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CRTC chairman Jean-Pierre Blais: ‘I’ve never promised pick-and-pay would be cheaper.’

BLAIR GABLE/The Globe and Mail

On Monday morning, dozens of executives from some of the country's largest television companies will file into a nondescript grey office building in Gatineau, Que., and begin a process that could radically change how Canadians watch TV.

Each day for the next two weeks, scores more of executives, industry group representatives and private citizens will flock to the same place. They will all be appearing before a special hearing convened by the Canadian Radio-television and Telecommunications Commission, or CRTC, casually dubbed "Let's Talk TV."

The hearing puts just about everything about the TV business up for discussion. That includes unbundling cable packages and allowing "pick-and-pay" options, debating whether transmitters that broadcast some stations for free over the air should be shut down and considering changes to the rules that promote and protect Canadian content.

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Already some 10,000 Canadians have filed comments to the commission, and representatives from 118 companies, organizations and individuals are expected to appear.

Many viewers like Elizabeth Moore of Winnipeg have been blunt about their frustrations. "Why is it so difficult to remove ALL bundling and allow consumers to choose only those channels they want?" Ms. Moore wrote to the CRTC. "If I want a blue shirt, I don't also have to purchase one in red, yellow, green, etc."

The five-member panel tasked with crafting new rules knows it needs to strike a delicate balance, driving change and increasing choice without badly upsetting television's fragile ecosystem. The industry is already under considerable pressure. Its revenue model is strained as advertising spending sags and migrates to other media. And a set of online steaming services have created new competition for viewers, often operating unregulated from outside Canada.

And there is political pressure too.

Nearly a year ago, the federal government used its Speech from the Throne to take aim at cable TV, saying it "believes Canadian families should be able to choose the combination of television channels they want."

Choice in channels has emerged as the hearing's central issue, but unbundling won't happen so easily. Television broadcasters and distributors are pushing back, arguing that pick-and-pay could be more expensive for many viewers and might kill niche channels. Ideas to sustain struggling local TV stations are also up in the air, as are suggestions that foreign streaming services like Netflix should help pay to support Canadian programs.

"The system is threatened like never before," BCE Inc., which owns Bell Media [as well as 15 per cent of The Globe and Mail], wrote in a submission to the CRTC this summer. "Changing consumer habits have provided a glimpse of the future. We have been watching closely, and we know the Canadian television system needs to adapt."

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The CRTC appears determined that the status quo will not survive, and commission chairman Jean-Pierre Blais has said "major changes" are in the works, calling this "a watershed public hearing."

"We're not just floating ideas here," Mr. Blais said in an interview. "I think we're well past floating ideas."

The outcome of the process is far from clear. But in an effort to focus a sprawling list of considerations, the CRTC has released a working document, known internally as "the straw man." It outlines four main themes to explore: Maximizing consumer choice, fostering local programming, nurturing strong Canadian programs and policing relations between broadcast distributors and programmers.

The "straw man" contains 29 tentative proposals, some with more than one option, that would thoroughly disrupt television's business model, and even industry insiders are having a hard time envisaging the result.

"The problem with the hearing right now is that there are so many variable elements that it is impossible to reach a conclusion about what's good, what's bad, without knowing what is the most likely thing to be adopted," said Michael Hennessy, president and chief executive officer of the Canadian Media Production Association (CMPA), which represents independent producers.

"Your brain starts to blow up."

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The right to choose

Precisely how much a pick-and-pay system would affect consumers and the television business would depend largely on how broadly it is introduced. A CRTC proposal from the straw-man document would make any "discretionary" channel available for customers to choose one by one, on top of a package of basic channels.

Broadcast distributors such as Bell, Rogers Communications Inc. and Shaw Communications Inc. might also be required to offer build-your-own bundles, but could still have pre-assembled packages as they do now – for example, Rogers offers the popular HBO Canada in a package with numerous movie channels for $21.05 a month.

But cable and satellite distributors oppose an unbridled pick-and-pay system, especially if it were paired with a proposed "skinny basic" option that would force them to offer a simple set of perhaps a dozen or so local and community-based networks plus the provincial legislature channel at a price capped at $20 to $30 a month. According to a CRTC study, an average "must-buy" basic package among Canadian and American carriers currently has about 50 networks, but can have twice that many.

Bell and Rogers argue that their own research shows there is little demand for a skinny basic option, and say it could lead to higher bills for most consumers, as the bundling of larger packages allows the fixed costs of running a television service to be spread more widely among customers.

"Even if it's 2, 3, 4, 5 per cent [of subscribers] that goes down to skinny basic, that will force a loss on basic which everyone else will have to make up for on the bigger packages," said Mirko Bibic, the chief legal and regulatory officer for Bell, which opposes shrinking basic packages.

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Rogers has said it would accept a skinny basic option (if it includes core U.S. networks ABC, NBC, CBS, FOX and PBS), but suggests distributors should only be forced to offer 50 per cent of their channels à la carte, keeping some expensive networks bundled.

South of the border, companies are watching the debate closely, and some are more blunt about the perils of unbundling. In a CRTC submission, U.S. media giant Viacom Inc. says mandating pick-and-pay would be "a consumer welfare destroying death spiral," and "may cause programming services to re-examine whether it continues to make business sense" to distribute channels in Canada.

The CRTC's own study on pick-and-pay notes that if the channels in a bundle happen to be "the ones the consumer wants, it is about $2 cheaper per channel to buy them in the package. So they are offered at a considerable premium."

And Mr. Blais agrees that giving consumers more choice may require tradeoffs. "I've never promised pick-and-pay would be cheaper," he said.

Even so, many stakeholders expect that some form of "pick-and-pay" system is virtually a done deal, not least because of the signals from the federal government. Canadian Heritage Minister Shelly Glover said in an interview that her government remains determined to create more choice for viewers, and that the rapid change in the way people are watching television "isn't something that can be ignored."

The CRTC has an arm's-length relationship with the federal government, so Ottawa's involvement in Let's Talk TV "is limited," she said.

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"But we were pretty clear about what we're asking for," she added.

A blow to the bottom line

Another knock-on effect of a pick-and-pay model could be the demise of several of the hundreds of channels currently on offer, companies warn.

Many specialty channels rely on subscriber fees and, in the current system, a subscriber may choose a bundle to get one specific channel. Over time, they might watch the others or they might not, but each channel earns a fee.

In a pick-and-pay world, channels with niche audiences are jeopardized. Children's programming might be especially vulnerable as only families with kids of a certain age would choose to subscribe. A channel like Book TV draws low ratings, but is considered worthy by those who enjoy it.

Family Channel offers "a cautionary example," according to the channel's owner, Halifax-based DHX Media Ltd., a production and distribution company. The station is commercial-free, relying on subscriber fees, and carried by 60 per cent of Canadian television customers, by virtue of being included in popular bundles. But pick-and-pay would undercut its business model by reducing its subscriber base, the company said in a submission, forcing "significant price increases" that might turn off even devoted viewers.

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Meanwhile, broadcasters warn that another proposal could also badly hurt profitability for conventional TV stations.

Networks that rely on advertising could suffer huge holes in their revenues if the CRTC moves ahead with a proposal on simultaneous substitution. Commonly called "Simsub," it describes a rule that allows Canadian television stations to swap a U.S. signal with its own, including its Canadian-bought ads, when the two networks air the same show. It is the reason Canadians watching the Super Bowl don't see U.S. commercials. Some consumers have complained that Simsub disrupts programs if the TV signals are not synchronized.

To broadcasters' dismay, the CRTC has proposed either eliminating Simsub entirely, or prohibiting it during live events like sports and awards shows, which are prime real estate for substitution.

A study from Armstrong Consulting, commissioned by Bell, Rogers and Shaw, estimates that ending Simsub would have reduced ad revenues for English conventional TV broadcasters by $242-million to $262-million in 2012-13, and cost them another $173-million to $191-million in "secondary economic impacts." It concluded that the loss in revenues would have resulted in decreased spending on Canadian programming by up to $122-million.

"Simsub is a way of protecting programming rights," said Ken Engelhart, senior vice-president of regulatory at Rogers. Without protection, "one of the last profitable parts of Canadian over-the-air television is gone."

No more free local TV?

Greater choice may be appealing to consumers, but it has already proven problematic for local television. According to CRTC figures, private local television stations' revenues fell by $100-million between 2011 and 2012.

In large part, that was because competition from online services and a growing stable of specialty channels has taken a bite out of local TV's business model. Stations that once had a captive audience in nearby communities are now struggling to keep up with national and foreign content, and their ad revenues are falling.

Local programming "matters an awful lot" to Canadians, said Mr. Bibic of Bell, which owns 30 local stations that employ roughly 2,000 people. But in the current system, "we're not making money."

"I'm not kidding you here: We can make more money off of our two or three weakest specialty services, whose [employees] you can count on two hands," he said.

The desire for more choice is being driven by the rising "individualism of how people consume content," Mr. Blais said, which is bringing about a "sea change" in the television business.

As of mid-2014, 11.5 million of Canada's 13.9 million households have a paid TV subscription, according to the Digital Life Canada Quarterly Tracking report. But 57 per cent of Canadians with Internet connections now watch long-form video or TV online, on 35 million Internet-enabled screens such as smartphones, tablets and laptops, which now surpass TV sets in number.

"That means more fragmentation and competition for video entertainment," said Kaan Yigit, president of Solutions Research Group, who also sees a generational shift in viewing preferences.

Bell has argued that broadcasters should be allowed to shut off over-the-air transmitters, which allow free access to a number of stations for a dwindling audience, but are expensive to maintain. The CRTC is tentatively proposing that local over-the-air signals could be shut down and moved to basic cable or satellite services instead, but some broadcast distributors such as Rogers and Shaw disagree, saying such a step would be premature.

Ditching over-the-air signals would "further remove a substantial sector of the population from the broadcasting system," Ryerson University researcher Gregory Taylor wrote in his submission – including many elderly and low-income Canadians who use antennas.

On a hand-written postcard, Sudbury, Ont. resident Joan Mulcahy implored the CRTC not to "forget those of us who, because of limited financial resources, depend on over-the-air transmission. It would be a shame for our isolation to increase because we no longer had access to television."

Keeping Canada on air

Conventional national TV networks, like their local counterparts, are struggling with a business model based on advertising revenue. Rogers forecasts a $45-million loss for its City channels in its submission, although it hopes to close some of that gap with new revenue from hockey broadcasts.

In a bid for more flexibility to manage their bottom lines, several broadcasters are asking for the rules around Canadian content to be relaxed. Rogers, for example, wants restrictions removed that force it to air Canadian programs during prime time, while Bell and Shaw want requirements around the number of hours of Canadian shows their stations air relaxed, promising to concentrate their spending on fewer, higher-quality shows.

The CRTC's working document takes a less radical stance, proposing to maintain the requirement that Canadian shows be aired in prime time evening hours, but to scrap daytime exhibition rules. It also suggests increasing, over time, the amount television stations and specialty channels must spend on Canadian content.

In a bid to bolster the production of domestic programs, the CBC and others suggested that profitable online streaming services such as Netflix, which has an estimated four million Canadian subscribers, should have to pay into the Canada Media Fund, which fosters and finances the production of Canadian content, just as local broadcasters do. But Netflix counters in its submission that because it is American-owned, it can't access the CMF to create its own programs. Paying what it has provocatively labelled a "Netflix tax" would "see new media cross-subsidizing old media," the company argues.

Television producers are also wary of new rules concerning Canadian content and pushing for stronger regulations to support Canadian TV. But some fear the CRTC will relax Canadian content restrictions as a concession to broadcasters and distributors that stand to lose substantial money on other proposals like pick-and-pay.

"That has always been my worst nightmare," said Mr. Hennessy of the CMPA.

At this point, Mr. Blais says "the money's there" to create good Canadian content. And insiders insist the CRTC is determined not to pull the financial rug from underneath broadcasters and distributors that are already struggling to adapt to online competition and changing viewing habits.

This summer, Bell Media cut more than 100 jobs, citing financial pressure. And earlier this year, new data showed the first hint that a substantial number of Canadians are cutting the cord on their cable and satellite connections, as total subscribers fell by more than 7,600.

In 2013, the weekly hours Canadians spent watching traditional television dipped slightly, while Internet TV viewing increased. The biggest decline on traditional sets was among 18 to 34-year-olds, who watched nearly 4 per cent less TV, the CRTC says.

"We're entering an era now where there's a lot of younger millennials who are never, ever buying cable. They get all of their television from their computer," Rogers' Mr. Engelhart said. "If cable rates go up, then that rate is only going to accelerate, and that's a problem for the system and it's a problem for consumers."

In pushing for more choice, the federal government also highlighted the importance of "protecting Canadian jobs," but Rogers' Mr. Engelhart said that ambition may prove far-fetched. "If this [hearing] is not done delicately, and well, we're going to have job losses in the cultural sector," he said.

The CRTC plans to have a new framework in place on Dec. 15, 2015, although some see that timeline as optimistic. Pick-and-pay should bring consumers more choice, but some TV bills may rise, some channels will likely die out, and the Canadian TV landscape could be adapting for years to come.

And that, Mr. Blais says, is why the hearings starting Monday are important: So viewers and companies can have their say before the commission makes any final decisions.

"There will be consequences, obviously," Mr. Blais said. "But what we want to make sure is that Canadians, in a dynamic marketplace, are in the driver's seat."`

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