Small Market Independent Television Stations (SMITS) Coalition C/O Canadian Association of Broadcasters 770-45 O’Connor Street Ottawa, Ontario K1P 1A4

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Small Market Independent Television Stations (SMITS) Coalition C/o Canadian Association of Broadcasters 770-45 O’Connor Street Ottawa, Ontario K1P 1A4

Spectrum Licensing and Auction Operations, Industry Canada, 235 Queen Street, Ottawa, Ontario K1A OH5 [email protected]

February 26, 2015

Attn: Senior Director, Spectrum Licensing and Auction Operations

Re: Canada Gazette, Part 1, Notice No. SLPB-005-14, publication date January 3, 2015 Consultation on Repurposing the 600 MHz Band

1. The Small Market Independent Television Stations (SMITS) Coalition is pleased to respond to the above referenced Industry Canada Consultation. 2. Members of the Small Market Independent Television Stations (SMITS) Coalition provide vital services to Canadians through local over-the-air (OTA) television stations operating in Canada’s smallest television markets – markets with fewer than 300,000 persons1. 3. The purpose of this submission is to outline the unique circumstances of, and challenges faced by Canada’s smallest local television broadcasters, and to recommend means by which they can be addressed by the Government of Canada so that SMITS can remain a vital part of the lives of close to three million Canadians. SMITS Coalition members are also members of the Canadian Association of Broadcasters (CAB) and support the CAB’s brief in this consultation. The Importance of Small Market Local Television to Canadians 4. SMITS Coalition member stations are comprised of: • Jim Pattison Broadcast Group (CFJC-TV Kamloops & CKPG-TV Prince George, B.C., and CHAT-TV Medicine Hat, Alberta) • Newcap (CITL-DT & CKSA-DT in Lloydminster, Alberta) • Thunder Bay Electronics (CKPR-TV & CHFD-TV in Thunder Bay, Ontario) • Corus (CKWS Kingston & CHEX-TV Peterborough, Ontario) • RNC Media (CFEM-TV & CKRN-TV Rouyn-Noranda, and CFVS-TV, Val-d’Or, Quebec) • Télé Inter-Rives (CKRT-TV, CIMT-TV & CFTV-TV in Rivière du Loup; CHUA-TV in Carleton, Quebec)

1 One SMITS Coalition Member, CHEK-TV Victoria, serves a market of 340,000, but was determined by the CRTC to be eligible for the SMLPF in December, 2013, given that the station met 3 of the 4 criteria and “suffers from the pressures noted above in the same way as other independent television stations that benefit from the SMLPF” Broadcasting Decision CRTC 2013-739. CHEK-TV accordingly joined the SMITS Coalition in 2014. • Miracle Channel (CJIL-TV Lethbridge, Alberta) • Newfoundland Broadcasting (NTV, CJON-TV, TV St. John’s, Newfoundland) • CHEK-TV, Victoria, B.C. 5. SMITS members operate in the smallest television markets in Canada. Small in market size, does not, however, mean small in impact. We are some of the most prized, effective and efficient operators of local television services in Canada. Among other things, together, we: • Serve approximately 3 million Canadians, or 8.5% of Canada’s population, many living in some of the sparsest parts of this country; • Provide over 190 hours of original, quality, locally relevant programming every week, 52 weeks a year; • Gift through the donation of airtime and the involvement of our personnel well in excess of $20 million across the country every year to charitable and community public service endeavours; and • Are relied on virtually every day as our viewers’ primary source of news and information2. 6. Canadians value local television. CRTC polling for the Let’s Talk TV process demonstrated that Canadians value local news more than any other program category (81%)3. A more recent poll places the number of Canadians who view local programming as “important” at 84%, up from 76% in 2008, and higher than any other type of Canadian content4. 7. Research commissioned by the SMITS Coalition shows that Canadians value local programming as much in small markets as they do in large markets5. The difference is that in small markets the local television broadcaster can be, and often is the only local television outlet6, and one of only a very few local media outlets of any kind. Thus if SMITS are forced to reduce local service or close, Canadians in these markets are left with few if any local alternatives. The Challenge Faced by the Government of Canada

8. The SMITS Coalition appreciates the challenge imposed by Canadians’ apparently insatiable demand for spectrum for mobile applications. We note in particular, the comment in Industry Canada’s Spectrum Outlook that “traffic over Canada’s commercial mobile networks is expected to increase fifteen-fold between 2011 and 2017”7. 9. It is important however to put that demand in context. 10. First, it is inherently unpredictable and not evenly spread throughout Canada. In fact it is highly concentrated in the densest urban markets close to the US border, markets like Vancouver, Toronto and Montreal. 11. Second, it is not in lieu of local television but in addition to it.

2 And SMITS do this on less than 5% of private TV revenues (Based on 2013 private conventional TV revenues of $1,944 million (CRTC Communications Monitoring Report: 2014, Table 4.0.1) and SMITS 2013 revenues of $95.3 million (SMITS June, 2014 Submission to CRTC in Let’s Talk TV Process, Appendix 1, Appendix 7.1)). 3 CRTC Phase II research. Let’s Talk TV proceeding. 4 Nanos poll conducted for Friends of Canadian Broadcasting. 5 Strategic Inc. Report, SMITS June, 2014 Submission to CRTC in Let’s Talk TV Process, Appendix 1. 6 The only SMITS Coalition member exception is CHEK TV, Victoria 7 http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf09445.html#a3.1

2 12. Unfortunately, Industry Canada’s consultation proposal fails to adequately appreciate these two realities. 13. While IC rightly (and thankfully) proposes to ensure that all Canadian full power stations in the 600 MHz will be found new allotments, it also makes it clear that “most [of the other] TV undertakings, operating in both UHF and VHF bands, would also be assigned new TV channels”. 14. In other words, under IC’s proposal, practically every local television station in Canada would be required to relocate their channel position, whether or not they are above or below the frequency band that will be assigned to mobile broadband and whether or not that spectrum is actually needed for mobile broadband in the market concerned at the time. 15. This would add tremendous time pressure, viewer inconvenience and cost for channel relocations in markets that may not even have sufficient demand for mobile broadband to warrant it in the foreseeable future. 16. It may take many years before there is sufficient demand in less populated areas for mobile operators to construct new networks utilizing the proposed 600 MHz band. There is no justification for television stations to unnecessarily vacate this band until such time as mobile networks will be constructed. 17. Moreover, even in markets that, because of local broadband demand or the “domino effect” of relocations in nearby markets, warrant conversion, Canadians clearly don’t want it to come at the expense of local television. 18. As the CRTC’s recent policy statement on conventional television confirmed, Canadian local OTA television stations remain a vital part of the television landscape in Canada, garnering over 40% of viewing in the English-language market and over 50% in the French-language market during prime time (7 to 11 pm)8. Canadians value over-the-air reception. As noted by the Commission, “an overwhelming number of Canadians who commented on the topic of over-the-air television viewed the ability to receive television programs inexpensively over the air as important and valuable.”9 19. The CRTC has accordingly mandated that OTA stations maintain over-the-air transmitters in order to retain key regulatory privileges, such as mandatory distribution on the basic service of BDUs and simultaneous substitution. 20. Thus at the very time that the CRTC has reiterated the importance of local OTA television and local OTA transmission, and at a time when revenues of local OTA television stations have been steadily declining (with a negative CAGR of -1.2% between 2009 and 2013 and continuing)10, IC proposes channel relocations that would cost local television stations millions of dollars. 21. Sadly, the situation becomes even more challenging when the focus is placed specifically on small market local television. The Economic Challenges of Small Market Television

22. Revenues for the 19 SMITS Coalition Members combined were approximately $68 million in 2014, a number projected to drop in 2015, and not helped by the CRTC’s elimination of the

8 Broadcasting Regulatory Policy CRTC 2015-24. Conventional stations also garner 40% of the news programming viewing market share. 9 Ibid. 10 CRTC Communications Monitoring Report (2014), Section 4.0, page 34.

3 Local Programming Improvement Fund (LPIF). This means that the average SMITS now operates on annual revenues of little more than $3 million. To put this in perspective, medium market television stations typically earn on the order of $10 million annually, and large market stations considerably more. Even most major market radio stations earn more than $3 million annually. 23. Revenues of a typical individual SMITS must cover: • $300,000 in technical costs; • $700,000 in sales and promotion; • $800,000 in admin & general; and • at least $1,500,000 in programming

… including new costs from recently increased regulatory obligations, such as quality assurance measures for closed captioning, closed captioning of PSAs and promos, described video requirements, harmonized levels of local programming, and emergency alerting. The latter regulatory requirement is the most recent new one for local broadcasters, taking effect March 31, 2015, and requiring the installation of an emergency message system at each local TV station in Canada, at an average installed cost of approximately $20,000 per station. 24. This means that there are effectively no revenues left for interest charges, depreciation or amortization. There is certainly nothing left for major new capital and related costs associated with channel relocation. 25. Moreover, as small independent television stations, most SMITS do not have the ability to cross subsidize their local operations from profitable specialty, BDU or ISP businesses. And no SMITS stations have or are affiliated with mobile wireless companies. These are businesses that need to stand on their own, and have no potential “upside” from an expansion of mobile broadband. 26. While viewing to SMITS stations has remained strong in recent years, SMITS have suffered significant revenue declines, beyond the challenges facing the conventional sector overall, largely due to two interrelated trends: 1. Historic lack of DTH carriage (and in some cases current lack of HD carriage on DTH and cable] and the influx of distant signals (on cable and DTH) has reduced viewing to programming and revenues; and 2. National ad buyers have reduced their buying of SMITS because of their ability to “buy around” these stations through distant signals and specialty television services. 27. The impact of audience fragmentation by DTH was addressed, in part, by the establishment by the CRTC of the Small Market Local Production Fund (SMLPF) in 2003, funded from 0.4% of DTH’s mandatory 5% contribution.11 Today, there are currently 22 stations12 that access SMLPF, dividing approximately $10 million between them. 28. SMLPF has become an essential revenue stream for SMITS, representing just over 10% of aggregate station revenues. It is not an exaggeration to suggest that, without SMLPF to

11 Broadcasting Public Notice 2003-37, para 127. 12 There are 19 SMITS Coalition member stations. Two additional VI stations owned by Bell Media (CJDC-TV and CFTK-TV) and one owned by Shaw (CJBN-TV) currently access the SMLPF, although they do not qualify as SMITS stations.

4 compensate, at least in part, for the damage done by DTH, many SMITS stations would not still be on air. 29. Unfortunately, the financial challenges outlined by the CAB and facing all local television in Canada have impacted small market local television the most. 30. National ad sales are down 14% from 2007 to 2013 - a greater decline than for the conventional television sector as a whole13. SMITS have had more success retaining local advertising revenues through 2013, but they are still down 3%14. 31. This - combined with increased distribution of distant signals by terrestrial BDUs, reductions in Network affiliate payments15, losses and declines in DTH revenue and SMLPF contribution, and new regulatory obligations - has made it abundantly clear that new compensatory funding is required16. SMITS made specific proposals to the CRTC in the Let’s Talk TV Proceeding. In its January 2015 Local TV Decision, the Commission indicated that it will hold a proceeding to address this matter in the 2015-2016 timeframe17. 32. Faced with declining revenues and profits, most SMITS stations will resort to cost containment measures – at least until the CRTC holds its promised proceeding. With operations already extremely lean, however, this is almost impossible to do without cuts that affect quality or amount of local programming – cuts that will affect local audiences. While each operator will face its own difficult choices, the result will be fewer local community events profiled or covered, fewer staff to cover the local council, and/or no one on standby to cover an off-hours emergency. 33. Faced with declining revenues and profits, and potential seven digit capital costs caused by IC relocation requirements, the prospect of going dark becomes very real. Cost to SMITS of IC Channel Relocation Proposals 34. Using the methodology outlined in CAB’s submission, the SMITS Coalition has estimated the cost of channel relocation for originating SMITS alone at $25 million in 2009 dollars or approximately $31 million today18, an average of $1.6 million per originating station19. 35. Using the same cost methodology, channel relocation for SMITS rebroadcast transmitters would cost in excess of $11 million, for SMITS or an average of over $400,000 per transmitter.

13 For further detail, see Strategic Inc. Report, SMITS June, 2014 Submission to CRTC in Let’s Talk TV Process, Appendix 1. 14 Figures are on a same station basis. I.e. excludes CHEK-TV, but includes other station pre and post membership in SMITS. 15 For example, CBC Network affiliate payments are down 18% since 2008, as the CBC has decided not to renew affiliate relationships. Remaining affiliate relationships are generally slated to end by August 31, 2016. 16 A full overview can be found in SMITS June, 2014 Submission to the CRTC in the Let’s Talk TV Process. 17 Broadcasting Regulatory Policy CRTC 2015-24, para 28-30. 18 Based on CRTC Report, “Cost Estimate of Digital Television (DTV) Conversion for Canada” dated March 31, 2009 http://www.crtc.gc.ca/eng/publications/reports/dtv0903.pdf, “Study 1 – Complete Service Replication”, which most closely matches the Department’s proposal to reassign all stations in Canada. 19 These average costs, based on the then DTV allotment plan, include very high costs to relocate from one band to another (eg. L-VHF to H-VHF) for seven out of the 19 SMITS stations, and significantly lower costs for 12 SMITS stations which remained on the same channel. Given IC’s proposal that virtually every station would be required to move, but be able to stay within the band in which they currently operate, we assume these costs would average down to some extent.

5 36. It is important to note that these cost estimates do not include costs such as site relocation, tower reinforcing, building upgrades, DTV test equipment, or the typically greater costs of shipping and installing equipment in small markets. 37. For the purposes of this submission, the SMITS Coalition has attempted to refine these cost estimates by conducting a survey of SMITS members to obtain current information on the extent to which SMITS have already voluntarily made upgrades to DTV (based on the current allotment plan) and the extent to which SMITS continue to operate rebroadcast transmitters. 38. The SMITS Coalition’s internal survey reveals that: • First, almost 85% of SMITS originating transmitters have already been converted to DTV. This was done as a long term investment in the future of these operations, to better serve viewers and under the reasonable assumption that the current DTV allotment plan would remain in place for the foreseeable future; • Second, the majority of originating SMITS converted to DTV used single channel (rather than broadband) antennae, given the lower costs of such equipment and the assumption of longevity noted above; and • Third, the majority of SMITS who have historically operated rebroadcast transmitters continue to do so, but in analogue format. Two SMITS members have recently had to make the difficult decision to shut down rebroadcast decisions given the costs relative to negligible incremental revenue20. 39. This survey information suggests that the actual relocation costs for SMITS would be somewhat lower than those calculated based on CAB’s methodology above, but that they would be in addition to the $9 million in costs already incurred by SMITS to convert to DTV transmission under the current allotment plan. 40. Moreover, even if lower than the above estimates, the relocation costs for SMITS can still be expected to be higher than the average $780,000 cost estimated by CAB for all OTA transmitters in Canada21. 41. Indeed, for originating stations alone, SMITS are in the position of having to assume, based on IC’s proposals, installed relocation costs of $1 to $1.5 million per station or between approximately $20 and $30 million22. This approaches half of SMITS total annual revenues. 42. Such numbers would be hard enough for even larger market station groups to swallow. The combination of higher relocation costs, increased regulatory burden and lower revenues makes the proposition of SMITS covering the costs of a government mandated relocation

20 NTV shut down its extensive network of transmitters across Newfoundland. CHEK-TV Victoria also shut down all of its rebroadcast transmitters. 21 In addition to the greater costs of shipping and installing equipment in small markets, there would appear to be at least two reasons for this: 1. The use by the majority of SMITS of single channel antennae, and some still analogue, which would need to be replaced 2. A disproportionately higher percentage of SMITS operate transmitters in VHF band, which would result in higher than average antennae costs. 22 The SMITS Coalition regrets that it is unable to provide more accurate cost estimates. A big part of the differential, however, is in respect of cost premiums small market broadcasters could expect to pay on equipment installations if aggressive time schedules where adhered to, leaving them with little negotiating leverage. By contrast, as it has been done “voluntarily” on time schedules chosen by all parties concerned, DTV equipment installed by SMITS members to date has been done so more cost effectively.

6 plan simply impossible from a financial standpoint. IC must take into consideration these financial realities facing SMITS when developing its policies on the possible repurposing of the 600 MHz band. 43. In the absence of significant improvements to IC’s proposal, at minimum, those SMITS who still operate them (that is, the majority) would likely be forced to shut down their rebroadcast transmitters. Given that Canadians in most SMITS markets have higher than average reliance on OTA transmission (more than the 8% national average), this would be a clear disservice to affected Canadians. Simple economic realities would, however, make it unavoidable. 44. Also unavoidable, in the absence of compensatory measures, would be dramatic material reductions in local service, if not outright station closures. A Solution that Balances Canadians Support for Local TV and Desire for Broadband Mobile

45. The SMITS Coalition recognizes Canadians growing appetite for broadband mobile, and IC’s need to allocate spectrum for it. 46. We also appreciate that the Canadian government has come to rely on the billions of dollars received in spectrum auctions from the reallocation of underutilized spectrum as an important source of revenue. 47. What surprises us is that, given the hundreds of millions, if not billions, of dollars the Canadian government can expect from future wireless spectrum auctions, funds have not been set aside to ensure that Canadians get to keep their local television and use their smartphones for broadband applications. 48. We do not believe that Canadians would see this as an either-or choice. 49. As noted by the CAB, the 700 MHz band was auctioned in 2014 to Canadian mobile operators, raising $5.27 billion for the federal government23. Meanwhile, the full cost of vacating the spectrum to allow this to happen was borne by Canadian local television stations. In fact, 145 stations in 33 mandatory markets spent approximately $113 million to construct DTV facilities and meet the then DTV Post Transition Allotment Plan deadline of August 31, 2011. 50. In the US, where local broadcasters have none of the domestic content obligations that their Canadian counterparts do, stations can negotiate compensation from distributors and have stronger territorial rights protections, this issue was addressed out of the gate. The 2012 Spectrum Act established a $1.75 billion TV Broadcaster Relocation Fund from which the FCC is to reimburse costs incurred when the broadcast spectrum is repacked following the FCC’s first incentive auction24. 51. The CAB argues that the #1 design objective for a new television allotment plan be to maintain continuity of service and minimize disruption to viewers receiving OTA television services. The SMITS Coalition agrees. 52. Accordingly, the SMITS Coalition supports the recommendations made by the CAB, in particular, that:

23 Industry Canada Spectrum Management and Telecommunications, 700 MHz Auction Results http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/h_sf10598.html 24 US local TV stations who agree to relinquish spectrum, share channels, or move from UHF to VHF will also be compensated financially from the proceeds of the US Incentive Auction.

7 1. IC confirm that there will be sufficient channel capacity in a new DTV allotment plan to accommodate all existing commercial TV stations and their retransmitters, plus a realistic number of vacant allotments for future needs; 2. A reimbursement mechanism such as a Canadian relocation fund be established out of anticipated proceeds from the future auctioning of 600 MHz spectrum for TV stations to be reimbursed for 100% of their costs resulting from the repacking of TV stations; 3. A mechanism be established to compensate broadcasters who agree to reduce the amount of spectrum utilized for over the air television services and accept a degrading of their access to Canadian viewing audiences; 4. A minimum notification period of 39 months be provided to transition to a new DTV allotment plan; and 5. IC firmly commit that all regular power originating and rebroadcasting stations can remain in their current band (UHF, high VHF, or low VHF) or have the flexibility to switch band of operation, in consultation with the Department. 53. In addition, the SMITS Coalition recommends that the roll-out plan be phased in to allow stations in markets where there is no immediate need for mobile spectrum to remain on current 600 MHz band allotments until mobile broadband demand warrants relocation. 54. As a potential interim measure, in respect of small markets without immediate need for mobile spectrum, the SMITS Coalition urges IC to consider the possibility of allowing stations to remain at their same channel position for as long as possible (be it in digital or analogue), where this could be done without interference or degradation of television or mobile services in adjacent markets25. Presented with the choice between an expensive relocation and a small diminishment or degradation of their access to Canadian viewing audiences, many SMITS would likely choose the latter, if it merely required them to operate existing transmitters at lower power. 55. In particular, given that most originating SMITS stations are in the VHF band (i.e. not the spectrum band that would be allocated to mobile) and would hence face the highest channel relocation costs, such an approach may be particularly doable in sufficiently remote markets.

All of which is respectfully submitted. Sincerely, Small Market Independent Television Stations (SMITS) Coalition

Rick Arnish Chair

25 This would also be consistent with current IC policy, allowing, as of October 24, 2014, 18 LPTV stations to continue to operate in the 700 MHz band, notwithstanding the fact that it was auctioned for mobile broadband services in January 2014. IC Consultation para 56.