WITH THE ENTIRE TV industry in turmoil, all of us supposedly pondering structural reform while audience fragmentation proliferates as the economy sputters and advertising budgets shrivel, everyone is wondering what Canadian television should look like in the 21st century.
(Ed Note: We first ran the following piece on March 16th and now that the OTA license renewal hearing is complete – and having been disappointed by the dearth of new ideas over those many, many days – we decided to take a page out of the OTA business model and rerun it. To us, this is the type of dramatic re-thinking of the Canadian industry that more of us should be undertaking, rather than repeating illogical mantras like: "consumers would disconnect their cable en masse if faced with any new fee"; or that "really, we want to save local content even though we’re laying hundreds of people off and slashing the number of hours produced.")
Randal Rudniski is director, equity research for media and telecom with Credit Suisse and in a recent e-mail forwarded to Cartt.ca by a third party, he sets out a new regulatory model for the conventional television market. Normally, the analysts we chat with or overhear during quarterly company conference calls write about profit and loss and growth and potential – and pontificate irregularly about the overall structure of the regulated electronic media market in Canada.
Some are better than others in knowing and describing the industry, but Rudniski’s model is pretty fleshed out. We had no idea financial analysts thought this deeply about industry regs, but here goes.
Now Credit Suisse policy is that their analysts aren’t allowed to be quoted in the press, but we did talk with him just to verify these are his ideas. He wasn’t altogether pleased his e-mail leaked out to the media, but agreed public discourse is a good thing and good on him for thinking originally.
(Ed note: And before any broadcasters out there reading this get all huffy about an analyst telling you what to do, remember all broadcasters in Canada are saying the same thing: The Model Is Broken – but aren’t offering much of a fix beyond asking for a fee for carriage, so keep an open mind as you read.)
Rudniski (and others, of course) believes the fundamental problem with conventional TV in Canada is that the system does not allow local broadcasters to have local programming rights. That means many non-local networks or sister networks broadcast hours upon hours of programming in competition, when compared to American markets.
So, for example, we end up with popular fare like Grey’s Anatomy on multiple channels at the same time, or slightly different times on the same evening. It’s bewildering to consumers, a waste of bandwidth on cable and satellite and dilutive to the investments Canadian broadcasters have made in U.S. programming. (Btw, we can call it “foreign” programming all we want, but most of what’s brought in is made-in-America.)
Cartt.ca is in Hamilton and with my Cogeco Cable subscription, I can see five Canwest channels: the local E!-branded station (formerly CHCH); Global Television (Toronto); Global Maritimes; Global Edmonton; and Global Vancouver. On the CTV side, I can get CTV Toronto and A Channel Barrie. But also CTV Kitchener, eastern CTV outlets ATV and ASN, CTV Calgary and CTV Vancouver. I also get multiple Citytvs and CBCs.
And that doesn’t count the myriad American local and distant signals my cable subscription enables – much of which, of course, carries the same shows found on Global, CTV, E!, and A.
So many channels – but with so much of the same programming, so little true, additional, choice.
“The U.S. system is heavily influenced by local rights. As is well documented, Buffalo supports the four local network affiliates while Hamilton cannot support even one local OTA service. Why? Because in Buffalo cable subscribers have access to the local ABC, NBC, CBS and Fox affiliate, plus PBS and CW, plus ironically CBC and CTV…. And that’s basically it. There are no Detroit, Boston, Chicago, Atlanta, Rochester, etc. stations distributed in Buffalo.
“In essence in the United States, the local network affiliate has the programming and is protected from other networks in its local market,” writes Rudniski.
In Canada, our model has allowed much choice on the dial, if not so much choice in actual programming, to the detriment of any sort of local broadcast rights.
Using CH Hamilton as an example, Rudniski writes: “How can CHCH ever be profitable when it faces competition in its local market from so many non-local services, which in most cases are networks of far greater scale and therefore can support the desirable U.S. shows while CHCH cannot? In the current model I believe CH will never again be profitable.”
So, what to do?
Retrench and concentrate on local news. Oh, and some serious regulatory change that involves a new fee for consumers (but not for every broadcaster).
Rudniski advocates a two-tier private broadcasting model to go with some changes to public broadcasting too.
He calls his first private broadcasting tier Local OTA, which would be subject to the following conditions and get the following benefits:
* 20 hours of local programming per week.
* A prohibition against carrying current foreign programming (meaning local OTAs could have American repeats, as new as a year after their debut, but not brand new, uber-expensive, U.S. fare)
* Receive a $1 to $2 per sub carriage fee in their local market as compensation for having their local rights infringed upon (Rudniski recognizes it would be impossible to shut out the other local ‘casters signals at this point, but as for distant OTA signals, read on…)
* Local OTAs must meet the current Cancon rules
* They would maintain mandatory BDU carriage in their local market, including satellite BDUs. “We can not have a local OTA market if households can not view the local signal,” writes Rudniski.
* Priority programming for local OTAs is local stuff. Drama requirements for this tier would be eliminated.
* The local programming improvement fund announced in 2008 for local news would have to be made larger.
“The hope is that by providing an alternative revenue model (carriage fee in compensation for the lack of local rights) that stations such as CHCH and CKVR leave the quasi-national model of buying U.S. shows and re-focus on truly local programming,” writes Rudniski.
“Advertising revenues for the local OTA would drop significantly relative to the levels they generate today although the cost of U.S. programming and Canadian drama programming would drop significantly and maybe more. Priority programming for local OTA would be local programming. So the hope is with carriage fee and effective funding support and lower programming expenses their profitability would improve.”
This system would likely mean significant ownership changes since both CanWest and CTV would probably not want to be in the local OTA business, says Rudniski. In fact, with E! on the block and A Channel just dropping 118 people through the cancellation of several local programs, CTV and Canwest have already signaled local OTA is a business in which they do not wish to partake.
Some in Hamilton say they want to buy CH even though Rudniski and others believe “it can never more be profitable,” he writes.
“So there is a demand for local programming but the overall obligations are too high and too broad in the current system relative to stations ability to generate revenues. If ownership change occurs, the 10% benefits test should be dropped, although prices paid would likely be nominal anyway. But we should be encouraging ownership diversity not punishing it. In my system, we should see incentive to be local, more resources for local, more local ownership therefore more diversity of ownership, diversity of editorial voices and more local programming,” he writes.
“They key is providing enough incentive to make local OTA viable. That’s why the carriage fee needs to be big although not so big to be onerous to the entire system. And that’s why a production fund such as a bigger LPIF is also needed.
Rudniski’s second OTA tier would be National OTA, who would be subject to the following conditions, and get the following benefits:
* National networks have a prescribed minimum amount of news programming (10 hours per week or other such level), but no local news requirement;
* Permitted to broadcast non Canadian programming;
* National networks must meet the current Cancon rules and while the priority programming rules would be maintained, spending ratios should not be implemented.
* National networks receive no carriage fee since they receive favourable distribution across Canada and are permitted to infringe upon the local rights of local OTA broadcasters. “In fact they should pay a portion of the local OTA carriage fee; after all it is their networks that create the greatest competition for the local OTA broadcasters,” writes Rudniski.
* Mandatory carriage rights on BDU systems. “We cant permit BDUs to drop them because we have the U.S. signals to replace them. That’s why providing them with negotiation rights for carriage is meaningless … because the BDUs will always have the threat of replacing them with the U.S. affiliates,” wrote Rudniski.
* No restriction on soliciting local advertising. If a local advertiser wants to pay a big price for an ad on a network then they should be allowed to. Ad rates on networks are so high they wouldn’t effectively compete against any local OTA broadcaster anyway; and if National Networks pay a part of the local OTA carriage fee then they are essentially paying local OTA for such rights.
* BDUs must distribute the nearest geographic signal of each national network in local markets, but distant Canadian and US signals should be abolished (i.e. more than one Global or CTV signal in a local market). “This would create satellite capacity to distribute local services in all local markets and remove a layer of fragmentation from the system,” writes Rudniski.
(Ed note: It might also spur sales of digital video recorders, if Eastern viewers can no longer time-shift by tuning into the later, western feed, for a show, for example.)
He calls fragmentation here, as compared to the U.S. market, “substantial and unnecessary,” and an ongoing problem. Conventional TV Stateside has satellite, specialty and Internet to compete against, too, but they don’t have to deal with more than a dozen other OTA signals. Distribution of U.S. signals and of non local services in a local market can’t change. It’s too late for that, says Rudniski. But, eliminating the distribution of distant signals should help the national networks, under this model, he believes.
“Under these rules the big national networks would not receive any direct monetary aid, although as national networks they would have lower local programming requirements. However they should benefit if the incentives are great enough that the troubled mid-tier networks convert to local OTA status and thereby no longer compete for U.S. programming. Local OTA services would also likely lose some of their national revenues, which could also benefit the national networks,” writes Rudniski.
Rudniski also added that Global Television’s EBITDA margin is projected to be 9% in 2010. “That’s actually not so bad given that the inherent risk within their business is fairly low – i.e. they don’t have a lot of risk capital at stake since they don’t make big programming bets that could turn out badly. They simply largely rent U.S. shows,” he noted.
“However, the regulatory rules need to be re-shaped to re-define the rights and obligations of the system while accommodating the overall level of fragmentation and the fact that we have too many local OTA services with too few rights with no prospect for profits in the current system, and national broadcasters with too high costs and too high fragmentation.”
Rudniski’s third OTA tier, the public broadcasting one, also offers some changes from the norm, such as:
* Public broadcasters are not permitted to broadcast non Canadian programming;
* Public broadcasters are not permitted to broadcast national sporting events (although Rudniski said he’d grandfather in Hockey Night In Canada, just on the basis of tradition). “In my view its completely irresponsible for our system to allow Canadian taxpayer funding to permit the CBC to compete against the big networks in sports and U.S. programming. Those are big ticket items for the networks. And it just raises the cost (and raises the losses) in our system,” he writes.
* Priority programming rules in place for Canadian drama.
* Public broadcasters are still permitted to sell advertising (all of them, not just CBC).
Without some sort of change – like what Rudniski has outlined in his e-mail – market forces will see most of the Citytv, E! and A networks shut down within the next decade.
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“Overall my system is designed to re-create the local OTA broadcast system. In doing so it would hopefully foster a creative, independent and maybe even profitable local OTA system, and to remove a layer of competition for the national networks, while maintaining viewer choice and trying to achieve the objectives of the Broadcasting Act.”
What do YOU think of this? Let us know at editorial@cartt.ca!
