The business model for conventional television is broken. Mr. Fecan of CTVglobemedia and Mr. Vinner of Canwest painted that broad picture for you when they appeared, and we agree with their views.
As our time is short, I will try to limit our submission to NTV’s experience and viewpoints.
This crisis has been in the making for years. Specialty channels, the CBC, cable, and satellite BDUs all have multiple monthly sustainable revenue streams. A private broadcaster has only one source of revenue--advertising--and that revenue is linked directly to audience viewing.
Today, we would like to point out a few of the root causes that have been in play for many years. They are: over-regulation, audience fragmentation, lack of fee-for-carriage, and, as a subsidized public broadcaster, we also wish to bring forward our views on the use of cultural development funds, fee-for-carriage, the LPIF, digital transition, and the role of the federal government.
On over-regulation, the regulator has over-licensed, causing fragmentation through a proliferation of specialty channels and foreign signals, with only token compensation for the damage these signals cause to the revenues of conventional stations. Today, we believe there is far too much regulation. It’s time to reform and relax the broadcasting regulations.
One prime example of over-regulation relates to Canadian content requirements. Once the CRTC set Canadian content quotas on private broadcasters’ broadcast days, and later expanded these to priority programming in prime time, the private conventional broadcaster’s balance was upset. The sale of advertising is our one and only source of revenue and it is directly linked to program ratings. Good ratings equal high yield; bad ratings equal low or no yield.
Broadcasters will all tell you, and they have told the CRTC, that airing most Canadian entertainment programs does not provide the audience levels necessary to provide the revenue needed to sustain their operations. When asked, Canadians say they want Canadian programming, but the ratings tell us otherwise.
Another example specific to NTV is the length of our broadcast day and evening broadcast periods. For decades, the CRTC granted NTV an extension to its broadcast day for up to 1.5 hours for news. This was due to our unique time zone when compared with eastern standard time. However, at NTV’s last licence renewal, the CRTC decided this extension was no longer acceptable and forced a change. The result: a shorter than normal broadcast period and a longer than normal evening period, meaning that NTV lost one hour each day of it simulcast opportunities, while causing it to air 3.5 hours a week more Canadian content in the evening period than any other station in Canada.
In NTV’s view, the CRTC should immediately do the following.
It should reduce Canadian content quotas to more reasonable and less restrictive levels.
It should make Canadian content programs accountable, using a ratings-based scale that credits a station’s Canadian content quota up to 200% on a prorated basis. We have this mechanism for advertising. Why not utilize it for programming? NTV spends millions of dollars to produce the province’s number one rated television program, the NTV Evening News Hour, yet it receives the same Canadian content credit as a rerun of Inspector Gadget.
The CRTC should provide a standard and reasonable base quota for local Canadian content and a positive Canadian content quota incentive of 150% for stations that over-perform regarding the production of local programming.
It should lift restrictions on certain advertising, in particular pharmaceutical drugs, opening up rich new national advertising opportunities.
It should eliminate part II licence fees, with no retroactive payment requirements.
It should freeze applications for any new services well beyond the return of stability. With 170 new stations licensed, the market is saturated.
Audience fragmentation. The activities of BDUs cause fragmentation to the local broadcaster’s audiences through the introduction of many signals, including U.S. networks and stations airing programming that we have purchased the rights to air in our market. We believe this is the only country in the world where cross-border signal theft or piracy is legitimized. Canadian networks do not air on American BDUs.
Further, it is unacceptable for a BDU to simply take an over-the-air broadcaster’s signal, sell that signal to their subscribers, and pay nothing to the originator of the signal. We believe the purpose of broadcasting in the Canadian Broadcasting Act was to provide a signal to the end-user or the public and not an intermediate entity that benefits financially from the use of the signal and pays nothing for it. That's just another form of signal piracy. I might add that when the shoe is on the other foot, cable and satellite BDUs are quite vocal over the piracy of their signals and cross-border signals.
Earlier in these proceedings, Ms. Bell of Canwest pointed out that during the 1971 hearings on cable TV, the CRTC suggested that people should pay for what they use to operate their business. It makes sense to us. In 1975, the CRTC granted MTV a cable subscriber fee of 25¢ per household and then quickly revoked it without a hearing. Since then, we have repeatedly asked the commission for local cable subscriber fees or fee-for-carriage. We believe that fee-for-carriage is a fair and equitable way to compensate broadcasters for the damage BDUs cause local audiences. Local signals are important to local subscribers, and they already believe they are paying for them.
In a study by the DTV Working Group, recently submitted to the CRTC, of 840 persons who receive only conventional television over the air, surveyed in five centres across Canada, 78% say they would pay a $10-per-month subscriber fee for local signals. This indicates that our signals are important to the public and that they are willing to pay for them. There has been controversy over traditional rates to broadcasters, should a fee-for-carriage regime be introduced. These are our suggestions.
Fee-for-carriage and distant signals are linked and should be an industry-to-industry matter. They are considered damaging to each broadcaster's local market. Nevertheless, they are of great value to the public, who time-shift and benefit from the diversity of voices, a crucial element of our democracy, from each corner of the country. Distant signals are also key components of every BDU's service offering. But from what we've seen and read so far, at the end of the day, the CRTC mediation process or government intervention may be required to solve this matter.
If sufficient subscriber fees flowed to each broadcaster for service provided by BDUs in its market, it would help to offset the damage caused by distant signals. Further, it appears from information recently available on the public record that cable and satellite BDUs are quite healthy, with substantial profit margins. They have had substantial rate increases over the past five to six years and are permitted to sell advertising in our markets, further eroding our only source of revenue. They pay us nothing for the use of our signal. If fee-for-carriage was applied at the local level, we see no case for these BDUs to pass further increases on to the public. In our view, BDUs were given a free ride in order to establish their infrastructure, and it's time they paid for what they take and use.
We believe unfair competition exists from a subsidized CBC operating in our market, with no relationship between their revenues, operating expenses, or capital costs. The CBC, with its very deep pockets, is able to undercut our advertising rates and purchase popular U.S. programming such as Wheel of Fortune and Jeopardy, programs that NTV until last year aired for 25 years and made popular in its market. Now these programs are used by CBC to gain ratings against us. If CBC were 100% subsidized and not competing with the private sector for advertising share, it would provide increased local and national advertising opportunities to the private broadcaster. A subsidized entity should not be permitted to compete with private industry.
CBC's mandate under the Broadcasting Act should therefore be changed to 100% Canadian content, with no advertising. A 100% content on CBC would allow relief to the private sector from the onerous Canadian content regulatory quotas placed on it by the CRTC. Selling advertising has caused CBC to travel down a road that in their view requires them to spend huge amounts on U.S. programming and expensive first-run movies, driving the cost of U.S. programming even higher as bidding among Canadian broadcasters for national rights includes a CBC that uses taxpayer dollars.
CBC recently reported that 60% of their expenses are in salaries. That indicates to us that they're either overstaffed or overpaid. Locally, we estimate they outstaff us three to one, yet produce only 5 hours to our 13.5 hours each week.
Further, there are expenses related to the selling of advertising. CBC maintains sales managers and salaried sales staff, whereas the private sector usually operates on commission sales. They must maintain billing, traffic, and credit departments, commercial production facilities, and staff. At the end of the day, it may well be discovered that the activity related directly and indirectly to selling advertising by CBC costs more than they actually gross. We believe this is especially true in the Newfoundland market.
On cultural development funds, in our view, CBC and the independent sector should explore more avant-garde Canadian productions, while the private sector should concentrate on productions that are economically viable and are quality productions where the focus is to create mass appeal Canadian content programming for exhibition by the private sector. In our view, this is best managed by the private sector, which understands what works. There has to be an accountable commercial element attached to the creation of Canadian programming.
The Broadcasting Act creates an expectation that Canadian programming should be exhibited on television, and although most Canadians suggest that we should have Canadian programming, the program ratings show time and time again that few are actually watching it. Most Canadian programs yield very poor results when compared to foreign programming. It should be obvious from this that Canadians are not satisfied with the quality of most Canadian programming. However, the private sector must realize a return on each hour of its broadcast day. To do this requires high ratings or, more simply put, programs that people will watch.
The local programming improvement fund is a means to help over-the-air small market broadcasters maintain local programming. We know this fund is $60 million, and we have heard that there are 72 stations that would likely qualify for the fund. We know that the formula suggested is based on each station’s past expenses related to local programming. If we divide the fund by the number of stations, we find there is $833,000 per station. Some say that CBC should qualify where they operate stations in markets of fewer than one million viewers.
We maintain that if CBC has access to this fund, based on their subsidized economies of scale, the lion’s share of that fund will flow to them. If this happens, their increased resources will cause competition to escalate for news-related advertising dollars. Should CBC’s ratings increase as a result, it will mean reductions and layoffs in the private sector, negating the fund’s benefit to private broadcasters. So instead of helping, this fund will just become another source of revenue for CBC, maintaining an imbalanced duplication of services that we believe was not meant to be the focus of the fund. We maintain that CBC should have no access to this fund if it is to provide any benefit to local broadcasting.
Further, money realized from the fund by the private sector should go exclusively towards the gathering and production of category 1 news.
In our view, digital transition is not about the quality or HDTV. It's—