Mr. Robert A. Morin
Secretary General
CRTC
Ottawa K1A 0N2

Executive Summary Canadians place the highest value on the local news offered by their conventional television stations. Local news is threatened by changing advertising and economic conditions, as well as by audience fragmentation. Two stations have recently closed, and more are threatened. Conventional television can no longer finance itself on advertising revenues alone. Forty percent of viewing on cable and satellite distributors is to Canadian conventional television stations. Big cable monopolies are extremely profitable, while satellite distributors are less so. Distributors have misled the public about the impact of paying for local signals. Rogers has hiked the price of basic cable since rate deregulation by 85% while the consumer price index has risen only 14%. The CRTC should re-regulate the basic rates of cable's big four and ensure that big cable does not pass along signal compensation costs to subscribers. Satellite distributors should be allowed to pass along signal compensation costs with no mark-up until such time as they achieve a 10% PBIT. This compensation should be allocated nationally based on population and linguistic composition. In each market, the compensation should be divided among local Canadian conventional stations based on total tuning to Canadian programs in the preceding broadcasting year.1

1. Friends of Canadian Broadcasting welcomes the opportunity to comment on this important topic and we seek an opportunity to appear at the forthcoming public hearing in order to offer the Commission comments from a viewers' and listeners' perspective.
2. There is strong evidence that Canadians value local news – more so than any other type of television programming. In an April 2008 study commissioned by Friends and collaborating groups, Pollara found that 76% of Canadians believe that local news is “very important”:²
   
   
   
3. Corroborating findings emerge from CMRI Inc.'s The 2008 TV Trends and Quality Survey: A Report on Canadians' Attitudes toward TV, which found that 64% of Anglophones 18+ years of age indicated that they were “very interested” in “local news” – a far higher percentage than for any other type of television programming. As well, during the 2008 Broadcasting Distribution Undertaking (BDU) & Specialty public hearing, the Commission heard from Nanos Research that “78% of respondents indicated that having local news was of high, or very high, value to them.³
4. Canada's conventional television broadcasters are the only participants in the audio-visual system with the capacity to deliver local news programs with high standards of journalism and production values.⁴ And these locally-produced programs are expensive compared with similar national network programming because the base costs of production are duplicated and must be borne by each individual station, rather than being amortized once across a national system.
5. Canada's local television stations are an important source of reflection and local news for each community, playing an essential role in the information infrastructure, and therefore the economy of every city in Canada. They are also essential to the expression of important stories from each community to national audiences and to serving the needs of those millions of Canadians who rely on over-the-air signals for their television reception.
6. It would appear that CBC, which earlier this year reported a $171 million shortfall and 800 layoffs, no longer has the resources to offer a critical mass of Canadian programs of distinction during peak viewing periods, and has resorted to a schedule driven by an assessment of the potential for commercial success featuring imported American shows such as Jeopardy!, Wheel of Fortune and Ghost Whisperer each week day and scores of Hollywood movies which now cram its schedule.
7. CanWest has hit the ropes, in some part as a result of pressure on television advertising revenues in the current economic downturn. While its television properties may emerge stronger under a new leadership and financial structure, its contribution to Canadian and local programming is the weakest of the three Canada-wide English-language conventional broadcasters.⁵
8. And, while CTV has dominated the English-language ratings race, mandatory information published quarterly by its parent company's 20% shareholder, Torstar, reveals that CTV has been operating at a substantial loss over the past year.⁶
9. The Commission's own financial summaries indicate that profit before interest and taxes (PBIT) of the private conventional television industry was only 0.4% in the broadcasting year ending August 31, 2008 – before the on-set of the recession.
10. Already, Canadians have witnessed the shuttering of two local stations – in Brandon and Red Deer – and several more have teetered on the brink of closing before they emerged at the last moment under new ownership – and this in such major centres as Montreal, Hamilton, Kelowna and Victoria. While the focus of attention has centred on local crises, national conventional networks are only as strong as their component parts. When fewer local stories emerge to a national audience from Brandon, for example, all Canadians are the poorer for it.
11. From a position of strength one decade ago, the economic engine of conventional television has tanked in recent years. This is in large part because advertisers now have many more choices to reach their desired demographic targets, and are less willing to pay large fees across the board to reach less-defined and shrinking mass audiences.⁷
12. Even if the private conventional television industry were to return to the negligible profit of the 2008 broadcasting year, the Commission will recognize that the industry is not sustainable on this basis. This fact signals that Canadian conventional television is in dire straights, which is alarming both for its economic implications, and for the threat it poses to diversity and local presence in communities across the land.
13. Hence the urgency of developing a new stream of revenue to sustain an essential link in the Canadian audio-visual system.
14. The audience for conventional television stations carried by cable and satellite distributors is substantial:
    

In the seven-week period from August 31 to October 18, 2009, nearly 40% of viewing by satellite and cable subscribers was to Canadian conventional signals⁸ and 90% of conventional viewing came from cable and satellite subscribers. Therefore, the economic value of conventional signals to distributors is beyond dispute.

15. The line on financial statements “Cost of Goods Sold” suggests that a company pays for what it sells. For five decades, cable monopolies have generated substantial profits from the sale of a product for which they have not paid. Perhaps during the early growth years of cable this might have been an equitable bargain for both parties, because cable extended the audience reach of local stations, and advertising agencies paid for full coverage area audiences. Advertisers no longer do so.
16. Furthermore, the BDUs' carriage of distant and time-shifted signals has fragmented local audiences, with negative impacts on conventional stations' local audiences and therefore advertising revenues. When viewers choose to watch a program on a station in another market or in another time zone, local stations lose on both ends of the transaction. This is because ad agencies pay for audiences on the local station only, and do not recognize the out-of-market audience. And they reduce what they pay when local viewership declines.
17. As well, public policy has allowed cable monopolies to acquire programming undertakings and thereby compete directly with conventional broadcasters for limited ad revenues. And the cumulative impact of audience fragmentation – while the distribution of multiple new channels may be highly lucrative for distributors – has hurt the bottom line of Canadian conventional broadcasters.
18. As a result, conventional television can no longer survive nourished by advertising revenues alone.
19. In the neighbouring American jurisdiction, public policy pays great respect to the concept of program rights protection. If U.S. rules applied in this country, no American conventional stations would be carried on the Canadian system, there would be no carriage of out-of-market signals in the same time zone, and no carriage of time-shifted signals. And in the United States, distributors pay for local conventional signals.
20. One result of this difference is that Canadians enjoy a much greater range of viewing choice than Americans. While this difference is of substantial benefit to Canadian distributors, through the ensuing audience fragmentation it damages the economic viability of Canadian conventional broadcasters, especially those operating in the English language.
21. There is overwhelming evidence that cable monopolies can afford to pay for local signals:
    

Based on your Commission's data, the cable industry's profit before interest and taxes (PBIT) was 25% in the 2008 broadcasting year – the most recent available data.⁹ Note that DTH & MMDS distributors, on the other hand, enjoyed a comparatively modest 4% PBIT in 2008.¹⁰

22. Data from the ‘big four' cable distributors' annual reports further illuminates big cable's financial capacity:
    
    
    And the cable industry is in no position to argue that Internet and local phone profits are irrelevant to this discussion, because both businesses have been built on infrastructure paid for by cable subscribers under past capital expenditure charges approved by your Commission.
23. Distributors have misled the public about the impact of paying for local signals. They have characterized signal compensation as a ‘TV Tax' which might add $10 to a monthly cable or satellite invoice.¹¹ They have suggested that Canadian conventional television operators had an operating profit of $400 million last year. And they have suggested that cable companies are profitable only when programming services are combined with other services such as Internet and home phone.
24. While posing as a consumer advocate, there is evidence that big cable has gouged consumers in recent years. For example, since your Commission ended the regulation of basic cable rates seven years ago, Rogers and Shaw have increased their basic price by 85% and 68% respectively, during a period when the Consumer Price Index rose by only 14%:¹²
    
25. Friends therefore recommends that the Commission re-regulate the basic service of the big four cable monopolies and ensure that cable distributors do not pass along any signal compensation to their subscribers. Satellite distributors, on the other hand, should be allowed to pass along, without mark-up, signal compensation costs to their subscribers, until such time as they achieve a 10% PBIT.
26. We also recommend that signal compensation should be allocated among the local conventional broadcasters based on total tuning to Canadian programs in the preceding broadcasting year. Each television market should be assigned a proportion of the total compensation based on population. Markets such as Montreal or Ottawa, with a significant presence of both official language groups, should each be considered as two distinct markets.
27. In a given market, the compensation should be allocated based on each conventional local broadcaster's share of the total audience for Canadian programs. The following chart indicates how this might work in the Toronto/Hamilton extended market area, and is based on the total audience for Canadian programs in the 2008 broadcasting year (note % Canadian Viewing in column two):
    
28. We understand that the Commission may not wish to employ the term ‘fee-for-carriage', but may be prepared to examine some form of ‘signal compensation'. The choice of vocabulary is not of primary importance. What is essential is that the Commission involve itself sufficiently in supervising the negotiating process so as to ensure that the interest of smaller broadcasting players, including those without specialty and pay assets which the BDUs may covet, is protected. This protection must include, but not be limited to, a solid commitment to arbitration on a timely basis.

Yours sincerely,

Ian Morrison
Spokesperson
Friends of Canadian Broadcasting
200/238 – 131 Bloor Street West
Toronto, ON
M5S 1R8

*** End of Document ***

For information: Jim Thompson 613 567-9592

¹ The CRTC's broadcasting year is from September 1 to August 31.

² Pollara's research report was originally filed the Commission by Friends (in collaboration with ACTRA, CEP, Stornoway Communications and the Writers' Guild of Canada) on May 7, 2008 (Final comments, CRTC 2007-10).

³ CRTC 2008-100, paragraph 336.

⁴ Cable's community channel, though providing valuable community service, is no substitute for local conventional television programs.

⁵ See, for example, data in paragraph 27.

⁶ In note 7 to its June 30, 2009 Interim Consolidated Financial Statements, Torstar discloses a “Comprehensive loss” of $189,050,000 by CTV's parent company CTVgm for the six months ended May 31, 2009.

⁷ CBC Television, for example, recently acquired Jeopardy! only to find that advertisers were often unwilling to pay for its almost one million viewers, but only for the 25% of Jeopardy! viewers in the 18-49 age group.

⁸ This would, of course, include simulcast programs, which are known to build audience by 25 to 30%.

⁹ Broadcast Distribution – Class 1, 2 & 3: Statistical & Financial Summaries 1004-2008

¹⁰ Mostly satellite.

¹¹ A $10 increase in the monthly cable/satellite invoices of 10,615,850 subscribers would generate almost $1.3 billion per annum.

¹² Friends expresses appreciation to the Communications, Energy and Paperworkers Union for permission to include this chart, which CEP originally researched.

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