July 11, 2019 3 months 1 week ago

Canadian Specialty Services Report: CRTC filings show trends, and confounds, too

Some numbers truly unexpected as we break down the report on individual specialty services

INDEPENDENT CANADIAN SPECIALTY services are punching well above their weight when it comes to making and delivering Canadian content, despite the fact they live in a far lower margin world than those owned by vertically integrated companies.

Collectively, independent, or non-vertically-integrated specialty channels spent a whopping 59% of their revenue on Canadian content in 2018, far outpacing VI channels, which collectively spent 38% of revenues on Cancon in the 2018 broadcast year, which ended August 31st. These numbers are according to the CRTC’s 2018 Individual Discretionary and On-Demand Services Statistical and Financial Summaries released two weeks ago along with the Commission’s full 2018 Broadcasting Financial Summaries, which we reported on here.

The vertically integrated media companies are Bell Media, Rogers Media, Quebecor Media and Corus Entertainment. (Ed note: Despite the fact Corus is separate from Shaw Communications, the CRTC has always considered it affiliated with Shaw, since it is owned by the same family, so its channels are considered part of the VI services in this report.)

The independents are everyone else, such as DHX Media, Pelmorex, Super Channel, Blue Ant Media, Ethnic Channels Group, Channel Zero, OUTtv, Hollywood Suite, Fairchild, Asian Television Network, CBC’s specialties and others. The report does not reflect any foreign-owned services.

Also noteworthy when comparing VI and non-VI is that independents employ more people than VI specialties., with 2,497 total staff at the end of 2018, as compared to the 2,147 VI folks. As anyone who has been let go due to cutbacks, or seen friends lose their jobs, it won’t surprise anyone to know that employment in the sector is down collectively 20% over the past five years.

The actual dollars earned (by the channels and the staff) of course, are far smaller for the independents than for the VI specialties. In 2018, Canadian VI specialties brought in $3.055 billion in total revenue (subscriptions plus advertising), a 3.5% increase over 2017. Despite declining subscribers, recent rate increases and an uptick in the number of VI channels have rebuilt revenue lost in the past few years when the revenue line dipped below $3 billion in 2016 and 2017. In 2014, however, VI specialties brought in $3.088 billion in revenue.

VI Cancon spending came in at $1.16 billion in 2018, a decrease of 1.7% over 2017, but an increase of 5.4% since 2014. Operating margins for VI specialties were 30.5%, and pre-tax margins were 20.3%

This contrasts starkly with Independent specialties whose operating margin collectively was 7% in 2018, with a pre-tax margin of 2.9%. This is on total revenue of $892.4 million, down 11% from 2017. It would seem one of two things (or both) happened: While wholesale rates jumped up for VI specialties to offset declining subscribers, independents simply lost those subscribers, or endured rate decreases.

Non-VI specialties brought in $223.7 million in national ad revenue in 2018, or 3% less than Rogers Sportsnet did all by itself. We’ll get more into the sports channels below, however.

Independents still managed to spend over $526 million on Cancon in 2018, or close to half of what the VI specialties spent in total dollars.

Like we said. Punching way above their weight, despite the fact staff at independents make about $5,200/year less than employees of VI company specialties. The total number of VI and non-VI channels are nearly identical in 2018, with 85 VI channels and 84 non-VI channels. Recent years have not been kind to independents, however, because in 2014, there were 121 independent specialties.

While to us, VI versus non-VI is the main story in these numbers – and surely lends heavy credence to the theory that vertical integration isn’t exactly working – there are many other numbers and comparisons we found rather interesting. Read alllll the way down for a look at the biggest fish in this pond, the sports channels (and why Pierre Karl Péladeau is so darn agitated).

* Bell Media’s Animal Planet has just one, poor, overworked staffer, who apparently makes a good living though at $166,304. Actually, in an organization as big as Bell Media, Animal Planet falls under the portfolio of a number of people juggling a range of its TV channels and so these types of things – assigning certain costs to certain spreadsheet cells to satisfy CRTC filing requirements, which may not quite make sense – are not uncommon in this report, as we’ll see.

* This report also tracks the BDUs’ video on demand services and boy, have most of them taken a financial beating as content sources for consumers grow almost daily. For example, Access Communications (Saskatchewan) VOD revenue has dropped by 63.4% since 2014, and Bell Canada’s VOD revenue line fell 34% just since 2017. Other BDU VOD returns mostly show a similar plunge.

* Some of the ethnic services who report (many independents have to file only revenue and programming expenditures) are clearly struggling as their viewers turn away from traditional TV to other online sources of video (legal or illegal). ATN’s South Asian TV, for example, saw a 32% drop in revenue between just 2017 and 2018 while Fairchild has endured a 23% drop-off in revenue since 2014, concurrent with a 47% decrease in subscribers. It really does seem time to examine ethnic broadcasting policy, as some have demanded.

* Bell Media’s Bravo! seems to be holding strong in comparison to some of the other channels, having lost only 11.3% of its subscribers since 2014 (it was at 5.85 million subs at August 31, 2018), while boosting ad revenue 13.8% in the last year. Its operating margin is 51%. Makes one wonder if a rebrand is a good idea right now.

* Corus’ CMT could perhaps use a rebrand. Still nominally Country Music Television, but with all the America’s Funniest Home Videos, Frasier and Three’s Company in its schedule, and lack of anything looking like regular country music, it’s unclear what the channel is all about and viewers seem equally confused as CMT has lost 45% of its subs and 32% of its revenue since 2014. The channel lost money in 2018.

* There is another side to that coin, however, in Rogers Media’s OLN. Again, it used to stand for Outdoor Life Network and once aired cool nature series and specials like the Tour de France, but now features cheap fare like Fail Army, Storage Wars and Impractical Jokers (it’s quite literally just those three shows and infomercials now). It’s wildly profitable, however with an operating margin of 87.5% on $16.5 million in revenue in 2018. Its programming expenses have been slashed by over 95% since 2014 to $648,050 in 2018, but the channel’s subscriber count has only dropped 19.5% to 4.18 million Canadians.

* Two Canals are facing tough waters at the moment. Bell Media’s French language science channel Canal D and lifestyle specialty Canal Vie, have each seen revenues fall 28% to $31.7 million and $34.4 million, respectively, since 2014. Sub numbers at both have seen dips of over 17% each in the same time period.

* Non-VI Blue Ant Media has put together an attractive package of channels which appear to be resonating with consumers and carriers. Virtually all of its channels are either stable or showing growth in revenue, although not all of its channels have to file detailed returns with the Commission.

* CBC is not immune to bad news as its primary specialty, CBC News Network, posted a pre-tax loss of $3.4 million in 2018, on revenues of $80.3 million (down 5% from 2017). Its primary blow came from a loss of a million subscribers over the past two years, leaving it with 9.82 million subs at the end of August 2018. Back in 2014, CBC NN earned a $10.2 million pre-tax profit on $90 million in revenues and 11.3 million subscribers. It’s subscriber hit is likely from carriers moving it away from basic, where it lived for many years, to tiers.

* Over to an independent, LGBTQ+ channel OUTtv is entirely bucking the trends, adding subscribers of late so that it counted 1.015 million in 2018, a 10% increase from 2017. Revenue rose 14% in the past year, too, but still off its historic highs. However, that success means more spending on content in the past two years, and the channel recorded a $1.3 million loss in 2018. Good thing OUTtv is one of the successful outliers, going international in ways VI specialties can only dream.

* With some of the channels, readers of the report can see just where rate increases kicked in, like in 2016 when Crave (formerly TMN) logged a 39% increase in revenue. It’s since ticked up another 8.3% to $181.2 million in 2018 on 1.76 million subscribers (off of its 1.94 million high in 2016, but well above the 1.15 million of 2014). It’s a pretty safe bet Game of Thrones was very helpful there. It’s important to note that while the TV channel shares the same name as the online portal, these numbers are for traditional TV Crave subscribers only.

* The various Disney channels now owned by Corus do quite well for the company in terms of revenue and subscribers, if not yet for profitability. It shows the power of that particular brand. Together, Disney Channel (4.2M subs), Disney Junior (3.3M subs) and Disney XD (3.1M subs) earned Corus over $48 million in revenue, but lost $1.3 million. The 2018 broadcast year was the first year Corus’ Disney channels filed these reports.

* That Disney power is shown inversely with DHX Media’s Family Channel and Family CHRGD, whose subscribers and revenue have fallen off with the loss of that powerful brand. One hopes Corus hangs onto a lot that content when the entertainment behemoth launches its Disney+ OTT service later this year.

* Rogers’ licenced brands FX and FXX have also been bucking subscriber trends, what with popular franchises like American Horror Story, It’s Always Sunny in Philadelphia and Atlanta on the schedules (along with loads of Modern Family reruns). FX had 3.96 million subscribers at the end of August 2018, a 3.8% increase over 2017 and essentially flat compared to 2014, but off a high of $4.6 million in 2015. FXX had 2.95 million subs in 2018, an increase of 71.5% over the prior year, as Bell TV and other carriers added the channel to its lineup. This successful execution is at risk because these are also brand licences whose future are up in the air in Canada as Disney decides what to do with the Fox assets (including the FX and FXX brands) it purchased earlier this year.

* Corus’ popular renovation, gardening and lifestyle channel HGTV brings in a ton of ad revenue, far outstripping its subscriber revenue (similar to another strong Corus staple, Food Network). HGTV brought in $50 million in ad revenue in 2018, well above its $20 million in sub revenue, even as its sub count dwindles by 3-4% each year, not unlike other mature specialties.

* Owning brands for young folks doesn’t pay like it used to. Bell Media’s MTV Canada turned in a $7.4 million loss in 2018 and has posted losses in four of the past five years. Bell’s Much has seen a loss of 2 million subscribers since 2014 and Bell booked a $64 million adjustment on the value of the channel in 2018, meaning Much lost $55 million in 2018. It’s not quite as bad at other youth channels like Vrak and YTV, but the latter was once in every home in Canada and has seen its subscriptions drop by 35% since 2014.

* Remember at the top we mentioned that some odd numbers crop up. Here’s an example. Back in 2014 when Teletoon was owned by Astral and Corus, the channel counted 18 employees each earning just over $84,000 per year. However, when Corus took it over, that employee count jumped to 91, but without a corresponding increase in remuneration, so the report shows an average salary of $20,000 in 2015. That has only shifted to 60 employees earning an average of $43,000 each in 2018. We asked Corus for an explanation and it essentially has to do with an accounting allocation of people and assets as it absorbed Teletoon. Added a company spokesperson: “Headcount that gets reported on our specialty channels are allocated resources. We seldom have dedicated staff working at the specific specialty channel level. Therefore, the monetary figures... would not reflect actual staff salaries.” This applies to all companies, VI or non-VI, save for the ones who operate single channels.

* Remember Viceland? Rogers former CEO Guy Laurence should have run away from Vice’s Shane Smith when he came looking for investors and just kept Bio, which wasn’t a great channel, but it didn’t lose $34 million in any year. While Viceland, which replaced Bio, didn’t actually drop many subscribers as compared to when it was Bio (Viceland had 2 million subs when it was shuttered in 2018, according to the CRTC report), the wholesale fees paid by BDUs fell off a cliff from 2017 to 2018 as carriers moved it to package it differently than Bio so subscriber revenue dropped by 30% in a year to $3 million. Add a $30 million charge to close the channel down in 2018 (maybe partly a write-off of part of the ill-advised $100 million investment Rogers made in Vice in 2014) and it’s clear what a bad idea that move turned into.

* From the “it’s good to be a must-carry” department comes TV5-Unis. The French language 9(1)(h) channel has 10.4 million customers and earned $39 million in revenue in 2018, an increase of 5.5% over 2017. It spent a ton on Cancon, $19.6 million in 2018, however.

Sports may rule, but subscribers are still slipping

THE VARIOUS Rogers Sportsnets (the regional channels plus 360 and One), along with Bell Media’s TSN and RDS altogether took in $1.357 billion in revenue in 2018 ($713.9 million for the Sportsnets and $643.5 million for Bell’s sports channels), which is 34.3% of the total specialty service revenue earned by all Canadian companies in 2018, VI and non-VI. It’s 44.4% of the total VI specialty channel revenue. Sportsnet’s numbers also include the ad dollars sold on CBC for Hockey Night in Canada broadcasts.

Those are single-digit percentage increases in revenue, form 2017-18, but reaching back further, to the beginning of Rogers’ 12-year $5.2 billion NHL deal, is enlightening. There, you can see increases in ad and subscriber revenue, where Sportsnet rode a $145% increase in ad sales in 2016 and a 45% increase in subscriber fees since 2014 to grow from a $312 million property (in revenue) to a $575 million one. Imagine if the Toronto Maple Leafs could get out of the first round of the playoffs.

TSN’s programming costs rose by almost $50 million to $351 million in 2018 over 2017, but the company declined to identify which sports rights drove that increase in a year. That more than halved its profitability in 2018, coming in at $45.3 million. Sportsnet’s pre-tax profit line in 2018 was $130.5 million (just the main regionals), a 22.6% increase over 2017.

When media company owners say sports matters – and still matters a lot, they aren’t kidding. TSN and Sportsnet are earning, with their main brands (the Sportsnet regional channels and TSN 1-5), about $43/subscriber/year each, not counting ad dollars. As a comparison, Bell Media’s Space, a popular, profitable brand, pulls in about $3.77 per subscriber per year, just on subscriber fees, according to the report.

When it comes to advertising, however, TSN and Sportsnet out earn other specialties by an enormous amount. Sportsnet pulled in $230 million in ad revenue in 2018 (not counting Sportsnet 360, World or One) while TSN raked in $138.4 million.

That doesn’t mean all is well, however. Sportsnet had 7.156 million subscribers in 2018, a good number, the second-best among all non-must-carry specialties. Those numbers fell 4.7% since 2017 and 13.7% since 2014. TSN counted 7.8 million subscribers in 2018, which is 4% lower than 2017 and 13.8% fewer than 2014.

The success of certain teams seems to matter, too. Sportsnet One, which airs a good chunk of exclusive regular season Toronto Blue Jays games, was at 6.1 million subscribers at August 31, 2018, off its 2015 high of 6.73 million subs – which also happened to be the year the Toronto Blue Jays made a fun, strong playoff run where the highlight was Jose Bautista’s bat-flip game. That particular game wasn’t limited to SNOne, but the strength of the team that year likely drove subscribers to that channel.

Adding those subs back to SNOne would earn Rogers about $7.7 million, which is just about what the company is paying Marcus Stroman to pitch this season, according to Baseball Prospectus.

FINALLY, THESE BARE numbers reveal just why Quebecor Media CEO Pierre Karl Péladeau is at the end of his rope with TVA Sports and is fighting Bell so hard. Since 2014, the Quebecor Media channel has lost a total of $135 million, while Bell’s RDS has earned $131 million pre-tax profit in that time.

Granted, TVA Sports was new in 2011 and RDS was born in 1989 and part of basic cable for a long time, but the Quebecor channel has sub-licenced Rogers’ NHL Hockey rights for the French market and it was assumed that would boost the channel’s fortunes. It has not.

TVA Sports revenue fell by 9% in 2018 as compared to 2017, thanks to a 21% drop in ad revenue to $18 million and a 6.6% drop in subscriber revenues to $71.3 million. Péladeau has blamed the channel’s subscriber losses (it’s down 20% since 2015) on Bell TV repackaging and has fought in front of the CRTC and now, in the courts.

At the same time, RDS has remained stable by comparison, even though it is shrinking, too. Subscribers have dropped to 2.54 million in 2018 from a high of 3.2 million five years ago. Annual revenue came in at $160.5 million in 2018, a drop of 5.7% in a year. It is still profitable, earning a 9% operating margin.

What do you think of the numbers we picked to highlight? The full report can be found here. Please let us know if you think we missed anything good in the space below or at editorial@cartt.ca.