Listen to presentation - runs 52.04 (including Q & A session)

Mr. Chair and Members of the Commission:

Thanks for the opportunity to appear today. Friends of Canadian Broadcasting is an independent watchdog for Canadian programming in the English-language audiovisual system, supported by 100,000 Canadians.

The conventional over-the-air (OTA) television model – acquiring US network programs, wrapping them in Canadian ads, and subsidizing Canadian programming with the resulting profits – is failing. 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.

Advertisers follow audiences. 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 1998¹ to $1.5 billion in 2008.²

As the Commission's data demonstrate, profits for private OTA television have been falling steadily to the point where by mid-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. This would be true even if our economy were not in recession.

The message from the applicants is consistent: audience is down, advertising is down, costs are up, the transition to digital is not affordable, and Canadian programming obligations are unsustainable.

While some have questioned the need for OTA delivery in future, the Commission has a responsibility to consider the needs of three million Canadians 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".³ In other words, OTA viewing by millions of Canadians will continue to be a feature of our audio-visual system well into the future.

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.
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. 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 your 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.

FRIENDS submits that the Commission's policies should recognize the vital contribution that Canadian OTA stations make to the cultural fabric of Canada. A successful outcome of this short-term renewal process would be to pave the way for sustainable, therefore profitable, OTA services. 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.

Canadians rely on their local television stations for news about their communities – the kind of local coverage that specialty channels do not provide. You may recall that in April, 2008, FRIENDS and several partners⁴ submitted to the Commission a POLLARA study on Canadians' Views on De-regulating Cable and other TV Distributors,⁵ 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:

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".⁶ CMRI's The 2008 TV Trends and Quality Survey: A Report on Canadians' Attitudes toward TV offers corroborating data:⁷

And local programming is most threatened in smaller and medium-sized communities, where there is often only one local source.

Historically, Bureau of Broadcast Measurement (BBM) audience numbers have shown strong viewership to Canadian news programming. At the same time viewing to what is now considered ‘priority programming' has been more challenged. Yet programs such as Corner Gas, when produced with substantial budgets, can yield competitive audience results.

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 will require an adjustment to the economic model for OTA television. The Local Programming Improvement Fund, though a laudable initiative, is not of a scale sufficient to address this challenge.

Canadians are willing to pay for local television. POLLARA found that:

We believe that it is now necessary for OTA television to be resourced on a level playing field with specialty channels. OTA television networks should have access to the second revenue stream of fee-for-carriage 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.

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%.

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.⁸

This new approach could be phased in over several years.

A few comments on your specific questions…

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".

Regarding the Local Programming Improvement Fund, in our March 30 submission, FRIENDS proposed 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.

We support the principle that stations which benefit from the Fund should do so based on their historic commitment to local programming. We also see merit in funding the LPIF on a more substantial basis – for example 5% of cable and satellite revenues – as some members of the Commons Heritage Committee have suggested.

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 counsels against changing 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.

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, a 97% decline. And those data precede the onset of the recession.

Regarding English-language Canadian Programming Expenditures, 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.

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 on resources for Canadian programming for years to come.

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.
However, such a rule might have the fruitful result of reducing the amount of US programming acquired for the singular purpose of keeping it out of the hands of competing Canadian broadcasters.

Also, all the station groups that might be affected by 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 in order to maintain the 1:1 ratio.

We would also encourage the Commission to examine any issues that might arise that could be considered restraint of trade.

Without a subscription component, OTA's survival will continue to be completely dependent on advertising revenue, which, as the Commission is aware, is directly related to audience and supply-demand factors. 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.

Regarding independent production, the Broadcasting Act requires that Canadian programming should include a "significant contribution"⁹ from the independent production sector, although the Act does not define "significant". FRIENDS supports a strong independent production sector but we also recognize that no single 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.

Regarding terms of trade, an issue largely 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.

Thanks for your attention, and best wishes in your important deliberations.

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For information: Jim Thompson 613-567-9592

¹ Canadian Media Directors Council, Media Digest 2008/09

² Interactive Advertising Bureau [IAB}

³ 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.

⁴ ACTRA, CEP, Stornoway Communications and the Writers' Guild of Canada

⁵ See PN CRTC 2008-100, paragraph 336.

⁶ Ibid.

⁷ 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.

⁸ http://www.friends.ca/news-item/7999

⁹ Subsection 3(1)(t)(v) of the Broadcasting Act

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Related Documents

Mar 30, 2009 — Policy Brief: Re: Broadcasting Notice of Consultation CRTC 2009-113 - Licence Renewals for Private Conventional Television Stations
FRIENDS' submission to the CRTC recommends that the quality and quantity of Canadian programming – especially local programming - be maintained as part of the private conventional television licence renewal process.