Douglas Barrett and Sandra Richmond are members of the KNOWlaw group of the Toronto law firm McMillan Binch. This article was prepared with the assistance of Jung-Kay Chiu.

With analog capacity close to saturation and the tide of digital distribution rising, the crtc faced a challenge simply determining how to process licence applications for digital services.

Its recently announced framework for licensing new digital programming services (Public Notice CRTC 2000-6) marks a watershed in the commission’s approach to the regulation of programming services and the awarding of licences.

Digital distribution technology means a vastly increased capacity for services and the crtc clearly expects a corresponding increase in licence applications. But with a limited digital subscriber base (and thus a limitation on the number of services a cable or dth operator can afford to carry), the commission had to address not just who would be granted a licence but also how that should be decided.

Balance through

licensing systems

The commission’s answer – a dual licensing system for new digital pay and specialty services – balances the need for regulation to promote Canadian programming with an open-market approach that recognizes the reality of digital services.

The Category 1 licence is designed to promote Canadian programming by requiring a minimum of 50% Canadian content by the end of the seventh year of the licence. In return for that commitment, the successful applicant receives guaranteed carriage by digital distributors (which cannot be solely on a standalone basis, but must also be part of a package) and protection against any service that would be a direct competitor in the same genre. The commission has said it will likely award approximately 10 of these licences.

The Category 2 licence is a sharp departure from the traditional, highly regulated licensing scheme. This market-driven system will require applicants to meet Canadian-content requirements (35% generally, but 15% for foreign services and 30% for music video services) and restricts the service from competing directly with Category 1 services and existing specialty and pay services, but does not involve the traditional approval of marketing or business plans.

Certainty of licence

Once the two requirements are met, though, it appears that applicants are virtually certain to receive a licence. There are no restrictions on the number of licences the commission will give, and no restrictions on competing with other services in that licence category.

While this system gives applicants a certainty that they will be licensed, it does not guarantee digital access. There could conceivably be hundreds of licensed services, all competing with each other for distribution. For Category 2 licences, the commission has essentially handed over to cable and dth distributors the role of deciding which services will make it into the system. This means that applicants for Category 2 licences will want to commence negotiations with distributors at the earliest possible opportunity.

Distributor ownership

And, it appears, distributors have greater freedom to make deals with the licensees. The commission has drawn back on its previous position that distributors cannot own more than 10% of the equity of a specialty service. A distributor can now own as much as it likes of any service, although owning more than 10% of a service will render it an ‘affiliated’ service. The catch, for distributors, is that for every ‘affiliated’ service that a distributor carries, the distributor will be required to carry at least five non-affiliated services.

(The commission will also retain existing ‘undue preference’ prohibitions for distributors. In addition, it will institute new regulations to ensure that licensees are not allowed to show undue preference to distributors, for example, by refusing to allow a distributor to carry them or to impose less favorable terms on a non-affiliated distributor.)

One likely result of this ownership decision is that distributors will own either 100% or 9.9% of a licensee – there is no incentive to own less than 100% once the 10% threshold has been crossed. And, given the high competition for carriage, it also appears to leave open the possibility that distributors may own 9.9% of the equity of many of the digital services they carry.

Indeed, a Category 2 service may find it needs to have a number of 9.9% equity ‘partners’ in order to arrange carriage with major cable and dth distributors.

Ethnic services

The commission’s policy does, however, open up opportunities for ethnic specialty services and, thus, principally for foreign-language services. Where a foreign service finds a Canadian partner and creates a service that meets the Canadian control test, the service may meet the requirements for a Category 2 licence with extremely low levels of Canadian content. However, these services will still be subject to open competition with other Category 2 licensees and have no guarantee that they will be picked up in the system. But many observers believe that the introduction and packaging of foreign-language services will be an important factor in the success of any digital rollout.

Existing analog services

The one part of the system in which the commission made no changes was the existing analog access rules. Services like History Television, Showcase and Bravo! will not be forced to move from their analog subscriber base to a digital subscriber base. Given that the digital subscriber base is much smaller than that for analog – and no one can predict the rate at which it will increase – this decision injects a degree of stability into the new licensing framework that is probably much appreciated by these services.

New landscape

It will be interesting to see how the participants react to this new system. The established service providers may continue to rely on the traditional licensing system because of its guaranteed carriage. Or, because they have a better ability to negotiate with distributors, they may decide to take their chances in the open market with Category 2 licences that have lower Canadian content requirements.

And, while the Category 2 licence will encourage applications from non-traditional sources and perhaps for non-traditional services, some applicants may decide they have to try for a Category 1 licence simply to guarantee carriage.

It may not take too long to find out how this new landscape looks – the commission has said it will issue a call for applications for new services in early February.

(This article contains general comments only. It is not intended to be exhaustive and should not be considered as advice on any particular situation.)