Corus, Astral argue for status quo in pay TV; licensing hearings begin today

Not surprisingly, Astral Television Networks and Corus Entertainment are telling the CRTC that new pay TV licensees would result in a slew of negative consequences to the broadcasting system, including a probable decline in their contributions to Canadian content. Public hearings into the possible licensing of new pay TV operators got underway today, but the pay TV duopoly –Astral with a lockhold on eastern Canada, and Corus on the west – are desperate to keep the status quo. Three applicants – Spotlight Television, Allarco Entertainment and Quebecor’s Archambault Group – are proposing pay services that would feature mostly U.S. movies. The fourth hopeful – The Canadian Film Channel – wants to operate a pay channel filled with Canadian programming but financed by its competitors (CCR, Aug. 9/05). "Under a competitive pay television model, there would be net loss of revenue to pay television overall and a corresponding net loss of Canadian programming expenditures. As a result, Canadian producers would not be better off," writes Astral to the CRTC in a bid to protect its offering, The Movie Network. Shaw Communications-owned Corus echoes similar sentiments in telling the regulator in its September 2005 document A Step in the Wrong Direction that there could be a potential erosion of the pay TV subscriber base because of a perception of diminished value and potentially higher retail prices. A deterioration of the economics of pay TV, Corus adds, would cause "a weakening ability of licensees’ ability to meet the commission’s conditions and expectations for Canadian programming and expenditures, resulting in applications for relief from such conditions and expectations." Corus’ Movie Central states that it has generated original made-for-pay dramatic series in Canada, commissioning four series in the past year: Slings & Arrows, G-Spot, ReGenesis, and Terminal City. That production would be put in jeopardy, points out Corus, if its existing revenues were diluted by competition. Spotlight Television, which sparked the pay TV hearing by filling an application for a licence, counters that many producers and certainly the Canadian Association of Film Distributors and Exporters (CAFDE) feel that the incumbent pay TV operators are not supporting Canadian feature films the way they used to. The CAFDE concludes that "the introduction of a new pay TV service with a significant commitment to support Canadian films will be in the public interest," Spotlight notes in its September 22 response comments filed with the CRTC. Astral cites a number of other potential downfalls with a competitive pay TV model in Canada, including increased costs for the rights of U.S. studio feature films, a fragmented customer base as viewers turn to alternative movie sources such as cable TV channels Showcase or Bravo, a less attractive programming offer for consumers on pay, no added diversity to the broadcasting system, and a dilution of the CRTC’s current regulatory "one channel per genre" policy. U.S. programming costs for first-window programming will rise if newly licensed competitors begin to bid on the programming that drives pay TV, Astral states. "As a result, significant revenue will be siphoned by the Hollywood studios as competitors bid up the prices for premium product," it says. Astral also argues that since TMN runs most of the programming that appears on the U.S. pay channels HBO and Showcase, any new pay TV channels would not be about "more choice" or "more diversity," but about more repeats of the same movies. Spotlight intends to gain exclusive access to 50% of TMN’s current first-window movie product, and fill the other half with a much wider range of non-studio independent movies. Astral says Spotlight’s expanded consumer choice is simply programming already widely available on numerous licensed Canadian specialty and pay services such as Showcase, Bravo, Prime TV, and the Independent Film Channel. Since Allarco Entertainment is not seeking exclusive access to Hollywood movies but equal access, Astral argues its proposed pay TV service will mean duplication. Compared to the U.S. TV model, Canadians only have to subscribe to one pay TV service to receive the same quality offering that Americans get from subscribing to three pay TV channels. That is because the composition of pay TV channels in Canada differs from that in the United States, according to Astral. All of the programming offered on TMN and its French-language counterpart Super Écran is made up of "first-window" titles. About 70% of that content is theatrical movies and the remaining 30% consists of Canadian original drama services, made-for-pay movies and specials, and original programming from HBO and Showtime. Astral’s written submission to the CRTC points out that a majority of programs on U.S. premium pay TV networks are not first-window, but are older second-window movies. Charts in Astral’s submission show that 43% of HBO’s programming is first-window and 57% second-window; 26% of Showtime’s is first-window and 74% second-window, and 44% of Starz! first-window and 56% second-window. "In reality, the competing U.S. pay television services, looked at individually or in total, are very different than their Canadian counterparts and arguably are inferior in terms of their price/value attributes," writes Astral. "Canadian pay television services have operated for over two decades as exclusive licensees in their regional territories. This has enabled The Movie Network and Super Écran to offer superior first window premium product to their subscribers." Spotlight sees no problem in running older second-window programming, and questions why, if Canada’s pay TV options are so much superior, fewer Canadian subscribing to pay TV than Americans on a per capita basis. "Indeed, the U.S. premium pay services are immensely popular despite the fact that they include many movies that are three to five years old as well as older classic films instead of just the recent release films that are only one to two years old," writes Spotlight to the CRTC. "That popularity reflects the fact that the public sees greater value in being able to watch an older A-list feature commercial-free than in watching… a current ‘first run’ title that they have never heard of and that went direct to video." Astral also quotes from a study it commissioned conducted by Communications Management Inc. (CMI) that points out that there are "serious reductions in wholesale revenues" for the second and third-ranked pay TV competitors. Astral questions why a subscriber would pay more for a single service with half the premium content than they pay today for a service with all of the premium content. But in Spotlight’s view, competition will result in more marketing and more awareness of pay TV in the eyes of consumers, and ultimately result in a more people subscribing to it. "Indeed, the Canadian market, both in terms of household penetration and revenues, lags the U.S. by a factor of more than 60%, and presents a prima facie argument in favour of competition," argues Spotlight. According to Spotlight’s research, the U.S. penetration rate for premium pay services is over two-and-a-half times the current Canadian penetration rate. The pay TV hopeful argues that in the early days of pay TV in Canada, when there was no monopoly, competition was unsuccessful partly because the Canadian services could not keep up with the demand for set-top boxes. Astral states that Spotlight has inappropriately estimated pay TV growth, which will suffer as new TV channels and new technologies such as Internet video downloading, DVDs, video-on-demand (VOD), and personal video recorders will create more competition for the pay TV platform. "Our competitors are the rest of the TV dial, the video store, the game console and now the personal computer," reiterates Corus in its submission to the commission. It adds, "In the highly competitive U.S. market, pay TV shows are seen only on their respective premium networks, and aren’t even sold as reruns on other channels. In Canada, however, they are often sold to widely accessible cable channels and even broadcast networks." Corus notes that two years ago CTV Inc., for example, became the first network to carry HBO’s The Sopranos on its over-the-air channels. As a result, on a per capita basis, almost ten times as many Canadians as Americans have had access to that show. But Spotlight counters that PPV, VOD and Internet downloads are seen by both consumers and studios as a distinct window from the rental market and "that consumers welcome the introduction of competition in the pay TV sector." Internet downloading competes with DVD and VOD rental, but not with pay, contends Spotlight. And in a presentation at the Canadian Cable Systems Alliance (CCSA) annual meeting last month, Rogers chief strategy officer Michael Lee stated that new technologies, such as VOD, were helping to reduce churn on the pay platform. Rogers added TMN on demand to its service initially at no extra cost to pay TV subscribers, but increased the TMN fee by $2 in July. Lee said there was no drop-off in subscriber numbers, and that adding TMN on demand reduced churn on the pay platform by 50% to 70%. He noted that about 65% of TMN subscribers used the VOD feature to watch about 11 movies a month on demand (CCR, Oct. 7/05). Spotlight quotes from Astral’s own annual reports to counter the broadcaster’s contention that pay TV audiences are fragmenting. Astral’s second quarter report, dated July 13, 2005, notes that pay TV subscriptions were up 2%. Its 2004 annual report states, "We were delighted by the growth of our pay TV subscriber base from 1.3 to 1.4 million, thanks to top-rated programming and the continued expansion of digital cable and satellite services." Licensing one or more pay TV channels would also mean a shattering of the CRTC’s existing and long-standing "not directly competitive" policy, which Astral says would be negative because it "would introduce significant instability and uncertainty into the environment in which pay and specialty television services operate." The exception, states Astral, would be difficult to confine to pay television as the "departure would encourage others to apply for competing services based on the precedent established by the commission in this case." Spotlight, however, counters that the "one to a genre" concept applies more to specialty TV, not pay TV. "One question is whether a national general interest pay television undertaking is a genre," writes Spotlight to the CRTC. "A second is whether, if it is, it enjoys a ‘one to a genre’ protection." Spotlight also doubts that if the commission ruled that it did not deserve protection that it would result in the demise of that policy for specialty TV. The pay TV licence applicant also notes that the CRTC has shown that it favours a competitive model and has been moving in that direction. For example, notes Spotlight, the regulator has granted competing licences for pay-per-view (PPV) and VOD services. In a 1995 Convergence Report, the commission indicated that it intended to reintroduce competition to the pay area: "The commission also foresees competition within the pay-per-view, near VOD and true VOD industries. Further, the commission expects that the pay television sector will evolve into a more viable competitive structure." Corus tells the commission that now is not the time for the CRTC to carve up the successful pay TV business, simply because it has "succeeded in building a profitable business." Desjardins Securities analysts, however, disagree. "We agree with the applicants that there is no economic reason why pay TV in Canada should still be a protected industry," states a bulletin issued by Desjardins analysts Carl Bayard and Maxim Sytchev. "The advent of digital distribution in the late 1990s ushered in a new era of profitability for the industry. According to CRTC statistics, the pay TV business in 2004 had revenues of almost $372 million and EBIT of $87.7 million. The pay industry’s EBIT margin was 25%."

Corus, Astral argue for status quo in pay TV; licensing hearings begin today

Broadcast | October 24, 2005

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