ISSUES IN THE CANADIAN CABLE TELEVISION INDUSTRY

January, 1985

THE BASIC ISSUE

The fundamental problem facing the industry is too low a rate of return, no matter how this is calculated, to allow the industry to finance its role to, “become the primary delivery vehicle for conventional and new programming services, as well as non-programming services.”

Despite this role as defined in “Towards A New National Broadcasting Policy” the industry’s rate of return on net fixed assets, for example, has declined steadily over the past few years. It is now far below a level that would allow it to replace its capital plant, and allow “cable operators to re-tool their plants to carry these new programming and non-programming services.”

On the one hand, the new policy states that, “Cable, drawing on satellites and over-the-air broadcasting, represents the most cost effective means of significantly expanding the viewing choice of most Canadians, while at the same time ensuring that the broadcasting system remains identifiably Canadian.” On the other hand, the cable industry faces:

• a rate regulation process that has caused charges for cable to drop consistently behind rates of inflation;

• an increasingly competitive marketplace with little protection from the regulator;

• being a mature industry with almost complete market saturation and yet being restrained from expanding sources of revenue through advertising and/or the provision of programming services it produces;

• restrictions on the carriage of services that others produce, e.g. distant Canadian signals, foreign satellite signals;

• being forced to be the government’s instrument for carrying out social or cultural policies to the detriment of the sale-ability of the service, e.g. heavy Canadian content regulations in Pay TV.

The statistics provided by the Canadian Cable Television Association which are updated annually clearly substantiate the declining financial health of the industry. While there are many subsidiary issues, the ones requiring immediate attention are those corresponding to the problems outlined above, i.e. those that will have the most immediate effect on reversing this trend.

BASIC CABLE RATES

The industry has been constrained for the last several years by the 6, 5 and 4% policy. This has worked particular hardships on an industry that was already suffering from a slow and arbitrary approach to granting rate increases over the last decade.

The December 12th CRTC announcement of deregulation for Class B and C systems as of September 1st, 1985 is a real step in the right direction. However, Class A systems would still be restricted to a maximum of 80% of the annual increase in the CPI without seeking further approval.

It is the Rogers’ position that 100% would have been justifiable, but the challenge we now face is less the percent increase than the inadequate base upon which such automatic increases are being granted. Large systems such as those in the Rogers group will have to make the case that a more rapid rate of increase is required, perhaps phased over several years, to get the base to the point where an 80% of CPI will provide a reasonable return for the cost of basic service.

COMPETITION

As well as obtaining more logical rates for the basic service, the cable industry’s next best bet for increased revenue is to sell new services. However, these services are being sold in an increasingly competitive environment.

A large portion of our revenue comes from Multi Unit Dwellings, (MUD’s), and it is difficult to be cost competitive with a Satellite Master Antenna TV system, (SMATV). An apartment owner can in many locations receive reasonably good off-air regular TV broadcast signals and supplement these with U.S. Pay TV or Superstation signals, providing an attractive product to the tenants.

It is the industry’s position that this competition is very unfair because the apartment owners have none of the requirements of the cable company to assist the broadcast industry through programme substitution, provide a community television channel service, or other such responsibilities. They are not subject to the 6% tax to support the Canadian Broadcast Program Development Fund. Nor are they constrained to carry priority Canadian broadcast signals.

The recent announcement by the government of a stay of prosecution for SMATV users was a blow to the industry which fortunately was modified on December 20th.

It will be important for the Rogers’ group to lobby the government for the passage of Bills C-19 and C-20, as within these pieces of legislation are redefinitions of who would be subject to regulation under the Broadcasting and Radio Acts.

In general, the cable industry’s position has been to avoid coming out against competition but rather requiring that that competition be fair. It appears the government is intending to define as a broadcasting undertaking any person within Canada who, “transmits or distributes by means of telecommunications any programming received by radio communication.” It specifically points out that there does not have to be any charge involved in the distribution. This should allow the government to regulate SMATV situations.

However, the follow-on implementation by the CRTC even if this bill is passed will require constant attention by the Rogers’ group.

It should be noted that there are many other forms of competition that will give the cable industry problems. The increasing use of VCR’s provides an alternative to Pay TV movie entertainment. Videotapes are not restricted as to their Canadian or moral content. There is little attempt at the moment to prevent copyright transgressions by illicit producers of videotapes.

There is not much that can be done about this except to alert the government that the Canadian competitive situation is changing and the cable industry is no longer like an electrical or telephone utility.

Another competitive threat on the horizon is Direct Broadcast by Satellite, (DBS), which strangely enough is being promoted by the Department of Communications and undoubtedly will be promoted by Telesat to use up redundant satellite capacity.

A further form of competition is Multichannel Multipoint Distribution Systems, (MMDS). These are omni-directional microwave systems used in the U.S. but not yet in Canada capable of carrying a number of premium TV signals. They could also form competition within our licensed areas.

Finally, there have been references by the Minister to increasing the involvement of the provinces in broadcasting and cable. The provinces wherever they have been heavily involved in cable, e.g. Manitoba, have consistently made life very difficult for the cable companies by favouring the provincially-owned telephone companies. In British Columbia the provincial government has readily granted licenses to competitive systems to cable, even to the extent of licensing overwiring of federally regulated cable systems. This is another area where the Rogers’ group will have to lobby if we are going to avoid double tiered regulation.

ADVERTISING ON CABLE

The CRTC has consistently come to the defence of the over-the-air broadcast industry even though their return on capital has for years been substantially greater than cable. Any hint of advertising on cable originated channels has been promptly turned down.

If cable companies are to upgrade their plants for the late eighties and nineties advertising could be a most important source of revenue.

Our experience in the U.S. indicates that there are many local advertisers who would be most willing to advertise on cable-only channels. The contention by the broadcasters that this would drain advertising revenue from them has never really been substantiated. Most of these local advertisers could not afford the CBC or CTV rates. The cable industry’s argument is that this would be good for the local producers of television commercials and programming, and would be good for the promotion of local businesses, i.e. good for the economy from any aspect.

To date the CRTC has even denied specialized real estate channels on the grounds that this is a form of advertising.

The situation has become so strained that when the CRTC allowed the cable industry to have a barker channel to promote its own programmes, the CAB (Canadian Association of Broadcasters) lobbied to get equal time on our own channel to promote their programming.

A corollory of the above is that the cable industry might get in to the direct production of programming beyond the community channel. The industry has tended to take the position that we would not mind if broadcasters themselves provided some of the programming and directly linked their facilities to the cable network, rather than providing costly over-the-air broadcast equipment for a minimal additional audience.

Again, lobbying for advertising on cable will become an important factor for the next period.

ENHANCED PROGRAMMING SERVICES

There are artificial restrictions now placed on the cable companies as to the ratio of foreign to Canadian signals. At a CRTC hearing on November 27/30 in Hull a proposal to allow distant Canadian signals was heard. Again, the broadcasters objected that this would interfere with local broadcaster viability. In fact, as the Chairman himself said, this was not demonstrated by the broadcasters. The cable industry noted that being able to see an Ontario station in B.C. would in fact be good for national unity as well as providing additional real choice to viewers. In our view such additional signals simply make our tiers more attractive and hence able to command either higher prices or lower the rate of churn. Such new programming signals will require capacity upgrades of the systems. However, such upgrades will be required in any case to handle stereo sound, digital TV or the still elusive High Density TV, (HDTV).

To finance these expansions continual lobbying for additional services will be required.

PROGRAMMING TO MEET MARKET DEMAND

One of the biggest impacts on our rate of return has been the churn in Pay TV. The basis of this problem is the heavy Canadian content required by Superchannel First Choice.

The industry’s contention has been that first the government should allow a new service such as this to be a commercial success, and then if necessary take something ‘off the top’ to be put back into support of Canadian production. What has happened is that we have been charged with the 6% tax referenced earlier, but are still paying the price of a poor product relative to HBO or other American Pay TV programming.

The Rogers’ position has generally been that the government should concentrate on quality of Canadian programming rather than just regulated quantity. The latter often leads to poor quality Canadian productions rushed to market to satisfy artificial ratios. This irritates the public and makes our product less saleable.

Hearings are coming up in January at the CRTC on the important Canadian content (Cancon) issue.

SUMMARY

In general, over the past several years the government has expected a great deal of the industry in terms of meeting its objectives of national unity, promotion of Canadian film production, community access and other matters, but has failed to give the industry enough marketing flexibility to allow it to afford to do these things. The squeeze on the bottom line has been the result. This has tended to force Canadian cable companies to look to the United States or elsewhere for a less tightly regulated cable environment. These investments which have not always been successful have themselves compounded the financial problems of the Canadian industry.

The basis of our lobbying should be to restore a reasonable balance between market freedom and meeting reasonable obligations in return for the cable franchise we have been granted. Although conditions under the new Chairman of the CRTC have improved, the system is still far out of balance.