2015-03-21

Pick-and-Pay With Cheaper Basic TV Is Coming... Next Year

Last Thursday the CRTC released its much anticipated ruling on the bundling of TV channels and minimum subscription pricing. During the "Let's Talk TV" hearings last fall they heard from all of the stakeholders: ordinary citizens, content producers (TV channels, production studios), broadcast distributors (cable and satellite companies), Internet companies, streaming video companies, the cultural community, and special-interest groups.

Most of those who appeared before the commission were in favour of changes to the status quo, but as you can imagine there were a lot of conflicting opinions on what those changes should be. Read on to see how Thursday's announcement will impact your cable or satellite bill over the next few years.

Thursday's decision was the third prong in a set of changes intended to improve competition in the Canadian TV landscape and improve choice for consumers. Here's a summary of what's changed with this ruling:

  • All distributors will be required to offer an entry level subscription plan for no more than $25. This must be in place by March 2016.
  • By March 2016, every channel not included in the entry-level plan must be offered individually or through small, "reasonably priced" bundles or theme packs.
  • By December 2016 every channel not included in the entry-level plan must be offered individually and through small, "reasonably priced" bundles or theme packs.
  • Existing subscription plans can still be offered - you won't be forced to change plans.

A year from now, you and I will be able to subscribe to a $25/month (or less) plan which includes our local channels, then add just TSN and Sportsnet to that plan if that's all we want. Will I do it? Maybe... it will depend on how much TSN and Sportsnet are charging and how much the set-top box costs.


Why Did The CRTC Have To Step In?

Over the past decade, control over the Canadian television landscape has become concentrated in the hands of a small number of players. As of 2015, Bell, Rogers, and Shaw/Corus own almost 80% of the English language "category A" television channels. Those are the channels that every television provider in Canada is required to make available to subscribers - it's like being guaranteed shelf space at the supermarket for your product. French language services aren't quite as concentrated, but the number is still high: approximately two thirds of French services are owned by Quebecor, Bell, and Shaw/Corus. Add to that the fact that those same companies act as the distributors of television signals (the cable/satellite/IPTV service you use) and also control the Internet and wireless infrastructure for most Canadian households, and you have control of almost the entire supply chain in the hands of a few very large companies.

How our politicians and regulators got us into this vertically integrated mess is a story for another day, but my opinion is that our laws prohibiting foreign ownership of telecommunication assets are at the root of the problem. When a media company like Astral decides to sell off its assets for over 3 billion dollars, there are very few Canadian owned and controlled companies that can afford to make a bid.

As the Commission's policy decision made clear, the CRTC recognizes that large vertically integrated companies have business incentives to favour their own services and make life difficult for competitors. In a normal market segment we would say that's what free enterprise is all about, but television and telecommunication service in Canada is not a normal market segment. It is regulated and requires a license, so barriers to entry are quite high, and many aspects of it are shielded from competition. We might have Verizon's FiOS or DirectTV in Canada if they were allowed to set up shop here, but they're not.

The new rules acknowledge the power of the large conglomerates and beef up the provisions in the existing wholesale code of conduct that covers business arrangements between channel providers and distributors. For someone like myself who had little knowledge of how such things work, the presentations at last fall's hearing were eye-opening. All of the small TV distributors told stories of punitive pricing schemes that require them to guarantee subscription levels for certain channels, or "make whole" provisions that compensate the channel for lost revenue if subscription levels drop off. Forced bundling at the wholesale level was also hindering competition since the owner of channel X would require that channels Y and Z be carried in certain packages as a condition of getting access to the more desirable channel X. Similarly, independent channel providers complained that it was often difficult to get carriage for their channels with the large distributors, and their channels were often relegated to the highest cost package.

It was tactics like this which held up IPTV service from companies like Zazeen and VMedia for so long. Imagine being told by the regulator that you must offer channel X to all of your subscribers as a condition of your license, but then getting the run-around when negotiating with the owner of channel X: not having calls returned in a timely fashion or refusals to provide pricing data! That only happens when channel X is owned by a company that also owns a television distribution company and does not want your business to cut into their bottom line or force them to compete with you on price.


What's In The $25 Package?

There's a lot of misinformation out there about the new entry-level service plan that will be required from all TV providers by March 2016, so here's the information in the CRTC's own words:

As you can see, the $25 price point is a maximum, so it's conceivable that some distributors will charge less. The decision states that the cap does not apply to equipment charges (set-top box rentals), but hopefully it includes all other manner of charges outside of HST. So-called "below the line" fees like Bell's mysterious $3 "digital service fee" would have to be included in the $25 price point, otherwise all sorts of new fees would be invented to jack the price back up to the same $40+/month entry level pricing we have today.

My guess is that most distributors will price their entry level package at the full $25 rate, then try to differentiate their service by throwing in a few non-mandated channels or perhaps subsidizing the cost of the set-top box rental. The big boys may throw in one or two of the stations they own much like they do in their $40+ packages now (Bell includes TSN, Rogers includes Sportsnet), but I expect those bonus channels to be less popular ones that don't cost them much to provide and would be harder to sell on their own.

Also of interest is that the US network channels are not required to be in the base package, but distributors are free to include them if they wish. Most will likely include them since they cost relatively little to provide and excluding them could be a competitive disadvantage.

I see local channels as big winners in the new basic package, because distributors are required to include the ones from your region and, more importantly, prohibited from including all of the other local channels from across the country. If you're in a part of the country that has fewer than 10 local over-the-air channels, distributors can and almost certainly will include local stations from elsewhere in the region up to a maximum of 10. That means the base package should include one station from each of the Canadian networks regardless of where you live. You'll get roughly what you'd get with an antenna if you were near a major city, plus a few mandated specialty channels like CPAC and APN.

One area of concern is that the decision did not explicitly mention high-definition as a requirement. Hopefully the CRTC will require that local channels which transmit HD signals be carried in HD, otherwise the distributors may offer only standard-definition as a way to entice you off the $25 plan and on to a more expensive one.

Some people have commented that $25/month is still too expensive. The CRTC did some analysis and arrived at that number after looking at entry-level pricing many years ago before TV prices started to skyrocket. Adjusted for inflation they felt that $25 was comparable to old entry-level plans, which they believe is a good indication that it's economically viable for cable/satellite companies to offer. There's a real danger that if they set the price too low, the cost of maintaining the required infrastructure would not be recuperated and some distributors would stop investing in their infrastructure. We'd all love to have $5/month service, but those multi-million dollar satellites don't build and launch themselves into space. SaskTel is on record saying that their cost to provide the new basic service will be more than $25/month, while Rogers seems to be happy with the price and composition of the new basic plan, so $25 can't be far off the mark.

What Will Happen To Specialty Channels?

A lot of discussion at the hearings and in the press concerned the fate of specialty channels. Earlier "Talk TV" decisions lowered the Canadian content requirements for specialty channels but also removed some of the protection they received from competition. In concert with a full pick-and-pay regime, the upshot is that specialty channels will be required to stand on their own merit. Popular ones like TSN and HGTV will continue to thrive and may be able to command a premium price; less popular ones like BookTV will see subscription numbers dwindle and may be forced to close up shop. It's always sad to see businesses close and jobs get lost, but the media industry shouldn't be immune from market forces. If the net result is that people are saving $10/month on their TV subscription, that's $10 of after-tax income that they'll either invest or spend elsewhere, likely creating some new jobs in the process.

In the past, the category designation applied for and given to a specialty channel made a huge impact on their business model. There were four categories:
  • 9(1)(h) - the most coveted category. Channels with this designation must be carried by all distributors and must be included in all subscriptions. In other words, every subscriber gets a 9(1)(h) channel whether they want it or not, so it was a guaranteed revenue stream. Luckily for consumers, the CRTC does not hand these out willy-nilly - the designation is reserved for local over-the-air networks and select specialty channels that serve the public interest such as parliamentary channels and the Aboriginal Peoples Network.
  • Category A - channels that must be carried by all distributors and which receive genre protection. "Must-carry" means that it has to be made available, but how it's priced and bundled is up to the distributor. Genre protection existed in order to prevent there from being too many of the same type of channel and spreading the content too thinly. Expect to see some changes from channels in this category since they'll now have to fight harder for their existence.
  • Category B - channels that are licensed for operation in Canada but do not have genre protection and are not required to be carried by distributors. The new rules eliminate the distinction between A and B and make all specialty channels like the old B.
  • Category C - similar to B but with some special twists for news and sports channels.
The new rules for specialty channels are effective immediately, so aside from some of the conditions left in place for news and sports channels, expect to see even fewer actual history-related shows on the History Channel. Maybe they'll bring back reruns of CSI: NY to supplement their reruns of Pawn Stars.

The good news is that power will shift to consumers, so if a channel does not carry enough compelling programming, people will vote with their wallets and drop it from their subscription. In the short term we might see the big media companies shift popular shows from one channel to another to shore up some of their less desirable channels, but I honestly don't think there's enough compelling content to support the number of specialty channels we have now. I expect many to fall by the wayside and the content to consolidate across fewer channels. With genre protection gone and pick-and-pay available there's an incentive to create highly desirable channels that attract a large subscriber base. It's better to have one channel with 8 million subscribers than three with overlapping content and 2 million subscribers each.

Why Do We Have To Wait So Long?

While consumers would have loved to have this available today, it takes time for billing and provisioning systems to be adjusted, plus there are existing carriage contracts in place that could put smaller distributors in jeopardy if they had to immediately implement pick-and-pay¹.

How quickly these changes become available will depend on who blinks first. The CRTC gave the industry one year to prepare, but it's likely that many will have some or all of the provisions in place well before the deadline. Rogers ran a pick-and-pay pilot project in London, Ontario a few years ago, and Bell offers something roughly resembling pick-and-pay in Quebec (to compete with Videotron's packaging), so for those two giants it's not like they have to rewrite entire systems from scratch. Watch for one of them to offer something in time for the fall TV season and for the other to follow suit in short order.

Given all of the viewpoints that the CRTC had to consider, it's hard to imagine that this decision could have worked out much better for consumers. After reading through the entire report as well as the analysis of several other writers, the only real concern I have going forward is that the large companies could try to compensate for losses in monthly TV revenue by jacking up wireless and Internet prices. Hopefully the upcoming decisions on wholesale wireless and Internet access will maintain or increase competition by smaller companies in those areas. Competition from the likes of TekSavvy & Start Communications in Internet and Wind Mobile in wireless has kept pricing from the big players in check - at least a little bit.

¹Update 2015-03-23: A VMedia representative tells me they'd love to be able to offer these options today, but are bound by existing wholesale contracts that require bundling or make pick-and-pay uneconomical. The CRTC ruling doesn't force companies to do anything prior to March 2016, so smaller distributors might get stuck waiting until contracts expire or for March 2016 to roll around before they can afford to offer skinny basic with full pick-and-pay.


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