Canadians still get their television over the air, and this number continues to shrink, slowly.⁷
22. While we do not oppose changes in regulation that might make the broadcasting system easier to administer, or provide greater flexibility and diversity for consumers, we are convinced that the success of the Canadian broadcasting system today is largely a result of a complex and interactive matrix of CRTC initiatives which have been, over time, interwoven and inextricably linked in a regulatory ecosystem. We strongly caution the Commission about the unintended consequences which will result from ad hoc changes to this ecosystem.
23. The existing tiering and linkage rules favour services based on when they were licensed as opposed to the contribution they make to the system. As a result, some services have benefited simply by being part of a package with other services. The time has come to address this favouritism, as very few consumers want to pay for services that they do not use. However, we do not believe that popularity should be the sole criterion for carriage.
24. FRIENDS believes that the contribution of independently-owned specialty channels is just as critical for the health and diversity of the broadcasting system as the presence of independent program creators and producers. A ‘market forces' approach puts these small independent groups at the mercy of the five very large BDUs. As the Commission has heard throughout the Diversity Hearing process, as well as from many written submissions in the present process, fair and equitable access for the independents is possible only if and when the Commission maintains and enforces rules to overcome the BDUs' dominant power, and thereby levels the playing field.
25. There is no reason to believe that this dominant BDU controlling position will decrease going forward. Shaw, for example, has continued to purchase any system put up for sale in its territory. Rogers has done the same while, at the same time, making significant investments in Cogeco. It is logical to conclude that the purpose of this investment is to position itself to take over Cogeco if and when the opportunity arises.
26. Recently, when an initial offer by Rogers to purchase Aurora Cable was rebuffed, Rogers filed an application with the Commission to overbuild Aurora. On February 13, 2008, Rogers announced that it had reached an agreement to purchase the company. One might question what real choice the owners of Aurora might have had, considering that their effective alternatives might have been either to sell their business, or to watch its value shrink under the dominating influence of a much bigger company entering its market.
27. During FRIENDS' appearance before the Commission's Diversity of Voices panel on September 21, 2007, the Chair asked: "Are we fixing something as opposed to fixing itself because the Telcos are coming on, there is also a question of doing access by way of YMAX, etc. and, you know, the whole delivery of these things over wireless, might technologically fix what you see as presently in your advantage about cable companies?"⁸
28. While FRIENDS agrees with the Chair that competition may evolve over a much longer term, the reality is that for the foreseeable future, the distribution of television in Canada is and will be controlled by a very small number of companies. As detailed in the Commission's 2007 Broadcast Monitoring Report, in 2006 cable reached nearly 74% of Canadian homes served by a BDU. Of this number, the top four cable companies: Rogers, Shaw, Vidéotron and Cogeco, with almost seven million homes combined, represented 92% of total cable homes and 68% of all homes. DTH and MDS combined reached only 26% of BDU homes.
29. Rogers, Shaw and Vidéotron dominate their respective territorial monopolies. While they express themselves as champions of competition, FRIENDS asks what competition in broadcast distribution exists in Canada, short of a seismic policy change permitting the arrival of real competition from the likes of Time Warner or Comcast. While the majority of Canadian subscribers have other options, none of these offer the robust high-bandwidth advantages of cable, and the entry costs are much less affordable.⁹
30. How should the Commission respond to the polarized points of view in the various submissions? As subscribers, Canadians have experienced fee increase after fee increase at the hands of their respective BDUs. As pointed out in the CEP submission, these increases have escalated substantially since rate deregulation. Yet, there is absolutely no indication that BDUs, especially cable BDUs, have lost substantial numbers of customers or profitability as a result.
31. However, according to the Blackwell/Globerman report, the implementation of fee-for-carriage at even modest levels will cause the virtual collapse of the cable industry. We don't think so. As pointed out in FRIENDS' January 25th submission, Rogers has just announced fee increases for dozens of its services, none of which seem designed to put Rogers out of business. In fact, Rogers¹⁰ charges a monthly $2.99 ‘digital services fee' just to allow a customer who has purchased a PVR access to its system, and $12.95 a month to rent an HD digital box. Yet a $3.00 to $5.00 monthly fee-for-carriage increase per month is expected to cause hundreds of millions of dollars in cancellations and downgrades!
32. As evidenced by the Harris-Decima poll, if one asks average consumers if they want to pay more for the same services that they are now receiving free of charge, the overwhelming response will be no. But this is obvious, and is a clear case of eliciting the desired response by asking a question that, without context, will always generate a largely negative response. As the Commission is well aware, the reality is that television is a service that most Canadian homes choose to acquire and history has shown that what consumers may say they will do in surveys and what is actually done are often very different. (See Appendix for details.) Furthermore, if the Commission were to accept FRIENDS' recommendation that fee-for-carriage be applied only to digital customers, then implementation would have no impact on analog service customers.
33. When the Commission made the decision to approve DTH in Canada, it provided the great equalizer to several millions of Canadian homes lacking access to cable, or wanting an alternative to cable. DTH has provided access to the same programming that was hitherto widely available in major urban centres, and eliminated the former access inequity that existed between rural and urban Canadians. While there have been some incidents along the way, cable's 1993 contention that the "Death Stars" would put them out of business has proven to be utterly baseless.
34. A highly desirable outcome from this proceeding would be public policy that balances the competing interests of OTA broadcasters, specialty services and BDUs; and that balances the interests of subscribers as consumers and also as Canadian citizens wishing to see their own stories and issues portrayed on their television screens.
35. In conclusion, we recommend that:
36. The Commission recognize that the interactive matrix of regulations it has created over several decades has enabled the flowering of a distinct Canadian television system, offering more choice than is available to typical US subscribers. It is an ecosystem of rules and policies. Tinkering with some of these in isolation would most likely have long-term unintended and negative consequences that would undercut the stated objective of "ensuring a strong Canadian presence in the Canadian broadcasting system".
37. FRIENDS believes that BDUs should be allowed to sell advertising on the community channel in exchange for incremental expenditures to strengthen local programming, supervised through an appropriate Condition of Licence.
38. FRIENDS supports the implementation of fee-for-carriage for digital subscribers provided OTA broadcasters commit to maintain and, where feasible, increase their commitment to local programming; these commitments to become Conditions of Licence during the 2009 group licence renewals.
39. Most important, the Commission should ensure access to the system for independent channel owners in a manner which recognizes the dominant position of BDUs in the negotiating process. The Commission has heard witness after witness explain that, except for the few major station groups, unless one has the clout to go toe-to-toe with the BDUs, there is no such thing as a fair negotiation. This constitutes a fundamental flaw in the system.
40. Just as it is desirable to have independent producers substantially represented in the system, so it is equally important to have independent owners participate – properly protected from BDU abuse of dominance. Given the BDU concentration of ownership and dominance that the Commission has sanctioned over time, this recommendation is essential for the continuing diversity of the system.
41. Finally, simple preponderance will result in a significant reduction in the carriage of Canadian channels. Also, simple preponderance could be expected to greatly reduce the flow of funds to Canadian specialty and pay services, and therefore their capacity to commission and acquire Canadian programming.¹¹ FRIENDS therefore recommends strongly that the Commission reject this proposal.
42. However, FRIENDS considers that the existing tiering and linkage rules can be amended to provide BDUs with greater flexibility in how they package existing services to their customers.
43. FRIENDS reiterates its request to appear at the public hearing beginning on April 7, 2008 to offer a viewers' and listeners' perspective.

Yours sincerely,

Ian Morrison
Spokesperson

For information: Jim Thompson 613-567-9592