ON THURSDAY, A PANEL of seven CRTC commissioners and a dozen industry executives took part in a hearing where they all must have asked themselves repeatedly, “Geez, how often have I heard this before?” At least, that’s the question that popped into my head as I listened in.
Bell Media faced off against the Canadian Independent Distributors Group during an expedited hearing concerning the parties’ fight over Bell Media’s 2011 wholesale carriage agreement, as we have already covered extensively. The CIDG (Telus, Cogeco, EastLink, Canadian Cable Systems Alliance and MTS) say the dispute isn’t primarily about the wholesale rates being demanded for the likes of TSN, Comedy Network, Bravo, MuchMusic, RDS, Animal Planet, and so on, but about the iron-clad insistence on how Bell Media wants its specialty channels packaged and the acquisition of non-linear content rights.
However, boiling down the primary issue we distilled during the day-long hearing (which boasted the much more interesting cross-examination format as both sides faced the panel at the same time and also asked each other questions) reduces to a re-hash of the age-old distributor-consumer question of a-la-carte vs. tiered channel packaging and who is with the angels on the side of the Canadian consumer.
(While a scant few paid attention to this hearing, its consequences will affect millions more Canadians than the wholesale usage-based-billing issue ever will. Off-the-record, Bell execs believe this hearing to be even more critical than the vertical integration or diversity of voices hearing as its outcome will directly affect both of those policies. Plus, if it goes against Bell, it will have to reopen its already signed affiliation agreements.)
On the one hand, Bell says its wholesale costing model, a penetration based rate card, rewards stable packaging with stable long-term rates for distributors. If a distributor wants more flexible packaging, sure to bring lower penetration for some specialties, they have to accept higher rates. Bell Media says 159 distributors (Rogers, Videotron, Shaw, Bell TV, SaskTel and 154 other tiny BDUs) have signed the deal. The CIDG member companies, none of whom own content like the big four vertically integrated firms, represent about 20% to 25% of subscription TV households, and have steadfastly refused.
“The PBRC option provides CIDG members with unprecedented packaging freedom while providing our services with the revenue stability they require in order to fulfill their obligations under the (Broadcasting) Act,” Bell’s SVP regulatory and government affairs, Mirko Bibic, told the panel last week.
CIDG members, however, place themselves as firmly on the side of the consumer, saying they must be allowed to package channels freely, responding to customer demand, customers who could jump to over-the-top, or unregulated, platforms. “Ensuring reasonable choice for consumers at reasonable prices is at the heart of the dispute between CIDG and Bell,” said Yves Mayrand, Cogeco Cable’s vice-president of corporate affairs. “The affiliation agreement proposed by Bell to CIDG would prevent CIDG members from providing more choice to consumers. Bell’s proposal is in many respects the antithesis of consumer choice.”
Mayrand said Bell will not allow “CIDG members from responding to consumer demand for more choice and flexibility to subscribe and pay for only the services they want to watch,” and, “for its sports services, Bell is seeking a minimum penetration guarantee that would force consumers to take the services whether or not they wanted them.”
As well, “by refusing to include multi-platform and non-linear rights as part of its agreement, Bell is refusing to allow other distributors to respond to the threat of over-the-top (OTT) services in the manner that they consider will best help them keep Canadians within the broadcasting system.”
A huge chunk of the economics underpinning the Canadian TV system is dependent on many consumers paying for many channels. The fact that people pay for A Network when they are really choosing Z Channel helps everyone in between thrive, pays for more overall choice for Canadians and boosts the amount of money flowing to the Canada Media Fund.
“We believe we have conclusively illustrated that repackaging without revenue protection against that will harm broadcasters, producers and consumers, all to just the benefit of the distributor,” said Bell Media president and CEO Kevin Crull on Thursday during the hearing. “Having walked on both sides of this fence, I can absolutely tell you that it will benefit the distributor. Viewers will get lower quality programming, less variety, less choice.
“…And independent producers will be tremendously harmed because with a… 10% drop in penetration, (and) if as a business operator I am to hold the profitability level of that channel, I am going to have to take out almost 20% of the costs – and any of our programming guys will tell you that channel will not look anything like it does today if you take out 20% of the programming costs,” Crull added.
“… The number one dream, when you wake up in the morning as a BDU is to lower your content costs – and making packaging changes is the way – taking stuff out that consumers won't notice but they will continue to pay the ARPU: Raising ARPU and lowering your content costs. We have a chart on when Videotron went to pick pack… the penetration of our services dropped precipitously… and their ARPU increased dramatically.”
(Bell, Videotron and Cogeco all allow their Quebec customers to pick bundles of channels, one at a time. As for the rest of Canada, only Shaw’s Plan Personalizer offers more flexibility than other English Canada carriers, but it doesn’t go as far as the Quebec market. The carriage agreement between Shaw and Bell Media is confidential but if the cable and satellite company isn’t paying higher rates in exchange for that flexibility, one would bet there has been an equitable trade-off of other benefits.)
CCSA VP contracts Jennifer Salmon hit the nail on the head hardest during Thursday’s hearing. “We are saying: ‘Listen, if we want to re launch the service in a customer friendly package that is theme based or preset, we shouldn't have to come and ask your permission… the fact of the matter is if our customers don't want that service, there’s nothing we can do,” she explained. “(U)nder (Bell’s) model, the customers who do want to watch it are the ones who are going to be penalized, because we may have had artificially high penetrations due to a traditional analog model, where our services were launched and a whole group was put in at once, because there weren't options.
“There are options today. Our members have had technological advances since, even, the last contract… We have had some who have been analog and now have digital capabilities, and I can tell you that requests to change packaging to allow for customer flexibility have been denied.
“That is what we are afraid of. We need to set out the parameters where we do not need to ask permission of Bell, because their only interest is to continue to protect their bottom line, and there is nothing in this agreement that protects the distributor,” said Salmon.
Setting aside how both sides are trying their level best to protect themselves – the distributors want to lower their content costs and increase profit while Bell Media wants to maximize its income by retaining subscriber revenue – TV channels have simply always been sold in tiers in the multichannel universe, from the first few off-air stations delivered over the initial co-axial cable systems for $4.99 in the 1960s to the various theme and other packages of today.
It’s long been thought to be a pretty good model as well – and for everyone. As specialty channels were launched, TV consumers were able to purchase large numbers of channels in various groupings that could satisfy many tastes while cable (then satellite and now telco TV) distributors were well-compensated for delivering quality signals to the home. Broadcasters benefitted from direct access to the home for a growing stable of channels which were well-supported by being tied to packages where, for example, the non-foodie would still end up paying for the Food Network because he or she liked the old TV shows on TVTropolis. Consumers benefitted, too, as the number of channels serving niche after niche, grew.
Over the years though, consumers often complained about being “forced” to pay for channels they claimed they didn’t watch (BBM ratings numbers tell a different story as over a month of viewing, consumers often tune into a far larger number of channels than they believe they do, but that’s not what we’re arguing here). “Why do I have to pay for X Channel when all I really want is Q Net” has been the question. For years, cable companies claimed it was a technical issue – that analog traps wouldn’t let them block individual channels, only certain large chunks of its bandwidth on the cable wire.
With the benefit of hindsight, that explanation, while technically true, was more or less a cop-out since channels were tied together out of economic necessity because it made business sense, but that old analog excuse is now hurting the TV business. People now know that with digital, they can buy one channel at a time. Heck, with iTunes, they can buy one episode of one show at a time. They don’t realize how the cost structure of the business is built and how, in fact, it may just be beneficial to them.
However, for the same reason we pay less at a retail store when we buy larger quantities, TV channels cost less when more are purchased together. Canadians either don’t understand that or just don’t believe it.
Since this industry likes parallels so much, the one I often use myself is potato chips. For example, if I want a bag of regular chips, I’m not forced to buy several additional bags of salt and vinegar, barbecue, sour cream & onion and ketchup. I can just buy a single bag of regular chips from any number of stores and be done.
Great big retailers, on the other hand, have packaged things together to make the individual unit costs cheaper. At Costco, for example, it sells a box of 30 1.75 oz Frito Lay bags of chips for $13.40. The box contains five Cheetos Crunchy, eight Doritos Nacho Cheese, two Doritos Cool Ranch, five Fritos Corn Chips, seven Lay's Classic Potato Chips and three Lay's KC Masterpiece BBQ Chips or Lay's Sour Cream & Onion Chips. Let’s say, if bought at a convenience store, an individual bag of chips would cost about $1, that makes a purchase of 30 bags there $16.60 more expensive than at Costco. So, if you only want a bag of Cheetos, go to Mac’s. If you’re a real snacker, Costco is your best choice.
The problem Canadians have is when it comes to television, we don’t have that choice. All of our traditional pay-TV choices are Costcos. If I only want one bag of Cheetos, I have to buy the big box full even though I feel like I should be able to buy just that one bag (and I really don’t care if they stop making Lay’s KC Masterpiece BBQ altogether, nor does it matter to me where the chips are made…). In the traditional TV game, if I only want Showcase, I have to buy a whole lot of other bags of chips, too.
In 2012 though, the age of the convenience store for TV content is upon us and our North American TV distributors must to do a better job of selling their volume-priced value. For example, a fan of The Big Bang Theory can find an episode on some channel more than a dozen times a day, or they can use their DVR to record them or call them up on demand, all thanks to their modern TV provider.
Or, for the convenience of watching just season four, anywhere, anytime, that fan can buy all 24 episodes for $52.50 from iTunes (to buy all five seasons of the series, it’s $236.46). Season five’s single episodes are selling for $3.49. Imagine as a consumer buying an entire TV lineup for $3.49 per half hour. For 50 channels, that would work out to $8,376 per day!
Even if we just count the 7 p.m. to midnight prime time hours, that’s still $1,746 per day. All right, let’s assume it’s just one person watching at a time, for the average amount of TV consumed per day by Canadians of four hours. Using the iTunes per-half-hour cost model, that comes to $27.92 per day, or $837.60 a month.
This is why no one sells single potato chips in this business – and the Commission and industry as a whole must take care to recognize and defend the value already distributed to Canadians through our convoluted, one-of-a-kind, television industry.
(A decision from this expedited hearing is expected sometime in the first half of April, according to the Commission.)
Like what we said? Dislike? Let us know at editorial@cartt.ca. We’ll keep it confidential if you prefer – or publish if you like.
