Broadcasting Notice of Consultation CRTC 2017-359
Feb 13, 2018
CRTC call for comments on the Governor in Council’s request for a report on future programming distribution models
Introduction and Context
1. This is FRIENDS’ second 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. After parties filed their first phase submissions, the Commission placed a reference document on the public record to “provide additional context and help focus discussion in the second phase”.1
3. Among the observations in the reference document we noticed the following sobering projection:
If current trends continue, TV viewing in the English-language market could decline by approximately 25% to 40% over the next 10 years. This decline is less pronounced in the French-language market, but even there we could see approximately a 10% to 20% decline over the same period. Of course, declines in traditional TV viewing don’t mean Canadians are tuning out; they may just be shifting to online sources.
4. Unstated, but apparent, is that those online sources are largely foreign, currently dominated by Netflix.
5. The sanguine nature of the Commission’s observation is startling. For most of the past twenty years, CRTC policy was that “new media”, “digital media”, the internet generally, “internet television” and “Over-the-Top Television (OTT)” were having no discernable impact on traditional television. We have moved from denial that OTT is having an impact to the inevitability of significant decline in barely the blink of an eye – and with no apparent sense of urgency nor expressed desire to do anything about it.
6. Based on the evidence filed in this proceeding, it appears that the Canadian television system may rapidly be approaching a potential point of no return. Even if that were not the case, it is only prudent for policy makers to recognize that:
- The broadcasting environment appears to be in sustained decline;
- The government and the CRTC have an obligation to manage the transition with equitable and appropriate policies; and
- Concerted action must be taken on numerous fronts.
7. Friends will address these points in this submission.
The Broadcasting System is in Decline
8. All intervenors, in their own way, and to varying degrees, recognize the ongoing decline facing Canadian television.
9. In common with FRIENDS, most in the creative community take the view that the erosion of traditional TV revenues over the next five years should be relatively modest – and manageable.
10. This assumption of modest revenue declines (averaging five to ten percent over the next five years) is supported by projections filed with the Commission by the large broadcast groups in a companion proceeding reconsidering Canadian programming licence conditions.2
11. The Commission’s reference document is substantially consistent with this assumption, projecting a 16% decline in TV advertising revenues and a 5% decline in subscription revenues over the same period.
12. Notwithstanding the gradual nature of projected declines, the notion of a forty percent decline in English Canadian television audiences over the next ten years, along with associated declines in revenues, is cause for alarm.
13. This is even more true given the possibility that declines may not be gradual or steady.
14. In our phase one submission, FRIENDS stated:
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.3
15. This point is confirmed by the large broadcast groups in their phase one submissions. Increased bypass of Canadian broadcasters by a multiplicity of OTT providers poses a serious threat to the Canadian program rights market – one that could quite suddenly deny private broadcasters access to the profitable US programming that has sustained their business model.4
16. Corus goes so far as to propose:
Planning for a ‘tipping point’ at which continued regulation of the private broadcasting sector is no longer tenable: We cannot say with any certainty when this tipping point will occur, but we believe that there needs to be a plan or a threshold in place to guide the eventual deregulation of the private broadcasting sector.
17. FRIENDS believes it is wildly premature to plan for “deregulation of the private broadcasting sector”. Moreover, like most other stakeholders, we believe that public policy should seek to avert a tipping point – not assuming or planning for its possible arrival.
A Transition to Equitable and Appropriate OTT Obligations
Equitable and Appropriate Obligations
18. A common theme among interventions is the notion that the system is transitioning from a primarily linear to a primarily on-demand viewing environment.
19. Interveners recognize that the extent to which on-demand viewing will be primarily satisfied by foreign OTT players, or a combination of Canadian traditional and OTT providers, will determine the future of the Canadian broadcasting system.
20. A consequential theme, espoused particularly by the large private broadcast groups, is the need for a new and more equitable regulatory framework.
21. With the notable exception of Corus, virtually all interveners suggest that this should be achieved by applying obligations onto OTT providers.
22. Bell states that “the Commission must find a way to ensure that international OTT services contribute equally to the Canadian production environment from which they benefit.”
23. Rogers states that it “believes that the time has come to adopt a new regulatory framework that would apply equitably to all platforms that are delivering television content into Canadian homes. It is only by creating a more equitable framework that Canada will be able to realize its full potential as one of the strongest and most competitive creative economies in the world.” Rogers proposes five minimum regulatory obligations:
- finance Canadian production (30% of gross revenues);
- pay licence fees;
- provide effective navigation and curation of Canadian programming;
- adhere to Canadian broadcast standards; and
- satisfy accessibility and public interest obligations, such as closed captioning, described video and public alerting.
24. Cultural groups join these broadcasters in calling for regulatory and funding obligations to be placed on foreign online TV providers. These groups recognize that, without concerted action, the ability of the system to support Canadian programming will be severely compromised over the medium to long term.
25. WGC states:
Canada cannot discard its cultural policy toolkit—it must continue to use it in a way that makes sense in the Internet age. In our view, that means, primarily, ensuring that the Broadcasting Act, and its cultural, social, and employment mandates, applies to broadcasters or broadcaster-like services that serve the Canadian market, whether or not they are based on Canadian soil, and whether or not they transmit over radio waves, dedicated BDU services, or on the Internet.
26. CMPA argues “it is time to conduct a fresh review of the DMEO and the VOD Exemption Order to modernize the Canadian broadcasting system and determine how current categories of exempt internet television services should contribute to Canada’s broadcasting policy”.
27. FRIENDS agrees with these observations and notes that they are consistent with those made in our phase one submission. The basic premise is that public policy need not, in fact must not, contemplate or accept as inevitable the demise of the Canadian broadcasting system.
Government and the CRTC have a Responsibility to Address
28. As noted by FRIENDS in the 2014 Let’s Talk TV (LTT) Proceeding, the CRTC’s early decision to exempt non-traditional IP-based forms of television distribution and exhibition was based on a fundamental and necessary premise, articulated as follows:
The Commission considers that broadcasting in new media creates opportunities for the broadcasting system to better serve Canadians and commends parties for their willingness to embrace the new media environment. Based on the record of the Proceeding, the Commission does not consider that broadcasting in new media currently poses a threat to traditional broadcasting licensees' ability to meet their obligations. In fact, new media is currently being used in a complementary manner by many broadcasters for activities such as providing audiences with the ability to catch up on missed programs, promoting broadcast offerings and building brand loyalty. As such, the Commission is satisfied that broadcasters have the tools to adapt to the challenges posed by technological change and the motivation to incorporate new platforms and formats into their business models5. [emphasis added]
29. As we and others stated in the LTT Proceeding, the notion that new media (or even the more limited OTT) is merely complementary and does not pose a threat to traditional broadcasting licensees' ability to meet their obligations is no longer valid. Nevertheless, the Commission still maintained the (since renamed) Digital Media Exemption Order (DMEO) stating:
[T]he Commission also reaffirms its view that licensing digital media broadcasting undertakings is generally not necessary to achieve the broadcasting policy objectives set out in the Act. For the time being, exemption of these services will enable continued growth and development of digital media industries in Canada, thereby contributing to the achievement of broadcasting policy objectives.6
30. If that decision was wrong in 2015, it is even more wrong now. As CMPA states in its first phase submission:
At the time the Create Policy was released and the exemption orders were last cursorily reviewed it was not yet apparent that BDU revenues were in decline: the Create Policy was released in 2015 and BDU revenues only started declining after 2014. However, based on the recent data it is now clear that BDU revenues are in fact declining and internet television services are having a substitutive, not complementary, impact on our system. Now is the right time to properly revisit the DMEO and VOD Exemption Order so that the proper regulatory measures can be determined and put in place before the decline becomes too great for the Canadian broadcasting system to bear.
31. There is absolutely no evidence that exemption without obligation of digital media is enabling “continued growth and development of digital media industries”, but now considerable evidence exists that it is harming the Canadian programming contributions of private broadcasters. By no reasonable interpretation can this situation be seen as “contributing to the achievement of broadcasting policy objectives”.
32. FRIENDS therefore submits that it is more than just “the right time” for the CRTC to review the DMEO. We continue to believe that, pursuant to the Broadcasting Act, the Commission is legally obligated to revisit the DMEO and determine what contributions pursuant to the Broadcasting Act would be appropriate for OTT services and other internet-based TV players.
33. This would achieve a much needed reassertion of Commission jurisdiction and allow appropriate OTT contributions to be put in place.
Policy Action Needed
34. In our first phase submission, FRIENDS identified a number of policy changes needed to “facilitate… a vibrant domestic market”. These include:
- support for Canadian news and democracy through tax credits and/or by expanding the advertising deductibility provisions of the ITA to apply to the internet
- mandatory contributions to Canadian talent and/or programming from online video providers
35. We expand on and supplement these recommendations below.
Support for local news
36. The Commission last reviewed the state of local TV news in 2015, and as a consequence, implemented (effective September 1, 2018) three key “stop gap” measures that have to-date succeeded in preventing material reductions in local TV news, and closures of local TV stations generally. These include:
- Establishment of an Independent Local News Fund, funded by mandatory BDU contributions, to support local news on independent TV stations;
- New flexibility for BDUs to divert contributions to their affiliated local news stations; and
- Ongoing hour-based requirements for local news, and commitments from station groups to keep local stations open in return for group licensing flexibility.
37. Unfortunately, the maximum CRTC-estimated value of the annual reallocation of BDU contributions to local news is only $85 million, or less than the average annual revenue loss of private local stations over the last five years. Moreover, large station groups are now requesting a shorter (three year) licence term, that could cause them to revisit commitments to local news and keeping local stations open as early as September 1, 2020.7
38. In their phase one submissions in this process, all the large broadcast groups comment on the popularity, importance and priority of local news. They note, however, that revenue and profitability losses place the delivery of local news at risk. Corus states:
[L]ocal news has become an even more important part of the appeal of traditional broadcasting. However, news becomes more financially difficult to monetize the more local it becomes. Even though local news is often the most watched programming on basic television stations, it is also the most expensive, per hour to produce, because unlike national news and entertainment programming, costs cannot be shared with other services and territories. Popularity does not equate to financial viability in this case.
39. In 2015, based on third-party research commissioned by FRIENDS and UNIFOR8, we estimated that, without CRTC or government action, on the order of 50% of Canada’s small and medium market TV stations could close by 2020.
40. The Commission’s 2015 decisions have forestalled, but not prevented that outcome. Significant closures of smaller local TV stations may now well have been pushed out as far as 2022 by the Commission’s actions. But, consistent with the pattern of closures that we have seen in print media9, they are on the way, unless action is taken to prevent them.
41. In its phase one submission, BCE states:
If the Commission is committed to protecting the local news ecosystem and to ensuring that democratic voices continue to be heard on our local television stations, it must act now to provide an innovative solution.
42. FRIENDS agrees with BCE that action must now be taken. We are not, however, of the view that such action rests solely on the Commission’s shoulders. Nor are we convinced that Bell’s proposal of subscription fees for local TV stations is the correct remedy.
43. FRIENDS believes that an adequate response is likely to lie in one or both of two potential government initiatives.
44. First, the application of the advertising deductibility provisions of the Income Tax Act (ITA) to the internet. In the 1960s and 1970s, 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. The time has come to apply these same provisions 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 both federal and provincial treasuries by an estimated $1.3 billion in additional corporate tax payable annually.
45. A paper commissioned by FRIENDS on this subject is attached as Appendix A to this intervention.10
46. Second, the introduction of a platform-agnostic local news tax credit. The reference document notes a $152.5 million financial shortfall in English language news in 2015, and a $105.7 million financial shortfall in French language news. This is the largest shortfall of any TV programming genre other than fiction (drama).
47. The Commission’s description of these statistics states:
Many have argued that without public funding, the market may not support certain kinds of TV content at their current levels and some types of programming may not exist at all. The following chart estimates what the financial surplus (or shortfall) of TV content by genre and language would be, in aggregate, without direct public support measures (such as the CMF, production tax credits and CBC parliamentary appropriation) or indirect measures (such as the cross-subsidization of Canadian content from profits on foreign content).
The preliminary results demonstrate that the only genres of TV content that have a meaningful financial surplus on an aggregate basis are sports and other (which includes lifestyle and reality programming) in the English-language market. The analysis illustrates the financial challenges of Canadian fiction (such as drama and comedy), news (such as local) and children’s programming in both the English- and French-language markets.
48. The significant difference between local news and fiction is that local news has no subsidy11. That is because, historically, it was not required. Local news was always profitable – until the internet came along, with digital advertising that took advertising dollars away from traditional (including local) media.12
49. Now that local news has joined other content genres in requiring subsidy to sustain it, it is only logical that an appropriate subsidy mechanism be identified.
50. While we are heartened by indications that support will be forthcoming for local newspapers in the upcoming budget13, we are concerned that the proposed scope (only local newspapers) and quantum ($75 million annually) will be inadequate to achieve the desired results.
51. Tax credits would be a more logical approach going forward. They are already proven to work in supporting many genres of Canadian TV programming. They are automatic and hence could not be misconstrued as political interference in impartial, arm’s-length news media. They can be designed to apply to all local media, print, TV and radio in a way that directly supports journalism and journalists.
Mandatory OTT Contributions
52. In the last six months, the federal government has made a number of statements regarding foreign OTT, specifically regarding Netflix. In particular, Ministers Morneau and Joly, as well as the Prime Minister, have all, in various ways and at various times, pronounced that there will be no “Netflix Tax”.
53. This pronouncement, parroting a legacy position of the Harper government, is neither logical nor clear.
54. At times, it appears to refer to the application of sales tax14, at other times to a mandatory “contribution requirement15, akin to current BDU contributions or broadcaster contributions to Canadian programs.
55. In respect of sales taxes, such as the HST, the notion that foreign internet-based television providers should have an ongoing sales tax advantage of up to 15% over Canadian television providers is simply discriminatory and nonsensical. It is of sufficient concern when Canadians have to deal with an “America first” President. We have no need for an “America first” Canadian government.
56. Friends confidently anticipates that this position will be reversed in the not too distant future.
57. In respect of a contribution requirement towards Canadian programming, it is important to draw a distinction between a “tax-like” post facto contribution, akin to the 5% BDU contribution that goes to third parties, and broadcaster Canadian programming expenditures, that broadcasters control – and benefit from.
58. The former can be visible to the consumer – as was the case when the Commission mandated a 1.5% of revenue BDU contribution to local programming16, and hence appear similar to a “tax”. The latter is invisible to the consumer, and clearly the appropriate approach regarding for Netflix.
59. FRIENDS’ phase one submission noted the “important precedent” inherent in the Creative Canada policy announcement of a $500 million five-year agreement with Netflix. We also noted that the announced, though opaque deal is flawed in many respects, including:
- 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 revenues (and less than 10% of anticipated five-year average revenues)17 as opposed to the 30% of annual revenues of the major broadcasting groups in Canada
- the deal comes 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
60. FRIENDS stated, however, that despite these considerable flaws, 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.18
61. In that light, we were pleased to hear Minister Joly state recently that the Netflix deal was part of a “transition plan” to “ensure Canadian-produced content while the government plots out next steps to ensure the longevity of Canadian-made film and TV”, and that “there’s also been no discussion regarding the fact that we will never change our laws or regulate. That was never part of the conversation either.”19
62. This leaves the stage set for the CRTC to implement a 30% Canadian programming contribution requirement on Netflix and similar OTT providers. OTT providers with less than a designated revenue threshold, perhaps $1 million annually, could be exempted from such a contribution requirement.
The Vital Role of the CBC
63. In its intervention, as part of its proposal to effectively “deregulate” private broadcasting, Corus proposed:
Conferring responsibility for fulfilling social policy broadcasting objectives upon the public broadcaster: The publicly funded broadcaster can provide opportunities and airtime to ensure regional reflection and diversity in the system even where this content can never achieve financial viability.
64. While FRIENDS does not agree with the notion of deregulating private broadcasting, we do agree that the relative importance of CBC in the TV universe, and in meeting key social and cultural objectives, will need to increase in the future as private broadcasters’ capacity to contribute decreases.
65. The government took a vital step in ensuring CBC is up to this responsibility, in increasing CBC’s parliamentary appropriation by $150 million annually over the five years 2017/2022.
66. A successful conclusion to the current search for a new CBC President is another vital step.
67. The licence renewal process for CBC, currently slated to get underway shortly20, will provide a vital opportunity for Canadians to comment on CBC’s plans for the future and to ensure CBC’s contributions to the system are significant and commensurate with its privileged public funding status.
68. Friends also notes the recent proposal from CBC management for a new advertising free model, conditional on increased public funding.21 FRIENDS sees merit in reducing CBC/SRC’s dependency on advertising, but in the absence of new ‘independent and merit-based’ leadership, will defer substantive comment.
2 Projected revenue declines for Rogers, Bell and Corus from 2016/17 to 2021/22 are 11%, 9% and 5% respectively. (Broadcaster filings. Broadcasting Notice of Consultation CRTC 2017-429).
3 See FRIENDS-supported report The State of the Canadian Program Rights Market: 2014.
4 See, for example, BCE Phase One Submission, at paras 2, 43-47
5 Broadcasting Regulatory Policy CRTC 2009-329, Review of broadcasting in new media, para 22, http://www.crtc.gc.ca/eng/archive/2009/2009-329.htm
6 The “Create Policy”, para 93. https://crtc.gc.ca/eng/archive/2015/2015-86.htm
7 Pursuant to Broadcasting Notice of Consultation CRTC 2017-429.
8 Near Term Prospects for Local TV in Canada, Nordicity and Peter H. Miller, November, 2015.
9 On the order of 200 daily newspapers have closed since 2008. The Digital Media Universe in Canada, Nordicity, DM@X Conference, January 27, 2018
10 See, The Deductibility of Foreign Internet Advertising, David Keeble and Peter Miller, Revised Edition, February, 2018.
11 Other than the CRTC BDU support measures introduced in 2018 (and therefore not reflected in these numbers) and CBC’s parliamentary appropriation.
12 As discussed in FRIENDS phase one submission.
14 Bill Morneau insists federal government still has no plans for a Netflix tax, Canadian Press, December 11, 2017.
15 CBC, media producers, actors call for internet and Netflix tax — again, Financial Post, Dec 7, 2017.
16 The Local Programming Improvement Fund (LPIF) pursuant to https://crtc.gc.ca/eng/archive/2012/2012-385.htm
17 13%, given Netflix’s $766 million in 2016 revenues. CRTC 2017 Monitoring Report. Note to Table 4.2.5. However, in light of projected revenue growth, the commitment is more likely to average less than 10% over the next five years.
18 Under the Investment Canada Act. 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
19 CMPA Prime Time Conference on February 1st, 2018. Per http://ottawacitizen.com/news/local-news/heritage-ministry-to-review-canadas-broadcasting-act
20 The broadcasting licences for the programming services of the Canadian Broadcasting Corporation were last renewed for five years from 1 September 2013 to 31 August 2018, pursuant to https://crtc.gc.ca/eng/archive/2013/2013-263.htm. Unless administratively renewed, under normal circumstances, the renewal process would begin shortly.