Robert Armstrong is a broadcasting and film consultant based in Montreal.

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Canadian pay television began in February 1983 with great expectations. By October of that year, the sector was in complete disarray. Why has pay-tv never fulfilled its early promise to the Canadian creative and production communities?

This question is of some interest as the crtc prepares for its Oct. 30 public hearing to examine nine applications for new direct-to-home satellite distribution and pay-per-view tv services.

Taken together, these applications present a very optimistic forecast for potential subscribers and subscriber revenues flowing to dth undertakings. For example, if licensed, the three distribution undertakings forecast some 915,000 subscribers and $360 million in annual revenues by the end of the year 2000!

In deciding how many dth services to license, what sort of guide does the history of pay-tv provide?

In 1982, the licensing of the first Canadian pay-tv services had already been delayed for several years by a reluctant regulatory agency. When the decision was finally made to proceed, little hard empirical information existed as to how to license discretionary cable tv services. As a result, the crtc relied on the applicants’ commitments and its knowledge of the u.s. experience where, in the early 1980s, pay-tv was booming.

Pay-TV in the U.S.

However, u.s. pay-tv services were launched in a very different broadcasting environment from that in Canada. When the first pay services commenced operations in the mid-1970s, u.s. cable penetration of television households was much lower than in Canada and pay services were used as a promotional device to sell cable services as a whole.

The price of u.s. pay services was submerged in an overall price for all programming services, and the cable subscriber was offered a wide variety of channels in a package of discretionary and non-discretionary services that included one or more pay channels.

For a single price, the cable consumer received two or three times as many channels as before and, in a sense, the u.s. pay services piggybacked on the rapid growth of u.s. cable penetration. As a result of this marketing strategy, the penetration rate of cable services and pay-tv increased dramatically in the u.s. in the late 1970s and early ’80s.

About 1983, however, the phenomenal growth of pay-tv subscriptions started to slow down as u.s. consumers discovered that they didn’t have to subscribe to pay-tv in order to obtain basic cable services. A shakeout and consolidation of u.s. pay services ensued in the period that followed.

Pay-TV in Canada

Needless to say, the crtc conducted its public hearing in 1981 to consider the first Canadian pay-tv service applications without the benefits of the hindsight we now enjoy.

In light of the success of u.s. pay-tv in the late ’70s and early ’80s, and the expansive promises of the Canadian pay-tv applicants, the commission licensed six services – far too many – in what was presented as a head-to-head competitive model.

In the months following the launch of Canadian pay services in February 1983, many Canadians decided that the price/ value relationship for one or two additional pay services was too high, considering the large number of services already available on basic cable.

Because the Canadian cable services enjoyed a much higher level of cable penetration than that in the u.s., Canadian pay-tv was often a single service add-on to the variety of services already offered by cable operators.

What is more, in addition to the price of pay, the subscriber required a set-top box (itself $4 per month or more) to receive a single additional channel, at what seemed like a substantial incremental price.

To further complicate the situation, the introduction of pay-tv in Canada coincided with the take-off of vcr penetration. Movie rentals and vcr playback competed directly with the pay movie channels. In place of the pay movie services, consumers could rent movies from video stores instead.

Canadian pay-tv incurred a series of bankruptcies and amalgamations until 1985 when the industry began to recover with more modest ambitions and a marketing strategy that emphasized packaging with the new specialty services: tsn and MuchMusic.

Rapid expansion followed for a period but, beginning in 1987, the development of extended tiers (with a negative option) seriously dampened the growth of pay-tv by again isolating pay services on relatively high cost tiers with low penetration. Pay television has been characterized by slow growth in subscriber penetration levels ever since.

After many fits and starts, Canadian pay-tv has settled into a niche market that contributes much less than was promised almost 15 years ago. Today, an aggregate penetration rate of under 20% of the total cable universe results in reduced levels of gross revenue, limited Canadian program expenditures, and a relatively modest contribution to Canadian program production.

According to data prepared for the Canadian Association of Broadcasters, pay-tv’s contribution to Canadian program spending, as a percentage of gross revenues (18.8% in 1993), is significantly lower than that of conventional private-sector television (29.9%) or the specialty services (36.6%).*

Given this experience, and the propensity of Canadian viewers to choose u.s. studio product over other movies, what is the appropriate way to license new Canadian television services in the new pick-and-pay universe?

New DTH services

Although the pay television experience has helped to condition the crtc’s approach to the licensing of new broadcasting services in the years since, there is a problem in regard to new dth services and the crtc’s Oct. 30 hearing.

In a preamble to the July 6, 1995 directions to the crtc concerning the licensing of new dth distribution and ppv programming undertakings, the government says the commission should not refuse to issue distribution or ppv licences ‘on the basis of a concern for economic viability.’

As a result, in the world of ‘dynamically competitive markets’ envisaged by the Orders-in-Council, the crtc will have trouble developing a rationale for weeding out any of the dth television applicants – unless one or more of the applicants fail to meet some aspect of the directions themselves.

And the Canadian broadcasting system may find itself in a situation of deja vu all over again.

* In 1993, the pay television licensees included Family Channel, The Movie Network, Superchannel, Super Ecran, Cathay, Chinavision and Telelatino.