Review of the regulatory framework for broadcasting distribution undertakings and discretionary programming services CRTC 2007-10

Mr. Robert Morin
Secretary General
CRTC
Ottawa, ON
K1A 0N2

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Dear Mr. Morin:

FRIENDS is a watchdog group for Canadian programming in English-language radio and television, and is supported by 100,000 Canadians living in every corner of the country.

We are very pleased to respond to Broadcasting Notice of Public Hearing CRTC 2007-10-3 with comments regarding fee-for-carriage which are supplementary to our comments filed in respect to the above noted proceeding on October 19, 2007.

FRIENDS re-iterates its request to appear at the public hearing scheduled for April 7, 2008 in order to present a viewers and listeners' perspective on the important issues under consideration.

The original business model for specialty television services in Canada was based in large measure on subscription revenues. Conventional wisdom at that time concluded that specialties would attract only small niche audiences, and that those who were interested in a given service would be prepared to pay for it. Today, while subscription fees still constitute 63% of pay and specialty revenues,¹ traditional advertising now represents 35%, accounting for almost all the balance. This ad growth demonstrates the value to advertisers of narrowly focused specialty audiences. Specialty channel ad growth has also increased because the fee subsidy affords specialty channels an opportunity to sell advertising inventory that is often significantly discounted in comparison with over-the-air (OTA) rates.

Data from the CRTC financial database show that in 2006 the pay and specialty sector had an operating margin of 25.1% and a profit before income tax (PBIT) of 22.9% - which is in line with the expectations of the investment community, a critical aspect of maintaining public market investment in the broadcasting sector.

Pay and specialty services have greatly expanded the diversity of offerings in the Canadian broadcasting system. At the same time their expenditures on the production and presentation of Canadian programming have averaged 36% of total revenues over the past five years. Clearly, subscription fees enabled this commendable record.

The financial model for OTA television, on the other hand, has relied on basic carriage to draw substantial audiences, and to generate commensurate advertising revenues. Over time, this model has been losing viability as a result of the significant audience fragmentation which has taken place primarily as a result of the presence of additional pay, specialty and over-the-air services. While this process has enhanced diversity and consumers have enjoyed the benefit of many new viewing options, OTA television profitability has suffered.

Local news and information programming - the heart of the Canadian broadcasting system - has recently witnessed the self-destruction of local news on the part of CBC Television when its funding was cut, and also experienced cuts owing to reductions in operating margins for private OTA stations. We have therefore already seen cutbacks in news and logic would dictate that further cuts will result to the quality and quantity of local and regional news, as well as other valuable Canadian programming, if audience erosion were to continue.

In 2006, private OTA broadcasters had an operating margin of 7.8%, a PBIT margin of 4.14 % and a negative pre-tax margin approximating 1% in the same year.²  These results are down from a PBIT of 11% and a pre-tax margin of almost 4% in 2005. 

As outlined in the following chart, operating margins for conventional television are significantly lower than specialty, pay, or broadcast distribution undertaking (BDU) services, especially when looking at BDU margins for all services. FRIENDS therefore submits that, in the face of ongoing audience fragmentation and the introduction of many new regulated and unregulated viewing options, the future vitality of over-the-air television is at risk:

The CRTC financial database also tracks payments made by BDUs for pay and specialty programming services carried from both Canadian and foreign sources. In 2006 DTH/MDS spent 38% of total revenue on affiliation payments while cable class 1, 2, and 3 systems spent only 26%. By rough comparison, OTA television stations spending on programming equals 66% of revenue with Canadian spending approximating 30% of revenue.

The success of the Canadian broadcasting system has been largely due to collaboration between those who create programming and those who distribute it. This collaboration is a delicate balance, which from time to time needs to be re-assessed. Now is such a time if Canadians are to preserve local programming going forward.

In principle, therefore, FRIENDS believes that OTA television should be permitted equitable access to subscriber fees. In return, the continuity, and to the extent feasible, the expansion of local programming must be guaranteed.

If the Commission agrees with this conclusion, legitimate concerns arise about the impact of any such decision on the pocketbooks of television subscribers. Notwithstanding their level of profitability, it may not be reasonable to expect BDUs to absorb the cost of any subscriber fee that the Commission might determine should be payable to local broadcasters. Therefore, appropriate rates and mechanisms need to be determined - providing meaningful revenues and stable audiences to OTA broadcasters without incurring hardship for listeners and viewers.

With respect to the mechanism, the greatest amount of incremental fragmentation previously referred to has resulted from the introduction of digital television (separate and distinct from High Definition (HD) television). Therefore, it would be appropriate for OTA broadcasters to obtain subscription revenues levied ONLY on digital subscribers.  Analog customers, especially lower-income, often elderly customers purchasing basic services, should not be required to bear additional fee increases.

FRIENDS submits that the Commission should not consider the existing and historical subscriber fee structure for analog specialty channels to be sacrosanct. The public interest would be well served through a re-apportionment to other priority needs based on financial performance data.

The following chart details basic cable and DTH subscribers as well as revenues generated from basic and non-basic carriage, net of Internet, installation fees, digital box rentals or sales:

While the average bill for cable customers is approximately $42.50, the average DTH invoice is about $52.00, because the cable average includes both basic and digital customers whereas all DTH customers are digital:

The following chart demonstrates annual revenues (in $ millions) that could be generated by charging digital customers a monthly OTA subscriber fee as indicated for different fee levels, beginning with number of current digital subscribers (as noted in the preceding chart):

FRIENDS proposes that a subscription fee should be adopted only for services that are eligible under BDU regulations for local carriage, and that offer local and/or regional programming. The Commission should also ensure that such a fee is not subject to any pass-through charges from BDUs, as they would incur no incremental costs.³

On numerous occasions BDUs have suggested to the Commission that even the smallest of incremental charges will result in a loss of customers. Obviously no customer wants an increase in any bill but increases are a continuing reality as we have recently witnessed, for example, from Rogers Cable when it announced price changesfor many of its services. In the case of Rogers, FRIENDS notes that while even the smallest incremental increase for programming is feared to cause a loss of customers, these same customers are not believed to object to paying a monthly digital services fee of $2.9 for the singular privilege of connecting a customer owned PVR to digital cable.⁴ A small sampling of other recent Rogers service increases includes:⁵

In CRTC 2007-10-1, the Commission solicited comment on the possible impact of disclosing financial information for large multiple systems operators of broadcast distribution undertakings in a manner similar to the disclosure provided for individual pay and specialty services.

All program undertakings, specialty and pay services, as well as BDUs are licensed by the CRTC, usually under specific terms and conditions. Each of these sectors is an important component of the Canadian broadcasting system and, each is inextricably linked to the others. While the Commission maintains responsibility for monitoring adherence to conditions of license and ensuring that each sector is making an appropriate contribution to the broadcasting system, financial transparency for all stakeholders is highly desirable, and should be as open to public scrutiny as possible.

FRIENDS applauds the Commission's determination in PN CRTC 2006-19 to continue to make available the financial information for individual pay and specialty channels. This is the only means by which stakeholders interested in reviewing the profitability and commitment to Canadian programming of these channels can do so.  As many pay and specialty services have specific Canadian program expenditure commitments based on revenue, access to this information is critical in assessing the performance of individual pay and specialty services.

BDUs should not be allowed a competitive advantage over pay and specialty services whose financial information is fully disclosed. FRIENDS believes the public interest will be well served by disclosing BDUs' consolidated financial information.

Yours sincerely,



Ian Morrison
Spokesperson

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For information: Jim Thompson 613 567 9592

¹Source CRTC Specialty & Pay Financial Database 2006

²CRTC Television Financial Database 2006

³An alternative scenario would be to allocate a subscriber fee to the Canadian Broadcasting Corporation (CBC) in return for the CBC reducing or eliminating its draw on ad revenues, thereby benefiting the private sector OTA broadcasters. Although CBC Television is subsidized by general revenues, it currently relies on advertising for about half its revenue. This reliance has the undesirable effect of pushing CBC in the direction of programs with commercial appeal which stray from its public service mandate under the Act. For example, CBC's schedule is skewed towards professional sports as a result of this dependency. For example, in the most recent broadcast year, 48% of CBC Television's prime-time audience was watching professional sports.

⁴The digital service fee is over and above applicable digital programming package charges and box rentals where applicable

⁵Letter to Ian Morrison from Phil Hartling, VP Consumer Services Marketing, Rogers Cable, January 2008.