As broadcasters across the country gear up for the 1999 programming season, they are also turning their attention to our digital future. The crtc, in anticipation of the coming digital rollout by cable, has called for comments on development of a new licensing framework for pay and specialty services. Business models and regulatory policies are being hotly debated as the future digital environment in this country is shaped.

After nearly a decade of hype, it is now clear that the realities of building a system of micro niche specialty channels in a country the size of Canada are complex and even daunting. On the one hand, greatly increased bandwidth will create an unprecedented need for specialty services and programming. On the other hand, all players will be faced with significant challenges as the broadcasting business virtually reinvents itself to survive the economics of digital.

The crtc is charged with the mandate of ensuring Canadian services and programming maintain a ‘pride of place’ in our broadcasting future in the context of reduced revenue streams, a still uncertain distribution future and competition from less expensive, often well branded, American services.

Cable steps up its digital rollout plans

Canada’s major cable companies are all now rolling out digital set-top boxes to consumers in selected markets. This is the final leg in the creation of an end-to-end digital media network which will allow viewers to access multiple niche specialty services, digital audio music, and eventually video on demand.

Despite enormous financial hurdles and an uncertain return, cable is under mounting pressure to step up the pace of its digital rollout. It faces new competition from a variety of alternative digital-based distribution systems such as mds and direct-to-home satellite services. These systems are already positioned to provide increased channel options, greater movie selections, and even interactive-type services. And, they are enjoying a growing subscriber base.

Reinventing specialty

television for digital

Now that the rollout is underway, the focus is again turning to programming. Digital distribution systems and their increased carriage capacity will create in turn, a growing need for fresh content. It is only with an attractive array of specialty and pay, music, and other services that broadcast distribution undertakings will tempt consumers away from traditional analog distribution.

Until now, the uncertainties of the future distribution environment has caused the crtc to halt further additions to Canada’s dial. Applications for over 70 new specialty channels are currently waiting for consideration by the commission. The crtc has imposed a moratorium on additions to the foreign satellite service list – the list of American and other international programming services allowed distribution in Canada.

The current crtc process for developing a new licensing framework is thus a welcome first step toward development of new programming services. In fact it is hoped that a new specialty licensing hearing will follow shortly.

Canadian broadcasters are also eager to launch new services, to ensure they have ‘shelf space’ to pre-empt the arrival of u.s. and non-Canadian services to the television dial. But winning a licence will be only a small part of the battle for the next round of emerging Canadian specialty channels, particularly if they are licensed for digital carriage only.

These new services will face unprecedented hurdles as they attempt to build viable businesses with micro niche services in a county with one tenth of the population of the u.s.

It will still be years before digital reaches critical mass in Canada.

PricewaterhouseCoopers forecasts that digital subscriber levels (including cable, dth, mds and others) will only reach approximately two million to 3.2 million with English Canada and 700,000 to 1.1 million in French Canada by 2005. In the meantime, digital services will have to survive with subscriber bases initially numbering just a few hundred thousand.

The Canadian Association of Broadcasters predicts in its submission that ‘Canadian specialty services licensed only for digital carriage will face an extremely risky business environment with little or no economic return in the first five to seven years.’

Further, the very nature of a micro niche environment will render current specialty business models untenable. In a 500-channel or even a 100-channel universe, channels will face increasingly narrow viewership. This means declining revenues as a result of reduced subscriber bases, lower pass through fees and a smaller share of ‘eyeball dependent’ advertising dollars.

In fact, both the cab and the Specialty and Premium Television Association warn that today’s traditional analog channels could not survive as is in a digital environment.

PwC concludes in its study for the cab entitled ‘Business Plan for Specialty and Pay Services in a Digital Environment’ that ‘Canadian companies must reinvent the business model for digital-only services by re-examining virtually every aspect of the business model from programming to packaging to partnering.’

Exactly how broadcasters will make digital viable in Canada is yet to be seen. In the u.s., where a variety of digital services are emerging, programming strategies rarely involve traditional standalone services.

Multiplexing,

multicasting

According to the PwC report, multiplexing and multicasting are the two most common programming strategies.

Discovery Communications is one of the first broadcasters to embrace multicasting: repackaging existing programming into smaller niche services such as Discovery’s Animal Planet or Discovery Travel. Discovery’s strategy hinges on leveraging its analog programming rights into subsequent plays on digital channels. The digital channels further enhance Discovery’s brand and provide, when sold with the analog service, additional eyeballs for advertisers.

Multiplexing on the other hand entails duplicating the same programming on numerous channels, sometimes with different start times. This strategy works well with premium and pay-per-view programming.

Survival of Canadian specialties will also likely depend on their ability to create synergies and spin off digital programming from existing services. This might include repurposing and repackaging of existing programming, along with multicasting and multiplexing arrangements. As well, broadcasters will look increasingly to spin-offs via the Internet and merchandising for incremental revenues.

A successful business strategy for a Canadian broadcaster will not necessarily translate to a winning business proposition for cable and other bdus. Cable will be exerting pressure for more freedom to set market-driven wholesale rates and offer services on a standalone ‘pick and pay’ basis. They are also looking for the right to carry more American services.

It is indeed an appealing prospect for carriers to simply add well established u.s. channels to their lineup. American services are often well branded and available less expensively than their Canadian counterparts. The bulk of their revenues are garnered from the huge u.s. market and carriage in Canada represents incremental profit only.

The reality is that regulation will play a critical role in assuring Canadian services and programming have a prominent place on the digital dial and receive the carriage status and fees necessary to build a viable business.

It is not clear though, even with favorable regulatory support, to what extent these new services, with their substantially lower revenue streams, will be in a position to stimulate Canadian production. The cab, for example, predicts that programmers, in the early years of their licence, will require ‘regulatory flexibility’ and less stringent Canadian content obligations in order to gain a foothold on the digital lineup.

Up until now, Canada’s independent television production sector has been able to count on continued growth with the addition of each new tier of specialty television services. There will no doubt be exciting opportunities for the production sector created by the new services – particularly for those who learn to exploit new programming models with creative multiplay, multichannel deals.

However, high-budget original programming for the new digital services may be limited, particularly in the early years.

As well, producers cannot count on increased public funding to match the expanded channel lineup. Telefilm warns in its submission that each additional English-language service could potentially increase demand for eip resources by $700,000 to $800,000 annually. Assuming the funding pool is not expanding any time soon, producers will likely have to look to increasingly creative financing scenarios to string together project budgets.

It is clear that all industry players, including Canada’s broadcasters, bdus and independent producers will be forced to rethink currently established practices.

As the crtc seeks to develop a framework to ensure ‘pride of place’ for Canadian programming in the digital future, all of its traditional regulatory tools are up for discussion. From rules governing access, distribution and linkage, carriage of foreign services and Canadian content requirements, the system will be rethought and overhauled in light of shifting environment.

The crtc will indeed face difficult choices as it seeks to adapt our regulatory system to a tough new economic model. These tensions are not new. However, they are all the more difficult in a new environment where investments become more risky and profit margins increasingly slim.

Kate Hanley is a lawyer and entertainment industry consultant. She is director of strategic planning at NextMedia, a Toronto-based communications and business consulting firm. She currently serves as vice chair of the Entertainment, Media and Communications Section of the Bar Association of Ontario.