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CRTC Dramatically Shifts Canadian Television Regulation

Fasken
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Communications Bulletin

On March 12 and March 19, 2015, the Canadian Radio-television and Telecommunications Commission (the “CRTC”) released the second and third major Let’s Talk TV decisions, Broadcasting Regulatory Policy CRTC 2015-86 and 2015-96. The two decisions, which must be read in tandem, address fundamental regulatory and consumer issues relating to Canadian content and the distribution of programming. They dramatically change the regulatory regime in which programming services—the makers of content—and broadcasting distribution undertakings—cable and satellite distributors of content—will operate. A number of commentators and consumers were expecting Let’s Talk TV to result in a major, inaugural policy decision regulating Netflix, a popular online content streaming service. While this did not materialize, these decisions represent significant shifts in television regulation and broaden the ability of traditional BDUs to provide content to consumers in innovative ways both online and on traditional linear platforms. The following provides an overview of the new rules and policies.

Content Regulation - Broadcasting Regulatory Policy CRTC 2015-86

This decision can be grouped into four broad policy measures: (1) creating new approaches to discover and access Canadian programming; (2) providing regulatory supports to certain types of programming; (3) streamlining the licensing process for programming services; and (4) emphasizing the quality over quantity of Canadian programming.

Creating New Approaches to Discover and Access Canadian Programming

“Discoverability”

In an environment of changing technology and the emergence of new broadband platforms, the CRTC stated its belief that content creators will need to seek out new approaches to connecting with audiences. The manner in which the industry adapts its promotional efforts to this new environment will ultimately dictate the success of Canadian programming. To this end, the CRTC will convene a summit on discoverability in order to engage stakeholders in a discussion on best practices going forward, to take place in the fall of 2015.

Third-party promotion expenses

The CRTC will permit independent programming services (i.e. those services not affiliated with a vertically-integrated, “VI”, company) to count expenses for third-party promotion of Canadian programs to a maximum of 10% of their Canadian program expenditure (“CPE”) requirements.

Local availabilities

Local availabilities are periods of advertising time (normally two or three minutes per hour) in non-Canadian services that are used for the promotion of Canadian programming services and other services offered by BDUs. Today, at least 75% of these local availabilities must be made available by BDUs for use by licensed Canadian services for the promotion of their respective services, for the promotion of the community channel and for unpaid Canadian public service announcements. The remaining 25% are used to promote a BDU’s broadcasting and telecommunications services.

To ensure that the local availabilities are used to promote original Canadian programs, rather than programming services or commercial advertisers or sponsors, the CRTC revised its approach. BDUs will now be required to devote at least 75% of local availabilities in each broadcast day for use by licensed Canadian television programming services, in an equitable manner and on a cost-recovery basis, to promote first-run, original Canadian programs.

Hybrid video-on-demand (“VOD”) services

The CRTC rejected proposals to revise the definition of “broadcasting revenues” for licensees to include revenues from programming offered online. It recognized that doing so would stifle innovation and inhibit licensees’ ability to offer new online-only programming. The CRTC also reaffirmed its view that licensing digital media broadcasting undertakings is generally not necessary to achieve the objectives of the Broadcasting Act. No changes are being made to the Exemption Order for Digital Media Broadcasting Undertakings (“DMEO”). 

The CRTC recognized, however, that VOD services, both traditional and online, increasingly face direct competition from foreign online video services (such as Netflix), and that audiences for these types of on-demand services will continue to grow in Canada.

The CRTC pointed out that there are currently two methods to offer VOD services in Canada: (i) through a BDU-specific VOD service; and (ii) through an online video service offered under the DMEO. Both operate under clear rules established by the CRTC. The CRTC noted, however, that while it is possible to operate a service under both regimes, the different rules that apply to each, particularly in regard to exclusivity, “would preclude the possibility of offering an identical service over both the Internet and the closed BDU platforms.” 

To address this, the CRTC will amend the current exemption order for VOD services to include an exempt, third category of hybrid VOD services which will be authorized to (i) offer exclusive programming in the same manner as services operating under the DMEO; and (ii) to offer their service on a closed BDU network in the same manner as traditional VOD services without the regulatory requirements relating to financial contributions to and shelf space for Canadian programming. However, to be eligible for exemption, a hybrid VOD service must also be offered on the Internet to all Canadians without authentication to a BDU subscription. The CRTC called for comments on the revised exemption order.

Funding models for Canadian programming

The CRTC stated its belief that the future television environment requires new approaches to what constitutes “Canadian programming.” Today, a program is recognized as “Canadian” based on the various creative and other roles played by Canadians and Canadian companies in its production. To encourage governments and partner agencies to consider more flexible and forward-looking approaches to the production and financing of Canadian programs in the future, the CRTC announced that it will launch two pilot projects:

  • Pilot Project 1: Live-action drama/comedy productions based on the adaptation of best-selling, Canadian-authored novels as Canadian will be recognized as Canadian.
  • Pilot Project 2: Live-action drama/comedy productions with a budget of at least $2 million/hour will be recognized as Canadian.

Both will be subject to the following criteria: (i) the screenwriter is Canadian; (ii) one lead performer is Canadian; and (iii) the production company is Canadian, which means that at least 75% of the service costs and of the post-production costs are paid to Canadians.

Terms of Trade Agreements

The CRTC determined that it is no longer necessary to intervene in the relationship between broadcasters and independent producers by requiring adherence to terms of trade agreements. The parties now have the clarity and experience they need to negotiate future agreements without CRTC intervention. Programming services will, therefore, be able to apply to remove the requirement to adhere to a terms of trade agreement, effective April 29, 2016.

Set-Top Box (“STB”) Data – audience measurement

The CRTC noted that the Canadian television industry should have access to appropriate tools to effectively respond to changes in the industry and to the needs and interests of viewers. It concluded that a STB-based audience measurement system could be such a tool as its data can be used to measure viewing levels of programs more accurately. This could improve the industry’s ability to provide Canadian viewers with the programming they want and information they need to make informed choices. It could also increase revenues flowing to program creators.

In recognition of its value, the CRTC is requiring the industry to form a working group (to meet no later than April 13, 2015) with the goal of developing a STB-based audience measurement system. Such a system will include technical standards, privacy protections, governance structure and cost sharing. This group will report to the CRTC on its progress by June 10, 2015.

Regulatory Support for Certain Programs Deemed to be in the Public Interest 

National news services

The CRTC determined that national news services, which benefit from a 9(1)(h) order, must better reflect their national nature of service. They have a duty to reflect and report on all regions of Canada. The CRTC will amend the standard conditions of licence and licensing criteria (currently set out in BRP 2009-562-2) so that licensees must:

  • have a demonstrated capacity to gather news and report on events throughout the country, whether achieved alone or through arrangements between services or in another way;
  • broadcast 16 hours per day of original programming (need not be first-run, though), 7 days a week, averaged over the broadcast year;
  • draw not less than 95% of all programming broadcast during the broadcast month from the following program categories: (1) news, 2(a) Analysis and interpretation, 2(b) Long-form documents and (3) Reporting and actualities;
  • operate a live broadcast facility and maintain news bureaus in at least 3 regions other than that of the live broadcast facility;
  • comply with additional journalistic and ethical codes; and,
  • be able to report on international events from a Canadian perspective.

Additionally, the standard conditions of licence will be amended to allow the services to count the maximum minutes of advertising allowed per hour as an average over the broadcast day. This will allow the service to offer continuous news coverage during a special event.

The new rules will be applied to existing services at licence renewal and will be used to determine whether to renew the 9(1)(h) order. Applications for new licences will also be assessed against these new criteria. Such applicants will need to provide evidence of demand for another national news service and will have to demonstrate that the proposed service will add diversity to the Canadian broadcasting system.

Programs of National Interest (“PNI”)

PNI are drama, long-form documentary, music/variety and award show programs. The CRTC ensures the creation of PNI by imposing on the CBC and large ownership groups PNI expenditure requirements and an obligation to allocate a high proportion of PNI expenditures to independent producers. The CRTC maintained these requirements but set out a new test for determining whether to initiate a proceeding to add or remove a type of program from the category of PNI:

  • the type of programming is generally expensive to produce and carries with it a greater risk of unprofitability;
  • the widespread availability of such programming to Canadians is necessary to the achievement of the objectives of the Broadcasting Act; and
  • in the absence of regulatory support such programming would not otherwise be available to Canadians.

Streamlined Licensing Processes for Television Programming Services

Streamlined licensing process

The CRTC replaced the numerous existing categories of television programming service licences with the following three, each of which will have their own standard conditions of licence:

  • Basic services (including over-the-air [OTA] stations, community television stations and provincial educational services);
  • Discretionary services (all pay and specialty services, including those services, other than OTA stations, which were granted mandatory distribution on the basic service pursuant to paragraph 9(1)(h) of the Broadcasting Act, the so-called 9(1)(h) services); and,
  • On-demand services (Pay-per-view and VOD services).

Genre exclusivity – competition among “Category A” services

In keeping with the reduced categories of programming services, the CRTC eliminated the policy of “genre exclusivity.” This policy provided for the licensing of those specialty and pay services, called “Category A” services, on a “one-per-genre” basis. The genre-monopoly insulated services from competition of other Canadian and non-Canadian services. Most of these licences were held by the VI companies. The CRTC stated that it will also amend the VOD standard conditions of licence to remove the prohibition against a Canadian subscription VOD package from competing with a genre-protected Canadian discretionary service. However, the CRTC will maintain the nature of service limitations for 9(1)(h) services, including national news services.

The CRTC found that genre protection was no longer an effective tool for ensuring programming diversity, a policy objective of the Broadcasting Act, as it had negative effects, including: stifling programming diversity, quelling competition for established brands and services owned by the VI companies, precluding competition in highly coveted niche genres, and creating complicated and difficult to enforce conditions of licence and nature of service (genre) descriptions.

By contrast, the absence of genre protection is designed to allow existing and new services to adapt their programming strategies and shift services into genres that are attractive and popular and to develop new and innovative genres of programming. The operation of these market forces will ensure a diversity of programming is available on television.

Expanded exemption order for programming services with fewer than 200,000 subscribers

The CRTC issued a new exemption order for programming services with fewer than 200,000 subscribers.[1] It expands and merges the current exemption orders to apply to all discretionary programming services with fewer than 200,000 subscribers. Except for certain requirements which are appropriate to differentiate between English, French and third-language services, the CRTC will impose a common set of obligations on these services falling under this threshold. It will come into force when the Broadcasting Distribution Regulations are amended to refer to the new exemption order.

Shift in emphasis from quantity to quality

The CRTC recognized that viewers increasingly consume high-quality programming on a program-by-program basis and on multi-platform environments. At the same time, the objectives of the Broadcasting Act require the CRTC to ensure that each element of the Canadian broadcasting system contributes to Canadian programing in an appropriate manner and that Canadian resources are predominantly used in the creation and presentation of programming.

In order to reconcile shifting viewer behaviour and the importance of Canadian content, the CRTC has prioritized the creation of high-quality Canadian programing that viewers will choose to consume. In order to accomplish this, the CRTC has shifted its focus from a regulatory approach based on exhibition quotas (the number of hours of Canadian programming broadcast), to an approach primarily based on expenditures (the amount of money spent on Canadian programming).

The CRTC therefore decided to impose new CPE requirements on a greater number of programming services and only maintain exhibition requirements for those time periods where they have the most impact.

Maintaining exhibition requirements where they have the most impact

Despite recognizing the limited utility of exhibition quotas in an on-demand environment, the CRTC pointed out that such quotas have ensured the presentation of Canadian programming in a fully linear television system.

Canadian exhibition requirements currently range from 15% for third-language and ethnic services to 90% for Category C national news services, with Category A, B and sports being required to devote between 35% and 60% of the broadcasting day to Canadian content.

The CRTC decided to change this structure on a phased basis as licence renewals take place and in accordance with the new service licensing categories. Private conventional television stations will only retain exhibition requirements (50%) during the evening broadcast period, with no overall minimum requirement for the broadcast day. For discretionary pay and specialty services, the CRTC will set overall daily exhibition requirements at 35%. As an exception, Canadian exhibition requirements for certain services, such as children’s and youth programming, will be considered at licence renewal on a case-by-case basis. The CRTC will maintain all exhibition requirements for services with a 9(1)(h) order.

These changes will take effect by August 31, 2017 for English- and French-language large private ownership groups and as early as September 1, 2018 for the independent services.

Canadian programming expenditures

The CRTC continues to believe that CPE requirements support the production of high-quality Canadian content. Furthermore, they help to create a “virtuous cycle” whereby investing in high-quality Canadian content drives viewing; high viewership generates revenues; and these revenues can be reinvested in producing future content.

The CRTC did not raise CPE levels for existing broadcasters. Instead, it decided that it will apply CPE requirements to all licensed services. Those that do not currently have a CPE requirement (such as independent OTA stations) will be assigned a CPE requirement, based on historical expenditure levels, at licence renewal.

With respect to English-, French-, and third-language discretionary services, CPE requirements will be implemented for all services with over 200,000 subscribers. The minimum level of CPE applied will be 10%—except for French-language services, which will be established on a case-by-case basis.

Distribution Regulation- Broadcasting Regulatory Policy CRTC 2015-96

This policy decision focusses on the regulations affecting the distribution of programming online and through traditional linear platforms. In particular, the CRTC is fundamentally changing the entry-level basic service and the packaging and promotion of programming services distributed by BDUs to expand the choices available to Canadian consumers. It is also proposing an enhanced code of conduct for BDUs and programming services that will prohibit certain provisions from being included in the distribution/affiliation agreements. Finally, the CRTC is adjusting the requirements for the distribution of independently-owned services, official-language minority services and ethnic/third-language services to ensure that there is a diversity of programming available and that consumers have greater control over these choices.

Consumer Choice and Flexibility

Mandatory, small entry-level service offering

The “basic service” is the entry-level BDU subscription package which is offered to all subscribers. Currently, the CRTC does not regulate the cost of the basic service and it permits each BDU to add to its basic service those programming services that are not deemed to be discretionary only services. 

The CRTC has now decided to regulate both the cost and content of a new entry-level basic service. Beginning March 2016, the CRTC will require all licensed BDUs (excluding exempt BDUs) to offer subscribers a “reasonably priced small entry-level service offering.” Specifically, the entry-level basic service must be priced at no more than $25 (not including equipment) per month. It must include the following services: all the local and regional television stations; 9(1)(h) services; educational channels, the community channels and services operated by provincial legislatures. BDUs may also offer the following services in the small entry-level service offering: where less than 10 local and regional stations are available, terrestrial BDUs will be authorized to include other, non-local/regional Canadian OTA stations, for a maximum of 10 OTA stations; in the case of terrestrial BDUs, one out-of-province designated educational service in each official language in provinces and territories where no such services are designated; one set of US 4+1 signals; and local AM and FM radio stations. It must be promoted in a like manner to the BDUs’ other “first-tier” offering so that customers are aware of the availability, price and content of the entry-level service offering.

BDUs will be allowed to provide an alternative, larger first tier offering, provided that (1) they also provide the entry-level service offering and (2) the first-tier offering includes all services that must be provided as part of the entry-level service offering. BDUs must allow those subscribers to the entry-level service offering to acquire other discretionary services either on a pick and pay basis or in smaller reasonably-priced packages.

Pick & pay and small package selection for all other channels

The CRTC found that it was in the public interest to take positive steps to foster greater choice and flexibility in the Canadian television system, by adopting new measures to ensure that consumers are able to obtain only those discretionary services that they want to pay to receive. Contrary to some suggestions, the CRTC has not prohibited BDUs from continuing to offer pre-assembled packages of discretionary channels.

By March 2016, the CRTC will require all licensed BDUs to offer all discretionary services on an individual pick-and-pay basis OR in small, reasonably priced packages, e.g. 5 or 10 channels, which can be a “build-your-own” or pre-assembled package, such as a theme-based package. By December 2016, BDUs must allow subscribers to acquire these services on a pick and pay basis AND in small, reasonably priced packages as described above. BDUs will be able to continue to offer pre-assembled packages, but will not be allowed to require subscribers to buy any service other than those in the entry-level service offering in order to access any other discretionary service or package. 

These new rules will not apply to analog and exempt BDUs. With respect to non-Canadian services, the CRTC continue to prohibit them from competing with Canadian pay or specialty services and will require the operators of the non-Canadian services to allow them to be offered on a pick-and-pay basis and in small packages in the manner that applies to Canadian services.

Preponderance of Canadian services

As of March 2016, BDUs must offer their subscribers a preponderance of Canadian channels. The requirement for each customer to receive (i.e., for BDUs to provide) a majority of Canadian services has been removed.

Relationship between BDUs and Programming Services - An Enhanced Wholesale Code

The CRTC stated that a vigorous wholesale market for programming services is essential to fostering greater subscriber choice. Most BDUs and all independent programming services encouraged the CRTC to enhance the Code of Conduct for commercial arrangements and interactions (now referred to as the “Wholesale Code”) to remove the obstacles to choice that are currently present in some affiliation agreements and to ensure fair terms and conditions of distribution. The CRTC responded by proposing significant changes to the Wholesale Code and imposing it on all licensed undertakings as a regulatory requirement, continuing to apply it as a guideline for exempt BDUs, exempt programming undertakings and exempt digital media undertakings, and stating the expectation that non-Canadian services conduct their negotiations and enter into agreements in a manner consistent with the intent and spirit of the Wholesale Code. This means that the CRTC has firmly committed itself, rather than the market, to being the arbiter of what will constitute “commercially reasonable” affiliation agreements and fair market value (“FMV”) wholesale fees.

The proposed amendments to the Wholesale Code include:

  • prohibiting provisions in affiliation agreements that: prevent the distribution of services on a pick-and-pay or build-your-own-package basis, impose packaging requirements on BDUs, or establish minimum penetration or revenue guarantees;
  • requiring BDUs to offer independent services in at least one pre-assembled package, in addition to offering them on a standalone basis, requiring VI BDUs to ensure that independent services are given packaging and marketing support that is comparable to that given to their own services, and ensuring that programming services are able to more fully exploit their programming rights on all platforms and that BDUs are able to develop and implement innovative multiplatform strategies;
  • new provisions that prohibit MFN clauses, unreasonable volume-based rate cards, unreasonable penetration-based rate cards (PBRCs), and make specific reference to viewership as a factor in assessing FMV of a programming service.

To facilitate its intervention in the marketplace, the CRTC also determined that it would be appropriate to add a provision to the Wholesale Code requiring all licensees to submit to dispute resolution 120 days before the expiry of an affiliation agreement. This will enable the CRTC to intervene without any need for a small undertaking to file a complaint, risking its relationship with a larger business partner.

A new proceeding was announced to address these proposed changes with comments due on May 4 and May 14, 2015. The enhanced Code will be implemented by September 2015.

Eliminating access rules for Category A services

Category A pay and specialty services currently enjoy preferential “access,” i.e.: mandatory distribution by licensed BDUs, regardless of the quality of the programing or the level of viewership the service enjoys.

The CRTC eliminated the access rules for all Category A services as of their next licencing period. This will be carried out in phases beginning September 1, 2017 with Category A services belonging to the large private broadcasting groups. The second phase will start in September 2018, with the removal of access rules for independent Category A services. The CRTC indicated that it believes removal of access rules will level the playing field for all pay and specialty services and incent Category A services to produce compelling programming and differentiate themselves in order to attract subscribers.

Protecting Independent and Ethnic and Third-language Services and Services for Official-language Minority Communities (“OLMCs”)

In order to ensure that a diversity of voices continue to be available to Canadians, the CRTC modified a variety of ratios requiring the distribution of independent, minority official language, and Canadian ethnic and third-language services by all licensed BDUs.

VI company - and independently-owned channels - a 1:1 ratio

As of September 1, 2018, VI companies will be required to offer one English- and French-language independently-owned channel for each of their own English- and French-language channels. The CRTC concluded that with respect to independently owned discretionary services, some measure of additional support is needed to ensure that independent services are treated fairly. Independent services are considered an important source of diversity in the Canadian broadcasting system because they often offer niche programming targeted at narrower audiences. As such, this new rule is designed to ensure that the diversity of voices is preserved through the protection of access for independent services as a group, although no one service would be guaranteed access.

OLMCs - a 1:10 ratio

BDUs will also be required to provide Canadians living in OLMCs with access to channels that meet their needs. Terrestrial BDUs will be required to continue to offer one Official-language minority service for every ten majority-language services they distribute. DTH satellite distributors will also have to offer the same 1:10 ratio. In addition, in order to provide Canadians living in OLMCs with access to educational programs including programs for children and youth, both terrestrial and satellite BDUs will be able to distribute an educational channel from another province in provinces and territories where there are no educational channels.

Ethnic and third-language programming services - a ratio of 1:1     

The CRTC decided to remove the current “buy-through” rules for ethnic and third -language Category A services. BDUs will, however, be required to distribute one Canadian third-language service for every non-Canadian service they offer. Also, for BDUs that offer pre-assembled packages containing third-language services, they will have to meet a 1:1 ratio of Canadian to non-Canadian services (where available) in those packages. Given that pick-and-pay or small bundles will be mandatory, the CRTC believes that Canada's multicultural communities should enjoy increased flexibility in choosing Canadian ethnic and third-language channels. 

Multiplexed Services

The CRTC will remove the current requirement to offer multiplexed channels together in a package from the standard conditions of licence for pay and sports services. With respect to new multiplexes, the CRTC decided to restrict future multiplexes by:

  • modifying the standard conditions of licence applicable to pay services and mainstream sports services to prohibit them from adding further multiplexed channels, unless authorized to do so by condition of licence; and
  • requiring other services that wish to offer multiplex channels to apply for explicit authorization to add new multiplexes.

Fostering competition among BDUs

A follow-up process will be announced to broaden the exemption order for terrestrial BDUs to allow BDUs with fewer than 20,000 subscribers to enter and compete in markets with licensed BDUs. This follow-up process will also seek input from parties as to which regulatory requirements should apply to these BDUs and in what manner. Competitive BDUs that intend to operate under the exemption order will be required to notify the CRTC three months prior to launching in the new service area. 

Conclusion

Both of the CRTC’s recent decisions fundamentally change the regulations affecting BDUs and programming services, increasing the emphasis on quality Canadian programming for consumption at home and abroad, and granting consumers greater control over the nature of the television services they receive. This new approach will have significant financial impacts on both distribution and programming services. Further changes can be expected, as BRP 2015-86 and 2015-96 each have triggered further policy and regulatory proceedings and the CRTC announced on March 19, 2015 that it will issue another decision resulting from Let’s Talk TV to be released in the week of March 23, 2015.



[1] Broadcasting Order 2015-88.

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