1 5 April 2007 Ms. Diane Rhéaume Secretary-General Canadian Radio-Television & Telecommunications Commission Ottawa, Ontario K1A ON2 Re: Broadcasting Notice of Public Hearing CRTC Item 1, Application by CTVglobemedia Inc. (CTVgm) (formerly Bell Globemedia Inc.), on behalf of CHUM Limited (CHUM) (Application No ) Dear Ms. Rhéaume: Introduction 1 The Canadian Broadcasting Corporation/Radio-Canada ( CBC/Radio- Canada ) is pleased to submit the following intervention in response to an application by CTVglobemedia (CTVgm) on behalf of CHUM Limited (CHUM) seeking approval for the transfer of all of the Common Shares of CHUM to CTVgm s wholly-owned subsidiary Ontario Inc. 2 CTVgm is the largest broadcasting conglomerate in English Canada with extensive assets in the area of conventional television, specialty services, newspaper and new media. CHUM is the third largest broadcasting group in English Canada with significant assets in conventional television, specialty services, radio and new media. If approved by the Commission, this transaction would create a broadcasting entity of unprecedented scope and scale across all broadcasting platforms.
2 2 3 According to its application, CTVgm wishes to retain a subset of CHUM s regulated operations and divest the remaining licensed undertakings to independent third parties. 1 However, the latter are marginal assets and the proposed divestiture does not at all reduce the significance of this transaction. 4 CTVgm values the transaction as it relates to the regulated assets which CTVgm wishes to retain - at $1.36 billion and proposes a tangible benefits package for the relevant assets (conventional television, specialty services and radio) amounting to $103.5 million. 5 CBC/Radio-Canada has identified three areas of concern with CTVgm s application: The resulting entity would have an unprecedented scope and scale in the Canadian broadcasting system, which would grant it an undue competitive advantage and have a significant adverse effect on other broadcasters, such as CBC Television, in both the advertising market and in the programming supply market. The transaction would result in a concentration of ownership which would have an unacceptable impact on the plurality and diversity of voices in English Canada and would directly conflict with the Commission s common ownership policy for conventional television stations. The proposed valuation of the transaction is incorrect and the proposed distribution of tangible benefits is inappropriate. 6 As a result of these concerns, and specifically, in view of the inappropriate nature of the distribution of the proposed benefits, CBC/Radio-Canada opposes the CTVgm application. CBC/Radio-Canada wishes to appear at the oral hearing to present and expand upon its views. 1 The divested assets would comprise CHUM s A-Channel Television Stations (CIVI-TV Victoria, CHRO- TV Pembroke, CHRO-TV-34 Ottawa, CFPL-TV London, CHWI-TV Wheatley, CKNX-TV Wingham, CKVR-TV Barrie), CKX-TV Brandon, Access: The Educational Station, The Learning Channel and SexTV: The Channel.
3 3 The Creation of a Juggernaut 7 CTVgm owns 25 conventional television stations, 21 specialty services, the Atlantic Satellite Network (ASN) and 40% of TQS. In the Fall of 2006 CTVgm aired 16 of the top 20 shows on English television. In 2005, CTVgm received 36% of total English television advertising revenues nearly 50% more than its nearest rival, Canwest, which had a 25% share of the advertising pie. TV Advertising Revenues by Major Player, English-Language Services 2005 Quebecor 1% CBC 6% Rogers 1% Corus 6% Other 6% CTVglobemedia 36% Alliance Atlantis 5% Canwest 25% CHUM 14% Source: CBC/Radio-Canada estimates based on CRTC Data 8 There can be no doubt that, even prior to its proposed acquisition of CHUM, CTVgm is by far the largest and most successful television broadcaster in English Canada. 9 CHUM is the third largest English language broadcaster in Canada with 12 conventional television stations, 21 specialty services, 34 radio stations and a subscription radio licence. In 2005 CHUM garnered 14% of total English television advertising revenues.
4 4 10 If the new CTVgm were to come into existence, its dominant position in the Canadian broadcasting system especially in the area of English television - would have very serious consequences for other broadcasters. 11 In the area of advertising, CTVgm s enormous number of services, as well as its success at acquiring top shows in part because of the depth of its financial resources - would provide it with an unprecedented degree of power in the advertising market. In particular, CTVgm would be in a position to demand that advertisers wishing to purchase spots in the most popular must have programs would have to purchase a bundle of ads across its full range of services, including some of CTVgm s less attractive spots. This could include buys on Citytv to further support its move into the US simulcast business that is already improving its power ratio. Power Ratio* of English-Language Conventional TV Services, CTV 3.4 Power Ratio CanWest CHUM Source: CRTC; BBM/NMR * Power Ratio: Revenue share / Previous year audience share 12 The dominant position of CTVgm in the advertising market would significantly impair the ability of smaller broadcasters, including CBC Television, to grow their advertising revenues. Given that over 50 % of CBC television s funding comes from commercial revenues, and that the vast majority of this amount is derived from advertising, this situation could have a very serious negative effect on CBC/Radio-Canada s ability to fulfil its licence conditions and its statutory mandate. The same would likely also be true for private sector television licensees.
5 5 13 The timing of such an outcome is particularly problematic. As the Commission is well aware, the advertising market for conventional television broadcasters has stalled and may soon be in decline. The most recent evidence that describes this situation comes from the Commission s 2006 Private Conventional Television Financial Summaries, where total conventional broadcaster advertising revenues (local and national) experienced a mere 0.2% annual growth in CBC/Radio-Canada Television and other small private conventional television broadcasters, who are already suffering from this market stagnation, will be the hardest hit by this proposed merger that will draw together and control a greater proportion of increasingly elusive advertising dollars. 14 In addition to dominance in advertising, CTVgm would also achieve an unprecedented dominance in the market for programming. It is already the case that CTVgm acquires significant excess programming that stays on the shelf. This is programming that other broadcasters might have wished to buy but could not. CTVgm also engages in restraint of trade because its programming power gives it the leverage to significantly outbid other players for major properties, such as the Olympics, and thereby discourage the formation of competitive programming alliances around specific program properties, particularly sports. 15 The new CTVgm would have significantly enhanced buying power and a much greater array of television viewing slots for the programming it acquires. With advertising revenues likely to be twice those of Canwest and 8 times those of CBC Television, the new CTVgm would be able to outbid virtually all other broadcasters for the most popular programming foreign or Canadian. This extraordinary buying power would further entrench CTVgm s ratings position, reinforce its dominance in the advertising market and provide it with yet greater strength in the programming market. 16 The potential for a snowballing effect is obvious. The end result could be an overwhelmingly dominant television broadcaster with all other broadcasters playing only niche or marginal roles. And, even if the situation were to stabilize prior to reaching such an extreme result, it would almost certainly settle in a way that would leave CTVgm in a position of unrivalled predominance in the English television market. Other broadcasters would be seriously weakened and unable to contribute in
6 6 anywhere near the same fashion to the broadcasting system as they have in the past. This would be as true for CBC Television as it would for private broadcasters. 17 Approval of this transaction as presented by CTVgm would give the new CTVgm 30 conventional television stations almost 30% more than the next largest player Canwest, 37 specialty services more than any other player in the system, 50% of total advertising revenues in the English market and real dual station ownership in all of the must-buy markets in English Canada. 18 In CBC/Radio-Canada s submission, CTVgm s proposed acquisition of CHUM would have a totally unacceptable impact on the Canadian broadcasting system by creating a single broadcaster of unprecedented size and dominance. The negative consequences for other broadcasters and for the system as a whole would be extremely serious. In order for a competitive market to function effectively there has to be some measure of balance between the players. If approved, this transaction would put the Canadian broadcasting system seriously out of balance. 19 There is no counterbalancing public policy reason which would justify allowing this transaction to proceed on the basis proposed by CTVgm given the negative implications for the Canadian broadcasting system. Moreover, the proposed transaction is especially inappropriate given the potential social consequences that could result from such a concentration of media ownership and control. Concentration of Ownership The Impact on Plurality and Diversity 20 In addition to the economic and operational consequences of CTVgm s proposal, there is also a concern for the maintenance of a plurality and diversity of voices in Canadian broadcasting. 21 This is a matter of vital importance for the democratic, social and cultural health of Canadian society. If a free and democratic society is to be healthy and vibrant there must be both a plurality and a diversity of voices available across all
7 7 media. This fundamental fact was stated succinctly in the United Kingdom s 2001 Communications White Paper: By diversity, we mean the range of different programmes and services available to viewers and listeners. Plurality, on the other hand, is about choices viewers and listeners are able to make between different providers of such services. Society benefits from both a diversity of services between and within genres (such as news, entertainment, documentaries, etc.) and a plurality of suppliers of such services (since this increases exposure to a variety of editorial styles and a range of views and opinions) The same perspective is set out in the American regulator s, the FCC s, 2002 Biennial Review Order on media ownership, which states: A diverse and robust marketplace of ideas is the foundation of our democracy. Consequently, it has long been a basic tenet of national communications policy that the widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public. This policy is given effect, in part, through regulation of broadcast ownership. 23 The Canadian broadcasting system is undergoing fundamental change. Industry consolidation has already created two major private sector players in Quebec with extensive cross media ownership - Cogeco and Quebecor. In English Canada we could, if recent transactions are approved, end up with a similar structure with Canwest Mediaworks and CTVgm. Consolidation at this level in Quebec has resulted in an increasing uniformity of news and editorial perspective and the same is occurring in English Canada. Companies consolidate to create operating efficiencies and synergies. However, as resources are shared across media platforms so too are perspectives and viewpoints particularly with respect to news and editorial perspective. The CTVgm transaction if approved will reinforce this very worrying trend. 24 A plurality of independent broadcasting sources, particularly for news and public affairs, is fundamental to our understanding of the conditions necessary for a true democracy and a healthy and vibrant society. A multiplicity and variety of services and programs is not enough. Further, CTVgm s assurances to the Commission that it can retain the unique and independent perspective of CHUM in its 2 Communications White Paper, s at page 35.
8 8 programming is an empty commitment. Consolidation of ownership leads to a uniformity of perspective across outlets. This is a normal consequence of the business of consolidation. One need only ask what ever happened to the distinct perspectives of companies that have exited the industry, such as WIC, Blackburn, Electrohome, CFCF Television and Moffat to understand that CTVgm s commitment to preserve the identify that made CHUM distinct will not be met. 25 The degree of concentration of ownership in television broadcasting that would result if CTVgm s proposal were approved raises profound concerns with respect to the plurality and diversity of voices in this critical broadcasting medium, and in Canadian media generally. Vancouver, Canada s second largest market, provides a case in point. Should this transaction be approved, two conglomerates would control all of the city s most important media: newspapers and private conventional television. Moreover, the approval of this deal would extend this control and homogeneity of voice into the radio environment as it would provide CTVgm with three local radio stations. 26 In Assessment of the Impact of the Benefits Test Applied at the Time of Transfers of Ownership or Control of Broadcasting Undertakings, Public Notice CRTC , 15 June 1992, the Commission stated: Concentration of ownership within the broadcasting system is not itself necessarily of concern to the Commission, provided that there continues to be an effective degree of diversity of ownership and of programming sources to ensure that the objectives of the Act are met. The Commission will continue to deal with such issues on a case-by-case basis and will have to be satisfied that the purchaser demonstrates that the advantages of any such concentration clearly outweigh the disadvantages, and that the transaction is in the public interest. 27 The Commission s concerns about concentration of ownership were repeated in Building on Success A Policy Framework for Canadian Television, Public Notice CRTC , 11 June 1999: The Commission will continue its current policy which generally permits ownership of no more than one
9 9 over-the-air television station in one language in a given market. This policy ensures the diversity of voices in a given market, and helps to maintain competition in each market. 28 CTVgm s proposal conflicts with both the general principle against concentration of ownership, as well as the Commission s specific policy against the ownership of more than one over-the-air television station in a market. 29 The onus is clearly on CTVgm to demonstrate that the advantages of any such concentration clearly outweigh the disadvantages, and that the transaction is in the public interest. CTVgm must also demonstrate that the multiple exceptions it requests to the Commission s over-the-air television ownership policy are justified. 30 In CBC/Radio-Canada s submission, CTVgm has not met this onus on either count. 31 As far as the one station per market policy is concerned, CTVgm argues that it should be permitted to own two stations since Canwest has two stations in four of the five markets at issue. 32 The fact that the Commission has granted an exception to Canwest in the past provides no policy reasons as to why an exception to the one station policy should be granted to CTVgm now. 33 In addition, the Canwest situation is significantly different from that proposed by CTVgm. CTVgm is proposing to own two local television stations in the same market in direct violation of the CRTC s dual station ownership policy. Canwest s situation with CHCH is not analogous. CHCH is carried in Toronto but it is clearly a Hamilton station with substantial commitments to serve Hamilton. In Calgary and Edmonton, the CH service (CKRD) is a distant signal from Red Deer. It is not a
10 10 local station in Calgary or Edmonton. It has no local commitments to those markets. The same is true in Vancouver with respect to the CH service (CHEK) from Victoria. 34 Any concerns the CRTC had with respect to Canwest retaining ownership in CHCH in Hamilton and CHEK in Victoria (Decision CRTC ) were dealt with through substantial local programming commitments that made it clear that CHCH and CHEK would be strong local stations in their respective markets. In approving Canwest s acquisition of WIC, the Commission took the steps necessary to ensure that its dual station ownership policy was not breached. What CTVgm is proposing is a clear breach of the policy. The Citytv stations in Toronto, Calgary and Edmonton are local stations in those markets. The CH stations carried in those markets are not. 35 In regard to the broader ownership policy issue, CTVgm has provided no explanation whatsoever why an increase in ownership concentration on this scale would be in the public interest. All conventional television broadcasters are facing serious financial challenges. CHUM, however, through its diversified ownership of radio and specialty services, is not in financial difficulty. This is not a case where a failing company needs to be saved from the brink of collapse and no one else in the industry is willing to step up to the plate. 36 The sole reason for CHUM becoming available was the death of its founder Allan Waters. The Waters family decided to sell and invited two bidders CTVgm and Astral to make offers. CTVgm won the auction by paying a 50% premium for the CHUM shares, but only 5% more than Astral s bid. The fact that CTVgm has the deepest pockets and was able to outbid even cash-rich Astral is no justification for permitting the enormous concentration of ownership CTVgm s proposal would entail. On the contrary, it provides further proof of CTVgm s already dominant position in English Canadian broadcasting and warns against approving the transaction as proposed. 37 The economic consequences for other broadcasters and for the Canadian broadcasting system as a whole have been discussed above. These concerns on their own provide sufficient reason for the Commission to deny CTVgm s application. The equally important concerns associated with increased concentration of ownership
11 11 and consequent reduction in the plurality and diversity of voices provide a second compelling rationale. 38 In CBC/Radio-Canada s submission, it cannot be in the public interest for a single broadcaster to have such a dominant position in what is still the most powerful communications medium in the world television. With 30 conventional television stations and almost 40 specialty services, CTVgm would blanket English Canada in all regions and cover all genres. There would be a single corporate source for all types of television programming and, no matter what disclaimers CTVgm may put forward, a single corporate culture and point of view. 39 A plurality of broadcasting sources, in particular in news, public affairs, and editorial perspective, is critical to the democratic process, as well as the social and cultural health of Canada. There is no need for the Commission to approve the level of concentration of ownership in English television proposed by CTVgm and every reason for the Commission to conclude that it should not be permitted. An Unacceptable Benefits Package 40 CTVgm proposes a package of tangible benefits that total $103.5 million based on a valuation of the transaction at $1.36 billion, excluding assumed debt of $270 million. Specifically, CTVgm proposes benefits of $27 million in respect of radio assets valued at $450 million and $76.5 million in respect of television assets valued at $765 million. No benefits are proposed in respect of the television assets that CTVgm proposes to divest to third parties. CTVgm values these assets at $150 million. 41 CBC/Radio-Canada has identified two areas of concern in respect of the proposed benefits package: the exclusion of assumed debt from the valuation of the transaction; and, the nature of the benefits proposed.
12 12 Assumed Debt Should be Included 42 In CBC/Radio-Canada s submission there are no grounds whatsoever for excluding the $270 million of assumed debt from the value of the transaction. This debt was incurred by CHUM in the same way any other corporation might incur debt to acquire new assets. If CHUM had had the cash to buy those assets outright and had done so, then CTVgm would have paid a higher purchase price and would not have had to assume any debt. Things did not happen that way. Instead, CTVgm assumed the CHUM debt and the total value of the transaction is the purchase price plus the value of the assumed debt. 43 In evaluating the value of a transaction, the CRTC relies on the definition of transaction value established by the International Business Brokers Association which states that the transaction value: "is the total of all consideration passed at any time between the buyer and seller for an ownership interest in a business enterprise, and may include, but is not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non-competition agreements, employment and / or consultation agreements, licences, customers lists, franchise fees, assumed liabilities, stock options, stock or stock redemption, real estate, leases, royalties, earn-out and futures consideration". 44 CTVgm has assumed the debt and therefore it should be counted toward the valuation of the transaction. 45 Contrary to CTVgm s suggestions, valuing the transaction in this manner would not result in double dipping from a benefits perspective. Rather, this valuation would ensure that proper benefits are assessed in light of the true, overall value of the transaction, independent of any peculiarities as to the manner in which that value is paid by the purchaser to the vendor.
13 13 46 In this regard it is important to emphasize that a purchaser of a broadcasting undertaking must assume any outstanding regulatory obligations incurred by that undertaking. The purchaser must then demonstrate the benefit to the system resulting from the proposed purchase. These new, incremental benefits are not double dipping. They are the justification for permitting the proposed transaction to proceed without requiring the undertaking s licence to be returned and a call for applications issued. 47 In the present circumstances, the assumed debt is entirely related to CHUM s acquisition of CKVU-TV and Craig Media 3 and therefore should be allocated to the television assets. This would mean that the value of the tangible benefits associated with the television assets should be increased by $27 million (i.e., 10% of $270 million). The Benefits Proposed 48 CBC/Radio-Canada does not have any concerns with the benefits proposed in connection with the radio assets to be acquired by CTVgm. Those benefits would flow to independent third parties and accrue to the advantage of the Canadian broadcasting system in general which is consistent with Commission policy. CTVgm s proposal for the television benefits is a different matter. 49 CTVgm has proposed benefits totalling $76.5 million in respect of the television assets to be acquired - $65 million for priority programming and $11.5 million for social and industry initiatives. CBC/Radio-Canada does not have a concern with the division of benefits in this way. 3 See CTVgm s Supplementary Brief at page 29 and its 29 January 2007 Deficiency Response at pages 6 and 7.
14 14 50 CBC/Radio-Canada is however deeply concerned with the allocation of the $65 million to a private, CTVgm-only funding mechanism. This approach is the same as that approved by the Commission in connection with the BCE/CTV transaction. In Transfer of effective control of CTV Inc. to BCE Inc., Decision CRTC , 7 December 2000, the Commission stated: The Commission, in applying its benefits test, has been consistent and rigorous in requiring that expenditures proposed as benefits be truly incremental. For benefits to be accepted by the Commission, they must be directed to projects and initiatives that would not be undertaken or realized in the absence of the transaction. The Commission also generally requires applicants to demonstrate that expenditures proposed as benefits will flow predominantly to third parties, such as independent producers. In many cases, applicants have chosen to satisfy these requirements by allocating sizeable portions of their proposed benefits packages to independent production funds. The approach chosen by BCE in this instance is a departure from that taken by others. BCE has proposed to direct more than 90% of its benefits package to new television program production, most of it to be funded by the applicant through a combination of licence fees, equity investments and distribution advances. The resulting programs will be broadcast on the CTV television network. 51 The Commission accepted the BCE/CTV approach in Decision , much to the advantage of CTV which effectively gave itself a $230 million programming bonus. In CBC/Radio-Canada s submission, it would be highly inappropriate for the Commission to accept this approach again, especially in the present context. 52 As discussed above, the CTVgm acquisition of CHUM would create a broadcaster of unprecedented scope and scale, especially in respect of English television. The creation of such an entity would have serious negative consequences for the plurality and diversity of voices in Canada, as well as the competitiveness of the television advertising and program supply markets. The last thing such an entity should be permitted to do is dedicate tangible benefits to itself and thereby further strengthen its dominant position. 53 In CBC/Radio-Canada s submission, if the Commission were to permit CTVgm to proceed with its transaction as proposed or any modification thereto
15 15 then it would be essential from a public policy perspective that all of the tangible benefits including the benefits associated with the transfer of television assets should be directed to independent third party activities and/or funds. 54 In the case of television benefits, CBC/Radio-Canada submits that the funds should be directed to the Canadian Television Fund where they could be used to support both independent producers and the Canadian television industry in its entirety. Conclusion 55 In CBC/Radio-Canada s submission, CTVgm s proposed acquisition of CHUM cannot possibly be viewed as being in the public interest. If permitted to proceed it would result in a broadcasting entity of unprecedented scope and scale with an overwhelmingly dominant position in English television. The impact on other English language television broadcasters in both the advertising and programming markets would be extremely negative. This would, in turn, have serious consequences for the entire Canadian broadcasting system. 56 In addition to these direct consequences for the broadcasting system, the concentration of ownership which would result from CTVgm s proposed transaction would significantly diminish the plurality and diversity of voices in English television. This would be a serious threat to Canada s democratic, social and cultural health. 57 CTVgm was able to outbid Astral for CHUM because of CTVgm s extraordinarily deep pockets. The mere fact that CTVgm has the most money cannot be allowed to determine the outcome of this matter. The public interest and the requirements of the Broadcasting Act must come first.
16 16 58 In light of these extremely serious public policy concerns, CTVgm s application should be denied. In CBC/Radio-Canada s view, a revised application must at a minimum include an appropriate television benefits package benefiting third party activities via the Canadian Television Fund. 59 CBC/Radio Canada appreciates the opportunity to provide its comments in this proceeding. As noted above, CBC/Radio-Canada would like to appear at the oral hearing. Yours truly, Bev Kirshenblatt Senior Director, Regulatory Affairs P.O. Box 3220, Station C Ottawa, ON K1Y 1E4 cc: *** End of Document ***