Presentation to the Standing Committee on Transport & Communications Senate of Canada

Remarks by: Ian Morrison, Spokesperson, FRIENDS of Canadian Broadcasting¹

Mr. Chair and members of the Committee, thanks for the invitation to appear today in the early days of your examination of "the challenges faced by the Canadian Broadcasting Corporation in relation to the changing environment of broadcasting and communications".

I was originally invited to focus on the broadcasting environment, but last week I was told that I could include some comments on the CBC, so I will touch on both - as a stimulus to our conversation today.

The basic challenges facing Canadian policy makers and broadcasters in 2014 are similar to those described by the Aird Commission in 1929. Here are five:

Providing Canadian content in sufficient quantity and quality to compete for audience attention with the flood of production from elsewhere, principally the United States.
Making that content universally accessible to all Canadians who want it - in a six time-zone country with more geography than population, with two official languages.
Ensuring that both the production and distribution of Canadian content are economically viable and sustainable - in the absence of a profitable business model.
Using the system to both celebrate and share the rich diversity of this country's regions and peoples - as opposed to some monolithic centrist vision.
Maintaining the independence of the system from undue influence or control by special interests of any kind - either political or commercial.

The late Graham Spry framed this challenge well when addressing a parliamentary committee in 1932: "The choice before the committee is clear. It is a choice between commercial interests and the people's interest. It is a choice between the state and the United States".

Here is a graphic² demonstrating the continuity of challenge in the second decade of the 21^st century:

Sheltered from US competition by language, French-speaking Canadians enjoy a preponderance of Canadian and Québécois content, while English-speaking Canadians, view 77% foreign, mostly American programming - constituting an outlier in comparison with other western democracies.

Notwithstanding its shortcomings, our television system is admired and respected worldwide. Because of time-shifted and out-of-market viewing options, and the wide range of over-the-air and specialty channels, the average Canadian viewer has greater viewing choice that the average American. Nonetheless, our system faces real threats.

Much of our success results from delicate checks and balances that have been put in place by the CRTC to ensure availability of Canadian programming. A pick-and-pay (or unbundled) system referenced in last October's Throne Speech could unravel decades of hard work to ensure the availability of a wide variety of programming which is predominantly and distinctly Canadian.

Another challenge is the changing pattern of advertising spending, where online spending has risen ten-fold in the past decade - propelled by a new-found capacity to monetize human activity - outpacing newspapers and conventional television. It is soon expected to exceed all TV ad revenues:³

And unregulated services such as Netflix, YouTube, Hulu and Google TV, among others are creating unprecedented fragmentation of Canadian tuning. As recently as the autumn of 2012, the CRTC insisted that such platforms continue to be complementary to the regulated broadcasting system.⁴ One policy option would be to offer priority carriage for Canadian services on the web.

Similarly, Canadian radio stations are now competing not only with satellite radio, but also with streaming channels from all over the world. Thus far, they have held up their share of ad revenues. But a recently published commercial radio environmental scan concludes that radio ad revenues "can be expected to start to decline over the next five to seven years... by as much as 15%.⁵

Another challenge to the sustainability of our broadcasting system is the immense profitability of the large communication companies for both their broadcast and non-broadcast services. Last year, their profits before interest and taxes (PBIT) exceeded, for the first time, the revenues of Canada's conventional broadcasters. In 2012, for example, Cogeco, Rogers, Shaw and Videotron and some smaller distributors' combined operating margin was 44%.⁶ Compare this to a 6% margin for the conventional television industry.

Why is this a problem? Because more than $2 billion in subscribers' money passed through the distributors' hands into those of their shareholders without contributing to the creation and broadcast of Canadian stories. This market domination absent price regulation means that consumers take it in their pocketbooks. We note that the current government, though speaking out in support of the interests of wireless consumers, has remained silent on the interests of cable and satellite consumers.

As a seguë towards your CBC study, I offer a few comments on Rogers' recent acquisition of NHL rights from 2014 to 2026. This is very good news for the National Hockey League and its hard-working players. Starting next September, Rogers will pay upwards of $400 million annually for the NHL's multi-platform rights. In a period of low inflation, $400 million constitutes a 500% increase in rights payments since 2007. Split amongst 30 teams, 77% of that money - more than $300 million per annum - will remain in the United States. By September, Canadians will be paying more than Americans for the NHL's audio and video images.

CBC Television used to make a substantial profit on its Hockey Night in Canada franchise. In 2007 it unwisely bid up its NHL rights payment by about 100%, believing, erroneously, as it turned out, that CTV/TSN would also be bidding.⁷ Shortly thereafter, a major worldwide recession suppressed TV ad rates, causing CBC to lose money on its investment. Our research indicates that CBC was able to get back into the black on its NHL investment by 2011⁸ and that it offered approximately $200 million per annum in its unsuccessful bid for the 2014+ rights.

Further, we understand that the NHL 'recommended' to Rogers the current arrangement Rogers has made with CBC to essentially 'rent' CBC Television's English network for upwards of 350 hours of prime time for the four NHL seasons beginning September 2014 and ending in June 2018. Under this deal, Rogers will have the right to sell ads on CBC Television during NHL hockey broadcasts. Media speculation has it that this arrangement will come to an end in 2018. We are skeptical, for two reasons.

We believe that Rogers has over-paid for the NHL rights, and going forward its shareholders will insist that it do its very best to monetize this asset. And CBC Television's Canada-wide reach is an unsurpassed opportunity to sell ads to national advertisers. Second, CBC Television has acquired a very high level of skill in telling hockey's story to Canadians, including high production values, which hockey fans have come to expect.

CBC Television has avoided a doomsday scenario for the time being: losing NHL hockey for 350 prime-time hours each year, and having to replace that programming at its expense. FRIENDS believes this four-year period offers CBC Television an excellent opportunity to do what SRC Television did twelve years ago - to wean itself from excessive dependence on professional hockey programming.

The loss of NHL rights will reduce CBC Television's ad revenues by more than $120 million, half its total ad revenue. As its sales costs will not fall proportionately, the net benefit of its remaining advertising will decline to a level where it could contemplate, for the first time, going non-commercial.

We are greatly concerned by the failure of CBC's CEO and senior management to engage in advance contingency planning for the possible loss of NHL rights. The writing was on the wall. CBC's testimony before the CRTC at last year's licence renewal hearings suggests that its head was in the sand on this matter. It appears to remain there today. In its recent corporate plans⁹ CBC's leadership has advocated ever more dependence upon self-generated, principally ad revenues. The recent failure of its NHL strategy as well as its recent venture into advertising on Radio 2 and Espace musique¹⁰ suggest the need to consider the option of a non-commercial future.

Albert Einstein defined 'insanity' as "doing the same thing over and over again and expecting a different result". We recommend that the Committee explore the possibility that this applies to the CBC. And removing subsidized competition with the private sector can offer a win-win benefit.

No less an authority than the Prime Minister has advanced this view, when he told the Canadian Association of Broadcasters that CBC's "English-language television has tended to become more commercial, more in direct competition with private television and more driven to use American programming to attract advertising dollars - an approach which does not appear to be successful. We (ie. the government) believe that CBC English-language television should become, and will have to become, more distinctive if it is to remain viable and fulfil its role as a unique public broadcaster."¹¹

FRIENDS agrees with the Prime Minister!

Finally, I want to flag two issues we believe merit your priority attention during this study.

One is to focus on strengthening CBC's 'local' presence in communities across the land. Canadian Media Research Inc. has established that 'local news' is Canadians' top priority for television. The Broadcasting Act charges CBC with reflecting "Canada and its regions to national and regional audiences, while serving the special needs of those regions".¹² We believe that greater attention should be devoted to the local and regional dimension of CBC's statutory responsibilities.

The second is to address the independence of CBC's governance, in keeping with the necessary arm's-length relationship between a public broadcaster and a government in a democratic country. The sage advice of the 2003 Lincoln Report has yet to be enacted: "in the interests of fuller accountability and arm's-length from government, nominations to the CBC Board should be made by a number of sources, and the CBC President should be hired by and be responsible to the Board".¹³

I look forward to our conversation this morning, and also to a future opportunity to comment once you have heard from the CBC.

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For Information: Jim Thompson 613-567-9592

¹ FRIENDS is an independent watchdog for Canadian programming on radio, television and online, supported by approximately 200,000 Canadian families, and is not affiliated with any broadcaster or political party.

² CBC/Radio-Canada, Corporate Plan Summary 2013/14 - 2017/18, August 2013, p. 14: http://www.cbc.radio-canada.ca/_files/cbcrc/documents/corporate-plan/corporate-plan-summary-2013-14-2017-18.pdf

³ Source: Interactive Advertising Bureau of Canada, Canadian Commercial Radio: 2014-2020: An Environmental Scan, January 29, 2014 by Peter Miller, p. 11: https://services.crtc.gc.ca/pub/ListeInterventionList/Documents.aspx?ID=212323&Lang=e

⁴ See Bell-Astral Denial - Broadcasting Decision CRTC 2012-574, paragraph 62.

⁵ Op cit., footnote 4, page 47

⁶ Their combined operating margin for non-broadcasting services was 70%, and for Basic and Non-basic cable, 21%.

⁷ http://www.friends.ca/news-item/10693

⁸ Friends' CRTC Brief, CBC Network Licence Renewal, October 5, 2012, paragraphs 12-37: http://www.friends.ca/brief/10850

⁹ http://www.cbc.radio-canada.ca/en/reporting-to-canadians/reports/corporate-plan/

¹⁰ http://www.friends.ca/news-item/11951

¹¹ Rt. Hon. Stephen Harper, Address to the Canadian Association of Broadcasters, November 29, 2004: http://www.friends.ca/files/PDF/SHarper.CAB.n29.pdf

¹² Section 3(1)(m)(ii)

¹³ Our Cultural Sovereignty, House of Commons Standing Committee on Canadian Heritage, 2003, page 567

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