ARCHIVED - Letter

Ottawa, 9 April 2009

Our reference: 443656

Mr. Gary Schellenberger, M.P.
Chair
House of Commons Standing Committee on Canadian Heritage
Room 06, Justice Building
Ottawa, ON K1A 0A6

Dear Mr. Schellenberger:

Thank you for your letter dated 26 March 2009, in which you request follow-up information to our 25 March appearance before your committee regarding the state of the television industry in Canada. In your letter, you ask two questions; I will repeat each question for ease of reference, followed by my response.

1. In this economic climate, Canadians are concerned that they may lose the local television stations in their market. While the current economic downturn certainly exacerbates the problem, it is my understanding that many stations, even those that are industry leaders in larger markets, have not been profitable for over a decade. Why is this?

Response:

While the conventional television sector is facing significant financial challenges, exacerbated as you note, by the current economic downturn, the problems experienced by the conventional television stations in larger markets are, in fact, relatively recent. CRTC financial records indicate that in 2007, the average profit before interest and taxes (PBIT) margin of private conventional television stations in metropolitan markets was 9.2%, whereas in markets with a population of less than one million, the average PBIT margin was -4.0%.

As I noted in my appearance before your committee, that is why the Commission established the Local Programming Improvement Fund (LPIF) to focus on improving the quality of local programming provided by conventional television stations serving markets of less than one million people.

It is estimated that the LPIF will provide approximately $60 million per year to support the production of local programming in non-metropolitan markets, which represents approximately 30% of the current annual local programming budgets of these smaller market stations. This amount is based on a contribution of 1% of gross revenues by cable and satellite distribution undertakings (BDUs). At the upcoming conventional television licence renewal hearing this month, the Commission will examine whether the estimated $60 million will provide sufficient support for smaller market local programming, given that the economic state of conventional television continues to deteriorate.

If, for example, the BDU contribution was increased to 2% of gross revenues, this would result in an increase in LPIF funds to $120 million per year, which represents approximately 60% of current annual local programming budgets.

2. Conventional television relies solely on advertising revenue for its survival. This business model was developed at a time when audiences were captive, because there was a paucity of other alternatives. Today, however, conventional television audiences are being lost to a myriad of other services. In the face of increasing audience fragmentation, how do you expect conventional television to survive?

Response:

It is clear that the business case for conventional television has changed significantly through the expansion of viewing choices, and this fragmentation of viewing is causing ongoing erosion in advertising revenue and profitability. Recent financial data for 2008 indicates that even in major markets, the average PBIT margin for conventional television stations has slipped to 5.25%.

It must be said that there is no silver bullet to “fix” conventional television. The Commission has implemented a number of measures to help this sector meet the challenges of the evolving communications environment: in addition to the LPIF, time limits on advertising are being eliminated, and conventional broadcasters have been given permission to negotiate with cable and satellite companies for the use of their distant signals. CTVglobemedia and Canwest estimate the lost revenues from time-shifting distant signals at $47.2 million, and at this month’s public hearing, the Commission intends to explore the question of implementing the new distant signals regime on an expeditious basis this year to provide an additional source of revenues for local broadcasters.

Certain broadcasters have requested, on a number of occasions, that they also be granted a fee for the carriage of their local signals by broadcasting distribution undertakings. But what we are witnessing amounts to nothing less than a fundamental transformation of the television industry in Canada. While the business model for the conventional television sector continues to decline, the audience share, revenues and profitability of the specialty sector continue to grow. Financial data for 2008 indicate that average PBIT margins for CTVglobemedia and Canwest’s specialty services were 23.1% and 20.6% respectively.

I have now stated on a number of occasions that this new reality means conventional television, which has traditionally been the cornerstone of the Canadian broadcasting system, can no longer bear the largest part of the obligations under the Broadcasting Act.

That is why, in Broadcasting Notice of Consultation 2009-70, the Commission announced that it would be initiating a public process later this year on how to structure and conduct group-based conventional and discretionary television licence renewals. This approach will take into account the systemic changes in the broadcasting industry, including those relating to the horizontal and vertical integration that has taken place throughout a number of its sectors, and the transition to digital technology.

The objective of this process is to establish an overall regulatory framework that provides all broadcast groups with the flexibility to adapt to the rapidly changing communications environment, while ensuring that the Canadian broadcasting system is distinctly Canadian in its content.

A key part of this process will be the role and impact of the public broadcaster in the Canadian television system. It has been suggested that the television services of CBC / Radio-Canada should also be prohibited from engaging in advertising, thereby freeing up additional revenues for the private television sector. This raises the obvious question, however, as to how this important revenue source would be replaced to ensure that the CBC / Radio-Canada is able to fulfil its mandate, as set out in the Broadcasting Act.

As I stated before your committee, this is not something the Commission will be able to do alone. Given the magnitude and complexity of this process, it will be essential that everyone comes forward with bold and creative ideas as to how we can best achieve our objective.

Thank you for the opportunity to appear before your committee to assist you in your deliberations. Please do not hesitate to contact me if you need any further information.

Sincerely,

Konrad von Finckenstein, Q.C.

Date modified:

2009-04-09