Opening Remarks of Rogers Communications Inc.
The following remarks were delivered at the November 16, 2009 CRTC Hearings by Rogers Communications.
Mr. Chairman, Members of the Commission:
Good afternoon, I am Ken Engelhart, Senior Vice President, Regulatory. Let me introduce our panel to you.
Seated to my left are: Phil Lind, Vice Chairman; Nadir Mohamed, President and CEO; Tony Viner, President, Rogers Media; and Leslie Sole, CEO, Television.
To my right are: David Purdy, Vice President, Video Product Management; and Pam Dinsmore, Vice President, Regulatory, Cable.
Seated at the table behind me, starting from your left, are: David Watt; Vice President, Regulatory, Telecom; Colette Watson, Vice President, Rogers Television; Robert Buchan, Counsel, Fasken Martineau; and Susan Wheeler, Vice President, Regulatory, Media.
Now I will begin our presentation.
Introduction
As a diversified Canadian communications and media company, Rogers is pleased to address the issues raised in Notice 2009-411. In our remarks today, we will discuss:
(1) Why Canada’s Broadcasters do not need U.S.-Style Signal Compensation;
(2) Why the Commission’s Proposals are so Different from the U.S. System;
(3) Why the Commission’s Proposals will not work in Canada; and
(4) Why a Well-Structured Group-Based Licensing Regime is Good for the Broadcasting System.
(1) Why Canada’s Broadcasters do not need U.S.-Style Signal Compensation
Canada’s conventional television sector is not in a state of crisis. As we pull out of the recession, advertisers will continue to spend increasing amounts on over-the-air television because those stations remain the best way to sell products and services to mass audiences. Rogers owns OTA television and we believe in it.
OTA stations already get well compensated by advertisers, with help from BDUs and governments. BDUs have built expensive ubiquitous networks which allow OTA broadcasters to monetize their advertising. The OTA broadcasters get mandatory carriage, the lowest channel positions on the cable dial, simultaneous substitution and exclusive access to their local television advertising markets.
In September, the Commission removed all limits on the amount of commercial advertising that can be aired on local television stations. This will further enhance the revenues of OTA broadcasters.
As well, each and every year, broadcasters, either directly or indirectly, receive a compensation package worth about $1 billion dollars. This includes a mix of federal and provincial tax credits, the simultaneous substitution initiative and payments from the programming funds, including the Canada Media and the Local Programming Improvement Funds. This compensation package doubles if we count the CBC’s annual subsidy from taxpayers.
Of course, there are some problems, and the Commission is very familiar with them. These are:
(i) overspending on U.S. programming;
(ii) fragmentation of audiences; and
(iii) the lack of DTH carriage.
The destructive overspending by CTV and Canwest on U.S. programming is well known. In the paper he prepared for the Commission, Peter Miller characterizes the bidding wars for popular U.S. shows as “irrational”. The numbers confirm Mr. Miller’s conclusion.
Growth in spending on U.S. programming by Canada’s English-language OTA broadcasters went from approximately $400 million in 2000 to over $700 million in 2008 – a 75% increase which outpaced revenue growth of 16% by almost 5 to 1.
This overspending was partly spurred by the Commission’s decision, over a decade ago, to remove Canadian Programming Expenditure requirements (or CPE) for OTA television broadcasters. Without any requirement to dedicate a specific portion of their revenues to Canadian programming, OTA broadcasters were incented to overspend in the U.S. In its group-based licensing proposal, the Commission has proposed to reinstitute a CPE requirement. This should act as a check on U.S. programming expenditures.
Fragmentation is well understood by everyone in the television business. The Commission licensed a huge number of specialty channels which compete with OTA broadcasters for audiences and advertisers. However, CTV and Canwest like to ignore that they own a majority of Canada’s most successful specialty services. As a result, their TV operations as a whole are very profitable – they do not need a bailout.
As Canwest CEO Leonard Asper put it recently:
“As I’ve mentioned, our television business alone generates hundreds of millions of dollars in operating profits, so we have a successful business”.
The Commission’s group-based licensing proposal, if implemented, will ameliorate the impact of fragmentation by allowing specialty and OTA services to share CPE and exhibition requirements.
The fragmentation caused by new digital media is also a concern, although to date, linear television tuning is not down. Let us not forget that digital media can also create new revenue opportunities such as VOD with new and refreshed ads, targeted advertising and online video services.
Finally, the growth of DTH subscribers over the past 10 years has had revenue implications for small market stations that are not carried by DTH distributors. When 40% of a station’s local audience are DTH subscribers, and DTH distributors are not carrying that local signal, this greatly reduces the station’s ability to sell commercial advertising. This is a continuing problem which the Commission should correct.
(2) Why the Commission’s Proposals are so Different from the US System;
Although the system is not broken, the Commission has proposed fixing it with a U.S.-style retransmission consent regime. However, the Commission’s fee proposal is very different from the U.S. model. Rogers knows this from experience, having owned and operated cable systems in the U.S. for many years, during which time we actually negotiated deals with U.S. broadcasters.
Under the U.S. system, OTA broadcasters must elect every three years whether they want mandatory carriage and no monthly fee, or negotiated carriage and a negotiated fee. In the U.S., the negotiations are market-driven and free. The FCC does not set the rate. It only ensures that the parties bargain in good faith. However, in Canada, market forces would not be a factor. All parties would be entitled to final offer arbitration and, ultimately, a Commission-set fee.
The compensation proposals being considered here today would lead to much higher payments in Canada for three reasons.
First, unlike in the U.S., no TV station would opt for “must carry”. They would all opt for a fee because they would continue to get “must carry” status.
Second, in the U.S., the stations do not want to remove their signals from a BDU’s line-up because they will lose revenue if they do so. This greatly reduces their demands for compensation. In Canada, stations would know that they can never be removed. Accordingly, there would be no reason for them to reduce their demands.
Finally, in the U.S., cable operators and television stations negotiate a whole range of issues which involve every aspect of their business relationships. Channel placement, carriage of specialty services, advertising by the cable operator on the television network, advertising by the network on the cable operator’s ad avails and other arrangements are all on the bargaining table. By agreeing to carry one or more specialty services, many cable operators avoid paying any fee for carriage. This is why we at Rogers avoided paying these fees when we were there.
Conversely, under the CTV and Commission proposals, the final offer arbitration would only involve the amount of cash to be paid. So, in Canada, cable operators would pay higher cash payments because they would not be allowed to roll in other “in-kind” elements into the compensation negotiation. All of the elements that work to lower the amount of the cash payments in the U.S. would not be present in Canada. As a result, the cash payments would be much higher.
The Commission distinguishes between the former fee for carriage proposal and the negotiation process before us today because in the former, the Commission sets the rate. However, under the current proposal, the Commission would also set the rate. The only difference is that it would do so after an arbitration hearing at the end of the process. This is nothing like the U.S. system and is simply fee for carriage by another name. The Commission and the OTA broadcasters need to decide whether they want negotiations or regulations. Regulated negotiations will not work.
(3) Why the Commission’s Proposals will not work in Canada
Policy Problems
Canadian BDUs face much higher costs imposed by regulation than American BDUs. As a result, if the burden of a cash signal compensation regime is added to the costs we already have, the total costs for Canadian BDUs would be much too high. If the OTA broadcasters want the U.S. retransmission regime adopted in Canada, we would need to do more than remove the possibility of an arbitration. We would need to eliminate all other support mechanisms currently in place and allow for the potential that certain local stations would not be carried. Although we are not recommending it, if the Commission removed all fund payments, rescinded all buy-through obligations, allowed cable to sell ads on local avails, removed access, genre protection and packaging rules for specialty services, and deregulated our VOD service, then we would accept a U.S.-style negotiated carriage and negotiated fee model. We prefer participating in the current Canadian system over the U.S. system, but in no case can we be expected to accept a new model made up of the most onerous parts of both systems.
The Commission has also raised the issue of signal protection in this proceeding. The current signal protection regime uses simultaneous substitution. This is the best way to protect program rights in a country where so many Canadians can obtain U.S. signals over the air. Any system involving blackouts of the U.S. 4 +1 signals would provoke a major consumer backlash. We have been distributing these signals for almost 50 years. Our customers expect to receive them as part of their basic cable package because, in many Canadian markets, they are available free over the air.
The Commission has proposed changing the signal protection regime by marrying it to signal compensation. The Notice proposes that it may require BDUs to drop U.S. 4+1 signals if a “negotiated” settlement on the value of local signals is not reached between BDUs and OTA broadcasters. This proposal would take a bad signal compensation regime and make it much worse. Signal compensation alone would drive viewers from the system. Forcing BDUs to drop U.S. 4+1 signals would incent even more Canadians to seek unregulated alternatives.
Another fundamental flaw in the Commission’s fee proposal is the preferential treatment DTH enjoys. As we said earlier, the major problem local OTA television stations have in Canada is not that cable operators carry them but that, too often, DTH distributors do not carry them. So, under the current proposal, cable operators would have to carry all stations and give them cash fees, while DTH distributors, if confronted by compensation demands, could simply walk away. That does not help small market television stations. And, it is unfair to cable distributors who, in carrying all, would have to subsidize all. The Commission’s proposal, therefore, cannot be fairly implemented unless DTH distributors are required to carry all local television signals. And frankly, if DTH was required to carry all local stations, it would remove a major problem that OTA television has, thereby eliminating the need for a signal compensation regime.
Consumer Problems
Adding the costs of a signal compensation regime to the costs of the fund and specialty service payments we already make would give distributors no choice but to raise prices. The negative impact on consumers and the system would be significant.
Raising rates with no added value would almost certainly cause large scale defections from the regulated system. Some customers would downgrade their cable or DTH packages. Some would vote with their feet, joining the millions of Canadians who already get their television programs from antennas, the Internet, or grey and black market satellite.
Make no mistake, the market for BDU services is vulnerable. A significant rate increase with no corresponding increase in value could lead to a tipping point. Once a sufficient number of viewers desert, the entire debate about the future of local television, as well as Canadian programs, becomes academic. The success of the Canadian broadcasting system has led many to believe that it is immune to the normal economic forces that affect all consumer markets. It is not.
Canadians like local television and want more of it, but surveys consistently indicate that over 80% of BDU subscribers are unwilling to pay more to receive it.
The Government itself voiced its own concerns about the consumer impact of the Commission’s proposed signal compensation regime when it issued the recent Order-in-Council directive to the Commission, asking it to report back to the Minister of Canadian Heritage, in particular, regarding the impact on consumers.
Legal Problems
As set out in the jointly commissioned legal opinion from the law firm Fasken Martineau that we filed as part of our evidence, a signal compensation regime would also create a new form of copyright which would exceed the Commission’s statutory authority. The Government of Canada has twice refused to create this copyright, and it has adopted the same policy position for the past 10 years in World Intellectual Property Organization (WIPO) negotiations on the same issue.
Most recently, the Standing Committee on Canadian Heritage did not support the concept of signal compensation and, in a separate opinion, the government members of that Committee strongly rejected any form of signal compensation for OTA broadcasters. For his part, the Minister of Canadian Heritage endorsed the Committee’s recommendations last month. In the U.S., the decision to impose a retransmission consent regime was a decision of the U.S. Congress, not the FCC. Sound public policy dictates that, should a similar regime be imposed in Canada, it should be decided by Parliament, not the CRTC.
There is also the concern that if a signal compensation regime were introduced in Canada that did not include payments to U.S. border broadcasters, it would inevitably lead to another 1970’s style “border broadcasting” war.
(4) Why a Well-Structured Group-Based Licensing Regime is Good for the Broadcasting System.
While the OTA sector is not in crisis, it has some well understood problems. However, the existing protections for OTA, the recent increase in advertising minutes, the LPIF, the easing of the recession and the Commission’s group-based licensing proposal will return the sector to health. Requiring DTH operators to carry all local stations would do more to help OTA stations than anything else. The signal compensation proposals, conversely, would create serious policy, consumer and legal problems.
The group-based licensing proposal, if properly introduced, could make a huge difference for OTA broadcasters. As the operators of the Citytv stations, we believe in the future of free over-the-air television. That’s why we are committed to building digital transmitters in all of our markets across Canada and that’s why we continue to invest heavily in our stations. We also believe that the future success of these stations will depend on their ability to remain relevant to viewers. To do this, broadcasters must be given the flexibility to develop programming strategies that are neither devised, nor overly constrained, by regulation.
The Commission’s proposal to impose a group-based expenditure and exhibition requirement for Canadian content will give broadcasters this much needed flexibility. It will allow all broadcast groups to maximize their programming strengths, while also ensuring that a healthy amount of funding and resources continues to flow to the production of local and national Canadian content.
That said, we believe that no other rules should be imposed to complicate and restrict our ability to pursue certain business and programming strategies. Asking all over-the-air broadcasters to commission, license or produce the same type of programming is a case in point. It would create a huge challenge for our Citytv stations where our brand and experience makes us better positioned to provide intensely local programming that is created, produced and watched by local people in Vancouver, Edmonton, Calgary, Winnipeg and Toronto.
As well, the re-introduction of a CPE requirement will act as a check on U.S. programming expenditures. Conversely, compensation for value would exacerbate this problem by incenting broadcasters to increase their value by overspending in the U.S. Such overspending would no longer be irrational as it would be rewarded with a higher return on investment from signal compensation negotiations. This would be particularly devastating for Citytv and other smaller broadcasting groups, since CTV’s position as the number one broadcaster would be permanently entrenched.
Given the fragmentation in the system, OTA broadcasters can no longer be everything to everyone. Our public policy objectives must be assessed on a system-wide basis taking into consideration our collective contributions.
The most important regulatory tool the Commission can give broadcasters at this time is the flexibility to manage and respond to the unprecedented changes in the television market. We believe the broad and flexible approach outlined by the Commission for group-based licensing will help do just that.
Conclusion
Rogers has been a strong supporter of the Canadian broadcasting system since our inception. We believe in it and its future. Through our many divisions, we have poured billions of dollars into it. We are willing to continue to work with the Commission and all other stakeholders in the system to help ensure its future. We are prepared to help broadcasters reinvigorate their business models for the digital and Internet age. We are not prepared, however, to support a fundamentally flawed compensation proposal.
Rogers submits that the new, more open, regulatory approach to group-based licences and DTH carriage of all local television stations, in concert with an improving economic environment and the exploitation of digital and mobile audiences, is a far better remedy for what ails conventional television than imposing higher fees on Canadian viewers. This approach is much preferred to a compensation proposal that will result in a significant and immediate transfer of money from Canadians to broadcasters with no corresponding benefits.
Those are our comments, Mr. Chairman; we would be pleased to respond to any questions you may have regarding our submission.
