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

April 8, 2008

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Introduction

Michel Tremblay:

Good afternoon Mr. Chairman, Commissioners and CRTC staff. My name is Michel Tremblay, Vice-President, Strategy and Business Development, of CBC/Radio-Canada.

With me today are Sylvain Lafrance, Executive Vice-President, French Services, and Richard Stursberg, Executive Vice-President, English Services.

Also with us are Steven Guiton, Executive Director, Strategy and Government Relations, Bev Kirshenblatt, Senior Director, Regulatory Affairs and Stan Staple, Director, Research and Strategic Analysis. We are also pleased to have Peter Grant, counsel at McCarthy Tétrault, with us today.

The CBC/Radio-Canada Proposal

As you know from our written submissions, CBC/Radio-Canada has developed a comprehensive regulatory proposal aimed at creating a consumer-focused regime which relies on market forces, whenever possible, while at the same time ensuring that the objectives of the Broadcasting Act are fulfilled.

When developing our proposal we have kept in mind the two overarching objectives of the Act identified by the Chairman, last June, in Banff:

  • Canadian content; and,
  • access to the system.

Our regulatory proposal is structured to ensure that Canadians have access to the system in a flexible, consumer-friendly and economical manner. If we hope to keep Canadians engaged with the Canadian broadcasting system, we must ensure that they can choose what they want to watch and gain access to that programming in a convenient and affordable manner.

At the same time, it is critical that the regulatory framework enable strong Canadian programming services to create diverse, high-quality programming that reflects Canadian cultural, social and linguistic realities. In this regard, our proposal is intended to ensure a level playing field for all services and a framework which will provide a sound financial basis into the future.

Our proposed framework relies on market forces to the greatest extent possible within the constraints established by the Broadcasting Act, while eliminating outdated regulatory rules. Ultimately, it should be consumers who will choose what they want to watch and which services are the most popular.

Our proposal contains four key elements:

  1. A small low-priced basic service made up of core Canadian services that would enable all Canadians – rich or poor, rural or urban – to obtain a variety of significant Canadian programming channels;
  2. Unfettered choice with respect to the remaining Canadian and foreign discretionary services, bounded only by a “predominance of Canadian” rule;
  3. A level playing field which would grant conventional broadcasters access to subscription revenues – a right BDUs and specialty services already enjoy – enabling conventional broadcasters to continue to play their cornerstone role in the system and to maintain, or even enhance, the quantity and quality of Canadian programming they offer Canadians; and,
  4. New revenue opportunities for BDUs to offset the costs of the fees they will pay to conventional broadcasters and thereby ensure that the price of the new streamlined basic service is affordable for all Canadians.

We recognise that the Commission has put forward its own carriage model for comment: a small mandatory Canadian basic; guaranteed access to a limited number of core Canadian services; and, no guarantee of access for other services.

The point of difference between the Commission’s carriage model and ours is the second element – the guarantee of access to a limited number of Canadian services not on basic.

We will be happy to answer questions on either approach. However, in the remainder of our opening remarks, we will focus on two aspects of our own proposal: the importance of a basic package with core Canadian services; and, the need to create a level playing field for all components of the industry. Sylvain will speak to you on the first point and Richard will address the second.

Providing Canadians with Core Canadian Services

Sylvain Lafrance:

Thank you Michel.

As Michel has said, providing Canadians with high-quality, diverse Canadian programming is what the Broadcasting Act is all about.

In our view, the opening up of the system to a multitude of new services has created tremendous opportunities from the perspective of diversity of programming – but there has been a cost. Conventional over-the-air (OTA) broadcasters – the cornerstone of the system –have paid that cost through audience fragmentation and loss of advertising revenues.

We believe it is time to rebalance the regulatory regime in order to provide proper support to conventional broadcasters. That is why the lead feature of our proposal is a small, all-Canadian, basic package of core Canadian services with the primary emphasis being on the distribution of conventional broadcasters. As Richard will discuss later, it is also why we are suggesting access to subscription revenues for conventional broadcasters.

The basic package is the only mandatory element of the current system and of our proposal. Subscribers must purchase the basic package in order to gain access to discretionary services.

Given its mandatory nature, we believe the basic service package should be: 1) all Canadian; and 2) affordable.

First, making the basic package all-Canadian means subscribers are not forced to purchase foreign services. If you pause for even a second, this approach seems obvious. There is no policy reason why the Commission should force Canadians to buy non-Canadian channels. The Commission appears to have reached this same conclusion in developing its own model.

Second, since the basic package is mandatory, it should be as affordable as possible. This, in turn, means it should be as small as possible. This will maximise consumer choice, enabling consumers to spend their money on the services they most want, instead of having to buy a big basic package full of channels they never watch. It will also likely have the effect of bringing new customers into the system – people who have not subscribed to BDU services because of cost considerations.

Given these two factors, the question becomes – which services should be included in basic?

In our view, the basic service package should include a core set of Canadian services which collectively meet the cultural, social and linguistic objectives of the Broadcasting Act.

We believe the starting point must be conventional OTA broadcasters – the cornerstone of the system. A limited number of other services should also be included. In our view, the core services which should be included in basic are:

  • local over-the-air services;
  • provincial educational services;
  • services that have a distribution order under section 9(1)h); and,
  • other services which make a unique and significant contribution.

Under our proposal, the basic service package would be identical for all terrestrial BDUs serving a local market.

As for DTH operators, they should carry at least one provincially relevant OTA signal from each major network.

In the case of Québec, we are asking that DTH BDUs be required to distribute, in a given region’s basic package, the same regional Radio-Canada station that must be distributed by terrestrial BDUs.

As a result, ExpressVu would now have to distribute Radio-Canada’s Gatineau-Ottawa station to area residents and Star Choice would have to add our Québec City station. It’s absurd that our Québec City station’s regional programming should not be available to the area’s subscribers, while Star Choice distributes TVA’s and TQS’s regional stations in Québec City.

It’s equally absurd that DTH operators only distribute two Radio-Canada stations throughout Québec, while distributing five regional TVA stations.

Finally, what about the services that make a "unique and significant contribution" to the system. We believe these should be services which are important from a cultural and civic or democratic perspective. We suggest the Commission include CBC Newsworld, Réseau de l’information de Radio-Canada (RDI) and TV5Monde.

We believe these services, if packaged with local over-the-air and provincial educational services, would give subscribers a core mix of Canadian content in both official languages – everything from regional, national and international News, to entertainment, to politics, to educational programming.

Beyond this set of core services, subscribers would be free to purchase whatever most interests them – sports, arts, movies, comedy – whatever they like, subject only to a predominance requirement.

We believe this approach fulfils the cultural, social and linguistic objectives of the Broadcasting Act while, at the same time, being very consumer-friendly. We think it makes sense.

I will now let Richard tell you about the financial aspect of our proposal.

A Level Playing Field – Maintaining Canadian Content

Richard Stursberg:

Thank you Sylvain.

The broadcasting world is changing dramatically.

Some of these changes are very recent.

Other changes – like the advent of subscription platforms – have been underway for some time. In fact, the Commission itself commented in its public notice on the maturity of the specialty services industry. That maturity is best evidenced by the fact that television subscription revenues are now nearly twice as large as all television advertising revenues.

People are accustomed to paying for television.

Equally important, they believe that when they pay a monthly subscription fee to a BDU, they are paying for all of the channels they receive – including conventional television stations.

And, the fact is – they are. If they don’t pay the basic rate, they don’t get the conventional channels.

However, the background fact that subscribers don’t know is that BDUs are not paying anything to conventional broadcasters.

This has created a fundamentally inequitable situation.

BDUs and specialty services have access to both subscription revenues and advertising revenues to fund their businesses. And, they are enjoying tremendous financial success. BDUs have a gross operating profit (EBITDA) of 21 per cent while specialty and pay services have a gross operating profit of 26 per cent.

Conventional broadcasters, on the other hand, are handicapped since they are denied access to subscription revenues. Given the changing financial model for the industry, it should come as no surprise that – in contrast to BDUs and specialty services – the financial position of conventional broadcasters has been in decline. Gross operating profit for these broadcasters is 9 per cent, and their revenues are not growing.

There is no policy justification for this unequal treatment of conventional broadcasters. This inequity has been a problem in principle for many years. Now, it has become a major problem in practice as well.

Conventional broadcasters are no longer able to properly finance their operations on the basis of advertising alone. The fragmentation of audiences and a shift of advertising dollars to new platforms like the Internet have slowed the annual growth in advertising revenues for conventional television in Canada to -0.4 per cent. It is predicted that this decline in growth will continue and should soon become negative.

At the same time, costs are going up, not down. The result is an unsustainable situation. If changes are not made, something will have to give.

Meanwhile, we have to remember that conventional broadcasters are the cornerstone of the Canadian broadcasting system. They produce and air more original Canadian programming than any other segment of the industry.

Given that Canadian content is one of the two overarching objectives of the Broadcasting Act, in our view it is inconceivable that the Commission would not take steps to fix the current situation.

We believe the Commission must create a level playing field for all players by granting conventional broadcasters access to subscription revenues.

Our proposal is quite simple and is based on the approach the Commission has used for decades with respect to specialty services.

At the time of its license renewal, a conventional broadcaster would submit a proposal for the per subscriber fee to be paid by the BDU to the broadcaster. This proposal would set out the financial basis for the fee and would be subject to scrutiny by the Commission and to comment by other parties.

Under our approach, the subscription revenues would be tied to specific Canadian programming activities of the broadcaster. This could involve the maintenance of existing levels of Canadian programming that are at risk from declining advertising, or the enhancement of programming levels to meet even higher Cancon requirements, especially in areas such as drama. We have included a detailed example of such a calculation in our February Reply and we would be happy to answer any questions you may have about our proposed approach.

We would like to emphasise that our proposal is aimed at leveling the playing field – and that means for CBC/Radio-Canada, as well as for private conventional broadcasters.

The Government and the CRTC have in the past required and encouraged the Corporation to implement a mixed financial model which involves heavy reliance on advertising revenues. Indeed in our 1987 license renewal, the Commission encouraged the Corporation to pursue advertising revenues with “all reasonable vigour”. The Commission subsequently endorsed the approach at the Corporation’s last license renewal in 2000. Consequently, CBC/Radio-Canada needs access to subscription revenues for exactly the same reasons as do private conventional broadcasters. There is no basis for handicapping the Corporation by excluding it from this revenue source.

Finally, we also recognise that the principle of a level playing field should be applied consistently. If conventional broadcasters are granted access to subscription revenues, then we believe it would be reasonable to grant BDUs access to new advertising opportunities on VOD and the community channel. In the case of VOD, this will, of course, require the consent and cooperation of the programming supplier. We are confident, however, that with these additional revenues in hand, there should be no need whatsoever for BDUs to raise subscriber rates.

Our proposal, then, achieves two things.

First, it remedies a long-standing inequity and establishes a level playing field by granting conventional broadcasters access to subscription revenues.

Second, it creates an opportunity for both supporting and enhancing the cornerstone role played by conventional broadcasters in the Canadian broadcasting system.

We believe our proposal is both principled and practical. It will benefit the system and prevent serious erosion in the quantity and quality of Canadian programming available to Canadians.

We believe it is a simple and clear choice.

Conclusion

Michel Tremblay:

Thank you, Richard.

As Richard says, we believe our proposal is simple, practical and principled.

Under our proposed approach, consumers would have greater choice, at lower cost, than ever before. And, at the same time, the central objectives of the Broadcasting Act would be achieved.

We believe this simple framework sets out the best way forward in the evolving and exciting broadcasting environment.

Thank you for giving us the opportunity to participate in this proceeding and to present these comments today. We would be happy to answer any questions you might have.

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