Consultation on the future of program distribution in Canada
Reference Document

Introduction

Digital has evolved

Many nations have adopted a hands-off approach to Internet-based services (also referred to throughout this reference document as digital services), because they see them as emerging technological innovations that could improve the lives of consumers and boost the economy. This approach has helped numerous innovations emerge and has forced traditional companies to evolve in order to better serve consumers. Some of those once-nascent companies have now become global giants that are among the most valuable companies in the world.

These global giants have developed a range of new business models for their audio and video services. Although these models rely on one or more of the same three basic approaches to revenue generation as traditional media companies – advertising, subscription and transaction – they employ new ways of engaging viewers and listeners in the creation and promotion of content. At the same time, companies that once offered traditional services are changing their business models to compete more effectively with these new players.

We live in an age of abundance. There have never been more services and content available for Canadians, yet many people choose to watch only traditional TV and only listen to the radio in the traditional way. And even though more and more people consume content online only now, the vast majority of us, in both the English- and French-language markets, consume content on both traditional and digital platforms.

Canadians have embraced digital

A generation ago, most TV viewing was to scheduled shows on only a handful of conventional TV channels. With the growth of the cable industry, Canadians were able to access specialty channels focusing on niche interests – such as food, history and sports – and viewing fragmented. Today, in the new personal TV era, viewing has changed significantly: it is on-demand, split across devices and personalized through recommendations. Recommendation engines increase the amount of exposure to shows and video you might like (and less of what you don’t), but the sheer abundance of content and platforms means it can still be difficult to find what you want. Particular content may also be left in obscurity unless it is effectively promoted and made discoverable.

There is no standard cross-platform measurement system in Canada, but estimates measure viewing to this more personalized kind of TV at more than 1 in 10 total TV viewing hours. And the adoption of personalized TV is not the same for everyone – young adults in the English-language market watch significantly more personalized TV than older generations and those in the French-language market.

TV is getting more personalized

What we listen to is also getting more personal. Although radio remains the largest platform for music listeners across the country, the amount of time spent listening to music on the radio continues to decline. Consumers, particularly younger Canadians, are turning to new platforms for music. They are much more likely to spend time listening to online streaming services and their digital music library – services that are tailored to their tastes. Most radio listening currently takes place while driving; this too may change as cars become more connected or even driverless.

Music choices are getting more personal

It should come as no surprise that consumers are shifting their time away from traditional TV and radio to digital. This shift may not be happening as quickly as news headlines suggest and it’s not happening evenly across all markets, but traditional TV and radio consumption is in decline.

If current trends continue, TV viewing in the English-language market could decline by approximately 25% to 40% over the next 10 years. This decline is less pronounced in the French-language market, but even there we could see approximately a 10% to 20% decline over the same period. Of course, declines in traditional TV viewing don’t mean Canadians are tuning out; they may just be shifting to online sources.

Listening to traditional over-the-air radio is declining slowly but constantly and is consistent in both the English- and French-language markets. If listening to traditional radio continues to decline at the current rate, we could see it drop by over 33% in the next 10 years. This decline is driven by music listening shifting to digital platforms (see charts 6 and 7).

Digital brings benefits and challenges

The economics of content creation has always favoured large markets over smaller ones. Content creation is often a “hits” business that requires significant volume and upfront costs, but once successful, content can be made available from larger markets at prices so low that they can discourage the creation of original content intended for smaller markets. And the low costs of distributing content make it easy to move content from one market to another. The principle applies broadly across genres and language markets. For example, it is less risky to:

• acquire hit U.S. entertainment than produce original English- or French-language entertainment programs
• make a national newscast than a local one
• acquire international news from a foreign bureau than establish one of your own
• play a heavily marketed global hit song than an unknown local artist

The U.S. Market Dwarfs Most Other Countries

Internet-based content services are providing great benefits to Canadians, while also disrupting the traditional media business and challenging assumptions behind government measures that support a vibrant market here in Canada. For example:

• Abundance. Making videos and recording music are easier than ever: the cost of production tools has declined significantly and their availability has increased. This has led to greater opportunities to participate at some level in content creation and an influx of content available to anyone with an Internet connection. YouTube and Spotify, for example, have built their businesses around this abundance. They strive to make all of the world’s content discoverable and share revenues with creators based on its usage. At the same time, the costs of creating some types of high-quality content have skyrocketed due, for example, to the costs of employing the most high profile talent, acquiring sports broadcast rights, international news reporting, etc.

• Global reach with a direct-to-consumer approach. Hollywood studios built an international business on selling content rights to partners around the world, including in Canada. In contrast, some online video services have grown to the size of a Hollywood studio by holding, to the greatest extent possible, the global rights to the content they produce or acquire and then selling subscriptions directly to consumers around the world, largely collapsing territorial and platform content windows. The growth of online TV services has driven an unprecedented investment in content, particularly in the U.S., that some are calling “Peak TV.” At the same time, it is unclear what kind of investment global online companies will be able or willing to make in content targeting local markets.

Competition from online TV services is driving "Peak TV"

• Sharing. Many online business models are built on the principle that information should be free. Search and social platforms are funded principally from advertising and depend on a broad definition of the fair use^{Footnote 3} of content. Social networking sites do not consider themselves media companies, but consumers increasingly report that they are an important source of news. They also may play an important role in the promotion and discoverability of content. Conversely, illegal services allow a business to blatantly pirate audio and video content, although some research has shown that piracy is reduced when legal models that better meet consumer needs are available.

Revenues are shifting

All content services – traditional and digital – generate revenue through either advertising, subscription and/or individual purchases of content.

In advertising, there is much debate about the merits of traditional broadcasting versus digital advertising buys, but the trend is evident: Internet advertising has surpassed both TV and radio as advertisers increasingly use digital platforms with a view to more precisely targeting their campaigns.

Not all of the expenditures on Internet advertising are directly competitive with TV and radio advertising. If we look at them more specifically, both online video and audio advertising revenues are growing more modestly.

Traditional TV subscription revenues have been more resilient in the face of online growth, but they too are starting to see some erosion. Online subscription TV services are much smaller in comparison, but growing rapidly.

At the same time as Canadians are starting to spend less on subscription TV, they are spending more and more on Internet access for faster speeds and more capacity, both at home (fixed) and on the go (wireless). The digital market is growing and there is no doubt what all this extra data is being used for – watching videos. Real-time entertainment^{Footnote 8} represents two-thirds of total capacity demand on North American fixed networks and one-third of mobile capacity. Of that real-time entertainment, Netflix and YouTube are the largest components.

What are we using the Internet for at home and on the go?

Impacts on traditional models are mixed

Radio

Radio broadcasters have been able to adjust their business model to slowing advertising revenue growth and declining listening. Over the last decade, profit margins have ranged between 15% to 20% in the French-language market and 18% to 23% in the English-language market.

Subscription TV

Profitability for cable TV and DTH (direct-to-home) satellite subscription businesses has been relatively stable, even as they have been losing market share to fibre subscription TV services (e.g. FibeTV, OptikTV) and the total number of TV subscribers in Canada has declined.

Conventional TV

The conventional TV business has struggled over the last decade in the face of declines in advertising. This is particularly the case in the English-language market, but more recently the French-language market has also seen a decline in profitability.

Specialty TV

Specialty TV has fared better with profit margins approaching or exceeding 25%, although profit margins for French-language specialty TV services have started to decline in recent years.

Canadian programming

Canadians want access to the best content the world has to offer. That includes Canadian audio and video content that reflects their country and their community and that is offered in their own language. Canada’s broadcasting legislation and policies were designed to support the creation of original content and the producers and programming and distribution services that offer such content.

Radio

Radio’s contribution to Canadian programming is strongly linked to its Canadian content quota requirements. However, radio also makes a direct financial contribution through Canadian content development (CCD) initiatives that aid in the support, training, development and promotion of Canadian musical and spoken word content for broadcast.

In the 2015-2016 broadcast year, commercial radio operators contributed 3 cents per revenue dollar to support CCD. Collectively, they contributed nearly $47 million to the development of Canadian content. On average, CCD funds have decreased 3.9% annually over the past five years. Approximately 50.7% of these funds were a direct result of the conditions of licence set out for new radio stations and the tangible benefits paid following a change in ownership or control of radio stations; the other half was garnered through radio licence renewals.

TV

Canadian broadcasters still have Canadian exhibition requirements, but their contribution is now more targeted to expenditures. Canadian programming expenditures (CPE) by licensed Canadian programming and distribution services have increased over the last decade and now surpass $3 billion annually. In addition to these expenditures, federal, provincial and sometimes municipal governments provide other direct and indirect support to Canadian production, such as contributions to the Canada Media Fund (CMF) and federal and provincial production tax credits.

Many have argued that without public funding, the market may not support certain kinds of TV content at their current levels and some types of programming may not exist at all. The following chart estimates what the financial surplus (or shortfall) of TV content by genre and language would be, in aggregate, without direct public support measures (such as the CMF, production tax credits and CBC parliamentary appropriation) or indirect measures (such as the cross-subsidization of Canadian content from profits on foreign content).

The preliminary results demonstrate that the only genres of TV content that have a meaningful financial surplus on an aggregate basis are sports and other (which includes lifestyle and reality programming) in the English-language market. The analysis illustrates the financial challenges of Canadian fiction (such as drama and comedy), news (such as local) and children’s programming in both the English- and French-language markets. It also suggests the financial challenges of producing other types of content in the French-language market, such as variety, documentary and public affairs programming, some of which may be produced for official language minority communities.

The estimated financial surplus on non-Canadian programming (all genres) was $1.1 billion in the English-language market and over $200 million in the French-language market.