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Decision
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Ottawa, 1 December 1987
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Decision CRTC 87-901
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The Sports Network - 871183000
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The Commission approves the application by The Sports Network (TSN), formerly Action Canada Sports Network, to amend its licence in order to permit distribution of its national English-language sports service by cable affiliates as an optional-to-basic or as a discretionary service for the remainder of the licence term, in accordance with the provisions outlined in the Public Notices accompanying this decision (Public Notices CRTC 1987-260 and CRTC 1987-261). The amendments to the conditions of licence are contained in the appendix to this decision and will be set out in the amended licence to be issued.
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This satellite-to-cable network is currently distributed on a discretionary basis to cable subscribers of Class 1 and Class 2 cable systems, and on the basic cable service to subscribers of Part III cable systems, as defined in the Cable Television Regulation, 1986. TSN will continue to provide programming exclusively devoted to all aspects of sports, including coverage of professional and amateur sports events, newscasts, magazine shows, interviews, commentaries, documentaries, audience participation programming, instruction and training programs and other programs that promote fitness and healthy lifestyles. This 24-hour-a-day service is primarily programmed on an 8-hour cycle, portions of which may be repeated within a 24-hour or 48-hour period.
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Launched on 1 September 1984, TSN now reaches more than one million Canadian households and has achieved Canadian programming content levels of 42% overall and 55% from 6:00 p.m. to midnight during the first six months of 1987, a substantial increase over the levels of 18% over-all, 34% between 6:00 p.m. and midnight and 47% during the mid-evening viewing hours (7:30 to 10:30 p.m.) required by condition of licence during its first two years of operation. Since its inception, TSN has spent significantly more than the proposed 70% of its program budget each year on Canadian programming (for a total of more than $30 million to date), including of independently-produced Canadian programming.
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In addition, TSN has "been responsible for over 10,000 days of work for freelance producers, directors and commentators"; it has spent "more than $14 million to date to promote TSN and cable in the Canadian market-place"; it has offered Canadian television viewers a true choice, providing them with events and coverage "not available anywhere else on the dial"; and it has leased mobile broadcast facilities and hired production crews from local commercial television stations in every part of the country, and offered conventional broadcasters "complimentary use of highlights form our event coverage [for use] in their own sportscasts".
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As Mr. Gordon Craig, President of TSN, stated at the hearing, in applying for optional-to-basic cable distribution, TSN is seeking more stability for its cable partners to meet the demands of each individual market. He noted that such a distribution mode "is sure to be subject to fewer seasonal fluctuations and packaging and pricing differences".
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He also stated:
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Basic carriage will increase access to Canadian specialty services by eliminating the high costs associated with discretionary technology and discretionary marketing. Specialty services will, for he first time, become affordable for the majority of Canadians.
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Optional carriage on basic will bring flexibility to the way cable licensees deal with their own local markets ... It will allow decisions to be made based on consumer preferences in individual markets.
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Demand
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As evidence of the demand for basic cable service distribution of TSN, the applicant referred at the hearing to a survey it had commissioned from Sorécom Inc. (September 1986), which one-third of cable subscribers (34%) "very much enjoy" sports programming. Of those interviewed, 89% of current subscribers to discretionary services presently receive TSN and 49% of the remainder indicated they would be "very/ or "somewhat" interested in watching TSN if it were available on basic service. TSN also pointed to an Angus Reid Associates Inc. survey (May 1987) commissioned by the CRTC, indicating that 68% of those questioned would be interested in watching sports programming. Mr Paul Brown, TSN's Director of Business Affaires, described TSN's understanding of the "price sensitivity" of subscribers:
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... we evaluated the interest in eight specialty services at the $2 and $3 price point and we found a strong interest, even at that point. And again, TSN was the leader at 49% "would buy" the service. There is very little price sensitivity between the $2 and $3 price point.
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Based on TSN's experience with cable operators over the past three years, Mr. Craig expressed confidence that the cable industry recognizes the contribution the sports service has made to the discretionary tier and "the value that is placed on TSN by [cable] subscribers". He stated that contracts have already been signed with Maclean-Hunter Cable TV and Selkirk Communications Limited to distribute TSN on basic cable and that negotiations are underway with Rogers Cable T.V. Limited, Cablenet and Cablecasting Ltd. He stated:
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We don't anticipate that we will come to September 1st without a full business relationship with our existing subscriber base in place.
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Programming
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The Commission has taken note of the description of program service supplied by the licensee, as set out earlier in this decision, the clarifications it provided at the hearing that audience participation programming would not exceed three hours per week, and that its fitness and lifestyle programming would not include feature length movies about sports personalities whether factual or fictional and would, in fact, be limited to a half-hour of programming Monday to Friday. TSN will be expected to adhere to these commitments for the remainder of its licence term which expires 31 March 1989.
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In its application, TSN proposed to amend a condition of its licence to increase its Canadian programming to 50% over the 24-hour broadcast day and in the evening period (6:00 p.m. to midnight). at the hearing, the Commission queried the applicant as to why it proposed a 50% minimum level of Canadian programming based on a 24-hour-per-day schedule, rather than 60% based on an 18-hour broadcast day, which is the standard by which conventional television broadcasters are assessed. Mr. Craig replied that TSN interpreted the "overall goal of the Commission to be the optimization of program hours in a broadcast day" and added:
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in that scenario, the conventional broadcaster requirement of 60% over an 18-hour day delivers 75.6 hours a week of Canadian content.
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Our measurement ... is 84 hours a week. So, there is an incremental weekly commitment in our licence proposal of 8.4 hours a week more than what the conventional broadcaster is required to commit to.
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That scenario equates to an increase of 437 incremental hours of Canadian content on an annual basis. We interpreted that as meeting the spirit of Canadian content targets ...
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When pressed further on the subject, Mr. Craig explained that TSN strives to have a well-rounded, balanced schedule in order to serve it subscribers across five time zones. While asking the Commission to consider "an adjusted yardstick", TSN undertook to abide by whatever conditions of licence with respect to Canadian programming the Commission might impose, and further committed "to have the Canadian content evenly distributed throughout the day parts" within its eight-hour programming cycle. The licensee also promised to abide by its existing condition of licence with respect to continuing to devote a minimum of 70% of its program budget to the acquisition of, or investment in, Canadian programs.
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With respect to the licensee's proposals for Canadian programming levels of 50% over a 24-hour-day, the Commission is not convinced that TSN has provided sufficient evidence to justify an exception to its policy that specialty services distributed on the basic cable service should adhere to the same Canadian content requirements as conventional television broadcasters. Accordingly, the Commission has decided to amend the condition of TSN's licence respecting the level of Canadian content to require, effective the date of commencement of distribution of TSN a part of the basic service on cable, that Canadian programs comprise not less than 60% of the broadcast year, and not less than 50% of the evening broadcast period. Condition 2 in the Appendix to Decision CRTC 84-339 (the original licensing decision for the TSN specialty service) is therefore deleted.
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Viability
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The licensee has estimated that in 1988/89, the first year of operation under the proposed revised distribution provisions, 12% of its subscriber revenue would be derived from cable subscribers receiving TSN as part of the basic service, rising to 41% in the second year. In its application, TSN projected that by 1990/91, 78% of its subscriber revenue would be attributable to basic cable service subscriber fees, representing approximately 70% of Canadian cable households or 90% of cable homes in the English-language market.
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While noting that the actual subscriber levels would depend on a number of factors outside its control, such as which cable systems would be inclined to convert their current distribution of TSN from discretionary to basic service, the date on which such a change might take place, the ultimate composition and retail price of the optional-to-basic service and the package of services that would be offered to consumers as discretionary services, the licensee stated that, if it were to acquire only half of its projected subscribers through optional-to-basic distribution, the effect on its revenue projections, would only be over-stated by some 15 to 20% over a five-year period.
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In assessing the cash flow requirements submitted by the licensee, the Commission has noted that although TSN had forecast a loss of $1.28 million during the first year, this is to be offset by "partners' advances" of $2.88 million. The licensee also gave its assurance at the hearing that TSN's owners, two affiliated companies of John Labatt Limited, have indicated that the funding of this undertaking is "secure". Accordingly, the Commission is satisfied that the cost projections as filed can be met by the shareholders.
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The licensee explained the factors behind its request to alter its carriage mode:
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an assumption that the Commission will licence new specialty services, thus altering the market place;
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its belief that premium pay services have reached their maximum subscriber potential;
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the high price of discretionary technology and marketing, resulting in a discriminatory retail price; and,
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the popularity of its service with viewers, with continuing BBM and Neilsen reports of increased hours of viewing.
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TSN did not anticipate any change in its level of production activity, and noted that event coverage costs are the same whether the programming is exhibited as a discretionary service or on the basic service on cable. The licensee admitted, however, that TSN's program costs would probably rise a its audiences and revenues increased:
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... the more [there is] demand for [our] product and [with] wider distribution ... it's going to cost [us] a little more in terms of accumulating and assembling that product for [our] distribution base. Our programming costs will go up, but our programming will not likely change.
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TSN acknowledged the concerns expressed by conventional broadcasters about the possible impact of this application in terms of audience fragmentation and loss of advertising revenue:
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We have insisted from the very beginning that TSN was not in the business of competing head to-head with the established broadcasters, either by siphoning programming or by cutting into [advertising] revenue.
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In our application, we projected that even after five years on basic, TSN would account for less than 1% of total Canadian television advertising revenue.
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Since TSN is already involved in national advertising, it stated that only the incremental revenue from this source, which it calculates to be less than half of 1% over 5 years, should be considered in assessing the impact of its service on conventional broadcasters.
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Although this specialty sports service can offer a well-defined audience to notional advertisers, TSN submitted that it was in a less advantageous market position to negotiate program rights than conventional television networks since its maximum potential audience would be less than 4 million viewers. It also reiterated its commitment not to siphon programming or to become involved in bidding wars for broadcast rights to sporting events. The Commission expects TSN to continue to adhere very strictly to this important commitment for the remainder of its licence term and intends to review this matter at licence renewal.
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TSN undertook to maintain its current level of advertising material of an average of 8 minutes per hour and will be expected to adhere to this commitment for the balance of the current licence term, at which time, consistent with the approach adopted by the Commission in the licensing of new specialty services for distribution as part of the basic service on cable, the Commission would intend to attach a condition of licence regarding the maximum amount of advertising. TSN has estimated that it would sell 42% of its advertising inventory in 1988/89, 44% by 1991/92, most of this in prime time.
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With respect to the wholesale price for distribution as part of the basic service on cable, TSN explained that, based on a new five-year contract it had negotiated with its cable affiliates, the price to cable affiliates would be $0.72 per subscriber as of the date of the decision, increasing to $0.80 for 1988/89. The Commission has assessed the applicant's financial projections and is satisfied that the expense projections for the remainder of TSN's licence term, which expires 31 March 1989, are reasonable. Accordingly, as set out in the appendix to this decision, the Commission authorizes, by condition of licence, a wholesale rete of $0.72 per subscriber per month for basic cable service distribution, effective as of the date TSN is distributed as part of the basic service, and of $0.80 per subscriber per month commencing 1 September 1988.
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In attempting to assess the impact of the expanded distribution of this specialty service on conventional broadcasters, TSN submitted that the Nordicity Group Ltd.'s June 1987 impact study had estimated that "the full range of specialty services ... [that] might be licensed ... would account for only 3% of the total private television advertising budget", and cited the study's assertion that only the incremental advertising impact of TSN, which the licensee itself estimates at less than a half of one percent over five years, should be considered.
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With regard to the possible diminished appeal of the discretionary tier, the Commission has noted TSN's statement at the hearing that it estimates that 88% of its revenue in the first year of operation under the revised distribution arrangements would be derived from discretionary subscribers, and that in year two it still expects to derive a contribution of 59% from discretionary subscribers.
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The Commission has further considered the licensee's statement that while it has played a major role in supporting the movie channels, "each service should establish unilaterally a price-value relation" and suggested that other attractive packaging arrangements may become possible as a result of the Commission's linkage requirements and licensing decisions, based on the applications considered at this hearing.
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Conclusion
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In assessing this application, the Commission has given particular consideration to TSN's contribution to Canadian programming gin terms of program content and expenditures in its three years of operation and to its firm commitments not to siphon or compete for broadcast program rights fro major sports properties currently carried by conventional television broadcasters. The Commission has also noted the strong evidence of subscriber demand cited by the applicant and substantiated in supportive evidence filed at the hearing by interveners, including a number of cable licensees. Based on the firm commitments made at the hearing, the Commission is confident that TSN will continue to play a leadership role in providing an attractive and diverse Canadian sports programming service that supplements the sports programming broadcast by conventional television licensees.
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The Commission has also assessed the financial viability of the proposal and the potential impact of the expanded distribution of this specialty service on consumers, the cable industry, existing pay television licensees and conventional broadcasters, as well as the Canadian independent production sector. In this regard, the Commission has examined the evidence and information presented by the licensee, namely that its projected incremental advertising income at best will be less than half of one percent of all television advertising revenue in Canada. It has also assessed the comments and studies available in the contexts of this hearing, and, after careful consideration, has concluded that although this service could obtain up to 0.7% of the audience share from conventional broadcasters by the end of the 1992/93 broadcast year, assuming its licence is renewed beyond its current term, the overall impact on existing broadcasters will be negligible.
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Further, the Commission has determined that because of current experimentation by cable operators with packaging alternatives and the low-priced (negative option) discretionary tier, TSN's migration to basic would not adversely affect the viability of existing pay television services beyond what is already occurring in the marketplace. As outlined in Public Notices CRTC 1987-260 and CRTC 1987-261, the Commission has taken steps to enhance the appeal of the pay television services.
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With regard to issues of public concern, the Commission expects TSN, in line with its commitments given at the hearing, to ensure that its programming reflects realistically the participation of multicultural minorities in Canadian society.
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The Commission also notes that TSN's active use of a sophisticated character generator, which provides computer animation and statistical information for its viewing audience, will make its programming readily accessible to hearing-impaired viewers. The licensee also undertook to explore with the Canadian Captioning Development Agency technology for providing captioning of its in-house productions.
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The Commission notes that a condition of licence was imposed in Decision CRTC 84-339 respecting the application of sections 14, 15, 18 and 19 of the Television Broadcasting Regulations, Consolidated Regulations of Canada, 1978, c.381. As this condition of licence is no longer appropriate and in order to take advantage of the new Television Broadcasting Regulations, 1987 which came into effect 9 January 1987, the licensee may wish to apply to delete this condition and to replace it with a condition of licence containing the appropriate sections of the new regulations.
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The Commission will follow with interest TSN's efforts to increase the quantity and quality of Canadian programming over the remainder of its licence term and requires it to adhere fully and at all times to the terms and conditions in Decision CRTC 84-339, as amended by the conditions set out in this decision and in the appendix to the decision.
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In approving TSN's current application, the Commission has taken into account the views expressed by the many interveners who supported this application, including the Cable Television Association of Alberta, Shaw Cable, Western Cablesystems Ltd., and Westman Media Co-operative Ltd., a number of advertising agencies and several sports organization, who cited significant subscriber demand. Mr. Lawrence Partington of Patterson-Partington International Television productions stated in his intervention that TSN has been of "tremendous benefit to Canadian producers, Canadian athletes, Canadian sports promoters and, most importantly, to Canadian sports fans".
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The Commission notes also that the CTV Television Network, the Réseau de télévision TVA Inc., The Canadian Film and Television Association and Mid-Canada Communications (Canada) Corporation wished to be assured that TSN would be required to exhibit the same level of Canadian content in its programming as convention television broadcasters and expressed concern about its potential impact in terms of audience fragmentation, erosion of advertising revenue and increased program costs.
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First Choice Canadian Communications Corporation and Allarcom Pay Television Limited each submitted strong interventions against the movement of this specialty service to basic cable. Both maintained that their subscriber penetration levels would decline if this application were to be approved because the attractiveness of the discretionary tier would be diminished for Canadian viewers. In support of this argument they submitted a study conducted by the Research Management Group (March 1987) which found a strong correlation between higher basic cable fees and subscriber disconnect rates for premium discretionary services. They also argued that since, by regulation, pay television services are prohibited from obtaining revenue through advertising, any loss of subscribers would directly affect their ability to support Canadian program production, to which a percentage of their annual revenues is allocated by condition of licence.
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A number of independent film producers and distributors also opposed this application on the grounds that the present configuration of Canadian discretionary services has stimulated subscriber interest, resulting in a significant measure of financial support for the Canadian production industry.
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The Canadian Association of Broadcasters wished to e assured that Canadian specialty services licensed for distribution on basic cable complement the programming already available to Canadians and provide new creative opportunities without siphoning programming from existing broadcasters or bidding up program costs.
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Global Communications Limited argued that while it recognized that TSN is an "exclusively specialized service", its target audience "represents a significant segment of the audience for television broadcasting as a whole". It went on to say that if TSN were to be distributed on basic cable, this could create an "immense potential for the siphoning of major sporting events form free television" with negative consequences for those Canadians "who cannot afford cable or are not passed by cable".
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The Federated Anti-Poverty Groups of B.C. and the Association coopérative d'économie familiale de l'est de Montréal expressed concern that the cost of basic cable service would increase if this application were approved and that consumers not wishing to receive such narrowcast services would be charged for them as part of the basic fee.
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The Commission has taken into account the concerns raised by these interveners and considers that they have been addressed in this decision. With particular reference to the comments of the existing pay television licensees, the Commission draws their attention to the exclusive distribution and linkage arrangements set out in Public Notice CRTC 1987-261.
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Fernand Bélisle
Secretary General
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APPENDIX
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Amendments to Conditions of Licence
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The Sports Network (TSN)
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1. The second condition set out in the Appendix to Decision CRTC 84-339, dated 2 April 1984, is deleted and replace with the following:
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"As of the date of commencement of distribution of TSN as part of the basic service on cable, the licensee shall devote not less than 60% of the broadcast year and 50% of the evening broadcast period to the distribution of Canadian programs.
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For the purposes of this condition, the definitions of broadcast day, broadcast month and broadcast year set out in section 2 and of evening broadcast period in section 4 of the Television Broadcasting Regulations, 1987 (SOR/87-49), as amended by SOR/87-425, shall apply to the licensee with the necessary changes."
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2. a) From the date of commencement of distribution of TSN as part of the basic service on cable until 31 August 1988, the licensee shall charge each exhibitor of TSN on the basic service, the wholesale rate of $0.72 per subscriber per month.
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b) Commencing 1 September 1988, the licensee shall charge each exhibitor of TSN on the basic service, the wholesale rate of $0.80 per subscriber per month.
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The balance of the conditions set out in the Appendix to Decision CRTC 84-339 remains in effects.
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