‘Penetration-based’ subscription rates needed in pick-and-pay regime: experts

Carriage negotiations between broadcasters and the broadcast distributors who deliver their channels to consumers will focus on finding the right “penetration-based” price rates in a future pick-and-pay TV model, industry insiders and experts said. “If you have a channel and it’s put in a position where its penetration is much lower —because of a la carte, pick and pay, or shifts in packaging — then that channel, to maintain the content it has, has to charge a higher per subscriber fee,” Michael Hennessy, president and CEO of the Canadian Media Production Association (CMPA), said in an phone interview in December. “The essence of the principle is right,” he added. “That has to happen.” As the CRTC and federal government ponder a move to a pick-and-pay TV model that will allow consumers greater flexibility to subscribe to individual TV channels instead of channel bundles, one of broadcasters’ top concerns is maintaining revenues at some of the country’s most profitable specialty services in the face of potential declines in their subscription numbers. Those services include about 40 “Category A” specialty channels, which the CRTC requires broadcast distributors to make available to their subscribers, as well as six “Category C” services, which includes popular all-news and sports channels. Together, those channels accounted for $2.1 billion of the English-language specialty channel sector’s $2.5 billion in revenues in 2012, according to CRTC data. This allows them to help subsidize the cost of running less profitable channels, broadcasters say. Under their current carriage agreements, broadcast distributors are often required to put those Category A and Category C services on their basic TV packages, or in other high-penetration bundles, ensuring those channels receive high subscriber numbers and per-subscriber fees, though also driving up the price of those channel packages. Under a penetration-based rate agreement, the distributors would be allowed to move those channels into less popular packages that have lower subscriber levels. In return, the distributors would have to agree to pay higher per-subscriber fees for those channels if their subscription levels fall too low. “With flexible packaging and new packages being created, if we can’t demand a certain package, then we have to be prepared for that volume to fall,” Kevin Crull, president of BCE Inc.’s Bell Media subsidiary, said at the International Institute of Communications’ annual conference in November. Crull told reporters that carriage agreements for newer, “Category B” specialty channels typically already contain penetration-based rate provisions. He noted that Bell Media has also made its Category A and Category C specialty services available to some distributors on a penetration-based rate model since summer 2012, after its carriage dispute with a coalition of broadcast distributors ended up at a CRTC arbitration process. During that dispute, Bell Media proposed a penetration-based rate system for some of its most popular specialty channels as a compromise that would give the broadcast distributors more packaging flexibility while also ensuring the broadcasters’ subscriber revenues would not drop too quickly if subscriber levels do fall. Louis Audet, president and CEO of Cogeco Cable Inc., which was one of the broadcast distributors involved in that dispute, said in a telephone interview in November that the key to a penetration-based rate system is to ensure that the sliding scale of per-subscriber fees doesn’t place too much of the risk on either the broadcasters or the broadcast distributors. If a drop in subscriber fees would trigger a relatively steep increase in the price the broadcast distributors pay, he said, those distributors will be hesitant to move the channels out of their basic TV package. “There is a logic to it,” Audet said of the penetration-based rate system. “Through the years, however, the risks associated with proceeding down that road will have to be appropriately shared between program owners and program distributors. That will be the object of future negotiations.” Geoffrey White, counsel for the Public Interest Advocacy Centre (PIAC), said his group is concerned broadcasters will attempt to impose “commercially unreasonable” terms in future carriage agreements, such as minimum subscriber penetration or revenue requirements. “We think there may be a temptation by the dominant players to try to creatively use penetration-based pricing as a way to cling to the status quo and impair the very consumer choice and flexibility that Canadians, the commission and the federal government are all seeking,” he said in an email statement last year. “Cramming even more channels onto the already-bloated and expensive basic service is clearly not something that would be in the public interest.” Crull said protecting broadcasters’ revenue is in the best interest of everyone involved in the Canadian broadcasting system because a significant drop in their revenues could cause them to scale back their programming spending, resulting in lower-quality programs. Lower-quality programs, he added, could result in more subscriber losses. “If costs are fixed and revenue falls, you just have two choices: you go out of business or you lower your costs,” Crull said in November. “If you really love Discovery Channel and you subscribe to Discovery Channel in a world because you’re passionate about that kind of content, do you think the content should be worse? Would you want to have an inferior Discovery Channel just because three of your neighbours didn’t sign up for it?” Hennessy, who represents the independent producers that create much of that content, agreed that lower broadcaster revenues would result in less money for content production, particularly if some of the country’s most popular Category A and Category C services experience sharp revenue declines. He said if the top channels “are pretty stable,” less program spending from the lower-tier channels would not have a significant effect on program producers. Ultimately, Hennessy said, subscription levels for many channels might remain unchanged in a future pick-and-pay regime, particularly if the CRTC allows broadcasters to continue offering channel bundles as they do now. “I’m very hopeful that a lot of this stuff will be solved just by making sure that everybody has that option,” Hennessy said. “If we get too deep into the details of this, it’s going to be one massive legal and regulatory fight, and that will lose sight of the fundamental issue, which is that you have to keep adjusting to consumer demand if you’re going to survive in this business.” — With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

‘Penetration-based’ subscription rates needed in pick-and-pay regime: experts

Broadcast | January 8, 2014

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