TORONTO – The four new pay television applications before the CRTC offer questionable customer value, will increase churn and hammer the bottom lines and the share prices of the two incumbent license-holders, says a research report published this week by investment bank Credit Suisse First Boston.
The report, entitled “A Luxury No One Can Afford,” says the four new pay services misinterpret the state of the Canadian pay system (which it characterized as “gold plated”) versus the American system and that any new applicant would find it very tough to stimulate high penetration levels.
The pay TV space in Canada is currently occupied by two regional monopolies, Corus Entertainment’s Movie Central in the west and Astral Media’s The Movie Network in the east.
“The (Canadian) system has produced ‘gold plated’ pay television services that feature the vast majority (80%-85% by our calculation) of the top grossing Hollywood movies and made-for-pay series,” says the report, whose lead author is analyst Randall Rudniski. “Accompanying this robust programming schedule is relatively high wholesale fees ($8-$9 per month) and retail fees ($16-$22 per month).”
Not to mention healthy margins going to the cable and satellite operators delivering the services.
“In contrast, the pay television sector in the United States contains several participants per market (HBO, Showtime, Starz, etc.). Retail rates are $9-$12 per month and penetration rates of pay services is 50% of television households versus 20% in Canada. In the U.S. half of pay television customers subscribe to multiple services since individual services at most feature 40% of the top grossing Hollywood movies. This shows that the higher penetration rate in the U.S. is not attributable to better individual services, but rather lower retail rates,” it reads.
The CSFB report figures its likely the Commission will license one or more of the applicants, with the most likely license going to Spotlight TV. However, it deems unlikely that the applicants request for must-carry status will be approved by the CRTC. What’s up in the air though, is whether or not the Commission will write any new rules about the exclusive purchase of foreign content by Canadian pay channels, new or incumbents.
All of the new applicants have asked for must-carry status so that they’ll be able to maximize penetration and subscriber flow. Rudniski says he’s 65% sure the Commission will license one or more while also refusing the must-carry demand for all of them. “In this scenario, we would expect approvals for Spotlight (which may go forward with its service owing to its potential affiliation with Bell Canada), Allarco (which would refrain from commercial launch), and BOOMTV (which is the most innovative and complementary of the pay applications regarding programming). Of the four proposed services, The Canadian Film Channel is the least likely to be licensed in any scenario owing to its indefensible revenue model,” it says.
Spotlight TV is a partnership between former Alliance Atlantis executive George Burger and an investment company backed by Insight Media owner Lawrence Tanenbaum. Bell ExpressVu also supports the application and holds an option to buy 15% of the company. Spotlight has $130 million backing its potential launch.
“Given its ownership backing, financial resources and detailed submission to the CRTC we consider Spotlight to have the greatest chance of the four applicants to receive a pay license. However, we are not convinced that its business plan is workable as submitted since we see limited capability for the service as proposed to stimulate overall pay television penetration owing to the availability of only modest incremental quality U.S. programming and to expected high retail rates for the service (due to its high wholesale rate and in order to prevent a re-pricing of the retail revenues collected by cable companies),” says the CSFB analysis.
The Allarco application is backed by former Superchannel owner Charles Allard while BOOMTV is a Quebecor application. “The application appears to be part of Quebecor’s strategy of buying programming for multiple viewing windows. The service would expand the variety of content available on pay television, however, it may find its subscriber targets difficult to achieve since its eclectic mix of programming (it would carry film, sports, dramatic programming and live events) may not have a strong appeal in any specific demographic,” reads the report.
The Canadian Film Channel application is from Channel Zero, operators of digi-nets Movieola and Silver Screen Classics. Its revenue model is lambasted by Rudniski. “TCFC proposes that, with mandatory carriage, it will distribute an all-Canadian channel to current and future pay television subscribers at no extra fee. TCFC proposes a unique revenue model: rather than collecting a subscriber fee it will collect 12.9% of the total revenues from the existing pay television services (representing roughly $48 million in 2004, or 52% of industry EBITDA). The 12.9% figure is stated as the number calculated to meet their commitment to broadcast 100% Canadian films,” says the report.
“In our view, this application has a low chance of being approved as the revenue model is poorly supported in its application. Furthermore, it would have no impact on competition in the industry, will not increase consumer choice, and could lead to an increase in the retail rate of pay television.”
Rudniski said new pay channels will likely have a universally negative impact, listing five potential outcomes, depending on the Commission decision (which will probably come around March 2006):
1. Higher programming fees for individual titles – A 10% increase in programming expenses is equivalent to $10 million for Astral (6% of consolidated EBITDA) and $4 million for Corus (2% of consolidated EBITDA).
2. Higher advertising expenses to differentiate offerings – A 10% increase in sales and promotion expenses is equivalent to $1 million for Astral (1% of consolidated EBITDA) and $0.5 million for Corus (0% of consolidated EBITDA).
3. Higher churn rates – Since quality programming would be distributed among more operators, each operator would have access to a smaller portion of the popular content. The implication is a potentially weaker program schedule and a likelihood of increasing customer churn.
4. Downward pressure on wholesale and retail fees – If foreign content agreements were available on an exclusive basis, programming line-ups of individual services would be less robust than at present. This could produce high churn rates unless retail and wholesale fees are reduced in compensation.
5. Pressure to consolidate – given the scale advantages of the new entrant there should be increasing pressure for the two regional operators to co-ordinate or consolidate operations and programming.
The applicants, and the objectors, go before the Commission on October 24th.
– Greg O’Brien
