Digital channels inching towards profits

This time last year, a warning went out about the future of digital TV when, in these pages, execs at CTV, Alliance Atlantis and other casters noted that the coming year – 2004 – would probably make or break many of the 50-or-so digital channels in Canada.

It was no secret that despite the hoopla surrounding their debut in 2001 the fledgling channels were not faring well with viewers or advertisers. Two of the most prominent, CTV’s WTSN and Corus Entertainment’s EdgeTV, had just folded while others were up to their eyeballs in red ink. According to stats recently released by the CRTC, not one of the English-language digitals made so much as a dime in 2003. The Independent Film Channel lost $4.1 million and drew just 726,000 viewers, for example. PrideVision lost $1.3 million and had 21,000. Leafs TV? Down $5 million with 85,000.

It looked like many of them would not last. The market was due for a great (here comes that dreaded word) correction.

And yet, here we are a year later, and the remaining pennies have not dropped. No other digis have folded. In fact, more have been added such as Alliance Atlantis’ Fine Living, the Catholic-aimed Salt + Light Television and out-of-towners such as Al-Jazeera and Fox News.

What gives?

‘I think we’re all surprised that so many have survived,’ notes Sherry O’Neil of OMD Canada, a media buying firm. ‘They’re probably more viable than most of us thought three years ago… And unless something dramatic happens with the owners they will continue to survive.’

Viewers and advertisers have begun to click with the stronger digis, she says, nodding to Scream and Showcase Action as examples, even if the numbers are still a little erratic. ‘You really have to pick individual nights or titles, as opposed to the station in general, but if Scream is running, say, the [Nightmare on Elm Street] movies, you know they’re going to have a good audience,’ she says.

Scream and Showcase Action each had between 700,000 and 800,000 subscribers in August 2003 and their losses were moderate, according to the CRTC. More recent figures provided by the consulting firm Media Stats show them at the one-million mark – a benchmark towards profitability – along with other strong performers such as Animal Planet, Court TV and Showcase Diva.

‘Animal Planet is just turning the corner now,’ says Rick Brace, president of its parent CTV. ‘Obviously we’ve had to review our expectations… There has not been a hockey stick effect’ – a point at which losses magically seesaw into gains – ‘but there has been modest growth year over year.’

He adds that other CTV/BCE channels, which include CTV Travel and ESPN Classic, are beginning to turn over and says he has no plans for any cuts.

AAC’s channels are also beginning to hit profits, according to EVP of programming Norm Bolen. ‘Not every channel, but in aggregate. We’re very positive about where we’ve got these things and our business plans are looking very solid for most of these channels right now,’ he says, adding that he’s always been bullish about the digitals. ‘It’s not just Action and Diva. BBC Canada is in there. IFC is in there. They all have some significant ad sales and they’re all growing in significant double-digit percentages.’

CRTC statistics support the ‘modest growth’ theory – in that the digital profits for 2003, although disappointing, showed significant improvements from 2002. The average digichannel lost $1.7 million in ’03, up from $3.1 million in ’02.

And yet some observers wonder if those numbers are entirely accurate, noting that broadcasters often bundle ad time on digitals together with their stronger-selling analog channels. ‘If I buy a show on Discovery they take the money and allocate it to Discovery Civilization just so they can show revenue,’ says Carol Cummings, manager of TV executions at the strategy firm Media Experts.

‘They’re driving ad money to the digitals,’ O’Neil agrees. ‘If I pay $10 per thousand on a mainstream channel, they’re selling me their digital at $5… They’re forcing demand.’

Brace concedes that ad bundling can make life easier for broadcasters, but insists it’s not ‘the main thrust of what we’re doing.’

‘Obviously bundling is in our interest,’ he says. ‘But at the end of the day, it’s the advertisers who dictate the road we’ll take. It’s their money.’

Curiously, all of the most profitable channels are Category 2 digitals, which enjoy fewer protections under the CRTC. Category 1s are subject to genre protection, are first in line for distribution and, at least in theory, represent ‘the most attractive services,’ according to the commission, whereas Cat 2s are essentially left to fend for themselves. Cat 2s save money, however, because they don’t have the same Canadian content requirements as Cat 1s.

The largest companies, of course, can afford to be patient with weak performers, which would explain why Leafs TV or CHUM’s little-seen MuchLOUD are still on the air.

‘We can be very patient with all of ours,’ says David Kirkwood, CHUM’s EVP of sales and marketing. ‘It’s not a problem because in so many cases as with MuchLOUD and MuchVibe they’re extensions of MuchMusic. A lot of the resources and the brand extensions allow us to operate very efficiently.’

‘We’re also optimistic that this 31 Days of Great Television is going to make a bit of a difference,’ he adds, referring to this month’s industry-wide free preview, put together by all the major casters including CHUM, Corus and AAC. It is the largest promotion since the digital channels debuted in 2001 and is thought to be costing some $10 million. ‘If we got 10% more on existing subs, that would be, I think, successful.’

Kirkwood notes that, along with current subscribers, the promo is also targeting so-called ‘empty boxes’ – households that have digital receivers but do not subscribe to any channels. (A small percentage of viewers, perhaps 5%, get boxes for other reasons such as video on demand or interactive channel guides.)

‘A lot of the increase may come from those people… since they’ve already got the box on their set,’ he notes.

Ian MacLean, VP of Montreal-based iTV Lab, believes Canadian broadcasting will continue its slow move towards the digital realm, noting that of the 12 million TV households in Canada, 4.2 million are now digital, up from less than 90,000 in 2001. Of all TV subscribers – that is, households watching anything other than over-the-air signals – 44% are digital. Recent stats from Ottawa-based Decima Research show digi cable making the strongest gains, adding 68,000 customers in the second quarter of 2004, compared to 36,000 among satellite companies.

‘That’s remarkable growth, double digit, year over year,’ MacLean says. He believes digitals in general will cross into profitability between now and the close of the decade. Subscription numbers will begin to flatten, but ad rates will continue to rise.

‘Buying digital properties provides great efficiencies,’ he says, ‘because there are certain hard-to-reach light TV viewers with very unique interests who can be found – not in huge numbers – but in high density on those channels.

‘If [viewers] are hungry for something that a broad-based, common-denominator broadcaster cannot provide – because it has to be all things to all people – then they are going to spend more time on digitals… and that’s what’s starting to happen. Tuning is starting to shift.’ (CTV)