This year Santa is leaving elephants under the tree for the broadcast regulator to play with

I was having lunch with a broadcaster the other day who is worried that the CRTC policy review around the future of broadcasting may put independent broadcasters in dire straits if it leads to wide-scale repackaging of cable and satellite (BDU) packages, particularly if that results in preferences to vertically integrated carriers and the decline of independent services that offer diverse and innovative products.  Interestingly, he is not worried about pick and pay packages per se as long as these become simply one more option amongst the current existing offers.

In fact, he strongly agrees that from a consumer perspective it is a no-brainer that BDUs have to make this element of choice available to consumers to retain subscribers. And as long as the deals with BDUs are fair he believes that channels that have built a distinct brand around a specific type of good content will succeed.

So I wonder what would happen if all BDUs, simply for pure market-driven reasons, have to have pick and play options in place anyway by the September 2014 hearings?  Would the CRTC’s job be done? Would the Conservative Party be happy with that result and be in a position to claim, going into the 2015 election, that the consumer had won as a result of its policies?

Or is pick and pay a small part of a bigger discussion? If so, there is lots more to discuss, if the interests of consumers, creators and citizens are to be reflected through the broadcasting system in a manner that serves the objectives of the Broadcasting Act. Pick and pay may be a no brainer, but messy in many respects, even though it already has widespread support in principle. More choice, including à la carte will make many consumers happier as long as they don’t lose their favorite channels or have to pay too much for same. But even if all Canadian broadcasters agreed to offer services à la carte and fair rates were easily negotiated, if the consumer price/ value proposition was right, and the U.S. cable channels ever agreed to pick and pay, and the CRTC was not beset by affiliation pricing disputes (irony intended), most of the fundamental challenges facing the industry, creators and citizens would remain. Remember that the CRTC has been very clear that it needs to address not only consumer issues, but the interests of creators and citizens. And that is where the elephants really start to gather knee deep in the big muddy river.

Because while pick and pay sounds like an easy fix to consumer concerns, and one that matters big time to consumers, it does not really guarantee that the shift of consumers to the Internet will abate or that overall pricing for TV services will decline. There are bigger issues at play that may still negatively impact diversity of content on TV and the supply of high quality original content whether from Canada or abroad.

So Elephant #1 is actually a question:  how, if it is even possible, can BDUs create attractive packages at any price if they are competing with free? Arguably pick and pay may be a solution in search of a problem  for many cord-nevers and a growing number of BDU subscribers increasingly attracted to content for “free.”

It is naive to assume that unauthorized use is no longer a problem because it’s easy to buy content on-demand. Both those options can co-exist quite easily.

I was listening to some younger people at the Film Flash Conference the CMPA and Telefilm Canada recently co-hosted in Toronto. They made the following argument: “Today with a Netflix account and simply accessing other content for “free” online, I can get all the content I need, so why would I pay for it even if cable had more à la carte or Netflix like alternatives?”  By the way, these comments came not from general consumers but from kids just starting out in the industry.  And it’s a common refrain from consumers of all ages.  Let’s be honest– a lot of “free” content has been “liberated” for unauthorized use and the practice is generally accepted as “ethically” ok by a growing group of consumers. (Similarities to music industry intended).

So in designing a “solution”, it’s important therefore to question if this is the “consumer” segment government particularly wants to respond to. Face it, most of these consumers are not even into channels. They are into shows, most of which they can get legitimately on-demand today; and many do. And many don’t.

That does not mean one shouldn’t improve the offers in response.  BDUs need to improve the on-demand offer, with options like complete seasons for catch-up, although that won’t attract the majority of consumers that already get those shows for free. It may be that pick and pay can, at best, help retain existing subscribers. Simply put, a broadcast policy that does not at least recognize unauthorized use (whether or not actually addressing it) won’t generate long-term solutions.

Elephant #2 is Netflix and other online VOD services, both domestic and foreign.  As long as broadband VOD can compete within the broadcast system for customers without any obligation to contribute to the Canadian system, then Canadian BDUs and broadcasters will argue they should be unregulated too.

But the net result of such deregulation would be a lot less money in the system for Canadian programming, particularly original and niche content. And that would be a big problem because, while a lot of broadband services might buy Canadian libraries, they will likely not invest in original content production. That would be a perverse outcome after all the vertical integration and consolidation allowed by the regulator to stabilize the system. But as long as online broadcasters grow and compete without obligations, BDU/broadcaster calls for deregulation will be the constant refrain.

Luckily the CRTC could address the broadband elephants under its clear and existing jurisdiction over broadband broadcasting. Or maybe the fact the CRTC could regulate Netflix et al is yet another elephant in the room.

Elephant #3 is the impact of consumers accessing broadcast content from unauthorized foreign services.  An unknown number of consumers are subscribing to services, like Netflix U.S., either through parties that can set up   “fake” U.S. IP addresses or by simply learning “how to” by ”googling” for instructions.  In a recent article online, I read that this is all supposedly “legal.” That sounds like bull to me, because legitimate foreign VOD services which don’t own the Canadian rights for their content, cannot (and would not knowingly) sell their services in Canada.  Nevertheless, to the extent Canadians are stealing Netflix U.S. and other similar foreign services, they are eroding the value of the program rights which Canadian broadcasters acquire, and that creates a loss of revenues and a growing problem for Canadian broadcasters that use the profits from those programs  to fund the acquisition and development of original Canadian shows.

Next let’s go to Elephant#4 and simultaneous substitution. Simultaneous substitution annoys consumers who claim to like U.S. ads, particularly at Super Bowl time. But with all its warts substitution generates a lot of legitimate revenue for original content. So before we trash simultaneous substitution let’s not forget why it came into force. The reason substitution came about in the first place is that the CRTC permitted cable to import U.S. services even though Canadian broadcasters had already bought the Canadian rights for the most popular shows on those services. Substitution is simply meant to protect the value of those rights, while increasing consumer choice.  And while Canadians now may take access to the U.S. services like ABC, CBS, NBC, Fox and PBS for granted, this type of regime is quite unprecedented. In the U.S., programs on distant signals are blacked out in local markets, if the local broadcaster owns the applicable program rights. So arguably if you killed simultaneous substitution there would be a legitimate argument to blackout U.S channels, in whole or in part. The obvious consumer anger could be very negative.

Now simultaneous substitution does create real problems for growing audiences to Canadian shows since they often get shifted around due to scheduling changes in the U.S., and that issue needs to be addressed. But you could do that and still protect rights perhaps through non-simultaneous substitution. But further undermining legitimate Canadian rights because some consumers want U.S. ads is not the way to balance the interests of all stakeholders in the system.

But even if we fix the substitution issue the cross-border Elephant #6 may still raise consumer costs. Something bad for consumers may be about to happen under the muddled umbrella of WIPO. Broadcasters around the world, including those in the U.S., may be close to getting new broadcast signal rights. One implication of that could be that Canadian BDUs would be required to compensate cross-border stations for carrying their signals (as an addition to their existing obligation to compensate program rights holders). This is a very real possibility. Treaty negotiations are occurring right now after a long hiatus. And so consumers may suddenly be faced with bills of a few dollars more to get the U.S. channels they grew up with. And more money paid to get such “basic” services could lead to reduced subscriptions to discretionary specialty services and thus less money for original Canadian content.

And it gets even more complicated because if BDUs have to pay the big U.S. networks for their channels, the logical next step is that fee for carriage for Canadian local signals will be implemented too. That, in turn, will help local services in continuing to offer quality programming in the face of erosion of rights but the overall cost increases to consumers could again lead many consumers to drop many specialty channels (owned by the same broadcasters) to keep costs in line.

And that takes us to Elephant #7 and what the cost of sports is doing to affordability. The big mantra around pick and pay has been to provide consumers more choice at a better price. Both choice and price are required to make a pick and pay value proposition that delivers value to consumers. And all that is going to be heavily influenced by the price of sports programming. The Rogers/NHL deal means the cost of sports programming is going to increase a lot. Rogers is going to argue that other BDUs should pay it at least as much, and likely more than TSN, and if SportsNet and TSN remain primarily on basic, then the cost of basic is going to ramp up significantly. The problem here is that BDU rates are not inelastic. The more the price of basic goes up, the less consumers will likely spend on specialty channels and the less money these channels have to expend on original Canadian and international content. But even this is not cut and dried because if sports is taken off basic does that make BDU subscription less attractive and make sports packages so expensive, the 60% or more group of consumers that buy sports have to drop even more channels?

I am going to ignore Elephant #8, what does the CBC look like without hockey and Elephant #9 how will the CRTC handle just the affiliation arbitrations that are sure to come just around the price of sports services? And Elephant #10,”what the hell is basic service in this new world”? All those are worth a blog or two on their own.

But all of this suggests a couple of things. Any review of broadcast policy cannot add much value unless the elephants are recognized, debated and addressed. That includes the question of whether it is time for the CRTC to exercise its jurisdiction in a different way over broadcast services that are currently exempt. And to deal with the issues around unauthorized use and unauthorized services in Canada. Elephants can be quite happy if left alone to wallow in the big muddy but those of us swimming in the same river need to pay attention to them.

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