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Broadcasting Public Notice CRTC 2006-19
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Ottawa, 16 February 2006
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Confidentiality of the annual returns of pay and specialty programming services
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Following consideration of submissions filed in response to Call for comments on a proposal to accord confidentiality to the detailed financial information provided to the Commission in the annual returns of pay and specialty programming services, Broadcasting Public Notice CRTC 2005-42, 29 April 2005, the Commission announces its determination to maintain the current practice set out in Guidelines respecting the confidential treatment of annual returns and material or information filed in support of a broadcasting application before the Commission, Circular No. 429, 19 August 1998.
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Background
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1.
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In Call for comments on possible requirements for the provision of notice to programming services by distributors of their plans to change packages, Broadcasting Public Notice CRTC 2004-64, 25 August 2004 (Public Notice 2004-64), the Commission invited comment regarding possible measures to ensure that negotiations between broadcasting distribution undertakings (BDUs) and programming undertakings (programmers) are conducted in accordance with good commercial practices. The Commission announced its determinations with respect to those matters in Good commercial practices, Broadcasting Public Notice CRTC 2005-35, 18 April 2005.
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2.
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One of the measures proposed in the comment filed by the Canadian Association of Broadcasters (CAB) in response to Public Notice 2004-64 was that the Commission grant confidentiality to the detailed financial information contained in the annual returns of pay and specialty services as a way to reduce a perceived imbalance in bargaining power in favour of BDUs vis-à-vis programmers. The CAB had suggested that this disparity did not promote the conduct of negotiations between the parties in accordance with good commercial practices.
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3.
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In order to ensure that all interested parties would have an opportunity to comment on the proposal, and given the importance of this issue to programmers, distributors and other parties, the Commission issued Call for comments on a proposal to accord confidentiality to the detailed financial information provided to the Commission in the annual returns of pay and specialty programming services, Broadcasting Public Notice CRTC 2005-42, 29 April 2005 (Public Notice 2005-42). In the interim, pending the outcome of this process, the individual financial results of pay and specialty services licensees for 2004 have been kept confidential. Data reflecting only the aggregate financial results have been published.
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Overview of comments received in response to Public Notice 2005-42
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4.
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The CAB argued that the principle of equitable treatment is fundamental to any consideration of the "public interest", and that there is no compelling public interest argument in favour of disclosure of pay and specialty annual returns that outweighs the fundamental principle of equitable treatment. The CAB stated that to accord confidentiality to the annual returns of BDUs while making public those of pay and specialty services creates an imbalance in the negotiating environment. Moreover, the CAB maintained that, because pay and specialty services have to negotiate terms of carriage with distributors, there should be equitable treatment with respect to how the Commission treats sensitive revenue information that it receives from programmers and distributors in their annual returns. According to the CAB, if the Commission increasingly expects pay and specialty services to reduce their reliance on regulation and to negotiate terms of carriage instead, then the Commission's practices and policies should not prejudice the negotiating environment.
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5.
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The CAB also argued that the balance of negotiating power is squarely in the hands of BDUs, not programmers. It claimed that, while BDUs are competitive with one another, each BDU exerts considerable market power with respect to its negotiations with pay and specialty services, because these services cannot reach their paying customers without the active cooperation of the BDU.
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6.
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CTV Inc.(CTV) supported the CAB's proposal that the Commission accord confidentiality to the detailed financial information contained in the annual returns of pay and specialty services. CTV based its position on the argument that the availability of detailed financial information pertaining to individual specialty services places them at a significant competitive disadvantage when negotiating rates for discretionary carriage with BDUs. According to CTV, all of the relevant financial information concerning the operations of individual specialty programmers is available for public scrutiny, while the financial status of individual BDUs remains largely confidential. CTV stated that, if the negotiations between programmers and distributors are to be effective and based on good commercial practices, it is necessary that the regulator afford equitable treatment to the sensitive commercial information that is in its hands.
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7.
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CTV also argued that it is not the public interest that is being served by the disclosure of the pay and specialty financial information. Rather, it is the private interests of the BDUs, with whom pay and specialty services must negotiate terms of carriage, as well as the private interests of producers and program suppliers, that are served by access to this information. According to CTV, the public interest will best be served when the current inequity in respective bargaining positions of BDUs and programmers is redressed by according confidentiality to the detailed financial information provided to the Commission in the annual returns of pay and specialty services.
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8.
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CHUM Limited (CHUM) also supported the CAB's proposal as being in the public interest. In CHUM's view, the individual returns of specialty services should be accorded confidentiality for the same reasons as those advanced by the Commission as grounds for according confidentiality to the annual returns of cable BDUs once their rates ceased to be regulated following the introduction of competition. According to CHUM, when the subscriber fees of a cable BDU cease to be regulated, the basic wholesale rate set in respect of a specialty service has little bearing on what a cable undertaking might ultimately charge a subscriber for that service. Moreover, revenues from basic carriage make up only a small portion of the overall revenues earned by most services, while many services, such as Category 1 and Category 2 services, cannot be carried on basic at all. CHUM argued that, as a consequence, the initial rationale no longer exists for making the annual returns of individual services publicly available.
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9.
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CHUM further maintained that data concerning the revenues and profitability of specialty services constitute extremely commercially sensitive information. It stated that the public availability of this data places such services at a disadvantage in their negotiations with BDUs. CHUM claimed that, in today's competitive distribution environment, all BDUs seek to reduce costs, and that affiliation payments to specialty services are a prime target for cost cutting. According to CHUM, because BDUs have access to the revenue and profitability data for a service, they often highlight the overall performance of the service as a reason why its wholesale rate should remain static or be reduced. CHUM noted, however, that affiliation payments often account for only a small portion of the overall revenues of a service, and that advertising revenues typically make up the majority of these revenues. It added that advertising revenues reflect the popularity of a service with subscribers; and that to keep wholesale rates static or to reduce them, based on the successful performance of a service, penalizes those services that are most popular.
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10.
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Quebecor Media Inc. (Quebecor) stated that the public interest would best be served by making public the annual returns of those pay and specialty services whose wholesale rates are regulated, while the returns of those services that do not have a regulated wholesale fee should be granted confidentiality.
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11.
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Cogeco Cable Inc. (Cogeco) opposed the CAB's proposal, arguing that there is no evidence that the current rules create an imbalance in bargaining power that places programmers at a competitive disadvantage in their negotiations with BDUs, nor is there evidence that the rules hinder the conduct of negotiations between the parties in accordance with good commercial practices. Cogeco recommended maintaining the provisions set out in Guidelines respecting the confidential treatment of annual returns and material or information filed in support of a broadcasting application before the Commission, Circular No. 429, 19 August 1998 (Circular 429) for the following reasons:
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- Specialty services are protected by various elements of the Broadcasting Distribution Regulations, including the access rules, linkage requirements, mandatory wholesale rates for basic distribution, and dispute resolution mechanisms, against: (a) the loss of distribution; (b) changes in their distribution from the basic analog tier to a discretionary analog tier, and vice versa, as well as changes in their distribution from an analog tier to a digital tier on major cable BDUs; (c) unfavourable packaging; (d) wholesale rate erosion; (e) undue preference or undue disadvantage; and (f) the negative, long term impact of disputes concerning terms of carriage.
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- The uninterrupted historical growth, both in revenue from wholesale rates paid by BDUs for the distribution of specialty services and in their average subscription revenue per subscriber over the years, is clearly incompatible with the existence of an imbalance in bargaining power favouring the BDUs.
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- The high degree of concentration of ownership in pay and specialty services ensures that certain programmers, such as BCE Inc./CTV Inc., enjoy considerable clout in commercial negotiations.
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- The high degree of vertical integration between specialty programmers and broadcasting distributors is clearly incompatible with the existence of an imbalance in bargaining power favouring the BDUs.
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- It is absolutely necessary and perfectly reasonable that BDUs, and any other interested party, be able to assess the economic demands of programmers for their services based on the data filed with, and disclosed by, the Commission, for the simple reason that there is not a free commercial market for the distribution of these services in Canada.
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12.
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The Canadian Cable Telecommunications Association (CCTA) argued that the CAB's proposal should be rejected by the Commission. It stated that the competitive rationale for extending confidentiality to the financial data of cable BDUs does not apply to pay and specialty services given the very different competitive environments in which distribution and programming undertakings operate. According to the CCTA, BDUs must compete on price, packaging options, bundling opportunities and value-added services in a marketplace containing at least three, and in some markets, as many as five, competitors. It added that pay and specialty services are insulated from direct competitive pressures by a number of regulatory supports and safeguards. In particular, it claimed that analog specialty services and Category 1 services have genre exclusivity that protects them from having to compete for programming rights or for subscribers/viewers interested in that genre. It also cited the access rules, which guarantee that pay and specialty services do not have to compete for carriage as they are distributed by all Class 1 and direct-to-home satellite BDUs, and the dispute resolution mechanisms, which permit these programming services to request that the Commission resolve disputes with BDUs over the terms of carriage.
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13.
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The CCTA further argued that disclosure of the financial information pertaining to specialty services is necessary if interested parties are to assess their applications for increases in regulated maximum wholesale fees, monitor their contributions to the production and exhibition of Canadian programs, and verify copyright liability for the services distributed by BDUs.
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14.
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Andrea Horan of Genuity Capital Markets and Brian Shector of Kagan Research also opposed the CAB's proposal, based on the argument that consumers have the right to know how the various programming services are performing and whether they are living up to their licence responsibilities.
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15.
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The Canadian Film and Television Production Association (CFTPA) argued that the clarity and transparency afforded under the existing guidelines for the disclosure of financial information are essential to the public interest. The CFTPA claimed that the financial information that broadcasters provide to the Commission on an annual basis is an important tool for assessing their performance in meeting their expenditure and exhibition requirements, and that the consistent and transparent reporting at the level of program expenditures, by genre and by production source, is necessary for the public to assess the activities of each broadcaster on a regular basis. The CFTPA added that the publication of aggregate information is meaningless. Specifically, it recommended that the existing reporting by individual licensees be expanded to include program category, production source, priority program expenditures and drama expenditures eligible for the drama incentives program, along with the provision of a further breakout between licence fees and equity investment, and a clear indication of Canadian Television Fund (CTF) licence fee top-ups and other "eligible" expenditures.
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16.
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The Canadian Cable Systems Alliance (CCSA) noted that the current guidelines for public disclosure of the financial data of rate-regulated and basic service programming services are intended to provide transparency to consumers with respect to services they must take as part of a BDU's basic service. According to the CCSA, there is no imbalance of negotiating power in favour of BDUs over programmers. It noted in this regard that Canadian specialty programmers are backed by organizations of substantial size and financial strength, and that no BDU could withstand the withdrawal of the entire range of programming services offered, for example, by Alliance Atlantis Communications Inc. or CTV. It added that the pay and specialty services continue to enjoy special access to distribution, as well as genre protection, and regulated rates when distributed on the basic service, and that the Commission's current guidelines regarding disclosure of financial data are based on a sound assessment of what is required to promote the public interest.
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17.
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The English-language Film/TV Council of Quebec (the Council) opposed the CAB's proposal on the grounds that removal of public access to the financial data of all broadcasters, especially that concerning their expenditures on domestic and foreign programming, would undermine the objectives of the public licensing process. In this regard, the Council proposed that all information filed in annual returns, including the returns of conventional broadcasters, be placed on the public file. It argued that, at a minimum, the level of disclosure currently required under Circular 429 be maintained in order to allow the conduct of analysis regarding the profitability of a service and its expenditures on programming, this being the minimum data needed to file a useful intervention to an application for a broadcasting licence or licence renewal.
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18.
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L'Association des producteurs de films de télévision du Québec, on behalf of a number of broadcasting associations in Quebec, opposed the CAB's proposal. It maintained that the public interest is best served by disclosure of the maximum amount of information concerning a licensee's revenues and expenses.
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19.
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The Coalition of Canadian Audio-visual Unions (the CCAU) includes, among others, the Alliance of Canadian Cinema, Television and Radio Artists (ACTRA), the Directors Guild of Canada, the Writers Guild of Canada, the National Association of Broadcast Employees and Technicians (NABET),and the Société des auteurs de radio, télévision et cinéma. The CCAU opposed the CAB's proposal, and recommended that disaggregate financial information for all pay and specialty services continue to be made available, together with a further breakout of spending on both Canadian and non-Canadian programming, by programming genre, for all Canadian pay and specialty services. In the CCAU's view, pay and specialty services benefit in many ways from the regulation that protects their businesses, including Canadian ownership and controls; the protective restrictions of the eligible satellite lists, protection from decoding of services in Canada that do not have a lawful Canadian distributor; and the use of Canadian taxpayers' money to satisfy Canadian content requirements through the inclusion in expenditure calculations of top-up funds from the CTF. It also noted the simulcast rules, which, although optional in the case of specialty services, play an important role in preserving audiences for advertising purposes. According to the CCAU, the main quid pro quo for this protective regulation is the production and exhibition by Canadian programming services of Canadian content, while the primary function of the Commission is to correctly and constantly calibrate the amount of Canadian programming and exhibition that individual broadcasters should be required to air in exchange for these protections.
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20.
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The CCAU noted that interveners play a key role during public proceedings in shining light on the activities of broadcasters and assisting the Commission in its deliberations. It claimed that it is thus clearly within the public interest to have an open and transparent process, together with a complete record upon which interested parties may base their comments. According to the CCAU, in the absence of access to adequate financial data, interveners are handicapped in their ability to assess a licensee's performance and future plans; and it is therefore incumbent on the Commission to make this financial data public so that interested parties can prepare their interventions. In the CCAU's view, the public interest in disclosure outweighs the private interest in withholding the information.
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21.
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The Canadian Independent Film & Video Fund (CIFVF) also opposed the CAB's proposal. The CIFVF maintained that, although it would be unnecessary to place an entire annual return on the public file, the relevant information relating to Canadian program expenditures of each program category should be made available to the public, broken down by expenditures on acquisition of program rights, script and concept development, program production and investment. According to the CIFVF, this type of information is needed, particularly by members of the production industry, in order to conduct business with broadcasters, and that without this information, an uneven playing field for negotiations is created.
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Commission's analysis and determination
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22.
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In Broadcasting Distribution Undertakings: Confidentiality of Information Filed in Annual Returns and in Applications for New Licences, Public Notice CRTC 1998-89, 19 August 1998, the Commission announced its determination to treat the annual returns of BDUs as confidential. The principal factor underlying this determination was the Commission's decision to license competition in the delivery of distribution services. The Commission anticipated that, as the monopoly of an incumbent cable BDU began to erode, the disaggregated information reported in its cable annual return would become of increasing value to both new and potential competitors in the market to the extent that disclosure of this information could undermine the cable BDU's competitive position with other BDUs and cause it specific and direct harm. Because of this new competition, the Commission determined that the public interest would best be served by treating a BDU's annual return as confidential where disclosure might prejudice the BDU's ability to compete and contribute positively to the broadcasting system.
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The Commission generally considers it in the public interest that the principle of equitable treatment be applied where the entities under consideration are subject to the same operating conditions. The argument of the CAB and other parties to this proceeding representing the views of programmers is that the Commission should extend confidentiality to the disaggregated data contained in the annual returns of pay and specialty services, thereby making the treatment they receive equitable with the treatment afforded to BDUs. This argument, as put by some parties, is predicated on the claim that pay and specialty services now face competitive market conditions and influences that are essentially the same as those that prompted the Commission to afford confidentiality to the annual returns of BDUs. The Commission considers that reasonable support for such a claim would require, at a minimum, clear evidence that pay and specialty services face competition for access and genre at a level that could compromise their ability to compete and contribute to the Canadian broadcasting system. In the Commission's view, however, no such evidence was presented by the parties. In addition, although the number of licensed specialty services is increasing, and although each, through their programming, must compete with other specialty services for both viewers and advertising dollars, many continue to enjoy regulatory protection from direct competition with respect to genre, guaranteed access to BDU carriage, access to the Commission's dispute resolution process and, in many cases, access to Commission-set wholesale rates when distributed as part of the basic service.
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24.
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The Commission also considers as unsupported by evidence the contention that the balance of negotiating power favours BDUs and not programmers. As noted above, many pay and specialty services continue to enjoy the regulatory benefits of genre protection, guaranteed distribution and access to the Commission's dispute resolution process to resolve issues arising between the distributor and programmer such as carriage rates and, albeit as a last resort, following the failure of distributor and programmer to negotiate settlement, channel placement and packaging. Moreover, although there are several smaller, non-affiliated specialty services, a large number of the pay and specialty services are owned by established broadcasters, some of whom are also affiliated with BDUs. In fact, because of their size and the number of undertakings they control, these established broadcasters have significant influence in negotiating with the BDUs that require their programming.
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25.
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Further, the Commission disagrees with the argument thatdisclosure of the disaggregated data contained in pay and specialty annual returns serves only the private interests of the BDUs, producers and program suppliers. Other parties, including individual subscribers and consumer groups, have an equally legitimate interest in having access to information regarding the revenues of pay and specialty services, their revenue-based programming expenditures and the sufficiency of those expenditures.
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26.
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For these reasons, the Commission is not convinced that the competitive and regulatory conditions under which pay and specialty services operate differ sufficiently from those in place at the time that the existing confidentiality guidelines were established to conclude that the public interest would best be served by treating their annual returns and financial statements as confidential.
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27.
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Accordingly, the Commission has decided to maintain its current practices, as set out in Circular 429 and described below.
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- The annual returns and financial statements for those specialty services that have a monthly subscriber fee set by the Commission or that are carried as part of the basic service package will continue to be placed on the public file. For all other specialty services, only that portion of the annual return and financial statements, down to and including profit before interest and taxes (PBIT), will be placed on the public file. Any portion of the annual return or financial statements that would lead to the disclosure of an undertaking's net income or loss, such as information below PBIT, or detailed information on shareholders' equity, will be treated on a confidential basis.
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- That portion of the annual returns and financial statements of pay television undertakings, down to and including PBIT, will continue to be placed on the public file. As in the case of specialty services, any portion of the annual return or financial statements that would lead to the disclosure of an undertaking's net income or loss, will be treated as confidential.
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28.
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Notwithstanding the above, in the case of each licensee that is a public company or whose financial statements are otherwise publicly available, the Commission will continue to place these statements on the licensee's public file.
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Secretary General
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This document is available in alternative format upon request, and may also be examined in PDF format or in HTML at the following Internet site: www.crtc.gc.ca
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Date Modified: 2006-02-16
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