Pick and Pay TV: Let the Hunger Games begin

In yesterday’s Speech from the Throne (SFT) the Government signaled its intent to ensure all Canadian cable/satellite and DTH (cable) subscribers have an à la carte or pick and pay option in their cable offerings. There are no details yet but it is widely expected that the Minister of Heritage will task the CRTC to look into the mechanics and implications of this and report back so the government can ensure that PNP will be implemented on a mandatory basis.

While there may have been some surprise that this was a specific plank in the SFT, there was no surprise that pick and pay was going to be on the table for the CRTC this fall in any event. On October 24 the CRTC will launch its ”Conversation With Canadians” on the Future of TV and the expectation has been that channel unbundling was going to be the biggest consumer concern.

It was also no surprise that the reaction of the industry was as muted as it was. Regardless as to how it plays out, PNP is a natural evolution of the path media is already on in terms of more channels and programming being available on-demand. But the how and the price are big issues in determining the winners and losers, of which there are guaranteed to be both. Decreeing pick and pay will be mandatory is easy. Making it work, particularly with regard to the CRTC’s objectives of balancing the interests of consumers, creators and citizens under the Broadcasting Act, well, that’s maybe not so easy.

But from a consumer perspective it’s ultimately just plumbing and of no import unless the price they pay exceeds their expectations, or their favorite channel goes dark because most consumers don’t watch it or the amount of original programming (Canadian or U.S.) on their favorite channels declines. It’s a risk for some.

But bottom-line, as we have said before, is pick and pay is inevitable and on-demand options will continue to increase. And as producers, creators, cablecos or broadcasters you need to be where consumers or your audience are if you want to be successful. Pick and pay may be one way to reduce cord cutting.

There is an old saw in business negotiations that goes like this. We have agreement on 95% of the issues and the only thing left to talk about is money. That is a bit like where we are today. PNP is going to happen sooner than later, arguably it already is, but the plumbing is still going to influence the end product.

So here are some random thoughts of how things may actually play out.

  1. Consumers will still be required to buy a basic cable package before they can pick and pay. As a consequence placement on basic becomes an even more precious commodity and who gets on, particularly given the vertical integration between cable and broadcasters, becomes a big regulatory issue. Assume either a big process on basic or a lot of undue preference filings.
  1. The impact on cable is likely to be gradual because the majority of consumers will not immediately switch. There is always inertia in any system. And the cable companies will use their marketing skill to refine theme packages and more attractive bundles to limit revenue erosion by getting customers to switch to other alternatives instead of pick and pay. However, the bottom line is there will be revenue erosion and the likely response by some cable companies will be to seek a reduction in regulatory obligations. Assume a reduction in Canada Media Fund contributions at a minimum and calls from stakeholders for better auditing of contributions.
  1. The impact on larger broadcasters will be varied at the channel level and negative at the corporate level. The big conventional channels like CTV, Shaw and City will not be impacted directly because they will retain 100% penetration on basic as must-carry services. But their more profitable specialty revenues will decline because pick and pay reduces penetration and that reduces advertising revenues and it will be hard to increase prices to cable companies to stay whole. If prices get too high then there is an increased likelihood consumers won’t pick the service (elasticity). The end result is that revenues for broadcasters will decline more than for cable and that will reduce spending on both Canadian original productions and first-run U.S. content. The first fight will be between cable and broadcasters as we saw 18 months ago as contracts get renegotiated to reflect higher costs for lower penetration. And while some contracts may have penetration based rate cards they were not designed for this eventuality. Expect more arbitration and/or Court challenges.
  1. Some channels that have no audience will go dark for sure. There are channels today that only exist today because they are in bundles. They have no audience based on BBM and since the Group Licensing framework was implemented these channels invest little or nothing in original content. However their loss will still shave a few million off the total profits of broadcasters. And that will reduce the ability to spend on original content to a limited degree. But it’s impossible to argue that channels that have no ratings and produce no original content should be forced on consumers.
  1. Some channels with low ratings that serve valuable but minority niches may also fail. If penetration goes too low, which it will for many services, then these cease to be viable. This will be the harder issue in terms of the CRTC responsibility to ensure diversity in the system and reflect a multiplicity of views. It goes to the CRTC’s obligation to serve the needs of all citizens. This will be the hardest issue because it requires a subjective assessment of what is critical programming to ensure continued diversity versus what is simply a bad channel. Ratings again provide some guidance but this is sure to become part of a debate on what goes on basic. Some diversity on TV may become collateral damage and the question will then be can minority needs be adequately met via the Internet.
  1. What happens if U.S. channels say no? U.S. specialty channels are more than likely to say “no way” to cable carriers in agreeing to pick and pay because they are set against any precedents that might spill over into the US markets. Some of their contracts may well either require placement in high penetration tiers or explicitly prohibit à la carte. Let’s assume they say no. The CRTC cannot afford to say Canadian channels that make a big contribution to the Canadian system must take a hit on revenues but U.S. specialty channels are protected. The hammer the CRTC has is to take these services off the authorized services list if they fail to comply with a new regime. That may well mean some channels leave the country. Expect a few Court challenges along the way. Consumers may be angry if such channels get dropped off the dial but many would support the move if they thought the alternative was no pick and pay.
  1. The fight over vertical integration safeguards will begin anew. If you are an independent broadcaster, and not affiliated with a big vertically integrated carrier, your biggest fear in a pick and pay world is not pick and pay but how the cable companies will fit you into the packages offered as an alternative to pick and pay. The worst scenario is to be only available on a stand-alone basis or in a package so unattractive you might as well only be “stand alone.” As noted above the best place to be is basic but that is unlikely for most. The issue will be in the continued theme packages that will be refined to be more attractive in terms of services and price. From a cable company perspective the best defence is to place a limited number of the top rated channels in a theme and offer them for a really attractive price. That means perhaps less channels in the package than today. But any independent provider not in the best theme will argue that they are being discriminated against if excluded (see battle between Out TV and TELUS) or will file an undue preference complaint if they perceive that cable companies are unjustly favoring their affiliated channels through better packaging.
  1. Pick and pay will require a number of changes to current regulations. There are a number of regulatory questions that are going to have to be addressed as a result of this change. Here are just three:
  • First, the CRTC will be under pressure to get rid of its genre exclusivity rules because if channels are increasingly on their own to either satisfy consumers or die, then they will argue that they will need to change the nature of their service to meet consumer demand if penetration drops precipitously. Sounds logical, but as you get more competition in a particular genre, and each of these channels has less penetration, then the budget to actually acquire original content in Canada, the U.S. or abroad shrinks.
  • Second, the CRTC has interpreted its mandate to ensure that there is a preponderance of Canadian services offered in packages taken by subscribers. What happens to the requirement for preponderance under pick and pay and to the extent it is lessened how do American and foreign services contribute in some manner?
  • Finally as broadcaster revenues decline they will argue that the rules that require them to contribute and exhibit original domestic content should apply to services like Netflix or existing channels like CNN should also contribute to the maintenance of the system. This goes to the CRTC’s creative objectives and it’s hard to say it’s unreasonable to at least debate under the circumstances.

It is important in terms of the overall health of the system that consumers feel that they are getting good value for their money. It also seems clear, if anecdotal, that many consumers want a pick and pay option. Therefore it is incumbent on the system to provide that.

Also as suggested above there are lots of issues that some consumers may see as plumbing but these remain important nonetheless. The CRTC wants to anchor its “Conversation” on three points: consumer, creators and citizen. That seems logical and a good point of departure for the “Conversation”. And the Government’s signal that pick and pay has to be part of the outcome makes it a lot easier to the focus discussion.


3 thoughts on “Pick and Pay TV: Let the Hunger Games begin

  1. I think you have laid out the issues. It’s been clear for some time that we have too many channels that are passing through subscription fees with very little benefit to viewers or content creators. One of the observations I took away from MIPCOM and MIPJunior is that producers in other countries are working very hard to diversify so that they don’t live or die according to the demands of broadcasters.

  2. Excellent analysis, Mike.

    it becomes very clear as one reads through it that PnP is potentially a sword through the Gordian knot of regulation – one that could leave us with a lot of pieces of cut rope and not too much tying us together.

    Of course it would be better to untangle the knot, and retie it in a way that makes sense, but that’s (a) not a popular political style and (b) a more than daunting job that will still leave plenty of stakeholders who cannot be brought into a consensus.

    I thought your analysis of the US channels’ reaction was very telling, and probably the key part of the discussion we need to have..

  3. Paul Armstrong says:

    I agree completely, Mike, particularly #4 and #5. And David K. has hit the nail on the head. I suspect that Canadian content producers will not want a single service to fail, fearing that would impact their ability to sell product, leaning heavily on objectives of the BA. This makes me pessimistic that the Cn will do what is needed. I hope I am wrong. Best wishes.

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