THE INITIAL CALL FOR THE REVIEW of the broadcasting system and the launch of the Let’s Talk TV consultation process was met with both skepticism and guarded optimism in the industry.
In many ways the industry had this coming. The price for cable television has increased dramatically over the past few decades, outpacing rises in price of most household commodities. The associated explosion in the number of channels, combined with the rise in price has created what behavioral economists call a “correlation effect”. This causes people to assume that the number of channels is the main cause of the price increase; regardless of the fact only a few channels have actually affected the price – mainly sports services.
In addition, the practice of vertically integrated companies repeating programs across multiple channels has created a widespread impression that consumers are paying more for a lot of the same content.
There are industry problems as well. The threat posed by Netflix and the other over the top services (“OTTs”) is reaching a tipping point. Meanwhile, vertical integration is proving every bit as challenging as skeptics had predicted. Maybe this review would be a chance to come up with some real solutions that could benefit the Canadian public and at the same time move the industry into the future.
Unfortunately, it quickly became clear that this would not be a broad inquiry, as the Government appeared to have reached a solution before the hearing even started: pick and pay. It was even more disturbing when it became clear that the specific policy fix was not made after careful deliberation, but because it was a good talking point for the upcoming 2015 election. Why else did the solution precede the inquiry?
The impact on the hearing was predictable. The presentations were guarded and defensive, with most of the industry demanding new rules to protect their businesses from vertical integration, the OTTs and the coming pick and pay world. Very little was said about how to adjust the entire system to meet these challenges. The Commission showed leadership, as did some participants, but the overall tenor was one of self-defense and skepticism.
Regardless, there was great value in the overall process and many important things were said. Here is my list of the five key takeaways that – all for different reasons – defined the hearing and the problems facing the industry.
1. Everything is a nail when you only have a hammer
There was a time when regulators understood that for markets to deliver positive benefits, we need government intervention; regulation to manage externalities and to curb predatory and extractive practices and the accumulation of monopoly/oligarchy power.
The current broadcasting system is rife with anti-competitive activities and it should be fertile ground for the Competition Bureau to make an inquiry. So it came as surprise to find out that this Competition Bureau is all about ‘unfettered markets’ and all that is ‘efficient’. The winner of least contextual and most ideological presentation goes to Ms. Duplantis, on behalf of the Competition Bureau, delivering the Government’s message that consumer choice alone should drive all future regulation.
“The blunt application of this ideology would clearly undermine the purposes and values of the Broadcasting Act.”
The blunt application of this ideology would clearly undermine the purposes and values of the Broadcasting Act. It fails to take into account the differences in conditions of license and entirely misses the fact that the regulations give control of the consumer relationship to the BDUs. Absent regulation, a competitive market cannot exist where one party is given the consumer relationship.
Moreover, in the real world, unfettered markets create less real choice and eliminate competition. They create an “illusion of choice” where different brands simply hide the fact that most are owned or controlled by several large corporate entities, something most Canadians do not know about our television industry. The fact that Canada has one the highest corporate concentrations of media in the world should be the Competition Bureau’s greatest embarrassment.
The lack of context was exposed when vice-chair Tom Pentefountas asked: “Would it be appropriate in a vertically integrated world that additional protections be offered to formerly category A-protected genres that are independent and that are not owned by VI entities?” The Competition Bureau clearly had not considered the issue or why, in a national system, some services may be licensed to serve smaller segments of the society.
Their follow up response was predictable, declaring that consumer choice was the only value worth considering. The ramifications are clear: culture does not matter; Canadian content does not matter. Efficient markets should determine all economic regulations (and never mind the financial crash of 2008). Milton Friedman would have been proud, although even Freidman believed “there is no such thing as a free lunch”.
Then again, he lived before the age of Netflix.
2. Size matters, but not enough
No presentation matched the size, scope and depth of the presentation of Bell; as would be expected of the largest broadcasting group in the country. It was an impressive display, covering a plethora of complex issues. Bell Media president Kevin Crull did an excellent job and should be applauded for his candor. Two of Mr. Crull’s comments stood out for their educational value.
The first lesson is that size matters – but only to a point. Vertical integration has its limits. Bell Media is the multi-headed hydra of the system, with 37 channels operated by an extremely competent team of professionals. So it was surprising when Mr. Crull admitted that several Bell Media channels would probably soon be shuttered, as they lacked a viable audience. One specifically mentioned was Book TV – a perennial industry whipping boy – as it maintains a high profitability (due to ownership market power) but low ratings (due to neglect), and thereby exposes both the flaw and the beneficial limits of vertical integration.
Mr. Crull’s second key comment was an important statement on the size of the external threat from OTTs. One of CTV’s key fall acquisitions is the series, Gotham, which promises to be a hit. The cost is confidential but will likely fall in the range of $200K to $500K per telecast for the first-run Canadian broadcast rights; a considerable investment in just one program. Mr. Crull noted that Netflix had acquired Gotham’s worldwide rights for the next release window for more than $4 million per episode. This puts extreme pressure on Bell to quickly monetize its investment and potentially diminishes its value as people may wait to see the show on Netflix.
“Perhaps the value of sports has finally reached its limit.”
A buyer like Netflix that has a multi-country reach has more buying power than a single country buyer – regardless of size. What is new is that now Netflix is even putting pressure on first-run, premium programming. Global scale beats national, which is a problem even when you are as big as Bell.
3. Let’s play ball
Everyone in the business knows that the cost of sports has become one of the major reasons for the dramatic price increase for cable in the past few years. The question on everyone’s mind is how many people would subscribe to the sports services if they were not part of the basic package. This question was answered by Telus, as they are the only major carrier that does not carry either of the two major sports services as part of their basic package.
The answer: 50% of Telus’s subscribers take the sports package. It appears Telus is making the right packaging decisions and half of the consumers can be saved from the high cost of sports in the basic package. This certainly means that sports services should not be part of a consumer-friendly skinny basic. Rogers and Bell will no doubt take issue with this, but the Commission may look south of the border at the current Los Angeles Dodgers situation. Perhaps the value of sports has finally reached its limit.
4. The external threat
The best was saved for last when Netflix’s representative, Corie Wright, showed up and was subjected to an entertaining sparring match with the chair. The event sent CPAC ratings through the roof and remained the talk of the industry for days. The saga continues with Netflix’s non-compliance with the Commission’s order, resulting in their evidence being expunged from the public record.
“In other words, ‘we have your back no matter what, Netflix’.”
These extraordinary events were directly related to the continued external influence of the federal government. When successive presenters suggested that the Commission impose a “Netflix tax”, the Minister of Heritage, Shelly Glover, sent out an unprecedented tweet saying: “We will not allow any new regulations or taxes on internet video – we will reject a Netflix and Google tax.” In other words, “we have your back no matter what, Netflix (and Google)”.
This was an amazing statement made during a public hearing before an administrative tribunal that is supposed to be operating with autonomy. It is the best example of how the government’s desire for a specific outcome limited this hearing and backed the Commission into a corner. Whatever one thinks of the outcome, there is no doubt this blunted the scope of the inquiry to the disservice of all.
5. The tonic
After the conclusion of the hearings I attended the CCSA Conference in Banff. It was a welcome respite from the proceedings. The CCSA includes a wonderful mix of entrepreneurs and community organizations, which makes the conference warm and casual. Mr. Pentefountas, arrived and delivered a well-crafted and sincere speech that spoke to the importance of the smaller BDUs and assured them of a future. However everyone remains concerned.
“We all worry that our businesses lack the resources to fight a two front conflict between vertical integration and the external threat posed by the OTTs.”
The CCSA members remind me of the independent broadcasters in that they are focused on a small but vital part of the Canadian mosaic. We are the industry’s farmer’s market as opposed to the VI big-box superstore. We share the commonality that if we were gone tomorrow, our customers would sorely miss us. Vision TV, OUTtv and APTN share solidarity with Access Communications, Novus and Coop de cablo de l’arriere-pays. We all worry that our businesses lack the resources to fight a two front conflict between vertical integration and the external threat posed by the OTTs.
One of the key speakers at the hearing was New York-based economist Laura Martin, CFA. Ms. Martin delivered a sensational lecture on consumer choice in the television sector, where she passionately and succinctly defended the value of bundled television to the consumer. She explained how a bundled system creates both internal efficiencies and the opportunity to have the programming subsidized by advertising. Unbundling would destroy this value and increase the cost of programming, along with pushing out niche and smaller players.
She also reminded us that the OTTs are a long way from working themselves. YouTube is very popular but it has yet to spawn any real hits and does not yet have a sustainable content creation ecosystem. Meanwhile, the Death Star known as Netflix is still not profitable and remains under pressure to raise their subscription prices, with some analysts telling them to go to $20 per month. They will remain supported by venture capital so long as they are in high-growth mode, but there is always a day of reckoning when profitability will be required.
All of this should remind us that the future is far from clear and we should be cautious about imposing quick fix solutions based on an assumed future. We may find ourselves surprised that companies that we see today as infallible are failing tomorrow.
The end of the beginning
The Commission’s decision will come down in the New Year, probably prior to the February budget. It is assumed that the budget will be the launching platform for the next federal election in the fall of 2015. The government will get their wish and some form of pick and pay option will be incorporated within the system so that it can be said the consumer has won and that things will be better under a Conservative Government.
We can only hope that the Commission is wise enough to… keep the system from… ‘Kerplunking’.”
We can only hope that the Commission is wise enough to temper the Government’s pre-judgment with some thoughtful regulations and keep the system from collapsing – or as the Chair might say, “Kerplunking”.
What is clear is that we need more fresh ideas and less ideology if the Canadian system is to survive and evolve for the future. A market-only approach will eventually succumb to an over the top death for both broadcasters and BDUs.
It is well past the time that we get serious and start talking about what is good for the system and not just good for ourselves.
The concept of a broadcasting system that works for all Canadians, promotes Canadian stories and provides high paying jobs is not outdated. In fact, it is imperative in a world economy that values creativity as a competitive advantage, that Canada maintains a strong broadcasting system. Let’s make this hearing the start of this discussion and not the final word.
Brad Danks (right) is COO of OUTtv and adjunct professor of law at the University of Victoria.
