ARCHIVED - Public Notice CRTC 2001-130

Public Notice CRTC 2001-130

Ottawa, 21 December 2001

Small cable systems - Digital migration policy

Summary

In this Public Notice, the Commission sets out certain special measures in order to help ensure that small cable systems remain competitive while the marketplace makes the transition to digital distribution.

For these purposes, the Commission defines "small cable systems" as those systems, including systems that compete with larger incumbent cable companies in their licensed territories (overbuilders), that are not owned or operated, directly or indirectly, by Rogers, Shaw, Vidéotron or Cogeco.

Although the Commission concludes that the consent of the programmer is required for the digital distribution of existing analog services by small cable systems, in the case of such systems, the Commission will expect consent to be provided:

. for digital distribution of services that would normally have been entitled to analog distribution, but which have not been carried by a small system due to lack of capacity, provided that the system is otherwise in compliance with the carriage rules;

. in the case of duplication or migration of a service, where the cable system undertakes that the programmer will be substantially no worse off, in terms of wholesale fees received.

In the case of a previously uncarried service, the Commission will expect programmers to give their consent to small systems for the distribution of previously uncarried analog services on digital tiers at effective per-subscriber rates that are substantially similar to those offered to their larger competitors (DTH or the incumbent cable company, as the case may be), provided that the system is otherwise in compliance with the carriage rules.

In this circumstance, it is the Commission's preliminary view that (a) failure for a programmer to grant consent under these circumstances would constitute an undue disadvantage to the small cable distributor under the Pay Television Regulations, 1990, or the Specialty Services Regulations, 1990, and (b) for a large distributor to invoke a "most favoured nation" clause of an affiliation agreement when such consent is granted would constitute the conferring of an undue preference on itself under the Broadcasting Distribution Regulations. (Most favoured nation clauses generally provide that programmers will not give a distributor treatment that is any less favourable than the treatment given to any other distributor.)

Background

The Digital Migration Report

1.

In Establishment of an industry working group to examine the digital distribution of existing pay and specialty services, Public Notice CRTC 2000-113, 4 August 2000 (PN 2000-113), the Commission initiated a process aimed at facilitating the transition from analog to digital distribution for certain programming services. Specifically, the Commission asked that existing pay and specialty services join with distributors in a working group to develop a proposal for the distribution of existing analog services in a digital environment. The Report of the Digital Migration Working Group (the Migration Report) was filed with the Commission on 2 February 2001.

2.

Issues pertaining to large cable systems and smaller systems were addressed separately since, according to participants in the group, "the circumstances under which smaller cable systems operate are significantly different."

3.

Participants in the Working Group generally agreed that there may be a need for the Commission to develop a more flexible regulatory regime with respect to the digital distribution of pay and specialty services by smaller cable system operators. However, there was little consensus as to the nature or extent of the relief that should be granted smaller systems.

Public Notice CRTC 2001-58

4.

On 25 May 2001, the Commission issued Digital migration issues - Reconvening of working group regarding large cable systems and Call for comments regarding small cable systems, Public Notice CRTC 2001-58 (PN 2001-58). The Commission called for comment with regard to digital migration issues as they pertain to smaller systems, including issues specifically identified in the Migration Report. The Commission invited comments on the following issues:

· the Commission's preliminary view that, for these purposes, small cable television operators should include those that are not owned or operated, directly or indirectly by Cogeco, Rogers, Shaw or Vidéotron;

· the appropriate wholesale rates for the carriage of existing services on the digital tiers of smaller distribution undertakings, and;

· any other special measures that may be appropriate for smaller distributors wishing to carry an existing service on a digital tier.

The Commission's conclusions

5.

The Commission considers that small cable companies make a significant contribution to maintaining a healthy level of competition in the distribution of programming. Competition, in turn, exerts downward pressure on rates, thus contributing to affordability of service. It also contributes to the delivery of a broad range of services to Canadians.

6.

Moreover, the Commission considers that smaller systems, particularly smaller independent systems, face challenges above and beyond those faced by larger systems. These challenges include:

(a) smaller systems often have difficulties negotiating wholesale programming fees comparable to those available to larger systems; and

(b) many smaller systems have lower capacity than their competitors, and may thus find it difficult to offer service packages fully comparable to those offered by their competitors.

7.

In light of their contributions to the broadcasting system, and given the particular challenges they face, the Commission considers that certain special measures are warranted in order to help ensure that smaller cable systems, as defined below, remain competitive while the marketplace makes the transition to digital distribution. The specific relief that the Commission considers warranted is discussed in greater detail below.

Definition of "small cable system"

8.

In balancing the interests of the parties, the Commission considers it appropriate to adopt a broad definition of "small cable system" for the purposes of this Public Notice. The Commission therefore maintains the definition of "small cable system" set out as its preliminary view in PN 2001-58, that is, a "small cable system" is one that is not owned or operated, directly or indirectly, by Rogers, Shaw, Vidéotron or Cogeco, without regard to the number of subscribers.

9.

The Commission notes that "overbuilders" are cable companies that compete with larger incumbent cable companies in their licensed territories, just as other small cable companies compete with DTH distributors. Thus, overbuilders face many of the same competitive challenges as small systems in more rural areas. For example, overbuilders generally do not have the subscriber base to command wholesale rates for programming comparable to those available to large incumbent cable companies.

10.

The Commission considers that the same rationale of ensuring competitive equity between small cable and DTH undertakings would apply to overbuilders in relation to incumbent cable companies. The Commission therefore includes "overbuilders" in the definition of "small cable system" for the purposes of this Public Notice, provided that the overbuilder is not owned or operated, directly or indirectly, by Rogers, Shaw, Vidéotron or Cogeco. The Commission would be prepared to review this determination with regard to any particular overbuilder, if it were to attain sufficient size as to command bargaining power comparable to that of its incumbent competitor(s).

Requirement for programmers' consent

11.

In PN 2001-58, the Commission indicated that the consent issue as it pertains to smaller systems would be resolved on a final basis in the present proceeding.

12.

The Commission considers that consent for carriage generally is fundamental to the programmer's right and ability to control its product. Accordingly, in the case of small cable systems as herein defined, the Commission finds that the programmer's consent is required for the digital distribution of existing analog services. However, in the case of such systems, there are circumstances in which the Commission will expect consent to be provided, in particular, (a) for digital distribution of a service that would normally have been entitled to analog distribution, but which has not yet been carried by a small system due to lack of capacity, and (b) where the cable system undertakes that the programmer will be substantially no worse off, in terms of wholesale fees received, if it consents to duplication or migration. These circumstances are described in greater detail in the section that follows.

Wholesale fees

13.

In negotiating affiliation agreements with distributors, programmers will often attempt to tie programming fees to the penetration rate achieved, i.e., either the per-subscriber wholesale rate will go down as the penetration rate goes up and/or the affiliation agreement will specify a guaranteed minimum penetration rate or a guaranteed minimum number of subscribers. Generally, the larger cable systems (and the two national DTH distributors) have enough subscribers to secure the best rates offered by most specialty services.

14.

In considering the appropriate approach to wholesale rates paid for existing analog programming services offered by small systems on digital tiers, the Commission considers it helpful to distinguish between the following situations: (a) initial launch on a digital tier of an analog service not previously carried by the cable system; (b) duplication or migration of a service currently carried on analog.

15.

With regard to the initial launch situation, the Commission notes that, in some instances, small systems have lacked the capacity to carry all existing analog services. In the Commission's view, there would be advantages for both distributors and programmers for such small systems to be able to launch these services on digital. Among other things, this flexibility would assist distributors in increasing the attractiveness of their digital offerings. In addition, such a measure could contribute to the broader distribution of programming services, thus providing incremental revenues to programmers. In addition, consumers would benefit from the increased availability of services. The Commission also considers that facilitating the carriage on digital tiers by small cable companies of previously uncarried services would contribute to the fulfilment of a number of objectives of the Broadcasting Act (the Act).

16.

Further, the Commission considers that such an approach would assist in sustaining competition between small cable systems and their competitors, which in itself will contribute to the affordability of services and to the delivery of a broad range of services.

17.

In light of the public interest objectives that would be achieved, the Commission expects programmers to give their consent to small systems for the distribution of previously uncarried analog services on digital tiers at effective per-subscriber rates that are substantially similar to those offered to their larger competitors (DTH or the incumbent cable company, as the case may be), provided that the system is otherwise in compliance with the carriage rules (as discussed below under the heading Analog access rules). Further, it is the Commission's preliminary view that (a) failure to grant such consent would constitute an undue disadvantage to the small cable distributor under the Pay Television Regulations, 1990, or the Specialty Services Regulations, 1990 and (b) for a large distributor to invoke a most favoured nation (MFN) clause because of the granting of such consent would constitute the conferring of an undue preference on itself under the Broadcasting Distribution Regulations (the BDU Regulations).

18.

In general, the Commission considers the possible impact of duplication or migration on a programming service to be considerably less clear than the initial digital launch of a programming service. Migration to digital of a service with a high penetration level on analog could result in a significant decline in revenues for the service. However, the Commission notes that there are instances where a programming service is carried on analog on a scrambled tier with relatively low subscriber numbers. In such instances, either migration to or duplication on a digital tier may have little negative effect on subscription revenues for the service, and may even result in increased revenues.

19.

However, given the possible negative consequences for a programmer of duplication or migration, the Commission considers that it would be inappropriate for it to expect programmers to consent to duplication or migration, absent certain assurances from the cable company.

20.

Accordingly, the Commission will expect programmers to consent to duplication or migration by a small cable company only where the company is prepared to ensure that the programmer will be substantially no worse off in terms of subscription revenues than it otherwise would have been.

21.

The Commission contemplates that this expectation would generally operate upon the expiry of the current term of an existing contract. However, parties may wish to renegotiate existing contracts to permit duplication or migration prior to that time.

22.

The Commission anticipates that the issue of appropriate wholesale rates for the carriage of services on digital in a transitional environment will be raised in the reconvened Digital Migration Working Group, which has reconvened to discuss digital distribution issues as they pertain to large cable systems. The Commission considers that small cable companies should be entitled to any further wholesale rate relief that could result from that process.

Preview periods

23.

It was suggested that small cable systems be permitted a six-month free preview period whenever they add a new service to either their analog or digital offerings.

24.

The Commission does not consider it necessary to mandate the length of free preview periods available to small cable systems. Rather, the Commission considers that the length and other terms and conditions of preview periods are best left to negotiations, taking into account other terms and conditions of carriage, as well as the nature of the service. It notes that, if small cable companies consider that they are being treated disadvantageously relative to their competitors with respect to preview periods, it is open to them to bring the matter before the Commission.

Analog access rules

25.

Under subsection 18(5) of the BDU Regulations, Class 1 distributors are required to carry all the existing analog pay and specialty services appropriate to their market (anglophone or francophone), "to the extent of available channels." Class 2 and Class 3 distributors are not obligated to carry these services; however, Class 2s must abide by the distribution and linkage rules when they do. Exceptions to subsection 18(5) must be authorized by condition of licence.

26.

The Commission has interpreted the access rules in subsection 18(5) of the BDU Regulations as requiring analog carriage (see, for example, Decision CRTC 2001-270, dated 18 May 2001, regarding Fairchild Television Ltd.). As a result, the carriage by a Class 1 cable operator of an "analog" service on digital only, under either an initial launch or a migration scenario, would prima facie represent non-compliance with the access rules. Duplication of an analog service on digital does not raise the same concern with regard to subsection 18(5), since the access rules would be met by the service's continued carriage on analog.

27.

As discussed above, the Commission considers that small cable systems should be able (a) to distribute on digital tiers those analog services that they have previously been unable to carry due to a lack of available channels (provided that those systems subject to the carriage rules are otherwise in compliance with them), and (b) to duplicate or migrate services when the cable system is prepared to ensure that the programmer is substantially no worse off in terms of subscription revenues than it otherwise would have been.

28.

Consistent with the above, the Commission would be inclined to approve applications from small cable systems for conditions of licence permitting the launch of a previously uncarried service on digital only, provided the system would otherwise be in compliance with the carriage rules. Similarly, the Commission would be inclined to approve applications for the conditions of licence necessary for the migration of a service when the small cable system is prepared to ensure that the programmer will be substantially no worse off in terms of subscription revenues than it otherwise would have been.

Distribution and linkage requirements

29.

Under subsection 20(1) of the BDU Regulations, Class 1 and 2 licensees are subject to the requirements of the Commission's Public Notice entitled Distribution and Linkage Requirements for Class 1 and Class 2 Licensees (distribution and linkage requirements). Part I of these requirements addresses such matters as (a) whether a service should be carried as part of basic service (i.e., dual status services) or as a discretionary service (modified dual status services), and (b) ratios of Canadian pay and specialty services to non-Canadian services. All of the services noted in Part I are services that, absent a condition of licence to the contrary, a Class 1 system must carry on analog in order to be in compliance with subsection 18(5).

30.

The distribution and linkage requirements do not contemplate and do not specifically address the carriage on digital of the analog services that are the subject of Part I of those rules.

31.

The Commission notes that the major difference between the distribution and linkage rules for analog cable and those for DTH operators is the requirement for Class 1 and 2 cable companies to carry Canadian specialty services according to their status, specifically:

· dual status services must be carried as part of the basic service, unless the operator of the service agrees to discretionary carriage;

· modified dual status services must be carried on a discretionary basis unless the distributor and the programming service agree to distribution on basic;

· discretionary only services can only be distributed on a discretionary basis, absent a condition of licence to the contrary.

32.

These requirements do not apply to DTH operators. DTH operators are, however, obliged to carry all specialty services, although they need not include any such services as part of the basic offering.

33.

The Commission is not prepared at this time to amend the distribution and linkage requirements applicable to the analog services discussed in Part I of the rules. Among other things, the Commission anticipates that the distribution and linkage requirements (and related issues) will be discussed by the Digital Migration Working Group, and considers that more comprehensive changes to the rules applicable to these services may be required as a result of that process.

34.

In addition, under section 20(1) of the BDU Regulations, exceptions to these requirements can be authorized via condition of licence. Small cable systems wishing either to launch previously uncarried analog services on digital or to migrate services can file an application seeking the appropriate conditions of licence under both subsection 18(5) and subsection 20(1).

The digital access regulations

35.

The digital access regulations (see section 18 of the BDU Regulations) currently require Class 1 and Class 2 cable operators who offer digital services to carry all Category 1 specialty services. In addition, Category 1 and 2 specialty services may only be offered on a digital basis, except by independent Class 3 distribution systems that do not use digital technology. Such systems (defined as Class 3 systems that are not interconnected with a Class 1 or Class 2 distributor) may carry Category 1 services on analog and may apply for permission to carry Category 2 services on analog (the Commission has indicated that permission will be granted only under exceptional circumstances).

36.

The Canadian Cable Systems Alliance Inc. (CCSA) argued that these regulations act as an impediment to the conversion to digital for small cable systems since they would require investment in digital head-end equipment and since these operators do not have effective negotiating power with newly licensed Category 1 programming services.

37.

The CCSA therefore requested that the Commission specify that these regulations do not apply to small systems (as defined in this process). It also asked that the Commission permit small cable operators to carry Category 1 and 2 services on analog.

38.

The Commission is not prepared to amend the regulations as requested by the CCSA. The Commission notes that the requirement that all Category 1 services be carried is based on the assumption that any distributor who has implemented digital service should have sufficient capacity to carry such services. Further, the smallest cable operators (independent Class 3s) are already permitted to carry the Category 1 services on analog, if they do not use digital technology.

39.

As well, for distributors who have lower digital capacity (e.g. less than 750 MHz), the obligation to carry Category 1 services depends on the language of the market (i.e. in English-language markets, such distributors must carry only the 16 English Category 1s, and not all 21 services).

40.

Finally, the Commission notes that the rules contemplate situations where a distributor may not be able to fulfil its obligations, and may seek a condition of licence exempting it from the requirement to carry all Category 1 services.

41.

The Commission would be inclined to approve applications for conditions of licence permitting a departure from its digital access regulations, as described above, from small cable operators who lack sufficient digital capacity to carry licensed pay or specialty services on digital in addition to Category 1s, provided that in place of the Category 1 services not carried, the system distributes existing licensed pay and specialty services either initially launched on digital or migrated under the conditions set out earlier in this Public Notice.

42.

The Commission notes that the digital framework requires distributors to offer Category 1 services in a package before they can be offered on a standalone basis. The Commission considers it appropriate to grant existing specialty services, when carried by
small cable systems on digital, the same packaging status as Category 1 services. The Commission will, in due course, issue a revised version of Part II of the distribution and linkage requirements to reflect this change.

Transport issues - Sourcing and transponder line-ups

43.

The Canadian Cable Television Association (CCTA) submitted, among other things, that there is currently no economically viable Canadian HITS (head-end-in-the-sky) solution. It noted that small cable systems must rely on one of two licensed Canadian Satellite Relay Distribution Undertakings (SRDUs) to gain access to digital signals, including a second set of U.S. "4+1" signals. The CCTA submitted that alternative access to U.S. signals would put small cable companies on a more equal footing with their DTH competitors, who can access such signals directly.

44.

In Exemption order respecting cable systems having fewer than 2,000 subscribers, Public Notice CRTC 2001-121, dated 7 December 2001, the Commission approved the terms of an exemption order that will permit cable systems with fewer than 2,000 subscribers to source U.S. "4+1" signals from non-Canadian satellites. However, under the terms of that order, many small cable systems, as defined in this Public Notice, would remain dependent on Canadian SRDUs with affiliated DTH undertakings that (a) in many instances compete directly with small cable systems, and (b) themselves have direct access to U.S. signals. Accordingly, the Commission considers it appropriate to permit small cable companies, as defined in this public notice, to access, from either Canadian or non-Canadian satellite service providers, U.S. "4+1" signals that have been authorized for distribution in Canada.

45.

The CCSA submitted that the Commission should:

· as a matter of policy, encourage the development of cost-effective solutions for the provision of digital signals to cable systems' head ends;

· act immediately to ensure that transponder line-ups are developed in a manner that minimizes the requirement for access to multiple transponders by independent cable systems; and

· as a matter of policy, require programmers to absorb the costs of transport of their programming services, in digital format, to the cable system head end.

46.

The Migration Report suggested that a technical subcommittee should be constituted to ensure that smaller system requirements are accounted for in determining transponder line-ups.

47.

The Canadian Association of Broadcasters (CAB) stated that it supports the development of cost-effective technical solutions to make digital signals more accessible to small cable operators, and endorses the formation of a technical subcommittee. However, it opposed the suggestion that programmers should be required to absorb the costs of transporting programming in digital format to small cable companies' head ends.

48.

The Commission notes that transponder line-ups can be designed to make it more or less expensive for licensees to meet their regulatory obligations, e.g., to the extent that licensees with digital offerings must carry all Category 1 services, it would be most cost-effective for cable companies if all Category 1 services were carried on a few transponders.

49.

In light of the concerns expressed above, the Commission's staff will contact the two Canadian SRDU providers to discuss the issue of optimizing transponder line-ups. Further, the Commission will inquire into transponder line-ups at Cancom's next licence renewal hearing in approximately a year (Cancom's licence expires on 31 August 2003).

50.

As to the CCSA's third suggestion, the Commission does not consider it necessary or appropriate to require that programmers absorb the costs of transporting programming in digital format to small cable companies' head ends. The Commission anticipates that its determinations with respect to wholesale programming fees and access to U.S. signals will provide some cost relief to small cable companies. Nonetheless, the Commission wishes to see a cost-effective solution to digital transport issues, and encourages the development of such solutions.

51.

The CCSA also stated that there are recent indications that U.S. programmers are not prepared to consent to digital distribution of their services by Canadian SRDUs for re-transmission to cable systems. The CCSA noted that, in some cases, these U.S. services are key drivers of subscriber volume. The CCSA therefore requested that the Commission make consent to re-transmission to small systems a condition of inclusion on the Eligible Satellite List for cable distribution.

52.

Among other things, the Commission notes that, on a going-forward basis, new foreign services are being authorized for digital distribution only. The issue raised by the CCSA is therefore not relevant in the case of new services being added to the list. With regard to foreign services already on the Eligible Foreign Satellite Services Lists, the Commission is not prepared to make consent to digital distribution by independent systems a condition for continued inclusion on the lists.

Dispute resolution

53.

The CAB's comments included a request for a timely binding resolution mechanism to deal with disputes regarding equitable wholesale rates and regarding terms of carriage.

54.

The CCTA requested that the Commission's mechanism for dispute resolution be available for expeditious resolution of cases where a small cable system operator and pay or specialty service are unable to agree on the rates or terms of digital carriage. In its reply, the CCTA added that the Commission should be prepared to resolve disputes quickly on a final offer basis.

55.

Sections 12 to 15 of the BDU Regulations (Dispute Resolution) set out the Commission's process for resolving disputes. The regulations state that the Commission may require the parties to engage in mediation before the Commission accepts a referral of the matter for dispute resolution. The current system is designed to ensure that disputing parties take all reasonable steps to resolve their disputes before resorting to the Commission. The Commission does not consider it appropriate to amend the existing dispute resolution process for the purposes of handling small cable migration issues.

Secretary General

This document is available in alternate format upon request and may also be examined at the following Internet site: http://www.crtc.gc.ca.