LAST YEAR AT THIS time, Kevin Crull was into week three of his transition from long-time telecom executive to the leader of the largest Canadian broadcasting company.
Now president of Bell Media, the company which owns the CTV and CTV2 conventional TV networks, 29 specialty channels including market leader TSN, 33 radio stations and the Sympatico.ca portal, Crull came over from Bell Canada’s telco side, having run Bell Residential Services for five years. For a decade prior to that he was a senior executive with AT&T and US West.
One of his final projects at Bell Canada was writing the business case for the acquisition of 100% of what had been CTVglobemedia, a case which valued the broadcaster at about $3.2 billion. Announced in September of 2010, the CRTC gave its blessing to the deal in April – after a February hearing. However, Bell’s move (coming right after Shaw Communications’ 2009 purchase of Canwest Global) also triggered a new examination of the vertical integration of media and distribution companies in Canada for which a hearing was held in June.
That new policy, released in September, stirred swift and harsh criticism by Crull, who accused the CRTC of changing the rules of the game after it had already set the players and playing field parameters. The executive has pulled back from that strong line buoyed, he says, by the recent small, but significant modification of that policy and the fact that change is afoot at the very top of the Commission.
Despite all that has been altered in terms of definitions of what can and can’t be exclusive on various new media platforms in Canada and the Commission-mandated changes to what carriers and broadcasters can and can’t do during carriage negotiations (like pull TV channels from customers), Crull remains committed to the concept of carriers married to content divisions. He says he’d buy CTVglobemedia all over again and is sympathetic towards the CRTC and the media world to which it must attempt to apply Canadian policy.
What follows is an edited transcript of a recent conversation between Crull (right) and Cartt.ca editor and publisher Greg O’Brien.
Greg O’Brien: Well, I figured I’d jump right into it right away with your appearance at the Broadcast Executive Society, where you said you believe the CRTC is anti-big company. So as a big company, what do you do about that?
Kevin Crull: I have some degree of sympathy for the challenges that the Commission faces in trying to balance both their obligation to uphold the Broadcasting Act and balance the interests of various players in the industry. So many of our debates are zero-sum debates, where you take from one to give to another, and it’s not really advancing the cause of society. I know that any time you have that zero-sum debate that it’s tough and it’s contentious.
In my mind, there are a couple of key principles that a regulator in a well-functioning economy has to observe. First and foremost is consistency, not flip-flopping on decisions. I think transparency is vital so that they have an underlying set of principles that they use to apply to decisions, and thirdly, symmetry across various players in the industry, or various even sectors. In my mind, this Commission has fallen down on all three of those.
…You know, I wrote the business case to make (the CTVgm) acquisition and in my former role running Bell TV, there were a number of regulatory decisions that I was involved as a distributor in arguing in front of the Commission. When those decisions went against my interests as a distributor and in favor of the broadcaster, it added to the justification list for buying CTV.
GOB: Would fee for carriage fall under that?
KC: A little bit less so. I would put the first one was Category C deregulation of specialty services. As Bell, we opposed the creation of Category C. We opposed the right of broadcasters to withdraw the signal following a negotiation, and we lost both of those. That obviously put an environment where the broadcaster had some negotiation strength. That decision has been unwound.
GOB: With the vertical integration policy.
KC: With the vertical integration. And it’s been unwound only for one reason; because Bell bought CTV. I can’t point to anything else that changed because they didn’t unwind it when Canwest was bought. Rogers owned Sportsnet (and Citytv) at the time. Videotron owned all kinds of programming assets and specialty channels. So that was one major backpedal.
The second one is with new media… The new media decision was in 2009 when it was reviewed and established that nonlinear forms of distribution would not be regulated.
GOB: And now?
KC: Now that’s changed. I think that value for signal is one that I remain optimistic and hopeful. The Commission has indicated its will by coming down in a decision that was, again, long-debated, long-discussed, and the Commission came down and decided in favor of a value for signal regime.
GOB: I’m sorry I’m rolling my eyes because I’ve covered these long debated and long discussed issues repeatedly over the years.
KC: I’m hopeful that value for signal is going to wind its way through the courts and we’re going to find that they have jurisdiction, and then we’re going to move forward.
GOB: And that will go in front of the Supreme Court next year, I think?
KC: That’s right. Greg, those are my key things… I know I’m not going to like everything the Commission does, and that’s fine. But when they do something, we adjust our strategy based on their decisions. What I think is destructive to an economy is if a regulator makes one decision, industry adapts, and they change the decision. That was the crux of my comments at the BES and behind the frustration.
GOB: Have you decided, though, what you’re going to do with this vertical integration decision? Can you, or are you going to appeal it, or are you just going to take the next – there’s 11 or 12 proceedings – and just go forward and fight all those, or say what you will on those?
KC: We did get some minor refinement of the order when the word “shall” was changed to “should”. I think that is an indication. If you have an order that in our mind was leaning 100 degrees to the misguided side, that pulled it back 10 degrees. Now, hopefully, in the specific orders of those 12 proceedings on how we actually implement, hopefully we can move it back again to something that’s more reasonable and moderate. So we’ll be working for that. I think longer term, there are obviously changes in the Commission that are coming in 2012, and we’ll look to work with leadership for a more market-friendly view.
GOB: So are you hoping that the new leaders, whoever they might be, might be a little bit more, as you say, market friendly?
KC: Well, I think what we would look for is a set of principles to be laid out by which the Commission is going to exercise its authority. We would obviously seek to influence those principles, but once the principles are set, then we would look for consistent application of those principles. We would then know that we could run our business with some certainty of regulatory behavior.
GOB: Now, just hopping back to the new media aspect we touched on, and the prohibition on exclusives, I most often view things through the prism of my own business. Let’s say I wanted to come to Bell, and make Cartt.ca as a TV channel exclusive to only Bell customers, I would want the freedom to do that type of thing if I wanted to. On the exclusive part of (the vertical integration decision) it seems to me that it limits options, and it also sort of applies regulation on new media where the Commission previously said there wouldn’t be.
KC: It’s certainly not a free market view because you’re right. You would say, if I distribute my content broadly, without restriction to the distributor, then my business will be worth X. If I do a deal with Distributor Y and they’re willing pay me something, and they're willing to promote my service, and it’s going to get this, then my business could be worth Y. You want that decision to create value for your business and to generate enough cash flow so you can reinvest in growth and things like that. There’s no question that that option was taken away.
I believe that that is the headline – at least for Bell and for me – of what we found unacceptable in vertical integration. That shouldn’t have been the headline, I would say, for two reasons. One is I think it would have been very rare cases that the economics and the interests of both content providers and broadcasters aligned to do what we’re talking about. It’d be rare.
GOB: Oh, yeah, if I tried to do what I was hypothetically talking about, that would kill my business. It wouldn’t make sense.
KC: Well, let’s say I thought Cartt.ca was so valuable to my ISP subscribers of Bell, I said, you know what, GOB. I’ll give you $10 million a year for an exclusive.
GOB: I might change my mind then.
KC: Right, so there are conditions that could set it up, but I think they’d be really rare. So, I think that as a headline was not really the top of the story. In my mind, it was the heavy-handed price regulation of an industry, and frankly, packaging regulation and Commission involvement in every commercial aspect of broadcast distribution. That was the headline that, in my mind, was the most unacceptable.
I think we also expected – based on the Commission’s moratorium, and based on everything else – we weren’t totally surprised by the new media portion.
I’d love to come back for one second to – we talked about value for signal a little bit. I’ve obviously walked in both sets of shoes on this debate.
GOB: Well, yeah, and that’s the point that Rogers and others make, that, “hey, Bell used to be on our side, but, now they’re on the other side. What gives?”
KC: Well, I don’t think it should be a surprise what gives. Where you stand depends on where you sit, and we didn’t own Canada’s largest conventional broadcaster when we were establishing a position before. We do now. So I would say that what has really changed is an inside look. I would say twofold. One is it’s our business interest. It’s that we now own the biggest broadcaster in the country. Two, an inside look at the business, and an appreciation, and an understanding for what’s happened in the business.
The industry, in my mind, will only thrive if there’s a balanced environment between three very important factions of delivering TV to Canadians. The three factions are” distribution – cable and satellite distribution; broadcast conventional television — over-the-air conventional broadcast TV; and pay and specialty services. In the year 2000, you had a balanced ecosystem, where revenues and profits were largely balanced among the players. Now we go to 2010 and you wind up with a severely imbalanced industry.
What makes it a public policy issue and an issue for Canadians, is not that conventional broadcast TV is suffering, but that conventional broadcast TV serves over 40% of the viewing hours that Canadians watch TV. It serves over 90% of the news they watch. It serves over 90% of what the Broadcasting Act calls local expression, which is a critical aspect of what we think upholding a solid system of Canadian culture is important for. Yet English conventional broadcast television is generating zero percent of the profits. In my mind that is absolutely not sustainable. This pillar is going to collapse.
There’s another imbalance in my mind when a regulator controls one part of a delivery ecosystem but not all parts of it. In distribution of specialty services, that’s now one aspect. Cable companies aren’t regulated as to what they can charge for TSN, and they’ve been raising the prices of their packages for 20 years on the backs of the popularity of TSN. Now, I’m regulated on how I charge a fee for TSN. That is an imbalance. That’s an asymmetrical regulatory stance.
GOB: But aren’t your fees deregulated, though, now, where you’re able to increase them? You’re talking about if there’s a dispute, you’re not able to withhold a signal (due to the vertical integration policy)
KC: Right.
GOB: Okay.
KC: Well, if there’s a dispute, I go to mediation with the Commission. Am I really free to negotiate if I have to negotiate in good faith, but if the distributor doesn’t like it, then they can just delay for many months, and then secondly, they can run to the Commission. And now I’m exposed to a Commission mediation, which is an unpredictable outcome. I may win. I may lose.
GOB: Now what do you say, though, to the likes of the small cable operators as well as larger distributors like Cogeco and Telus, who don’t have broadcasting assets, who want to see you held back because you’re perceived to have a lot more power than they do because they don’t have broadcasting assets to bargain with?
KC: The negotiating leverage that I have is no different than when CTV was stand-alone… CTV was pursuing this course of strategy long before Bell came into the scene. First of all, those companies had a choice to make. Those companies chose not to invest in content, and by the way, companies in a free market make strategic decisions what to do with their portfolio, with their business. The first thing I’d say is that if they wanted to they could buy content, absolutely.
GOB: So given all that’s happened, and laying all this out for me here, do you look back at this business case you wrote thinking, ‘geez, if I had to do it all over again? Would I still do it?’
KC: For sure because one thing is I absolutely believe that the pendulum swung way too far, and I think that it’ll come back to an equilibrium. It’ll take time. It’ll take effort. It’ll probably take a change in the Commission. It may take some other policy directives or involvement from the government, but I believe that the pendulum is ultimately going to find equilibrium in a good place. Other aspects of the business case are stunningly overachieving what we had hoped.
GOB: Such as?
KC: Well, I’d say first of all, just the quality of the assets. The quality of the assets are second to none and are spectacular. The quality of the people. I’ve been so delighted by the talent, the passion, the commitment, and the performance of the team that runs every part of our business, from conventional TV, to sports, to our non sports specialty, our news organization, our sales organization. I would say that the integration and taking over the operation and the management has been far better than I could’ve hoped. I think the performance of our assets is outstanding. The financial performance of the asset is ahead of our business case, and it’s spectacular in a year-over-year sense. That’s not driven by conventional. Ratings are very good. Conventional financial performance continues to struggle.
We do see a continuing, really small erosion of the conventional viewing audience, but it’s pretty consistent with what it’s been the last decade as viewers move to specialty. The trend that’s a little bit more concerning is the younger viewers are declining faster than the average overall. When we look at the advertiser-friendly demos, they are migrating to specialty or to over-the-top services faster than the overall is.
GOB: How do you address that as Bell Media to keep those eyeballs, even if they're on an iPhone, or a tablet, or someplace else?
KC: First of all, we have to stay focused on the best content. We want to develop the best Canadian content. It hasn’t been announced yet, but we just went to commission a really exciting, new Canadian drama. We want to procure the best foreign content, and we want to market it, and schedule it, and position it the most expertly that we can so that it’s popular in Canada. I think that as we are going through this transition from an old industry model of monetization to a new one – and we’re clearly in the early stages. Geoffrey Moore wrote a great book called Crossing the Chasm, and it’s about big companies that have to adapt their business model to new technology. We’re in the early stages of Bell Media crossing the chasm but I think what’s really vital is that we maintain our content supremacy and so far I’m really delighted. I think that our lead over our competitors in Canada has expanded. What we’ve done with CTV and with CTV2 has expanded our position.
GOB: Do you foresee it getting more difficult to gain those foreign rights? Will there ever be a point where, say, CBS or whomever tells you, look, we’re just going to show Canadians our TV shows on CBS.com, or on Google TV, or whatever, and we’ll monetize it that way? Do you foresee a day where that might come to pass?
KC: I hope not… Great content is the beginning of the story of a successful program in Canada. It absolutely does have to be marketed, scheduled, and positioned properly in order to become a big hit. We generally have audience trends that follow the U.S., but not perfectly. Even in the U.S., I don’t believe that you can move a television program to an a la carte basis and throw it out there online and not have built-in audiences that are watching a program before or after it, not have promotion of that program in a lot of different areas. I don’t believe that you can create hits that way.
I’m hopeful that what we call the CTV megaphone will continue to be an invaluable asset for us and for the studios. Today they really value that for sure. That CTV megaphone does allow us to be pretty competitive when we’re bidding for programs.
GOB: Now how about your smaller megaphone, CTV2? I see the ratings are up quite a bit, which is good, but are you able to monetize that properly so that you’re able to keep these regional sticks sort of profitable or close to it?
KC: We made a commitment to the Commission when we bought CTV that we would invest in those channels because we thought they were important to their local markets, and because we thought a diversity of voices in those markets was important.
The Commission allowed us to use some of our benefits money for station operations, and we are working our tails off to make them successful and sustainable. I will tell you that the ratings improvement hasn’t translated into financial improvement and it often lags. It can lag anywhere from kind of a half a season to a full season because your sales force is selling, a lot of times, on past ratings. We’re really hopeful that we’ll see some financial improvement in January through the second half of this season and especially next season. We’re working very hard to make them financially viable. I think value for signal is an important part of that case. When a value-for-signal regime is implemented, we want to have strong channels with popular programming that are important to distributors and viewers.
GOB: Well, you can see that out of the U.S. as well as I can how big of a piece of the bottom line the retransmission money is for the broadcasters down there.
KC: The broadcasters have told me they wouldn’t be able to survive without retransmission. It’s a critical part of their current bottom line, and it is the critical part of their future growth, and even – I’ve spoken to my peers in Comcast and NBC, and even in another integrated entity, they are 1,000 percent behind the necessity of retransmission for the industry.
GOB: Cogeco’s CEO, Louis Audet, said recently that broadcasters had to prepare themselves for the day where these big packages won’t be around anymore, or they won’t be such an option, or there’ll be more options for smaller packages. He didn’t say there would be a la carte, but he did mention TV sports rights fees as something many customers are going to want to support by buying those big programming packages. When you hear him say that, what do you think as a broadcaster?
KC: I think that that story has been talked about for a long time. He’s not the first to raise it. As an industry, we’ve talked about it.
GOB: I think he’s the first cable CEO to say it as clearly as any of them have in Canada, that I’ve seen.
KC: We’ve talked about things like skinny basic and a la carte for a long time and I’d say that the evidence hasn’t changed. When offered really skinny content, consumers don’t go for it. The evidence hasn’t changed that the economics of the industry can adapt (to a-la-carte). I don’t want to suggest to you that they can’t adapt. They would take time, and they would take us to change the way we package, and price, and market our services.
I believe that you would find an environment where, in order to support the creation and distribution of compelling content, and in order to serve all the viewers in all the niches of interests that viewers have – I think you’d find this: If I want to pick an a la carte, or even a far more flexible packaging based on my interests, and I want to support, let’s just call it a consistent return for content creators, broadcasters, and distributors. So if we forklift our industry from today over to extreme packaging flexibility, and we maintain the return on investment for each player, I think you’d find that an option for the viewer would be you can get 50 channels or 60 channels for $60, or you can get 500 channels for $70.
The reason is because for the big broadcast groups and the big studios, that incremental spend winds up getting reinvested into new and different kinds of content that finds small-niche people that are interested. If I had to create that niche content for just the people who were interested and offer it to them, it’s going to be priced really differently.
GOB: That’s the thing the general public doesn’t think about. They think because they're paying $20 for 20 channels that if they bought them one at a time they’d each be $1. That’s not going the case.
KC: They’d probably each be $15 because out of those 20 channels, you’d pick a different five than I would pick and that everybody else would pick. What would be unacceptable is to advantage one part of the industry and disadvantage another part by forcing a transition. I think if we’re honest with ourselves and we say we’re going to forklift this industry from a structure that had operated for the last 30 years, and we’re going to forklift it to a new structure, I don’t think that it would work.
And so let me give you an example. In my discussions with record labels in the music industry, nobody up and down the value chain is happy about what happened to the music industry. Albums used to support artists that created two or three popular hits, and then they sold an album of 10 or 12 songs. That allowed a lot of creative expression, a lot of flexibly. It got a lot of sampling. A lot of us as kids enjoyed the B side of albums, and a lot of us developed our musical tastes off of that.
GOB: But some of us – and I’m including me here – you’d hear the hits, buy the album and go, “man, the rest of this is garbage. Why can’t I just buy the two songs that I like?”
KC: So what happened is the industry would have never, ever, ever succumbed to a 99-cent single if they didn’t have such rampant piracy. When your choice as an industry is to literally go out of business –
GOB: Or take the dollar.
KC: Take the dollar. In hindsight, I promise you there’s no rational person in that entire ecosystem who would’ve said the right thing to do was to sell singles for 99 cents. Do we want to support – I mean, again, back to serving Canadians with a broadcasting system that allows us to create news, Canadian content, local expression, a variety of choice. I don’t think that we want that to crumble.
GOB: It’s more the presenting people with the choice of where you can say, ‘look: Here it is over here. You can pick packages of three channels if you want. Here’s the price.” As long as you just offer them the choice, they’ll be happy with that, and they’ll probably still pick the big packages of channels anyways because most of us live with others. If I tried to limit what just I watch on TV, it’d be easy, but I have a wife and two kids, my in-laws come over and I’ve got RAI because her father speaks Italian, so there’s all sorts of variables and each family is different. We all need choice. We all like big bundles. It just a matter of presenting it all and saying it’s there. Then maybe people would be just a little bit happier.
KC: I’m sympathetic and I understand very much that point of view. I don’t refute whatsoever that that’s an appealing outcome. In order to accommodate that, though, the whole industry has to change. Look at the way I buy content. Now, I have to go buy content and do studio deals, and do output deals, and distribution deals that reflects my need to tweak the way I go to market like that. Right now I don’t have agreements that have pricing and packaging capability to allow (a-la-carte). It’s a pretty major adjustment of the way an industry operates for me to create that.
The cable companies, also, and satellite, and telco need to figure out how they support their business. I don’t dispute that we should go there, but I think we need to go there in a measured way that doesn’t further destroy one of the legs of these stools. I think that’s going to take some time.
GOB: Do the new deals you signed with all those carriers across the country contemplate any more additional flexibility for some of your channels to be able to sell, for example, Comedy Network in a smaller package or to do something unique with BNN or something like that?
KC: When we negotiate our distribution agreements, we negotiate both pricing and packaging. I would say that we are immensely flexible with the distributor, but it’s part of the negotiation. Once we reach an agreement, then packaging is part of that agreement. We’re immensely flexible to work with them up front about how they want to transition and move their business, but that’s a commercial negotiation and it includes rates and packaging. Then once we agree to it, then they go implement that.
GOB: But are those carriage deals flexible enough where – if a cable company came to you in a year saying, look, we want to put Comedy Network on channel 12 as a stand alone, can your deal accommodate that type of unique switch?
KC: I think that’s too specific to the agreements that we have with individual distributors.
GOB: Not that anyone would try that.
KC: Those are the kind of discussions that we have with the distributors. What’s really interesting, because I have been studying the record industry model, is how artists have really lost in the transition from traditional album distribution and what it took for an artist to make a minimum wage in the U.S. They now have to sell ten times as much music as they did under the old structure.
GOB: Or tour nonstop.
KC: Right… Again, it goes to the point that if we’re not careful, then we destroy all the way up and down the value chain. So far, good music hasn’t stopped coming out. It depends on your tastes, your interests, but generally music hasn’t stopped being written. At some point you do really change.
I found another interesting thing in studying what’s happening with (over-the-top video). Customers were asked in a 2010 survey if a la carte pricing in cable would be really appealing as opposed to OTT options. The answer was no. They said, ‘no, that really wouldn’t change my point of view relative to whether I’m interested in an OTT option or not.’
GOB: People are going to want Netflix whether they can buy a la carte from their cable operator or not.
KC: Absolutely right.
GOB: When it comes to boosting revenue on the TV side… one of the ways TV companies are experimenting in the States – a little bit less so in Canada – is interactive or targeted advertising. Is that something that you see as potential for increasing revenue where you can target those ads, sell the same 30 seconds more than once, is that something that can help in the short term? How do you envision that?
KC: I don’t think it’s real, short term. We need more customer insight. We need more control over advertising presentment and placement, and then we need to align the interests of marketers and the targets of marketers with the way we distribute the ads – and we need better results reporting. One of the beauties of even just banner ads is that you can report to your client how many times it was viewed, how many click-throughs it had, and then they can even follow sales. That’s a really appealing aspect of online advertising that traditional advertising doesn’t offer.
I think we need a lot more intelligence about the effectiveness of mass-market advertising and of targeted advertising. We have a lot of neat initiatives moving towards that that involve both technology enhancements with how we place ads and distribute TV, but with big data, a term that now covers the collection of terabyte after terabyte after terabyte, you fish through all of that data to find relevant relationships that may not have been apparent before. Big data can be brought to viewing behavior in advertising even without a lot of technology placement enhancements, I think, to make advertising more effective.
We’re kind of excited about the investments in the near term to do things because, as you know, to have an overhaul of the entire distribution system so that ads can really be customized is a ways off.
GOB: Well, yeah, and you’ve got to coordinate it with the distributors as well.
KC: Absolutely.
GOB: You’ve got to have a deal for Telus and Rogers all the way across the country to be able to segment it the way you want it segmented, and there’s got to be standards and everything else built in.
KC: There’s privacy issues about how much do you use, and share, and learn about the customer. At any rate, I think there is an undeniable momentum towards that. It’s going to be one of these things that it won’t happen at the pace we think it will. It’ll either be faster or slower because that’s just the way technology sort of goes.
GOB: It always seems to be faster, I think.
KC: I don’t know. Some technology takes a lot longer to evolve than we think, whenever the futurists say what will happen.
GOB: There’s a quote I gave once to a CBC radio reporter where I said don’t underestimate consumer inertia. When something works, and they’re happy with it, and they’re paying $80 a month for it, they can sit down and watch TV… don’t underestimate how it’ll take something really spectacular or really horrible to make them change that.
KC: The president and CEO of one of the biggest ad agencies in Canada said to me that targeted advertising has been tomorrow’s promise for the last 20 years.
I think it’s exciting to work with advertisers to leverage this unbelievable medium that we have to be more and more effective to meet their needs. And I think we’re going to have to do more and more nontraditional things. At first proper placements and things like that were a little bit jarring. Now it’s nothing to see product placements. I think we’ll get far more creative and aggressive about the use of our real estate, to the interest of advertising clients.
GOB: And you don’t just do a straight 30-second sell anymore anyway. There’s all sorts of integrated things you do, whether it’s online, or how many views online, whether it’s the time of day, West, East Coast. It could be quite complicated.
KC: I think co-viewing applications are really exciting as well. I just would throw this in because we’ve seen social media. The number-one tweeted about topic in the world is television. Television is inherently social, and social media has opened up the living room to the world. People are organically using social media to engage more in our products, and we haven’t even created the tools to make it more exciting.
