OTTAWA – The price of delivering Detroit to Vancouver, or Halifax to Hamilton, or any other distant TV signal to a market outside its territory will come under the microscope for the next two weeks at the Copyright Board of Canada.
Beginning Tuesday morning, the Broadcast Distribution Undertakings (BDUs) and the Retransmission Collectives will be facing off at a Copyright Board hearing over the value of distant television signals. The Collectives (who are the U.S. and Canadian TV stations, sports leagues, music collectives and such) tell the Board the number of distant TV signals available to Canadian TV subscribers has increased considerably over the years and, therefore, so too should the rate paid by cable TV companies. The BDUs (cable, satellite, IPTV providers) on the other hand, say the number isn’t as important as actual viewing time and since that is in decline, the distant signal fee should decrease.
The Collectives want the new rate set at $2 per subscriber per month in 2014, rising to $2.38 in 2018. The BDUs argue that the current 2013 rate of $0.98 each should be the starting point in 2014 with it declining by $0.02 each year to $0.90 by 2018. The Collectives then have their own formula as to how that money is split between themselves.
(Taking the $2 figure and basing it on the assumption that most BDU customers have at least one distant signal and that there are over 11 million BDU customers in Canada, but that this proceeding doesn’t include cable systems of under 6,000 subscribers, the total amount of money we estimate the parties could be talking about here is in the $240-million range per year, rounding off the number of BDU households to 10 million. Plus, we’re talking about a five-year deal, making it a decision worth in the $1.2 billion range on the Collectives side, or less than half that compared to the BDU side.)
The hearing, which starts Tuesday (Nov. 24th), marks the first time in more than 20 years where the Collectives and cable TV distributors have squared off before the Board over the value of a distant signal retransmission tariff. Back in the early 1990s, when the rate for distant signals was first established at $0.70 per subscriber per month, the average Canadian cable TV customer received about five distant signals. The average BDU subscriber can now receive about 50 of them.
This dramatic increase translates into increased value for customers and therefore higher fees for the signals. The Collectives originally asked for a $1.38 per subscriber per month fee in 2014, but upped figure to $2 after analyzing detailed financial information from the broadcast distributors, many of whom sell the channels as their own distinct packages.
However, it’s not only an increase in the pure numbers of signals but also how customers view them. For example, a high definition signal is viewed as carrying more value than a signal in standard definition. According to data from Forum Research, Canadians believe the value of a TV channels doubles when it’s offered in HD and SD rather than just SD alone.
An analysis of the retransmission tariff, conducted by Gerry Wall, president at Wall Communications, concludes that the BDUs are getting off easy on their distant signal payments. According to his analysis, the broadcast distributors are paying an averag of $0.018 per distant signal when they should be paying $0.09 per signal. He bases his figure on taking the average retail price charged by a BDU for a distant signal and the average wholesale to retail mark-up applied by BDUs to specialty channels.
“An analysis of the retransmission tariff… concludes that the BDUs are getting off easy on their distant signal payments.”
His calculation suggests a retransmission tariff of $4.97 ($0.09 x 54 distant signal channels). The Wall evidence also indicates that BDUs appear to be profiting signficantly by retransmitting distant signals. While, the actual figures have been blacked out, the following statement about Telus Corp. provides some hints to that profitability. (Telus offers a distant signal package for $9 per month.)
“In other words, Telus earns more than # times its entire annual retransmission royalty obligation by delivering distant signals on a single tier, to only #% of its subscribers. And this does not take into account all of the additioanl value generated for Telus by the delivery of distant signals on its basic and other discretionary tiers to all of its subscribers,” the Collectives note in their May 15 Statement of Case. The hashes are theirs.
The broadcast distributors tell the Board in their October 22 Statement of Case that contrary to assertions from the Collectives of an increasing value, distant signals are actually seeing a decline in value as a result of lower viewing numbers and the ability of customers to watch on alternative platforms.
The BDUs acknowledge that cable, satellite and IPTV BDUs retransmit about 55 distant signals, but the majority of cable TV subscribers don’t watch them. “Most households only watch programming on approximately three of those signals to any significant degree. Most households do not watch any of the programming on the majority of distant signals available to them,” contend the broadcast distributors.
Figures from Numeris submitted by the BDUs show that Canadians are tuning in less and less. Relative to 2009, tuning into distant signals was down 11% in 2012 and 18% in 2014 in diary markets and 10% and 17% over the same period in meter markets.
“Among viewers aged 18 to 34 years, the decline is even more pronounced,” add the BDUs. “Compared to 2009, viewing to distant signals among this age group was down 33% in the diary markets and 27% in the meter markets. This more dramatic decline of tuning to distant signals over a five-year period among younger adults suggests that the importance of distant signals will continue to diminish for the foreseeable future.”
The Board must also recognize the new realities of Canadian broadcasting, add the carriers, pointing out the myriad options available to Canadians such as video on demand on regulated platforms and the in the unregulated space over the Internet. In addition, new TV broadcast rules coming into force in 2016 – pick-and-pay to name one – will lead to less distant signal retransmission.
“A fair and equitable royalty for retransmission of that distant signal programming has to reflect that diminished value.” – Submission from BDUs
“It doesn’t take an expert to realize that in a 500-channel universe where almost everything is available on-demand and from multiple sources, the importance and value of distant signal programming has diminished and continues to diminish. A fair and equitable royalty for retransmission of that distant signal programming has to reflect that diminished value,” they say.
The starting point for the Board assessment was major point of contention for the BDUs. Whereas the Collectives argue that the Board should look at the distant signal regime in its entirety, the broadcast distributors say, the Board need only look at the reality of the market in 2013 because those 2013 rates were freely negotiated.
When it comes to the $2 proposed tariff, the BDUs say this doesn’t reflect current reality. They argue that the A&E base case* is no longer a good proxy or benchmark on which to set the retransmission tariffs. In an analysis done by Dr. Tasneem Chipty of Analysis Group, she concluded that a better starting point would be a mix of U.S. specialty services and Category B Canadian specialty services.
Now to arrive at a rate, she used viewing data collected from set top boxes from Rogers Communications, Shaw Communications and Bell Canada. In addition, she subtracted non-programming costs in payments made by BDUs to programmers, subtracted the impact of simultaneous substitution, and then factored in low viewing levels and the availability of alternative platforms. She concluded that a $1 per subscriber per month is appropriate.
(*Back around 1990, when the first distant signal retransmission tariff was established, the Copyright Board used American cable channel A&E as a proxy for determining the amount of the distant signal retrans tariff. Basically, what the BDUs paid to carry the channel was the basis for some formula the board used to come up with the retrans tariff.)
The Collectives take issue with the Chipty analysis in their revised Statement of Case filed earlier this month. They say it’s ripe with factual and methodological errors by including a “slew” of small and little watched, low-cost Category B specialty services. This only serves to drive down the average fee.
Besides, add the Collectives, the fees for these services aren’t negotiated at arm’s length because the BDUs and programmers are generally part of the same company. They also note that the set top box data is tuning data, not viewing data and that this data is “unrepresentative of actual viewing shares and habits.” When the factual and methodological errors are corrected, Chipty’s analysis arrives at royalty rates in the range of $2 to $3 dollars per-subscriber per-month and higher.
The Collectives contend that the BDUs reports and witness statements do nothing but distract the Board from the task at hand, noting that they rely “on flawed data or incorrect inferences drawn from the regulatory regime. The proposed evidence from BDU managers is speculative, alarmist, self-serving and inconsistent with the actual behaviour of subscribers and the BDUs themselves.”
This process is not arbitration, where the Board picks one side over the other. It may well choose a different rate and formula when making its decision, which could take a year or more to be made public.
