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Ottawa, 26 March 1991
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Decision CRTC 91-160
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Viewer's Choice Canada, a General Partnership
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Toronto, Ontario - 901887000
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Following a Public Hearing commencing 27 November 1990 in the National Capital Region, the Commission approves the application by Viewer's Choice Canada (VCC), a general partnership, for a licence to carry on an English-language pay television network undertaking for the distribution of a pay-per-view (PPV) service via satellite to cable affiliates in Eastern Canada (Ontario, Quebec and the Atlantic Provinces).
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The licensee will be regulated pursuant to the Pay Television Regulations, 1990 and the licence shall be subject to the terms and conditions set out in the appendix to this decision.
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VCC had requested a full licence term of five years. The Commission, however, has decided to issue a network licence to VCC expiring 31 August 1994. This term will allow the Commission an early opportunity to examine with the licensee any negative impact of PPV on Canadian programming objectives, particularly with regard to existing subscription pay television services, and the extent of PPV's contribution to the Canadian broadcasting system. The Commission also intends to examine the impact of PPV on First Choice Canadian Communications Corporation (First Choice) at the time it considers the renewal of First Choice's licence for the English-language pay television network undertaking serving Eastern Canada, expiring 31 August 1993. As noted later in this decision, First Choice is controlled by Astral Bellevue Communications Inc. (Astral), which is also the controlling partner in VCC.
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Notwithstanding the distribution and linkage requirements referred to in subsection 10(2) of the Cable Television Regulations, 1986, the Commission is not prepared to allow cable television licensees to link the proposed service with any non-Canadian discretionary service or services. The Commission notes in this regard that neither the applicant nor any of the prospective cable affiliates proposed that there be any such linkage arrangements. Accordingly, by condition of licence, the Commission will require VCC to ensure that all affiliation agreements entered into between it and cable television licensees incorporate a prohibition against linkage.
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Background
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In Public Notice CRTC 1988-173, which accompanied the Commission's decisions renewing the licences of the general interest pay television licensees in 1988, the Commission stated that it would be prepared to deal with PPV proposals. The Commission, however, advised that future applicants would be required to "reflect the existing pay television structure" in their proposals, and to present a clear view of how their proposed PPV services would contribute to the Canadian broadcasting system, particularly with respect to the financial support and exposure of Canadian programming.
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Subsequently, in Decision CRTC 90-78, the Commission approved an application by Allarcom Pay Television Limited (APT) for a network licence to provide a PPV service, on an experimental and temporary basis, to subscribers of Allarcom's discretionary pay television service (Superchannel) in the three cities of Regina, Saskatoon and Yorkton, Saskatchewan.
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In its decision, the Commission made it clear that its approval of the PPV structure proposed by APT did not imply that the Commission necessarily endorsed that structure as the most appropriate PPV model, or that it precluded the licensing of applications proposing alternative structures or approaches for the introduction of PPV services.
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The Commission's primary concern, then and now, relates to PPV's ability to contribute in a meaningful manner to the development and exposure of Canadian programming, specifically feature-length films. The Commission's concern also stems from its appreciation of the difficult market conditions that confront the Canadian feature film industry in its efforts to secure financing, distribution, and exhibition of domestic programming. A good deal of the discussion of VCC's application at the 27 November 1990 hearing was devoted to an examination of these issues, and they are discussed further below.
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VCC's Proposal
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a) Overview
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VCC is a general partnership consisting of Astral, which holds a 50.1% interest in the partnership, Rogers Pay Per View Inc. (Rogers) and TSN Enterprises, each with a 24.95% interest. VCC will be managed by a partnership committee of five members, including three nominees of Astral, one of Rogers and one of TSN Enterprises.
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Astral, a company effectively controlled by members of the Greenberg family of Montreal, is active in the film distribution industry and is the 100% shareholder of First Choice. It also owns 50% of The Family Channel Inc. and holds an indirect 54.2% interest in Premier Choix:TVEC Inc. Rogers is a company that is ultimately controlled by Mr. Edward S. Rogers of Toronto who, through Rogers Communications Inc., has extensive holdings in Canada's cable television, broadcasting and telecommunications industries. TSN Enterprises is a partnership of Ault Foods Limited (Ault) and Labatt Brewing Company Limited (Labatt), which companies are, in turn, both wholly-owned subsidiaries of John Labatt Limited. Ault and Labatt are also partners in the ownership and operation of The Sports Network (TSN), licensee of the national, English-language specialty sports programming service. TSN Enterprises is also the 70% owner of TSN's French-language counterpart, Le Réseau des Sports.
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VCC proposes to make use of satellite facilities to transmit encrypted programming to cable television affiliates and, potentially, to direct-to-home subscribers. For the most part, this programming will consist of feature films, but will also include live coverage of musical concerts and sporting events.
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In the case of feature films, the encrypted satellite programming will be taped overnight by cable television affiliates and made available to subscribers in accordance with VCC's network schedule. The illustrative or sample film schedule submitted by the applicant consists of eight four-hour modules that would rotate between 16 and 20 first-run film titles over a four-week period. The service would operate between the hours of 2:00 pm and 2:00 am Eastern Time, seven days a week. As for the live concerts or sporting events, these would be scheduled at the rate of slightly more than one per month, or 14 per year. The applicant's projections assume an initial, average retail price of $4.40 for both Canadian and non-Canadian films and $9.95 and $20.00, respectively, for Canadian and non-Canadian events or concerts.
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In order to access VCC's PPV service, cable subscribers will need to be equipped with addressable decoders. Initially, the subscribers of most cable systems will place their orders with customer service representatives by telephone prior to the scheduled commencement of a specific film or event. Charges for the service will be added to subscribers' monthly cable bills.
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The applicant has assumed that its initial market will consist of approximately 275,000 households across Eastern Canada; this figure is based on the applicant's estimate of the number of subscribers in the region now equipped with addressable decoders used to receive existing encrypted discretionary services, and who are served by cable systems with 5,000 or more addressable subscribers. According to VCC, the capital and operating costs that would be incurred in offering PPV render it financially unattractive to cable systems with fewer than 5,000 addressable subscribers.
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While VCC had requested that its undertaking be designated a video-on-demand (VOD) service, as well as a PPV service, the Commission notes that the service, as proposed, would not employ the system architecture and technology that would be necessary to offer a true VOD service, at least for some time. Given the many unresolved technical, regulatory and other issues surrounding VOD, including questions as to whether and how VOD would be accommodated within the Canadian broadcasting system, the Commission has determined that it would be inappropriate to license VCC for the operation of a VOD undertaking at this time.
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While not forming part of VCC's current proposal, the Commission notes the applicant's intentions to explore the future development of an equivalent French-language PPV service. Such a plan would require a separate application.
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b) Exhibition of Canadian Programs
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The applicant made a commitment to schedule, each year, a minimum of 12 new Canadian feature films (including all new Canadian features that are suitable for a PPV window and meet the Pay TV Standards and Practices), and a minimum of two Canadian-based events or concerts. As reflected by its illustrative model, VCC also committed to maintain a minimum ratio of Canadian to non-Canadian programming of 1:20 for first-run film titles, and 2:14 for concerts or events, both ratios being measured on an annual basis.
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VCC indicated that, initially, most cable television affiliates would devote two channels to the PPV service, one for the distribution of films and a second for the distribution of live events and promotional material. As envisaged by the applicant, some cable television affiliates with available channel capacity may opt to use two or more channels to distribute films. The additional channels would also be programmed by the applicant and might include different film modules or the original modules in a different sequence.
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Although the Commission will not restrict the number of channels that may be used by cable affiliates for the distribution of VCC's programming, it will require that VCC retain control at all times over the scheduling of films on all channels used for the distribution of the PPV service by cable affiliates, and that the prescribed minimum ratios for the scheduling of Canadian to non-Canadian first-run film titles and events are maintained on an annual basis, on each channel. With respect to the network's logging requirements, the Commission will require VCC, by condition of licence, to provide to the Commission, upon request, a record of the network's programming distributed by individual cable affiliates.
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VCC also made a commitment to give fair and equal treatment to Canadian and non-Canadian films and events with respect to their promotion, the number of showings or repeats, and the frequency with which they are rotated in the schedule. Given the general lack of marketing support for Canadian films at the box office, the Commission also notes the applicant's plans to promote Canadian programming and encourage viewership.
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VCC stated that it would accept as a condition of licence the limitation that currently applies to First Choice with respect to the distribution of productions with Astral financing. Accordingly, it will be a condition of licence in respect of VCC that the distribution of such productions be limited to those in which Astral does not hold creative or financial control.
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Similarly, in selecting Canadian films for distribution on its PPV service, VCC made a commitment to treat distributors on an equitable and non-discriminatory basis, with no preferential treatment being given to the productions distributed by Astral. The Commission expects the applicant to adhere to its commitment with respect to non-discriminatory treatment of distributors.
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c) Financial Support for Canadian Programming
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VCC made a commitment to forego the network's share of the gross PPV revenues generated by the distribution of all Canadian films and by the distribution of at least two Canadian events per year. These revenues will be passed along to the Canadian rights holders. As a result, Canadian rights holders will receive two-thirds of the gross revenues attracted by Canadian films and 70% of the gross revenues generated by two Canadian events each year. According to VCC's projections, these revenues would amount to approximately $936,000 over the first three years of operation. The Commission will require VCC to adhere to this commitment, by condition of licence.
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In addition to the PPV revenues that VCC will pass on to the holders of Canadian programming rights, VCC made a commitment in its application to contribute a total of $2 million over five years to FUND (the Foundation to Underwrite New Drama) for FUND's equity investment in Canadian films. Under this commitment, FUND would also benefit from all recoupment revenues earned on its equity investment in Canadian films using VCC's contribution of $2 million.
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At the hearing, VCC acknowledged the difficulty in accurately predicting the amount of recoupment revenues that would be generated by its proposed contribution to FUND, and committed to increase its contribution from $2 million to $3 million over five years. The applicant claimed that recoupment revenues from this $3 million could amount to as much as $1.5 million over five years. As discussed later in this decision, the Commission has attached a condition of licence requiring VCC to contribute to FUND the sum of $3 million over the first licence term, as opposed to the five-year period proposed by the applicant.
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d) Impact on First Choice
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In responding to the Commission's stated policy concern regarding the impact of PPV on general interest pay television services, the applicant argued that the controlling interest held by the principals of First Choice in the ownership of VCC is, itself, a significant guarantee that the PPV service will be introduced in a manner designed to minimize the impact on First Choice. Similarly, the applicant observed that "Astral, Rogers and TSN are the most direct potential victims of any new service that could exist in an unregulated environment", whose shared interest will therefore be to limit the competitive impact of the PPV service on existing services.
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To this end, VCC undertook to implement various strategies and approaches to minimize any negative impact on First Choice, including a commitment not to purchase films or events on an exclusive basis, thereby maintaining the same "orderly market" that currently exists with respect to program windows. The Commission expects the applicant to adhere to this commitment.
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VCC's business plan does not include any "buy-through" requirement that would oblige householders wishing to access the PPV service first to subscribe to the premium pay television service. According to VCC, any such buy-through requirement would severely limit access to the PPV service and would impose a substantial constraint on its future growth.
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Since the obligations imposed on First Choice for the distribution of Canadian programming are tied to subscriber levels, and its Canadian program expenditure requirements are tied to revenue performance, any decrease in the number of First Choice subscribers would translate into a reduction in the contributions by First Choice to the production and exhibition of new Canadian programming.
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In this regard, the applicant conceded that, in the absence of a buy-through requirement, some current subscribers of First Choice would likely elect to cancel their subscriptions in favour of PPV. According to estimates provided by First Choice, the introduction of PPV could result in a one-time loss to First Choice of 30,000 subscribers.
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The Commission notes that it is also possible that the PPV service will attract audiences from among cabled households that do not currently subscribe to pay television services. To the extent that subscribers from within this "expansion market", as it is referred to by VCC, are attracted to PPV, this could have a further negative impact on the future growth of First Choice.
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In order to minimize the competitive impact of PPV on First Choice, the applicant undertook to market VCC as a "value-added" service to existing pay television and specialty services. Elements of this strategy will include giving marketing emphasis to the fact that charges for the common addressable decoder required to receive PPV and pay television are already included in the cost of a pay television subscription. For its part, Astral indicated that, although films will generally be available on a PPV basis some 5 to 16 months before their pay television window, it would stress the greater value of First Choice on a cost-per-film basis.
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While the measures proposed by the applicant are designed to minimize the competitive impact of PPV on First Choice, the Commission remains concerned that the level of funding available to support the production of new Canadian programming would be reduced as a consequence of the introduction of the VCC service. In this regard, the Commission notes that the projected one-time loss of 30,000 First Choice subscribers would lead to a substantial decrease in the level of investment in Canadian programming that First Choice, under the terms of its licence, would otherwise be required to make.
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To help ensure that the introduction of PPV provides a positive net contribution to the system, the Commission will require the applicant, by condition of licence, to contribute $3 million to FUND within the term of its licence.
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The Commission considers that this is a reasonable requirement in the circumstances, and is satisfied it will ensure that, while the proposed PPV service may reduce the Canadian program investment that would otherwise have been made by First Choice, this will not translate into a net loss for the Canadian broadcasting system as a whole. As discussed at the public hearing, there are a number of uncertainties surrounding the introduction of PPV, including VCC's market performance and success in implementing its projected business plan, VCC's ability to contribute to the Canadian broadcasting system, and the scope of its impact on First Choice. These will be influenced by such factors as the proportion of the expansion market of stand-alone PPV viewers that VCC is able to attract, the future growth in the number of cable subscribers with addressable decoders, and the number of PPV channels offered by cable affiliates. There is also uncertainty relating to the size of the revenue "splits" between VCC and the suppliers of non-Canadian programming, the "buy rates" for Canadian PPV programming and the consequent level of revenues that will be passed on to Canadian rights holders.
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Given the various matters noted above, the Commission will assess VCC's progress at the time of licence renewal. As stated earlier, the Commission will also review the competitive impact of VCC on the performance of First Choice at the time it considers the application by the latter for licence renewal.
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The Commission notes the support for VCC's proposal expressed in several interventions, including those filed by various representatives of the cable television, television production and film distribution industries. The Commission has also considered the views expressed in the interventions submitted by the Ontario Ministry of Culture and Communications, the CBC, and by CHUM Limited in its capacity as licensee of MUCHMUSIC, and notes the applicant's replies thereto.
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At the hearing, Ontario Closed Caption Consumers, Inc. presented an intervention congratulating VCC upon its commitment to distribute all films, and all live events other than music concerts, with closed captions. The Commission joins the intervener in strongly encouraging each cable television affiliate of VCC to acquire and install a telecommunications device for the deaf (TDD) and to ensure that the TDD number is listed in the public telephone directory, thus enabling hearing-impaired subscribers to access and enjoy the PPV service.
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Allan J. Darling
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Secretary General
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Appendix to Decision CRTC 91-160
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Conditions of Licence in Respect of Viewers Choice Canada, a General Partnership:
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1. The licensee shall distribute on its network undertaking, in each broadcast year, a minimum of 12 Canadian feature films (including all new Canadian features that are suitable for PPV and meet the Pay TV Standards and Practices), and a minimum of 2 Canadian-based events.
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2. The licensee shall retain control at all times over the scheduling of films and events exhibited on the cable television undertakings operated by its affiliates, and shall, in each broadcast year, maintain a minimum Canadian to non-Canadian ratio of 1:20 for first-run film titles, and 2:14 for events, on each channel used for their exhibition.
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3. The licensee shall remit to the rights holders of all Canadian films and to the rights holders of 2 Canadian-based events, in each broadcast year, a minimum of 66.6% and 70%, respectively, of the gross revenues earned from the exhibition of these Canadian films and Canadian-based events.
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4. The licensee shall contribute to FUND, for FUND's equity investment in Canadian films, the sum of $3 million over the licence term. ii
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5.(a) The licensee shall not distribute any film or video production with respect to which Astral has carried on activities other than financing or distribution.
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(b) Where Astral has carried on financing or distribution activities with respect to a film or video production, the licensee shall not distribute that film or video production unless all actual production and creative control, apart from such financial approvals as are normally required in such circumstances, remains the full responsibility of an independent Canadian production company.
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6. Upon request by the Commission, the licensee shall provide to the Commission a record of the network's programming distributed by individual cable affiliates.
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7. Notwithstanding the distribution and linkage requirements referred to in subsection 10(2) of the Cable Television Regulations, 1986, the service provided by the licensee shall not be linked with any non-Canadian discretionary service, and the licensee shall not enter into any affiliation agreement with cable affiliates that does not incorporate this prohibition against linkage.iii
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8. Definitions:
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In these conditions:
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"broadcast year" means the period from the date of commencement of operation of the service to 31 August 1992 and each 12-month period thereafter commencing on 1 September, 1992.
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