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Ottawa, 2 September 1986
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Decision Introductory Statement to Decisions CRTC 86-812 to CRTC 86-814 Related to Pay Television
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A Review of the Conditions of Licences Pertaining to the Funding and Exhibition of Canadian Programming
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For related documents: Decisions CRTC 82-240 (18 March 1982), 82-1023 (23 November 1982), 83-576 (27 July 1983), 83-959 (16 November 1983), Introductory Statement to Decisions CRTC 1984-1 to 1984-4 (5 January 1984), and 84-654 (16 August 1984); Public Notices CRTC 1984-1 to CRTC 1984-3 (5 January 1984), 1984-275 (8 November 1984), 1985-155 (22 July 1985), 1986-28 (14 February 1986) and Notice of Public Hearing CRTC 1986-29 (11 April 1986).
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BACKGROUND
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In April 1985 First Choice Canadian Communications Corporation (First Choice) and Allarcom Pay Television Limited (Allarcom) filed applications requesting amendments to certain conditions of licence relating to the funding and exhibition of Canadian programming. Subsequently, Premier Choix: TVEC Inc. (Premier Choix: TVEC) filed a similar application for relief from existing Canadian programming requirements.
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Public Notice CRTC 1985-155 deferred consideration of these applications pending the release of the Report of the Task Force on Broadcasting. But when it became apparent that the Report would not be completed by the anticipated deadline of 15 January 1986, the Commission, with the agreement of the Task Force, announced on 14 February 1986 (Public Notice CRTC 1986-28) that it would proceed with the hearing of these applications. The applicants were invited to complete or update their applications by 14 March 1986 and a public hearing was held in the National Capital Region commencing 10 June 1986.
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Since the original licensing and launch of pay television services in Canada over three years ago, seven major public hearings have been held to consider significant structural changes which have taken place in the industry.
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Such factors as fewer than anticipated subscribers and unregulated competition from a number of sources have resulted in a pay television environment that is substantially different from what it was at the time that these licences were granted. This has greatly affected the licensees's financial results, as well as their ability to meet the requirements of the original decisions. The Commission has stated its determination to take into account fluctuations and changes in the environment under which its licensees operate. On this basis, it was ready to review the regulatory demands imposed on the pay television licensees and to make adjustments, if necessary.
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The 10 June 1986 Public Hearing marked the first time the public and the Commission have had an opportunity since these undertakings were originally licensed to assess the conditions of licence with respect to the exhibition and funding of Canadian programming which were included in the original licensing decisions of the general interest pay television networks.
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The Commission received 97 interventions to these applications, the vast majority of which were in favour of the proposed amendments. The Commission wishes to acknowledge the significant contribution made by the interveners and notes that a positive spirit of co-operation was evident throughout the proceedings.
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The Commission emphasizes that these applications sought interim measures to improve the financial situation of the licensees. The Commission intends to review industry conditions and licensee commitments within the context of licence renewals, which will be scheduled prior to the expiry of the current licences in the spring of 1987. On this occasion, any appropriate recommendations of the Report of the Task Force on Broadcasting can be considered.
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It is appropriate to note that, in response to a perceived discrepancy between the wording of the text and the conditions of licence of Decision CRTC 82-240, the Commission announced on 28 July 1982 (Broadcasting Order CRTC 82-1) a "correction" which specified that in the conditions of licence pertaining to the amounts of gross revenue and of the program budget to be expended on Canadian productions the words "in each year" and "commencing 1 July 1982" should be deleted.
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Some organizations within the Canadian production industry appealed this correction, and the Governor in Council (Cabinet) upheld the appeal in Order in Council P.C. 1982-2958 (22 September 1982). Accordingly, the original wording of Decision CRTC 82-240 was reimposed and every subsequent decision relating to general interest pay television network licences has incorporated the requirement that investment in Canadian programming is to be achieved on an annual basis instead of "over the term of the licences" as indicated in Broadcasting Order CRTC 82-1.
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THE APPLICATIONS
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All three applicants proposed to reduce the time requirements for the exhibition of Canadian programming. First Choice, Allarcom and Premier Choix: TVEC have been required, by condition of license, to meet 30% Canadian content levels overall and during prime viewing hours. On l January 1986 the requirement increased to 50%. Half of this amount must be Canadian drama including feature films. These requirements must be met on a six-month semester basis ending 30 June and 31 December each year. It should be noted that these levels of Canadian content were proposed by the licensees at the original 1981 public hearings and have been re-affirmed at subsequent hearings. In the current applications, First Choice and Allarcom requested amendments to their licences to reduce the exhibition requirements to 15%.
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Premier Choix: TVEC requested a reduction to 20% Canadian content. As stated at the hearing, the licensee proposed [TRANSLATION]:
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We would like to clarify the situation today. It isn't a matter of a 10% total, including 30% complementary programming, but rather 20% Canadian content consisting of 10% for feature films and 30% for other programming.
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The licensees have also been required to expend not less than 45% of gross revenues and not less than 60% of their program budgets on investment in or acquisition of Canadian programs on an annual basis. First Choice and Allarcom have proposed the replacement of these conditions with a formula whereby 50.l% of "adjusted gross revenues" would be devoted to the funding of domestic product. "Adjusted gross revenues" was defined by the licensees as total revenue derived from the operation of a network pay television licence, less all operating expenses other than those allocated for programming. In addition, First Choice and Allarcom proposed the awarding of a double financial credit for new dramatic productions in which the licensees engage in funding prior to the completion of principal photography or taping.
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Further, Allarcom sought the elimination of the condition of licence requiring it to exhibit 16 hours per week of regionally-produced or acquired programming. It also requested the cancellation of the requirement that it re-invest 100% of the profits generated from its licensed operations in the production of Canadian programs.
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Premier Choix: TVEC proposed the replacement of the 45% and 60% expenditure requirements with a formula that would require the allocation of 15% of gross revenues and 30% of the programming budget for investment in or acquisition of Canadian programs.
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ISSUES
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Exhibition Levels
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At the hearing, the licensees described in detail the current situation regarding the availability of suitable Canadian product, and noted that they are heavily dependent on feature films for the bulk of their schedules. The first three years of their existence have been characterized by a heavy dependence on existing product, or "shelf material".
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Mr. Paul Gratton, Director of Programming for First Choice, described the situation in these words:
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we showcase a minimum of 36 new Canadian feature films every year which includes recent theatricals, old shelf classics and made-for-pay features. It is approximately at this rate that Pay has been burning up the ever dwindling number of available Canadian feature-length movies.
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The licensees submitted that the lack of domestic product has meant that in order to meet their Canadian content requirements, they have had to repeat these productions many times, resulting in considerable subscriber dissatisfaction and subsequent disconnects. Mr. Gratton explained:
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In order to fill a 30% air quota level the repeat factor on these 36 pictures must be three times higher than it is for all other titles in our inventory ... lowering the on-air quota requirement will serve only to lower our repeat factor. It will not diminish the number of pictures that we licence, nor will it reduce the amount of the licence fees paid.
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Many of the interventions at this hearing were from the private production sector. They were generally in favour of a reduction in exhibition quotas on the grounds that Canadian feature films were becoming over-exposed.
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A number of interveners, including the CBC and the Canadian Film and Television Association (CFTA) suggested that the Canadian content levels could be reduced to 25% overall and during prime viewing hours. The CFTA also proposed that the pay television licensees be accorded a 150% air-time credit for the exhibition of new Canadian dramatic productions, similar to the benefit allowed conventional broadcasters.
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The Canadian Association of Broadcasters (CAB) was opposed to any reduction below 30%, and further suggested that this level should rise to 50% after two or three years. The Alliance of Canadian Cinema, Radio and Television Artists (ACTRA) was opposed to any amendments to the existing conditions of licence, and further urged the Commission to undertake a major review of the pay television industry at the next licence renewal hearing.
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In their reply to the interventions, both First Choice and Allarcom noted the constructive proposals put forward by the CFTA. They indicated that the proposal for a 150% air-time credit for the exhibition of new Canadian dramatic productions would enable the pay television licensees to meet an overall exhibition quota of 20% without undue repetitions. However, they were of the opinion that the requirement for prime viewing hours should be limited to 15% because of the high number of R-rated domestic films. First Choice and Allarcom also indicated that they would not count as Canadian any production of less than 15 minutes duration.
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Allarcom indicated during the hearing that the condition of licence requiring the exhibition of 16 hours per week of regionally-produced programming could continue to apply. It also stated that it was prepared to continue to abide by the requirement that it reinvest 100% of the profits generated from its licensed operations in the production of Canadian programs.
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After careful consideration of all of the evidence and the various views and opinions put forward, the Commission has determined, as set out in the attached decisions, that First Choice, Allarcom and Premier Choix: TVEC should exhibit not less than 30% Canadian programming in prime viewing hours, and not less than 20% during the remainder of their schedules. The Commission acknowledges the licensees' concern regarding the distribution of restricted material in prime viewing hours but notes that Canadian and foreign films have roughly the same ratio of adult themes and that there seems to be a trend away from this type of material in recent years.
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Furthermore, the Commission will permit a 150% credit for the exhibition of new Canadian dramatic productions. These measures should allow the licensees to reflect better the current production capacity of the domestic feature film industry.
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The Commission expects the licensees to adhere to their commitments that there will be no reduction in the annual number of domestic titles licensed, and that they will continue to acquire and/or invest in all available Canadian feature films which comply with their Code of Standards and Practices. The Commission will assess the fulfillment of these commitments at the time of the renewal of these licences.
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Expenditure Requirements
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The pay licensees have identified a number of factors which have had a detrimental impact on the viability of their operations. The current subscriber penetration levels remain at only half of the original projections. The general availability of VCR movie rentals may be considered as an alternate source of movie programming to pay television. Pay television licensees are also confronted with a considerable measure of subscriber sensitivity to the level of rates charged for these services and are thus strictly constrained from raising rates in order to increase operating revenues and cash flow. All of these factors account for a situation which challenges the viability of pay television operations.
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According to the applicants, current combined deficits exceed $72 million and are projected to more than double in four years time if the licensees are required to operate according to the existing conditions of their licences. Under the 45% and 60% expenditure requirements, First Choice projects a $107.2 million deficit by 31 August 1989, Allarcom projects a deficit of $44.9 million by 31 August 1990 and Premier Choix: TVEC projects a deficit of $19.l million by 31 August 1989.
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A large majority of the interventions recognized the current predicament of the pay television industry and supported measures which would reduce its deficits, although many raised concerns regarding the licensees' proposals.
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The most contentious aspect was the proposal to reduce the expenditure requirements from the current levels of 45% and 60% to 50.l% of "adjusted gross revenues". Similar concerns were raised with regard to the proposed double financial credit for new dramatic productions. The interveners considered that any scheme involving "adjusted gross revenues" as a base could be open to abuse and could be difficult for the Commission to monitor. As an alternative, they suggested a fixed percentage of actual gross revenues. Many interveners pointed out that the double financial credit for new dramatic productions would artificially inflate the amount of funds credited to domestic product.
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In response to these concerns, the licensees put forward a variety of funding scenarios, and discussed various alternatives, including those suggested by the various interveners. First Choice and Allarcom provided documentation which indicated that 20% of actual gross revenues would provide a funding level similar to their proposed 50.l% of "adjusted gross revenues". They noted that if the proposal, as filed, would result in ongoing difficulties for the Commission or the industry, a commitment based on a percentage of actual gross revenues would be acceptable.
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Some interveners, including the CAB, were opposed to any reduction in expenditure requirements. Others, including Cineflics Ltd., the CBC and the CFTA, suggested that lowering the expenditures to 25% of actual gross revenues would permit the licensees to reduce a portion of their deficits and allow them to maintain their commitments to the funding of domestic product.
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The Commission has analyzed the revenue projections of the licensees and notes that, based on the subscriber growth rate assumptions provided by the applicants, First Choice and Premier Choix: TVEC would still face significant accumulated deficits after four years under the 20% expenditure requirement. Nevertheless, the Commission, while maintaining its original objectives for the pay television industry, has determined that the licensees should expend not less than 20% of actual gross revenues on investment in or acquisition of Canadian programming.
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The Commission considers that it is unnecessary to have two Canadian content expenditure requirements and, accordingly, has not imposed one that is based on a percentage of programming budget in the attached decisions.
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The Commission notes that many interveners expressed strong support for the cross-licensing agreement reached between First Choice and Allarcom whereby four domestic feature films from each of Western and Eastern Canada will gain national exposure on pay television. The Commission encourages the licensees to maintain and develop further this cross-licensing agreement.
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The Commission also notes that First Choice has made a commitment to ensure that the Foundation to Underwrite New Drama for Pay Television (FUND) will have a minimum annual budget of $1 million for script and concept development and related activities for each full 12-month period. The Commission places utmost importance on such measures and notes that FUND has been engaged in providing grants for this purpose.
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Finally, the Commission notes that over the past three years, the pay television licensees have expended a total of $73,700,000 for investment in or acquisition of Canadian production. To date, First Choice has spent approximately $48 million, Allarcom $17.5 million and Premier Choix: TVEC $8 million in support of the Canadian independent production industry.
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