Speeches and Interviews

November 27, 2006

CBC/Radio-Canada proposes a new model for the future of Canadian Television

Robert Rabinovitch, President and CEO of CBC/Radio-Canada, at the CRTC, Gatineau (Quebec)

Introduction

Mr. Chairman, Commissioners, my name is Robert Rabinovitch, and I am President and CEO of CBC/Radio-Canada. With me today are Sylvain Lafrance, Executive Vice-President, French Services, and Richard Stursberg, Executive Vice-President, CBC Television. Also with us are Ray Carnovale, Vice-President and Chief Technology Officer, and Michel Tremblay, Vice-President Strategy and Business Development.

We are very pleased to be here to present CBC/Radio-Canada's remarks in this important policy hearing that is key to the future of conventional television broadcasting. We have circulated copies of these remarks to you, as well as a package of reference material that I will be referring to as I move through our presentation.

I wish to state at the outset that our September 27th filing and today's interventions focus solely on your particular call for these hearings on conventional television policy. We have not used this as an opportunity to foray into other issues.

Your determinations in this proceeding are extremely important for the entire Canadian broadcasting system, as conventional television continues to be the cornerstone of that system.

At CBC/Radio-Canada, we are proud to be a part of this sector and to have contributed to its historical success.

This success has been the product of both the public and private elements of our industry, working under the Broadcasting Act and your direction toward common public policy objectives. This combination of public and private interests to promote common goals is fundamental to our Canadian broadcasting system and is enshrined in the Broadcasting Act.

And as I'm sure you are well aware, in order to pursue these goals, each one of us in this industry, whether we are public or private broadcasters, relies on a business model that is driven by significant financing from both Government and advertising-based sources.

So, how do we measure this public-private success story for the Canadian conventional television industry? The facts speak for themselves. Every week throughout the year, 90 per cent of Canadian television viewers tune into a Canadian conventional station. Conventional television is the face of local television, the home of original Canadian drama and entertainment programming, and the primary source of local news and public affairs.

As you have seen from our September 27th filing, conventional television broadcasters – both public and private – are now responsible for the creation and first window airing of nearly all of the most popular Canadian series and specials shown in prime time.

And let us not forget the crucial role of conventional broadcasting in providing Canadians with international news and current affairs, and a Canadian interpretation of news and current affairs.

In addition, we are the major force in the funding of all original Canadian television programming. We provide 75 per cent of the total financing to original Canadian drama and comedy programming.

It is therefore not hype when we describe conventional television as the cornerstone of the Canadian television industry. It is a fact.

Given the central role played by conventional television, it is critical that the Commission's next TV Policy create a framework that supports the ongoing health of conventional television by recognizing the current challenges facing this sector.

I would like to focus on the two that we consider the most fundamental:
-the weakening business model for conventional television; and,
0the transition to digital television and the role of over-the-air broadcasting.

Conventional Television's Business Model

First, our business model. It is well known that conventional television is highly dependent on advertising to generate revenues. This is true of private conventional broadcasters, as well as CBC/Radio-Canada.

Indeed, over 50 per cent of CBC Television's funding comes from commercial revenues, and the vast majority of this amount is derived from advertising. Similarly, over 40 per cent of Télévision de Radio-Canada's funding comes from commercial revenues, and the vast majority comes from advertising. In light of this business reality, we, like our private conventional broadcasting counterparts, are extremely concerned about any weakening in the advertising revenue stream.

The combination of audience fragmentation and technological advances in how programming is delivered and accessed has caused and is continuing to cause advertisers to rethink their attitude toward advertising on conventional television. As a result, the advertising model that has supported conventional television broadcasters for decades is weakening.

This again is a fact.

Numerous parties in this proceeding have referred to the June 2006 PriceWaterhouse Coopers (PWC) report that identifies conventional television broadcasters as the most challenged Canadian media industry in terms of future revenue growth over the next five years. Equally alarming is the fact that in the last two years, PriceWaterhouse Coopers have cut their five-year forecast revenue growth for conventional television by 50 per cent.

PriceWaterhouse Coopers is not alone in holding this view.

Scotia Capital predicts that Canadian conventional television revenues will decrease by two per cent next year. Similarly, in the United States, Kagan Research predicts that prime-time upfront ad sales for conventional broadcasters will decline by one per cent this year.

All of these analysts, as well as other analysts, such as TD Newcrest and Yankee Group, identify fragmentation and the effects of new technologies and new platforms as the causes of this challenging environment for conventional television.

Unfortunately, as advertising revenues will be weakening, conventional broadcasters' programming costs will continue to rise – as they have done historically – as we meet our programming and operational commitments. The combination of these two factors – stalling revenues and rising costs – suggests a dim future for conventional broadcasters.

We've put this data together for you at Page 1 of your reference materials.

This chart – which relies on the PriceWaterhouse Coopers five-year revenue data that no party has disputed and which, in fact, numerous BDUs have cited in their own submissions – demonstrates that the combination of weakening advertising revenues as forecast by PWC and the historical growth in costs will have conventional broadcasters incurring significant losses before the Commission conducts its next TV Policy Review.

I should point out that this chart simply reflects historical cost trends.

Essentially, the weakening advertising market will make it impossible for conventional television broadcasters to advance the Commission's goals with respect to original Canadian programming, including local programming, High Definition (HD) programming, drama, etc.

The future does not look promising if conventional broadcasters continue to rely on advertising revenues as their major source of funding.

Conventional Broadcasters' Eligibility for Subscriber Revenues

What is to be done to remedy this situation?

First, it is important to understand that we are not suggesting the Commission establish specific financial remedies in this proceeding. There is simply insufficient data to permit a specific and complete solution to be established at this time.

What is needed right now, however, is a clear policy statement from the Commission that conventional television broadcasters are eligible to gain access to subscriber revenues generated by BDUs. Given the record of this proceeding, there is simply no good reason not to do so.

This policy statement would effectively put conventional broadcasters on the same broad economic footing as specialty services that have access to both advertising and subscriber revenues.

A statement of eligibility would not guarantee conventional broadcasters a share of subscriber revenues, however.

The purpose of such a statement of principle would be to provide the Commission and conventional broadcasters with the future tools, as required, to enable conventional broadcasters to continue to lead the Canadian broadcasting system and meet the Commission's policy objectives.

Whether such tools would be required would be determined by the Commission at the broadcaster's license renewal proceeding, taking into account such factors as the broadcaster's regulatory commitments and its proposals to pursue new initiatives that would continue to advance the objectives of the broadcasting system.

We believe this approach would be both pragmatic and fair.

It would permit a case-by-case examination of each broadcaster's situation and would not require a "one size fits all" approach.

It would also address the current situation that has BDU subscribers paying for access to conventional broadcasters' signals without the associated subscriber revenues being shared with these broadcasters.

If you turn to Page 2 of your reference materials you will see the results of a survey that CBC/Radio-Canada recently commissioned and which has been tabled with you today.

These results show nearly 90 per cent of Canadians believe that they are paying for conventional broadcasting services when they pay their cable or satellite bills.

Canadian BDU subscribers see clear value in the conventional broadcasters' television signals they receive from their cable and satellite distributors, despite the free over-the-air availability of these services. I suspect they would be surprised to learn that not a penny of their cable and satellite bills is passed on to the broadcasters who create and provide those signals.

We believe it is entirely appropriate for the Commission to include in its revised TV Policy, a policy statement indicating that conventional television broadcasters are eligible for a share of BDU subscriber revenues – revenues generated by the programming supplied by conventional broadcasters.

Again, given the record of this proceeding, there is simply no valid reason not to do so.

Transition to Digital/High Definition (HD)

Let me now turn to the second issue I mentioned at the beginning of our presentation: the transition to digital/HD and the role of over-the-air broadcasting.

As we all know, the communications world is now a digital world and conventional broadcasters must keep pace. Recognizing this fact, and for efficient spectrum management reasons, we've recommended that the Commission and Industry Canada help encourage this transition by establishing a target date for conversion of analogue television service to HD.

The issue is not, therefore, whether Canadian conventional television should transition to digital.

The issue is – how best to do this, how is it to be funded, and how quickly are we able to move to digital?

In the early 70s, the Government asked CBC/Radio-Canada to embark on an accelerated coverage plan designed to ensure that all communities with populations of 500 or more would have access to our over-the-air television signals.

As a result, CBC/Radio-Canada's over-the-air infrastructure was expanded significantly using money specially allocated by Government to CBC/Radio-Canada for this purpose.

At that time, over-the-air reception was a significant and important vehicle for distributing television broadcast signals to Canadians, with the vast majority of Canadian households receiving their television programming in this manner.

However, looking at Page 3 of your reference materials, you will see the dramatic decline in over-the-air reception that has occurred from 1972 to last year. As you can see, over-the-air delivery has dropped from over 60 per cent penetration to just over 10 per cent in the space of approximately 30 years.

Meanwhile, CBC/Radio-Canada's analogue television transmitters are coming to the end of their useful life and limited funds are available for their replacement. In fact, no supplementary funding has been provided to CBC/Radio-Canada to replace these transmitters.

Based on the current reception levels, we believe it would be fiscally irresponsible for us to try to replace our entire analogue transmitter infrastructure with a digital one.

However, we also need to bear in mind that while Canadian over-the-air reception levels have come down dramatically, in a number of places across the country many people still rely on over-the-air technology to receive their television programming. Surprisingly, because satellite delivery of television has become very popular in rural areas, most of these over-the-air viewers reside in urban centres.

To address this overall decline in over-the-air reception levels, while recognizing off-air's continued importance in many Canadian markets, we have proposed a hybrid approach that would see 44 digital over-the-air transmitters installed in major markets, with other areas served by another distribution technology – namely, satellite, or in some instances cable or eventually perhaps Internet Protocol Television (IPTV).

If you turn to Page 4 of your reference materials, you will see a chart illustrating CBC/Radio-Canada's current over-the-air coverage and the coverage that would be achieved under our hybrid approach.

From our perspective, the hybrid model is not a difficult choice. In fact, it may be the only option for CBC/Radio-Canada for the transition to the digital/HD environment.

Determining the speed of the transition is a financial question and brings us back to conventional broadcasters' weakening business model.

While we will continue to devote resources to the digital/HD challenge, our industry simply does not have the financial wherewithal to undertake this transition in a timely and effective manner in support of Canadian programming. For its part, CBC/Radio-Canada estimates that with PriceWaterhouse Coopers' advertising revenue projections, it will take us another 12 years to achieve full digital/HD conversion of our English and French television services.

Access to supplementary financing, particularly subscriber revenues, is therefore crucial.

To reiterate, we are proposing eligibility, not a guarantee, to subscriber revenues, as a means to offset conventional broadcasters' weakening advertising-based business model. This will ensure that conventional broadcasters have the financial resources to lead a successful broadcasting system in the new digital multi-platform environment with, for example, quality local, HD, and drama programming, as determined by you. And, we are proposing an approach that would allow conventional broadcasters to operate on the same financial footing as specialty services.

We believe it is critical that the Commission take action now in order to provide an environment over the next several years in which conventional broadcasters could continue to make a substantial contribution to the Canadian broadcasting system.

Thank you for the opportunity to present these comments. We would be happy to take your questions.