2013-10-22

Canadian Government to Push TV Providers Toward Pick & Pay Pricing

One of the promises in the Canadian government's speech from the throne last Wednesday involved unbundling TV channels to give consumers more say in which channels they pay for. The actual wording was this:
"Our Government believes Canadian families should be able to choose the combination of television channels they want. It will require channels to be unbundled, while protecting Canadian jobs."
The text is understandably short on specifics, but most people take this to mean that the government, through the CRTC, will push TV distributors and channel owners to move to a "pick and pay" system where customers can choose individual channels rather than have bundles where it's impossible to avoid paying for channels they don't want. For the TV-viewing public this is a good move, but don't get too excited... it's going to take some time to get there, and it's extremely unlikely that you'll be able to subscribe to the 10-15 channels you watch and nothing else.

Read on for my thoughts on what has to happen and where I think we'll eventually end up.



A lot has been written about this subject already, with most of the articles focusing on how far the pick-and-pay scheme might go, whether consumers will actually save money, or what it will mean for the content providers. Two of my favourite bloggers covered it last week:
Peter Nowak: Pick-and-pay TV would reshape the medium
Michael Geist: Government to Mandate "Pick-and-Pay" Pricing Option for Television Services 
If we assume that the goal of the government (and consumers) is a system where there is complete freedom to select individual channels, then I believe the best we consumers can hope for is a pricing scheme similar to a utility bill: a relatively small fixed monthly charge to pay for your hook up (optionally including the rental of one or more set-top boxes), plus monthly charges for individual channels ranging from a few cents to tens of dollars.

Standing in the way of that right now is a system that the CRTC has instituted over several decades based on their interpretation of the goals of the Broadcasting Act. That system includes the promotion of Canadian content, and requires channels to gain CRTC approval before they may be distributed to the public by broadcasters. Each approved channel is also slotted into a category that determines how it will be distributed.


TV channels in Canada today fall into one of these categories:


Mandatory distribution: this is as good as it gets if you are a channel owner. This designation means that every TV distributor (ex. Bell Fibe, Bell Satellite, Rogers, Shaw, Videotron, Telus Optik TV, etc.) must carry your channel and must include it as part of their basic tier - every customer receives the channel. Luckily, the bar is set very high for this category so there are relatively few of these. Any TV station that transmits an over-the-air signal falls into this category within the geographic reach of its over-the-air signal. In other words, all TV distributors in the Toronto region must include all of the over-the-air stations from the Toronto area as part of their basic package. The flip side is that the channel does not get compensated by the distributor, but then again the channel was granted a precious license to use the public airwaves to transmit its signal, so it's a fair tradeoff. There was a lot of debate in recent years because the over-the-air TV stations wanted to be compensated by the distributors. They called it "Value For Signal", the CRTC called it "Fee for carriage", and the Supreme Court shot it down in late 2012. In my opinion, the only valid point the TV stations had was the distribution of their signal outside of their over-the-air region, ex. getting CTV Toronto in Halifax or Vancouver.


For channels that don't transmit over-the-air, a select few are granted mandatory distribution if they can convince the CRTC that they serve a "real and exceptional need". You can see the current list of mandatory specialty channels on the CRTC web site at http://www.crtc.gc.ca/eng/com100/2013/r130808.htm.


Mandatory carriage: this is the next best thing to mandatory distribution. A channel with this designation must be carried by all TV distributors who are reasonably capable of carrying the channel. The distributor can charge whatever they want with the channel (as far as the CRTC is concerned anyway), as long as customers have it as an available option. Back in the days of analog cable, mandatory carriage meant preferred placement on the dial. Cable companies used to control a subscriber's channel package by filtering out the frequencies for channels that were not paid for, so a basic package would include channels 2-30 for example and the "plus" or "VIP" package might go up to channel 50. In the digital channel world that's no longer an issue since the set top box is told which to show or block on a channel-by-channel basis.


These must-carry stations are called "Category A" channels and you can see the current list here: http://en.wikipedia.org/wiki/Category_A_services. Conditions of a category "A" license are that the channel must have a specific programming format (ex. history-related shows for The History Channel), and it must meet a higher quota of Canadian-content programming than category B/C channels.


Category B & C: the vast majority of specialty channels fall into category B, with sports and news channels in category C.



The presence of channels with the "mandatory distribution" designation currently establishes a bare-minimum channel package for any TV distributor; don't expect that to change since the channels with that designation are either already broadcast freely over-the-air in the local area, or were deemed to be important enough to society that all TV subscribers should be forced to pay for them. If you look at the maximum wholesale rate for the specialty channels in this category, they collectively add about $1 per subscriber per month to the cost of any TV distributor. Add that to the distributor's fixed infrastructure costs such as getting the channel's signal to their facility and getting the service to your door, and you're unlikely to see a basic package with the mandatory channels come out to much less than $12-15/month to consumers.



Channel Bundling

Further complicating things are the business arrangements that content owners (the channels) make with distributors. If we lived in a world where every TV channel had a unique owner, this wouldn't be a problem, but there is so much vertical integration in the Canadian media marketplace that there are really only a handful of companies controlling all of the channels available in Canada. Take a look at the list of TV channels owned by each of the big media companies in Canada:

Bell: http://en.wikipedia.org/wiki/List_of_assets_owned_by_Bell_Media

Rogers: http://en.wikipedia.org/wiki/Rogers_Media
Shaw: http://en.wikipedia.org/wiki/List_of_assets_owned_by_Shaw_Communications
Quebecor: http://www.quebecor.com/en/content/communications-giant

Think of a channel that you:

  1. never/rarely watch but have to pay for, or
  2. would like to subscribe to individually but can't due to bundling.
Chances are, such a channel is on the list of media assets for one of the above companies. Our media ownership in Canada is much more consolidated or "vertically integrated" than the US market, and Americans are starting to get very concerned about their levels of consolidation (ex. FCC Turns Blind Eye to Rampant Media Consolidation). That should make Canadian consumers very worried about things north of the border since it's almost always consumers that come out on the losing end of oligopolies, financially speaking.

When you're a media company with a large number of channels, including some popular channels that most subscribers want, you can force your unpopular channels upon subscribers by requiring distributors to keep unpopular channel X in a bundle with popular channel Y or Z. For popular channels, you have leverage to set minimum subscriber amounts for channel Z that all but force a distributor to move that channel into their most common pricing tiers.


Making this even more frustrating for consumers is the tendency of the media companies to move popular shows from one of their channels to another in order to help drive up the subscription numbers of an unpopular channel. Global TV carries the American show Big Brother on its over-the-air network, but rather than air Big Brother Canada on Global where you would think fans of the American Big Brother would expect to find it, parent company Shaw chose to put the show on its "Slice" specialty channel. Similarly, there was outrage in the curling community back in 2005-2006 when the CBC secured the broadcast rights to major curling events, then aired them only on their "CBC Country Canada" speciality channel that did not broadcast over the air and was not available in analog cable packages back then, meaning cable customers needed an expensive digital cable box to receive the channel.

I don't see how the CRTC can stop a media company from moving shows from one channel they own to another, but for pick-and-pay to work, they'll have to do something about channel bundling, or better yet, find some way to break up the media companies so that the industry isn't controlled by so few.


The big companies can't afford to get too wacky with their bundling requirements and contract terms when dealing with each other, because they need each other's TV customers and channels. The companies that don't own content (ex. Telus and smaller/newer outfits like VMedia and Zazeen) are in a more precarious position since they must negotiate with all of the big companies and have very little leverage when trying to get a fair deal.



Existing contracts

Any TV distributor currently operating in Canada has a number of existing contracts that limit their flexibility in offering channel packages. For pick-and-pay to work, something would have to be done about existing contracts that have tied selling or onerous minimum subscriber ratios. That won't be easy and might require more than just CRTC policy changes. We've seen in the past how media companies go running to the courts if they don't like a CRTC ruling, so don't expect anything different if the CRTC gets heavy-handed about existing carriage contracts. I'm sure the distributors would like to see such contracts voided, but the content companies would cry that the government is interfering with a free market.

When the same giant company is both a content provider and a distributor would they complain? If they think it will affect their bottom line you bet they will, and you need only look at the "Fee for Carriage" / "Value for Signal" propaganda that came out of Bell / Rogers / Shaw at the time.


Summary

I would love to see the government step in and break the media / telecom conglomerates into separate entities - something called "functional separation", but I'm afraid that's extremely unlikely to happen. Given the current ownership landscape we're stuck with, here's what I think needs to be done:
  1. Prohibit carriage conditions that involve other channels or minimum subscriber counts. The cost of getting the channel's signal to a distributor should, by default, be the distributor's responsibility. This would ensure that a channel would not have disproportionate costs for delivering their signal to a distributor where only a small number of customers subscribe to the channel. The parties would be free to negotiate cost sharing arrangements based on subscriber counts since carriage benefits both parties, but the channel should not be able to withhold its signal based on the excuse of transit costs to the distributor.
  2. Eliminate the Category A designation and the mandatory carriage it brings with it. Some channels have changed their programming so much since receiving their Category A license that it's made the concept of protected programming formats a joke. The History Channel for example fills their schedule with such "historical programming" as Swamp People, Ice Road Truckers, and Outlaw Bikers. Removing the "must carry" designation will allow new distributors to begin offering service more quickly. They currently must wait until they've negotiated contracts with the companies in charge of all of the Category A channels, and that can take quite a while for reasons outlined earlier.
  3. Set a timetable (ex. 18-24 months) by which existing carriage contracts must be renegotiated under the new rules. Apply the same timetable to phasing out the mandatory distribution rules.
  4. Require that content companies have a standard rate structure that applies to all TV distributors. This should be disclosed (in confidence) to the CRTC. That will prevent content owners from treating their own distribution companies more favourably than competitive distributors. Content providers should be free to set their own prices, but they should not be able to force distributors who compete with their parent company's distribution arm to pay more. The broadcast industry in Canada is not a free market - it is not analogous to Westin selling a truck full of baked goods to Sobey's. Getting a channel approved for broadcast distribution in Canada is not trivial and puts you in a relatively exclusive club. You should not be able to abuse that privilege for the sake of harming your competitors.
  5. Establish an arbitration panel for handling carriage fee disputes, and establish significant fines and penalties for any content companies found to be unnecessarily withholding or delaying the delivery of channels to distributors. This will ensure that smaller distributors have access to all of the same channels as the big companies, and should increase competition and innovation.
  6. Allow unpopular channels to die off. Very few channels rely solely on monthly subscriber fees for revenue; advertising makes up some (or most) of their income, but rather than attract more viewers through quality programming, too many channels have fallen into the trap of relying on monthly per-viewer subscription fees from distributors thanks to bundling. That puts them at risk in a pick-and-pay system if their programming is sub-par, but so what? This is not the consumer's problem, and pick-and-pay will return the power to the consumer to decide what is or isn't worthy of their hard earned dollars. If a channel does not carry enough programming to justify its monthly subscription fee, people will not pay for it and it will eventually fold. In the long run, as Peter Nowak says, "Exposing channels to actual market forces will actually make them competitive and likely force a change in how they’re sold."  That can only be a good news for consumers.
We've recently seen the CRTC address a lack of competition in the cell phone industry by limiting contract terms to 2 years. The new policy did not apply to existing customer contracts, but even still it was a step in the right direction and had more consumer-oriented benefits than many pundits expected. Hopefully the government's changes to the TV industry will also exceed expectations.
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