Policy proceeding on a group-based approach to the licensing of television services and on certain issues relating to conventional television Broadcasting Notice of Consultation CRTC 2009-411 Opening Remarks CBC/Radio-Canada November 17, 2009
BNC 2009-411 Opening Remarks Introduction of the Panel Good morning Mr. Chairman, Commissioners, staff. I am Hubert T. Lacroix, President and CEO of CBC/Radio-Canada. This is my first appearance before the Commission and I am pleased to have the opportunity to provide you with our views on the important issues you are considering in this proceeding. We have provided you with a package of slides that I will be referring to periodically during our presentation. With me today are Sylvain Lafrance, Executive Vice President, French Services, Richard Stursberg, Executive Vice President, English Services, Steven Guiton, Chief Regulatory Officer, and Bev Kirshenblatt, Senior Director, Regulatory Affairs. Overview There are four main areas that the Commission is examining in this proceeding, and we recognize the importance of each of these issues. But let s be frank. Value for signal defines all of the others, and has captured the attention of Canadians. This will be the focus of my comments. In the context of BNC 2009-614 proceeding which will have its oral hearing phase less than a month from now over a hundred and fourteen thousand
2 Canadians have contacted the Commission directly to say how important local TV is to them. This is unprecedented. Never before have so many Canadians been directly engaged in a matter before the Commission. Canadians are watching. They want local TV to survive. And they don t want to face ever higher rates from BDUs. Our submissions in this proceeding and in the BNC 2009-614 proceeding are intended to help the Commission devise a solution to this issue a solution which will restore balance, protect consumers, put local TV on a sound financial footing and strengthen the Canadian broadcasting system overall. Revenue Support for Conventional Broadcasters A lot of activity regulatory interventions, governmental lobbying and public discussion has occurred since we filed our evidence over 2 months ago. Today, I want to cut through the noise and get to the heart of the matter. The issue facing the Commission is straightforward. It comes down to the two questions: 1. Is there an imbalance in the system? And, if so, 2. How should that imbalance be corrected?
3 1. The Imbalance in the System In our view, there can be no doubt that there is a very serious imbalance in the Canadian broadcasting system. Conventional television broadcasters have had to deal with the reality that their regulated business model cannot cope with today s fragmented media environment. This is neither a recessionary nor a transitory phenomenon. Could you please turn to your slide package. In Figure 1 of that package, you will see the historic decline in the financial health of Canadian conventional broadcasters. This decline has long pre-dated the recent recession. Its origin is clearly associated with the start of the growth of multi-channels in Canada, and the resulting fragmentation of television audiences. Just in passing, I note that Rogers yesterday said that there is no broken model for OTA. Last year, Rogers conventional TV services lost 18% prior to the recession, and in their licence renewal filings to you, they want to be relieved of any requirement to do drama and other programming of national interest. Last year the private conventionals made only $8 million; compare this with the $2 billion made by the cable companies. The weakness in conventional broadcasters business model has come to light due to the growth in multi-channel TV. Fragmentation has revealed the underlying problem, it is not the problem.
4 Figures 2 and 3 in your package show the audience share of conventional broadcasters local television stations as compared to the most popular specialty channels in English- and French-Canada. As you can see, there is no contest. Conventional broadcaster channels are by far and away the most popular television channels in Canada. Canadians love their local television. What s peculiar is that, unlike the specialty channels in this figure, the popular conventional channels receive no direct compensation for the value that they bring to the system. There is a complete disconnect between what people watch and who gets a share of what Canadians pay to access those channels. This makes no sense. CBC/Radio-Canada has on a number of occasions provided the Commission with studies on the source of, and viewership to, original Canadian programming. In this proceeding, we once again undertook these studies. If you turn to Figure 4 of your package, you will see the results of this study. Once again, we can confirm that viewing to original Canadian entertainment programming makes up the vast majority of viewing to conventional broadcasters schedules. Indeed, when we look at viewing to all original Canadian entertainment programming shown on any service in Canada, conventional broadcasters account for over 90% of this original viewing. The costs of providing this cornerstone role combined with the lack of direct compensation for the value they bring to the system has had a predictable effect
5 on conventional broadcasters financial performance vis-à-vis their specialty channel competitors. In Figures 5 and 6 you can see the result. Despite their lower popularity, specialty channels financials have continued to grow as the more popular conventional sector has suffered a financial nose-dive. This is the first part of the imbalance the failure of the system to flow monies through to the programming services that people value, and to the services making the greatest contribution. The second part of the imbalance relates to the relationship between BDUs and local television stations. Figure 7 shows the PBIT (profit before interest and taxes) of the cable industry as compared to several other industries. As you can see, cable BDUs are doing very well. Looking back at Figure 1 you can see that it is a very different story for local television broadcasters. Why is this a Tale of Two Cities? The answer is simple. First, BDUs are not paying for local television. They take the OTA signals, sell them to subscribers and give none of that revenue to the OTA broadcasters. You know that and that s why we are here today.
6 Second, the BDU market is not competitive. Figure 8 shows BDU basic rates since 1998. As you can see, from the time when cable rates were deregulated the direction has been steadily up. Over the last 5 years, the basic cable bill has gone up more than 4 times the cost of living. And just to be clear on this point, Figure 9 compares Canadian with U.S. rates. It is pretty obvious that the Canadian BDUs are winning this race to the top and that it s the Canadian consumer who is paying. BDUs are making tremendous profits free-riding on local television while those same local television stations have become financially unsustainable.
7 2. How should the imbalance be corrected? A balanced system requires a rational approach to revenues. Players should succeed or fail based on their talents, skills and efforts not on artificial constraints on access to revenue sources. On its face, there is no policy reason why any broadcasting undertaking should be denied access to either advertising or subscription revenues. On the contrary, restricting access to a revenue source will introduce distortions into the system advantaging some and disadvantaging others. That is precisely what has happened here. The solution is simple. Local television stations should be given access to subscription revenues. In other words, BDUs should compensate local television broadcasters. How can this change be implemented? In our view the simplest way to implement this change would be for the Commission to issue a distribution order along the lines of the draft order accompanying our September 14, 2009 submission. BDUs and local television broadcasters could then negotiate an acceptable level of compensation. If the parties could not agree within a reasonable timeframe, they could seek arbitration by the Commission. On this last point, I would like to comment on an argument made by many BDUs in their written filings and emphasized by Rogers yesterday in its presentation.
8 The argument is that there can be no negotiations because there is no way to value local television. This is nonsense. All BDUs and specialty services have negotiated compensation arrangements for years. It is not that difficult. And as you heard yesterday, south of the border cable and satellite companies have no trouble valuing OTA signals. So, the idea that there is no value to over-the-air signals is very hard to accept. And, by the way, Rogers clearly values over-the-air signals. In 2007, Rogers paid nearly $400 M for the City TV stations and now owns a total of 10 OTA stations. Rogers has even gone to court to defend the value of its OTA signals. In 2000, Rogers was one of several OTA broadcasters that sought an injunction and damages against the principals of icrave TV. As you may recall, icrave TV proposed to take OTA television signals from Toronto and retransmit them over the Internet. Here is what Rogers had to say to the court about the icrave TV business: The {icrave TV} business model is to trade on the value of the Broadcasters signals, programming and compilations without doing anything to develop or legitimately licence television content.
9 Rogers claimed that this re-transmission devalued its signals. Rogers asked for damages comprising either statutory damages of $70 million to the date of the application, plus $1.1 million per day thereafter, or $100 million plus an accounting for profits and other relief. In 2000 when someone wanted to take the OTA signals of Rogers and others and distribute them to the public without paying anything to the broadcasters, Rogers had no difficulty finding a value in those signals. We are confident that with a bit of reflection Rogers could do so again. If required to negotiate compensation with the OTA broadcasters, Rogers and the other BDUs should have no difficulty coming up with reasonable proposals for the value of local TV signals. To begin, they need only look at the popularity of local TV with their subscribers. Negotiation is a reasonable, efficient and familiar approach. It is doable. And in our draft Distribution Order we have identified 6 criteria that could be used to guide those negotiations. What about Canadian consumers? And finally, we come to the heart of the matter. The whole point of having a robust, healthy, balanced Canadian broadcasting system is so that Canadians can have affordable access to a wide range of broadcasting services, including the local television stations they love to watch. So, how would a compensation regime impact consumers?
10 Given the past behaviour and recent statements of the BDUs, we believe the Commission needs to take concrete steps to protect consumers. In our view, the simplest and most consumer-friendly approach would be to establish a small, all Canadian basic service which would include all local television stations and a very limited set of other programming services. No other services could be added to basic. We think a number of options are available to the Commission to ensure that this small basic service would be significantly lower-priced than the larger basic packages currently offered. This would provide an affordable entry point into the system for all Canadians. Beyond basic, consumers could buy what they wanted and only what they wanted. BDUs could, of course, offer a bundle of the small basic and other services for example to mirror their existing basic package but they could not force customers to buy that bundled package. The end result would be an affordable basic package, a sustainable financial future for local television and more choice for consumers. Affordability, sustainability and choice. We believe this is a worthy goal and an attainable one. Thank you for the opportunity to present these comments to you this morning. We would be pleased to answer any questions you may have.
Figure 1 Private Conventional TV Profit (PBIT) Margin, 1976-2008
The Popularity of Conventional vs. Specialty Services: English Market Figure 2 Compensation No compensation 2.2% 2.1% 2.0% 1.8% 1.8% 1.7% 1.6% 1.5% 1.5% 1.4% 1.4% 1.4% 1.3% 1.2% 1.1% 1.0% 1.0% 1.0% 3.5% Prime Time Audience Share (2008-09) 6.8% 8.1% 12.3% + plus dozens more with even smaller audiences 1 TSN SPORTSNET HISTORY+ A&E DISCOVERY FAMILY+ TLC TMN/MC CNN SPIKE TV NEWSWORLD W NETWORK PEACHTREE HGTV YTV SPACE TREEHOUSE TV FOOD COMEDY+ CTV CBC TV GLOBAL
No compensation The Popularity of Conventional vs. Specialty Services: French Market Compensation Figure 3 3.4% 3.4% 2.6% 2.4% 2.1% 1.9% 1.8% 1.6% 1.6% 1.3% 1.2% 1.0% 0.6% 8.5% 0.5% 0.4% 0.3% 7.9% 18.4% 27.1% TVA RADIO-CANADA TQS MUSIMAX Prime Time Audience Share (2008-09) RDS CANAL D CANAL VIE RDI LCN VRAK TV HISTORIA TV5 ARTV MUSIQUE PLUS
The Contribution (%) of Original and Repeat Programming to the Viewing of Canadian Drama/Comedy on Conventional Broadcasters Figure 4
Conventional and Specialty/Pay Television Profit Margin (PBIT) 1999-2008 Figure 5
Figure 6 Conventional and Specialty/Pay Television Profit (PBIT) 1999-2008
Profit Margin of Select Industries (2008) Figure 7
Figure 8 The Cost of Basic Service by Cable and DTH BDUs
Subscription TV Price Growth: Canada vs. U.S. Figure 9