Over-the-Top Providers Disrupt Canada's Pay TV Model

Online Providers May Help Erode Regulatory Walls
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GATINEAU, Canada — “Survival of the fittest” refers to species that successfully adapt to whatever is thrown at them — who find a way to “fit” —rather than those who are in good physical shape. After all, the Tyrannosaurus Rex could easily take out an alligator. But it was the alligator that survived the asteroid that hit Mexico 65 million years ago. The mighty T-Rex did not.

Canada’s broadcast regulator, the Canadian Radio-Television and Telecommunications Commission (CRTC), may be approaching its own evolutionary moment.

Playing the role of killer asteroid this time are programming services like Netflix that come across the border over the top of the TV services overseen by the commission.

Established in 1968 to replace the country’s Board of Broadcast Governors, the CRTC regulates and licenses Canada’s so-called BDUs, or broadcasting distribution

undertakings, a catch-all term covering broadcasters, cable companies, satellite-TV providers, telco-TV distributors and IPTV outfits.

‘CANCON’ CARRIAGE

In doing so, the CRTC enforces specific government policies aimed at supporting Canada’s production and distribution industry. This is why it requires broadcasters

and channel providers to carry at least 35% Canadian content — known here as CanCon.

CRTC licenses also require BDUs carrying popular U.S. channels to bundle them with less-popular domestic services. The U.S.-sourced HBO Canada, for example, is paired with The Movie Network, a domestically-owned channel.

The CRTC also has to translate the federal government’s various social policies into action.

Hence, Rogers Communications — a BDU serving 2.1 million Canadian households with digital cable, broadband Internet and voice telephone — is required to include APTN (the Aboriginal Peoples Television Network), CPAC (the two Canadian Parliament TV channels, in English and French) and religious offering

VisionTV in its basic-channel package, even though the viewership demand for these channels is negligible.

Rogers isn’t alone in this conundrum. All Canadian BDUs are required to carry these and many other channels as part of their basic service.

Because the BDUs must pay many of these channels for carriage, their

costs are passed on to Canadian consumers.

This “consumer pays for policy” structure doesn’t bother CRTC spokesperson Patricia Valladao. “You have to pay school taxes in Canada, whether or not you have a child yourself who is going to school,” she said in an interview. “If you want to only read the sports section in a newspaper, you still have to buy the whole newspaper to get it.”

Times are changing, though, after decades of having to buy the whole newspaper.

The CRTC does not regulate the Web. Netflix, to name one popular example, has as many as 2.8 million subscribers in Canada, out of a total 13.3 million households

measured by the 2011 Canadian Census, according to CBC/Radio-Canada and BBM Analytics research.

Netflix and other online subscription video services coming into Canada don’t have to comply with costly CanCon requirements and choice-limiting channel packaging rules.

This puts Canadian BDUs at a competitive disadvantage. That’s why they, and the millions of their increasingly irate Canadian subscribers, are happy that the CRTC has launched a comprehensive public process of revamping the current rules, a process that will culminate in public hearings this September.

The CRTC got things rolling by disseminating a recently-concluded online questionnaire aimed at ordinary Canadians called “Let’s Talk TV: Choicebook.” Some 1,300 respondents filled it out, giving their advice about possible changes to Canadian TV and BDU regulations.

The sentiment of broadcasters and BDUs toward the CRTC process is succinctly summed up by Marina Brzeski, director of corporate communications for Cogeco Cable Canada. While her company agrees that increased choice is good for Canadian consumers, she said, “the biggest challenge is to deliver the government of Canada’s objectives to offer the Canadian consumers more choice, while respecting the commission’s regulations and contract obligations with broadcasters.”

VMedia, a Toronto-based IPTV BDU competing with Rogers and other incumbents, is also saddled with the CRTC content rules. The only way it has been able to compete on price has been to take smaller profit margins on its channels, allowing it to charge consumers less for the same regulated content, director George Burger said.

“The CRTC has been given a very clear mandate by the Minister of Canadian Heritage to look for ways to give consumers more choice,” he said. That’s difficult to do, he said, given that “at least 25 Canadian channels that are included in the basic BDU service package are mandated by law.”

The question is not just whether or not the commission will continue to charge Canadians for channels they don’t want. It’s also whether the BDUs will continue to provide the regulated-only delivery platform necessary to make this possible.

Cable companies, including Rogers Communications, are already looking to adapt, not waiting for the CRTC to decide on possible changes to BDU regulations.

HYBRID ALTERNATIVES

“We’re already looking at deploying hybrid set-top boxes that can access regulated content via cable, and unregulated [over-the-top] content via the Web/broadband, so that our subscribers can watch both on their TVs,” Dave Purdy, Rogers senior vice president of content, said.

“We’re not alone in this effort,” Purdy said. “I expect that virtually everyone in the future will have access to a hybrid viewing experience, whatever their service provider.”

It might be only a short step from hybrid regulated and unregulated content delivery in Canada to a fully unregulated model, should consumers here decide that paying $7.99 a month for commercial-free programming from Netflix beats paying $52 to their local BDU.

This is the challenge facing the CRTC. It likely won’t occur during this regulatory process, because the unregulated OTT services only have a relatively small (though growing) share of the public’s viewing attention, compared with the programming that the CRTC oversees.

But if high demand for Netflix’s House of Cards is any indication, the balance is inexorably changing. One day, it could tip sufficiently to the unregulated video side to give the CRTC’s well-intentioned consumer-must-pay policies “the kiss of death,” Purdy said. 

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