TV UNBUNDLING: AN ECONOMIC AND CONSUMER EXPERIENCE IMPACT ASSESSMENT OF THE CRTC’S PROPOSED APPROACH ABOUT OLIVER WYMAN Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 25 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm’s 3,000 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit http://www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman. Oliver Wyman’s presence in Canada extends from offices in Montreal and Toronto across the country and draws from the strength of Marsh & McLennan Companies’ offices in 13 Canadian cities. In addition to advising private sector leaders, Oliver Wyman has provided expert advice and testimony in several Canadian regulatory and public policy initiatives: for example, interacting with the Canadian Transportation Agency, the Ministry of Transport, the Canada Mortgage and Housing Corporation, the Canadian Development Investment Corporation, the Office of the Superintendent of Financial Institutions, and the Ontario Securities Commission. Oliver Wyman’s Communications, Media & Technology practice helps industry leaders anticipate shifts in consumer behavior and competition, develop value growth strategies, improve operations and maximize organizational effectiveness. Our global team has worked for all major multinational telecom groups, and have launched or re- launched over 60 telecom operators. This has provided us with a deep understanding of the wireline and wireless ecosystems, particularly in margin improvement across commercial and operational levers in the most competitive markets in the world. Our team also advises media distributors, such as cable and satellite broadcasting distribution undertakings (BDUs), film and TV studios, publishers, broadcast and pay TV companies, Internet service providers (ISPs), digital distributors, gaming companies, consumer electronics brands, platform operators and private equity investors. We offer our extensive experience anticipating consumer behavior to redefine value propositions, offers and go-to-market approaches. The team involved in this study has supported 5 of the major cable BDUs in North America, 3 leading satellite BDUs, 3 global media conglomerates, 2 Hollywood majors, and 6 of the top publishers in North America, including supporting the launch of the industry’s digital distribution joint venture in both Canada and the US. The team has also directed Oliver Wyman’s role as New York City’s official knowledge partner for the media and hi-tech sectors for the past 5 years, leading MediaNYC2020, Mayor Bloomberg’s initiative to support the media and digital sectors in NYC, engaging with 70+ media-sector CEOs. This paper was authored by: MARTIN KON, a Toronto native, Partner and Co-head of Oliver Wyman’s Communications, Media & Technology practice; KAIJIA GU, a Principal in the firm’s Communications, Media & Technology practice; and PHILIPPE BENICHOU, an experienced member of the Communications, Media & Technology practice. Learn more at http://www.oliverwyman.com/what-we-do/communications-media-technology.html 2 INTRODUCTION The global media and entertainment sector is experiencing major disruption in all sectors, and the Canadian television landscape is evolving rapidly as a result. Canadians have more choices available - and more choices to make - than ever before, and we are certain that this trend will continue. The CRTC’s “Let’s Talk TV: A Conversation with Canadians” initiative is a worthy and important one. Understanding consumers’ views, preferences and ideas is the right starting point, and matching that understanding with knowledge about industry dynamics, competitive forces, and regulatory priorities is equally important. Oliver Wyman feels privileged to contribute to this dialogue, and as a proud Canadian, I am honoured to lead our efforts. We are committed to supporting the development [email protected] of the communications, media and technology sectors for consumers, businesses and society as a whole, both generally and in Canada specifically. Our firm traces its origins back to a business that Canadian pioneer William M. Mercer founded in Vancouver in 1945, and, though we are now a global firm with offices in 25 countries, we remain deeply involved in and committed to Canada. We have endeavored in this study to provide an objective and fact-based perspective on the impact of the CRTC’s proposed approach on both the economics of the television ecosystem and on the consumer experience. We have drawn extensively from our work with many leading BDUs, studios, broadcasters, and technology companies in Canada, the United States and Europe, and leveraged proprietary data on actual television viewing behaviour to try and predict future consumer behaviour. Our analysis necessarily makes a number of assumptions which we have made explicit throughout the document. In doing so, we have endeavoured to be conservative yet, at the same time, have conducted a range of scenario and sensitivity analyses to yield a broader spectrum of potential outcomes. This is an extensive and complex topic, and this report can only touch on certain aspects of it. We hope it makes for an interesting and thought-provoking read, and provides a complementary and helpful perspective to the “Let’s Talk TV” conversation. MARTIN KON Co-head of Oliver Wyman’s Communications, Media & Technology Practice CONTENTS EXECUTIVE SUMMARY THE CANADIAN 1 TV INDUSTRY CONTEXT ECONOMIC IMPACT 2 ON STAKEHOLDERS CONSUMER EXPERIENCE IMPACT: CHOICE AND FLEXIBILITY – 3 A QUALITATIVE ANALYSIS APPENDIX A. DETAILED EXPLANATION OF ASSUMPTIONS APPENDIX B. SENSITIVITY ANALYSIS 1 1.1. A DIVERSE AND DEEPLY INTERTWINED CANADIAN TV INDUSTRY 5 1.2. CRTC’S TV CONSULTATION: PROPOSED CHANGES 9 2.1. SUMMARY CONCLUSIONS 11 2.2. KEY ASSUMPTIONS 19 2.3. SCENARIO A: ASSUMPTIONS AND IMPACT DETAIL 22 2.4. SCENARIO B: ASSUMPTIONS AND IMPACT DETAIL 27 3.1. MACRO TRENDS: TV VIEWING IS RAPIDLY CHANGING 30 3.2. GAP BETWEEN PERCEPTION AND REALITY 34 3.3. VALUE OF DISCOVERY OF DIVERSE CONTENT 34 3.4. PARADOX OF CHOICE 35 A .1. SEGMENTED IMPACT 37 A.2. IMPACT ON CONSUMERS 37 43 The television industry is rapidly changing, with explosive growth in the pool of available programming and an ever-increasing set of formats and consumption alternatives for consumers—from a la carte channels, theme packs, time-shifting, and Video on Demand (VOD) to over the top (OTT) options such as Netflix and myriad other internet-distributed content. This evolution is due partly to consumer demand for “anywhere, anytime, on any device” experiences, partly to technological advancements in digital distribution and device capabilities, and partly to increased competition and lower barriers to entry in both content production and distribution. In short, the marketplace is driving substantial change in the television experience. EXECUTIVE SUMMARY This report presents the findings of a study are interested only in a limited number of programming conducted by Oliver Wyman, commissioned by services through Small Basic plus a la carte/BYOP Rogers Communications Inc. (Rogers) and Shaw options. For this minority of consumers, the savings Communications Inc. (Shaw), and draws from our would be in the range of 5% to 15% for the different work for various Canadian and U.S. distributors, studios, scenarios we tested, while the number of channels broadcasters and technology players. It focuses on received by these consumers would drop by the likely economic impact on both the consumer and approximately 59%. However, the majority of consumers the industry of the Canadian Radio-television and would experience higher bills (up to 12% depending Telecommunications Commission’s (CRTC) proposed on the scenario) and/or access to markedly fewer approach to unbundled packaging options for specialty channels, and a much smaller and less diverse “pool” and pay TV services in Canada, as well as the potential of programming (especially Canadian content), which impact on the consumer experience. The proposed would undermine the CRTC’s stated objectives. approach is designed to give consumers the option of subscribing to an entry-level “Small Basic” package, and Consumers who opt for a la carte/BYOP options would adding other channels on an “a la carte” or “Build Your lose much of the option value and potential enjoyment Own Package” (BYOP) basis. of discovering (or being directed to discover) new and diverse programming. Under the CRTC’s proposed Our overall conclusion is that, while intending to provide approach, the pool of programming services that more choice and flexibility to consumers, the CRTC’s many consumers have access to would be reduced proposed approach could actually hurt consumers and because fewer channels will be subscribed to in a Small the industry in several ways: by ultimately decreasing Basic + a la carte/BYOP environment, thus removing prices for only a minority of consumers while increasing the “occasional channels” that consumers would not prices for the majority who choose to stay with their proactively pay for on an individual basis, but that current package; by decreasing overall programming currently make up ~18%