Vertical integration helps Canadian TV sector transition: analyst

The tendency of major players in Canada's television industry to be involved in both content and distribution is helping the sector deal better with issues such as cord cutting and a declining advertising market, according to an investment analyst. Jeff Fan, a telecom analyst with Scotia Capital, in a research note issued this week contrasted the Canadian industry with the situation in the United States, where just one major TV-service provider, Comcast Corp., also owns TV stations. In Canada, vertically integrated companies such as BCE Inc., Shaw Communications Inc., Rogers Communications Inc. and Quebecor Inc. provide service to 78 per cent of TV subscribers in the country, Fan said. Fan said these four companies are also responsible for 62 per cent of spending on Canadian video content and 84 per cent of spending on imported video content in this country. "The biggest concern in the TV industry (which includes broadcasters and broadcast distributors) is the changing behaviour of TV viewers and in particular, the millennials, and the impact it has on the advertising market, cord cutting, and cord shaving," Fan said in his note. He said the vertically integrated nature of the Canadian TV industry has resulted in the content and distribution arms of TV companies working in concert with each other as opposed having competing agendas. "Because of the structure, we believe individual VI firms’ broadcast and distribution segments have worked together internally and made decisions that benefited the firm as opposed to their operating units," Fan said. "For instance, the broadcasting arms have not sold non-linear rights to other OTT providers simply to boost short-term revenue and earnings to the detriment of future advertising and monthly subscription revenue streams." A report released this month from Boon Dog Professional Services Inc. said Canada's publicly traded companies lost a combined 113,700 TV subscribers in the first half of 2015, up from a decline of 19,200 in the same period a year earlier. Traditional TV-service providers in the United States saw a net decline of 566,000 subscribers in this year's second quarter, according a report in Variety this month, up from a loss of 321,000 the year before. Fan noted that the main over-the-the-top (OTT) options in Canada are Netflix Inc. and — when they eventually make themselves fully available online, regardless of other service subscriptions — Shomi and CraveTV. With Shomi owned by Rogers and Shaw, and CraveTV owned by Bell, Fan said even the homegrown OTT services in Canada are branches of vertically integrated players. "We think the structure, along with the foresight of firms, insulates the market from a dramatic spike in cord cutting because there is limited room for independent OTT providers to thrive," Fan said. "There are no Canadian equivalents of Hulu or Amazon. And even if cord cutting picks up, we believe Shomi and CraveTV will keep Rogers, Shaw, and BCE positioned to retain the economics through their OTT ownership and revenue stream." Irene Berkowitz, a media instructor at Ryerson University, agreed that Canadian television companies are somewhat insulated from changes occurring in the industry. However, she said it has more to do with the relative lack of OTT alternatives in Canada. "If want HBO, for instance, you've got to have cable," she said in a phone interview, noting that Time Warner Inc.'s HBO streaming service is not available in Canada, and Bell owns the rights to HBO content here. Berkowitz added that the key ingredient to success in video consumption — and this has been true since CBS launched I Love Lucy in the 1950s to more recently with the advent of Netflix — is owning content that has global appeal. That's something she said is lacking among Canadian companies at a time when the media industry is become more global. John Lawford, executive director with the Public Interest Advocacy Centre (PIAC), said that while vertical integration is good for the shareholders of Canadian TV companies, it is not positive for the general public. He said in an email that vertical integration "keeps out competition, raises prices for competitors and limits choice. ... What could possibly be good about vertical integration for consumers?" Fan said that while vertical integration "does not solve the advertising problem," it buys companies more time to adjust to market changes. There are challenges, from an advertising perspective, in monetizing and measuring audience habits when it comes to on-demand video consumption on various devices, he said. "By keeping more pay-TV subscribers in the system and by managing through a gradual decline as opposed to a sharp spike in cord cutting, we believe Canadian broadcasters have more time to observe how the U.S. media industry evolves and ultimately implements a solution that helps broadcasters measure and monetize non-linear viewership," Fan said. Fan said a TV-service provider like Telus Corp. benefits from not being in the content business because it is not exposed to declines in advertising revenue. However, he added that Telus ends up paying more for content as a result of not being vertically integrated. He said CRTC records show that, in 2014, Telus spent 40 per cent more a month on content per subscriber than Shaw, its main competitor for TV service. He added that Telus ended up with a net margin of 51 per cent in its TV service, compared to a range of 62 to 66 per cent among peers. That said, Fan wrote that Telus "made the right decision by not participating in media M&A a few years ago and we believe it is still the right decision today. However, it is important to point out that there is a cost of not being VI in a fully VI market." — With reporting by Derek Abma at dabma@thewirereport.ca and editing by Shruti Shekar at sshekar@thewirereport.ca

Vertical integration helps Canadian TV sector transition: analyst

Broadcast | August 18, 2015

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