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Digital Economy Consultation

Jul 13, 2010

Summary

Friends of Canadian Broadcasting is a watchdog for Canadian programming supported by 100,000 Canadians. Citizenship involves much more than consuming. Overwhelmingly, Canadians believe that government should work to reinforce Canada's cultural sovereignty as a distinct society on the northern half of the continent. Digital techniques are fungible and global, while culture is local and specific. Ideas are not digital, but can be communicated better and faster employing digital technology.

The Canadian Media Fund, and other federally-sponsored funds can be augmented substantially by tapping into the huge profits of the four big cable monopolies, whose profit before interest and taxes in 2009 exceeded 25%. FRIENDS recommends a 10% levy on revenues, and preventing these monopolies from recouping the contribution from their subscribers. This recommendation would yield $461 million (2009).

The success of the Canadian audio-visual system in ensuring shelf-space for Canadian programming over five decades has been built upon a foundation of appropriate regulation. Appropriate regulation facilitates markets. Canadians value local news more than any other type of television programming, and local news is threatened by changes in the ad market as well as the recession. Conventional broadcasters cannot rely on market forces to negotiate with the much more powerful cable monopolies and satellite television distributors.

Removing foreign ownership restrictions in telecommunications will lead to a domino effect in a converged communications business environment where cable and then broadcasting will come under foreign control, gravely threatening Canada's cultural sovereignty.

The government should demonstrate leadership in assisting three million Canadians who depend upon analog over-the-air television reception to prepare for the conversion to digital. Failure to do so will create a substantial political problem for the government and an information access problem for 10% of the population.

The CBC/SRC's senior leadership is failing to fulfill CBC's mandate in Canadian content. Nonetheless, Canadians value public broadcasting and want it strengthened. FRIENDS recommends that the government reform CBC's governance to increase its competence and accountability. Once an accountable Board and executive are in place, CBC's budget should be increased to at least $40 per capita and its dependency on commercial revenues should be reduced, particularly in non-sports programming.

The government should take care to defend the CRTC's independence by displaying caution in overturning its expert decisions. The number of CRTC Commissioners should be reduced from 12 to five and their compensation should be increased.

Friends of Canadian Broadcasting (FRIENDS) is a watchdog for Canadian programming on radio, television and new media supported by 100,000 Canadians. FRIENDS is not affiliated with any broadcaster or political party. Our comments include the following topics: an overview, content, market forces and regulation, foreign ownership, analog/digital TV conversion, CBC/SRC and the CRTC.

Introductory comments

'Consumers' exist throughout the world, whereas 'citizens' can function only in democratic environments which rely upon well informed citizenry to contribute to the public good through self reliance, respect and mutual help. Hence Canada's strategies for digital advantage relate to more than the economy. They include citizen participation and the reinforcement of a distinct society on the northern half of the North American continent.

A Pollara survey commissioned by FRIENDS in May 2009 identified that 88% of Canadians believe that, as Canada's economic ties with the United States increase, it is becoming more important to strengthen Canadian culture and identity. [1] Hence, the Government of Canada should align its digital policies to encourage cultural sovereignty. Economic forces will tend to push Canadians in the direction of a culturally homogeneous global melting pot. Cultural policies should promote Canada's distinctiveness and diversity.

The discussion paper poses the question of how best to attract the most talented persons from around to world to enhance Canada's digital advantage. We point to extensive evidence that quality of life issues motivate internationally mobile high talent personnel, and that quality of life is influenced directly by perceptions of the priority that a host country devotes to cultural development.

Ideas are not digital. Creativity can be enhanced through digital tools but it is important to recognize that these tools are only pipes and techniques - not to be confused with content. Digital techniques are fungible, travelling around the globe at electronic speeds while cultural ideas and content are local and specific.

Technological developments have transformed the world for millennia. As the late Northrop Frye observed, "the most technologically efficient machine that man has ever devised is the book".

Content

The digital economy consultation paper asks about ensuring a strong Canadian presence of new digital media on the Internet and how to generate the necessary funding.

The Canadian Media Fund (CMF) is a fundamental component of the funding of Canadian television programming. On page 26, the consultation paper refers to "our private sector funding partners". This statement is, at best, a euphemism. The CMF and its antecedents dating back to the mid-1990s have derived their non-government revenues from a government-imposed contribution on the part of the broadcasting distribution undertakings (BDUs) - the cable and more recently satellite television distributors. In other words, this is a 'tax' amounting to 5% of revenues, which those 'partners" have been permitted, thus far, to recover from their customers, the people of Canada. [2]

CRTC data [3] demonstrate that the cable monopolies achieved an enormous profit before interest and taxes (PBIT) of 25.1% or $2.3 billion in 2009 [4] - all of this being revenue from rate-unregulated fees charged to their customers. Big cable's PBIT has doubled in the past four years and now exceeds the revenues of Canada's private conventional television stations. Clearly these 'partners' can afford to make greater contributions to the Canadian Media Fund. No contributions to the CMF or any other content funds are made by the cable monopolies from revenues generated from their home phone or Internet services, which piggy-back on the same cable infrastructure that has been financed through customer levies sanctioned by the CRTC.

We invite Ministers to consider the $9 billion that Canadian television viewers pay annually to their cable monopolies as an investment in an audio-visual eco-system, where currently more than $2 billion leaks out each year in order to be devoted to other purposes. If even a portion of that investment by Canadians were to stay within that eco-system, the quality and quantity of Canadian digital programming would improve immensely.

FRIENDS recommends that these regulated monopolies be required to contribute 10% of their cable, home phone and Internet revenues to the CMF and other government-sponsored cultural funds, and that they not be permitted to raise their rates to recoup this contribution.

This measure would raise $461 million annually from cable revenues alone.

This untapped revenue source does not apply to Canada's satellite television distributors, whose PBIT was a modest 3.7% in 2009.

Cable monopolies should be permitted to sell advertising in their locally-produced programming and 50% of the net revenue should be devoted to federally-sponsored funds.

Prescribed minimum amounts of Canadian content should be required on Canadian digital media platforms such as wireless PDAs.

Market Forces & Regulation

FRIENDS supports removing "unnecessary, job-killing regulation", "maximizing reliance on market forces" and "promoting modern rules and regulations". In other words: 'not necessarily regulation, but regulation if necessary'.

However, we oppose ideologically-motivated attacks on regulation, and observe that such ideological positions have suffered a huge credibility setback from evidence of how such sentiments recently contributed to the on-set of a global recession.

Appropriate regulation facilitates markets, just as traffic lights facilitate the flow of traffic in an urban environment. In Canada's broadcasting system, some players who benefit from regulation when it reduces direct competition from American broadcasters, or augments revenues (such as through simultaneous substitution or non-deductibility of advertising on foreign stations, or the protection of territorial monopolies in the case of cable) have a tendency to complain about concomitant obligations, such as Canadian content quotas or signal compensation regimes.

Canada's success in ensuring shelf-space for English-language Canadian programming in the face of the entire American audio-visual system over many decades has been built upon appropriate and effective regulation. If government advice or direction to the CRTC were to inhibit creative regulatory responses to new developments, such as ensuring floors of Canadian content on digital smart phones, Canada's cultural sovereignty would suffer.

Another important role of appropriate regulation is to level the playing field between cable monopolies and the much less powerful broadcasters. This becomes even more important in an environment where cable profits exceed broadcasters' revenues. Reliance on 'market forces' in this environment will lead only to the survival of the fittest, where 'fit' is deemed inappropriately to equate to size - to the detriment of cultural sovereignty. The preponderance of evidence in many CRTC hearings makes clear that reliance on market forces in disputes between broadcasters and the big four cable monopolies consistently leads to cable dominance.

The phrase 'legacy players' is an inappropriate description of Canada's private, conventional television broadcasters. Their minus six percent PBIT in the 2009 broadcasting year, reflecting an aggregate loss of $116 million, [5] reflects the combination of the effects of the recession and changes in the advertising marketplace, leading to reduced attractiveness of mass audience buys.

Because conventional television is the only provider of high production value local programming in the Canadian television system, the disappearance of profit from conventional TV is a serious development. Canadians value local programming more highly than any other type of television. In an April 2008 study commissioned by FRIENDS and other groups, Pollara found that 96% of Canadians believe it is 'important' to have local news on TV, 76% found this 'very important' - a far higher response than for any other program format: [6]

In general, the Canadian audio-visual system is moving towards increasing concentration of ownership where cable monopolies control broadcasters: consider Rogers control of City-TV, Quebecor's control of TVA and Shaw's projected control of Canwest/Global. CTV remains the only substantial entity beyond the cable monopolies' control. In this environment, reliance on 'market forces' is delusional.

Foreign Ownership

The rationale for loosening or removing restrictions on foreign ownership and control of telecommunications companies is that, as the discussion paper asserts, "sufficient competition" will "drive innovative service delivery at reasonable prices". Of course, 'sufficient' and 'reasonable' are words susceptible to various interpretations. In contrast with European and American telecoms, Canada's telecom industry must bear the infrastructure costs of vast geography and sparse population - which the discussion paper describes as "geographically challenging". Unless public policy were to follow the perverse goal of lowering prices in major urban centres at the expense of Canada's substantial rural and smaller urban population, our providers must continue to cross-subsidize rural costs with urban profits.

Hence cross-jurisdiction price comparisons, for example in wireless, can be inappropriate and misleading. Furthermore, the recent appreciation of the Canadian dollar against the Euro, Pound Sterling and United States dollar renders published comparisons obsolete - a lower Canadian dollar skewing comparisons to Canada's disadvantage. As the discussion paper states on page 16, "international comparisons should be treated with caution".

Also, where government decides to encourage additional competition, the law of unintended consequences may come into play, provoking, for example, a Bell/Telus amalgamation, or some other competition-reducing concentration of ownership, or perhaps an acquisition of a struggling new competitor by an incumbent at fire-sale prices. To head off the amalgamation threat to competition the government should consider instituting a policy to prevent any player from growing beyond, say 40% of the wireless market place.

Among FRIENDS' concerns regarding a possible loss of Canadian ownership and control of Canadian carriers are the export of high-end jobs, reduced protection of the personal privacy of Canadians through the intrusion of such instruments as the United States Patriot Act, loss of sovereignty through dependence on United States routes for data flow, reduced resilience in emergencies and a threat to service access on the part of Canadians living in rural and remote areas.

FRIENDS' principal concern, however, relates to Canada's cultural sovereignty.

Canada's media and communication industries have converged in recent decades, and the pace of this convergence has recently increased. CRTC's web site displays data on the corporate structure of Canada's biggest media and communications companies: BCE, CanWest, Cogeco, CTVglobemedia, Québecor, Rogers, Shaw and Telus. [7]

Taking Rogers as an example, beneath a holding company known as Rogers Communications - of which the Rogers family holds 82% of the voting shares - Rogers' business lines include cable television, local and long distance telephone, Internet access, wireless, broadcasting, baseball and publishing. Last year its revenues approached $12 billion:

Rogers Corporate Structure

Although Rogers may be Canada's most converged media and communications company, it is by no means unique:

  • Shaw operates in the cable and Internet businesses, and is entering wireless. Through the Shaw family's common ownership and control, Shaw is related to Corus, a radio and specialty television company.
  • Québecor controls Vidéotron, TVA and Sun Media, offers Internet access and plans to enter the wireless business.
  • BCE controls Bell Canada, Bell Aliant, Bell TV and holds a 15% stake in CTVglobemedia - which in turn controls Canada's largest television broadcaster and the Globe and Mail.

In this integrated communications business, changing the foreign ownership requirement for one sector - telecom - can be expected to cause a domino effect on the other sectors. If BCE were foreign owned, it would become ineligible to control Bell TV. Rogers would have to dispose of Rogers Media and Rogers Cable, and so on.

Disposing of these broadcasting assets would destabilize the Canadian broadcasting system by reducing the investor pool, as well as ending synergies between the component parts. It is likely that the affected players would instead call for changes to ownership requirements under the Broadcasting Act, just as they did successfully when telecom ownership requirements were changed in the 1990s. The Montreal Gazette reported on November 23, 1995 that "the federal government is relaxing limits on foreign ownership of Canadian cable and broadcasting companies.... (Heritage Minister Michel) Dupuy said the rule changes put the broadcasting and cable industries on the same footing as telecommunications companies."

CanWest's former CEO, Leonard Asper, testified before the House of Commons Industry Committee in 2003 that "any changes in the rules that apply only to telecom companies would soon be of competitive significance to broadcasters as telecom companies move increasingly into the BDU (broadcasting distribution undertaking) and broadcasting businesses". And Cogeco's Louis Audet told the Committee that "we are suggesting that competitive equity will require that cable companies and telephone companies be treated the same way under liberalized foreign ownership rules".

The 2003 Industry Committee's report underscored Mr. Audet's comment in the following passage:

"Technological advances and convergence of technologies, especially over the last decade, have blurred the lines that previously separated the services offered by telecommunications common carriers and broadcasting distribution undertakings.... Telecommunications carriers and BDUs are now competing for the same customers in some markets (e.g., high-speed Internet service). The telecommunications and broadcasting landscape is further complicated by vertical integration and by cross-media ownership. Clearly, defining an enterprise as a pure "telco" or "BDU" on the basis of their underlying distribution networks or the services they provide is becoming more and more difficult (see Figure 4.1)."

Broadcasting landscape

Canadian broadcasting is a public good which is essential to the communications infrastructure of local economies across the land. It facilitates the participation of citizens in the democratic process, and it contributes to building a distinct identity on the northern half of the North American continent. Allowing such an important instrument of Canada's national development to fall into foreign hands would signal the demise of our cultural sovereignty.

While no patriotic Canadian would deliberately counsel such an outcome, tinkering with foreign ownership rules in one part of the media and communications industry will inevitably place other parts at risk.

Speaking on behalf of Industry Canada, Marta Morgan told the Commons Industry Committee in March 2010 that relaxing foreign ownership rules in telecom would serve to bring Canada in line with other OECD countries. None of those countries is immediately adjacent to the huge cultural and economic influence of the United States of America. [8] In view of Canada's unique position, we urge the Government of Canada to heed the advice of the 2003 Lincoln report ("Our Cultural Sovereignty: The Second Century of Canadian Broadcasting") "that the existing foreign ownership limits for broadcasting and telecommunications be maintained at current levels." [9]

This recommendation enjoys widespread public support. An April 2010 public opinion poll by HarrisDecima commissioned by FRIENDS in collaboration with ACTRA and the CEP, found that a strong majority of Canadians oppose foreign ownership of telephone, cable and media companies: [10]

Foreign Ownership

Analog to Digital Television Conversion

On April 7, 2010, Industry Minister Tony Clement told Canadian Press, "I'm really going to try and avoid postponing.... I would really like to stick to the deadline.... That requires us to engage with the industry sooner rather than later. If we stick to the deadline and actually have quite a detailed plan, it should not create any misery for Canadians." [11]

Michael Janigan of the Public Interest Advocacy Centre has described this approach as "leadership by amnesia". Canadian Press reported that "there has been no large-scale move to inform Canadians about what's on the horizon. A link to Frequently Asked Questions on Industry Canada's web site is dead (April 7, 2010), and the TV industry has no co-ordinated approach to letting viewers know what to expect."

A number of well-informed observers have noted that the government has a financial interest in maintaining the deadline, as it cannot auction the liberated spectrum until the analog television signals fade to black.

FRIENDS speaks on behalf of almost three million Canadians who rely on over-the-air analog reception via their own antennas. Canadian Media Research Inc. has found 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" and the CMRI study also indicates that 26% of OTA viewers cannot afford cable and satellite charges. In other words, OTA viewing by millions of Canadians will continue to be a feature of our audio‐visual system well into the future, unless a government oblivious to the interests and political clout of millions of predominantly older Canadians were to decide to deprive them of their access to the audio-visual system.

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. [12]

Perhaps more sensitive to public opinion, the American Congress mandated a program to subsidize digital conversion for the equivalent group in the United States. FRIENDS has raised this matter repeatedly in submissions to the Commons Heritage Committee and the CRTC. It constitutes a sleeping political giant, which may be deferred only if the broadcasters' precarious financial positions lead to a delay in the August 2011 conversion deadline.

Accordingly, FRIENDS recommends that the Government of Canada introduce a digital conversion consumer subsidy program modelled on the U.S. program and financed from a modest levy on the anticipated proceeds from the subsequent frequency auction.

CBC

FRIENDS believes that the discussion paper takes a rose-tinted view of the digital achievements of the Canadian Broadcasting Corporation under its current senior management. For example, the paper refers to CBC/SRC as "leading the way to attracting users at home and abroad to cutting-edge Canadian content and applications" and suggests that CBC is "redefined by changes in technology".

FRIENDS' research indicates that CBC English Television has walked away from its mandate to present Canadian programming during prime time hours. In a three-week survey period during the BBM Sweeps in February/March 2010, CBC-TV reached an all-time low of Canadian content during prime time: this year broadcasting foreign programming during 25% of its prime time schedule - one in four hours of non-Canadian programming. This is in stark contrast to 2000, when 98% of CBC-TV's prime time schedule consisted of Canadian shows:

CBC

We note that this poor performance flies in the face of Parliament's advice that 100% of CBC's prime time shows should be Canadian. Our research also indicates that CBC English Television presented 227 foreign movies during the 2009-10 TV season, sixteen of them in prime time. [13]

CBC's current senior management has also allowed CBC Radio News to languish in recent years, imposing a television-driven 'hub' system for commissioning news stories. Recently leaked research, commissioned by CBC, constitutes a 'cry for help' from CBC's National Radio News reporters, including such comments as the following, paraphrasing CBC's Executive Vice President of English services: "TV makes money and radio costs money. The concept of public broadcasting is lost." [14]

Canadians strongly support public broadcasting as well as the thousands of dedicated CBC creative personnel who actually make the programming that people listen to and watch. A Pollara public opinion survey commissioned by FRIENDS in May 2009 makes this fact abundantly clear: [15]

 

Canadians who watch and listen to CBC

Perceptions of CBC

Organization best suited to provide Canadian prgramming

Views on the level of support

Attitudes towards increasing funding to CBC

Most responsible for delivering strong Canadian programming

Advice for the MP

Views on appointment system

Views on the presidental appointment system

The House of Commons Heritage Committee has recommended that the governance of CBC be reformed to reflect practice in other industrial democracies, affirming the arms-length independence of the Corporation from political direction, and also affirm that the Corporation's Board of Directors, rather than the Prime Minister, should have the job of hiring and firing the CBC President - in order to introduce accountability to the position. The Committee has also recommended that CBC's Parliamentary allocation be increased from $33 to $40 per capita over a multi-year period, and that CBC's dependence on advertising revenues decrease. [16]

FRIENDS notes that the current President and CEO, as well as one of his two immediate subordinates with programming responsibilities, lack previous experience in radio and television production, scheduling and marketing, a situation that would be unheard of at the top of a private broadcasting organization or, indeed, in the leadership of public broadcasters in other industrial democracies.

FRIENDS supports the Heritage Committee's advice and therefore offers four inter-related recommendations to improve CBC/SRC's capacity to serve Canadians in the 21st century:

Reform the appointment process for the CEO and Board of Directors to end Prime Ministerial patronage appointments so that the best qualified Canadians are appointed to govern CBC through an arms-length selection process sanctioned by Order-in-Council appointments.

Delegate to the Corporation's Board of Directors the power to select and dismiss the CEO.

Raise the Corporation's Parliamentary allocation to at least $40 per capita over a multi-year period.

Direct the Corporation to reduce is dependence on advertising revenues in non-sports programming.

CRTC

Canadians support the concept of an arms-length expert body to oversee Canada's communications systems in the public interest, and invest a high degree of trust in the Commission:

Guardians of Canadian Programming

FRIENDS therefore recommends that the federal government display care and caution in exercising its statutory powers to challenge or overturn the Commission's expert recommendations, in order to preserve the Commission's independence as an agent to protect Canadian listeners' and viewers' interests.

FRIENDS notes that the United States Federal Communications Commission manages to operate effectively with only five Commissioners, whereas the CRTC has twelve.

We recommend that the government consider reducing the number of CRTC Commissioners to five from the current 12 and also increase substantially their compensation to attract persons with the necessary qualifications.

-- 30 --

For information: Jim Thompson 613-567-9592


[1] http://www.friends.ca/fact-sheet/8287

[2] In the case of the cable monopolies, the CRTC has permitted them to divert 40% of this 5% to fund their community programming endeavours, leaving only 3% for the CMF.

[3] http://www.crtc.gc.ca/eng/publications/reports/BrAnalysis/dist2009/bdu.htm

[4] The CRTC's broadcasting year-end is August 31.

[5] http://www.crtc.gc.ca/eng/publications/reports/BrAnalysis/tv2009/tv2009.htm

[6] http://www.friends.ca/poll/6925 (page 32)

[7] http://www.crtc.gc.ca/ownership/eng/title_org.htm

[8] "Improving Canada's Digital Advantage" recognizes Canada's unique situation when it describes "Canadian commercial spectrum (being) aligned with the U.S.".

[9]http://www2.parl.gc.ca/HousePublications/Publication.aspx?DocId=1032284&Language=E&Mode=1&Parl=37&Ses=2

[10] http://www.friends.ca/press-release/9439

[11] http://www.friends.ca/news-item/9408

[12] CMRI Inc., Trends in TV Audiences and Public Opinion, 1996-2006

[13] http://www.friends.ca/press-release/9551

[14] http://www.friends.ca/blog-post/9471 and http://friends.ca/Stursbergaudio

[15] http://www.friends.ca/poll/8288

[16] The Prime Minister advocated a reform along these lines in a speech as Leader of the Opposition to the Canadian Association of Broadcasters on November 29, 2004.