Penetration-based pricing biggest barrier to pick-and-pay: analyst

The biggest challenge standing in the way of a pick-and-pay TV system is the current penetration-based rate card regime, Scotia Capital telecom analyst Jeff Fan said in a research note. Penetration-based rate cards (PBRCs), which allow distributors to package specialty channels as they see fit and require them to pay more for a channel if its subscriber penetration rate falls, were instituted in 2012. BCE Inc. suggested the system during a carriage dispute between its Bell Media subsidiary and a group of TV distributors, and Fan said in Monday’s note that that it is now “predominant” in the industry. He said that for broadcast distributors, the “largest impediment to the adoption” of a pick-and-pay or build-you-own-package television system “is the entrenched nature of the PBRC agreements. In order to enable some element of flexibility, we expect that the CRTC may make some changes to the current PBRC regime.” Fan said that in addition to charging distributors higher per-subscriber rates if a channel’s subscriber base falls below a certain amount, the agreements also often include “make-whole” provisions under which distributors have to compensate broadcasters for the smaller advertising revenue that a lower subscriber base brings. In its notice of consultation, the CRTC said PBRCs could result in subscribers paying higher retail rates and said that it intends to “closely examine” the effect that pick-and-pay could have on the cost of individual channels. It also asked for comment on what role, if any, it could play regarding these agreements. Independent broadcaster Blue Ant Media Inc. asked the CRTC to put in place measures to mitigate the risk independent broadcasters face. “Unlike vertically-integrated companies that can leverage against subscriber fluctuations and can use revenue generating parts of their business to absorb losses on other parts of their business, independent broadcasters cannot withstand such instability and losses,” it said in its intervention to the CRTC. Blue Ant asked the commission to “essentially maintain the status quo” for independent broadcasters, including ensuring a minimum penetration level equal to current subscription penetration levels and “payment of wholesale fees based on current subscription levels to (i) incent BDUs to actually achieve the minimum subscription penetration levels, and (ii) to ensure that independent services can continue to invest in Canadian programming.” In its intervention in the TV review process, Rogers Communications Inc. said the CRTC should put in place “commercially reasonable” rate cards. The company said “extreme penetration-based rate cards” are an obstacle to greater channel packaging flexibility because under them, if a channel’s penetration declines, the fees distributors are required to pay are “so exorbitant that the BDU simply cannot afford to offer the service in a smaller package or on a pick-pack and a la carte basis.” It said that it has been “confronted with a PBRC that is designed not only to make a service whole for subscriber revenue losses, but also for any reductions in advertising revenues that may or may not materialize as a result of fewer customers choosing to subscribe to the service.” It suggested the CRTC limit these agreements so the “make whole” provisions apply to subscriber revenues but not advertiser revenues. Shaw Communications Inc. told the CRTC that while penetration-based rate cards should be allowed, “broadcasters should not impose punitive terms (e.g. more than make-whole if expected penetration is not achieved)." Telus Corp. said that broadcasters “should not be allowed to dictate terms which hinder consumer choice,” including “make-whole” rate cards. Broadcasters use rate cards “to make it commercially unreasonable to package their service in a manner that provides consumers the ability to decide whether or not to pay for and receive the service,” it added, suggesting that said the CRTC prohibit “wholesale rates based on penetration‐based rate cards that incorporate 'make-whole' revenue guarantees, or that are commercially unreasonable.” It gave the example of its negotiations with Bell Media regarding TSN, which ended up in arbitration, which included a proposal under which Telus would have paid Bell more if it distributed TSN in a sports theme pack than if it had distributed TSN to all its subscribers. “This is an example of a rate card which makes it economically irrational for the BDU to make a service entirely discretionary and open to consumer choice,” Telus said. It suggested the CRTC forbid penetration-based cards for sports specialty channels. “It is imperative that the Commission ensure that wholesale fees are set at fair market value, which takes into account actual consumer demand for the service and recognize that this too changes with fluctuations in programming investments,” Telus said. Interventions in the CRTC’s review have covered a number of topics, including unbundling TV services, the future of over-the-air TV and regulating over-the-top services. The public consultation portion of the commission’s review is set to begin Sept. 8. — With reporting by Anja Karadeglija at akarad@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

Penetration-based pricing biggest barrier to pick-and-pay: analyst

News | July 9, 2014

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