ARCHIVED -  Public Notice CRTC 1988-57

Public Notice

Ottawa, 13 April 1988

Public Notice CRTC 1988-57

Canadian Specialty and Pay Television Services: Amendments to the Cable Television Regulations, 1986

BACKGROUND

In Decisions CRTC 87-895 to 87-900 and 87-903 to 87-905 dated 30 November 1987, the Commission issued eight new licences for Canadian specialty services and one new licence for a Canadian pay television service. In Decisions CRTC 87-901 and 87-902, the Commission amended the existing licences for The Sports Network (TSN) and MuchMusic.

In Public Notice CRTC 1987-261 issued on the same date, the Commission set out rules governing the distribution of programming services as part of the basic service of cable licensees holding Class 1 or 2 licences, or as discretionary services. In addition, the Commission outlined requirements concerning the linkage of programming services distributed as discretionary services. It also indicated which non-Canadian satellite services would be authorized.

In Public Notice CRTC 1987-262 also issued on 30 November 1987, the Commission proposed for public comment amendments to the Cable Television Regulations, 1986 (the regulations). The proposed amendments made adjustments to the regulations to take into account the new provisions related to distribution and linkage set out in Public Notice CRTC 1987-261. The proposed amendments also set out a scheme to permit cable licensees to increase the basic monthly fee in respect of a mark-up.

Twenty-seven interested parties filed comments on the proposed amendments by the 29 January 1988 deadline. Comments were received from individual cable companies, as well as the Canadian Cable Television Association (CCTA), the Association des Câblodistributeurs de Québec (ACQ), pay television licensees, specialty licensees, the independent production industry and a provincial educational broadcasting authority. Issues addressed in the comments included the following:

- the amount of the mark-up cable licensees are to be allowed to include in their basic monthly fees for the distribution of specialty services as part of the basic service;

- contracts entered into by cable licensees for the provision of service at bulk rates;

- the regulation of the wholesale rates for Canadian specialty services to be distributed as part of the basic service;

- the positioning of programming versus non-programming services;

- the positioning below channel 31 of Canadian specialty services distributed as part of the basic service;

- the effect on pay television services of the distribution of TSN and MuchMusic as part of the basic service;

- the definition of a francophone market;

- the "take one, take all" rule applicable to Class 1 licensees operating in francophone markets;

- the authorization of five additional U.S. services to be packaged exclusively with Canadian pay television services;

- the distribution of some specialty services at the option of the cable licensee either as part of the basic service or as discretionary services;

- the negative option;

- proposals for further changes to the linkage rules;

- the authorization of additional U.S. services; and

- the introduction of pay-per-view.

Many of the above-noted issues fall outside the scope of the proceeding announced in Public Notice CRTC 1987-262 and will not be addressed in this document. Those issues on which the Commission wishes to comment are set out below.

MARK-UP

In Public Notice CRTC 1987-260, the Commission indicated that cable licensees whose basic monthly fee is regulated pursuant to section 18 of the regulations should be allowed to include a mark-up in their basic monthly fee to cover additional operating costs associated with the introduction of the new specialty services on basic. The mark-up should also provide some incentive to cable operators to distribute the new specialty services but should remain sensitive to subscribers' capacity to pay for these services.

This issue was discussed with both applicants and interveners at the 1987 public hearing but resulted in little factual information with respect to the administrative and operational costs that would be incurred with the provision of new services; nor was there any consensus on the amount of incentive necessary to foster the carriage of specialty services.

The Commission took into account the limited information available on this subject at the conclusion of the public hearing and recognized the need to allow cable licensees to recuperate their costs. In order to provide licensees with an incentive to carry optional specialty services so as to ensure their maximum availability, the Commission proposed to amend section 18 of the regulations in order to authorize cable licensees holding a Class 1 or 2 licence to charge a maximum mark-up of 5¢ per subscriber per month.

In the comments filed on this proposal, there was general dissatisfaction with the level of the proposed mark-up. With the regulatory framework and licensing approach enunciated in Public Notice CRTC 1987-260 in mind, the CCTA set out in its comments a detailed description of the incremental costs that are associated with the distribution of specialty services as part of the basic service and that must, in its view, be allowed to be recovered by cable licensees as part of the mark-up. Individual cable licensees and the ACQ concurred with the costs identified by the CCTA. These costs include:

(i) the licence fees paid by cable systems to the Commission;

(ii) all revenue-based taxes, franchise fees or levies;

(iii) an allowance for uncollectible accounts; and

(iv) the operating costs related to the subscriber notification process, customer service representative activity, launch and follow-up marketing activities, accounting and administrative procedures and maintenance attributable to the increase in the number of channels used to distribute specialty services.

The CCTA also submitted that smaller cable systems face many of the same absolute introductory costs as the larger operators but do not have the same economies of scale to absorb these costs. Therefore, it was suggested that a larger mark-up be allowed for smaller systems.

The CCTA further suggested that the licence fees and other revenue-based taxes, franchise fees or levies could be recovered by cable operators under section 18(3) of the regulations. It acknowledged that a further amendment would be required to section 18(2) to allow an increase in the basic monthly fee to cover an allowance for uncollectible accounts.

While section 18(3) does not allow for a recovery of licence fees, other revenue-based taxes, franchise fees or levies, the Commission has taken these direct costs into account in devising the mark-up scheme outlined in this document. The revised mark-up formula thus reflects all of the above-noted costs.

Estimates of the incremental operating costs were offered by a number of parties. On a per service per subscriber basis, they ranged from 1¢ for larger systems to 2¢ for smaller systems.

A number of parties, including TSN, Much Music and Cablecasting Ltd., argued that the mark-up should include a further amount to provide an incentive for the carriage of the specialty services as part of the basic service. Suggestions ranged from 25¢ per subscriber where all specialty services were carried to a 10% to 34% profit margin on the combined wholesale fees of the specialty services. Following a careful review of the much more detailed information contained in the comments regarding the incremental costs associated with the introduction and distribution of specialty services on basic, the Commission has concluded that an increase in the amount of the mark-up that cable licensees may include in the basic monthly fee is justified. The Commission has also concluded that a distinction between Class 1 and Class 2 cable systems is warranted in order to provide a larger mark-up per service for smaller cable systems. Further, the mark-up allowed for each service will be proportionately somewhat larger for cable systems operating in a francophone market due to the slightly greater wholesale fees of French-language specialty services licensed for the francophone market. Lastly, the Commission maintains the view expressed in Public Notice CRTC 1987-260 that the mark-up should provide some incentive to cable operators to distribute the new specialty services in order to ensure their timely distribution and the widest possible access by Canadian subscribers.

Accordingly, the Commission has amended section 18 of the regulations as set out in the attached Schedule to permit licensees whose basic monthly fee is regulated by the Commission to include a mark-up in their basic monthly fees as follows:

(a) Cable systems operating in a francophone market:

- Class 1 systems: 3¢ per subscriber per service - Class 2 systems: 6¢ per subscriber per service

(b) Other cable systems:

 Class 1 systems: 2¢ per subscriber per service  Class 2 systems: 4¢ per subscriber per service

(c) All cable systems:

- a further 5¢ per subscriber when the licensee carries all of the specialty services which are authorized for distribution as part of the basic service and which are available for such distribution in that market.

The amendment has been registered with the Clerk of the Privy Council to come into effect as of today's date.

THE AUTHORIZATION OF FIVE ADDITIONAL U.S. SERVICES TO BE PACKAGED WITH PAY TELEVISION SERVICES

In Public Notice CRTC 1987-261, the Commission authorized five additional non-Canadian satellite services that could be packaged exclusively with Canadian pay television services. A number of parties, including First Choice Canadian Communications Corporation, Allarcom Pay Television, the CCTA and the Canadian Film and Television Association (CFTA), identified possible problems associated with the distribution in Canada of these five services.

Over the past few years, the Commission has received several requests by the CCTA and the cable industry to expand the list of authorized satellite services in order to include these five services, as well as other foreign services.

The Commission notes that by adding these five services to the list of "Part II Eligible Satellite Services", it has authorized cable systems, under certain circumstances, to distribute these services should they wish to do so. Cable systems are not, however, required to carry any of these five services.

Moreover, given that cable licensees may allocate no more than eight channels for the distribution of non-Canadian satellite services as discretionary services, and given the popularity of a number of the non-Canadian satellite services already being distributed, such as The Arts and Entertainment Network, CNN, CNN Headline News, the Nashville Network and Financial News Network, cable licensees are not expected to wish to replace these popular services in order to distribute all of the newly authorized ones.

Furthermore, the Commission remains of the view that in order to minimize the impact of the growing movement by cable operators to market specialty services on low-priced discretionary tiers, the exclusive linkage provision for pay services is necessary and important.

The Commission reiterates its suggestion in Public Notice CRTC 1987-260 that, pending amendments to Canadian copyright legislation, cable licensees choosing to offer any of these five services should negotiate with the foreign suppliers or rights holders of these services with a view to including in the fee to be paid to the carrier an appropriate amount of compensation for copyright liability.

OTHER ISSUES

The CCTA and Rogers Cablesystems Inc. requested the addition of a number of non-Canadian satellite services to the list of "Part II Eligible Satellite Services". In a separate public notice of today's date, the Commission has issued a list of "Part II Eligible Satellite Services" to replace the list dated 30 November 1987. For the reasons set out in that notice, Tempo Television has been added to the list.

The balance of the issues raised by interested parties in their comments and listed at the outset of this document dealt with the licensing approach and regulatory framework for specialty services. All of these matters have been considered in detail by the Commission in the proceeding that culminated in Public Notices CRTC 1987-260, 1987-261 and 1987-262 and in Decisions CRTC 87-895 to 87-905. The Commission is not prepared to reopen these matters at this time. Accordingly, the Commission has enacted the amendment to section 10(2) of the regulations in the form proposed in Public Notice CRTC 1987-262 and set out in the attached Schedule. The amendment has been registered with the Clerk of the Privy Council to come into effect as of today's date.

Fernand Bélisle Secretary General