Canadian Heritage Committee on Nov. 23rd, 2010

[The Chair, Conservative, Michael Chong]

This is the 31st meeting of the Standing committee on Canadian Heritage, on Tuesday, November 23, 2010. Pursuant to Standing Order 108(2), we will study the impacts of private television ownership changes and the move to words you viewing platforms.

Our witnesses today are Mr. Cardin, Mrs. Collins and Mrs. Creighton, of the Canada Media Fund, as well as Mr. Mastin and Mr. Bolen, of the Canadian media production Association.

We'll begin with an opening statement from the Canada Media Fund.

[Valerie Creighton, President and Chief Executive officer, Canada Media Fund]

Thank you for the invitation to talk to you today. With us today are Stéphane Cardin, vice-president of industry and public affairs, and Sandra Collins, vice-president of finance and administration. I'm going to give you just a bit of an overview. Then Stéphane will talk about the convergent stream, and Sandra will speak to some of the issues surrounding broadcaster corporate groups and our revenue streams at the fund.

Last March, the Ministry of Canadian Heritage provided a new mandate for what was the Canadian Television Fund. It incorporated the programming of the Canada New Media Fund, which was previously administrated by Telefilm. The new mandate champions the creation and promotion of successful, innovative Canadian content and software applications for current and emerging digital platforms through financial support and industry research.

In 2009-10, we provided just over $327 million for the creation of Canadian content. Through these investments, the CMF contributes to the Canadian digital economic strategy. We just completed an annual process in which we undertook a formal dialogue with our industry stakeholders across the country, from Saint John to Iqaluit to Victoria and everywhere in between. This year we visited 23 Canadian towns and cities, coast to coast to coast, and met over 1,000 industry representatives. This process provides us with an opportunity to hear the concerns and observations of the industry and helps inform our process of developing the guidelines every year.

Stéphane will take you through the successes and the convergent stream.

Stéphane.

[Stéphane Cardin, Vice-President, Strategic Policy Planning and Stakeholder Relations, Canadian Television Fund]

The CMF has two separate financing streams, the convergent stream and the experimental stream. Through the convergent stream, the CMF provides support to popular television projects, as well as to their digital media components.

To give you an idea of success on the French-speaking market, I can say that among the 20 most popular programs in 2009-2010, 10 had received the support of the Canadian media fund. Several programs, in English and in French, regularly attract more than 1 million viewers. Last July, for example, the first episode of the Rookie Blue series, on Global and ABC, in the US, attracted a total of 9 million Canadian and American viewers. Currently, to get funding from the CMF, projects in the convergent stream must either have value-added digital media components or be broadcast on platforms other than television.

The experimental stream is there to support very innovative digital media content as well as interactive software applications. The success of this stream has led to more than 240 funding applications, for a total of $83 million, during our first round of funding. Out of that number, we have selected 27 projects for funding, including interactive games, web portals, mobile phone applications, web series and web applications, for a total amount of $12.9 million. The second round of funding applications closed a few days ago, on November 12, and we have received close to 180 additional funding applications, for a total of $65 million. We are now assessing all those applications.

Obviously, the new mandate of the convergent stream of the CMF is moving ahead and will allow for the development of content available at any time to all Canadians on their platform of choice.

Sandra?

[Sandra Collins]

During this fall's industry consultation, we took note of some observations from various stakeholders. One of these is that many Canadians are in fact migrating from cable and satellite to consuming content over the Internet. In fact, you may have noticed in this morning's Globe and Mail that a “Report on Business” column talked about a reporter's own experience of how he was unplugging.

This trend is beginning to have an impact on the CMF's revenue stream. As you may know, the CMF contributions provided by cable and satellite companies are based on a percentage of their broadcasting revenue. As things shift from the regulated to the unregulated, our revenues over time will decrease.

We're beginning to see that happening now, in that the percentage of growth in the BDU revenue—and this is also included in the chart in the document we provided you—has already started to diminish. We've seen recent year-over-year growth at 10%, for 2008-09; it went down to 6% in 2009-10; this year we expect it to go down to about 2%. This decline is being seen on both the cable side and the DTH side. It's a little more dramatic, at this point in time, on the cable side.

The other source of revenue, of course, that we have is from the Government of Canada. It has remained stable at $120 million since 2006-07. In 2010-11, the current year, we received an additional $14 million, which was provided to support the expanded mandate, and it was the funding that went to the Canada New Media Fund.

As far as the impact of consolidation in the broadcast sector and the impact on the CMF are concerned, particularly in the English market what we've seen is that the share of CMF funding allocations provided through what we call “performance envelopes” is increasingly received by broadcasters who are part of one of those vertically integrated groups. The broadcasters have the ability to direct their envelopes towards productions, in addition to providing a broadcast licence, and then in turn the CMF engages and contracts with that producer. So there are fewer players directing a lot of the production.

For example, in the English market, if we look at the performance envelopes that we calculated for this year and apply what we know are probably going to be the new ownerships, including that of Bell, the broadcasters within those vertically integrated groups received 50% of the CMF performance envelopes. That includes Bell, obviously, for CTV; Quebecor; Rogers; and Shaw, for both Corus and CanWest.

When we also consider that 35% went to CBC, that leaves 15% of our English performance envelopes allocated to 10 channels that weren't part of a vertically integrated broadcast group. Obviously, that's only for channels that have a performance envelope and that we deal with.

[Valerie Creighton]

Clearly, the rapid change in the distribution, broadcasting, and production environment and the resource pressure downward on the fund will continue to create new challenges for the whole system, but also some new opportunities.

In spite of all of this, we still are of the view, having been through the fist year of the implementation of the fund, that from a policy perspective it was the right thing to do. When the government gave us the mandate, there were lots of questions in the industry about how to trigger and move the whole industry forward into the digital media universe. But we think the catalyst was there in the mandate, and it was clearly the right thing to do.

That is evidenced, I think, by all of the interest we're getting in countries around the world talking to us about what is happening in Canada and how we're making it a success.

We'll continue to adapt and change our policies to ensure that our job is the support of content. We view this very much as a content fund, and we want to make sure that the content is as innovative and compelling as possible, so that Canadians can watch it anytime, anywhere, anyplace, as they choose.

Thank you very much for the opportunity to give you this information. We're happy to take questions.

[The Chair, Conservative, Michael Chong]

Thank you very much.

We'll have an opening statement now from the Canadian Media Production Association.

[Norm Bolen, President and Chief Executive Officer, Canadian Media Production Association]

Good afternoon, Mr. Chairman and committee members.

We appreciate the opportunity to appear before you today and will keep our remarks short so that we have more time for questions and answers, but first we offer our congratulations specifically to you, Mr. Chong, on your recent election as chairman of this important standing committee. I look forward to working closely with you and the other committee members in the weeks and months ahead.

My name is Norm Bolen. I am the president and CEO of the Canadian Media Production Association. With me today is Reynolds Mastin, counsel for the CMPA.

We represent hundreds of independent companies across Canada. They produce and distribute English language television programs, feature films, and interactive content. With a handful of exceptions, these are all small and medium-sized businesses, entrepreneurs. Our members produce content that is consumed by millions of viewers in Canada and abroad, and that content is viewed on small, medium, and large screens. Gone are the days when producers developed content for a single platform. Today producers almost always develop their content so it can be exploited on multiple screens.

As most of you know, our organization was formerly the Canadian Film and Television Production Association. We rebranded a number of months ago to the Canadian Media Production Association. We did this specifically to better reflect the reality of today's independent production sector and in light of the multiplatform universe that is already so prevalent in the lives of Canadians.

Our members have a significant impact on the Canadian economy. They generate most of the $5 billion in production that occurs in Canada each year, and this activity sustains some 130,000 high-quality creative jobs.

While these economic performance indicators are important, independent producers are about much more than just money and jobs. By the content they produce, independent producers reflect--and, I would add, even celebrate--the broad diversity that exists across our vast country and the proud history that makes us so unique.

The fundamental role of producers has long been recognized and supported by successive governments. This is why the Broadcasting Act recognizes the important role that independent producers play in the Canadian broadcasting system. Section 3 of that act requires that “the programming provided by the Canadian broadcasting system should...include a significant contribution from the Canadian independent production sector”.

Independent producers are a key engine driving diversity, creativity, and innovation. I would like to think that our sector is well positioned to make a significant contribution to Canada's burgeoning digital economy, but lately, to be brutally honest with you, I'm beginning to wonder if this is at all true. For independent producers to be well positioned to contribute meaningfully to Canada's economic and cultural future, certain things must change, and they must change quickly. We therefore congratulate you for launching your study on the impacts of the changes in private television ownership and the move towards new viewing platforms.

Over the last decade, and certainly in the last few years, the massive consolidation and integration of the television sector has indeed had a significant impact on independent producers. There is now a severe and unsustainable industry imbalance between independent producers and broadcasters. That imbalance is not only undermining content innovation and programming diversity; it is also threatening the very existence of the independent production sector. We remain hopeful, however, that the government and all political parties continue to believe in the importance of the contribution made by independent producers.

The key question, as I see it, is really quite simple: do we continue to believe it beneficial to all Canadians that a viable and healthy independent production sector not only exists but can flourish? I and many millions of Canadians believe the answer to that question is an unequivocal “yes”, so I implore you to grasp the opportunity with this study to make concrete recommendations to address the imbalance that currently exists in the television sector between independent producers and broadcasters.

Reynolds, would you continue?

[Reynolds Mastin, Counsel, Canadian Media Production Association]

You may be wondering what the problem exactly is between producers and broadcasters. Simply put, we're now reduced to three large, integrated, private broadcast corporate groups in English Canada. As such, there are effectively few selling opportunities in the television market for our members.

More specifically, those three broadcast groups are now using--I would even say abusing--their dominant position in the market to secure unreasonable terms from independent producers. They're demanding more rights, including all digital rights, and often for very little additional fees, if any.

Broadcaster consolidation has virtually eliminated competition in the Canadian programming rights market, resulting in fewer incentives for broadcasters to experiment with multiplatform content production and distribution; untenable and unsustainable rights deals for independent producers; and the virtual elimination of any return on investment for investors and funders, including the Canada Media Fund.

The equation is simple: where broadcasters control all of the rights, they will reap all of the benefits. This leaves other key partners--independent producers, the Canada Media Fund, federal and provincial funding agencies, and independent production funds--with little or nothing to show for their investment in Canadian programming.

The situation for independent producers has also become progressively worse over time. Ten years ago broadcasters were taking three-year licence deals on programming. Today, for very little additional compensation, they demand as many as 12 years. This virtually eliminates any possibility for a producer to sell in second or third markets.

Ten years ago broadcasters negotiated for only one conventional station and maybe three to five plays or broadcasts of the program over the three-year licence term. Today, with little additional compensation, they demand the rights for that same conventional station; all of their other owned and controlled broadcast platforms, such as pay or specialty; unlimited plays on all their platforms; Internet rights; all rights for all media; merchandising rights; and very often rights for foreign territories.

Let's consider this last point for a second. A Canadian broadcaster whose sole raison d'être is the Canadian market is using its considerable clout to scoop up the rights for foreign territories. This is going way too far.

You may be asking yourselves why producers do not simply refuse these harsh business terms that are so damaging to their businesses. There's a simple answer to that question. For most independent producers, turning down these terrible terms effectively means putting their businesses on hold, or even closing their doors permanently. I would highlight that a broadcaster is also the only trigger to access a large majority of the financing available under the Canada Media Fund, and one of the key triggers to access the Canadian film or video production tax credit.

This puts broadcasters in a very strong bargaining position. Without a broadcast deal, our members have no access to most of the CMF and likely no access to the tax credit. Without access to these crucial sources of funding, there would be far fewer Canadian content productions in underrepresented genres, like drama, documentary, and children's programming. Thousands of key creative and technical craftspeople from coast to coast would also lose their jobs.

Ultimately, Canada's diversity would be significantly lessened, and independent producers would fall considerably short of being able to effectively contribute to Canada's growing digital economy. This is why we have been pushing so aggressively for the implementation of an equitable and enforceable terms of trade framework between independent producers and broadcasters.

This would provide a common-sense solution related to the ownership and exploitation of all rights, including digital rights, thereby maximizing the distribution of content across all platforms. This is a key government policy objective that can be achieved at no cost to taxpayers and with minimal, if any, direct regulatory intervention.

[Norm Bolen]

Before we wrap up, I would like to make a short comment about the Canada Media Fund.

As you may know, the Department of Canadian Heritage's contribution to the fund expires at the end of this fiscal year. This program is crucial for underrepresented Canadian programming and the independent production sector. It is critical that it be renewed long term. As you may also know, we've been actively working with our colleagues in the creative sector in arguing before the courts that Internet service providers should be considered broadcast distributors under the Broadcasting Act.

Let me briefly explain why it is necessary to push so hard on this front.

Over time, Canadian audiences will increasingly migrate to platforms that are currently not regulated. As this trend accelerates, revenues earned within vertically integrated communications companies will shift from those generated by their traditional and cable satellite services to those derived from their Internet access services. Overall these companies could end up earning just as much, maybe even considerably more, from their customers' shift to broadband.

At the same time, they will end up contributing less and less to the Canada Media Fund, since their contributions are currently based solely on their cable and satellite revenues. Data already show the CMF revenue from BDUs flattening out, as Valerie suggested. This is not a positive trend for Canadian content, for the independent production sector, or for the thousands of jobs we sustain across Canada.

In closing, I offer four specific recommendations that we ask you to incorporate into your study.

One, recognize the imbalance that currently exists between independent producers and television broadcasters in the negotiation of rights and the detrimental effect this has on diversity and innovation in the system.

Two, recommend that the Minister of Canadian Heritage issue a policy direction to the CRTC, pursuant to section 7 of the Broadcasting Act, requiring the commission to ensure that broadcasters have taken all appropriate steps to reach an equitable arrangement with the independent production sector regarding the ownership and exploitation of program rights.

Three, support the renewal of the Department of Canadian Heritage's contribution to the Canada Media Fund on an ongoing basis. This will introduce much-needed stability in the funding system. It will also allow all stakeholders to plan long term and continue enhancing the effectiveness of the fund.

Four, endorse the proposal that all distribution platforms, including those that are currently not regulated, be required to make a financial contribution to a fund to support the creation of Canadian content.

With these key building blocks in place, I am confident that Canadian independent producers will be much better positioned to be able to contribute meaningfully to both our growing digital economy and our cultural future.

That concludes my presentation. I would be happy to answer any questions you may have. Thank you.

[The Chair, Conservative, Michael Chong]

Thank you very much.

We'll have 40 minutes of questions and comments, beginning with Madam Crombie.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Thank you all for presenting to us today.

I think I'll start with Mr. Bolen and Mr. Mastin, as I was quite taken by your presentation.

Apart from the four recommendations you've just made, how do we right that balance? How do we correct the imbalance that exists between the large broadcasters and the small independents?

You talked about the terms of trade framework. Are those four recommendations you made included in that framework?

[Norm Bolen]

There are short-term and long-term sets of potential solutions that we need to consider.

In the short term, terms of trade is our best opportunity. The commission has encouraged--and I could use a stronger word, has insisted, really--that the broadcasters and the independent producers come to the table, negotiate in good faith, and attempt to find a reasonable balance on the sharing of rights so that both the independent producers and the broadcasters can run successful businesses. We need both to be strong. We need to have a strong production industry and a strong broadcasting industry. And we need both to continue to have a platform that we can build out from into the international digital marketplace, where we're going to see opportunity if we have a strong industry here. So that's number one.

The second thing is a bigger transitional question, and that relates to how the whole environment is evolving. We need to find a way to transition a system that was built on a traditional broadcasting model to a system that is now much more consumer driven. The CMF is beginning to do that. They've started to create conversion projects; they've started to fund experimental projects, and they are encouraging a kind of forced marriage between traditional content producers and interactive content producers, and that's a very positive thing. We need to continue that. We need to make sure we calibrate that very carefully, but we also have to start considering some of the sacred cows.

Should broadcasters alone be the triggers or should we be finding newer kinds of triggers? As newer platforms and newer players in the marketplace become commissioners of content and distributors of content, they too should begin to have some access to different kinds of funds that are available. The other thing is to consider whether producers shouldn't also have access to these funds directly, rather than through broadcasters.

These are some of the ideas we need to look at in a broader context.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Okay, terrific. I probably am going to be limited in time, so I'll spit some of these out.

Looking at the impact of vertical integration, the benefits and the drawbacks for Canadians, but also the impact on the independent producers and creators, how else can you quantify the negative impact that has produced?

[Norm Bolen]

The real problem, if you're an independent producer, is you're basically in a take it or leave it situation when you're dealing with broadcasters. There are fewer broadcasters in the marketplace than there were five or ten years ago, so you have fewer customers. That's one thing.

The broadcasters, because of their market power, get more rights for not a lot more money. You don't have any inventory yourself, and to the extent that the broadcasters monetize those rights that they acquire from you, you're not sharing in that revenue. So we're seeing the margins of these independent production businesses being compressed, being squeezed. They're very small margins, barely able to build any kind of serious capital in their businesses, and we are seeing the broadcasters getting bigger, stronger, better capitalized, and more profitable. It's a David and Goliath situation, effectively.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

On that point, how do they do it in other jurisdictions, like in the U.S.? How are producers funded? Do they have other sources of revenue? Do they receive revenue from other platforms? Are there royalties? What's the business model like?

[Norm Bolen]

The American system is a completely different system. It's dominated by large studios, largely, and major broadcasters who are producing the content themselves, in some cases, or financing the content 100%. They have what's called a “service production industry”. So, basically, a broadcaster pays 100% of the budget of a show and the producer makes the show and gets paid fees. The broadcaster owns the rights to the show, and away you go. In the Canadian marketplace, broadcasters' licence fees cover only, on average, about 35% of the total budget of a show. The rest of the money comes from either government subsidies, in the form of tax credits from the Canada Media Fund, which is partly money that comes from consumers, or from foreign sales, from distribution advances, and from deferrals of their own fees. So it is a much different system.

If the Canadian broadcasters were paying 100% of the cost of production, then it would be a much different situation. But they're not. The producers take significant risk, but they don't share in the return as much as they should. So it's a completely different system.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

What about in other jurisdictions and in terms of your revenue streams? Do you gain from the Internet or other non-traditional platforms?

[Norm Bolen]

Those platforms are not generating massive amounts of revenue, certainly not as much as the traditional platforms.

I would refer you to the British system. In the U.K., the government, several years ago, saw the same imbalance in their country, and they directed their version of the CRTC, Ofcom, to ensure that producers retain more of their rights. Ofcom imposed the terms of trade deal on the broadcasters in the U.K., which ensured that the producers would hang on to more of their rights. That has resulted in the growth of some significant production companies in the U.K. that have expanded their businesses quite successfully because they've been better capitalized. So there is a success story in the U.K. situation that we see as a good example for Canada.

[The Chair, Conservative, Michael Chong]

Thank you very much, Madam Crombie and Mr. Bolen.

Madame Lavallée.

[Carole Lavallée, Bloc, Saint-Bruno—Saint-Hubert, QC]

Thank you very much.

Mrs. Creighton, you mentioned the subsidies that have been granted. You gave us a lot of figures which I did not have enough time to record. Could you tell us again the number of applicants and, if possible, their distribution by province?

[Valerie Creighton]

The first thing I'd like to say on that is that the fund is about 50% oversubscribed. Historically, prior to the envelope system, it was first come, first served. There was no requirement for a broadcast licence, and production companies lined up outside of the door of the old CTF and around the block.

Right now, we support just over 400 in production—I'll give you the numbers from last year—about 352 in development, and a small number of projects in versioning, to be able to take those projects into both languages.

In production, on average, every year we do about 400 or 450 projects.

[Carole Lavallée, Bloc, Saint-Bruno—Saint-Hubert, QC]

Can you tell us how those 450 projects are distributed by province?

[Stéphane Cardin]

This data can be provided but I can tell you that two thirds of our funding is for English production, and one third for French production. This is specified in the contribution agreements that we have passed with the government of Canada. Furthermore, 10% of the third reserved for French language production must be provided to producers from outside Quebec. The other 90% is generally given to Quebec French language production.

[Carole Lavallée, Bloc, Saint-Bruno—Saint-Hubert, QC]

Is that 10% of the 33%?

[Stéphane Cardin]

It is 90% of 33%.