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Public Notice
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Ottawa, 27 October 1988
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Public Notice CRTC 1988-173
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Introduction to Decisions CRTC 88-772 to 88-777
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The Renewal of the General Interest Pay Television Network Licences and Certain Specialty Service Network Licences
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At a hearing in the National-Capital Region commencing 13 June 1988, the Commission considered applications for the renewal of the general interest pay television network licences issued to First Choice Canadian Communications Corporation (First Choice), Allarcom Pay Television Limited (APT) and Premier Choix:TVEC Inc. (PC:TVEC); and for the renewal of the specialty service network licences issued to The Sports Network (TSN), CHUM Limited (MuchMusic) and Chinavision Canada Corporation (Chinavision).
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The Commission also considered an application by APT to amend its licence to enable it to provide its pay television service directly to individual satellite dish owners (DTH) on a national basis; that is, beyond its licensed area which consists of the western provinces and the Territories.
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Telelatino Network Inc. (Telelatino) had also submitted an application for the renewal of its specialty service network licence. At the hearing, Telelatino sought amendments to its application which would have, in the Commission's opinion, resulted in significant changes to the original application that had been submitted and placed on the public file. Following discussions with the Commission, Telelatino withdrew its application and subsequently filed a revised renewal application for consideration at a later date. The revised application was considered at the 3 October 1988 hearing in Toronto and a decision will be issued separately.
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BACKGROUND
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The Pay Television Networks
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In 1982 the Commission licensed a number of general interest pay television networks to serve all or some of the different regions of Canada. In Decision CRTC 82-240 dated 18 March 1982, the Commission stated:
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Through its capacity to generate revenue, pay television should contribute significantly to the broadcasting system by increasing the diversity of programming available to all Canadians from coast-to-coast and by enhancing the quality and distinctiveness of Canadian programs. Pay television should provide new opportunities and revenue sources for the program production industry in Canada, particularly for producers currently unable to gain access to the broadcasting system. Pay television should also provide new opportunities for developing programs that reflect the various regions of Canada and should provide new programming in both official languages.
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The perceived similarity of some of the services, unexpected expenses associated with head-to-head competition for programs and head-to-head marketing as well as unfavourable economic conditions gave rise to a number of problems for the original pay television licensees, with the result that certain of the original pay television networks ceased operation.
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In 1984, faced with a situation which augured badly for the survival of Canadian pay television, the Commission approved major structural and ownership changes to the remaining pay television networks. In the Commission's opinion, had these remaining Canadian networks not survived, their services would eventually have been replaced by U.S. pay television services, to the detriment of Canadian entrepreneurs, producers, performers and rights holders.
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Despite these changes, however, the remaining licensees, First Choice, APT and PC:TVEC, encountered continuing difficulties, such as low penetration levels, unregulated competition from a number of sources and, at some point, an insufficient availability of suitable Canadian feature film product. This lack of domestic product forced the licensees to repeat existing productions many times to meet the Canadian content requirements of their licences which, in turn, caused considerable subscriber dissatisfaction and a high rate of disconnection. The resulting financial difficulties led the licensees to apply in 1985 to amend the conditions of their licences relating to the exhibition and funding of Canadian programs.
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The Commission considered these applications at a hearing on 10 June 1986. Many of the interveners at the hearing were from the private production sector. They were generally supportive of a change in the exhibition quotas on the grounds that Canadian feature films were being overexposed. A large majority of the interveners also recognised the financial predicament of the pay television industry and favoured measures which would contribute to reducing the licensees' cumulative deficits which, at the time, stood at a combined total of 172 million.
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In Decisions CRTC 86-811 to 86-814 dated 2 September 1986, the Commission approved the licensees' applications in part. In its decisions, the Commission emphasised that it considered these amendments to be interim measures that would be in effect only until such time as the licensees' financial situations had improved. The Commission stated that it intended to review industry conditions and the licensees' commitments in the context of their first licence renewals.
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The Specialty Network
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TSN, MuchMusic and Chinavision, as well as Telelatino, were the first specialty networks to be licensed by the Commission. Like pay television, these networks are expected to increase the diversity and quality of Canadian programs and provide new opportunities and revenue sources for Canadian producers.
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TSN and MuchMusic were both licensed to carry on their national specialty sports and music networks, to be distributed on a discretionary, user-pay basis, on 3 April 1984. In the MuchMusic decision (Decision CRTC 84-338), the Commission stated that the establishment of a Canadian specialty music network should "assure a marked increase in the production of Canadian music videos and the exposure of Canadian talent, and should stimulate both the independent Canadian production and the Canadian recording industries to experiment and respond to the demands of the growing audience for music video programming". In licensing TSN (Decision CRTC 84-339), the Commission noted the applicant's intention to offer Canadian sports fans a diverse mix of Canadian and international sports and to provide exposure for Canadian collegiate and amateur sports.
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On 24 May 1984, Chinavision was licensed to provide a predominantly Chinese-language specialty service to be distributed on a discretionary, user-pay basis (Decision CRTC 84-445). The Commission considered that Chinavision's proposed service would meet a growing demand and need for Chinese-language news, information and educational programming.
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In 1987, the Commission approved applications by TSN and MuchMusic for permission to be distributed also as part of the basic cable service in non-francophone markets (Decisions CRTC 87-901 and 87-902 dated 30 November 1983).
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THE JUNE 1988 HEARING
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The 13 June 1988 hearing was the first opportunity for the Commission, in the context of a renewal hearing, to assess in detail the past performance and future plans of the three general interest pay television network licensees and of the three specialty network licensees noted above. It was also the first opportunity to assess the contribution that each of the licensees has made in realising the objectives set out in the Broadcasting Act and, in particular, in strengthening the Canadian broadcasting system.
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The licence renewal process requires a thorough examination of each licensee's commitments and specific proposals to improve the services it proposes to offer In the future. In considering the six renewal applications before it, the Commission has taken special note of the licensees' potential future contributions to the system, particularly with respect to maximizing Canadian content exhibition levels and funding for Canadian programs.
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More than 400 interventions were filed in respect of the 13 June hearing. Interveners included individuals, businesses, production companies, community associations, industry groups and government organisations. A total of 34 interveners appeared to present their comments at the hearing. The Commission benefited greatly from the participation of all of these interveners and has taken into consideration their comments and concerns in arriving at the renewal decisions released today.
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The Pay Television Networks
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At the hearing, it became apparent that the financial position of the three general interest pay television licensees has improved considerably since 1986.
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As noted in the decisions which follow, the licensees' cumulative deficits have been reduced such that all three licensees expect to eliminate their cumulative deficits during the new licence term.
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Many of the interveners from the production industry highlighted the licensees' financial and moral support for their projects and emphasized that the licensees have played and will continue to play a vital role in ensuring the ongoing production, promotion and exhibition of Canadian films. In this respect, the Commission notes that, according to their applications, First Choice, PC:TVEC and APT expended a total of over $105 million on Canadian programming during the years 1983 through 1987.
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Interveners also commended the licensees for their commitment to the development of new talent, at both the scriptwriting and production levels. Their continuing commitments in this respect are seen as crucial for the future growth of an indigenous film industry.
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It was generally recognised that the licensees' potential over the next licence term to contribute in a meaningful way to the increased exhibition of Canadian product will be directly related to the availability of Canadian feature films. Some interveners argued that domestic exhibition requirements must reflect supply; others argued that the demand that would be created by increased exhibition requirements would generate the supply necessary to meet those requirements.
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Other factors were also cited as potentially affecting the level of suitable Canadian programming available for exhibition on pay television. A number of interveners, including the Canadian Film and Television Association (CFTA) and the Writers guild of Alberta, took the position that the federal government's increased support to Telefilm Canada, announced this spring, could help to stimulate the increased production of Canadian product; others such as the Association of Canadian Film and Television Producers expressed concern that the expected decline in private investment in Canadian film and television production resulting from capital cost allowance amendments announced last year could lead to a reduction in Canadian product. For this reason, writers and producers alike called upon the Commission to ensure that the pay television licensees continue to provide both funding and an exhibition window for their product.
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As to how the general interest pay television licensees can best contribute financially to the future development of Canada's feature film industry, producers were generally united in calling for the licensees to allocate a greater proportion of their program budgets to licence fees rather than to equity investments. licence fees are favoured because they represent clear revenues to producers. Equity investment, on the other hand, involves the potential sharing of subsequent revenues with investors. From the producers' point of view, according to the CFTA, the latter arrangement has two negative aspects to it:
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One is that the more investors you have in a project, as opposed to people paying for the property, the more you have to go offshore to find the revenues to recoup your production costs.... Of course, it means that an awful lot of producers start off-shore, looking for pre-sales in other countries. This results in a product that is, generally speaking ... of less Canadian cultural significance....
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The other one is ... that for the independent production sector to thrive on its own ... it has to see revenues rather than investment ... because the profits from foreign licensing and ancillary marketing of these films should accrue to these producers to the greatest extent possible.
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The interim nature of the 1986 amendments to the licensees' exhibition and funding requirements was emphasized in a number of the interventions. While certain interveners advocated an immediate return to original levels, others favoured gradual increases that would reflect the licensees' financial status and subscriber levels, and industry developments.
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The Commission considers that the licensees are now in a position to make improvements in their service to subscribers and in their contributions to the Canadian broadcasting system. Further, the Commission agrees that, if pay television is to expand its role within the Canadian broadcasting system and continue to support the ongoing development of a vibrant and creative Canadian production industry, these improvements should come in the form of increased funding for script and concept development and Canadian program production, and in an expansion of the time devoted by each network to the exhibition of Canadian programs, particularly during prime viewing hours.
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In the Commission's view, the licensees' increased funding of Canadian programs should stimulate greater program production and contribute to the creation of sufficient product to meet the licensees' additional exhibition requirements.
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The Specialty Networks
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In recent years, the number of Canadians subscribing to TSN, MuchMusic and Chinavision has increased substantially. These licensees expressed confidence that their services will continue to grow and respond to the increasing programming demands of their targeted audiences.
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The Commission notes that, overall, each of these networks has been able to meet its commitments and requirements with respect to the expenditure on and exhibition of Canadian programming. According to their applications, TSN, MuchMusic and Chinavision expended a combined total of over $36 million on Canadian programming during the years 1985 to 1987. In the Commission's opinion, these services have added to the diversity of programming available to Canadians and, in so doing, have strengthened the Canadian broadcasting system.
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Conclusion
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The Commission continues to expect Canada's pay television and specialty networks to increase the choice of programming available to Canadians, to support the development of Canadian talent and to make available high quality programming from new programming sources by providing new opportunities and revenue sources for Canadian producers. The Commission also expects these programming services to complement existing services and each other.
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In the Commission's view, the general interest pay television services and the specialty services offered by TSN, MuchMusic and Chinavision have matured considerably over the last five years. The Commission is encouraged by these developments. As the services grow, they become better able to contribute to the creation and exhibition of quality Canadian programming.
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The Commission has examined the licensees' commitments in these respects in the context of each licensee's financial success to date and, in particular, with regard to the growth in subscriber and, where applicable, in other revenues, as projected for the next licence term. These commitments, as well as each licensee's past performance, future plans, underlying assumptions, service orientation, and initiatives regarding certain important social issues are addressed in the individual decisions which follow this notice.
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SPECIFIC ISSUES RELATING TO THE CONTINUED DEVELOPMENT OF CANADIAN PAY TELEVISION AND SPECIALTY
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In CRTC Notice of Public Hearing 1988-32 dated 15 April 1988 which announced the 13 June hearing, the Commission set out a number of issues to be addressed at the hearing which it considered crucial in terms of the continued development of Canadian pay television and specialty services. In addition to indicating its intention to review the applicants' past performance and future plans, the Commission stated that it wished to explore with participants such issues as the merits of pay-per-view, the problems encountered by Telelatino and Chinavision in gaining access to certain cable systems, and current and future pricing options for discretionary services. These specific subjects are addressed below.
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1. Pay-Per-View
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In CRTC Notice of Public Hearing 1988-32, the Commission stated:
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In light of increasing competition to the pay television industry from video retail outlets, the Commission invites discussion on the relative merits of pay-per-view as a mechanism to ensure enhanced viability of the existing pay television networks.
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The matter of pay-per-view received considerable attention at the hearing and a number of appearing parties indicated an interest in filing applications to offer pay-per-view service sometime in the near future.
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While the general interest pay television licensees generally supported the concept of pay-per-view, they were concerned about the potential harm at this time to their own operations should a pay-per-view service be offered on a competitive basis. These licensees indicated that should pay-per-view be introduced, they wished to be involved at the ownership level as well as in program acquisition and scheduling to ensure the orderly development of the market. For its part, First Choice stated that it was currently "working on a strategy of how (it) can integrate (pay-per-view) as part and parcel of the existing universe of pay television" and that it will "have the research and the recommendations available to the CRTC before the end of this year". APT indicated that it has already held "a number ofpreliminary discussions with cable operators" regarding pay-per-view.
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TSN also indicated its intention to become involved should pay-per-view be introduced, since it considers that Canadian sports programming could form an integral component of such a service.
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Support for the introduction of pay-per-view was also expressed by a number of representatives of the cable industry. The CCTA and the Ontario Cable Television Association (OCTA), as well as Maclean Hunter Cable TV (Maclean Hunter), and North Eastern Cablevision Ltd., envisaged the cable licensees working in conjunction with the pay television and specialty licensees to develop and offer a pay-per-view service. Rogers Cablesystems Inc.(Rogers), on the other hand, considered that because the profitability of the service is likely to be limited, each loyal cable operator should negotiate pay-per-view program rights and market its own pay-per-view service.
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The government of Ontario, in its intervention, stated that the existing discretionary licensees would be logical providers of a pay-per-view service, either on their own or in partnership with others, because of their experience in dealing with program providers and in serving the discretionary market.
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The Video Dealers Association of Canada (VDAC) was concerned about the potential impact of pay-per-view on its own members and cautioned the Commission against introducing any new service which might damage the fledgling pay television industry in Canada.
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The Commission thanks the participants for their comments on the subject of pay-per-view. It is satisfied that all interested parties have now had an opportunity to present their views on the matter and that concerns with respect to pay-per-view have been canvassed. The Commission expects that the industry has profited from this exchange and notes that pay television licensees have already initiated discussions concerning the development of an appropriate pay-per-view model. The Commission would he prepared to deal with proposals resulting from such discussions provided they reflect the existing pay television structure and adequately address the concerns that have been raised.
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2. Access for Telelatino and Chinavision
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Telelatino and Chinavision are specialty networks licensed by the Commission for national distribution. In CRTC Notice of Public Hearing 1988-32, the Commission noted that these networks were experiencing problems in gaining access to certain cable distribution systems, and announced that it intended to discuss with Chinavision, Telelatino and the cable industry at the 13 June hearing the results of access reports filed by these licensees.
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At the hearing, numerous cable licensees discussed the issue of access. The Commission focused particularly on the Montreal area cable systems operated by CF Cable TV Inc. (CF Cable) and Vidéotron Ltée (Vidéotron), and questioned these two cable licensees on their reasons for not having provided Telelatino and Chinavision access to their cable systems. Because of the critical importance of the Montreal market for these ethnic specialty networks, and because of the power which CF Cable and Vidéotron possess because of their control over this market, the Commission urged the two cable licensees to review the issue and requested that both file reports with the Commission before 15 July 1988 on their further negotiations with Telelatino and Chinavision.
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With respect to Telelatino, both Vidéotron and CF Cable indicated in their reports that they had agreed to offer the specialty network a full channel on their respective systems.
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With respect to Chinavision, both Vidéotron and CF Cable have offered the specialty network an unimpaired channel on a shared basis with Canal Famille, one of the new French-language specialty networks. Such an arrangement would be subject to review after a three-year period pursuant to mutually agreeable criteria in order to determine whether full-channel access would be offered to Chinavision at that time.
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As stated in Public Notice CRTC 1985-139 dated 4 July 1985 entitled "A Broadcasting Policy Reflecting Canada's Linguistic and Cultural Diversity", and as reiterated in subsequent notices and decisions, the Commission is committed to the development of broadcasting services that reflect the cultural and linguistic plurality of Canada as an essential part of the Canadian social structure. The Commission also stated in Public Notice CRTC 1985-139 that it "expects cable television licensees to ensure that all Canadian discretionary services, including those of Telelatino and Chinavision, are marketed effectively, priced fairly, packaged attractively, and carried without discrimination."
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Based on the developments described above, the Commission is satisfied that the problem regarding access by Telelatino to cable systems in the Montreal area have been resolved. The Commission acknowledges the positive negotiations that Vidéotron and CF Cable have conducted with Telelatino and is encouraged by the arrangement to provide Telelatino with a full channel on their cable systems.
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The Commission further acknowledges the on-going negotiations between Chinavision and the Montreal area cable licensees. In setting conditions of Chinavision's licence concerning the exhibition of Canadian programs, the Commission has taken into account the fact that the specialty licensee's ability to distribute its complete schedule of programs could be restricted where access to cable systems is provided on other than a full-time basis.
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3. Current and Future Pricing Options For Discretionary Services
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a) The Retail Price of Pay Television
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The Commission has, in the past, elected not to regulate either the wholesale or retail rates charged for pay television and specialty services offered on a discretionary basis. Instead, the Commission has left it to the network licensees and cable operators to negotiate such rates. This policy has placed the responsibility on cable licensees to ensure that Canadian discretionary services have ready access to the Canadian marketplace so that each may contribute to fulfilling the objectives set out in the Broadcasting Act. On a number of occasions, the Commission has expressed concern with respect to the pricing, packaging and marketing of Canadian pay television and other discretionary services and has advised that it would monitor the situation closely to ensure that the development of discretionary services is not hindered by discriminatory carriage arrangements or unrealistic retail rate structures.
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The Commission discussed the matter of the retail price of pay television with a number of the participants at the 13 June hearing. First Choice submitted that pay television could be more successful if the retail price were lower. While representatives of the cable industry tended to agree with this position, they did not agree with the pay television licensees on how a price reduction should be achieved and who should bear responsibility for it.
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First Choice was of the view that cable licensees include in the price of pay television a higher amount than necessary to recover hardware costs and other overhead expenses. In particular, First Choice noted that the retail price for its service charged by cable companies frequently includes a charge for decoder rental which exceeds the actual cost.
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The CCTA, the OCTA and Cablenet Limited (Cablenet) took the view that the cable operators' mark-up on pay television's wholesale rates is not too high, due primarily to the cost of churn. Churn is defined by the cable industry as the total number of disconnects as a percentage of the average number of subscribers over a given period of time. As stated in the CCTA's submission, if churn rates are high, too few subscribers remain connected long enough to ensure that the costs of installing or connecting a service are recovered. The CCTAstated that, because of the relatively high churn rate of pay television, cable operators face the dilemma of having to charge rates for discretionary service packages that are low enough to encourage service retention, but high enough to minimise installation losses. According to Cablenet, "further significant growth" in pay television penetration "will only be possible if the wholesale cost of these services (and therefore the price to subscribers) can be reduced".
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At the same time, the OCTA stated that retail rates can be managed with success, so long as mutual agreement can be achieved among (service) providers and cable systems". For its part, Maclean Hunter stated that it would be prepared to discuss a bilateral reduction of rates with the pay television licensees.
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The Commission maintains that rates for discretionary services should he governed by the marketplace rather than regulated by the Commission and that wholesale and retail rates charged for pay television are thus matters to be resolved by the pay television and cable licensees. It encourages these parties to pursue negotiations premised on bilateral rate reductions, along the lines proposed by Maclean Hunter, as a means of lowering the retail price of pay television and, hence, increasing the penetration of and continued subscription to the pay television services.
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b) Regulations of Wholesale Rates Charged by Specialty Network Licensees to SMATV Operators
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Another issue raised at the hearing by Durham Condominium Corporation, Multi-Unit Cable Corporation, the Satellite Communications Association of Canada and the government of Ontario, was the matter of the wholesale rates charged for distribution on SMATV systems of those specialty services whose wholesale rates are regulated by the Commission. These interveners pointed out that SMATV systems are paying wholesale rates for TSN and MuchMusic that are significantly higher than those paid by cable operators for distribution of these specialty services as part of the basic service. The interveners requested that the Commission specify, by condition of licence if necessary, that the wholesale rates established for optional-to-basic specialty services such as TSN and MuchMusic apply in respect of all broadcasting receiving undertakings, including SMATV systems.
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The Commission intends to undertake an overall review of the criteria for exemption of SMATV operators from the requirement to obtain a licence and will soon be issuing a public notice regarding the criteria for exemption set out in Public Notice CRTC 1983-225 dated 10 November 1983. As part of its review, the Commission will consider whether it should regulate the wholesale rate charged by specialty service licensees for the distribution of their services on SMATV systems. Accordingly, the Commission considers that it would be premature to reach a final determination concerning this matter until such time as it has received public comment in response to the forthcoming public notice.
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PROPOSED REGULATORY CHANGES
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In light of the number of Canadian specialty networks now licensed, the Commission considers that it would be appropriate at this point to introduce regulations dealing specifically with these undertakings. The Commission intends to include in these regulations those provisions of the Television Broadcasting Regulations, 1987 that were incorporated by reference into the licences of the specialty networks approved in November 1987, as well as other relevant provisions. The Commission expects to issue the proposed regulations for public comment by early next year.
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Moreover, amendments are required to certain provisions of the Pay Television Regulations relating to ownership and other matters. Accordingly, at the same time, the Commission also intends to issue for public comment proposed amendments to the Pay Television Regulations.
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Fernand Bélisle Secretary general
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