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CRTC call for comments on the Governor in Council’s request for a report on future programming distribution models

Dec 1, 2017

Broadcasting Notice of Consultation CRTC 2017-359

Introduction

1. FRIENDS appreciates this opportunity to provide a first phase intervention on the issues raised in Order in Council P.C. 2017-1195 (the OIC), dated 22 September 2017, as set out in CRTC Notice of Consultation 2017-359.

2. These comments provide FRIENDS’ views based on available research and data.  FRIENDS expects to file additional evidence, including new research and data, in the second phase of this process, as contemplated in Broadcasting Notice of Consultation CRTC 2017-359-1.

3. FRIENDS notes at the outset that, given the stated purpose of the OIC, namely for the Commission to provide “substantive input to the [Government’s] review of the Broadcasting Act1, the OIC questions are exceedingly narrow.

4. While FRIENDS accepts that attempting to better understand future models for distribution is certainly important, the Heritage Minister’s failure to ask her expert advisory panel direct questions on the very legislative issue at stake – that is the future of the Broadcasting Act itself – is unfortunate.

5. The last time the federal government requested a section 15 “factual report” from the Commission on the future of broadcasting – in 20062 – the result was a report from the Commission that did not predict, and could not have predicted, the massive growth of the broadband internet and internet advertising, online video, social media, smartphones ­– all communications tools and media that Canadians value highly, but that now also demonstrably threaten valued Canadian media, in particular local news as provided by newspapers and TV stations.

6. The fundamental public policy issue at stake is therefore not how distribution models will evolve, but how they should evolve – that is, how new communications technologies can best serve the public interest, and what role public policy should play in ensuring that happens – also shaping what programming choices Canadians have available to them – regardless of how distribution models evolve.

7. In light of this, FRIENDS applauds the Commission for seeking input on “the broader issues raised in the OIC”, in addition to the three specific OIC matters. Ultimately, it is this broader context that matters, taking us away from a laissez-faire approach to new distribution models, and allowing them be shaped merely by corporate private interests, to one shaped by the public interest.

8. We address the broader public policy context immediately below.  We also address broader measures in response to Commission Question 9.

Public Policy Context

9. Over nine decades, broadcasting policy and legislation in Canada has focused on steering communications technology for social and cultural goals.  While economic goals have been a consideration, the fundamental purpose behind the Broadcasting Act and other federal government media initiatives has consistently been to intervene where market forces alone do not deliver desired results.3

10. As a result, Canada’s approach to broadcasting has never been lassez faire.  Instead, successive governments have recognized that Canada’s national interest was in play, and acted accordingly.

11. Governments, in particular, have done this through successive updates to the Broadcasting Act4, ensuring Canadian ownership and control of this most important communications medium, and regulating matters such as carriage of Canadian services, Canadian content exhibition and funding.

12. For close to a century, Canada has regulated broadcast technology to achieve the twin goals of providing Canadians with both Canadian programming and that available from the rest of the world, including licensing of:

  • The first Canadian private radio stations in the 1920s
  • The first CBC radio network in the 1930s, and a second CBC network in the 1940s
  • The first CBC OTA TV stations in the 1950s
  • Cable TV in the 1960s
  • Pay TV and Specialty services in the 1980s
  • DTH in the 1990s
  • IPTV in the 2000s

13. This technologically-neutral approach to broadcasting – an assertion of Canadian sovereignty (by way of maximizing the availability and promotion of Canadian content) over the most modern distribution platforms of the day – collapsed with the coming of the internet.

14. At the time, there were valid reasons.  In the 1990s, while the internet had some characteristics that could be considered broadcasting, it was primarily an alpha-numeric medium, with no discernable impact on broadcasting. The CRTC accordingly exempted “new media undertakings” from licensing and other obligations under the Act.5

15. As little as ten years ago, when the internet emerged as a broadband audiovisual medium, the Commission had at least some valid reason – albeit without foresight ­– to maintain the exemption approach, given the lack of apparent impact.6

16. However, even the Commission recognized as early as 2006 that that impact was foreseeable:

“In the Commission’s view, given the evidence of this proceeding with respect to the speed and acceptance of technological change, it would be prudent for policy makers to assume a potential for material economic impact on broadcasting undertakings over the medium term.

Accordingly, the Commission considers that within the next three to seven years, public policy action will need to be taken if it is to have the desired effect.  Corrective action taken beyond this time frame may be ineffective.”7

17. A decade later, with de facto internet TV and radio assembling significant Canadian audiences and clear evidence of material negative impact on Canadian broadcasting services, Canadian public policy nevertheless remains trapped by inertia.

18. On the big questions ­– support for Canadian news; mandatory Canadian programming contributions from online TV providers such as Netflix; ending favourable tax treatment for foreign online media – Canada has failed to act.8

19. The primary reason is the ‘mythology’ of the internet itself.  A founding mythology, perpetrated by its denizens and acolytes, that attempts to give the medium an untouchable ‘deity-like’ status, and intimidate Canadians into thinking that any attempt to “regulate” the internet would deny them their freedom to use it as they wish or cost them additional new taxes.

20. No major progress will be made on the big policy questions related to Canadian entertainment, information and news content, until we recognize that:

  1. The internet is just another electronic distribution medium.  Its protocols and characteristics of 2-way communications and efficient, reliable, distributed architecture make it a viable network for a multiplicity of uses, one of which is broadcasting;
  2. The internet is regulated. It is regulated in numerous ways to protect Canadians’ privacy, to limit piracy, to eliminate hate, libel and slander.9  It is even regulated by the CRTC to ensure “net neutrality”. It can be regulated for broadcasting;
  3. Regulation does not mean denying access.  No reasonable person is suggesting that Canadians’ ability to access legal services they want should be restricted in any way;
  4. In return for the privileged access to Canadians, particularly by dominant players like Google, Facebook and Netflix, it is only fair that foreign internet media contribute to Canadian content.  Sixty percent of Canadians accept this.10

The Objectives of The Broadcasting Act Remain Relevant and Appropriate

21. Regarding the Government’s proposed review of the Broadcasting Act, the Creative Canada Policy Framework states:

“Key broadcasting areas of the review may include whether the policy objectives in the Broadcasting Act require updating to reflect the current and future expectations for our system. It may include assessing whether the powers of the CRTC to regulate broadcasting are well-suited to the changing realities of broadcasting.”11

22. FRIENDS is convinced that the values set forth in Section 3 of the Broadcasting Act remain as valid today as they were in 1991. These include Canadian ownership and control of key infrastructure, reflection of Canada’s diversity, and support for Canadian programming.12

23. FRIENDS challenges any intervener in this proceeding to demonstrate that a majority of Canadians believe such objectives are no long relevant.

24. FRIENDS recognizes, however, that the relative importance of priorities has changed and will continue to change over time.13  For example, while Canadian ownership of content providers and aggregators was a highly achievable priority in the closed television world, it is less achievable, and hence more aspirational, on the internet.

25. Moreover, some objectives should be updated to make them more technologically neutral.  For example, the priority distribution undertakings are to give to Canadian programming services, as set out in 3(1)(d)(i), should be generalized to apply to internet distributers such as online aggregators and ISPs.

26. In addition, some tools, such as denial of entry or exhibition quotas, have become less effective. Others, such as tax credits or direct contributions are rising in importance.

It is Time to Apply the Broadcasting Act to Internet Television

27. FRIENDS believes that much of the opposition to any form of broadcast regulation on the internet stems from an incorrect assumption – one might say, fear mongering ­­­­– that such regulation will inherently involve restrictions on what content Canadians can watch or what sites they can access – that it will turn the “permission-less” internet into an internet that requires pre-approval from the CRTC or some other regulator before content can be made available to and accessed by Canadians.

28. This ‘Trojan Horse’ is advanced by no credible cultural or industry group, but its presence has convinced policy makers to recoil from advancing the objectives of the Broadcasting Act in respect of internet content through any means whatsoever.

29. Such reluctance may have been excusable until a few years ago.  It is no longer.  It has become an abrogation of responsibility.

30. Fortunately, conditions are such that Government not only must now act, but has actually established an important precedent with Netflix. The Creative Canada policy announcement of a $500 million five-year agreement with Netfilx is flawed in many respects:

  • the commitment is to “original productions in Canada”, not Canadian content
  • the deal makes no specific commitment to French-language production
  • the commitment amounts to only 13% of current Netflix revenues14 as opposed to the 30% of annual revenues of the major broadcasting groups in Canada
  • the deal is under the Investment Canada Act, not the Broadcasting Act as enforced by Canada’s expert broadcast tribunal, the CRTC
  • the deal is a one-off, and does not apply to any other internet TV service

31. Despite these considerable flaws, however, the Netflix deal is a de facto assertion of Canadian jurisdiction over cultural content on the internet that sets the stage for more comprehensive action under the Broadcasting Act.15

Response to CRTC Questions

Future programming distribution models

Q1. How is the growth in online audio and video consumption changing the business models of program creators and distributors? What are the new models?

Q2. Content is generally monetized through advertising, subscription and/or transaction revenues. How are new business models shaping the evolution of these revenue sources?

Q3. Many new business models are global. How will the growth of a global content rights market affect business models?

32. As these questions are intertwined, FRIENDS has chosen to group its answer.

33. With the possible exception of global rights acquisition, FRIENDS submits that online distribution business models are more characterized by their similarity to traditional TV business models than any fundamental difference.  The difference is primarily in the delivery platform (internet based; predominantly on demand rather than linear), not the content itself.

34. As noted above, public policy needs to stop mythologizing the internet as a completely different medium to which the ‘old’ rules do not apply.

35. In both private traditional and internet TV, revenue is advertising and/or subscription based.  Public TV relies on direct funding, supplemented by advertising.

36. The big change in the last 10 years is the meteoric rise in internet advertising revenue:

Sources: Interactive Advertising Bureau of Canada for all data except for 2015 and 2016 radio and daily newspapers as published by News Media Canada

37. As total advertising revenue is relatively constant, and grows tracking GDP, the phenomenal growth of internet advertising first deprived ‘traditional’ media of historic advertising growth, and now is significantly reducing their revenues.

38. Private over-the-air television revenue has declined from a peak of $2.14 billion in 2011 to $1.68 billion in 2016, or 22%. In total, Canadian TV advertising revenue has declined from its peak of $3.55 billion in 2011 to $3.19 billion in 2016, a decline of 10%.16

39. As a result, the viability of advertising revenue as a primary revenue source for quality TV programming is now threatened.  This applies to both traditional and internet TV17.

40. This also underlines the vital role of CBC in the internet age, and the importance of the stable increased funding established by the Government.

41. The growth of a global content rights market is not in itself devastating to the Canadian broadcasting system.  But a tipping point could soon be reached. Indeed, the evidence suggests that threats to the Canadian rights market are increasing exponentially.18 

Q4. Given Canadians’ ever-increasing demand for data to stream audio and video content on fixed and mobile broadband networks, how will these networks keep pace with future capacity requirements, particularly in rural and remote areas?

42. FRIENDS has no particular expertise in this area and hence offers no comment.

How and through whom Canadians will access programming

Q5. Canadians currently enjoy audio and video content through a combination of traditional broadcast and Internet-based services. How will consumer behaviour evolve in the next five years? What factors will influence this evolution?

43. Unless public policy were to fail Canadian broadcasting, erosion of traditional TV to Internet TV options over the next five years should be relatively modest and manageable.

44. The vast majority of Netflix subscribers are also BDU subscribers.  BDUs lost only 407,000 subscribers (or 3.5%) from 2012 to 2016, despite Netflix subscriptions soaring to almost 6 million Canadian households.19 Moreover aggregate “Canadian broadcasting sector” revenue declines from 2012 to 2016 are only 0.14%.20

45. Unfortunately, Canada’s failure to require foreign internet giants to play by established Canadian rules fails to make up for this gap and could cause an accelerating erosion of Canadian TV viewing, given the competitive advantages unregulated foreign internet entities have been afforded by public policy.

46. The Government’s commitment to top up funding losses suffered by the CMF as a result of BDU revenue declines is a modest step in the right direction, but falls far short of the gaps in funding to Canadian content that already exist – and can only increase.

47. Indeed, FRIENDS believes that a failure of the government and the CRTC to act in the next few years will lead to a tipping point, and devastating erosion of Canadian media, from which our country could not recover.

Q6. From whom will Canadians access programming in the future?  For instance, will Canadians look to traditional or online providers? Global or domestic providers? Content aggregators or multiple distributors?

48. Canadians will access programming in myriad ways in the future, including those identified in the question, as well as others not anticipated.  Trying to predict how Canadians will access programming should not detract from public policy continuing to ensure a healthy degree of access to Canadian content and Canadian sources on Canadian and foreign platforms – shelf space for Canada.

49. In the past, we were able to limit the entry and role of foreign broadcasters into our broadcasting system. We succeeded to such an extent with traditional TV that Canadians overwhelmingly watch Canadian TV channels, with viewing to foreign channels on the dial declining to a low of 10% in 2015.

50. That ability to shut out foreign broadcasters is now over, owing to the internet.  But this is not a new phenomenon.  It was the reality many decades ago, when Canadian broadcasting began, over the air.  From the very start, we Canadians contended with foreign signals by building a Canadian system, recognizing that foreign signals were still available to most Canadians.

51. That is the challenge we have once again today: how to strengthen Canadian content and voices in the face of widely accessible foreign competition.

52. The bad news is we have to contend with global players with deep pockets, and no interest in Canadians as citizens – only as consumers.

53. The good news is we have a strong installed Canadian broadcasting base.  We are not building from scratch. And because they operate directly in Canada, subject to Canadian laws, and deriving substantial revenue from Canadians, we can ensure foreign players make an appropriate contribution to Canadian cultural and social well-being.

Ensuring a vibrant domestic market

Q7. What are the characteristics of a vibrant domestic content creation and distribution market?

54. A vibrant domestic content creation and distribution market is a market that both makes available and sustains a substantial variety, quality and volume of Canadian content, while also providing the best the world has to offer.

55. What has been achieved to date in the Canadian broadcasting system should be the benchmark for the future. Viewing stats show that on Canadian TV channels, news viewing is almost entirely Canadian, sports and information programming is majority Canadian, and categories like reality and music in the range of a third Canadian. Even in drama, 20% of viewing is to Canadian drama in English Canada, and 30% in French Canada.

56. Public policy should strive to improve this share base in our domestic TV market. This will require us to ensure that the system funds Canadian content at least to the level it has achieved to date.

57. Compounding the technological threats to our broadcasting system, recent CRTC decisions under your former leadership have actively undermined the Canadian television program rights market and broadcasting system supports.  These include:

  1. Elimination of simultaneous substitution on the Superbowl
  2. Weakening the predominance rule from services received by BDU subscribers to services offered to BDU subscribers
  3. Introduction of mandatory (regulated) unbundling, rather than a market-driven approach
  4. Active encouragement of competitive unregulated Canadian OTT providers

58. A study Commissioned by FRIENDS and other interested parties has estimated that the cumulative negative impact of these recent CRTC decisions could lead to the loss of 15,000 Canadian jobs and take $1.4 billion from the Canadian economy (GDP) annually by 2020.21

59. The Commission should revisit these decisions to avoid further self-inflicted negative impact.

Q8. Will new business models support a vibrant domestic content and distribution market? If so, which ones and why? If not, what content or distribution services would be missing?

60. As a matter of fundamental principle, we have to make the market work for Cancon rather than accept whatever Cancon the market will deliver.

61. As stated in our Q3 answer, first and foremost we need to shore up the domestic rights market and remove the unfair competitive advantages foreign OTT players have upon entering the Canadian marketplace.

Q9. What are the legislative, public policy or regulatory measures currently in place that will facilitate or hinder a vibrant domestic market? What needs to stay in place? What needs to change?

62. FRIENDS is unaware of any “legislative, public policy or regulatory measures currently in place that will … hinder a vibrant domestic market”.  We look forward to reviewing the interventions on other parties and commenting in the second phase on this matter.

63. With regard to “What needs to stay in place“, FRIENDS believes that there is no basis to weaken the fundamental regulatory framework as it applies to traditional broadcasters, at least in the near term.22

64. Regarding “What needs to change”, and “legislative, public policy or regulatory measures currently in place that will facilitate… a vibrant domestic market”, as noted above, we believe that the fundamental changes that must occur concern internet media.

65. We divide these changes into four areas:

66. First, support for Canadian news and democracy. Canadians strongly value local news and want the federal government to act to ensure its survival. Seven-in-ten (70%) agree their MP should work to keep local broadcasting strong, while more than half (54%) think the federal government should be active in supporting local news.  Only one-third (32%) think the fate of local news in Canada should be left to the market to decide.23 While the CRTC has introduced stop-gap measures in support of local TV news24, total annual contribution amounts from the CRTC’s new regime will bring in less than the average annual reduction in local TV revenues for each of the last five years.25 FRIENDS believes that direct but arms-length support from government for Canadian local news media, through tax credits or other means, is therefore essential.26

67. Second, mandatory contributions to Canadian talent and/or programming. Online video providers above a certain size (we suggest a threshold of 500,000 Canadian users) should have mandatory CRTC imposed contributions to Canadian programming analogous to those imposed on traditional broadcasters.

68. Third, priority for Canadian media. As noted, one of the objectives of the Broadcasting Act is that priority be given to Canadian programming services.  This should be updated to allow the CRTC to mandate appropriate priority on the internet for Canadian programming and Canadian programming services through such measures as zero rating.

69. Fourth, support for Canadian media generally. Four decades ago, the Canadian government recognized the need to provide an incentive for Canadian companies to advertise on Canadian rather than foreign media through the advertising deductibility provisions of the ITA.  It is time these same provisions were applied to internet media. Such a move would result in an influx of more than $400 million annually in incremental advertising revenue for Canadian media, including television, and benefit the federal treasury by an estimated $1.15 billion in additional corporate tax payable annually.27 

70. On a final note, we believe that Canadian ownership and control should remain a central objective.  While we accept that the internet does not make this practicable in terms of Canadians’ access to major global internet media, we believe Canadian ownership and control of both significant content and assets underlying telecommunications infrastructure is both essential and sustainable.

71. Canadian broadcasting and cultural policy should continue to provide encouragement of and distinct advantages for Canadian media and Canadian content.

72. Indeed, we contend that ownership of a ‘network’ is even more vital to sovereignty when foreign program services, such as Google, Facebook and Netflix, dominate, as is the case today.  We thus strongly oppose any further relaxation of telecommunications foreign ownership rules.

73. We believe this is fundamental to Canadian culture and sovereignty. No country can remain sovereign if it gives up all ownership and control over the primary means of communication among its citizens.

 


1 Creative Canada Policy Framework, Section 2.1, para. 4

2 The Future Environment Facing the Canadian Broadcasting System, December 14, 2006, pursuant to OIC P.C. 2006-519, issued June 8, 2006.

3 Dating back to at least the Aird Commission, and its 1929 report which concluded that Canada was in need of a publicly funded radio broadcast system.

4 Canadian Radio Broadcasting Act passed by Parliament on May 26, 1932 established the Canadian Radio Broadcasting Commission (CRBC). The Canadian Broadcasting Act came into force in 1936, creating The Canadian Broadcasting Corporation (CBC), with authority to operate a national radio system. The first Broadcasting Act was enacted in 1958, which established a regulatory agency (the Board of Broadcast Governors) to monitor the activities of radio and television broadcasting in partnership with the CBC. The 1967 CRTC Act and 1968 Broadcasting Act ushered in today’s CRTC as the regulator, with Pierre Juneau as its first Chair.  The 1991 Broadcasting Act made broadcasting “technologically neutral”, formally bringing specialty and on-demand services within the rubric of Canadian broadcasting.

5 https://crtc.gc.ca/eng/archive/1999/pb99-197.htm

6 May 25, 2011, Broadcasting and Telecom Notice of Consultation CRTC 2011-344, Fact-finding exercise on the over-the-top programming services in the Canadian broadcasting system, concluded “...the evidence does not demonstrate that the presence of OTT providers in Canada and greater consumption of OTT content is having a negative impact on the ability of the system to achieve the policy objectives of the Broadcasting Act or that there are structural impediments to a competitive response by licensed undertakings to the activities of OTT providers.”

7 Note 2, supra, paras 433-434

8 As evidenced by both the government’s Creative Canada Framework, and CRTC decisions under Chair Blais.

9 This was true even under the Harper Government which in an April 2014 digital strategy document, Digital Canada 150, identified such regulatory measures as privacy rules, anti-cyberbullying legislation, anti-spam laws, child pornography internet reporting legislation, child sexual exploitation provisions in the Criminal code, cyber security rules, and anti-money laundering regulations.

10 Nanos Research. What Canadians Think About Local Broadcasting, the CBC and the Federal Election, September, 2015 (Nanos 2015-706.

11 Section 2.1, para 2

12 http://www.friends.ca/Research/polls

13 Also recognized by the CRTC in its 2016 s. 15 report

14 Given Netflix’s $766 million in 2016 revenues.  CRTC 2017 Monitoring Report . Note to Table 4.2.5.

15 Under the Investment Canada Act, and equivalent to an approximate 17% contribution on today’s annual Netflix Canada revenue. http://www.newswire.ca/fr/news-releases/launch-of-netflix-canada-a-recognition-of-canadas-creative-talent-and-its-strong-track-record-in-creating-films-and-television-648509133.html

16 IAB 2012 & 2017 Reports.

17 The successful Internet TV models to date have been subscription based.  As internet advertising rates are if anything lower than equivalent prime time TV rates, it seems implausible to expect any national internet TV service to be viable on advertising alone.  A global service of exceedingly popular, globally attractive programming, could however be a possibility.

18 See FRIENDS-supported report The State of the Canadian Program Rights Market: 2014.

19 Solutions Research Group Consultants Inc. estimates that Netflix has roughly 5.9 million Canadian subscribers.

20 CRTC 2017 Communications Monitoring Report, section 4.0.  Declines from 2015 to 2016 were 0.5%.

21 Canadian Television 2020: Technological and Regulatory Impacts, Nordicity & Miller, January 2016

22 Note renewal of major groups; PNI reconsideration

23 Nanos Research poll conducted for FRIENDS of Canadian Broadcasting in May 2017

24 ttp://www.crtc.gc.ca/eng/archive/2016/2016-224.htm

25 The CRTC estimates the value of its annual reallocation of BDU contributions to local news at $85 million.  Private local TV revenues in Canada have declined from a peak of $2.144 billion in 2011 to $1.678 billion in 2016, with a drop of $79 million from 2015 to 2016.

26 A Nordicity/Miller report published by FRIENDS in January 2016 predicted that more than half of local stations in small and medium sized markets would fade to black by 2020 in the absence of action by the CRTC.  (Near Term Prospects for Local TV in Canada)  The CRTC’s moves to fund local TV from BDU contributions and require major corporate groups to keep TV stations open defer this day of reckoning to 2021, but will not forestall it.  Evidence of insufficiency includes 2017 cuts by Bell to local newscasts. http://mediaincanada.com/2017/03/31/bell-media-cuts-jobs-tweaks-local-sports-coverage/

27 See The Deductibility of Foreign Internet Advertising, David Keeble and Peter Miller, January, 2017.