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Canadian Television 2020: Technological and Regulatory Impacts

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Canadian Television 2020: Technological and Regulatory Impacts Canadian Television 2020: Technological and Regulatory Impacts Nordicity Peter Miller, P. Eng., LL.B Prepared for: ACTRA Canadian Media Guild Directors Guild of Canada Friends of Canadian Broadcasting Unifor December 2015 Peter H. Miller, P. Eng., LL.B. Preamble This report was prepared by Nordicity and Peter Miller, P. Eng., LL.B. for ACTRA, Canadian Media Guild, Directors Guild of Canada, Friends of Canadian Broadcasting and Unifor. The analysis and conclusions expressed in this report are those of the Authors and not necessarily those of the commissioning parties. ABOUT NORDICITY Nordicity is a leading consulting firm specializing in policy, strategy, and economic analysis in the media, creative and information and communications technology sectors. Over the last three decades, Nordicity has become widely recognized as one of the leading international consultancies specializing in economic analysis and business planning within the television broadcasting sector. ABOUT PETER MILLER Peter is an engineer and communications lawyer with 25 years of creative and telecommunications industry experience, in both private practice and executive positions. Since 2005, he has acted as an advisor for select clients in both the public and private sectors, and has authored numerous reports on technological and policy trends and their impact on the media landscape. Peter H. Miller, P. Eng., LL.B. Table of Contents Executive Summary 1 Part A. Environmental Scan 14 1. Objective of Study 14 2. Summary of Research and Analysis 16 2.1 Gradually then Suddenly: The Impact of Technological Change on Canadian Television 16 2.2 Canadian Programming Objectives of Broadcasting Policy in the Internet Age 19 2.3 The Canadian Television System Circa 2020 - Impact of Technology Alone (the Baseline Scenario) 22 2.3.1Total Revenue 22 2.3.2Canadian Programming Expenditures 23 2.3.3Overall Trend 25 2.4 Assessment of the Impact of the LTTV Decisions 26 2.4.1Unbundling 26 2.4.2Predominance on Canadian Services Offered, Not Received 27 2.4.3Elimination of Access Rules 29 2.4.4New Hybrid Exemption Order 30 2.4.5Combined Impact of LTTV Decisions 31 2.5 Unbundling Decision Revisited 34 3. Conclusions 40 Part B. Modelling and Assumptions 42 1. General 42 2. Scenarios 44 2.1 Baseline Scenario 44 2.1.1Over-The-Top TV Subscriptions 44 2.1.2BDU Subscriptions 52 2.1.3BDU Subscription Revenue 55 2.1.4Advertising 58 2.1.5Television Advertising 64 2.1.6Carriage Fees 66 Peter H. Miller, P. Eng., LL.B. 2.1.7Total Revenue 67 2.1.8Canadian Programming Expenditures 68 2.2 LTTV Scenario 72 2.2.1Unbundling 75 2.2.2Preponderance of Canadian Services and Elimination of Access Rules 78 2.2.3Hybrid OTT Exemption Order 80 2.2.4Closures of Specialty and Pay Services 84 2.2.5Simultaneous Substitution 87 2.2.6Canadian Programming Expenditures 87 2.2.7Independent Production 88 2.2.8Economic Impact 90 2.3 Unbundling Revisited 93 2.3.1Assumptions 93 2.3.2Financial Impact 95 2.3.3Economic Impact 97 Peter H. Miller, P. Eng., LL.B. EXECUTIVE SUMMARY i. This study provides a third party assessment of the economic challenges facing Canadian television in light of CRTC decisions made pursuant to the 2014 Let’s Talk TV (LTTV) hearings. ii. The study develops three potential scenarios for the 2015 to 2020 period, as follows: x Baseline --- The anticipated impact of technological and consumer behaviour changes, assuming that the pre-existing broadcasting regulatory regime remains --- i.e. without the implementation of the LTTV decisions; x LTTV Impact --- The anticipated impact of the CRTC’s LTTV decisions, including unbundling, and changes to ‘predominance’ of Canadian services received; x Unbundling Revisited --- With a modified implementation of the LTTV regulatory decisions, in particular, the maintenance of current predominance and access rules, and the implementation of unbundling through a more market based approach. iii. The scenarios presented in this study are designed to provide the most plausible outlooks possible given available information. The authors welcome a vigorous dialogue about these assumptions and their conclusions, and indeed hope this study triggers a debate among decision makers and stakeholders about the future of Canadian TV from an economic and Canadian programming perspective. Gradually then suddenly: The Impact of Technological change iv. Digital technology helped spur the Canadian television system to its highest watermarks in terms of revenues and contributions to Canadian programming --- more capacity, more channels, more Canadian content--- all via a ‘‘closed’’ system of broadcast distribution undertakings (BDUs) to which over 85% of Canadians once subscribed. v. This closed BDU system is now effectively under attack from newer IP based digital technologies, and their tendency to disintermediate, bypass and disrupt traditional distribution networks and business models. vi. ‘‘Suddenly’’, Netflix goes from zero to over a third of Canadian households as subscribers. Suddenly, two Canadian over-the top-television (OTT) services launch with hundreds of thousands of subscribers, and morph from being complementary to BDU offerings to competing with them. Suddenly, the question is not just whether OTT is impacting traditional television, but whether it is destined to replace it. 1 Peter H. Miller, P. Eng., LL.B. vii. Technologically driven changes are dramatically affecting consumer behaviour, including viewing habits and service adoption, which in turn are affecting industry advertising and subscription revenues, and Canadian programming expenditures. viii. The outlooks developed in this study examine these trends in detail and project outwards to 2020, based on a series of assumptions, carefully developed using current trends and reasonable assumptions about future consumer and industry behaviour. ix. These outlooks do not contemplate the end of Canadian television as a pre-ordained or foreseeable outcome, despite what we agree will be an inexorable transformation from a predominantly linear/channel model to a predominantly IP based on-demand model. This view is held by most observers and commentators for a number of key reasons, including the fact that: x the anchors of traditional TV --- live sports, live events and news --- remain a key ‘‘must have’’ competitive edge for most viewers; x the business model of OTT is largely dependent on supply of library programming from traditional TV studios, is not as profitable as U.S. traditional TV, and is not ready to replace that of traditional TV; and x the availability of ‘‘good enough TV’’ on OTT makes it adequate as a BDU replacement for lighter TV viewers only. x. In our view, the most likely scenario over the short to mid-term is a material but not fatal erosion of traditional television. It is being driven primarily by Millennials, infrequent TV viewers and non-sports/TV news watchers. Such viewers are the most motivated to abandon or reduce reliance on BDU services, and adopt some combination of BDU, over-the-air (OTA), and OTT platforms, and in the case of OTT, likely more than one platform. Declining Support for Canadian Jobs and Programming xi. The closed BDU system was the perfect platform for content monetization and regulation, through such measures as Canadian content exhibition requirements, expenditure requirements, simultaneous substitution, access rules, foreign TV service entry rules, and genre protection. This closed system also delivered great value for Canadians. It provided access to 99% of the top U.S. content (and much other foreign content) that Canadians wanted, but in a way that ensured that the profits generated by this foreign content supported a robust Canadian production system that created jobs and delivered quality Canadian programming. 2 Peter H. Miller, P. Eng., LL.B. xii. Technology is, undeniably, making achieving the objective of support for Canadian programming more difficult in two key respects: x The move to ‘‘on demand’’ from ‘‘linear’’ or ‘‘scheduled’’ TV renders shelf space requirements like Canadian content exhibition obligations less effective; and x Opportunities for by-pass of Canadian television providers (through the internet) increase, thus inevitably putting pressure on Canadian content expenditure stipulations. xiii. These types of technological challenges are not fundamentally new and, one might presume, should make the goal of support for Canadian programming more, not less, important. xiv. A key measure of success for Canadian broadcasting policy going forward, and a litmus test for the CRTC’s LTTV Decisions, should, therefore, be whether the system continues to maximize support for Canadian programming. While the Broadcasting Act does require that the system be ‘‘readily adaptable to scientific and technological change’’ and meet other such consumer-oriented goals, there is no reason why such consumer interests cannot be met in addition to furthering the cause of Canadian programming. xv. CRTC figures cited in the LTTV decisions place the value of public and private support for Canadian programming at more than $4.1 billion in 2012-2013. Almost two thirds (65.6%), or $2.7 billion of this came directly from the expenditures of Canadian television programming services on Canadian programs. The remaining amounts came from federal and provincial tax credits (15.8%), the Canada Media Fund (CMF) (9%), tangible benefits (4.8%), the contributions of BDUs to community programming (3%) and various independent production funds (1.5%). xvi. Put another way, of the $4.1 billion
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