ARCHIVED -  Public Notice CRTC 1991-74

Public Notice

Ottawa, 23 July 1991

Public Notice CRTC 1991-74

Radio Market Policy

On 17 December 1990, the CRTC issued Public Notice CRTC 1990-112 entitled "Radio Market Criteria". In this Notice, the Commission proposed:

 (i) a set of criteria that could be used by the public and the Commission to give indications at an early stage of the capacity of markets to support additional commercial radio stations; and,

 (ii) a revised CRTC procedure for handling applications, incorporating the use of these criteria and other measures.

The Public Notice further explained how the Commission would apply the results of the tests. It stated that, regardless of the indication of these tests, the proposed procedure did not envisage any unilateral decision on the part of the Commission to terminate the process [i.e. deny the applications at this point without going to a public hearing].

The proposals were framed against the background of radio's declining share of advertising revenue, the declining profit performance of radio in recent years, a continuing demand by applicants for licences to establish new radio stations, and precedents in which the Commission has had to deny all applications due to the lack of evidence of the capacity of the market to support new stations.

In response to the public notice, the Commission received comments from 12 parties, and is grateful for the assistance they provided.

II. DISCUSSION OF ISSUES

a) Basic Criterion

The Basic Criterion was:

 The introduction of an additional commercial AM or FM station must not affect the ability of existing commercial AM and FM stations to discharge their programming responsibilities.

Some submissions argued that this criterion would restrict too greatly the entry of new competition, and for this reason should not be used.

In response, the Commission notes that, while it has always placed a high value on competition, and that competition among multiple broadcasting services is present in most radio markets in Canada, it is a fact that any new entry will have some impact on existing stations' operations. Clearly, the availability of varied and comprehensive programming using predominantly Canadian creative and other resources, objectives which are set out in the Broadcasting Act (the Act), requires financially healthy licensees. It is also the case that licensees only continue to hold their licences on the condition that they discharge the programming responsibilities placed on them in accordance with the Act. Their performance in this respect is reviewed in a public process at regular intervals, and this practice will continue.

For the above reasons, and as long as the Act requires licensees to pursue objectives that are not always strictly in accordance with economic self-interest, the Commission considers that an approach based on the above criterion is appropriate, and is likely to be a more efficient means than unlimited competition, to foster a continued, varied and comprehensive service.

b) The Tests

Public Notice CRTC 1990-112 listed the three tests as follows:

1. Group Profitability

 To measure this indicator, the Commission will determine the average profitability of all commercial stations in the market over the preceding 5 years. Should this profitability be negative, the market will be deemed to have failed this test. Profits are measured before interest expense and taxes (PBIT).

2. Individual Profitability

 To measure this indicator, the Commission will examine whether each of the stations in the market was profitable or unprofitable in each of the preceding 5 years. The total number of instances where stations were profitable will be compared with  the number where they were unprofitable. Should the number of unprofitable station-years be equal to or greater than the number of profitable station-years, the Commission will consider the market to have failed this test.

3. Revenue Growth

 To measure this indicator, the Commission will examine the growth of total advertising revenues within the market. If advertising revenues have exhibited no positive real growth (i.e. after inflation) over the preceding 5 years, the Commission will consider the market to have failed this test.

Most submissions supported the use of profitability and growth as the parameters for measuring the levels of performance expected before entry would likely be favourably considered.

Some submissions preferred a definition of profitability in which profits would be measured after deduction of interest expenses.

In measuring profitability, the Commission has opted for the exclusion of interest charges for two reasons:

 (i) it is the only fair method of comparing situations in which licensees rely to differing extents on debt financing; and,

 (ii) interest payments are a return on capital used in the business, and a P.B.I.T. check discloses whether there is any return on  capital, whether to equity holders or to debt holders. A test measuring profits after the deduction of interest expenses and taxes (P.A.I.T.) only discloses whether there is a return on capital to equity holders.

c) Data Used In Tests

Other submissions questioned whether the Commission should rely on data submitted by licensees, suggesting that this raised the possibility of deliberate or accidental distortions.

The Commission requires that all operating data submitted by licensees be accompanied by a related financial statement that has been audited by an outside party. While this data may still be subject to some degree of distortion (as suggested in the comments), it is the best information of its kind available to the Commission. The degree of distortion is not considered critical because, in the procedure proposed, these tests are only a first check. In all cases where a complete application is received and proceeds to a public hearing, it is to be accompanied by a more comprehensive study of the market, performed by an independent expert, relying to a considerable extent on other data.

For the purposes of the tests, which measure only a specific and limited situation, this data is considered adequate.

d) Data Disclosure and Confidentiality

Public Notice CRTC 1990-112 indicated that the Commission would adhere to its standard policy guideline of making public all data except where this would be to the competitive disadvantage of individual licensees.

The Commission requested comments as to whether it should publish the results for each station in a market or for market aggregates only. It received suggestions both for and against the publication of the revenue and profitability data for individual stations. Those who supported the release of individual station data argued that such disclosure would permit better assessment of market conditions, and that since these operations used public frequencies, the public was entitled to such disclosure. Others argued that such disclosure could expose broadcasters to competitive disadvantage.

After consideration of all arguments, the Commission has decided to release market aggregates only, at this time, but will continue to monitor whether further disclosure is necessary for successful operation of the new procedure.

e) Independent Market Study

Terms of Reference

Public Notice CRTC 1990-112 had proposed that, in cases where a complete application had been submitted, the CRTC would commission an independent study to consider the capacity of the market to support an additional commercial station with special reference to relevant features of the local economy and the impact on licensees already serving the market. After review of the submissions, the Commission has decided that the independent studies will be conducted along the lines indicated. It has also decided that it will bear all costs pertaining to such studies, as originally proposed. The studies would also consider past cases of new entries, involving markets with similar characteristics and of comparable size, and the impact of the proposed new entry on other markets in the surrounding area. On the other hand, the studies will not investigate particular station formats, as this area is best left to applicants to investigate.

Maximum Number of Studies

The Commission proposed to have a maximum of six studies conducted per year, this figure being the average recorded in recent years. On the basis of considerations related to the expected availability of internal resources, as well as the demonstrated reasonableness of the number, and its plan to review these practices after three years, the Commission considers retention of the six-study maximum to be reasonable.

f) Procedure

Calls

In section 3(a) of Public Notice CRTC 1990-112, the Commission stated that, in the situation where an independent study concludes that there is no room in a market for an additional station, the following procedure would be followed:

 ... If the applicant decides to continue, (i) the study will then be made public, (ii) a call will be issued, and (iii) all complete applications will be considered at a public hearing. It should be noted firstly that the issuance of calls is not a requirement under the Act. Secondly, in processing applications for entry into a market, the Commission has, under certain circumstances in the past, proceeded to a public hearing without issuance of a call.

In most of the instances envisaged in 3(a) involving applications for prospective new commercial entries, the Commission intends to continue with its current practice of issuing a call for applications. In this respect, the Commission wishes to emphasize that, should the original applicant wish to proceed, its application will be heard at a public hearing, whether or not a call is issued. Notwithstanding the above, the Commission will not generally be disposed to entertain applications for authority to establish a new entry in markets where a new station has been in operation for a period of less than twelve months.

g) Applicants' Market Studies

In addition to the independent market studies commissioned by the CRTC, the Commission will continue to require all applicants to conduct their own studies in support of their new entry proposals.

The Commission will expect applicants' market studies to be comprehensive and provide an adequate framework for analysis and comparison. They should provide information on the capacity of the market to support the particular format proposed and investigate the impact of their proposal on the ability of existing licensees to fulfill their programming responsibilities.

h) Review of Procedure

The Commission will review these new procedures and the criteria outlined above after three years, as recommended in some of the submissions.

III. SUMMARY OF THE NEW PROCEDURES AND CRITERIA

In the following pages, the Commission sets out in consolidated form the procedures and criteria that it intends to use in the processing of applications for conventional, commercial AM and FM undertakings. It expects that these practices will preserve the right of potential applicants and all other parties to be heard according to the provisions of the Act, and that they will allow for the rational entry of new services into markets, while promoting the efficient utilization of scarce resources.

THE BASIC CRITERION

 The capacity of the market must be such that the introduction of an additional commercial AM or FM station will not unduly affect the ability of existing commercial AM and FM stations to discharge their programming responsibilities.

THE SPECIFIC TESTS

1. Group Profitability

 To measure this indicator, the Commission will determine the average profitability of all commercial stations in the market over the preceding 5 years.

 Should this profitability be negative, the market will be deemed to have failed this test. Profits are measured before interest expense and taxes.

2. Individual Profitability

 To measure this indicator, the Commission will examine whether each of the stations in the market was profitable or unprofitable in each of the preceding 5 years. The total number of instances where stations were profitable will be compared with the number where they were unprofitable. Should the number of unprofitable station-years be equal to or greater than the number of profitable station-years, the Commission will consider the market to have failed this test.

3. Revenue Growth

 To measure this indicator, the Commission will examine the growth of total advertising revenues within the market. If advertising revenues have exhibited no positive real growth (i.e. after inflation) over the preceding 5 years, the Commission will consider the market to have failed this test.

 INDEPENDENT MARKET STUDIES

 Terms of Reference

 The CRTC will commission a maximum of six independent studies each year to investigate the capacity of markets to support an additional radio station, with special reference to the impact on licensees already serving those markets. The studies will provide projections of market capacity for the future, highlight any specific relevant features of the local economy,  and where relevant, draw inferences from past cases of new entries into specific markets and their neighbours.

REVISED PROCEDURE

The revised procedure for consideration of applications for entry into a market are as follows:

 1. An application for a conventional AM or FM undertaking is received.

 2. Through correspondence with the applicant, the Commission ensures that the application is complete.

 3. Following receipt of a complete application, the CRTC will commission an independent study to investigate more fully the capacity of the market to support an additional station.

 4. The findings of the study will be made available to the applicant as soon as possible following its completion. The applicant will then be required to decide whether to proceed with the application, given the findings of the study, and the criteria of the Commission set out in the previous Section of this Public Notice.

 5. (a) If the applicant decides to proceed, i) the study will then be made public; ii) a call for applications from other interested parties may be issued; and, iii) all complete applications will be considered at a public hearing.    (b) If the applicant decides not to proceed, the process will be terminated and its application returned.

 6. The study will be placed on the public record.

Scheduling of applications for consideration at hearings will be determined, in part, on the basis of feasibility as indicated by the criteria and studies, and the date of receipt of complete applications in the Commission.

The Commission emphasizes that the modifications to its procedure do not include any unilateral decision on its part to terminate the process following the first stage described above, even if the independent study concludes that the market cannot support an additional station.

Notwithstanding the above, the Commission will not generally be disposed to entertain applications for authority to establish a new entry in markets where a new station has been in operation for a period of less than twelve months.

If the process does result in a call, applicants will be expected to carry out their own market studies in support of their individual applications and, through reference to the Commission's new criteria, to demonstrate the capacity of the market to support the additional service they wish to provide and the impact of their proposal on existing licensees. Applicants will also be expected to address the appro- priateness of their chosen format.

RELEVANT DATA

The financial data relevant to group profitability of stations, and to the growth of radio revenues in the various radio markets across Canada, will be made public and updated on an annual basis by the Commission.

The following data will be published for all radio markets:

1. The five-year average of Profits before Interest and Taxes (PBIT) for all stations as a group.

2. The total number of instances over the preceding five-year period in which individual stations within a market have been profitable or unprofitable on an annual basis.

3. The five-year average of the annual growth rate (after inflation) of radio revenues in the market.

Where, in its judgment, licensees will not be placed at a competitive disadvantage, the Commission may also release additional data.

Related Documents: Public Notices CRTC 1990-111, "An FM Policy for the Nineties" and CRTC 1990-112, "Radio Market Criteria", dated 17 December 1990.

Allan J. Darling
Secretary General