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ARCHIVED - Public Notice CRTC 2000-6

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Public Notice CRTC 2000-6

Ottawa, 13 January 2000
Licensing framework policy for new digital pay and specialty services
Summary
This notice sets out a framework for licensing new digital Canadian programming services. The framework will enhance diversity and choice for viewers, in the current and evolving digital distribution environment.
The approach will:
  • make possible the provision of a diverse selection of attractive new Canadian programming services to be distributed to Canadian viewers with digital technology;
  • facilitate the rollout of digital distribution technology;
  • provide a balance between the traditional licensing approach and a more open-entry, competitive environment made possible by the expansion of digital capacity; and
  • promote alliances between Canadian and foreign services.
The Commission will license two categories of new digital services. It will shortly issue a call for applications, for new digital services in both categories in French, English or other languages.
Category 1 services will be a limited number of specialty services (approximately 10) that make a strong contribution to the development, diversity and distribution of Canadian programming and are the most attractive services for early digital distribution. These services will have digital access privileges. Category 2 services will be licensed on a more open-entry basis. The Commission intends to grant licences to all Category 2 applications that meet basic licensing criteria even if the services are competitive with one another. Such services will not be assured digital access.
The Commission will consider applications for distributor-affiliated Category 1 and Category 2 services. Measures will be in place to ensure the distribution on equitable terms of services that are not affiliated to distributors. Existing undue preference regulations will continue to apply, to address any concerns that may arise about the potential for distributors to confer an undue preference on affiliated services in matters such as access, packaging and other terms of carriage.
The Commission will issue a call for requests for authorization to distribute new foreign services in Canada on a digital basis after the publication of its licensing decisions for new Canadian digital services.
Introduction

1.

In 1997, the Commission received over 70 applications for new pay and specialty services. At that time, it determined that there were a number of issues that needed to be examined before it could proceed with a public hearing to consider those applications. Outstanding issues included the limited availability of analog channel capacity, the current state of digital distribution technology, the emerging competitive distribution environment, and the evolving structure of the broadcasting industry.

2.

Due to greater available channel capacity in Francophone markets, and the lower number of licensed French-language services, the Commission proceeded with consideration of French-language applications at a hearing conducted in December 1998. The Commission licensed four new French-language services in May 1999, for carriage on an analog basis in early 2000.

3.

In Public Notice 1998-79, the Commission announced that it would postpone its consideration of new English-language pay and specialty services until it could conduct a separate public process to examine an appropriate licensing framework for such services in the existing environment. The Commission indicated that it was concerned about the pace of the rollout of digital cable capacity and of the development of competition in distribution services.

4.

To assist in the development of an appropriate framework for considering new pay and specialty applications, the Commission called for comments on a licensing framework for new pay and specialty services on 3 February 1999 in Public Notice 1999-19. Issues raised in the notice included:
  • whether licensing for digital or analog distribution would be more appropriate;
  • the extent to which the access rules should apply to any new licensed services;
  • the appropriate carriage status for any new licensed services; and
  • tiering, packaging and linkage rules that might be applied to any new licensed services.

5.

The notice also raised questions about possible licensing criteria for new pay and specialty services, including their ability to contribute to broadcasting policy objectives, as well as the extent to which financial and competitive factors should be considered in the licensing process. In addition, the Commission sought comments on the weight it should give to matters of distributor equity, other forms of cross-ownership or wholesale fees in its consideration of new applications. The deadline for comments was 14 May 1999. Forty-nine written submissions were received.

6.

The Commission has considered all these submissions in developing this policy framework and wishes to thank those who provided comments for the useful contribution they have made to the Commission’s deliberations.

7.

In view of the scarcity of analog channel capacity, most parties emphasized that new services should be licensed on a digital basis. There was also general agreement that new Canadian services that launch on a digital basis at this time will face financial risk. The initial subscriber base will be limited and the rate at which the subscriber base will grow is uncertain.

8.

For these reasons, the programming sector generally emphasized the need for regulatory support for new services, including carriage rights and rules to ensure that new services are sold in packages rather than on a stand-alone basis. Most supported the continuation of the Commission’s traditional licensing and regulatory approach.

9.

On the other hand, distributors generally stated that the regulatory approach should maximize the benefits of digital distribution, including increased customer choice in the selection of services. Distributors generally favoured a more open-entry, market-based approach to the licensing and eventual launch of new services.

10.

The submissions also indicated the importance of making new, high-quality programming services available to provide incentives for viewers to adopt digital technology.

11.

Based on the record of this policy review process, the Commission anticipates that, over the next few years, the deployment of digital distribution technology by wire line distributors will gain momentum. The Commission notes that Direct to Home (DTH) distributors and multipoint distribution system (MDS) distributors currently utilize digital technology. During this transitional period, while most subscribers will continue to receive their programming signals with analog technology, digital distribution will gain in importance in the marketplace in view of the advantages it offers.

12.

The advantages of digital distribution include:
  • the ability to deliver more services;
  • increased flexibility in the way that programming services may be packaged;
  • improved navigation and organization of channels based on individual viewer choice;
  • greater opportunities for viewers to interact with the programming product;
  • the capacity to support high definition programming;
  • a potential for higher picture and sound quality; and
  • enhanced possibilities for integrating the delivery of programming and non-programming services (such as Internet access and telephony).

13.

While the Commission expects digital penetration to be limited in the short term, it considers that the advantages offered by digital distribution will ultimately speed up the expansion of digital capacity and the conversion to digital by all distributors and customers.

14.

Accordingly, the Commission has adopted an approach that provides a bridge between the traditional regulatory mechanisms – which have been highly supportive of emerging new Canadian services – and a more open-entry environment that allows for greater risk-taking, provides for a greater number of services in the marketplace, and allows the success of services to be increasingly determined by customers.
New digital services

15.

To provide incentives for Canadian viewers to switch to digital technology, and given the limitations on analog capacity, the Commission will now license a range of new pay and specialty services for digital-only distribution.

16.

The Commission acknowledges the comments received from interveners that it was too early to consider licensing new French-language services on a digital basis. However, the Commission considers that linguistic diversity is an important consideration. Accordingly, it will welcome applications under this licensing framework for digital pay and specialty services in both French and English, as well as other languages.

17.

Under the new framework, the Commission has decided to license two categories of new services: Category 1 and Category 2 services.
Category 1 services

18.

Category 1 services will be specialty services that make a strong contribution to the development, diversity and distribution of Canadian programming and are the most attractive services for early digital distribution.

19.

The Commission expects to license approximately ten new specialty services as Category 1 services. These services will have digital access privileges and genre protection to assist them to launch vibrant services during the uncertain period of digital rollout.

20.

To make Category 1 services available to the maximum possible number of digital subscribers, distributors who offer programming services to the public using digital technology will be required to distribute all Category 1 services appropriate to their market on a digital basis. This requirement will be imposed by regulation. In addition, the Commission points out that it will issue in February 2000 its determination on the proceeding initiated in P.N. 1999-74 entitled Review of the access rules for Canadian pay and specialty services in bilingual markets - Call for comments.

21.

To address the situation where a distributor has insufficient digital capacity, the Commission will consider allowing exceptions by condition of licence.

22.

To ensure that all Category 1 services have the benefit of favourable packaging arrangements, distributors will not be permitted to distribute any Category 1 service on a stand-alone basis unless it is also distributed as part of a package. As well, each Category 1 service must be packaged and marketed on an equitable basis as compared to any other new digital service.

23.

To moderate the challenge of early digital launch, the Commission will license Category 1 services on a one-per-genre basis. Specifically, the Commission will not license a service that is directly competitive with another Category 1 service or with an existing pay or specialty service.

24.

Contributions to Canadian programming, including commitments to exhibition, expenditures and original production, will be an important consideration in the selection of Category 1 services. Other criteria will include contribution to the diversity of available genres, enhancement of linguistic diversity in the digital offering (French, bilingual or multilingual services), attractiveness of the service to potential viewers, innovation in the use of the digital medium (for example, interactivity), affordability, and the reasonableness of the business plan.

25.

The Commission expects to license Category 1 services for a seven-year term. It will expect applicants for Category 1 licences to commit to a reasonable level of Canadian programming in each year of the licence term leading to a minimum of 50% Canadian programming over the broadcast year by the end of the first licence term. Given the importance of such commitments in the licensing process, applicants should not expect to be permitted to modify their proposed commitments during the licensing process (after applications are filed).

26.

The Commission will carefully assess the proposed commitments made by Category 1 applicants. To do so, the Commission must be able to consider the ability of applicants to implement their plans. Accordingly, the Commission will consider the market studies and business plans of the applicants and take note of the wholesale rates for discretionary digital carriage.

27.

The Commission considers that limiting the distribution of these new programming services to digital technology is consistent with the limitations on analog capacity. Accordingly, Category 1 services will only be allowed distribution on a digital basis with the following exception. The Commission will permit independent Class 3 distribution systems (small systems) that do not make use of digital technology, to distribute Category 1 services on an analog basis. For this purpose, the Commission will consider an independent Class 3 distribution system to be a Class 3 distribution system that is not interconnected with a Class 1 or Class 2 distribution system.

28.

This exception has been made to respond to a concern that digital transition may be too expensive for some of these small systems in the near term. Nonetheless, the Commission encourages all distributors to implement digital distribution technology as soon as practicable.
Category 2 services

29.

The Commission recognizes that some services will be prepared to accept the risks of launching on a digital-only basis without the types of regulatory support that will be provided to Category 1 services. In a digital environment characterized by increasing capacity and enhanced packaging flexibility, the Commission considers that licensing such services will provide a benefit to the broadcasting system by expanding the availability of programming services for digital distribution. As these services will need to compete with one another for distribution and for the attention of customers, licensing them will also lead to enhanced subscriber choice.

30.

The Commission expects that category 2 services will include services offering niche programming to particular audiences, services that provide multiple viewing opportunities for particular types of programming, and services that repackage existing programming in creative ways.

31.

The Commission will license Category 2 services in a way that maximizes the benefits of an open-entry approach. The Commission will not limit the number of Category 2 licences to be issued.

32.

The Commission will expect applicants for Category 2 licences to commit to minimum Canadian content exhibition requirements. For English- and French-language specialty services, that minimum will be 35%. For ethnic specialty services, it will be 15%. Music video services will also be required to exhibit a minimum of 30% Canadian music videos.

33.

For pay services, the Commission will expect Canadian content exhibition and expenditure commitments to be comparable to those of existing pay services.

34.

As noted above, Category 2 services that are competitive with each other will be licensed. However, the Commission will not license a Category 2 service that is directly competitive with an existing pay or specialty service or with a new Category 1 service. The Commission will not consider the viability of Category 2 services, their business or marketing plans, or the rates to be charged by them. This will ensure that highly experimental or innovative services will not be excluded due to a lack of perceived viability.

35.

In accordance with the open-entry licensing approach, distributors will be able to select the Category 2 services on the basis of their perceived appeal to their subscribers. Category 2 services will not have carriage privileges, except as noted under the section entitled Distributor Equity below.

36.

Category 2 services will only be allowed distribution on a digital basis. Independent Class 3 cable systems may apply for a condition of licence permitting the carriage of a Category 2 service using analog technology. Such applications will only be approved in exceptional circumstances, for example, where a Category 2 ethnic programming service is particularly suitable for distribution in a given market.
Majority of Canadian services

37.

Distributors will be required to ensure that the majority of services received digitally by each of its subscribers is Canadian. This approach will allow distributors to offer a broad range of choices to customers, while ensuring the continued predominance of Canadian services in the emerging digital distribution environment. For the purpose of this rule, all of the programming signals of a pay-per-view or video-on-demand service will count as one service. This approach is consistent with the Commission’s existing regulation ensuring the predominance of Canadian services.
Distributor equity

38.

The Commission considers that it is appropriate not to restrict the potential applicants for new services. It is also clear from this proceeding that distributors have an interest in the rollout of digital distribution, and will therefore be prepared to launch as many new programming services as possible, to increase digital penetration. Accordingly, the Commission sees no need to deny an application for a licence solely because a distributor holds, directly or indirectly, equity in the proposed service.

39.

The Commission also recognizes the key role distributors will have under this licensing framework. Distributors will negotiate terms of carriage, packaging and marketing arrangements and will, in the case of Category 2 services, select which services to carry. As a result, the Commission believes it is appropriate to adopt measures to ensure that non-affiliated services are treated fairly by distributors.

40.

In its 19 May 1995 Convergence Report, the Commission identified sufficient capacity on cable networks and comprehensive access rules as prerequisites in assessing whether cable systems should be allowed to operate programming services other than over-the-air radio and television stations. The Commission considers that in the transitional digital environment, with expanding (but still limited) capacity, it will still be necessary to continue the existing undue preference prohibition and to provide some specific access rules.

41.

The prohibition against conferring undue preference or disadvantage which applies to all distributors under the Broadcasting Distribution Regulations will continue to apply to terms of carriage issues, including those that may arise from distributor equity. Because distributors offering programming services to the public using digital technology will be required to distribute all Category 1 services on a digital basis, no further safeguard is necessary for them.

42.

The Commission will introduce an access rule applicable to all distributors who carry any Category 2 programming service in which they directly or indirectly control more than 10% of the equity. These distributors will be required to distribute at least five non-affiliated Category 2 services for every affiliated Category 2 service they distribute. For the purpose of this rule, all of the programming signals of a pay-per-view or video-on-demand service will be considered to count as one service.
Additional undue preference provisions

43.

An additional concern raised in this proceeding was that licensees of distributor-affiliated programming services could potentially confer an undue preference on the distributor to which they are affiliated. For example, such a licensee might refuse to be carried by a competing distributor or might agree to more advantageous terms of carriage with its affiliated-distributor. The Commission intends to propose an amendment to its regulations to introduce a prohibition against pay and specialty services granting undue preference similar to the provision applicable to distributors by virtue of the Broadcasting Distribution Regulations.
Pay-per-view and video-on-demand services

44.

New pay-per-view and video-on-demand services will be treated as Category 2 services for the purposes of carriage. They will only be authorized for distribution with digital technology and will not have access privileges.
Repeat channels

45.

To allow for the distribution of alternative programming schedules, the Commission stated in Public Notice 1993-74, Structural Public Hearing, that it would consider applications from existing services for amendments to their licences to be able to offer repeat channels. Channels authorized under this policy were to have significant restrictions, including a rule that they must be composed exclusively of repeats of programs aired within the previous seven days.

46.

Under this digital framework, opportunities will exist to license services that provide alternative program scheduling without the need for the types of restrictions that were part of the Commission's policy related to repeat channels. Those who wish to propose services that will create new viewing opportunities based on existing programming should apply for a Category 1 or Category 2 licence under this licensing framework. The Commission will no longer authorize repeat channels by condition of licence.
Existing services

47.

The rights and obligations of existing pay and specialty licensees are not affected by this public notice. These services will continue to be subject to existing rules and will not be considered either Category 1 or Category 2 programming services. As noted above, the Commission will not license Category 1 or Category 2 programming services that are directly competitive with existing pay or specialty services.

48.

A number of issues were raised in this process relating to the migration of existing services from analog to digital distribution. The Commission will address these issues at a later date.
Foreign services

49.

A diversity of foreign programming is a valuable supplement to Canadian programming in a variety of genres. The Commission encourages alliances between Canadian and foreign services as an appropriate way to achieve the objectives of the Broadcasting Act.

50.

However, the Commission recognizes that there may be genres in which a Canadian programming service is unlikely to be developed. The Commission will therefore issue a call for requests to add foreign services to the lists of eligible satellite services (the lists) for distribution on a digital basis. The Commission will issue this call concurrently with its licensing decisions on new Canadian Category 1 and Category 2 programming services. A streamlined public process to consider such requests will allow distributors to offer new foreign services at the same time as the new Canadian ones.

51.

Consistent with the Commission's existing policy, it will not be predisposed to authorizing foreign services that are competitive, in whole or in part, with Canadian services. This approach will give priority to new and existing Canadian services, including those that have formed alliances with foreign services. Authorization to be added to the lists will be granted where approval would be in the public interest.

52.

It will be a condition of being added to the lists, that a foreign service not hold or exercise preferential or exclusive programming rights in relation to the distribution of programming in Canada. For example, a foreign service added to the lists could not, as a condition of being maintained on the lists, deal in rights in such a manner that unduly precludes a Canadian programming undertaking from acquiring that programming.
Implementation

53.

The implementation of this licensing framework will require amendments to the applicable regulations. The Commission will issue a public notice calling for comments on proposed amendments.

54.

The Commission will also issue a call for applications for new digital pay and specialty services in early February. Previously submitted applications for new pay and specialty services will be returned to the applicants. These applicants or any other interested parties may submit the same applications or new applications for digital Category 1 or Category 2 services in light of the licensing framework set out in this notice.
Secretary General
This notice is available in alternative format upon request, and may also be viewed at the following Internet site: http://www.crtc.gc.ca
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