ARCHIVED - Broadcasting Decision CRTC 2002-181

Broadcasting Decision CRTC 2002-181

Ottawa, 8 July 2002

Maritime Broadcasting System Limited and Newcap Inc.
Charlottetown, Prince Edward Island

Applications 2001-1338-2, 2001-1339-0, 2001-1337-4
Public Notice CRTC 2002-6
6 February 2002

Local management agreement - Charlottetown

The Commission, pursuant to section 11.1 of the Radio Regulations, 1986, approves in part the applications for conditions of licence that permit the continued operation of Charlottetown's three radio stations under the terms of a local management agreement.

Background

The applications

1.

On 22 November 2001, the Commission received applications by Maritime Broadcasting System Limited (MBS), the licensee of CFCY and CHLQ-FM Charlottetown, and by Newcap Inc. (Newcap), the licensee of CHTN Charlottetown. The applications were for conditions of licence that, pursuant to section 11.1 of the Radio Regulations, 1986 (the Regulations), would authorize MBS and Newcap to continue to operate their respective Charlottetown radio stations in accordance with the terms of a local management agreement (LMA).

2.

MBS and Newcap have operated their Charlottetown stations in accordance with the terms of their LMA since 1994. Under their agreement, MBS acts as manager of all three stations. MBS also owns and operates the only other commercial radio station in Prince Edward Island, CJRW-FM Summerside.

Section 11.1 of the Regulations

3.

Section 11.1(1) of the Regulations defines an LMA as follows:

"local management agreement" means an arrangement, contract, understanding or agreement between two or more licensees or their associates that relates, directly or indirectly, to any aspect of the management, administration or operation of two or more stations that broadcast in the same market.

4.

Section 11.1 of the Regulations goes on to state:

(2) Except as otherwise provided in subsection (3) or under a condition of its licence, a licensee shall not enter into, or operate its station pursuant to, a local management agreement.

(3) A licensee may operate its station pursuant to a local management agreement that was entered into before March 31, 1999 until December 31, 2001.

Commission's LMA policy

5.

In Local Management Agreements, Public Notice CRTC 1999-176, 1 November 1999, the Commission announced that it had amended the Regulations by adding section 11.1 respecting LMAs. In its notice, the Commission described the amendments as giving it the opportunity to assess the potential impact of such agreements in any given market. It noted that the amendments would allow licensees to enter into an LMA or continue to operate their stations pursuant to such an agreement, provided that the agreement is authorized by the Commission by condition of licence.

6.

The Commission identified as its concern the increased market power that parties to an LMA might have over a market's other radio licensees or potential new entrants, and the negative impact that this increased market power could have on the ability of those licensees to meet their broadcasting obligations. At the same time, the Commission noted that LMAs, in the past, "have typically provided economies of scale for radio stations experiencing financial difficulties". It also stated that it "continues to consider LMAs to be appropriate tools for radio broadcasters, offering an alternative business model that provides flexibility and creates opportunities for economies of scale".

7.

In Public Notice 1999-176, the Commission noted that several parties filing comments on the proposed amendments during the public proceeding held for this purpose had called for the inclusion of clear criteria in the Regulations for assessing the appropriateness of an LMA. The Commission stated, however, that in its view, the appropriateness of an LMA will:

.vary from one situation to another and from market to market. Furthermore, each LMA situation will reflect the specific needs of the radio broadcasters wishing to enter into or continue with the arrangement. Consequently, the Commission will evaluate LMAs on a case-by-case basis, taking into consideration all relevant circumstances.

8.

The Commission added that it would be generally inclined to approve LMAs that:

· include unprofitable stations;

· include a number of stations that does not exceed the number of undertakings that may be commonly owned under the ownership policy; and

· are limited to a specific term and represent a temporary alternative business model that will allow the broadcasters to improve their performance.

Applicants' rationale for continuation of the LMA

9.

In their applications, MBS and Newcap acknowledged that their LMA has been successful in permitting the three Charlottetown stations to achieve some synergetic savings. They argued, however, that termination of the LMA would oblige Newcap to make significant expenditures to re-establish CHTN as a stand-alone business, and incur capital and operating costs of an order that would result in a reversion to unprofitability. MBS and Newcap acknowledged that it might be appropriate to review the terms of the agreement at the time of licence renewal, but were reluctant to commit to ending the agreement by a specific date. The applicants, in fact, indicated that they did not view their LMA as a short-term solution, and expressed the opinion that no AM station operating as a stand-alone in an extremely competitive environment could achieve profitability.

10.

According to the applicants, retail sales in Prince Edward Island stand at $8,700 per capita, while personal income is 20% below the national average. They noted that the province's population has grown by only 1% in the past five years. The applicants also expressed concern with respect to Charlottetown's local economy, and stated that, without the LMA, there would be little or no opportunity for Newcap's station CHTN to remain profitable or improve its performance.

Commission's analysis and determination

11.

As mentioned above, the applications were filed in November 2001. The Commission was thus unable to process them by  December 31, 2001, this being the date by which, in accordance with sections 11.1(2) and 11. 1(3) of the Regulations, conditions of licence authorizing the continuation of any LMA should have been in place. The Commission has nevertheless permitted the Charlottetown LMA to remain in effect pending the announcement of its determination on these applications.

12.

The Commission announced its receipt of the applications by MBS and Newcap in Public Notice CRTC 2002-6, 6 February 2002. In its notice, the Commission indicated that, in reaching its decision on the proposed conditions of licence, it wished to consider whether the term of the LMA should be permitted to extend to the end of the current licence terms, or should expire at an earlier date. The Commission also sought public comment on the continued appropriateness of the LMA, as well as on the state of competition and the availability of radio voice diversity in the Charlottetown market and the province of Prince Edward Island. The Commission received no intervention to these applications.

13.

A review of the Commission's financial summary reports for the years 1997 to 2001 reveals that the three Charlottetown stations currently enjoy reasonable financial health. Their level of profitability is higher than the average level for radio stations across Canada. In fact, the profit before interest and taxes (PBIT) margin of the three Charlottetown radio stations well exceeds the average PBIT margin (22.2%) for radio stations across the Atlantic region. Moreover, the Commission notes that Newcap's overall profitability has gradually increased since 1997 and that its average PBIT margin significantly exceeds the average PBIT margin (16.13%) for radio stations across Canada.

14.

The Commission acknowledges that termination of the LMA would be followed, necessarily, by an increase in CHTN's operating costs, and that the station would be obliged to make additional capital equipment expenditures. The Commission nevertheless considers that, based on the available financial evidence, the station should be able to achieve an appreciable operating and PBIT margin without the LMA. In light of these circumstances, the Commission does not consider it appropriate for CHTN to continue to be operated under an LMA.

15.

However, given the challenges associated with winding down an LMA, and in order to provide an opportunity for the parties to consider their options, the Commission has decided to approve in part the applications, and will permit the Charlottetown LMA to remain in effect, by condition of licence, until 31 August 2003. Accordingly,the Commission adds to the licence for each of CFCY, CHLQ-FM and CHTN Charlottetown the following condition of licence:

The licensee may operate its station under a local management agreement for a period terminating 31 August 2003.

Secretary General

This decision is to be appended to each licence. It is available in alternative format upon request, and may also be examined at the following Internet site: www.crtc.gc.ca