Canadian Heritage Committee on May 13th, 2014

[The Chair (Mr. Gordon Brown (Leeds—Grenville, CPC)), Conservative, Gord Brown]

Good morning, everyone. I'm going to call to order meeting number 23 of the Standing Committee on Canadian Heritage.

We are currently conducting a study and a review of the Canadian music industry.

We have quite a number of witnesses with us today. From what is known as FACTOR, the Foundation Assisting Canadian Talent on Recordings, we have Susan Wheeler and Duncan McKie, as well as Allison Outhit. From Fondation Musicaction we have Pierre Rodrigue and Louise Chenail. From Fonds RadioStar we have François Bissoondoyal and Louise Chenail as well.

We are going to hear from our witness groups, each of whom will have eight minutes in total. We will start with FACTOR.

You have the floor for eight minutes.

[Susan Wheeler, Chair, Foundation Assisting Canadian Talent on Recordings (FACTOR)]

Mr. Chairman, members of the committee, thank you very much for your invitation to appear before you today. We hope these discussions will provide valuable insight into the evolution of the Canada Music Fund.

FACTOR is a private not-for-profit corporation that was established more than 30 years ago by private radio and Canadian music companies with just $200,000 in voluntary radio contributions.

In 1986 a private-public partnership was formed when FACTOR began to administer government funding offered through the sound recording development program. In the most recent year on record, FACTOR received $8.4 million from the Government of Canada through the Canada Music Fund and $11.1 million from private radio broadcasters through their Canadian content development contributions mandated by the CRTC. This makes private radio the majority funding partner in FACTOR.

This revenue model allows us to supplement Canada Music Fund programs with funding from private radio and to develop independent programs financed entirely by the private radio sector. In 2012-13 we committed close to $17 million through our various programs, supporting almost 2,000 funding requests.

Through FACTOR-administered government and radio support since 1982, Canadian companies and artists have been remarkably successful both domestically and abroad. Companies such as Nettwerk, Maple Music, Arts and Crafts, Paper Bag, Secret City, and Justin Time are most notable, as is 604 Records, which recorded the Carly Rae Jepsen hit Call Me Maybe, which achieved more than 10 million downloads worldwide in 2012.

This year FACTOR supported six Juno-winning albums, and in 2014 the FACTOR-supported album Throw a Penny in the Wishing Well, by Jennifer Gasoi, won the first Grammy ever for a Canadian children's recording. We are extremely proud of these accomplishments and the role FACTOR has played in supporting these sound recordings.

[Duncan McKie, President, Foundation Assisting Canadian Talent on Recordings (FACTOR)]

Notwithstanding these successes and in the face of the profound changes confronting the music industry, FACTOR has completely overhauled its programs and systems. We began with consultations with Canadian Heritage and the music industry in 2012 and launched the new system in the spring of 2013.

In our new system, we ask music company applicants to submit revenue reports based on their exploitation of master rights to recordings. This includes revenues from all sound recording sales, including digital sales and placements in ads, TV, and film. We then rank companies based on that revenue and fund them according to their national standing. This has replaced rankings based entirely on the physical sale of CDs.

For artists, we created a national ranking based on an aggregate score on 17 separate measures of achievement. An artist's ranking on this scale determines their eligibility. This inclusive approach attempts to reflect how today's artists build their audiences and careers and position themselves for commercial success. Included in this assessment are live performance dates completed and booked, their social media success, press notices, placements in ads, films and TV, the strength of their marketing team, and sales of recordings in all forms.

Companies and artists then apply through our programs for support. FACTOR plays a critical role in providing early-stage financial assistance to Canadian artists and music companies. FACTOR operates on a merit system whereby applications are judged by a national network of juries composed of more than 1,000 music industry professionals.

In our demo program, we provide grants of $1,500 to record a single or demo track that can be used by artists to help promote themselves and professionalize their work. Any artist can apply to this program, provided they submit the requisite materials to our juries. In 2012-13 we funded 215 such projects. In the past year some 279 have received financing under this program, a 30% increase.

At the next level, our full-length juried sound recording programs allow many first-time applicants who wish to create a full-length recording to compete for support in a program that is also juried. Once approved, artists or their representative companies can access additional marketing, showcase, touring, and video funding. In 2012-13, 131 such projects were funded; this number rose to 141 in the past year.

Beyond this level, we provide comprehensive support to more established companies and artists for a funding package comprising a sound recording, marketing and promotion, showcases and touring, and videos, both traditional and digital. Support can be as much as $150,000 in matching funds per project.

It is also notable that this support and all support for sound recording projects is given in the form of matching funds, which are forgivable loans, repaid based on the overall commercial success of the project. Repayments have averaged about 20% in past years. Overall, FACTOR approved 513 sound recording projects in 2013-14, 234 of which were full-length sound recordings. I should note that sound recordings can also be released exclusively on a digital platform.

Although FACTOR supports the production of sound recordings as a primary investment amounting to about $4 million per year, the bulk of the overall budget is allocated to marketing, promotion, touring and showcasing, and videos, with $6.5 million spent on marketing, almost $3 million on touring and showcasing, and $400,000 on videos both digital and traditional.

To support the export of Canadian works, we allow half of any marketing budget to be spent outside of Canada. Additionally, $2 million of the $3 million in touring and showcasing support is spent in international markets. This ratio is growing as FACTOR sees more demand for live performance support outside of Canada.

Our funding is pan-Canadian. In the year 2012-13, we supported artists, companies, and projects in and from all provinces and territories. With respect to submissions and approvals, some 52% of projects were approved nationally. On a provincial basis, most achieved a success rate within 5% of that number. Only Saskatchewan, at 42%, and the territories, at 22%, fell outside of that range.

We also support a network of regional education coordinators with an annual grant of $360,000. They provide local guidance to artists in their region who wish to access FACTOR programs.

FACTOR also supports a wide variety of collective activities intended to celebrate our achievements, enhance the domestic and foreign market potential of artists and companies, and subsidize business development costs. There are four such Canada Music Fund collective initiative programs, which we administer, each with a specific goal in mind.

The largest component supports major awards and conferences, such as the Junos, Canadian Music Week, North by Northeast, Polaris, M for Montreal, POP Montreal, Sled Island in Calgary, the Halifax Pop Explosion, the Manito Ahbee aboriginal festival in Winnipeg, BreakOut West, and many more from all across the country, including Yukon and the Northwest Territories. These projects also receive substantial financial support derived from radio CCD contributions.

Other components include support for marketing on digital platforms, export showcases, and official language minority showcases.

We also have a $450,000 sponsorship fund that underwrites more than 60 smaller events per year, which are outside the scope of the collective initiatives, and it's funded exclusively by private radio. Recipients have included the Lunenburg Folk Harbour Society, the Alianait Arts Festival in Nunavut, the Interstellar Rodeo in Edmonton, and MusicFest Canada, a national competition focused on young artists in classical, jazz, and choral ensembles.

FACTOR staff continue to work with our federal government partners to improve our programs and services. Today, wherever an artist lives in Canada, we have a program available to help them at each stage of their career. Ultimately, we are in the business of helping the industry do what it does best: create, market, and export great Canadian music. Canadian music is one of our greatest national exports and a huge source of pride for all Canadians from coast to coast to coast.

We are very honoured to be entrusted with such an important role in ensuring this impressive legacy continues for many years to come.

We welcome your questions.

[The Chair, Conservative, Gord Brown]

Thank you very much.

We'll now move to Fondation Musicaction.

Mr. Rodrigue, you have the floor. You have eight minutes.

[Pierre Rodrigue, Chairman of the Board of Directors, Fondation Musicaction]

Thank you, Mr. Chair.

Thank you for inviting us this morning. My name is Pierre Rodrigue, and I am the Vice-President of Communications and Marketing at Bell Media. However, it is in my capacity as chairman of the board of directors of Musicaction that I appear before you today. With me is Louise Chenail, chief executive officer of Musicaction.

As you know, Fondation Musicaction manages funding programs which support the development of the independent francophone music industry in Canada. Musicaction also manages the RadioStar Fund, but my presentation today will deal only with the two components of the Canada Music Fund which we administer, and which complements the “Music Entrepreneur” component, which is managed directly by the Department of Canadian Heritage.

Before presenting the foundation's five main mandates, I would like to give you an overview of the structure and governance of our organization.

First, our foundation is based on a public-private partnership. Based on its revenue sources, Musicaction has been a true public-private partnership for 30 years. Since 2002, Heritage Canada has contributed 6 million dollars per year to help manage the “New Musical Works Component” and the “Collective Initiatives Component”. This significant funding is complemented by contributions from private broadcasters, worth $2.5 million.

Secondly, I will tell you about the composition of our board of directors. Our board is composed of representatives from broadcasters and the music industry, but also—and this is something that distinguishes us from factor—representatives from the Société professionnelle des auteurs et compositeurs du Québec. We benefit from the expertise of these music industry representatives, who continually review the programs. We are also aware of the risk of potential conflicts of interest, so our foundation has developed strict ethics and governance policies, governing the request acceptance process, among other things.

Thirdly, our foundation has a policy of visibility. Musicaction has a detailed policy concerning the obligation to use the Canada wordmark in recognition of Heritage Canada's support. The policy provides for sanctions if the rules are not respected and includes a rigorous verification procedure.

Fourthly, we fund projects individually. Through its various programs, our foundation provides funding for individual projects and does not fund companies as a whole.

I will now present Musicaction's five main mandates.

The first two mandates of the foundation are essentially carried out through the “New Musical Works Component” and its seven programs. The first mandate is to support the production and marketing of francophone music content. This mission is carried out through the album and song production programs, which are designed to guarantee access both to intermediate entrepreneurs with a proven record, called “Recognized Producers”, as well as emerging companies and self-producing artists, through a competition process involving selection by a jury.

These two separate approval methods ensure access for everyone, as well as the quality of the projects that are funded, and a great musical diversity. Through these two programs, 110 albums and 15 production projects are supported every year. More than 385 songwriters and composers also receive support for their role in producing this content.

This first mandate also involves a national marketing program, which supports the marketing and promotion of sound recordings, image production and stage productions. While 31% of annual funding for new musical works, in other words $2 million, goes to production, 46% of this component is allocated to national marketing. The marketing mandate is carried out through three other programs, international marketing, sales and management.

Finally, the second mandate under the new musical works component is to develop and renew francophone music. Musicaction has programs to support emerging artists. The first aspect of this mission is the program to support emerging artists, which aims to train new artists at the beginning of their career and to integrate them into the music industry.

We are currently supporting around 15 new artists. Through its other programs, the foundation has also implemented criteria that support emerging artists. Every year, through the “New Musical Works” component, 210 separate applicants, excluding singer-song writers, benefit from our financial support. The large number and range of recipients, including artists, producers of albums and shows, record labels, managers, editors, distributors and music industry associations, demonstrate that all players in the music industry can have access to funding in a way that respects quality, diversity and the renewal of the discipline of music.

Our results show that our initiatives have been successful, despite the extremely difficult context of the music industry today. In four years, 20 projects that we supported received certification and more than 200 awards were given to projects and artists that we supported. In 2013 alone, out of the 20 best-selling francophone Canadian albums, 11 had received support from us.

In 2012-2013, the 25 recognized producers who had received support from us had invested nearly $50 million in the music industry.

In other words, thanks to the Canada Music Fund and private broadcasters, each dollar invested by Musicaction helped generate more than $14 in independent revenue for companies.

Now, let discuss the last three mandates. They were strengthened in recent years through additional funding from the department for specific initiatives, under the “Collective Initiatives Component”.

Firstly, there is support for francophone minority communities. In 2008, Heritage Canada entrusted Musicaction with the management of the “Music Showcases Program”, whose main objective is to encourage performances by francophone artists from Francophone minority communities within large-scale tours.

To give you some figures, during the program's first installment, we supported 70 artists, presented more than 200 showcases nationally, and saw 50 national tours and more than 250 performances outside of the country. This significant and sustained presence on stages in Canada and abroad has resulted in the emergence of a number of important young artists. I could mentioned Damien Robitaille from Ontario, or Radio Radio and Lisa LeBlanc from Acadia.

The second mandate is to develop digital markets. In addition to the support for individual digital initiatives, additional funding from Heritage Canada has been invested in collective digital projects since 2010-2011. The goal is to increase the amount of digital content available, but also to increase its visibility amid the huge range of music available online.

The 29 projects funded run the gamut from a mobile application for a large festival with a download link, to a project to adapt and integrate an international digital distribution structure. In short, these new broadcasting, revenue-related, and exclusive original content creation projects have undoubtedly helped to improve the positioning of francophone Canadian music on the Web.

Examples of the foundation's initiatives to promote programming and encourage the emergence of new projects include meetings between music technology professionals, project presentation activities, consultations with experts, collective consultations, and permanent digital committees. Even if the first steps toward establishing a dialogue and creating new habits have been taken, there is still much work to be done to optimize the content available and to establish a presence in the digital space.

Finally, the third mandate under Collective Initiatives is to develop international markets. By supporting showcase presentations, networking activities and collective stands at fairs, this program allowed us to develop new partnerships with some of the most prestigious international festivals. I could mention the Francofolies in Spa and in La Rochelle, le Printemps de Bourges, or WOMEX, which increase visibility with foreign professionals.

In its first three years of existence, the program supported 203 artists, and 196 showcases were presented in 29 different events, mainly abroad. As a result, individual requests for international marketing support increased. Canadian artists have never been so active in francophone parts of Europe.

To conclude, I will make four observations concerning current issues.

First of all, we need to invest more and better in the new digital ecosystem which is constantly evolving, in order to be more visible and more accessible.

Secondly, given the emergence of new business models, assistance programs must be flexible in order to meet the needs of a constantly changing industry.

Thirdly, as borders open up, exporting to target markets will become essential.

Finally, the challenge will still be to ensure that our artists can both continue to produce high quality content and have the means necessary to stand out both on the Canadian market and on target export markets, throughout the digital universe.

Thank you for your attention.

[The Chair, Conservative, Gord Brown]

Thank you.

We will now move on to the representative from Fonds RadioStar.

Mr. Bissoondoyal, you have eight minutes.

[François Bissoondoyal, Chairman of the Board of Directors, Fonds RadioStar]

Mr. Chair, members of the committee, my name is François Bissoondoyal, chairman of the board of directors of RadioStar and also Director of Disks for l'Équipe Spectra.

Before giving you a brief history of Fonds RadioStar, its objectives and its results since we have witnessed changes in Canadian music consumption, first allow me to thank you for having invited us.

Fonds RadioStar was created in 2001. It is a not-for-profit organization born out of the CRTC's 1998 policy concerning commercial radio. This policy provided for a financial contribution of 3% of the purchase price of radio companies to a marketing fund for Canadian culture.

With the goal of promoting French-language Canadian culture, and targeting emerging artists in particular, Fonds RadioStar was officially launched in August 2001, before the first impacts of the changing consumer behaviour in the digital world were being felt by the music industry.

Since its creation, Fondation Musicaction has managed RadioStar, under the authority of an independent board of directors which is separate from that of Musicaction. Fonds RadioStar thus also benefits from expertise and optimal resources to carry out its mandate.

Also, this double management system by Musicaction and Fonds RadioStar as well as national marketing programs under the Canada Music Fund allow us both to ensure that these programs are complementary and can be leveraged, and to avoid duplicating expenses. In this way, we ensure that the fund is meeting its objective of intervening later in the marketing process than other sources of funding.

I will now discuss access to funds.

Funding is available for recent and existing albums that are already on the market. In the case of a record label recognized for promoting new artists, this funding is available one month before the launch, after providing proof that an initial investment in the project has been made.

Since 2007-2008, the return has been based on meeting a sales threshold which varies depending on the musical genre and the number of albums produced by the artist in question. This is a simple and objective criteria which reassures the client that his or her request will be granted if he or she meets the necessary threshold. And indeed the acceptance rate for projects received since this change has been around 99%. This criterion also gives companies the flexibility of investing at the moment that best suits them to ensure the best possible conditions for their artists' development projects to succeed.

One of the other fundamental principles of the fund, we should remember, is to give priority for funding to emerging artists. The thresholds are lower for first albums, facilitating access to funding. On average, since 2007-2008, 65% of projects that were funded were associated with artists who had produced no more than two albums in their career.

Here are a few figures and results associated with this funding.

From its foundation until the last fiscal year in August 2013, Fonds RadioStar has supported the second marketing phases of 544 albums. These albums are associated with 371 different artists and 9 projects are associated with artists' groups. More recently since the overhaul of 2007-2008, 200 albums which received funding and which came out between 2008 and 2012 generated total sales of a little over 2.8 million units. Out of these albums, 22 received certification, 10 platinum and 12 gold.

Looking beyond albums and artists, over 12 years the fund has directly supported the activities of 145 different companies, including 121 record labels and 24 different concert producers. It has also indirectly supported people working in the marketing of an album, including radio promoters, press relations representatives, concert agents, Web promoters and so on. On this last point, analysis of investments in these projects shows there has been a clear change in marketing strategies, which are now more focused on current music consumption trends.

We should not abandon traditional music marketing methods, but we need to be present in different spaces. Today, strategies are emphasizing Web promotion, notably the production of images for the Internet and support for on-stage performances. Over the last 3 years, 45% of investments have been directed to these areas; 25% toward the Web and 30% toward the stage — compare to 28% in 2004-2005.

To ensure that our initiatives remain relevant, we are continually adjusting the fund based on an analysis of the trends and on consultation with industry.

For example, once the new revenue resulting from the Bell-Astral transaction was confirmed, and after consultation with industry representatives, the fund, with the approval of its board and of the CRTC, immediately adopted a series of measures to bolster the available funding. Given that there is a desperate need in terms of promotion, notably because of the industry's transition towards digitalization, we decided to act as quickly as possible while reserving some of that revenue to extend the life of the fund. This flexibility also allows us to promote alternative initiatives to funding individual projects, and this benefits the industry as a whole.

Recently, in 2012, the fund added a “Collective Projects” Component to its marketing assistance program. This component supported a study concerning consumption habits, sociodemographic trends, the search for new content, and new purchasing processes for francophone music content, which involved 5,000 respondents. The results of this study were included in a practical guide which is available on the Web to all of the players in the music industry.

To conclude, allow me to make a few observations concerning the issues that the industry is currently facing.

Firstly, the democratization of the means of production has led to an abundance of content on the market. As a result, while it is necessary to have original and high quality content, to stand out, marketing is increasingly important.

Secondly, the diversification of promotion and distribution channels, the increase in marketing and international competition costs, notably involving huge stars, require increasingly large marketing budgets. Apart from a few instant successes, most careers develop over a much longer period than before, and even established artists practically have to start at square one or work very hard to maintain interest. So we need to invest more.

For us the goal is to ensure fair access to funding and to maintain a fair balance between demand and the fund's objectives and financial capacity.

Thank you.

[The Chair, Conservative, Gord Brown]

Thank you.

We will now move to questions.

We're going to start with the government. Mr. Dykstra, you have seven minutes.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you, Chair.

Through you, Chair, to the witnesses, I appreciate all of you coming here. This has been a fairly in-depth and long study, so I appreciate the opportunity to meet and speak with you this morning.

We don't have a lot of time, so I'll be as brief as I can, and hopefully you can respond in kind.

Duncan, one of the major pieces of all of this that has been referred to on a regular basis when we come to committee is FACTOR, because it is—and Musicaction—the basis upon which the foundation is built for so many Canadian artists to be able to move forward.

I wonder if you could just clarify for the committee the type of funding that you receive, both privately and publicly.

[Duncan McKie]

It's very straightforward. We receive $8.4 million from the Canada Music Fund on an annual basis. It's structured in a particular way, but I won't go into that. That's covered in the contribution agreements which are available to you, of course. Also, we received $11.1 million last year through CCD, Canadian content development, mandates from radio broadcasters which is, of course, through CRTC regulation. That fluctuates from year to year because it's dependent on transactions in the business and advertising revenues. It can go up or down. Right now it's at $11.1 million. We estimate it's going to be fairly high for the next one or two years; after that there's a decline.

[Rick Dykstra, Conservative, St. Catharines, ON]

We've heard both sides of the perspective on FACTOR from those witnesses who have been here. I wonder if you could isolate what you think are the current strengths and weaknesses of FACTOR.

[Duncan McKie]

I can start with the second one first and say, to give it a short answer, that I'm sure we have some weaknesses.

Let me talk to you a little bit about access because that's one of the things some people have commented on. Anyone can access FACTOR. FACTOR is not an exclusive club that belongs only to a group of independent labels who have a monopoly on the funding.

If you're an artist in any part of the country that wants to start out, wants to begin a career, you can access FACTOR for a $1,500 grant to record your first demo or single. Indeed, if you're a band or an artist and you get a showcase invitation from a legitimate festival in Canada, we will fund you up to $5,000 to go there, no matter what you've done. We have entry-level programs for people right across the country.

Also I'd say that distribution of our funds regionally is, importantly, very equitable. In fact I think somebody pointed out that 80% of the English music business is in Ontario and only 59% of our approvals are in Ontario, so there's a disproportionality. There's a larger percentage—or 52% of our approvals are in Ontario—and every province gets about the same number, as I pointed out. So, there's an equal probability that if you have a project that you're proposing to us, you'll get funded whether you're in Newfoundland or in Victoria or in Toronto.

There have been some misconceptions I think about.... The last thing I'll mention, and I mentioned it in our notes, is that we were the first organization to move towards funding that is not based on the sale of physical CDs, which was the old model of counting units. We are now fully engaged in measuring the commercial success of the company based on all forms of distribution, including digital, and with respect to the artist, we also dropped that singular condition. Now, we have 17 measures that cut across all of the artists' activities, including their digital activities, including their touring, including their live....

I think we're incredibly robust when it comes to our approach. If we have any weaknesses, it’s that we can't cover all the ground. Some people like you to be, to quote the chair, like peanut butter and spread all over the place. It's just not possible. The demands are sometimes beyond what we can meet. Although some might say that's not a weakness, I would say it's problematic to be continually meeting those issues, for us.

[Rick Dykstra, Conservative, St. Catharines, ON]

It's an interesting question. From a financial perspective, I understand that you guys do have some reserve money.

[Duncan McKie]

Yes.

[Rick Dykstra, Conservative, St. Catharines, ON]

How much is in that reserve?

[Duncan McKie]

About $35 million.

[Rick Dykstra, Conservative, St. Catharines, ON]

It kind of contradicts what you just said, in the sense that you can't spread yourself everywhere, yet you've got millions of dollars in reserve that you could potentially use on a yearly basis to assist more artists.

[Duncan McKie]

We will use that. The plan that the board adopted about two or three years ago was to take the tangible benefits money, which is where those reserves, from which we—

[Rick Dykstra, Conservative, St. Catharines, ON]

What does that mean? What are the tangible benefits?

[Duncan McKie]

They are the benefits that come from radio transactions through the CRTC. For example, there's a 6% levy on the amount that one pays in a transaction for a radio group. You might remember there was a large deal not that many years ago, maybe four or five years ago, between Astral and Standard, another between CHUM and CTV, and a recent one between Astral and Bell. All of these generated fairly large sums of tangible benefits. The board decided not to spend the money immediately but to set it aside for when those transactions weren't happening anymore.

We have a financial plan that shows the diminishment of those tangible benefits starting in about 2017. Then the reserve becomes an income generator, plus we're going to access the capital to keep FACTOR at a constant level of about $16 million, at least until 2020, so that far out. Beyond that, it just depends on the conditions.

I would say that was a prudent approach because if we hadn't done that and had started to invest the capital, we might see no FACTOR past 2020, or a very small FACTOR past 2020, and we couldn't meet the commitments we've built up in the industry today. The choice was made by the board at the time, and Susan may want to comment on it, but I think it was financially prudent. I think it was the right thing to do. I think we're now seeing the fruits of having made that decision.

[Rick Dykstra, Conservative, St. Catharines, ON]

When you go post-2017 to the decline in revenue from radio, is it basically the music that's played that you won't receive revenue from anymore?

[Duncan McKie]

It's not based on music played. We don't get paid that way. Our revenue from radio is based on a percentage of advertising revenue, a gross.

[Rick Dykstra, Conservative, St. Catharines, ON]

That the ownership receives from the advertising base.

[Duncan McKie]

Yes. There are two forms. There's a 0.5% levy on gross revenues that go to radio stations every year. That's accounted for by the stations and their groups, and we receive a cheque. The second form, which I alluded to, is the 0.6% on transactions.

That's not related in any way to their play of music. It's an obligation of the CRTC for them to contribute to the development of Canadian content.

[Rick Dykstra, Conservative, St. Catharines, ON]

So your view is that there won't be as many transactions, and therefore there won't be as much revenue.