Submission to the CRTC on the review of the regulatory frameworks for broadcasting distribution undertakings and discretionary programming services

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

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Dear Mr. Morin:

Re: Broadcasting Notice of Public Hearing CRTC 2007-10 Review of the regulatory frameworks for broadcasting distribution undertakings and discretionary programming services

FRIENDS of Canadian Broadcasting is an independent watchdog for Canadian programming in the English-language audiovisual system, supported by 100,000 Canadians. FRIENDS wishes to appear at the February 2008 public hearing in order to place before the Commission a listeners' and viewers' perspective on issues raised in this Public Notice.

Attached is our submission in response to the Notice.

Yours sincerely,

Ian Morrison
Spokesperson

"Most importantly, we wish to thank Robert Buchan for his guidance throughout the project, the contributions he made to the report and for sharing his knowledge of the Canadian broadcasting sector with us. Bob is one of the leaders of the Canadian communications bar. He was indispensable to this project and worked tirelessly to help see the report to fruition."

Laurence Dunbar & Christian Leblanc
August 31, 2007

"On my left is Robert Buchan of Fasken Martineau DuMoulin, lifelong counsel to Rogers."

Phil Lind
Vice Chairman
Rogers Communications
September 20, 2007

"The CRTC's role in content regulation will be reduced to eliminate duplication where other legislation exists."

Conservative Party of Canada
January 3, 2006

Introduction

1. Throughout this submission, FRIENDS is responding to the statement that the Commission outlined in paragraph 12 of its Notice of Public Hearing:

"The considerations described above would lead to the conclusion that it is time to move away from the current detailed regulation, and to take a revitalized approach to both distribution and discretionary programming undertakings that aims at reducing regulation to the minimum essential to achieve the objectives of the Act, relying instead on market forces wherever possible. In particular, the Commission seeks to:

• develop forward-looking regulatory frameworks that are strategic, straightforward, flexible, and equitable;
• ensure a strong Canadian presence in the broadcasting system in the form of distinct and diverse Canadian programming and services; and
• recognize the increasing autonomy of audiences and consumers, providing them with the greatest possible choice of services at affordable prices."

2. While FRIENDS concurs with these three objectives, our primary focus is the Commission's stated objective of ensuring a strong Canadian presence in the Canadian broadcasting system.
3. Canadians consumers have access to hundreds of Canadian and US television channels, specialty, pay, pay-per-view, and more recently foreign-language services. It is safe to say that Canadians have access to a broader selection of services than most United States homes, notwithstanding the fact that we are one-tenth the size of the US population.
4. This success can be attributed in large measure to a regulatory framework that the Commission has established over several decades. This framework has created a balance between programming undertakings, pay and specialty services and broadcasting distribution undertakings (BDUs). This regulatory balance has been carefully crafted by the Commission to ensure that the interests of all stakeholders are generally in harmony, resulting in the maximum overall contribution that can be made by each sector to our broadcasting system as expressed in the goals of the Broadcasting Act. ¹
5. What is puzzling, therefore, is that against this backdrop of regulatory success, the Commission's Public Notice would appear prepared to abandon many elements of balance and safeguards in the system, in the pursuit of simpler regulation.  We see no basis for the contention that most of the proposed deregulation would measure up to your primary yardstick by having a positive impact on the creation, exhibition, or audiences for Canadian programming. At the same time, we consider that there is good reason to be concerned that many of the proposed changes would affect Canadian services negatively and thereby the Canadian broadcasting system.
6. It is unprecedented to see a Public Notice which seems more inclined to dismantle the entire system and to start over. In the Canadian broadcasting environment, the term "market forces" is analogous to the Darwinian notion of letting the strongest survive - in this case the survivors being those programming groups that have the services that BDUs want or the leverage to ensure carriage of their full line-up of channels. 
7. In such a new regulatory landscape there would be little or no room for smaller participants that were not a force in the market, despite their substantial contribution to diversity in the broadcasting system.
8. We are also concerned that the Commission appears to be flirting with a former cable monopoly marketing strategy, a negative option, where the Public Notice describes the Commission's intention to move forward on several significant, if not historic changes in its regulatory framework, unless evidence can be provided to the contrary:
9. "In general, the Commission will expect parties arguing for continued regulatory intervention to provide a full rationale for that intervention, with supporting evidence, to establish that such intervention is essential to the objectives of the Act." ²
10. As FRIENDS will detail in this submission, we believe that should the Commission move forward as indicated, the result will be a reduction in access, in the number of services that are not BDU-affiliated, in available hours of Canadian programming, and expenditures on Canadian programming.
11. FRIENDS considers that there may be three possible reasons for this premise in the Public Notice. The first would be a philosophical shift to neo-conservative deregulation values, or a wish to transfer from the telecom sector to broadcasting the notion of enabling markets to work. We note in response that the Commission's broadcasting policy success since its creation has come from a recognition of the need to modify market forces to open up shelf space for Canadian programming and the survival of a distinct audio-visual presence on the northern half of the continent. Pure market forces would not have resulted in the creation of Canada as a distinct geopolitical entity, and will not ensure its survival as such.
12. A second possible motive for this Public Notice would be to adapt to technological change in a digital environment. Yet, the Commission has already addressed this issue in its framework for digital penetration, including the 85% threshold. ³
13. A third possible rationale might be the implications of an environment of new media consumer choice. While this might eventually confront broadcasting policy, there is no evidence that it has yet done so. ⁴
14. More likely than any of the above reasons, in our view, is a lobbying campaign by the BDUs - in particular, big cable. Therefore, it behooves the Commission, and interveners, to consider the BDUs' interests in relation to the public interest, as expressed in the goals of the Act.
15. FRIENDS is very concerned that the Public Notice reads like a BDU regulatory ‘dream come true' with the proposed abandonment of access and linkage rules, genre exclusivity, and nature-of-service conditions. This would homogenize the distinct channels that currently exist, while at the same time facilitating BDU access for additional US services.
16. Canadian broadcasting is an ecosystem, each of the components inextricably linked so that a change in one sector will influence the others. The existing regulatory structure, and the specific rules within each sector, have evolved over time, each created for a specific purpose.  It is vital to consider their inter-dependence and its consequences.
17. For example, most Canadian specialty services have specific exhibition and expenditure commitments. If revenue goes down, so too will Canadian program spending in the following year. A reduction in Canadian spending means a reduction in the amount of money flowing to independent producers, and the cycle continues. It is therefore critical as we examine each of the Commission's suggestions to ask whether they do not have the unintended consequence of reducing viewing of Canadian programs.
18. In essence, the BDU presentations at the Diversity of Voices hearing said: "Trust us". There is no historical reason to do so. On the contrary, we know from Shaw's application to carry the USA Network that this service would be added immediately to their channel line-up at the same time as several Canadian Category 2 services are being told that there is no capacity.  To the Commission's credit, Shaw's application was turned down, but we note that a petulant Shaw responded as follows:

"The CRTC is continuing on a path of protectionism for the benefit of certain Canadian programmers at the expense of Canadian television customers." ⁵

19. One of the most interesting aspects of the Shaw application was that the vast majority of the most popular shows featured on the USA Network are already available to Canadian audiences through other Canadian specialty services which have purchased the intellectual property rights to broadcast them in Canada. One of the consequences that could be anticipated if the Commission had allowed the USA Network directly into Canada is that Canadian rights to this programming would be retained by the USA Network and no longer made available to Canadian specialty services. The system has witnessed this behaviour in the past with a number of other US services which are available in Canada and routinely purchase exclusive Canadian rights.
20. Witness also what happened when the Commission allowed BDUs to alter their audio line-up. It will come as no surprise that BDU-owned and operated radio stations from distant markets began taking up limited bandwidth on Rogers Cable while CBC Radio Two disappeared from Rogers' digital audio line-up.
21. FRIENDS recognizes the substantial challenge in developing a long-term regulatory strategy in an increasingly unregulated environment. However, we also believe that abandoning the principles of access and balance (a form of citizen protection that is just as important as consumer protection) that have been instrumental in creating the success we witness today is an enormous mistake which will lead to a BDU stranglehold on the services provided.

Genre Exclusivity Authorization of Non-Canadian Satellite Services

22. One of the key elements in the Commission's licensing policy with respect to analog and Category 1 digital services has been defining nature of service obligations that distinguish one channel from others. This process has also ensured that not all services migrate towards the mainstream, fostering the emergence of niche services that make an important contribution to diversity.
23. The Commission is correct that the licensing of additional services has had a blurring effect, but the present rules still maintain the maximum amount of separation between the services. A legitimate fear might be that, in the absence of clear nature-of-service definitions, channels will move towards programming with the greatest audience appeal. To the extent that maximizing audience becomes the key driver of programming decisions, we can expect that the current clusters of niche appeal would dissolve, and be replaced by an abundance of programming selected from only the most popular areas - with diversity the loser.
24. In such a scenario, it is entirely likely, therefore, that channels could materially change from their present form. As a consequence, the overall channel offering would likely become far less eclectic and much more homogenized.
25. This concern, however, pales in comparison with the notion of the Commission abandoning the protection of Canadian services from the entry of US services in the same genre. The Commission's policy with respect to the carriage of non-Canadian services and genre protection has been instrumental in creating programming partnerships which have effectively "Canadianized" popular US services while at the same time ensuring a valuable contribution to spending on, and exhibition of, Canadian programming. The proposal would retire this valuable mechanism and cut off the supply chain of specialized programming for many Canadian services. Furthermore, as previously noted, the best programming from most general interest US services such as HBO and USA Network, which are not eligible for distribution in Canada, is already available through a variety of Canadian specialty services.
26. Prior to the launch of the first analog specialty services more than two decades ago, the cable industry argued successfully that the launch of Canadian specialty services would be greatly enhanced by the addition of the most popular US services at the time (including A&E and CNN Headline News) as ‘drivers' of the new tier of services. It will never be known whether the new Canadian services needed these American drivers to succeed, but this was the rationale for granting these services access to the lucrative Canadian cable market without any obligation to make a contribution towards Canadian programming objectives.
27. As we have commented in FRIENDS' Diversity of Voices submission, it is our view that should genre protection from US services be dropped, it is simply a matter of time before the existing Canada/US partnerships would be discontinued in favour of direct distribution of the US service by a Canadian BDU. Where a partnership does not exist, for example, in the case of the History Channel, FRIENDS would also be concerned that a BDU might replace the Canadian History Channel with the US version, not because of better programming, not because of consumer demand, but rather because it was cheaper and would entitle the BDU to two minutes of advertising content within each hour of programming.
28. On a smaller scale, this has already happened after a Category 2 licence was approved for a partnership between Corus and RAI ⁶ for a service to be based on programming largely sourced from RAI 2. Subsequent to this approval, the Commission received and approved ⁷ a request from Rogers Cable to add RAI to the eligible satellite services lists.  Of course, FRIENDS does not object to the carriage of foreign language channels by BDUs. However, the opportunity for any element of that service to generate Canadian programming was lost by the approval of direct distribution of RAI.

Access

29. During FRIENDS' appearance at the Diversity of Voices public hearing, the Commission's Chair asked if addressing the issue of cable's abuse of dominant market position may be a problem that is in the process of fixing itself. Our response was that, while ultimately viable and substantive market competition might one day emerge, this would be sufficiently in the future to warrant the Commission's serious consideration in 2007.
30. As outlined in the Commission's 2007 Monitoring report, in 2006 cable reached almost 74% of Canadian homes served by a BDU. Of this number, the top four cable companies: Rogers, Shaw, Vidéotron and Cogeco, with a combined 6,895,000 homes represented almost 94% of total cables homes, and 69% of all homes. Total DTH reaches only 26% of BDU homes and 19% of all homes.
31. Thus, cable is clearly dominant: Rogers in eastern Canada, Shaw in the west and Vidéotron in Quebec. While DTH provides a valuable service especially in giving rural and remote communities comparable access to the services that are enjoyed in urban communities served by cable (albeit usually minus local coverage), the Commission is well aware of the limitations of DTH and satellite capacity, as well as the emerging IPTV technology.
32. Simply stated, outside of must-carry services, BDUs control access, packaging, marketing, and rates. Even with existing access rules, the Commission has heard many allegations of abusive ‘negotiation' tactics used by BDUs, especially with respect to smaller companies that have absolutely no negotiating leverage.
33. The present access rules ensure that those services which have met the test of the Commission's licensing process receive access in accordance with their business plan. FRIENDS strongly recommends that the Commission continue to maintain these access rules for all services. Notwithstanding this recommendation, should the Commission still decide to eliminate or amend the access rules, we would recommend that consideration be given to creating a separate set of rules for independently-owned specialty services so that they too can participate in the system. FRIENDS suggests that an independent service could be defined as one that is not controlled by a BDU or a national broadcast group.
34. It is FRIENDS' view - shared by many - that diversity is well served by having a broad group of owners and rules that ensure access.

Tiering, Linkage and Preponderance

35. As previously noted, many of the Commission's rules are harmonized by design. It is therefore inappropriate, and potentially dangerous, to examine individual rules in isolation. For that reason, in the following paragraphs we address tiering, linkage and preponderance as outlined in the Commission's Public Notice (and where appropriate as addressed in the Dunbar/Leblanc report).
36. FRIENDS' response to the issues starts by looking at three important considerations:

• How does each suggestion relate to the objectives of the Broadcasting Act?
• What impact would preponderance of distribution have on preponderance of affiliation payments made by BDUs to Canadian pay and specialty channels?
• How are Canadian services currently carried and what impact might these proposed changes have on the present carriage pattern?

37. As referenced above, Section 3 (1) (f) of the Broadcasting Act states that:

Each broadcasting undertaking shall make maximum use, and in no case less than predominant use, of Canadian creative and other resources in the creation and presentation of programming, unless the nature of the service provided by the undertaking, such as specialized content or format or the use of languages other than French and English, renders that use impracticable, in which case the undertaking shall make the greatest practicable use of those resource. (emphasis added)

38. Parliament's instruction is that "preponderant" (or 51%) is a minimum expectation as distinct from the intended "maximum". We are at a loss, therefore, to understand how a simplification of the rules which results in BDUs being required to meet only the very minimum level is a regulatory advancement consistent with the Act.
39. A review of the CRTC BDU Financial Database for the year 2006 ⁸ indicates that 88% of all affiliation payments by BDUs were made to Canadian pay (29%) and specialty (71%) channels while non-Canadian services received 12% of total affiliate payments (this latter amount still exceeding $ 200 million). A simple preponderance analysis would suggest that it is acceptable for affiliate payments to Canadian services to drop to 51% of total affiliate payments. To put this scenario into context, affiliation payments to Canadian channels would have dropped by $608 million (from $1.45 billion to $ 842 million) had they been effective in the 2006 broadcasting year.
40. FRIENDS has examined the cable line-ups on major Multiple Systems Operators (MSOs) such as Rogers and Shaw. Both companies appear to be carrying more Canadian channels than required under the cable regulations. It is therefore very important to understand the impact of the tiering and linkage rules and their overall impact on BDU carriage.
41. Since many of the major BDUs have ownership interests in specialty services, FRIENDS considers that the existing 5:1 linkage rules have had a material impact on the carriage of non-affiliated Canadian services which might not otherwise have been carried were this not necessary to enable carriage of affiliated services. To illustrate this, FRIENDS notes an exchange between Commissioner Williams and  Shaw Communications' Ken Stein on September 17, 2007 during Shaw's Diversity of Voices presentation to the Commission:

1375  COMMISSIONER WILLIAMS:  And you feel that many of the existing rules impede your ability to offer this choice that your customers are seeking?

1376  MR. STEIN:  Yes, absolutely.  We put "Scream" on, and then we had to take it off because it was a Corus service.

42. FRIENDS speculates that if the linkage rules no longer existed, Scream would certainly be carried on Shaw systems. The question is: What service would not be carried as a consequence? We further assume that Scream could have been carried by Shaw if it had elected to carry additional non-affiliated Canadian services but was precluded from doing so by the limited channel capacity discussed by some Diversity of Voices interveners. The Commission might ask whether this capacity is reserved for eventual carriage of the USA Network.
43. The 5:1 linkage rules also ensure that a reasonable balance exists between BDU-owned services and services not affiliated with a BDU.
44. Michael McEwen's report provides an excellent summary of the regulatory environment in each of the countries studied. Through the lens of this report one can envision what the Canadian broadcasting system might look like were the Commission to adopt the various recommendations that have been suggested.  FRIENDS believes that a critical aspect of this report is understanding the relative levels of distribution development in each of the countries surveyed, and the level of investment risk associated in each case. In Canada real BDU risk occurred decades ago.
45. Today our BDUs are mature and extremely profitable. They are developing revenues not just from television distribution but also Internet and telephone services from the same infrastructure. In contrast, operations in parts of Europe and Australia are still in initial growth mode, and in many cases have not yet reached break-even. In return for assuming the significant financial risks associated with building a BDU system, it would appear that their regulatory and carriage obligations have been designed to be minimal.
46. In the case of BSkyB, for example, it would appear that a very high percentage of the channels are either owned or controlled by Sky (as illustrated in 'Appendix A' of this submission). It is not difficult to look at the Sky line-up of services and imagine a host of similar Rogers or Shaw services making up a cable menu of the future. Nor is it difficult to question whether this is really the type of enhancement to the broadcasting system that was envisaged from this public process.
47.  With respect to tiering, FRIENDS recognizes that the existing tiering rules are generally based on when services were licensed, and furthermore that certain less popular services receive ongoing benefit from being packaged with services in higher demand. Indeed a hallmark of BDU marketing strategy has consistently been to use popular services to ‘drive' the sale of other channels that are part of the same package.  This means that not only does the less popular services in the tier benefit, but the BDUs also sell more services. There is no question that unbundling the existing tiers is the ultimate step in a process dictated by ‘market forces'. However, there is equally no question that some services whose place in the system has been approved solely in order to provide unique or niche content will suffer as a result.
48. Packaging should be the prerogative of the BDU, subject to restrictions against undue preference (where BDUs package their affiliated services with popular services such that their own services are beneficiaries).

BDU Access to Local Advertising

49. In past submissions, FRIENDS has noted its concern about the reduction in local programming and news coverage on over-the-air conventional broadcasters. FRIENDS has also noted the fact that in some markets the cable community channels are the only source of television news. FRIENDS believes it would be both fair and appropriate to give community channels full access to local advertising revenues provided that at least 50% of these revenues is re-invested in programming of local relevance and specifically targeted to the community served. FRIENDS expects that the availability of affordable local advertising would also be a significant benefit to local advertisers within smaller communities that receive media signals from larger adjacent cities.
50. FRIENDS does not support the sale of local availabilities within certain US specialty services because we believe it would provide little or no benefit to the Canadian broadcasting system while at the same time having a significant negative impact on Canadian over-the-air and specialty services.

Advertising Limits

51. Now that advertising limits for conventional over-the-air stations have been eliminated, we see no reason why parity for specialty services should not be maintained.

Analog/digital distribution

52. The Commission has asked whether or not we might anticipate that analog distribution will be phased out completely. FRIENDS believes that BDUs will push to do this sooner rather than later. From a consumer perspective, the elimination of the analog service will require digital set-top boxes to be installed on each and every television set in the residence for continued service.  Rogers' June 30, 2007 report to shareholders states that 1,237,100 households (or 55% of total basic subscribers) now have at least one digital box. Rogers also reports a total of 1,677,900 digital terminals, or an average of almost 1.4 terminals per home. This suggests a continuing gap between the number of digital terminals and the total number of television sets within subscribers' homes. Obviously, additional terminal rentals would significantly increase the monthly cost of cable, with particularly negative implications for lower-income and senior Canadians - a development with potential political implications.

Basic Service

53. The basic service provides customers with an entry-level package of services without a requirement to subscribe to additional services. FRIENDS believes that the provision of such a service is in the best ongoing interests of Canadian customers, particularly low-income and elderly customers.

BDU Packaging

54. As previously noted, packaging is fully controlled by BDUs and we submit that forced packaging happens in a number of different ways. It is self-evident that viewers can select only the options on offer. For example: one must subscribe to the basic service before taking any other services. Many of the major BDUs do offer individual services on a pick-and-pay basis. However, the net result is that the cost of a customized package can often exceed the cost of a much larger pre-selected package of services. This is likely why the vast majority of customers subscribe to the traditional tiers of services as offered. Similarly, a subscriber must also take the basic digital version of the service before qualifying to acquire the HD version. This means that the subscriber has to pay twice for the same content. Time-shifted channels are also packaged and sold separately as part of an upgraded service.

Undue Preference or Disadvantage

55. FRIENDS supports the concept of reverse onus to replace the existing undue preference procedures because we consider that it will be more effective, and level the playing field somewhat for the smaller specialty and pay services.

Simultaneous Substitution

56. The Dunbar/Leblanc report recommended that "the Commission reassess the net impact that simultaneous substitution has on the Canadian broadcasting system and assess whether there are other regulatory mechanisms that might break the very strong economic incentives for Canadian broadcasters to schedule American television programs in peak viewing periods, to the detriment of Canadian programming."
57. The Canadian broadcasting system receives enormous benefit from the airing of US programming. The revenues generated by the sale of advertising in US programming directly enable the production and airing of Canadian programming. The Commission's regulations require that fifty percent of the programming in the 6 pm-to-midnight evening viewing period, and 60% overall, be Canadian, although the complicated credits applied to priority programming can result in a different calculation of actual hours of programming broadcast. Simultaneous substitution was developed by the Commission to protect the programming rights that Canadian stations have acquired. It has the effect of increasing the revenue of Canadian broadcasters by 20% to 25%.
58. Ending simultaneous substitution would ultimately reduce the amount of money available to finance Canadian programming, which  would take a double hit if such a proposal were to be adopted. First, the 20/25% reduction in revenues from US programming would have a devastating impact on Canadian broadcasters' profitability. Second, if a new prime time drama commitment were to be imposed, then some broadcasters (for example, those lacking high-ratings Canadian programs like Corner Gas) would have an incentive to counter-program their Canadian obligations against their competitors' strongest US shows, thereby reducing CanCon audiences.

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For information: Jim Thompson 613 567 9592

Appendix A

SKY Vision Europe - Channel Line-up

Below is a sample of the channels offered by Sky Vision. This includes many channels generated directly by Sky or through its parent, Fox:

*** End of document ***

¹ Section 3 (1) (f): "Each broadcasting undertaking shall make maximum use, and in no case less than preponderant use, of Canadian creative and other resources in the creation and presentation of programming…" (emphasis added)

² Broadcasting Notice of Public Hearing CRTC 2001-10 par. 16

³ In Public Notice 2003-61, the Commission determined that a BDU may apply for approval to cease analog carriage once 85% of its subscribers have the ability to receive digital services.

⁴ For example, the Commission's statistics demonstrate that BDU and discretionary service profits have reached record levels.

⁵ Peter Bissonette, President, Shaw Cable

⁶ RAI is the Government owned and funded national broadcaster in Italy

⁷ Approval for the addition of RAI 2 to the eligible satellite list was given in CRTC 2005-51

⁸ Affiliate payments, page 28