Copyright Board sets first ever tariff for Canadian pay audio services

A landmark tariff set by the Copyright Board of Canada this month for pay audio services will take a bite out of profits of Canada’s two providers, and has left industry players scratching their heads about the rationale behind the rate. The tariff – the first ever for pay audio services – will cost Canadian Broadcasting Corp.’s Galaxie and Corus Entertainment Inc.’s DMX Music combined between $100,000 and $125,000 per month in copyright royalty payments this year. Broadcast distributors will also face fees following the Copyright Board’s March 15 statement of royalties for the commmunication of musical or dramatico-musical works by pay audio services. The royalties are to be collected by the Society of Composers, Authors and Music Publishers of Canada (SOCAN) for the years 1997 to 2002 and the Neighbouring Rights Collective of Canada (NRCC) for the years 1998 to 2002. "It’s certainly very high. I think it’s one of the highest tariffs that’s ever been published," says one industry player close to the issue. In a rare move, the board set a single tariff rather than certifying separate tariffs for SOCAN and NRCC. It concluded the rate should be 18.2 per cent of the monthly affiliation payments paid by broadcast distribution undertakings (BDUs) for pay audio signals – one of the highest ever set. But the board applied a "newness" discount, bringing the final rate to 16.38 per cent – 11.115 per cent for SOCAN and 5.265 per cent for NRCC. The preferential rate for small cable systems was set at 5.56 per cent (SOCAN) and 2.63 per cent (NRCC). "It is a well-known practice, when valuating companies, to account for the newness of an operation through a ‘risk’ discount," the board states in its statement of royalties decision. "DTH has invested heavily to attract customers by subsidizing hardware; all of this has been done at no cost to rights holders. Given the important share of revenues that rights holders will now receive from these users, it is normal that they share in the risk factor associated with this new industry. Accordingly, a discount of 10 per cent seems appropriate to account for this ‘newness’ factor, bringing the final rate to 16.38 per cent." The average monthly affiliation rate paid by BDUs for pay audio services per subscriber is 50 cents for a 30-channel service and 65 cents for the Galaxie-DMX 40-channel service, according to Decima Publishing research. This boils down to royalty payments of between eight and 10 cents per pay audio subscriber per month, which will be split 50/50 by pay audio services and BDUs, as is the case with SOCAN Tariff 17.A (specialty TV services). "(The board) actually doesn’t have a reason for that rate," a source representing the BDU industry tells CCR. "They sort of completely discounted our theory, which was (that pay audio) is radio. They completely discounted SOCAN’s theory, and instead of coming up with a cogent theory about why 18 per cent is the right number, they said, ‘we’re going to set a really big range, which is like 6 per cent to 40 per cent, and we think it’s here.’ It’s a dartboard decision if there ever was one." Adds another source: "There is some kind of logic as to where the dartboard was put on the wall, but the initial figure from which they make the calculations is really very arbitrary." During Copyright Board hearings that took place over 13 days ending in May 2001, the pay audio services and BDUs maintained that the commercial radio tariff should serve as the starting point for calculating a tariff rate for pay audio. They argued that radio and pay audio services are similar, including their "almost identical" reliance on music. This approach would have resulted in a rate of between three and five per cent. SOCAN and NRCC offered various approaches, including examining how much other subscription broadcasting services, especially pay and pay-per-view, spend for program content and setting the royalties so that pay audio’s rate of return is similar to commercial radio and other subscription broadcasting services. The approaches put forward by the collectives would have resulted in a whopping royalty rate of between 30 and 40 per cent of a BDU’s affiliation payments. In the end, the board went its own way. "In the Board’s view, none of the comparisons offered is clearly preferable to the others. All of them are sufficiently weak, or in need of sufficiently large corrections, to make the use of one or a combination of them highly problematic." The board goes on to conclude that pay audio services are neither in competition with nor are substitutes for commercial radio. "The tariffs put forward as starting points target industries that do not compete with (pay audio services) and whose business models are so far removed from that of (pay audio services) as to make comparisons difficult, if not irrelevant." The board adds: "This is a case where there are no useful proxies available to the Board. At most, there are a variety of marginally relevant indicators, all of which nevertheless serve to establish a ‘comfort zone’ within which the Board, given all the circumstances, is able to exercise its discretion in setting the tariff. As counsel to the cable system operators put it, this is a case where tariff making involves looking at the characteristics of the industry and trying to figure out what makes sense at the time. In doing so, the Board will keep in mind its raison d’être which, contrary to what counsel to the (pay audio) service providers stated, is not so much to supervise the rates charged by SOCAN’s members as to balance the competing interests of copyright owners and users." In its decision, the Copyright Board notes that pay audio services enjoy substantial profit margins which, because of their cost structure, are predicted to grow significantly over the next few years. It adds that Canadian pay audio services launched more successfully and grew more rapidly than U.S. services. Indeed, pay audio has experienced solid growth thanks to an aggressive deployment of digital TV services in recent years, and now counts nearly 2.5 million subscribers, most of which are on digital. Most digital BDUs bundle a pay audio offering with their basic digital packages or with the rental cost of digital equipment. While the services concede that they have profitable businesses, at least one provider says there’s a limit to what its business can bear, and the future remains uncertain. "It will be quite a bit less profitable than it was before the decision," the source notes. "Quite frankly, I think the board is a bit presumptuous in saying that we’re well established. We could not impress on them that there’s a lot of competition brewing in various forms and we don’t know where we’re heading." The source adds that when the tariff is added to the four per cent of gross revenues pay audio services must contribute to Canadian music talent development as per their CRTC licences, some 20 per cent of Galaxie and DMX’s gross revenues is earmarked for copyright or public benefits. While the tariff covers some five years up to 2002, SOCAN and NRCC must file new proposed tariffs for the coming year or years by the end of March. The tariff is certain to be brought up in the course of the CRTC’s licence renewal process for Galaxie and DMX, announced on March 26 – Broadcasting Notice of Public Hearing CRTC 2002-4.

Copyright Board sets first ever tariff for Canadian pay audio services

Broadcast | March 28, 2002

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