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

Dear Mr. Morin:

1. Friends of Canadian Broadcasting is an independent watchdog for Canadian programming in the English-language audiovisual system, supported by 100,000 Canadians. FRIENDS thanks the Commission for the opportunity to comment on these short-term station group renewal applications. Subject to the comments herein, FRIENDS supports the renewal of all the applications.
2. FRIENDS requests an opportunity to appear before the Commission at the public hearing on this matter scheduled to begin April 27, 2009 in order to offer a viewers' and listeners' perspective.
3. Any reduction in the quality or quantity of Canadian programming - especially the availability of local programming - is of critical concern to FRIENDS' supporters, and to most listeners and viewers. No decisions taken as part of a short-term renewal process should be allowed to pre-empt consideration next year of a longer-term broadcasting strategy which will encourage a strong Canadian presence based on audience demand.
4. As you know, the Canadian broadcasting system is held up world-wide as one of the best - this despite our relatively small population base. Canadian television viewers enjoy more choice than most American viewers, notably including access to distant signals and time-shifting options.
5. In addition to these traditional television and specialty options, however, an increasing proportion of television or ‘television-like' content is available on the Internet. As the Commission has heard during the recent New Media hearing, Canadians are actively seeking out and enjoying this content. While older viewers may be expected to continue to access the majority of their television programming through traditional broadcasting distribution undertakings (BDUs, principally cable and satellite distribution systems) a growing number of younger viewers are effectively opting out of the regulated Canadian broadcasting system, and accessing their television on-line, where they can watch in real time, on demand, or download content for future viewing.
6. Choice, however, has come at a price and, as the Commission is well aware, new over-the-air (OTA) or specialty channels approved for carriage in Canada - in addition to a myriad of Web choices - have fragmented the total available audience to the extent that the business model for OTA television is no longer productive or sustainable. CBC Television, which describes itself as a "publicly-subsidized commercial network", ¹ is suffering from the same ad revenue downturn and has mused about selling off stations and shrinking its geographic coverage, while at the same time turning to more mainstream US programming, in a vain attempt to increase revenue.
7. The traditional conventional OTA model - acquiring US network programs, wrapping them in Canadian ads, and subsidizing Canadian programming with the resulting profits - is breaking down. Canadian OTA broadcasters are competing to bid up the cost of US programming at the very time that their audience is declining. And now they are also asserting that local news programming is no longer profitable.
8. Services like Zillion TV, which has distribution agreements with most major US program suppliers, now make it possible to access virtually any mainstream television program from the Web. While many used to question whether or not Web viewing could really compete with a comfy couch and much bigger television screens, faster Internet connections and the ability to view Internet content on a television monitor are reducing these technological barriers, and thereby mainstream OTA television's original competitive advantage.
9. Advertisers follow the audience. Recently, the greatest shift that has taken place within the advertising pie has been towards Web advertising, which has increased in Canada from $25 million in 1998 ² to $1.5 billion in 2008. ³
10. As the Commission's data demonstrate, profits for private OTA television have been falling steadily to the point where in 2008 the entire industry delivered negligible profit. What might initially have been considered a cyclical downturn has now emerged as a major structural change, threatening the viability of OTA television.
11. While each of the station group renewal submissions may differ in detail, the message of these short-term renewal applications is consistent: audience is down, advertising is down, costs are up, the transition to digital (which will deliver no incremental revenues) is not affordable, and Canadian programming obligations are unsustainable.
12. While some have questioned the need for OTA delivery in future, the Commission has a responsibility to consider the needs of the three million Canadians (9.6% of the population in the Fall of 2006) who rely on OTA reception. Canadian Media Research Inc. has concluded that "given the slowing trend in the past 4-5 years, it seems unlikely that the OTA segment will decline by much in coming years". ⁴ In other words, OTA viewing by millions of Canadians will continue to be a feature of our audio-visual system well into the future.
13. Cities with OTA viewing exceeding the Canadian average include: Windsor (27%), Saskatoon (15%), Montreal (14%), Quebec and Sherbrooke (13%). Even in cities with a lower proportion of OTA viewing, the number of viewers is substantial, for example: Toronto (477,000), Vancouver (138,000), Edmonton (113,000), and Ottawa (111,000). CMRI also reports that, even in households subscribing to a BDU service, not all television sets are hooked up to the cable/satellite service. OTA viewing accounted for 25% of TVO's audience in 2006, 16% for CBC-TV, 14% for CTV and 8% for Global.
14. With the advent of digital OTA conversion in 2011, many of these Canadians will have an incentive to become BDU customers, although the CMRI study indicates that 26% of OTA viewers cannot afford the BDU charges. Nonetheless, digital conversion may be expected to increase the power and profitability of the distributors at a time when the OTA providers are in crisis. As FRIENDS has previously observed in submissions to the Commission, BDUs are already acquiring rights to content for their video-on-demand (VOD) offerings. This suggests that OTA broadcasters could well cease to exist in future, were it not for their unique and proven ability to serve their local communities and to serve as the primary conduit for telling Canadian stories.
15. FRIENDS submits that the Commission's policies should recognize the important contribution that Canadian OTA stations make to the cultural fabric of Canada. A successful outcome of this short-term renewal process should be to pave the way for sustainable, therefore profitable, OTA services going forward. In our view, this can only be done by ensuring that OTA has the financial capacity to produce Canadian local programming and to tell Canadian stories.
16. Canadians rely on their local television stations for news about their communities - the kind of local coverage that specialty channels cannot provide. In April, 2008, FRIENDS and a several partners ⁵ submitted to the Commission a POLLARA study on Canadians' Views on De-regulating Cable and other TV Distributors, ⁶ which reported the results of a survey of 1,200 cable and satellite subscribers. Page 32 demonstrates that Canadians consider local news their top priority:
17. 
18. At the BDU & Specialty public hearing, the Commission heard evidence from Nanos Research that "78% of respondents indicated that having local news was of high, or very high, value to them". ⁷ CMRI's The 2008 TV Trends and Quality Survey: A Report on Canadians' Attitudes toward TV offers corroborating data: ⁸
19. 
20. This survey confirms that local news is anglophone Canadians' top priority for television viewing.
21. Such local programming is most threatened in smaller communities, where there is often only one TV source.
22. Historically, Bureau of Broadcast Measurement (BBM) audience numbers have shown strong viewership to Canadian news programming while at the same time viewing to what is now considered priority programming has been more challenged. More recently, however, it has become clear that programs such as Corner Gas, when produced with substantial budgets, can yield competitive audience results. However, we note that, as CTV suggests in its supplementary brief, Corner Gas loses money. ⁹
23. The maintenance of local programming and story telling on OTA television should be the Commission's top priority in this short-term licence renewal process. This requires an adjustment to the economic model for OTA television. The Commission's Local Programming Improvement Fund, though a laudable initiative, is not of a scale sufficient to address this challenge.
24. Canadians are willing to pay for local television. POLLARA found that:
25. 
26. 
    We believe that it is now necessary for OTA television to be funded on a level playing field with specialty channels. Private over-the-air television networks should have access to fee-for-carriage as determined by the CRTC provided they promise to use at least a portion of the money to maintain and enhance local and drama programming. We propose that the networks commit to a three-way split among local or drama programming, digital conversion and bottom line until the completion of digital conversion in 2011. Thereafter, the split should be two-thirds to drama or local programming and one-third to the bottom line.
27. BDUs should not be permitted to generate very substantial profits from the sale of their cable products - driven by OTA stations - without being obliged to pay for the services that they are then re-selling. FRIENDS recommends that BDUs should be permitted to pass along this charge to their subscribers only if their profit before income tax [PBIT] descends below 15%.
28. We believe the Commission should focus its priority attention on small to medium-sized markets, some with only one OTA channel. Where a licensee, or an applicant for a licence, can demonstrate to the Commission's satisfaction that: [1] it is committed to providing a defined minimum of local programming, [2] ad revenues are insufficient to sustain that programming, and [3] the community it serves is willing to pay a per-subscriber fee sufficient to make up the gap between local revenues and programming costs, the Commission should approve a levy on subscribers upon receipt of satisfactory evidence that a majority of subscribers support the proposal (following the principle of majority rule). The Commission should consider its local calling area expansion policies on the telecom side a precedent for such an innovation in support of local programming in smaller markets.
29. We also propose that the CBC should abandon ads on TV, except during professional sports coverage. This would inject new revenue into the competing private television business. In return for vacating ads on non-sports programs, CBC Television should be re-financed either by a levy on cable and satellite distributors to be determined by the your Commission, or through general government revenues, or by some combination of the two. This would transform CBC Television into a genuine public broadcaster. ¹⁰
30. This new approach could be phased in over several years. Five years ago, the Prime Minister, then Leader of the Official Opposition, advanced this argument in a speech to the Canadian Association of Broadcasters:
31. "English-language television has tended to become more commercial, more in direct competition with private television and more driven to use American programming to attract advertising dollars - an approach which does not appear to be successful. We believe that CBC English-language television should become, and will have to become, more distinctive if it is to remain viable and fulfill its role as a unique public broadcaster. We should consider giving it a mandate that clearly articulates its role as a unique Canadian broadcaster, and seek to reduce or eliminate mass-audience American programming from its schedule. In terms of foreign content, CBC could concentrate on non-North American international programming, that tends to be under-represented in the system. Along the same lines, we would seek to reduce CBC's dependence on advertising revenue and its competition with the private sector for these valuable dollars, especially in non-sports programming. This refocused CBC will, obviously, have to be provided with stable and long-term public funding." ¹¹
32. Following are FRIENDS responses to some of the specific questions posed by the Commission.
33. Local programming
34. What are appropriate local programming obligations for the short term, given the current economic climate? Should local programming obligations be harmonized, with minimum levels based on market size rather than historical commitments?
35. If the advice FRIENDS offers in this submission is taken, we do not consider it necessary to address the issue of harmonization, particularly in the short-term. We would object to any proposal which masked reducing local programming obligations under the label of "harmonization".
36. Local Programming Improvement Fund
37. In Regulatory frameworks for broadcasting distribution undertakings and discretionary programming services - Regulatory policy, Broadcasting Public Notice CRTC 2008-100, 30 October 2008, the Commission established the LPIF to improve the quality of local programming provided by conventional television stations serving non-metropolitan markets of less than one million people. The use of LPIF funding must be incremental to current expenditures on local programming; the Commission will calculate the current base level of local programming expenditures by averaging a station's expenditures for the past three broadcast years. Given the severity of the current economic downturn, should the LPIF incrementality criteria, or the approach to determining the base levels for incrementality, be revised?
38. FRIENDS has proposed in paragraph 28 above a means whereby community members might decide, on a majority basis, to invest to sustain local programming. Were this approach to receive favourable consideration by the Commission, the LPIF might match locally-generated funds.
39. We support the principle that stations which benefit from the Fund should do so based on their historic commitment to local programming.
40. Priority programming
41. The large multi-station groups are required to broadcast, on average, at least eight hours per week of priority Canadian programs, such as drama and documentaries, during the peak viewing periods between 7 p.m. and 11 p.m. Should the Commission continue to require a minimum level of priority programming in the short term? If the Commission were prepared to consider the elimination of existing priority program obligations, should there be requirements for minimum amounts of original hours of specific types of programming, such as drama or documentaries?
42. The priority programming commitments of large multi-station groups provide an appropriate minimum exposure for under-served Canadian programming categories, and should be maintained. One of the priority programming policy's principal advantages is the encouragement of diversity. FRIENDS recommends against changing the definitions of priority programming as part of this short-term hearing process. Such a fundamental change to broadcasting policy should be considered one year hence.
43. We note that, for the private OTA sector, Category 7 drama expenditures in the 2000 broadcasting year were $98 million, or 19% of Canadian programming expenditures. Eight years later, drama spending totalled $109 million, or 17% of Canadian programming expenditures. Taking inflation into account, this spending has declined by 8%. However, in 2000 private OTA profit before income tax [PBIT] was $261 million, compared with only $8 million in 2008.
44. English-language Canadian programming expenditures
45. In Determinations regarding certain aspects of the regulatory framework for over-the-air television, Broadcasting Public Notice CRTC 2007-53, 17 May 2007 (the 2007 Conventional Television Policy), the Commission stated that the continuing reduction, by English-language conventional television licensees, in Canadian programming expenditures as a proportion of total programming expenditures was cause for concern. This concern has only intensified as a result of the 2008 data released on 10 February 2009, which show that private broadcasters' spending on Canadian programming was relatively stable, whereas spending on foreign programming rose by 7.4% over 2007 levels. At the group-based renewals scheduled for April 2010, the Commission intends to address these concerns with a view to implementing effective regulatory mechanisms to ensure that private ownership groups with television licences contribute appropriately to the creation of Canadian programming. Please comment on the effectiveness of a condition of licence requiring a specific ratio between Canadian and non-Canadian programming expenditures. The Commission at first blush finds a lot of merit in the idea of imposing a condition of licence on English-language broadcasters requiring a 1:1 ratio between Canadian and non-Canadian programming expenditures. If a decision on a ratio is adopted, should it be imposed on a trial basis for the upcoming one-year licence term or on a long term basis following the upcoming April 2010 hearing?
46. FRIENDS considers that this proposal should be deferred to 2010 because, were it to be adopted, it could only be implemented prospectively owing to the typically multi-year contractual obligations between Canadian broadcasters and foreign rights holders on one side of the ratio, and on the other side, the current absence of free cash flow in the system.
47. Any examination of this proposal should start by recognizing the reality that a communication border with the United States does not exist. All US network programming comes into Canada on one of the US networks. If that program is not purchased by a Canadian broadcaster and is not simulcast, no benefit from Canadian viewership will accrue to the Canadian broadcasting system, even though that program attracts a Canadian audience. As Canadian program spending is substantially cross-subsidized by revenues from the sale of US programming, the inability to purchase a show because a Canadian broadcaster had reached a regulatory threshold could have a negative impact for years to come.
48. In the longer term, this proposal, therefore, should be screened for its vulnerability to the law of unintended consequences. For example, it may carry an inherent danger of achieving the unintended consequence of reducing overall spending on Canadian programming. It therefore merits careful scrutiny.
49. However, such a rule might reduce the amount of US programming which is acquired for the singular purpose of keeping it out of the hands of competing broadcasters.
50. Also, all of the station groups that might be included in such a decision own specialty services and often purchase subsequent runs of the same programs after the original network airings. The existence of a 1:1 ratio might lead to creative amortizations of the overall contractual value of the programming package for the singular purpose of maintaining the 1:1 ratio.
51. We would also encourage the Commission to examine any issues that might arise that could be considered restraint of trade.
52. Without a subscription component, OTA's survival would be completely dependent on advertising revenue, which, as the Commission is aware, is directly related to audience. Audience will drive revenue from both US and Canadian programming, and aggregate revenue, not spending ratios, is what will determine the amount that is available for spending on Canadian programming. FRIENDS submits that, if the Commission wishes to impose regulation on program spending, then a more straight-forward approach would be a formula based on percentage of revenue rather than a ratio of program spending.
53. Independent production
54. Large English-language television station groups are expected to ensure that at least 75% of the priority programming they broadcast is produced by independent production companies; for its part, Group TVA inc. is expected to allocate minimum annual expenditures for independently-produced French-language programming. Are the current approaches to support the broadcast, by conventional television stations, of independently-produced programming effective? Should other approaches be considered in the short term?
55. The Broadcasting Act requires that Canadian programming should include a "significant contribution" ¹² from the independent production sector although the Act does not provide a definition of "significant". While FRIENDS supports a strong independent production sector, we also recognize that no one sector deserves protection at historic levels when much greater systemic flexibility may be required going forward. FRIENDS suggests that the required contribution might be reduced to 60%, a level that is not only significant but also predominant.
56. Terms of trade
57. In the 2007 Conventional Television Policy, the Commission stated that terms of trade agreements between broadcasters and independent producers would provide stability and clarity to all concerned, and that it expected licensees to submit terms of trade agreements as part of their licence renewal applications. What is the status of the terms of trade agreements, and when will these agreements be implemented?
58. While this is largely an issue between broadcasters and producers, FRIENDS notes that one of the most important changes to the American broadcasting regulatory environment in the past twenty years has been allowing US television networks to take an ownership position in the programming which they acquire. This has been cited as an important factor in the US networks' survival at a time when OTA television in the United States is challenged by many of the same issues facing Canadian broadcasters. Accordingly, we encourage the Commission to examine the issue of ownership within the broader context of the terms of trade agreement.

Yours sincerely,


Ian Morrison
Spokesperson

cc: The applicants

For information: Jim Thompson 613-567-9592

*** End of Document ***

¹ http://www.friends.ca/news-item/7684

² Canadian Media Directors Council, Media Digest 2008/09

³ Interactive Advertising Bureau [IAB}

⁴ How Many Canadians Rely on Over-the-Air TV Reception and What Do They Thin About TV? A Profile of OTA Viewers and Special Survey Results, prepared for Heritage Canada, CMRI, June 2007, page 6. This study indicates that OTA reception varies from 2.1% in Newfoundland to 12.7% in Quebec.

⁵ ACTRA, CEP, Stornoway Communications and the Writers' Guild of Canada

⁶ See PN CRTC 2008-100, paragraph 336.

⁷ Ibid.

⁸ The data presented here canvassed 943 anglophones, and appear on page 23. Data from previous years' versions of this survey confirm that local news is consistently Canadians' top television priority.

⁹ CTV's investment in Corner Gas was funded from the BCE benefit package in 2000.

¹⁰ http://www.friends.ca/news-item/7999

¹¹ http://www.friends.ca/files/PDF/SHarper.CAB.n29.pdf

¹² Subsection 3(1)(t)(v) of the Broadcasting Act