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Broadcasting Notice of Consultation CRTC 2014-190, CRTC Let’s Talk TV Proceeding - Final Submission

Oct 3, 2014

Introduction

Friends’ final submission will respond to four major themes addressed in the Commission’s Working Document (or notable for their absence) and associated submissions from parties at the Oral hearing or in Undertakings filed thereafter.

Going into the proceeding, the key theme was unbundling, and the Commission’s clear desire to accept both appropriate and inappropriate “policy directions” from the Harper Government.  In addition, the Commission demonstrated an appetite to radically undo the current regulatory framework.

A few weeks later, everything has changed.

Key elements of the Commission’s radical restructuring of the current regulatory framework have been soundly rejected by virtually all stakeholders in the system, and from surprising quarters1.  Notable in this regard was the near unanimous rejection of the Commission’s ill-conceived proposals to eliminate simultaneous substitution2, amend the current foreign services test, and eliminate the requirement for a preponderance of services received by a subscriber to be Canadian.

Two issues, neither of which were Commission priorities – nor even really on the radar coming into the proceeding, have now come to the fore.  One is the obligations of over the top television (OTT), the other the fragility of smaller-market local TV.

The Chair has consistently made two things clear about OTT: That the Commission’s exemption of OTT is a form of regulation; and that, under the Act, the Canadian Broadcasting System is one system (that is, it includes OTT).

That view of OTT – quite apart from the question as to whether OTT should make a specified contribution to Canadian programming – has now been directly challenged by Netflix and Google, and undermined by the Prime Minister.  This demands a response.

The “noise outside the room” that appeared to shape the Commission’s views on these matters, to some extent fed by the Commission itself3, has shifted from unbundling to not “taxing” Netflix.

A third area of “noise” is emerging, although it has not yet hit the Harper Government’s radar.  It will.  That is the likelihood of local TV station closures, particularly in small- and medium-sized communities across Canada.  All politics is local!  If the Commission does nothing, stations will start to close within weeks or months of the Commission’s decision.  Given its appearance of ‘ownership’ of Commission decisions, the Harper Government will wear these closures, and likely lose seats it now holds as a result.

A fourth, albeit longer-standing and currently quieter, area of “noise” relates to the CBC.  In his appearance before the Commission, the current president once again demonstrated why he remains the Harper Government’s best weapon for the institution’s destruction.  The CBC’s presentation radiated with backward ideas, the absence of necessary analysis and the lack of any defining vision of what a public broadcaster can and should be.  Fortunately, Canadians still care about the CBC and the Commission is in a position to help, despite the disastrous tenure of Harper’s man at the CBC, Hubert Lacroix.

At the hearing’s close, the Chair stated:

“We will make our decision known in due course. We will do so based on the record before us. In fairness to all participants and in light of our mandate, which is defined by statute and by properly adopted policy direction, we will decide based on that and nothing else.”4

Friends hopes this statement is an indication that the Chair and this Commission have assumed the spine that the Act requires. There is a profound distinction between being sensitive to the views of the government of the day, and directly adopting that government’s focus-group-generated platitudes.

The CRTC does not need to win popularity contests.  It is certainly not required to do the bidding of the government of the day5.  Its mandate is to regulate and supervise the Canadian broadcasting system, pursuant to the Broadcasting Act.  It is here to do the right thing, as it sees it.  And in so doing, it can sometimes save a government from itself, and sometimes save the system from a particular government.

We thank the Chair, Vice Chair, Commissioners and staff for the courtesy shown to us and to all parties appearing at the oral hearing. We wish you well in your forthcoming deliberations.

Response to submissions on the Obligations of OTT towards the broadcasting system

In its appearance, the Ontario Government6 argued for a “reciprocal contribution to the Canadian broadcasting system by foreign over-the-top providers” and urged that Canadian content financial obligations for foreign OTT be addressed “as soon as possible in a separate proceeding”7.

Parties like CMPA, ACTRA and DGC made similar submissions, as did Friends.

Most broadcasters did not call for obligations to be placed on Netflix, per se, but rather for a level playing field.  That is, if obligations are not being placed on foreign OTT, they should not be placed on the online services of Canadian broadcasters8.

Like CMPA, Friends agrees with this position, and therefore opposes the Commission’s Working Document Proposal 10 (Redefining broadcasting revenues to include online activities) unless and until appropriate obligations are imposed on foreign OTT.

Foreign OTT providers9 oppose any mandated contributions on three principal policy grounds:

  1. It would set a bad international precedent;
  2. It is not necessary given the success of Canadian content online; and
  3. It would not be fair to require mandatory contributions from which foreign OTT could not benefit10.

Parties did not make the traditional line of argument that regulation was impossible.  It is now generally accepted that online services, foreign and domestic, are subject to Privacy laws, the Criminal Code, provisions of the Telecommunications Act and tax laws, among others. Indeed, foreign OTT players specifically avail themselves of such laws and regulations when it suits them: to assert “net neutrality” or avoid collecting and paying HST, for example.

The other policy arguments made against Canada imposing mandated OTT contributions are weak at best.

The suggestion that a foreign OTT contribution requirement would set a bad precedent internationally is, at least, honest.  It would set a bad international precedent – for foreign OTT providers.  Canada is not alone in trying to balance historic measures to support domestic culture with the global nature of the Internet.  References were made at the hearing to Netflix’s entry into France.  Even a modest step made by the CRTC in this direction would be keenly watched, and silently applauded by policy makers in many non-US western democracies.

On the success of Canadian content, online and generally, and the impact of OTT, the news is both good and bad.  Certainly, Canadians have embraced platforms such as YouTube as both creators and users.  No one is arguing that somehow content regulation11 should apply to user-generated content (UGC).  And while YouTube channels are starting to share some characteristics of TV, it may well be that, for now, in the absence of evidence of direct impact, no content regulation should be applied12.

The same cannot be said of OTT providers like Netflix.  As we stated in our appearance, no one can any longer credibly assert that new media, including OTT, remain merely complementary and pose no threat to broadcasting licensees’ capacity to meet their obligations.  Evidence includes losses of program packages, losses of Pay TV subscriptions (cord shaving), and losses of BDU subscribers (cord cutting)13.

That said, the debate over content regulation of OTT now appears to be overshadowed by the refusal of YouTube and Netflix to provide even the minimal confidential data requested by the Chair, consistent with the exemption order under which these services operate in Canada.

Confident that they can simply refuse the Commission’s requests – presumably based on the public statements from the Harper government, if not private exchanges with Harper government officials14 – Netflix and Google have thrown down the proverbial gauntlet.

The Commission’s very jurisdiction and authority have been challenged. 

It has to act.

Friends notes the Commission’s appropriate decision to wipe Netflix and Google’s testimony and filings from the record of the proceeding, should they not fully comply with the Commission’s undertaking requests15.  Unfortunately, while this ensures procedural fairness for the Let’s Talk TV proceeding, it does nothing to bolster the Commission’s jurisdiction.

To that end, Friends believes that its proposal that the Commission commence a review of the New Media Exemption Order (NMEO) should be adopted immediately, rather than following this proceeding.

This would demonstrate the CRTC’s independence and the care with which it nurtures its mandate.  It would also directly follow up on the Chair’s observation that failure of foreign OTT to provide requested information would jeopardize status under the exemption order.

An NMEO review would bring everyone to the table.  A stated objective would be to determine what contributions pursuant to the Broadcasting Act would be appropriate for OTT services and other Internet-based TV players.  Google and Netflix could choose to participate or not, provide data or not.  But failing to participate and provide data would simply mean the Commission would base its decision on the record before it.  In other words, the consequence of not participating would be on Google’s and Netflix’s doorstep.

Friends acknowledges that there is another option – a route favoured by former Chair Von Finkenstein – to commence a Federal Court of Appeal Reference on the Commission’s jurisdiction over OTT and Internet-based programming and distribution undertakings.  Such a reference could narrowly address OTT or ask the court to determine the extent of the Commission’s jurisdiction to regulate all broadcasting aspects of online services including, specifically, requiring information to be filed, imposing shelf space requirements, and requiring expenditures or third party contributions to Canadian programming.

This would not be Friends’ preferred option because, in our view, an administrative tribunal should not question its own jurisdiction on matters it has clearly embraced.

In any event, the choice is either to assert jurisdiction or confirm whether it exists.  Doing nothing is no longer an option.

Response to submissions on support for Private local TV

Of all the issues not addressed in the Commission’s Working Document, the most alarming was the absence of measures to ensure the sustainability of conventional television, particularly small-market local TV.  Indeed Bell correctly identified this omission as the “most disappointing” feature of the Working Document16.

This was all the more surprising given the fact that the hearing Notice of Consultation specifically identified “fostering local programming” including “appropriate ways to enhance the sustainability of local television stations” as issues to be explored17.

Unfortunately, somewhere between the Notice of Consultation and the Working Document, measures to support the sustainability of local TV became measures to undermine it.  This included:

  • The Commission’s continued flirtation with the notion of eliminating simultaneous substitution, either altogether or on live-event programming (WD Theme 4); and
  • The Commission’s suggestion that OTA transmitters be shut down (WD Theme 16).

Simultaneous Substitution

As already noted, the suggestion that simultaneous substitution be eliminated is without merit.  Even eliminating it in the limited form of live events serves no legitimate purpose, given the damage that would be done to the system.

Friends notes in this regard the testimony of PIAC, which, despite a ‘consumer’ mandate, recognized that the few complaints on simulcast were not sufficient to warrant the elimination of a measure that was so fundamental to the business model of local TV18.

Friends also notes the testimony of SMITS which cited not only their huge dependence on simultaneous substitution (in both the French and English markets) as accounting for roughly 50% of their advertising revenues19, but that “without the ability to generate revenue from our local commercials appearing on hockey games or award shows, we would not only lose the simulcast revenues, we would lose all the promotional and revenue benefit we currently get from such signature shows”20.

Sustaining small- and medium-market independent television

While relatively conservative in its choice of words, the SMITS Coalition left no doubt that even if the Commission does not eliminate simulcast in any way, small market stations will close, should the Commission not introduce material new financial support by way of a direct BDU contribution:21

If you believe local TV in small markets across Canada is worth saving, if you want to ensure that three million Canadians, many living in some of the sparsest parts of this country, still have valued local service, we ask you to act.22

Friends believes in local TV.  Public opinion research confirms that local television news is Canadians’ top priority.

We note that, pursuant to an undertaking, SMITS filed specific proposals for a “unified fund” to support independent small- and medium-market local TV stations.

While Friends has no view of the most appropriate funding model, we agree that such a model should be limited to small- and medium-market independents.

In particular, we agree that large-market private local TV stations, be they vertically integrated (VI) or independent, should not be allowed to access such funds.

Sustaining support for small- and medium-market VI television stations

This leaves only the question of Bell’s medium- and small-market stations, and some small-market stations owned by Rogers and Shaw.

In its appearance, Bell spoke of abandoning 5, 10 or possibly more of the 30 communities in which it operates local TV stations.23 Friends assumes that the vulnerable stations to which Bell is referring include so-called CTV-2 stations in Barrie, Pembroke/Ottawa, London and Wheatley, as well as CTV stations in markets such as Kitchener-Waterloo, Sudbury, Timmins, North Bay, Sault Ste. Marie, Lethbridge, Red Deer, Yorkton, Prince Albert, Moncton, and small-market stations in Terrace and Dawson Creek acquired from Astral. While neither Rogers nor Shaw spoke specifically about shuttering stations, it is likely that Shaw’s small-market Kenora station could also be at risk.

Friends agrees with SMITS testimony that VI local stations have advantages that independents do not.  Friends also believes Bell’s testimony that 10 or more of its 30 local stations are at risk, in the event that there is no evident path to profitability. 

That said, we do not support Bell’s proposed local specialty model.  It suffers from all the downsides of the failed “value for signal” regime plus one more – Canadians would lose access to OTA transmission.  We note also that neither Rogers nor Shaw support this model. 

We acknowledge that in a response to undertakings, Bell proposed the creation of a local programming fund “supported by a 2% levy on BDU broadcast-related revenues”24.  It is unfortunate that Bell made such a significant proposal so late in the process.  Bell’s proposal has significant merit as regards the quantum of support proposed, the source and the fact that it would be open to CBC.  In that way, it is very similar to Friends’ proposals. That said, Friends is not convinced that such a fund should include large market stations (as Bell apparently suggests), nor do we believe the proposed allocation formula to be necessarily appropriate25.

While Friends recognizes that there is a problem with the sustainability of the business model for small- and medium-market television, we do not see a clear solution at hand for VI small- and medium-market stations, nor do we see a demonstrable sustainability problem with large market stations.

Accordingly, while we recommend that the Commission fast track the implementation of a fund to support small- and medium-market independent television, we believe the Commission should initiate a dedicated process leading up to the major group renewals to address the sustainability of small- and medium-market VI television.26

Such a hearing could examine the challenges and future of small- and medium-market VI television, including:

  • Advertising revenue trends, such as the ability of national advertisers to “buy around” medium-sized markets,
  • Opportunities to increase reliance on local advertising,
  • Value of increased CPE and Cancon flexibility; and the
  • Impact of eliminating CTV-2 as a separate mini-network, closing ‘duplicate’ stations in markets with both a CTV and CTV-2 station, and reconfiguring station distribution where former CTV-2 and CTV stations overlap.

A possible conclusion may be that VI entities are not well-suited to operating in small- and medium-sized market.  In such a case, the Commission should make it clear that if VI entities seek to close rather than sell local stations, it would call for applications to serve such markets with a leaner, more locally-focused model.

Response to CBC submissions on funding mechanisms, OTA transmission and advertising

In its appearance, CBC made three principal arguments, namely that

  1. It should be granted permission to shut down OTA transmitters;
  2. The Commission should introduce an OTA TV-negotiated compensation regime; and
  3. The Commission should introduce a new local TV programming fund, funded by an incremental 1% of revenue contributed from BDUs.

Friends opposes the first of these two proposals and, as discussed below, believes there is a better means of supporting CBC than it sharing in a broad fund with private broadcasters.

Moreover, Friends believes that the CBC should reduce its reliance on advertising.

CBC should remain an over-the-air broadcaster

Friends strongly opposes the Corporation’s proposal to give local broadcasters (including itself) the option to shut down their OTA transmitters in favour of negotiated affiliation agreements with BDUs.  As we stated at the public hearing, “we care about over-the-air” – for all local broadcasters, but especially for the CBC.

Polling data on the record of this proceeding confirms that Canadians expect to continue to have the choice of accessing free OTA local signals.  In particular, they expect not to have to pay twice in order to receive the national public broadcasting services already supported through their taxes.  The same data shows that the almost two million Canadians who currently rely on OTA reception tend to be older people on fixed incomes and others whose modest discretionary income is likely to render even a “capped skinny basic” unaffordable.  These persons also spend above average proportions of viewing time with CBC and other public broadcasting services.

The CBC did not stress the cost-saving aspect of exiting OTA transmission – perhaps understandably.  Based on industry data on file with the Commission, the average cost of operating a transmitter is $185,000 per year.27  On this basis, the CBC’s annual bill for operating 27 transmitters would be approximately $5 million – a modest amount, compared to the cost of disenfranchising almost two million Canadians!

The principle of universal accessibility is one of the fundamental tenets of public service broadcasting.  The public broadcaster has a responsibility to be ‘first in’ to any new distribution technology, and ‘last out’ of any old one.  No other public broadcaster anywhere in the democratic world is contemplating getting out of the OTA business.

Stop dismantling the national public broadcaster

The CBC claims that its proposal to abandon over-the-air transmission is motivated by a desire to “fix” the “broken business model” for itself and other conventional television operators.  However, it is, in fact, a further disturbing example of the Corporation’s current penchant for finding ways to undermine the very institution it seeks to preserve – ‘burning the furniture to heat the house’.

Other previous examples of this penchant include:

  • Failing to replace many former analogue TV transmitters during the transition to digital – thereby beginning the process of disenfranchising OTA viewers,
  • Reversing the forty-year tradition of commercial-free public radio services – without generating meaningful revenues as a result, and
  • Eliminating all non-news in-house television production – including such quintessentially distinctive genres as feature-length documentaries.

Senior executives of the Corporation have been heard to muse about the possibility of ceasing all over-the-air broadcasting of radio music programs, or transferring all children’s programming to exclusively on-line delivery.  We are aware that these and other similar ideas are currently being floated as trial balloons at focus groups organized by the Corporation.  This is hardly the kind of open, transparent and accountable public consultation process that ought to be undertaken before making such fundamental changes to the CBC’s public service delivery model.

This kind of “disruptive innovation” to the status quo is, in reality, a form of self-disintermediation.  CBC/Radio-Canada wishes to get out of both the production business and the transmission business, leaving itself as little more than a commissioner and scheduler, seeking to broker deals between third parties who create content and others who operate digital delivery platforms.  Is this the kind of national public broadcaster Canadians want?  CBC’s 35+ million shareholders deserve an opportunity to answer that question – before it is too late.

There is a better way

In undertakings filed on September 19th, the CBC presented estimates for the revenue that might be generated through its affiliation payment proposals.  These estimates range from a low of $27 million, through a mid-range of $68 million, to a high end of $137 million.

Without commenting on the validity of the CBC’s projections, Friends notes that the proposals filed in its June 27 submission would generate an initial $67 million for the Corporation, growing over time to $156 million – comparable to or greater than the CBC’s mid-range and high-end estimates – and without the necessity of adding a further levy on BDUs  (which would likely be passed on to consumers).  Rather than sharing a 1% or negotiated BDU contribution with large market stations, under Friends’ proposal, CBC would have a dedicated stream of funding from within the current BDU 5% contribution, subject only to an amount the Commission decides to set aside for SMITS and other small- and medium market independent stations.

The reality of declining public funding for the CBC

During its appearance on September 12th, the Chairman asked the Corporation, in effect, whether its fundamental problem is not the lack of public funding through the Parliamentary appropriation.28

Friends finds it shocking, even shameful, that the senior executives who bear the public trust of leading and managing CBC/Radio-Canada under the authority of the Broadcasting Act would twist themselves into knots to avoid giving a direct answer to this simple question.  However, given this appalling abdication of responsibility, we will offer an answer on their behalf.

Since 1990 (the same reference year used by the CBC for the industry trends cited in its presentation) the value of the Parliamentary appropriation to the CBC has declined by approximately 40%.29

The Harper government has cut $115 million from CBC’s budget since 2012, after promising during the May 2011 general election to “maintain or increase support for the CBC”.  Restoration of just this amount would represent almost as much as the high end of the projected revenues from the CBC’s affiliation fee proposal, according to CBC’s own calculations ($137 million).

So, the answer to the Chairman’s question is a resounding “Yes.”  Friends notes that, even though the level of public funding for the CBC is, as the Corporation’s representatives observed, a matter of government policy rather than regulatory oversight, previous Commissions have found occasion to bring to public attention the serious negative consequences of reduced public funding for the Corporation,30 and this Commission may wish to consider doing so again in their Decision in this proceeding.

Advertising

For many years, the Corporation’s response to declining public funding has been two-fold:  cutting costs and increasing self-generated revenues.  The first has resulted in the gradual but inevitable hollowing-out of the creative heart of the organization.  The second has turned out to be both poor public policy and poor business strategy, since it has reduced CBC’s distinctiveness, yet failed to yield a sustainable new income stream – especially since the loss of NHL hockey.

One of the main themes of Friends’ June 27 submission is that “substantially reducing advertising on CBC English Television would still be worth doing, as the single boldest stroke in creating a more distinctive and valued national public broadcaster”.31 Moreover, that such a move would be of real benefit to private broadcasters, and that the financial impact on the CBC could be offset by other more mission-compatible means.

During the public hearing, the CEO of CBC/Radio-Canada stated that “the ad revenues . . . are going away.”32. While this is true for all conventional broadcasters, it is especially true for CBC English Television.  Friends is on record as estimating the net value of the remaining advertising on the English network at $80 million,33 and has good reason to believe that by 2015, it may fall to $50 million.

Whatever structural and regulatory changes come out of this process, Friends urges that they should include recalibrating the public and private elements of the Canadian broadcasting system, including steps to make the public element less commercial and therefore more distinctive.  It is entirely within the Commission’s purview and powers to give the Corporation a strong nudge in this direction – and there is past precedent for it to do so.34

Public vs. Private Elements of the System

One of the three principles articulated by the Corporation in the introduction to its oral presentation was “system-wide solutions,” rather than protections for individual companies.”35 Later in the course of the Corporation’s appearance, we were reminded that under the Broadcasting Act, the Canadian broadcasting system comprises public and private elements, both of which contribute to public policy and public service (Section 3b).

However, this does not mean that the public and private components of the system are expected to do the same things, or be treated in the same way.  Unfortunately, in our view, this erroneous assumption all too often underlies both the Corporation’s and previous Commissions’ approach to these issues.

Rather than proposing system-wide “marketplace solutions,”36 the CBC ought to be focused on acquiring, or rather regaining, the tools it needs to fulfill its unique mandate within the system.  And the CRTC ought to help it, even push it to do so.

Friends believes that this could be achieved by recalibrating the respective expectations and privileges of the various components of the system.  For example, if local news, distinctive Canadian drama and other highly esteemed forms of programming are (increasingly) prohibitively expensive for private conventional broadcasters to deliver, they could and should be expected to deliver less in those areas, while the CBC would be commissioned to deliver more.

In return, the private and commercial elements of what is now a highly vertically-integrated system of conventional and specialty broadcasters, BDUs, mobile and Internet operators, might reasonably expect to contribute a somewhat greater share of their profits to the cost of having these essential public policy and public service ingredients delivered by the CBC, in return for being relieved of part of that burden to deliver them themselves.

Similarly, a greater distinction between the public and private elements would be achieved if the CBC were to substantially exit the commercial arena.  A portion of the resulting financial benefit to private broadcasters should be redirected to the CBC to help compensate it for these revenue losses.

Such a recalibration between the public and private components of the system would require subtle and nuanced regulatory intervention by the CRTC.  Friends recommends that the Commission embrace such an integrated, asymmetrical approach.

Response to submissions on the Commission’s proposals for unbundling and other fundamental changes

The negative impact of the Commission’s proposed unbundling and other fundamental changes was omnipresent at the hearing.  While estimates of the extent of the impact differed, no intervener suggested, or introduced evidence to the effect that there would be no negative impact.

A study filed by Bell, Rogers and Shaw estimated the value of simulcast at $458 million, of which Bell estimated $40 million consists of live programming for its licensees alone.37  Discussions on the importance of live programming as “PVR-proof” and key to promotion for both large and small stations demonstrated that eliminating simulcast on this sub-segment would not be a viable answer.38

The Miller Environmental Scan notes that live event programming remains one of the “core efficiencies” and hence key competitive edges of traditional television over OTT.39 Clearly anything that compromises broadcasters’ ability to acquire and monetize live event programming does not only risk tens of millions of dollars, it risks the ability of the system to compete with OTT with the one thing that OTT cannot do well.  This is why simultaneous substitution is so important to maintaining a separate Canadian rights market.  Tampering with simulcast jeopardizes not just revenues, but the viability of the system as a whole.

The only evidence tabled in the proceeding on the impact of the Commission’s proposals writ large was the Friends’ co-sponsored Environmental Scan.

The economic impact results of the Environmental Scan were specifically cited by MTCS in its appearance as a major cause for concern.  While these results do not appear to have been questioned by other parties, the Chair commented on them as constituting  “rather a huge number” and requested clarification on methodology.40

In an undertaking response, Mr. Miller, the author of the scan suggested that the changes still on the table – namely unbundling, loss of preponderance, elimination of simulcast – could indeed have the same devastating economic impact in loss of revenues, jobs and GDP as initially postulated in the study.  The author described this as a ”plausible” worst-case scenario – that is, neither an absolute worst case, nor a precise forecast.41  The author also noted:

…the combination of unbundling with another major regulatory change (particularly changing the foreign services test or eliminating predominance on services received) increases the potential impact, and unpredictability of impact, considerably from that of a scenario of unbundling alone, particularly given the potential effect on the Canadian rights market.42

The author’s companion Rights Study,43 which Friends’ also co-sponsored, makes clear the centrality of measures like preponderance, simulcast and the foreign services test to the maintenance of a separate Canadian rights market.  Support for this view can be found throughout the record of this proceeding.44  Maintaining these measures is crucial.  But requiring unbundling and also eliminating one of these measures would be disastrous.45

As discussed below, extensive evidence was introduced on the negative impact of unbundling based both on U.S. evidence and including estimates from Canadian broadcasters themselves. 

The only (somewhat) contrary view was that of the Competition Bureau, whose mandate makes its perspective evident, and which, without evidence, suggested, “We don’t know”.46

Comments from most parties, however, were sobering, to say the least.  Here are a few:

“We believe that the pick-and-pay model could well result in the destruction of the existing broadcasting infrastructure and a massive reduction of jobs across Canada.”47

“We recognize that this pick-a-pack, small basic regime is going to hurt. Our average revenue-per-user will decline. It will hurt the penetration levels of programming services. Let's not pretend that it won't. There will be losses.”48

“It is very clear from the evidence that the offering of channels on a Pick and Pay basis will reduce the revenues of most, if not all, broadcasters. And, all other things being equal, the more revenues are reduced, the less money there will be for broadcasters to invest in the compelling programming, whether Canadian or foreign.”49 

 “Even if our proposal on pick-and-pay and free market wholesale negotiation with the big BDUs, even if that is adopted, I envision, of my 29 channels, that 7 or 8 or 9 of them that make money today are going to go away and the remaining channels are going to have compressed profitability in that environment.”50

“Every one of our services will be threatened. Even our strongest services … will be immediately weakened. In competition with targeted online advertising, reach is the most important thing that we have to offer. An audience loss of as little as 10 percent will make some advertisers look elsewhere. [A & B] will be harmed because they are locked into long-term program and branding deals that were negotiated without any expectation of the uncertainty created by pick-and-pay. Services like [X, Y & Z] may simply become unviable and we should not dismiss or understate this impact on Canadians51.

Friends has intentionally omitted identifying features from the quotes above, to make a point.  These quotes are not from “unreliable witnesses”.  These quotes are not from parties who have some vested interest in misleading the Commission.  They are from broadcasters and stakeholders who will have to operate within the environment the Commission creates.  Some of them have diplomatically said they will embrace it.  But none have said it will not come at a serious cost.

For our part, Friends accepts the evidence of Environmental Scan author, Peter Miller, that unbundling alone can be expected to have a worst-case impact of 10,674 FTEs in employment losses and an annualized loss of $1 billion in GDP for the Canadian economy in 202052.

If Commissioners disagree with Mr. Miller’s calculus, it behooves them to commission independent expert evidence to back up their scepticism.

While conceding the likelihood of negative impact, the Commission’s logic appears to be a self-described need to balance “choice and flexibility” with support for Canadian content53. Assuming this is the case, then by any reasonable measure, unbundling fails the test.

The balance of evidence suggests that Canadians will, on average, be worse, not better off.  For those few who benefit from the ability to choose a handful of channels at less overall cost, there will be many more who will at best pay more, and at worse lose channels. All Canadians will lose the benefits of diversity.

We invite the Commission to assert its statutory independence.

While Friends accepts that there are ways that the Commission could implement unbundling in such a way as to minimize it’s negative impact,54 the better answer is to not do it at all.  Even a 5% impact, while far better than worst-case scenarios, would still have major, unpredictable consequences. 

Perversely, one of these is local TV.  In its appearance, Bell made it very clear that its ability to cross subsidize its conventional stations from profitable specialty services would be jeopardized by unbundling.  This rings true.

What a sad but ironic outcome if the Harper Government’s push for unbundling led to the closure of local TV stations – which, instead of enhancing its electoral prospects, led to losses in key Conservative-held ridings, where most of the small-market stations operate.

Conclusion

In its June 27th submission, Friends urged the Commission to “approach the notion of change to current regulatory frameworks with caution. The default should be a bias in favour of retaining and fine-tuning, rather than abolition. The ‘do-no-harm’ principle comes to mind”.

Many other parties, from independents to Corus, ACTRA, DGC and the Province of Ontario have expressed similar views55

Where parties “embraced” unbundling, it was either tactical or, as expressed by CMPA’s Michael Hennessy, considered to be a “done deal”.

The evidentiary record of this proceeding does not support unbundling.  To the contrary, every stakeholder has warned the Commission of economic losses. The only issue remaining is their extent.

Just as the FCC has resisted political pressure to introduce à la carte in the US, the Commission should do so here.  As we suggested in our submission, the Commission should refuse to proceed on the grounds that unbundling cannot be done “while protecting Canadian jobs.56.

The record of the proceeding also supports Friends’ recommendations that the Commission:

  1. Adopt SMITS proposals to secure the sustainability of the most vulnerable small-market local TV stations, to be implemented by fall 2015;
  2. Immediately start a public process on solutions for medium market VI (e.g. CTV-2) stations, culminating with 2016 group licence renewals;
  3. Start the process of recalibrating the respective expectations and privileges of the public and private elements of the system by mandating that a minimum of 0.5% growing to 1.5% of BDU revenues within current BDU 5% contributions be directed to support for CBC, and requiring CBC to shift away from its dependence on advertising;
  4. Set the broad strokes of a regulatory framework that would be expected to have a lifespan of three to five years.  This could include, for example, consolidation of licences, standard conditions of licence (COL), increased flexibility in exhibition requirements, etc.;
  5. Immediately commence a review of the New Media Exemption Order to assert the Commission’s jurisdiction to determine what contributions pursuant to the Broadcasting Act would be appropriate for OTT services (foreign and domestic) and
  6. Prepare a report to government (with or without an additional prior process), under the CRTC’s own initiative, on the ‘Future of TV’.  Lay out a vision of a dynamic, functioning and contributing broadcasting system – and a regulatory framework to support it, updating the Commission’s 2006 report, and making appropriate recommendations on the contribution of OTT, plus CBC funding.

One of the more damning comments on the Commission’s proposals for regulatory reform was this comment in the Friends’ co-funded Environmental Scan:

The analysis suggests that, in the medium to long term, the impacts of technology as manifested in competitive and consumer trends will materially increase and force the hand of public policy. In the short term, however, the greatest risk to the system comes not from external nor technological threats, but from the fundamental regulatory changes being considered in this proceeding, including the loss of simultaneous substitution, the implementation of pick-and-pay and relaxation of barriers to entry of foreign services. [Emphasis added.]

This comment was made before the release of the Commission’s Working Document.  The Environmental Scan’s author, in an Undertaking Response filed by CMPA, nevertheless makes it clear that the changes still remaining on the table could have the same devastating economic impact - loss of revenues, jobs and GDP - as initially projected in the study.

Even in a regulatory scenario of unbundling alone, losses could remain greater than those attributable to technological change57.

The system has enough to deal with in struggling with the likes of Netflix and Google.  The Commission should not act on proposals that make matters demonstrably worse.  It should act only to make things better.


1 For example, MTCS generally; Disney, CMPA, unions and guilds on simultaneous substitution.

2 The only party that expressly called for the elimination of simulcast was Forum for Research and Policy in Communications (FRCP), which clearly had no grasp of the business and rights market consequences of its own proposal.

3 The Chair’s questioning ‘style’ with the Ontario’s Ministry of Tourism, Culture and Sport (MTCS) on regulating OTT was a clear example of this.  It immediately fed news headlines and a rebuttal from Minister Glover.

4 Transcript, Volume 10, para 22976.

5 Unless that government were to amend the Broadcasting Act or pass other enabling legislation.

6 Represented by Ontario’s Ministry of Tourism, Culture and Sport (MTCS) in this proceeding.

7 Transcript, Volume 1, para 981.

8 See, for example Bell at Transcript, Volume 3, para 4650-4654.

9 In letters to Google and Netflix dated 29 September 2014, the Commission indicated that all hearing testimony and supporting documentation of the companies would be removed from the public record if they did not respond to specific undertaking requests for information related to activities in Canada, including (from Google) amount of content uploaded from Canadian locations and advertising revenues derived from Canada and (from Netflix) Canadian subscribers, investments in Canadian-made productions and other matters, by October 2 2014.  As of the date of writing, the outcome of this is unclear.  In any event, Friends submits that its comments are a sufficiently general response to arguments that OTT should not be required to make a contribution as to be warranted in its Final Submission.

10 We will not comment on this other than to respond, “So what”?  When did an obligation have to benefit the party obliged to do it?

11 As we accept the Chair’s terminology, in the sense that exemption is a form of regulation, we use the term “content regulation” to apply to any imposition of Canadian programming contribution, expenditure or shelf space requirements.

12 Obviously the terms and conditions of any OTT contribution would have to be determined.  As per our Submission, Friends would expect, however, that it would include a minimum 10% financial contribution, a reasonable shelf space requirement (perhaps 15%) and a threshold of subscribers or revenues, above which it would apply.

13 See Environmental Scan paras 9.5-9.8.

14 Lobbying activity summaries on the site of the Office of the Lobbying Commissioner of Canada reveal significant lobbying activity over the last 12 months by senior Netflix officials, including CEO Reed Hastings, as well as third parties on Netflix’s behalf.

15 CRTC letters to Netflix and Google, dated September 29, 2014.

16 Transcript, Volume 3, para 5428.

17 Broadcasting Notice of Consultation CRTC 2014-190, at paras 64-68.

18 Transcript, Volume 2, para 3404-3409.

19 The SMITS Coalition stated, “for most SMITS markets, as much as 75% to 95% of a full 126 hour weekly schedule is simulcast. Accordingly, we estimate its value at approximately $25 to $30 million per year.” Transcript, Volume 9, para 20710. Appendix 7.1 to Appendix 1 the SMITS Submission reveals that SMITS advertising revenues are in the $53-$54 million range.

20 Transcript, Volume 9, para 20711.

21 SMITS also spoke about being in the red as a group and being unable to sustain losses indefinitely. Transcript, Volume 9, paras 20686-20687 and 20691-20692.

22 Transcript, Volume 9, para 20730.

23 Transcript Volume 3, para 4442-4531.

24 Bell Response to Undertaking, Part 1, p. 8.

25 Two thoughts come to mind.  One, in proposing the inclusion of large market stations, Bell is essentially suggesting a contribution level similar to LPIF but directed to far more local stations.  (LPIF excluded metropolitan markets).  Two, Bell’s population based proposal ignores factors like the amount of local programming and market need.  Moreover, as Bell receives roughly 30% of conventional TV revenues (excluding CBC’s parliamentary appropriation), it would presumably benefit from receiving a similar percentage of this fund.  This suggests to Friends that funds would be disproportionately directed to Bell rather than CBC and small market private TV, where the greatest need lies.

26 Bell’s standing commitment to keep the CTV-2 stations open gives further breathing room to the Commission.

27 http://www.crtc.gc.ca/broadcast/eng/hearings/2014/2014_190a.htm

28 Transcript Volume 5, paragraph 10975.

29 http://www.friends.ca/blog-post/238

30 For example, in Decision CRTC 1994-437, renewing the Corporation’s television network licenses:  “An overriding concern is the continuing need by the Corporation for sufficient funding to fulfil the mandate set out for it by Parliament. Reductions in Parliamentary appropriations, unless compensated by new revenues not dependent on the sale of airtime, may lead either to a reduction in the breadth, depth or quality of the programming or to an increasing reliance by the CBC on the types of programming designed to attract advertising, forcing it to pursue large audiences for revenue-generating purposes, at the expense of programming more suited to fulfilling its mandate.”

31 Friends Submission, para 109.

32 Transcript Volume 5, para 10807.

33 Paragraph 64 of Friends’ intervention dated October 5, 2012 in response to Public Notice CRTC 2011-379, concerning the renewal of the CBC’s network licenses.

34 See the previous quote from Decision CRTC 1994-437, and the following paragraph, which goes on to say:  “Since the 1974 renewal decision, the Commission has continued to be concerned about the influence of advertising on the CBC's programming. Revenues from advertising, as a percentage of total CBC Corporate revenues, have increased from 17% in 1983/84 (a level that had not varied greatly since the early 70s) to 22% in 1992/93. In its renewal applications, the Corporation projects that percentage to increase from 22.3% to 25.2% over the next five years.”

35 Transcript Volume 5, para 10684.

36 Transcript Volume 5, para 10683.

37 Transcript Volume 3, para 3916.

38 See Bell at Transcript Volume 3, para 4296, and SMITS at Transcript, Volume 9, para 20711.

39 Canadian Television: An Environmental Scan, 2014, Appendix 1 to Friend’s Submission, paras 5.22-5.27.

40 Transcript, Volume 3, paras 6075 and 6078-6080.

41 CMPA Undertaking Response, Appendix, p. 1.

42 Ibid, p. 4

43 State of the Canadian Program Rights Market, Appendix 2 to Friend’s Submission

44 See for example, CMPA at Transcript Volume 3, paras 5994-5995; MTSC at Transcript Volume 1, para 963; Corus Submission at paras 21, 91-92, & 96-97; Bell Submission at para 161.

45 See, for example, CMPA at Transcript, Volume 3, paras 5794-5799, and 5990-5997.

46 Transcript Volume 1, paras 799-801. The Bureau, with no evidence, argued that Canadian experience in Quebec (which the Bureau evidently believes demonstrates minimal impact) was a better indicator of impact than US evidence, which demonstrates severe potential impact.  Vice Chair Pentefountas correctly pointed out the major difference between the English- and French-language markets in terms of number of services (30- out of a 50-channel universe as opposed to picking 30- on a 500-channel universe; para 878) and hence impact of BYOP.  (Pick and pay is not offered in Quebec.).  More relevant Canadian experience includes Rogers’ London trial which experienced average reductions in penetration, and Corus’ experience in Quebec, which demonstrates material reductions (as much as 25%) in the penetration of English-language Corus services in Quebec vs. the rest of Canada (see Corus Response to Undertaking).

47 Corus.  Transcript Volume 3, para 6745.

48 Rogers.  Transcript Volume 4, para 8222.

49 CMPA.  Transcript Volume 3, para 5797.

50 Bell.  Transcript Volume 3, para 4420.

51 Shaw.  Transcript Volume 4, paras 8545 – 8547.  Shaw’s Oliver Weyman Study estimated that “as many as 26% of current channels could be at risk of becoming commercially unviable in one of the modeled scenarios”, and “assumed based on analyzing current viewing behaviour and purely rational decision-making that 35% of consumers would switch to a new a la carte/BYOP option”.

52 CMPA Response to Undertaking, p. 5.

53 Transcript, Volume 9, para 19862.

54 See, for example, Miller’s suggestions at CMPA Response to Undertaking, Appendix, p. 5-6.

55 An unfortunate exception was CMF, which called for “forward-looking framework, but, also a risk-taking policy.“ Transcript Volume 1, para 1632. Friends assumes that this was an attempt at appearing supportive of the Commission.  Nothing in CMF’s mandate would support accepting the degree of “risk” that would come from adopting the Commission’s Working Document proposals.

56 The October 2013 Throne Speech stated: “Our government believes Canadian families should be able to choose the combination of television channels they want. It will require channels to be unbundled while protecting Canadian jobs.”

57 The Environmental scan examined best case, business worst case and regulatory worst case system revenue outlooks.  The business worst case, due to technological change, sees a 3% decline to 2016 and a 9% decline to 2020. The regulatory worst case sees a revenue decline of 30% to 2020, based on a 40% impact. (See paras 10.41 – 10.45.)  The Undertaking Response filed by CMPA suggests a 5-15% impact on unbundling alone, or a 4%-11% decline in system revenue by 2020. 

Related Documents:

Sep 10, 2014 — Policy Brief: Presentation to the CRTC - PN 2014-190 (Let’s Talk TV)
FRIENDS spokesperson, Ian Morrison, makes a presentation to the CRTC on the commission's hearing about the future of television in Canada.

Jun 27, 2014 — Policy Brief: PN CRTC 2014 – 190: Phase 3 – Let’s Talk TV
FRIENDS makes several recommendations to the CRTC as part of the Commission's examination of the Canadian broadcasting system. The submission contains three appendices: (1) FRIENDS’ responses to CRTC questions, (2) A study of the Canadian Rights market, and (3) An Environmental Scan of Canadian TV.