REVIEW OF THE REGULATORY
FRAMEWORK FOR BROADCASTING
SERVICES IN CANADA

FINAL REPORT
August 31, 2007

Laurence J.E. Dunbar
Christian Leblanc

Review of the Regulatory
Framework for Broadcasting
Services in Canada

Final Report
August 31, 2007

August 31, 2007

Mr. Konrad von Finckenstein
Chairman
Canadian Radio-television and
Telecommunications Commission
1 Promenade du Portage
Gatineau, Quebec
K1A 0N2

Dear Mr. von Finckenstein,

On April 27, 2007 we were retained by the Commission to conduct a comprehensive review of the existing regulatory framework for broadcasting services in Canada and to submit a report containing recommendations for reform by August 31, 2007.

The objective of this review was to assess the effectiveness of the existing regulatory framework in meeting Canada's requirements for broadcasting services, and to recommend ways in which those requirements can be better served, with either more efficient regulation or with less regulation.

We are pleased to submit our report containing in excess of one hundred recommendations for reform.

Thank you for entrusting us with this mandate.

Yours sincerely,

Laurence J.E. Dunbar               Christian Leblanc

Acknowledgement

We would like to acknowledge the significant contributions to this report by Scott Prescott, Leslie Milton, Stephen Whitehead, Aidan O'Neill, Jay Kerr-Wilson and Anne Tardif, the research and editing performed by Anne Ko and Meghan Clarke, as well as the tireless effort we received from our support staff, including Gayle Pugliese, Diane Hendren, Deana Castello and Eileen Hudson.

Most importantly, we wish to thank Robert Buchan for his guidance throughout the project, the contributions he made to the report and for sharing his knowledge of the Canadian broadcasting sector with us. Bob is one of the leaders of the Canadian communications bar. He was indispensable to this project and worked tirelessly to help see the report to fruition.

Laurence Dunbar       Christian Leblanc
(Ottawa)                       (Montreal)

Executive Summary

OUR MANDATE

This report was commissioned by the Canadian Radio-television and Telecommunications Commission (CRTC) on April 27, 2007. The authors were directed to conduct a comprehensive review of the existing regulatory framework for broadcasting services in Canada and to submit a report containing recommendations for reform by August 31, 2007. The CBC's special mandate was stated to be beyond the scope of our review.

It is important to note that the views expressed in this report are those of the authors. The CRTC was not involved in formulating any of our recommendations and did not participate in our consideration of the issues.

OBJECTIVES OF OUR REVIEW

The objective of our review was to assess the effectiveness of the existing regulatory and policy framework in meeting Canadians' requirements for broadcasting services, and to recommend ways in which these requirements can be better served, with either more efficient regulation or with less regulation.

While this mandate does not extend to a consideration of possible amendments to the Broadcasting Act, it was recognized that it would not be possible to make a meaningful assessment of the current regulatory framework, regulations, policies and procedures as they relate to Canada's broadcasting system without first reviewing the history, purpose and scope of the 1991 Broadcasting Act. That review inevitably includes consideration of the Broadcasting Policy for Canada contained in section 3 of the Act, the Commission's statutory objects, as outlined in subsection 5(1), and the regulatory policy that is contained in subsection 5(2) of the Act. This discussion is contained in chapter 2 of the report.

METHODOLOGY

The methodology that we were asked to apply to our review was summarized by the Chair of the CRTC, in an address on May 10, 2007 to the Annual Conference of the British Columbia Association of Broadcasters. Chairman von Finckenstein stated that we have been asked to consider, in respect of each CRTC regulation or policy:

• First, what was its original purpose;
• Second, what is its relevance and effectiveness with respect to present and future needs; and
• Third, should it be retained, improved, streamlined or eliminated in order to serve the purposes of the Broadcasting Act most efficiently and economically?

He went on to explain that ".the study will make recommendations to maximize the reliance on market forces, always keeping in mind the overriding twin objectives of Canadian content and access to the system."

In our report, we have followed this approach paying particular attention to the two key objectives identified by the Chairman.

BROADCASTING AND REGULATORY POLICY OBJECTIVES

The CRTC has authority under the Broadcasting Act to enact regulations and formulate policies that are applicable to the broadcasting undertakings it regulates and supervises.

In the exercise of its regulation-making power and its policy-making function the Commission is both guided and circumscribed by the clear requirement in subsection 5(1) of the Broadcasting Act ". to implement the objectives of the broadcasting policy set out in subsection 3(1)" of the Broadcasting Act, and also ". to have regard to the regulatory policy" which is set out in subsection 5(2) of the Act. As a matter of law, each of those separate policy objectives has equal weight. Therefore the Commission cannot ignore any of these policy objectives when it enacts regulations or formulates policies. In case of conflict (which rarely happens) the Act states that the broadcasting objectives in subsection 3(1) are to be given priority status over the objectives of the regulatory policy in subsection 5(2).

The number of objectives identified by Parliament, and the lack of any express prioritization, places the regulator in a difficult situation. The CRTC is directed to implement all of these diverse objectives without any guidance from Parliament as to where to place its emphasis. Since our mandate does not extend to recommending legislative change, our report reviews the CRTC's policies and regulations in light of the broadcasting policy objections in subsection 3(1), and the regulatory principles in subsection 5(2) of the Broadcasting Act. In this important respect, the scope of our review differs significantly from the recent review of telecommunications policies and legislation by the Telecommunications Policy Review Panel.

SCOPE FOR REFORM

Notwithstanding the large number of statutory policy objectives in subsection 3(1) and their specificity, the Broadcasting Act confers a significant amount of discretion on the CRTC with respect to how it goes about the job of regulating and supervising the Canadian broadcasting system.

The statutory framework established in the Broadcasting Act therefore does not foreclose regulatory reform, nor does it mandate regulation when it is not required to implement the policy objectives in subsection 3(1). Rather it empowers the Commission to apply a test of materiality to the issue of whether regulation is required to achieve the statutory policy objectives, and it empowers the Commission to define the extent of regulation, as well as the nature of regulation required to implement those objectives when a blanket exemption is not justified on the facts.

In considering the issue of regulatory reform in the broadcasting sector, it is also important to note that paragraph 5(2)(g) states that the Canadian broadcasting system should be regulated and supervised in a flexible manner that "is sensitive to the administrative burden that, as a consequence of such regulation and supervision, may be imposed on persons carrying on broadcasting undertakings."

FRAMEWORK FOR EVALUATING REGULATION

To be effective, regulation must be directed at achieving policy objectives, it must be achievable in the sense that compliance must be within the control of the regulated entity, and it must be enforceable. It should also, to the extent possible, reflect performance-based standards, rather than dictating the means to achieve those standards.

The costs of regulation include the direct costs of complying with the regulation that must be borne by the regulated undertaking and the ongoing supervisory and enforcement costs of the regulator, as well as market costs and inefficiencies caused by regulatory intervention. In general, the least costly or intrusive regulatory measure necessary to achieve the policy objective is preferable to more intrusive or costly measures. Inconsistency between regulations should also be avoided, since inconsistent regulation introduces unnecessary costs and undermines the effectiveness and transparency of the regime.

It is with these principles of "smart regulation" in mind that we have reviewed the CRTC's regulations and policies with respect to broadcasting.

Smart regulation requires the regulator to engage in a disciplined approach to regulation. It requires the regulator to clearly identify the policy objective being pursued, and it requires an assessment of whether the policy objective in question can be adequately addressed in the absence of regulatory intervention (whether by market forces or by the regulated entity's own self-interest). This analysis requires a detailed understanding of the industry and market conditions.

If it is determined that regulatory intervention will materially advance a statutory policy objective when compared with the option of no intervention, then the regulator should use a regulatory mechanism that will fulfill the policy objective in the least intrusive manner possible, having regard to possible unintended effects of regulatory intervention. Where licensees compete with each other, there is also the need to maintain competitive neutrality among them by applying uniform rules to comparable undertakings.

These principles are not new to the Commission. They were reflected in the report of the External Advisory Committee on Smart Regulation and have been adopted by the Government of Canada. These principles were recently articulated by the Telecommunications Policy Review Panel in its 2006 Report to the Government of Canada and they were codified in the Policy Direction to the CRTC issued the Governor in Council pursuant to section 8 of the Telecommunications Act. While the circumstances of the telecommunications and broadcasting industries regulated by the Commission may be very different, these principles of smart regulation are equally applicable and adaptable.

COORDINATION OF REGULATORY ACTION

While the CRTC plays a pivotal role in the regulation of the Canadian broadcasting system, it is not the only governmental agency with responsibilities that affect this sector.

As the broadcasting sector faces new challenges posed by the Internet and digital media, it will be important for all of these governmental departments and agencies to continue to coordinate their activities in a manner that best achieves the policy objectives being pursued.

The External Advisory Committee on Smart Regulation also addressed this issue in its report. It recommended the establishment of a mechanism to support inter-departmental discussions to foster the development of government-wide positions on regulatory issues and to ensure that departments take appropriate action to design regulations with national priorities. The goal is to ensure that policy objectives are clearly spelled out and that regulatory action is coherent and integrated.

Given the importance of the Canadian broadcasting system to Canada's cultural identity, and given the fact that our broadcasting system is affected by externalities beyond the jurisdiction of the CRTC (such as copyright laws, cultural policies and fiscal and trade policies), we recommend that the Commission explore the creation of a multi-disciplinary committee to address important issues of common concern and to bring to bear in a coordinated manner all the levers of government and regulation. An obvious candidate for this type of initiative is digital media, as discussed further in our report.

THE ROLE OF COMPETITION IN THE BROADCASTING SECTOR

The original rationale for regulating commercial broadcasting activity was the notion that radio spectrum was a scarce public resource that should be allocated for the highest and best use. Canadian broadcasting legislation has refined what that use should be by setting forth both a comprehensive set of policy objectives and guidelines on how the CRTC should regulate.

However, even in this regulated environment, competitive market forces have always had an important role to play.

• Traditionally, commercial television and radio stations competed with each other for program rights, audience share and advertising revenues.
• Networks also competed for coverage.
• More recently, pay television, specialty services, pay-per-view and video-on-demand (VOD) services have also competed for audiences, program rights and, in some cases, advertising revenues.
• There are now a number of different types of broadcasting distribution undertakings competing for customers.

Nonetheless, regulation is still pervasive even in areas where undertakings compete: Examples include:

• limits on market entry;
• regulated formats;
• restrictions on advertising;
• genre protection;
• restrictions on program content;
• restrictions on program production; and
• restrictions on program distribution and marketing.

In our report, we have made a number of recommendations to inject more competition and more consumer choice into the Canadian broadcasting system.

Less Genre Protection

The system of genre protection is breaking down as the distinction between genres gets blurred. Genre protection was intended to protect a nascent pay and specialty market against competition - to get them on their feet. While we see a need to continue to protect Canadian programming services from directly competing non-Canadian services, we question the need for genre protection between Canadian services.

Recommendations

Collapsing Licence Classes

The existing regulatory framework addresses criteria for distinguishing various classes or categories of broadcasting licences from each other. This regime has been designed to insulate licensees from inter-licence class competition, and to ensure diverse voices. With the blurring of old distinctions between providers of linear and non-linear programming, and with different classes of licensee often competing with each other for the same programming, the utility of maintaining all of these regulatory distinctions is questionable.

Recommendations

Restrictions on Advertising

Time limits on advertising by radio licensees were eliminated over a decade ago. Since then, the amount of advertising broadcast by radio licensees has been dictated by market forces. The 2006 Broadcasting Monitoring Report indicates that a very significant portion of the advertising incentive minutes available to English and French-language conventional over-the-air (OTA) and specialty television broadcasters were not in fact used by these broadcasters. This suggests not only that these minutes had little or no incentive value, but also that market forces limit the amount of advertising that is broadcast.

Recommendations

Rationalizing the Categories of Specialty Services

There are currently five categories of specialty programming services with varying regulatory obligations. These services vary in terms of carriage rights, access rights, access rules and wholesale fees they may charge. Many of the rights and obligations attaching to these licences appear to depend on when the specialty service was launched, and not on merit. The different rights attaching to these types of licences limit competition between these services, as some are carried as of right at a prescribed rate, some are carried at negotiated rates, and some do not have to be carried at all.

Recommendations

Competitive Entry into OTA Television

At present, applications for new radio and over-the-air television services are scrutinized to ensure that the market can support an additional service provider. While we understand the rationale for this approach, the limitations on entry may come at a fairly high cost. In effect, this approach protects inefficient competitors and can serve to preclude entry by new players that might operate more efficiently than existing service providers, respond better to consumer demand, offer more Canadian content and more high-quality programming to consumers.

In the period between 2003 and 2006, the Commission licensed 233 new OTA radio stations, including 76 new stations in 2006 alone. This has resulted in more competition for advertising revenues and greater choice for consumers. In contrast, the Commission is more reticent towards allowing new entry in the OTA television market.

Recommendations

Packaging by BDUs

At present, broadcasting distribution undertakings (BDUs) are heavily restricted in their packaging of programming services for retail sale. These rules limit the ability of BDUs to compete with one another by offering innovative service packages that are responsive to consumer demand. Although the Commission is proposing to relax some of these requirements in a fully digital environment, in the 2010 to 2013 timeframe, this is a long time to continue to operate under a more restrictive regime.

Recommendations

CANADIAN CONTENT

We do not consider that that market forces alone are likely to achieve all the statutory policy objectives relating Canadian programming services. However we question whether all of the existing regulations and policies are working in a manner that effectively achieves these objectives. The current system involves a myriad of rules embodied in regulations, policies and conditions of licence that vary both between and within various classes of licence.

Although OTA television services have typically been considered to be the preeminent contributors to Canadian content development and exhibition, total expenditures by pay and specialty services on Canadian programming now exceed, by a significant amount, total expenditures by commercial OTA television services. Specialty and Pay TV services also spent a significantly higher portion of their revenues on Canadian content than commercial OTA television. While CPE as a percentage of revenues has remained relatively flat for commercial OTA television services, expenditures by OTA television services on non-Canadian programming has increased as a percentage of total revenues.

The overall viewing share of specialty and pay services now exceed that of conventional OTA television. The same is true for overall viewership of Canadian programs. These data suggest that specialty and pay are taking on a bigger role with repect to Canadian content and that presumptions underlying our existing framework may have changed.

Priority Programming

The available data strongly suggests that the existing regulatory incentives and obligations with respect to English language Canadian drama programming are not effective. Snapshots of the schedules for OTA stations in specific markets suggest that the amount of Canadian drama that is being broadcast during peak time in the regular season by English language commercial OTA television services is very limited. Priority programming obligations appear to be largely satisfied by the broadcasting of entertainment magazines and reality television programming, and by scheduling priority programming during lower viewing periods, such as Friday and Saturday nights and the summer period.

The incentives which permit OTA services to gross up Canadian drama programming broadcast during peak viewing periods effectively reduce the amount of Canadian programming that these services must broadcast during such peak periods.

The advertising minute incentives, at least in the case of OTA television services, will have no value once the limits on advertising minutes are lifted for this class of licensee and, in any event, they do not appear to have been effective. Many of the advertising incentive minutes available to conventional and specialty services have not been utilized, suggesting that these minutes have little or no incentive value.

The economic incentives associated with simultaneous substitution appears to dictate, to a very large extent, the peak period program schedules of English language commercial OTA television broadcasters, ensuring that foreign content is predominantly displayed during peak viewing periods. These factors suggest that existing measures to promote the production and exhibition of Canadian content need to be reexamined. It is not at all apparent that the economics of producing Canadian entertainment magazine or reality television programming suffers from the same challenges as Canadian drama programming, or that this type of programming merits specific regulatory incentives.

Recommendations

Canadian Program Expenditures (CPE)

In our view, an assessment of the effectiveness and rationalization of CPE requirements is merited. On their face, expenditure requirements can be problematic in the sense that they fail to promote efficiency. On the other hand, expenditure requirements, including in particular obligations to contribute a portion of revenues to funds to support Canadian content, are applied broadly to other classes of broadcasting undertakings including, most notably, radio and distribution undertakings and are often included in OTA television benefit packages. It appears to us that there is a need to rationalize the CPE rules with other Canadian content obligations in order to make them more transparent and uniform within competing groups of licensees.

Recommendation

Simultaneous Substitution

Simultaneous substitution maximizes the value of Canadian exhibition rights of American programming. It is often cited as a means to help to fund Canadian content.

However, if one looks at the examples of program schedules for the major English language commercial television networks during the regular season peak viewing period (in Appendix C of our report) one can see that, with very few exceptions, they are filled with American programs scheduled at the same time that the American networks have scheduled the same programs. In a very real sense, simultaneous substitution appears to be dictating the scheduling of Canadian English-language OTA television networks - pushing Canadian programs into non-peak viewing periods or into the summer months.

This undermines the economic value of Canadian programming and the very great efforts that the regulatory system and the industry exert to produce more Canadian content. Simultaneous substitution also increases the price paid for Canadian rights to American programs.

Recommendation

Independent Television Production

S. 3(1)(i)(v) of the Broadcasting Act states that the programming provided by the Canadian broadcasting system should "include a significant contribution from the Canadian independent production sector." Requirements vary widely across different classes of licence - from 75% for priority programming by conventional OTA television, to 25% for Category 1 specialty services, to a prohibition on in-house production by pay television licensees. These restrictions extend to related production houses. There are signs that this policy may not be working in a manner that is most conducive to the production of Canadian content in the current economic and technological environment.

Recommendations

ACCESS

We believe that the priority carriage rules and the power conferred on the Commission in s. 9(1)(h) to designate other programming services for compulsory carriage by BDUs, are important tools to ensure that Canadians have access to specific programming services that the Commission considers important to achieving the policy objectives in s. 3(1) of the Act. We favour the maintenance of a basic service that exhibits a high level of Canadian programming, and we favour the continuation of a "buy-through" requirement that requires Canadians to subscribe to this basic service before buying other discretionary services. We see this as an important part of the equation if the Commission is going to consider increasing the options available to consumers to purchase discretionary services in a more consumer-friendly environment.

We suggest that consideration be given to further enhancing the visibility of discretionary services that provide high levels of Canadian content, significant Canadian program expenditures or perform a public interest function, by tying access rights to the contribution that a service makes toward furthering the objectives of the Broadcasting Act. Incentives might include such benefits as compulsory carriage, subscription fees, inclusion in the basic service or even channel placement. We consider that this approach would have merit over the existing framework that has rewarded discretionary services with carriage rights based more on their launch date than on their merits.

Recommendation

Channel Placement

There appear to be divergent views on the importance of channel placement. While specialty services claim that it is an important determinant of their success, BDUs appear to take the opposite view. If it is determined that channel placement is still important to the success of programming services, consideration should be given to requiring that Canadian services, particularly those that satisfy high Canadian content thresholds, receive better placement on the BDU dial than non-Canadian services or Canadian services with lower Canadian content levels.

Recommendations

Carriage Fees

The requirement to regulate carriage or wholesale fees should be investigated in light of the relative bargaining power of parties. A must-carry obligation appears on its face to enhance the bargaining power of a programming service, provided that the service is entitled to seek carriage fees. On the other hand, a programming service with no must-carry rights would appear to be in a much weaker bargaining position than the BDU unless its programs are in great demand by consumers.

In our view, market forces should have a role to play in determining the value of the service being carried. However, the Commission should be prepared to engage in a dispute settlement or adjudicative role, when there is an inequality in bargaining power on either side. As discussed further on, we favour strengthened anti-discrimination provisions and increased enforcement powers to deal with these types of disputes.

Carriage of Related Services

We recommend eliminating some of the existing requirements that inhibit BDUs from carrying affiliated programming services. (For example, the current rules require the BDU to carry five specialty services for each related specialty service that it carries.) In our view, this type of rule may inhibit carriage of new Canadian programming services without necessarily addressing the issue of discriminatory conduct.

In order to offset the ability of BDUs to engage in anti-competitive conduct in respect of their own or related programming services, we recommend that the Commission strengthen its test of discriminatory conduct and its enforcement mechanisms.

Preponderance

In Review of the regulatory frameworks for broadcasting distribution undertakings and discretionary programming services, the CRTC proposed a rule that would require BDUs to ensure that customers receive a simple preponderance (51%) of Canadian programming services (based on all services received). We agree that the CRTC's proposal would provide for a simpler form of regulation. In our view, consumer demand should play a greater role in the Canadian broadcasting system, as it does in other sectors of the economy.

Forcing Canadians to subscribe to truly "discretionary" services that they do not want, in order to get one they do want, is precisely the type of regulation that may drive consumers to the Internet, pay-per-view and on-demand types of services. If the Canadian broadcasting system is to remain relevant and attractive to viewers in an age of watching "anything, any time", it needs to adapt to the new environment.

Recommendation

Dispute Settlement and Enforcement

We believe that a shift to greater reliance on market forces in the broadcasting sector must be accompanied by enhanced dispute resolution mechanisms that address, efficiently and effectively, competitive disputes and include credible sanctions on anti-competitive conduct. In many cases, a complainant will not have access to the evidence necessary to satisfy this requirement because relevant examples of a BDU's conduct with respect to third party or self-dealing will not be publicly available and will be exclusively within the knowledge of the BDU.

Recommendation

Administrative Fines

Consideration should also be given to asking the Minister of Heritage to consider the possibility of tabling legislation to grant the CRTC a power to impose administrative fines similar to the amendments proposed by the Telecommunications Policy Review Panel to the Commission's powers under the Telecommunications Act. In our view, the Commission's power to revoke broadcasting licences, and the criminal sanctions in the Act, are not very practical means of enforcing regulatory obligations - except in the most egregious cases.

NEW MEDIA

Much has changed since the New Media Exemption order was issued by the Commission in 1999:

The Internet is no longer primarily a text-based information medium;

Multiple platforms have developed for the delivery of digital media;

Major American television networks have begun to make episodes of their conventional television shows available on the Internet the day after their initial broadcast. In Canada, broadcasters have also begun to experiment with Internet-based shows. The CBC and other Canadian networks have also begun to make some of their programs available on the Internet and more recently, some Internet-only programming has been exhibited - such as the post-game shows following NHL playoff games in 2007. The Internet also provides an important outlet for specialty channels - some of which have had difficulty obtaining carriage rights on conventional BDUs.

While "geoblocking" has proven to be effective in blocking access to American content when the owner of that content has an interest in maintaining a system of geographic licensing, it is not effective where programming rights are ignored and the site offering the content is operating outside of copyright laws. Therefore, while Joost and the American television networks may be blocking access by Canadians to content already licensed to Canadian broadcasters, not all sites are doing the same. In addition, if American producers of television programs start selling Internet distribution rights separately from Canadian television distribution rights (which they have not yet started to do), Canadian broadcasters could face competition from the very programs that they purchase from U.S. distributors, without the benefit of simultaneous substitution. In 2006, Internet-based advertising amounted to approximately 6% of ad dollars in both Canada and the United states - breaking through the $1 billion barrier in Canada. It is predicted to continue to grow at a high rate.

In this new environment, some stakeholders in the Canadian broadcasting system are voicing concerns about the suitability of our existing statutory and regulatory framework for addressing the impact of new media on the Canadian broadcasting system. The Internet differs in certain respects from other previous technological threats to the Canadian broadcasting system insofar as it provides users access to worldwide content - not just content originating in Canada or south of the border. This makes the enforcement of other forms of protection, such as copyright laws, less effective than they might be in an exclusively North American context.

Recommendations

DETAILED ASSESSMENT OF REGULATIONS AND POLICIES

Following our discussion of these broad policy issues, our report focuses on application of these principles to the specific regulations and policies formulated by the Commission.

Chapter 10 discusses in turn the regulations applicable to the different elements of the Canadian broadcasting system. This includes the regulations applicable to private conventional and community television undertakings, pay television, specialty services, pay per view and video on demand, broadcasting distribution undertakings, and commercial and community radio.

Chapter 11 addresses major Commission policies applicable to the broadcasting sector. These include the Commission's policies on ownership, benefits, aboriginal broadcasting, ethnic broadcasting, cultural diversity, educational broadcasting, services for persons with disabilities and religious broadcasting.

Finally, Chapter 12 addresses broadcasting procedures, including the application and licensing process, the CRTC Rules of Procedure, and information returns and licence fees.

These chapters contain detailed discussions of the origins of the regulations and policies, their original purpose and the extent to which we consider them to be effective and necessary in the current broadcasting environment. These chapters contain detailed recommendations for reform.

Since it is not possible to accurately summarize our report in seventeen pages, reference should be made to the text of the report and to the full text of the recommendations contained in it. A complete and accurate compendium of all our recommendations is contained in Appendix A to the report.

INDEX

1. Introduction
2. Broadcasting and Regulatory Policy Objectives
3. How the CRTC Regulates Broadcasting - "The Regulatory Toolbox"
4. Framework for Evaluating Regulation
5. The Role of Competition in the Broadcasting Sector
6. Canadian Content
7. Access
8. Relationship between Copyright and Broadcasting Regulations
9. New Media
10. Classes of Broadcasting Undertakings - and their Regulations
    (a) Private conventional English and French-language OTA Television
    (b) Community Broadcasting on Television
    (c) Pay Television
    (d) Specialty Television Services
    (e) Pay-Per-View and Video-on-Demand
    (f) Broadcasting Distribution Undertakings
    (g) Commercial Radio
    (h) Community Radio
11. Major CRTC Broadcasting Policies
    (a) Ownership
    (b) Benefits
    (c) Aboriginal Broadcasting
    (d) Ethnic Broadcasting
    (e) Cultural Diversity on Television
    (f ) Educational Broadcasting
    (g) Services for Persons with Disabilities and their Portrayal in Broadcasting
    (h) Religious Broadcasting
12. CRTC Broadcasting Procedures
    (a) Application and Licensing Processes
    (b) CRTC Rules of Procedure
    (c) Information Returns and Licence Fees

Appendix A - List of Recommendations
Appendix B - Exemption Orders
Appendix C - Programming Schedules
Appendix D - Self-Regulatory Codes of Conduct

(1) INTRODUCTION

This report was commissioned by the Canadian Radio-television and Telecommunications Commission (CRTC) on April 27, 2007. The authors were directed to conduct a comprehensive review of the existing regulatory framework for broadcasting services in Canada and to submit a report containing recommendations for reform by August 31, 2007.

The CRTC has a broad statutory mandate from Parliament, under section 5 of the Broadcasting Act, ". to regulate and supervise all aspects of the Canadian broadcasting system with a view to implementing the broadcasting policy set out in subsection 3(1) and, in doing, shall have regard to the regulatory policy set out in subsection 5(2)."

In the implementation of that mandate, the CRTC enacts regulations that are applicable to various classes of broadcasting licensees, and also formulates broadcasting policies.

The objective of this review is to assess the effectiveness of the existing regulatory and policy framework in meeting Canadians' requirements for broadcasting services, and to recommend ways in which these requirements can be better served, with either more efficient regulation or with less regulation.

While this mandate does not extend to a consideration of amendments to the Broadcasting Act, it was recognized that it would not be possible to make a meaningful assessment of the current regulatory framework, regulations, policies and procedures as they relate to Canada's broadcasting system without first reviewing the history, purpose and scope of the 1991 Broadcasting Act. That review inevitably includes comments on the Broadcasting Policy for Canada contained in section 3 of the Act, the Commission's statutory objects, as outlined in subsection 5(1), and the regulatory policy that is contained in subsection 5(2) of the Act.

The first part of this report therefore briefly reviews, in a non-prescriptive manner, the purpose and scope of the Broadcasting Act as well as the responsibilities of the CRTC with regard to the regulation and supervision of the Canadian broadcasting system.

Our approach to this review involves a three step process with respect to each constituent element of the system. The first step is to identify the CRTC's regulations, orders and policies applicable to the broadcasting sector in question, and to identify their original purpose. The second step involves an assessment of the relevance of that purpose in the current and near future environment and the extent to which the regulatory mechanisms in question are effective in meeting the objectives of the Act. This assessment will be made in light of recent and on-going developments in technology, the strengthening of competitive market forces, the evolution of new media services and other pertinent factors. Third, for those policies which are considered to meet the stated objectives, we have been tasked with considering whether other, less intrusive or burdensome regulatory mechanisms might be employed to achieve the same objective.

In a manner similar to the approach taken in the 2006 Report of the Telecom Policy Review Panel, we have also been asked to consider the extent to which market forces can be relied upon to achieve the Canadian broadcasting policy objectives.

This mandate was summarized by the Chair of the CRTC, in an address on May 10, 2007 to the Annual Conference of the British Columbia Association of Broadcasters. Chairman von Finckenstein stated that we have been asked to consider, in respect of each CRTC regulation or policy:

The general approach described by the Chair is consistent with the principles set forth in Smart Regulations: A Regulatory Strategy for Canada.¹ Those principles, which were also adopted by the Telecommunications Policy Review Panel in its Final Report, provide as follows:

It is important for the reader to appreciate that the terms of reference for our review of CRTC regulations and policies, as broad as those terms may appear to be, do not include recommending amendments to the mandate of the Canadian Broadcasting Corporation which is contained in the Broadcasting Act. All other policies and regulations however, fall within the scope of this review.

Given this very broad mandate and the four month time-frame specified for its completion, the CRTC requested that we focus on what the Chair has referred to as the "overriding twin objectives of Canadian content and access to the system." While not discounting the potential need to satisfy other policy objectives in the Act, we have focused in particular on regulatory measures that have been enacted in furtherance of these two broad objectives.

With this in mind, we have reviewed the seven sets of separate CRTC regulations that are currently in force, and will also review the major broadcasting policies that are applicable to various classes of licensees today. We will not, however, attempt to delve into particular conditions of licence that may apply to individual licensees, except insofar as the discussion of major broadcasting policies addresses those policies that have been implemented through conditions of licence.

Organization

The report starts out with a discussion of the objectives of the Broadcasting Act (Chapter 2) and the "regulatory toolbox" provided to the Commission to regulate the Canadian broadcasting system (Chapter 3). Those two chapters are followed by a discussion of the principles of "smart regulation" adopted by the Canadian Government and the application of these principles to our analysis of the existing regulatory framework for broadcasting (Chapter 4).

In the next five chapters (5-9) we discuss at a relatively high level five important topics that have relevance across all elements of the broadcasting system. These include the three key issues that we were asked by the Chairman of the CRTC to focus on - namely: the role of competition in the broadcasting sector (Chapter 5); Canadian content (Chapter 6); and access (Chapter 7). We then discuss two important extraneous forces that impact the Canadian broadcasting sector: the relationship between copyright and broadcasting regulation (Chapter 8); and the impact of "new media" and the Internet in general on the regulatory environment (Chapter 9).

Following these higher level discussions, we start to focus our analysis on the specific regulations and policies applied by the Commission.

Chapter 10 discusses in turn the regulations applicable to the different elements of the Canadian broadcasting system. This includes the regulations applicable to private conventional and community television undertakings, pay television, specialty services, pay per view and video on demand, broadcasting distribution undertakings, and commercial and community radio.

Chapter 11 addresses major Commission policies applicable to the broadcasting sector. These include the Commission's policies on ownership, benefits, aboriginal broadcasting, ethnic broadcasting, cultural diversity, educational broadcasting, services for persons with disabilities and religious broadcasting.

Finally, Chapter 12 addresses broadcasting procedures, including the application and licensing process, the CRTC Rules of Procedure, and information returns and licence fees.

Appendix A contains a compendium of the recommendations made in the report.

2. BROADCASTING AND REGULATORY POLICY OBJECTIVES

Although the CRTC does not have the responsibility or power to amend the Broadcasting Act, it does have the clear authority under that Act to both enact regulations and to formulate policies that are applicable to the broadcasting undertakings the Commission regulates and supervises.

In the exercise of its regulation-making power and its policy-making function the Commission is both guided and circumscribed by the clear requirement in subsection 5(1) of the Broadcasting Act ". to implement the objectives of the broadcasting policy set out in subsection 3(1)" of the Broadcasting Act, and also ". to have regard to the regulatory policy" which is set out in subsection 5(2) of the Act.

The importance of these statutory policy objectives cannot be overstated in any review of the regulatory jurisdiction and powers of the CRTC in respect of broadcasting. To appreciate the significance of these policy objectives it helps to understand how and why these two separate but related sets of policy objectives came to be incorporated into the Broadcasting Act.

The current Broadcasting Act was enacted in 1991. It is essentially an amended and expanded version of the 1968 Broadcasting Act, which established the Canadian Radio and Television Commission ("CRTC") as the ". single independent public authority" with responsibility for regulation and supervision of the Canadian broadcasting system.

When Parliament enacted the 1968 Broadcasting Act, its core objective was to establish an independent, quasi-judicial, regulatory agency responsible for broadcasting that would operate at "arm's length" from the government of the day.

At that time many believed the CRTC's predecessor regulatory agency, the Board of Broadcast Governors, had been insufficiently insulated by its constating legislation from political pressures.²

Parliament intended therefore to ensure that the newly-created CRTC would be sheltered from such pressures. But Parliament also considered it appropriate to include at the beginning of the Broadcasting Act a set of policy objectives which it called the Broadcasting Policy for Canada. Those policy objectives were intended to inform and guide the newly-created independent broadcasting regulatory agency in the exercise of all of its core regulatory functions.³

All of the separate objectives of the 1968 Broadcasting Policy for Canada were continued in the Broadcasting Act when it was amended in 1991, and at that time a number of additional broadcasting policy objectives were added in subsection 3(1) of the Act.⁴

Also, in the 1991 amendments to the Broadcasting Act, a new set of regulatory policy objectives, which are found at subsection 5(2) of the Act, were enacted. Those regulatory objectives are intended to supplement the broadcasting policy objectives in subsection 3(1), and in some instances they overlap with them.

For ease of reference, the Broadcasting Policy for Canada, as found at subsection 3(1) of the Act, is reproduced below, as is the regulatory policy, as found in subsection 5(2) of the Act.

Broadcasting Policy for Canada

3. (1) It is hereby declared as the broadcasting policy for Canada that

Regulatory Policy

5. (2) The Canadian broadcasting system should be regulated and supervised in a flexible manner that

As a matter of law, each of those separate policy objectives has equal weight. As noted above, the Commission is obliged by its statutory objects to implement the broadcasting policy set out in subsection 3(1) and, in so doing, to also have regard to the regulatory policy set out in subsection 5(2). Therefore the Commission cannot ignore any of these policy objectives when it enacts regulations or formulates policies. In case of conflict (which rarely happens) the Act states that the broadcasting objectives in subsection 3(1) are to be given priority status over the objectives of the regulatory policy.

The number of objectives identified by Parliament, and the lack of any express prioritization, places the regulator in a difficult situation. The CRTC is directed to implement all of these diverse objectives without any guidance from Parliament as to where to place its emphasis.

Notwithstanding this lack of direction, it is possible to classify the objectives of the Broadcasting Act very broadly into four primary policy objectives and several subsidiary ones. The four primary policy objectives are:

(i) Canadian Ownership and Control

Paragraph 3(1)(a) requires that the Canadian broadcasting system "shall be effectively owned and controlled by Canadians." This requirement is unequivocal and in our view forms one of the cornerstones of Canadian broadcasting policy.

(ii) Languages of the Canadian Broadcasting System

Paragraph 3(1)(b) describes the Canadian broadcasting system as operating "primarily in the English and French languages" thereby reflecting the special status of Canada's two official languages. Paragraph 3(1)(c) recognizes that while sharing common aspects, English and French language broadcasting operate under different conditions and have different requirements. Paragraph 3(1)(k) also requires that a range of broadcasting services in English and French be extended to all Canadians as resources become available. It is therefore clear that English and French language programming is to be presented to Canadians in all regions of the country.

Paragraph 5(2)(a) of the regulatory policy states that the Canadian broadcasting system should be regulated and supervised in a flexible manner that is readily adaptable to the different characteristics of English and French language broadcasting and to the different conditions under which broadcasting undertakings that provide English or French language programming operate.

Subparagraph 3(1)(d)(iii) specifies that the system should also reflect the linguistic duality and multi-cultural and multi-racial nature of Canadian society and the special place of aboriginal peoples in that society. Paragraph 3(1)(t) provides that, when the Commission considers it appropriate, distribution undertakings may provide access to underserved linguistic and cultural minority communities.

(iii) Canadian Content Programming

Many of the policy objectives in subsection 3(1) address the content of Canadian programming. These include paragraphs 3(1) (a), (d), (e), (f), (i), (j), (o), (q), (r) and (s). These provisions require each element of the Canadian broadcasting system to contribute in an appropriate manner to the creation and presentation of Canadian programming. They address programming diversity, multi-culturalism, multi-racialism, educational programming, and the need to be reflective of Canadian society including men, women and children. They also address the involvement of public and private sector broadcasters, the use of independent production and talent resources. These provisions are discussed at length in other chapters of this report.

With one or two exceptions, which contain the caveat that the particular policy objective is subject to the availability of resources,⁵ the Broadcasting Policy for Canada in subsection 3(1) is both prescriptive and very detailed in its requirements.

(iv) Access by Canadians

While the policy objective of ensuring a right of access to the Canadian broadcasting system is not as well-articulated in the Act, it is nonetheless referred to in a number of places, and is certainly implied by many of the other policy objectives in subsection 3(1).

For example, paragraph 3(1)(e) requires each element of the Canadian broadcasting system to contribute in an appropriate manner (inter alia) to the "presentation" of Canadian programming; subparagraph (t)(i) requires distribution undertakings to give priority to the carriage of Canadian programming services, and in particular, to the carriage of local Canadian stations; subparagraph t(iii) requires BDUs to provide reasonable terms for the carriage, packaging and retailing of programming services; subparagraph t(iv) requires the provision of access for underserved linguistic and cultural groups to broadcasting distribution undertaking (BDU) programming services; and paragraph 3(1)(p) requires programming to be accessible by disabled persons, as resources become available.

In addition, the regulatory policy prescribed in subsection 5(2) requires the Canadian broadcasting system to be regulated and supervised in a flexible manner that: (d) facilitates the provision of broadcasting to Canadians, (e) facilitates the provision of Canadian programs to Canadians and (f) does not inhibit the delivery of information services to Canadians.

When read together, the policy objectives speak broadly of access by Canadians to Canadian programs and Canadian content, reasonable access by broadcasting services to distribution undertakings, and access by various minorities to the broadcasting system and programming in their preferred language.

This is clearly the corollary to the requirements relating to Canadian content and Canadian programming. Without access to this content, the comprehensive objectives relating to programming would not be fulfilled.

(v) Other Policy Objectives

The four preceding broad categories do not encompass all of the specific policy objectives in subsection 3(1). There are other objectives of broad application, including the requirements in paragraph 3(1)(g) that programming be of a high standard, in paragraph 3(1)(h) for all persons who are licensed to carry on broadcasting undertakings to have responsibility for the programs they broadcast, in subparagraph 3(1)(d)(iii) for employment equity, and in subparagraph 3(1)(d)(iv) for the system to be readily adaptable to scientific and technological change.

The regulatory policy also provides in paragraph 5(2)(g) that the Canadian broadcasting system be regulated in a flexible manner that is "sensitive to the administrative burden that, as a consequence of such regulation and supervision, may be imposed on persons carrying on broadcasting undertakings."

Given this statutory framework, and the importance of the statutory policy and regulatory objectives, one can easily appreciate why it is difficult for the Commission to withdraw completely from areas of regulatory activity, or to forbear from regulating a particular broadcasting activity or service. Stakeholders in the system are typically quick to seize on the wording of a policy objective in either subsection 3(1) or 5(2) of the Act that addresses their particular interests, and then to insist that the Commission continue to regulate in such a manner as to ensure that specific policy objectives are fulfilled. The authors of this report are cognizant of that constraint on the regulatory discretion of the Commission. We appreciate that it would be of little value for us to make broad sweeping recommendations for forbearance or deregulation if such forbearance or deregulation would lead to the non-fulfillment of one or more of the policy objectives of subsections 3(1) or 5(2).

Notwithstanding these statutory limitations, there are regulations, policies and procedures of the Commission which we believe should be streamlined, or even eliminated, in order to foster more light-handed and efficient regulation and greater reliance on market forces in a manner that will comply more fully with the regulatory policy in subsection 5(2) and still implement the Broadcasting Policy for Canada. Those regulations and policies are clearly identified and reviewed in this report.

In considering the opportunities that exist for regulatory reform, one must acknowledge that the Commission does regular housekeeping of its own with regard to updating and eliminating outdated regulatory policies and regulations. For example, with regard to the commercial radio broadcasting sector, the Commission announced in December 2006 the findings of its 2006 Review of Commercial Radio Policy.⁶ That comprehensive review of the policies and regulations that pertain to private commercial radio broadcasters was the fourth Commission review of commercial radio policies and regulations over the past sixteen years. Similarly, on May 17, 2007 the Commission published Broadcasting Public Notice CRTC 2007-43 outlining its determinations regarding certain aspects of the regulatory framework for over-the-air (OTA) television. That Commission policy review included a lengthy public hearing in November 2006 which painstakingly reviewed the effectiveness of the Commission's 1999 Television Policy.⁷

On the other hand, in January 2008 the Commission will conduct a public hearing to review its policies and regulations as they affect the discretionary programming services - specialty, pay and video-on-demand services - as well as the regulation of broadcasting distribution undertakings (BDUs).⁸ This will be the first comprehensive review of the Broadcasting Distribution Regulations (BDU Regulations) since 1997.

In September the Commission also announced that it will be convoking a public hearing to review policy and regulatory issues related to diversity of voices in broadcasting, and the related subject of broadcasting ownership policy.⁹

This means that some regulations and policies are more up-to-date than others and may be in less need of a thorough overhaul. However, our review of the Commission's policies and regulations is not restricted to one or more of the different regulated sectors of the Canadian broadcasting system. We have been given a mandate to provide an unobstructed and candid outsiders' view of all existing CRTC regulations and policies as they relate to private broadcasting. Nonetheless, in drafting this report we have remained very conscious of the fact that reform by the Commission itself of its own policies and regulations is very much an ongoing "work in progress."

3. HOW THE CRTC REGULATES BROADCASTING - "THE

REGULATORY TOOLBOX"

The CRTC is a quasi-judicial, independent regulatory agency with the statutory responsibility to regulate and supervise all aspects of the Canadian broadcasting system.

In order to implement the Broadcasting Policy for Canada through its licensing and other regulatory activities, the Commission has been given a number of statutory regulatory powers that are set forth in the Broadcasting Act and have not changed significantly since 1968.

(i) Licensing

The most important of these powers is, of course, the power to grant licences, for terms of up to seven years, to operate broadcasting undertakings. Subject to certain statutory safeguards and conditions, the Commission may also amend, and/or suspend, or even revoke a broadcasting licence. It may also approve, or deny, the transfer of ownership or control of a broadcasting undertaking.

(ii) Regulations

Before the Commission considers issuing a licence to operate a broadcasting undertaking it first decides whether it would belong to an existing class or whether there is likely to be, over time, a sufficient number of similar broadcasting undertakings to justify establishing a new class of broadcasting licensees. If there is, that new class is defined and established by the Commission. The CRTC typically promulgates a set of regulations to apply to all licensees of a given class.

The CRTC has, pursuant to section 10 of the Broadcasting Act, promulgated five sets of sector or class specific regulations that apply to:

In addition to those five sets of regulations that apply to the respective five classes of broadcasting undertakings, the Commission has also enacted two additional sets of regulations that apply to all broadcasting licensees. Those are:

(iii) Conditions of Licence

The Commission also has the statutory power to attach specific conditions to a given broadcasting licence. Such conditions must be, in the words of section 9 of the Broadcasting Act, ". related to the circumstances of the licensee". Through specific conditions attached to individual licences, the Commission is able to "fine tune" the regulatory requirements that pertain to a particular licensee under the Broadcasting Act.

(iv) Licence Exemptions

A fourth and correlative power to the Commission's licensing authority is the obligation imposed on the Commission by subsection 9(4) of the Broadcasting Act which requires the Commission to:

In 1996 the CRTC undertook a public process to explore the issue of exemptions and to determine whether a more expeditious regulatory process could be devised to deal with certain classes of undertakings. That public process culminated in the Policy Regarding the Use of Exemption Orders.¹⁷

As part of that policy, the CRTC noted that the prescriptive wording of subsection 9(4) of the Act obliges it to consider the appropriateness of exemption whenever it examines new classes of network, programming or distribution undertakings and, where appropriate, existing classes of such undertakings. The CRTC emphasized that, given the wording of subsection 9(4), it is not the size or importance of the class of undertaking to be exempted that is determinative. Instead, the test consists of assessing whether it is necessary for the class to comply with Part II of the Act or relevant regulations in order to further the implementation of the policy set out in subsection 3(1) of the Act.

In Public Notice CRTC 1996-59, the Commission set out its policy to exempt classes of programming undertakings only where:

The ability to impose conditions of exemption allows the Commission to exempt whole classes of undertakings from licensing and other regulatory requirements, while still ensuring that members of the exempt class continue to contribute appropriately to the implementation of the broadcasting policy set out in subsection 3(1).

The CRTC has issued a large number of exemption orders which are listed in Appendix B to this report. Some of the more significant orders, including the New Media Exemption Order, the Exemption Order for Small Cable Undertakings and the Exemption Order for Mobile Television Broadcasting Undertakings, are discussed in detail in later chapters.

(v) Policy Guidelines and Statements

In addition, the Commission has the power, under section 6 of the Act, to issue policy guidelines and statements with respect to any matter within the jurisdiction of the Commission. Policy guidelines and statements are not binding, as a matter of law. They become binding when implemented through regulations or conditions of licence, or on a case-by-case basis when dealing with requests for the issuance, renewal or amendment of broadcasting licences or for the approval of the transfer of ownership of a broadcasting licence. Examples of Commission policy guidelines and statements are frequently found in public notices and circulars.

(vi) Expectations

The Commission also implements its policies through "expectations" expressed in licensing decisions. Although such expectations are not legally binding on licensees as are regulations and conditions of licence, most licensees take careful note that they may be called to account on their fulfillment on the occasion of their next licence renewal.

(vii) Inquiries

The Commission also has the statutory power, under section 12 of the Act, to conduct inquiries into matters under its jurisdiction, and to issue mandatory orders requiring the performance of any act required to comply with, or forbidding any act that is contrary to, the Broadcasting Act or regulations, decisions or orders made by the Commission.

(viii) Industry Self-Regulation

The Commission has also implemented various industry self-regulatory mechanisms through conditions of licence. The Commission has, for example, imposed conditions of licence that require licensees to comply with specific industry codes on issues such as gender portrayal, violence in television programming, or advertising directed to children.

The CRTC has relied for many years on industry compliance with voluntary codes of conduct of various types. In this area of regulation there has always been a commendable level of consultation and co-operation between the Commission and certain industry associations, notably the Canadian Association of Broadcasters (CAB), the former Canadian Cable Telecommunications Association (CCTA), and Advertising Standards Canada (ASC).

The Commission over the years has encouraged those industry associations to develop, in consultation with their members and the Commission, various self-regulating codes of conduct and standards pertaining to broadcasting.¹⁸ Examples include the CAB Voluntary Code Regarding Violence in Television Programming, CAB Sex Role Portrayal Code for Television and Radio Programming, Advertising Standards Canada General Portrayal Guidelines for Advertising, CAB Broadcast Code for Advertising to Children, and the Code for Broadcast Advertising of Alcoholic Beverages.

The Commission is able, through the flexible regulatory tool of suspending conditions of licence as long as licensees adhere to such codes, to ensure that broadcasting licensees comply with the provisions of the relevant codes. The Commission has been able, therefore, to effectively delegate regulatory responsibility to the particular industry-created organization that is responsible for the administration and enforcement of the respective codes. Such organizations include the CAB itself, ASC, and the Canadian Broadcast Standards Council (CBSC).

The CBSC was originally established in 1990, under the aegis of the CAB, to assist the industry in responding to complaints arising from so-called "controversial programming." Over the past seventeen years, the CBSC has earned the respect of those involved in the Canadian broadcasting industry, including the CRTC, and the Canadian public. The CBSC has assumed increasing responsibility over the years for the administration of several self-regulatory codes.

It goes beyond the scope of this study to comment in detail on the operations of the CBSC, or on the substance of the several self-regulatory codes that have been developed by industry associations. However, we would be remiss if we did not note that initiatives at industry self-regulation, particularly in those instances when the CRTC has been an active participant in the developmental process, and is able through the suspension of condition of licence regulatory mechanism to ensure that the codes and standards are adhered to, has been a great success. It has relieved the Commission from the need to directly regulate, on a day-to-day basis, such time-consuming matters such as advertising of alcoholic beverages, controversial programming, gender portrayal, and violence in television programming.

Industry self-regulation, when properly implemented and administered, can result in achievement of policy objectives with less regulatory burden for both the regulator and the regulated undertakings. However, it can result in the substitution of private interests for public interests if it is not properly structured.

(ix) Enforcement Powers

The Commission can address non-compliance with its regulations and conditions of licence through the issuance of a mandatory order. A mandatory order can be made an order of the Federal Court or a provincial superior court and can be enforced as an order of that court through contempt proceedings.¹⁹

The Commission can also address non-compliance with a condition of licence by revoking or amending a licence during its term, or imposing more stringent conditions of licence at licence renewal, or in an extreme situation, refusing to renew a licence.

While the Commission can and does consider non-compliance with "expectations" at licence renewal proceedings, there are no direct sanctions prescribed under the Broadcasting Act for non-compliance with an expectation.

Operating a broadcasting undertaking without a licence, breach of a regulation, or of a condition of licence or a mandatory order are also punishable as summary conviction offences.²⁰ The Broadcasting Act and Criminal Code set out maximum fines which vary depending on the nature of the offence (operating without

a licence, breach of a regulation or order, breach of a condition of licence).²¹ Any such offences would be prosecuted by the Attorney-General of Canada.

4. FRAMEWORK FOR EVALUATING REGULATION

Notwithstanding the large number of statutory policy objectives in subsection 3(1) and their specificity, the Broadcasting Act confers a significant amount of discretion on the CRTC with respect to how it goes about the job of regulating and supervising the Canadian broadcasting system.

For example, the general powers conferred on the Commission in subsection 9(1) to establish classes of licences, to establish conditions of licence, to issue, renew and revoke licences, and to require BDUs to carry program services are all discretionary. The same is true of the power in section 6 to issue policy guidelines and statements, the very broad power to make regulations in sections 10 and 11, and the Commission's remedial powers in section 12.

Where the Act limits the Commission's discretion is in the pursuit of the policy objectives in subsection 3(1), the regulatory policy in subsection 5(2), the power to issue exemption orders in subsection 9(4), and the circumstances in which a public hearing is required.

This means that the Broadcasting Act itself provides few restrictions on the scope for regulatory reform as long the Commission continues to regulate and supervise all aspects of the broadcasting system with a view to implementing the policy objectives in subsection 3(1), while having regard to the regulatory policy set out in subsection 5(2).

Although the Act imposes a licensing regime on broadcasting undertakings by virtue of the criminal sanctions contained in section 32, it creates an exception for those broadcasting undertakings that are subject to an exemption order. As noted above, the wording of subsection 9(4) is mandatory insofar as it compels the Commission to issue an exemption order (on such terms and conditions as it deems appropriate) to any class of licensee specified, in respect of any or all of the requirements of Part II of the Act, or of a regulation made under Part II, where the Commission is satisfied that compliance with those requirements "will not contribute in a material manner to the implementation of the broadcasting policy set forth in subsection 3(1)."

This statutory framework established in the Broadcasting Act therefore does not foreclose regulatory reform, nor does it mandate regulation when it is not required to implement the policy objectives in subsection 3(1). Rather it empowers the Commission to apply a test of materiality to the issue of whether regulation is required to achieve the statutory policy objectives, and it empowers the Commission to define the extent of regulation, as well as the nature of regulation required to implement those objectives when a blanket exemption is not justified on the facts. Where no exemption is justified, the Act gives the Commission significant latitude to determine the extent of regulation required for various classes of licence, and the Commission has the discretion to define which classes to regulate.

In considering the issue of regulatory reform in the broadcasting sector, it is also important to note that paragraph 5(2)(g) states that the Canadian broadcasting system should be regulated and supervised in a flexible manner that "is sensitive to the administrative burden that, as a consequence of such regulation and supervision, may be imposed on persons carrying on broadcasting undertakings."

The Government of Canada has expended considerable resources and effort in the past few years studying ways to improve and modernize the regulatory system in Canada in light of evolving needs, demands and challenges of the 21^st century. To this end, the External Advisory Committee on Smart Regulation was established in May 2003; it was tasked inter alia with developing a set of principles to guide government departments and governmental agencies engaged in the regulatory process. The Committee's report Smart Regulation: A Regulatory Strategy for Canada, which was issued on September 20^th, 2004, contains numerous recommendations. The concept of "smart regulation" was defined by the Committee in the following terms:

Smart Regulation: A Regulatory Strategy for Canada sets out five principles which should govern regulatory measures and procedures. These five principles, which are reproduced below, are animated by a vision of instilling trust, supporting innovation, investment and competitiveness, and demonstrating to Canadians that the public interest is being protected. The five principles of smart regulation are:

To be effective, regulation must be directed at achieving policy objectives, it must be achievable in the sense that compliance is within the control of the regulated entity, and it must be enforceable. It should also, to the extent possible, reflect performance-based standards, rather than dictating the means to achieve those standards.

The costs of regulation include the direct costs of complying with the regulation that must be borne by the regulated undertaking and the ongoing supervisory and enforcement costs of the regulator, as well as market costs and inefficiencies caused by regulatory intervention. In general, the least costly or intrusive regulatory measure necessary to achieve the policy objective is preferable to more intrusive or costly measures. Inconsistency between regulations should also be avoided, since inconsistent regulation introduces unnecessary costs and undermines the effectiveness and transparency of the regime.

It is with these principles in mind that we have reviewed the CRTC's regulations and policies with respect to broadcasting.²⁴

Before delving into the specifics of regulatory measures applicable to broadcasting undertakings, some general comments on the relationship between the various regulatory tools available to the Commission and the five principles of smart regulation are worth noting.

For example, licensing is a relatively intensive and costly form of regulation. In comparison, conditional exemption orders significantly reduce the regulatory burden on licensees and the Commission. The reduced costs of exemption orders must be balanced against their effectiveness in terms of achieving policy objectives. If conditions of exemption can be enforced effectively, the use of exemption orders may be preferable to licensing. When licensing does not contribute materially to the advancement of a statutory policy objective, an exemption order should be issued.

In addition, since regulations are generally applicable to all undertakings in a given class, they are somewhat more transparent than regulatory obligations imposed by condition of licence. However, conditions of licence permit fine-tuning across undertakings and more targeted performance standards. If regulatory objectives can be achieved more effectively through targeted obligations, conditions of licence may be preferable to regulations of general application, but this is subject to the assurance that competing undertakings are equally affected by regulation, and the relative competitiveness of individual undertakings is not artificially enhanced or reduced by targeted regulatory measures.

"Expectations" imposed on licensees are less intrusive than conditions of licence or obligations imposed by regulation, but only in the sense that sanctions for non-compliance are more limited. Expectations are more flexible, but also may be less effective than regulations and conditions of licence. Expectations are also less transparent and predictable than regulations or conditions of licence.

In its report, the External Advisory Committee on Smart Regulation also expressed a preference for assessing alternative instruments for meeting policy objectives, including voluntary measures and performance-based approaches where possible.

Incentive regulation may be an effective means of inducing desired conduct by regulated entities - but it will only be effective if there is a direct causal connection between the incentive and the desired conduct. The target goals of incentive regulation need to be established at the outset, they must be monitored and the results compared with the target goals in order to gauge their success.

Care should also be taken to guard against the "belt and suspenders" approach to regulation by which the licensee is not only required to satisfy a performance target - but is also told precisely what it must or must not do to achieve the target. As discussed within the substantive subsections of this report, Canadian broadcasting regulation has at times suffered from this tendency to micromanage.

Smart regulation requires the regulator to engage in a very disciplined approach to regulation; it requires the regulator to clearly identify the policy objective being pursued, and it requires an assessment of whether the policy objective in question can be adequately addressed in the absence of regulatory intervention (whether by market forces or by the regulated entity's own self-interest). This analysis requires a detailed understanding of the industry and market conditions. The mandate established by the Commission for this review of its regulatory framework is consistent with the principles of smart regulation.

If it is determined that regulatory intervention will materially advance a statutory policy objective when compared with the option of no intervention, then the regulator should use a regulatory mechanism that will fulfill the policy objective in the least intrusive manner possible, having regard to possible unintended effects of regulatory intervention. Where licensees compete with each other, there is also the need to maintain competitive neutrality among them by applying uniform rules to comparable undertakings.

These principles are not new to the Commission. They were recently articulated by the Telecom Policy Review Panel in its 2006 Report to the Government of Canada²⁶ and they were codified in the Policy Direction to the CRTC issued the Governor in Council pursuant to section 8 of the Telecommunications Act.²⁷ While the circumstances of the telecommunications and broadcasting industries regulated by the Commission may be very different, these principles of smart regulation are equally applicable and adaptable.

In this report we have sought to evaluate CRTC regulations and regulatory policies with these principles in mind. We recommend that the Commission adopt this approach starting with its pending reviews of the BDU Specialty and Pay Television Regulations, and its "Diversity of Voices" review.

Recommendation 4-1

Recommendation 4-2

Recommendation 4-3

Recommendation 4-4

Coordination of Regulatory Action

While the CRTC plays a pivotal role in the regulation of the Canadian broadcasting system, it is not the only governmental agency with responsibilities that affect this sector.

The Governor in Council also has a number of important powers conferred on it, including the power pursuant to section 7 of the Broadcasting Act to issue policy directions of general application on broad policy matters with respect to the policy objectives in subsection 3(1) or the regulatory policy in subsection 5(2), the power to issue directions to the CRTC concerning classes of eligible licensees in section 26, and the power to set aside or refer broadcasting licensing decisions back to the Commission for reconsideration pursuant to section 28.

Heritage Canada also plays an important role as the department responsible for broadcasting policy and Canadian culture. Many of that Department's programs play an integral role in the regulation of the broadcasting sector in Canada.

Industry Canada also plays an extremely important role in the management and licensing of spectrum, and both it and Heritage Canada are involved in the development of copyright policy and legislation.

The Department of Finance's fiscal policies can also play an important role in the system, as was the case with respect to Bill C-58 respecting non-deductibility of advertising expenses related to advertising placed on non-Canadian broadcasting undertakings. The Department of Foreign Affairs and International Trade also plays a role in trans-border broadcasting issues.

As the broadcasting sector faces new challenges posed by the Internet and digital media, it will be important for all of these governmental departments and agencies to continue to coordinate their activities in a manner that best achieves the policy objectives being pursued.

The External Advisory Committee on Smart Regulation addressed this issue in its report. It recommended the establishment of a mechanism to support inter-departmental discussions to foster the development of government-wide positions on regulatory issues and to ensure that departments take appropriate action to design regulations with national priorities. The goal is to ensure that policy objectives are clearly spelled out and that regulatory action is coherent and integrated.

While it is beyond the scope of our mandate to comment on policies posed by governmental agencies other than the CRTC, we have at certain junctures in our report noted where coordinated action might be beneficial.

Recommendation 4-5

5. THE ROLE OF COMPETITION IN THE BROADCASTING SECTOR

The original rationale for regulating commercial broadcasting activity was the notion that radio spectrum was a scarce public resource that should be allocated for the highest and best use. Canadian broadcasting legislation has refined what that use should be by setting forth both a comprehensive set of policy objectives and guidelines on how the CRTC should regulate. Many of these policy objectives relate to the content of programming broadcast on the system, as discussed in detail in chapter 2.

Therefore, in one sense, competition has been supplanted to a significant degree by regulation in accordance with the wishes of Parliament.

However, even in this regulated environment, competitive market forces have always had an important role to play.

Within local television and radio markets, while the regulator has historically limited the number of licensees, those licensees compete with each other for program rights, audience share and advertising revenues.

However, even with respect to these areas of competition, regulatory limits have been placed on the licensees' activities. For example, allowable minutes of advertising have been restricted, program content has been heavily regulated, and in many cases programming formats have been prescribed to prevent direct competition between licensees in order to preserve their "financial viability".

While some of these regulatory prescriptions have been relaxed over the years, this has rarely been done on a consistent basis, and numerous other prescriptions have been added, creating an increasing number of regulatory layers.

For example, in 1990 the CRTC removed the requirement for AM radio stations to conform to a licensed format, and in 1995 it permitted FM radio stations to deviate from their prescribed programming formats without regulatory approval - yet when the Commission hears applications for new FM stations, it still scrutinizes each new applicant's proposed format to gauge how the new application may fill a hole in the market and contribute to the diversity of voices available. If the new licensee is at liberty to change its format following the issuance of a licence, why is the proposed format still scrutinized at the time of licensing?

Even where there is ample spectrum available for a radio or television broadcasting within a given market, the CRTC may and does still limit new entry. In such cases, spectrum scarcity is obviously not the principal rationale for limiting new entry. Rather it is the perceived need to protect the existing licensees in that market from revenue erosion from a new competing service. The apparent goal is to ensure that the incumbent licensees retain the financial health necessary to continue to meet their respective licence obligations.

If one were to rely on market forces, one would allow new entry to occur and leave it to consumers to determine which licensees survived on the basis of their ability to attract viewers and advertising. One would presumably auction the scarce radio frequencies to ensure an economically efficient allocation of spectrum, as is now done with wireless mobile spectrum. The reason that this has not historically happened is that the CRTC is concerned that competition may erode an existing licensee's ability to fulfill its regulatory obligations, including its Canadian content obligations, and a competitive market might not produce the variety of programming choices and the diversity of language and expression called for by Parliament in the Broadcasting Act.

In the realm of pay television, policies are also in place that limit both competition between pay television services and competition with other services (such as OTA television and specialty services).

When pay television services were first licensed in 1983, they were subject to restrictions on both formats and advertising. They were required to be one hundred percent subscription-based in order to preserve OTA television's continued access to television advertising revenues, and they were restricted to movie or performing arts formats. A number of competitive pay television services were licensed and several new entrants failed financially shortly thereafter.

After the pay television industry was restructured in the mid-1980s, and for the next two decades, the Commission followed a policy of awarding one licence per pay television genre in the same area of service. This policy was originally designed to stabilize the financial position of the pay television industry in Canada following the financial failure of several pay television licensees after the initial licensing process in 1983. Again the Commission's concern about financial viability was tied to its desire to ensure that licensees could meet their regulatory obligations. The policy was also designed to ensure programming diversity in the broadcasting sector.

This form of genre protection was recently departed from with the Commission's licensing of Allarcom to launch a new pay television service with first run movies that will compete directly with the two regional pay television services in Eastern and Western Canada.²⁸ Rather than abandon its policy of genre protection, the Commission characterized this as an "exception" to its general policy, and grounded its decision on the sound financial health of the pay television industry and its ability to absorb another competitor with a similar movie format.

When the Commission licensed Canadian specialty television programming services, it put in place regulatory mechanisms that restrict competition between specialty channels and conventional OTA television, as well as between specialty channels and pay television services and other specialty channels - both Canadian and non-Canadian.

Specialty channels are by definition "narrow-cast" services that are not supposed to compete directly with OTA television services. They are also distinguished from pay television services by their narrow programming focus - although they are allowed to exhibit some movies that fit their particular genre. Unlike pay television services, they are permitted to advertise - and in most cases they also receive a fee for carriage.

With the exception of Category 2 digital services, Canadian specialty services are protected from competition from other Canadian specialty services by a form of genre protection that purports to allow only one specialty service per programming genre. They are also protected from competition from foreign specialty channels by a policy that prohibits the carriage by BDUs of foreign specialty channels of the same genre as Canadian specialty channels.

However, this system of genre protection is not nearly as tight as the policies suggest. Over time, cracks have appeared in the system. This is partly the result of the proliferation of specialty channels which have pushed the CRTC to define increasingly narrow genres, and partly because of a lack of sufficiently good programming to go around.

For example, Canada now has more than one specialty sports channel, based on the fiction that one is regional and one is national. These same specialty channels compete with each other for program rights, as well as with the conventional OTA television services, as evidenced by the sale of Blue Jay rights and the Olympic Games to specialty sports channels, or to consortia involving specialty channels.

Canada also has more than one specialty news service, based on a finer "slicing" of genres in respect of coverage of Canadian news - a distinction that has gradually lost meaning. We also have CNN, HN, Fox News and BBC World providing competing foreign news services.

The Commission also issues licences to "pay-per-view" networks that exhibit movies unsupported by advertising. In recent years, these networks have also provided access to sporting events on a subscription basis. NFL Sunday Ticket and NHL Ticket are two examples. While these networks compete to a certain extent with pay television and specialty sports channels, restrictions remain in place to try to differentiate them for regulatory purposes.

Canadian BDUs have also been very successful in recent years in developing video-on-demand (VOD) services that provide access to movies and other programming on a pay-per-view basis. While the pay-per-program requirement was intended to distinguish these services from pay television services, the boundary lines between VOD services, pay-per-view services, pay television services and some specialty services is also becoming blurred.

VOD services are now offering program series such as the Sopranos or "24" that originally aired on OTA television or on pay television services. The Sopranos can now be viewed on at least three types of broadcasting licences (or exhibition "windows") that were originally intended to be distinct.

To blur these distinctions even further, pay television licensees are now offering access to many of the same movies and services that they offer on a scheduled format in a non-linear, "on demand" format. This non-linear format further erodes the original distinction between pay television, pay-per-view and VOD as far as format is concerned.

To complicate things further, broadcasters are starting to use the Internet as a means of making their linear programming available on a non-linear basis. Popular television shows can now be viewed the day after airing on many network websites, as can playoff hockey games and other types of programming.

In a competitive market one would also expect BDUs to be able to package their programming services in a manner that is most appealing to the public in order to capture more market share. However, while the Commission has taken great strides to open the BDU market up to competing delivery systems using a variety of technologies, it has put in place a very complex regime of tiering and linkage rules that severely restrict the composition of programming packages available to Canadians, and hence restrict the ability of BDUs to market their services to satisfy consumer demand. These include linkage rules designed to force subscribers to take services they might not want in order to obtain those they do want.

Again, there are understandable reasons why consumer choice has been limited in this matter. These include the policy objectives in the Broadcasting Act, which call for the Canadian broadcasting system to give priority to the carriage of Canadian programming, and for each element of the system to contribute in an appropriate manner to the creation and presentation of Canadian programming.

It is very unlikely that competitive market forces can be relied on to achieve all of the objectives in subsection 3(1) of the Broadcasting Act. This means that regulation continues to have an important role to play. The question is rather whether competitive market forces can be relied on to a greater extent than they are today to fulfillment broadcasting policy objectives. Can broadcasters and BDUs be given more flexibility to achieve the targets set for them by the regulator? Can consumers be given more power to select "discretionary" services of their choice?

These are not rhetorical questions. As discussed below in the chapter on New Media and the Internet, new digital distribution platforms, some of which are unregulated, are beginning to provide Canadians with significant new choices for programming services. While new media outlets for programming services and the demand for these services is still developing, there appears to be little doubt that this demand is growing and will continue to do so.

In this environment, the Canadian broadcasting system needs to remain relevant to consumers. It needs to adapt to changing market conditions that cater to consumer demand for "anything anytime." This process must start now if we wish to avoid the degradation of our regulated Canadian broadcasting system through loss of viewership. We believe that a more flexible and transparent regulatory system now will produce a stronger broadcasting system in the longer term.

In this environment there is a need to step back and consider whether the regulatory framework for broadcasting would look the same as it does today, if we were starting out in this new environment. It is difficult to conceive that it would.

There are obviously numerous points at which competitive market forces could be permitted to play a larger role in the Canadian broadcasting system if regulation were relaxed. In assessing the extent of this role, the CRTC must consider whether competitive market forces would adequately satisfy the policy objectives in subsection 3(1) of the Act, and whether the cost of those required regulatory mechanisms outweigh the benefits. It must also consider the extent to which regulatory mechanisms relied on in the past can be relied on in the future to achieve the policy objectives pursued. If the Commission considers that market forces can be relied upon to a greater extent than has been the case in the past, then it may also have to consider transitional provisions to ease the transition from one regulatory model to another.

Possible Increased Role for Competition

As discussed above, genre protection is intended to limit competition between Canadian pay and specialty services, as well as from non-Canadian programming services. The current rules are not applied in a consistent manner, and sometimes rely on regulatory fictions concerning genre definition in order to accommodate new services and viewer demand.

On the other hand, the objectives in subsection 3(1) of the Act clearly call for predominantly Canadian programming, and a diversity of voices.

One solution would be to maintain genre protection against non-Canadian programming services, while relaxing or eliminating it within Canada. This would protect Canadian programming services from foreign competition, while allowing market forces within the Canadian market to determine which Canadian services succeed.²⁹

This approach of deregulating programming formats or genres has already been tried by the CRTC with respect to AM and FM radio, and Category 2 digital specialty services. The CRTC's recent licensing of a second generic pay television licensee also represents a relaxation of genre protection for pay television services.

Letting consumer preference dictate which programming services succeed or fail is not a novel idea. It is a fact of life in most sectors of the Canadian economy. Relying on the competitive market to develop a variety of programming services that address the diverse interest of Canadians is not a radical idea either. In a digital world, with hundreds of channels, it is unlikely in the extreme that all programmers would choose to provide the same type of programming. Rather, one would expect them to identify niche markets and to strive to provide better programming options than their competitors.

In this new environment, there may still be services that the Commission might consider need special protection because they are of importance to achieving a particular objective of the Broadcasting Act, and because of the limited available audience. However, these services should be identified on a case-by-case basis in accordance with clear guidelines that can be well-understood by the industry.

Recommendation 5-1

Recommendation 5-2

Collapsing Licence Classes

Much of the existing regulatory framework addresses criteria for distinguishing various classes or categories of broadcasting licences from each other. This regime has been designed to insulate licensees from inter-licence class competition, and to ensure diverse voices.

With the blurring of old distinctions between providers of linear and non-linear programming, and with different classes of licensee often competing with each other for programming, the utility of maintaining all of these regulatory distinctions is questionable.

In our view, the CRTC should consider collapsing some of these licence categories and letting the market decide whether it wants more subscription-based specialty or VOD services, more pay-per-view services, or more advertising-based services.

Obviously, if genre protection were relaxed, and if one or more categories of broadcasting licences were collapsed, the rules of engagement would also have to be equalized so that one licensee would not have an unfair competitive advantage over another. This would require imposing the same Canadian content rules and regulatory obligations on all licensees in the same collapsed category of licensee. This topic is discussed further in the chapters that follow on Canadian content and access.

Recommendation 5-3

Different classes of broadcasting undertakings are subject to different rules respecting access to local and national advertising revenues, as well as differing restrictions on the amount of advertising they can broadcast. OTA private conventional television licensees are permitted to sell local advertising, provided they offer local programming, as well as national advertising. Specialty television services are generally restricted to selling national advertising services, while pay, pay-per-view and VOD services are generally not permitted to sell advertising at all. There are varying restrictions on the ability of community television services to offer advertising services.

In terms of advertising time limits, the current 12 minutes per hour cap on advertising by OTA television licensees is to be eliminated in two steps by September, 2009. Specialty television services remain subject to a limit of 12 minutes per hour of advertising. As noted above, pay, pay-per-view and VOD services are generally not permitted to solicit or accept advertising.

In the case of radio, the Commission lifted time limits on advertising in 1993. In general, however, FM licensees must devote at least one-third of their broadcast week to local programming in order to be permitted to solicit or accept local advertising. This policy is applied on a case-by-case basis to AM licensees.

There is certainly logic to linking the ability to offer local advertising to the provision of local programming. We note however that at least in the case of national television services, there would appear to be a natural market incentive to focus on national rather than local advertising. By definition, national (or regional) specialty and pay television services as well as pay-per-view and VOD services do not have the ability to provide targeted local advertising. It is not clear, therefore, whether regulatory restrictions on the provision of local advertising by national specialty television services are necessary, or that relaxation of these restrictions would have a significant effect on the marketplace.

In our view, consideration should also be given to removing the cap on advertising minutes for conventional OTA television services immediately, and to eliminating the time limit on advertising by specialty services. As indicated above, time limits on advertising by radio licensees were eliminated over a decade ago; since then, the amount of advertising broadcast by radio licensees has been dictated by market forces. Data provided by the Commission in its 2006 Broadcasting Policy Monitoring Report also indicate that a very significant portion of the advertising incentive minutes available to English and French-language conventional OTA and specialty television broadcasters were not in fact used by these broadcasters. This suggests not only that these minutes had little or no incentive value, but also that market forces limit the amount of advertising that is broadcast.

More generally, we also think that the time has come for a detailed assessment and rationalization of the sources of revenues available for private conventional OTA television, pay television, specialty services, pay-per-view and VOD services, including access to advertising revenues and subscription fees. More or less, advertising, subscription fees and pay-per-view could in theory all become areas for broadcasters to compete in making their services attractive to consumers. It is not at all clear that the mandated regulatory distinctions on access to revenues are workable in the long term, or that they will maximize the contributions of Canadian commercial television services as a whole to the Canadian broadcasting system.

Recommendation 5-4

There are currently five categories of specialty programming television services with varying rights of carriage and various regulatory obligations. These include three original types of analog specialty channels ("dual status", "modified dual status" and discretionary services), and Category 1 and 2 digital services. These services vary in terms of carriage rights, access rights, access rules and wholesale fees they may charge for carriage.

Many of the rights and obligations attaching to these licences appear to depend on when the specialty licence was issued, and not on any clear regulatory criteria. The different rights attaching to these types of licences limit competition between these services, as some are carried as of right at a prescribed rate, some are carried at negotiated rates, and some do not have to be carried at all.

While the Commission has signaled its intent to rationalize this regulatory framework in a purely digital environment, in our view, consideration should be given to moving more quickly to a simpler framework that is governed more by consumer demand and market-based subscriber fees.

This is not to say that all specialty services should necessarily be treated equally. The CRTC may still wish to ensure specific carriage requirements and regulate the rates for certain services that it might consider to be of vital importance to achievement of a particular objective in the Broadcasting Act or that might fulfill a public interest function, such as public safety. However, any such decision should be made as an exception to the general rule and should only be taken following a determination that the service in question is required in order to fulfill a specific objective of the Broadcasting Act and that the competitive market is unlikely to support the service in question without regulatory intervention. If such a determination is made, the Commission should select the least intrusive regulatory mechanism capable of achieving the desired policy objective.

The current system continues to reward discretionary services with carriage rights based more on the launch date of the service in question than on its merits. As discussed further in Chapter 6, we recommend that the Commission consider incenting Canadian discretionary programming services to create more Canadian content by rewarding higher levels of Canadian content, or services with higher quality Canadian production values, with more favourable access rights.

Recommendation 5-5

Relaxing restrictions on In-house Production

Over-the-air ("OTA") television broadcasters, pay, pay-per-view and some specialty television services currently face varying requirements to source a minimum percentage of the Canadian programming they exhibit from independent producers. In some cases, such as in the case of pay television services, 100% of Canadian programming must be obtained from third parties, while in the case of conventional OTA television services, at least 75% of priority Canadian programming must be obtained from independent producers.

While these requirements are directly linked to the broadcasting policy objective of ensuring that the Canadian broadcasting system includes a "significant" contribution from the Canadian independent production sector, as discussed more fully in Chapter 6 below, we believe that it may be possible to reduce the current requirements to use independent production without jeopardizing this objective and permit greater scope for market forces to determine the most effective and efficient means of producing Canadian content.

Liberalizing Over-the-Air Entry

Another way of introducing greater reliance on market forces and competition into the current regulatory framework is to loosen the rules that currently govern the licensing of OTA broadcasting undertakings. At present, applications for new radio and over-the-air television services are scrutinized to ensure that the market can support an additional service provider. This approach is intended to ensure that new entry does not undercut the ability of existing service providers to fulfill their regulatory obligations, including their Canadian content requirements.

While we understand the rationale for this approach, the limitations on entry may come at a fairly high cost. In effect, the approach protects inefficient competitors and can serve to preclude entry by new players that might operate more efficiently than existing service providers, respond better to consumer demand, offer more Canadian content and more high-quality programming to consumers.

We note that there has in fact been a considerable amount of new entry into commercial OTA radio in recent years. In the period between 2003 and 2006, the Commission licensed 233 new OTA radio stations, including 76 new stations in 2006 alone.³⁰ This has resulted in more competition for advertising revenues and greater choice for consumers. At the same time, overall PBIT margins have remained stable (up slightly from 19.3% in 2003 to 20.1%)³¹ in 2006. In contrast, the Commission appears to be much more reticent towards allowing more entry in the OTA television market.

Recommendation 5-6

Packaging of services by BDUs

At present, BDUs are heavily restricted in their ability to package programming services for retail sale. These rules prevent BDUs from competing with one another by offering innovative service packages that are responsive to consumer demand. Although the Commission is proposing to relax some of these requirements in a fully digital environment, by 2010 or 2013, depending on digital penetration, this is a long time to continue to operate under a more restrictive regime.

This is another area where there appears to be scope for greater reliance on market forces. As discussed in more detail in Chapter 6 below, we believe that if rules are adopted to establish a strongly Canadian basic service package with a buy-through requirement, it may be possible to allow market forces and consumer demand to dictate remaining packaging issues.

Recommendation 5-7

Specific recommendations on each of these issues is contained in the various chapters of this study dealing with the regulations or policy in question.

6. CANADIAN CONTENT

Those words written in the opening two sentences of the Fowler Committee Report in 1965 are as valid0020today as they were in 1965. While technology and the face of Canadian broadcasting has changed significantly in the interim, our preoccupation with the content exhibited on our broadcasting system remains constant.

As discussed in Chapter 2 of this report, many of the objectives of the Broadcasting Policy for Canada set forth in subsection 3(1) of the Broadcasting Act, address programming content.

Canadian content regulation has been part of the regulation of Canadian broadcasting for at least 50 years. Prior to the creation of the CRTC in 1968, the Board of Broadcast Governors had found it necessary to promulgate a regulation concerning the Canadian content of television programs. That regulation required at least 55% of all broadcasting time to be reserved for programs basically Canadian in content and inspiration. It was enacted to give effect to section 11 of the 1959 Broadcasting Act, which required a broadcasting service to be "basically Canadian in content and character" and to promote and ensure "the greater use of Canadian talent by broadcasting stations."

Although the current version of the Broadcasting Act contains many more specific policy objectives relating to program content - it nonetheless maintains the same core principle of Canadian content and character, supplemented by principles of multi-culturalism and multi-racialism. It also continues to endorse the use of Canadian creative resources in the production of Canadian programs and makes specific reference to the use of the Canadian production sector.

With the advent of new technologies giving rise to a number of different distribution platforms and many new forms of programming services, such as pay television, pay-per-view, VOD and specialty channels, we have moved away from a "one size fits all" approach to Canadian content, to one that recognizes that the nature of the programming service may temper the amount of Canadian content required. This principle, which is embodied in paragraph 3(1)(f) provides as follows:

The resultant regulatory system is characterized by a myriad of different Canadian content requirements that are specific to the class of licence issued, and in some cases to the sub-class of licence or specific broadcasting service in question. In some cases, the contribution is by way of financial transfers to funds which support production of Canadian content (as in the case of BDUs), in others it is by way of program production and exhibition requirements, and in others it is by way of support for independent production. The applicable rules are embodied in the regulations and policies applicable to the various elements of the Canadian broadcasting system, as well as in conditions of licence, and are discussed in detail in the following chapters of this study. In this chapter, the authors have attempted to pull some of these disparate elements together in one place to discuss the extent to which the existing rules appear to be advancing the objectives in subsection 3(1) of the Act, and to highlight possible areas for reform.

Before commencing that discussion, it is useful to recount why it has been found that regulations and policies are required to ensure that Canadian programs, reflective of the Canadian experience in all of its diversity, will be produced and broadcast. Why wouldn't this happen in the absence of regulation?

In the English-language private television broadcasting market, the argument for regulation is based on the economic cost of producing high-quality television Canadian programming compared with the option of purchasing much less expensive Canadian rights to exhibit foreign-produced programs. While public demand for Canadian news, public affairs and sports programming is strong enough to support these types of productions, Canadian broadcasters have long contended that the relatively small size of the Canadian market and strong demand for high-profile and well marketed foreign-produced television productions, principally from theU.S., but also from the UK and other countries, makes it very difficult to recover the cost of producing home-grown dramatic programs to compete with the likes of American sitcoms, the Sopranos, "24" or the CSI series.³³ This is not to say that Canadians are not capable of producing good dramas and sitcoms. They clearly are. The talent is not lacking. It is the economic model that is working against us.

When one considers that it can cost approximately $3.2 million (Can) to produce a one-hour prime time drama program in the United States³⁴ - but only $200,000 to purchase Canadian rights to the same programs, and $1.5 million (Can) to produce a one-hour drama in Canada, one can easily see why there is a very strong economic incentive to purchase Canadian rights to American drama programming. When one considers the extent of the marketing resources that are expended to promote popular American television productions, and the spill-over advertising on American talk shows, entertainment programs, and the print media that inevitably revolves around these entertainment products, the allure of American productions is even greater.

Again, this is not new phenomena. In 1965, the Fowler Committee made the following observation:

The situation in the French-speaking market is different in that television viewers there are fond of French-speaking shows and have their own "star system." French-speaking dramas, for instance, are extremely popular in Québec because viewers can "recognize" themselves in these shows, which often have strong local content of a sociological and philosophical nature. What is more, the artists and writers responsible for these dramas are true local stars, thus providing even further attraction for viewers and buoying the shows' ratings. One might therefore surmise that, even without regulation, Canadian content objectives would be met in such a market. It would be unwise, however, to think that this situation will remain stable in years to come, which is why we believe that the same regulations governing such things as Canadian content should remain in force in the French-speaking markets, including Québec. With the possibilities of the Internet, the multiculturalism of our society and a general philosophy that favours the "global" over the "local", Québec drama series are facing increased competition from foreign dramas, especially those from the U.S. The appeal of American television series (translated into French), even in a French-speaking market, should not be underestimated. One convincing example of this occurred in the summer of 2006 when the shows that earned the highest audience ratings on Société Radio-Canada (the French-speaking branch of the CBC), other than the Fête Nationale show, were two American series translated into French: "Perdus" (the French version of "Lost") and "Beautés désespérées" (the French version of "Desperate Housewives"). At the time of writing, everything points to a possible repeat of this situation in the summer of 2007. These two shows were in fact ranked 18^th and 20^th, respectively, on the list of the most-watched television shows in the summer of 2006.³⁶

This phenomenon, in and of itself, is nothing new. But the situation is all the more worrisome given the current context. The same economic incentives described above (namely the purchase of rights to U.S. television series) exists in the French-speaking market, where the difference in the cost of purchasing rights to a U.S. series for French translation and producing a Canadian television show may be even greater than in the English-speaking market.

For these reasons, the French-speaking market should continue to be governed by the same Canadian content regulations, even though achieving these content objectives will be easier in light of the demand in this market for French-speaking and local productions.

We do not disagree with the conclusion that market forces alone are unlikely to achieve the policy objectives set forth in the Broadcasting Act, including the objectives relating to a preponderance of Canadian television content. We do however question whether all of the existing regulations and policies are working in a manner that directly and effectively achieves these objectives.

The table below summarizes the regulations governing exhibition and expenditures on Canadian content by the various classes of private television undertakings. The requirements vary significantly across and within classes of undertakings. For example, only commercial private OTA television services have peak viewing/priority programming requirements. While other classes of services generally have expenditure requirements and private commercial OTA television services do not, many OTA licensees do have expenditure requirements as a result of benefits commitments. The resulting "patchwork quilt" of regulatory obligations lacks transparency and creates inconsistent regulatory obligations for competing services.

The complexity and inconsistency of requirements also makes it very difficult, if not impossible, to assess the effectiveness of the various Canadian content requirements.

Although OTA television services are typically considered to be the preeminent contributors to Canadian content development and exhibition, it is significant that total expenditures by Canadian pay and specialty services on Canadian programming now exceed, by a significant amount, total expenditures by private conventional OTA television services on Canadian programming. In 2006, for example, private conventional OTA licensees spent $623.7 million on Canadian programming, while specialty and pay services spent in excess of $890 million.³⁷ Specialty and pay services are also spending considerably more on drama programming than private conventional OTA television services.

Significantly, also, while CPE as a percentage of revenues has remained relatively flat for private conventional television services, expenditures by OTA television services on non-Canadian programming has increased as a percentage of total revenues. This appears to be due to the increasing allocation by English-language OTA services of their program budgets to non-Canadian programming. The percentage of programming expenditures spent on Canadian content by English-language OTA services has declined from 50% in 1999 to 40% in 2006. French-language OTA television broadcasters in contrast continue to spend approximately 90% of their programming budgets on Canadian content.

Significantly also the percentage of revenues spent by English-language specialty and pay television services on Canadian programming is only marginally below the percentage of revenues spent by French-language specialty and pay television services on Canadian programming and, in both cases, specialty and pay television services spent a significantly higher portion of their revenues on Canadian content than private conventional OTA television services.

Viewing trends are also interesting. While individual private conventional OTA television services attract a bigger audience share than individual specialty services, overall the viewing share of specialty and pay services (36.2%) now exceeds the viewing share of private conventional OTA television services (31.3%).³⁹

The table below shows the percentage of viewing of Canadian programming by genre and class of licence. Canadian viewing of news on all services is very high. However, in English-language markets, specialty and pay services are garnering a higher percentage of viewing than Canadian programming in individual categories like drama, as well as over-all.

PERCENTAGE VIEWING OF CANADIAN PROGRAMS, BY PROGRAM TYPE

These data suggest that as between private conventional and specialty and pay television services, more and more specialty and pay television services are taking the lead in terms of both expenditures on and exhibition of Canadian content, at least in the case of English-language services.

The available information also strongly suggests that the existing regulatory incentives and obligations with respect to English-language Canadian drama programming are not effective. While we do not have the information necessary to conduct a comprehensive assessment of the amount of Canadian drama scheduled during peak viewing periods by private conventional OTA television and other television services, snapshots of the schedules for OTA stations in specific markets suggest that the amount of Canadian drama that is being broadcast during peak time in the regular season by private conventional OTA television services is very limited. (See sample schedules attached as Appendix C) Priority programming obligations appear to be largely satisfied by the broadcasting of entertainment magazines and reality television programming, and by scheduling priority programming during lower viewing periods, such as Friday and Saturday nights and the summer period.

On their face, the existing drama incentives are also problematic. The incentives which permit OTA services to gross up Canadian drama programming broadcast during peak viewing periods effectively reduces the amount of Canadian programming that these services must broadcast during such peak periods. The advertising minute incentives, at least in the case of OTA television services, will have no value once the limits on advertising minutes are lifted for this class of licensee and, in any event, they do not appear to have been effective. Many of the advertising incentive minutes available to conventional and specialty services have not been utilized, suggesting that these minutes have little or no incentive value.

As discussed more fully below, there is also an inherent tension between simultaneous substitution requirements and the exhibition of Canadian programming during peak viewing periods. Simultaneous substitution appears to dictate, to a very large extent, the peak period program schedules of private conventional English language OTA television broadcasters, ensuring that foreign content is predominantly displayed during peak viewing periods.

These factors suggest that existing measures to promote the production and exhibition of Canadian content need to be reexamined to determine the extent to which they are actually succeeding in achieving the objectives of the Act with respect to Canadian program content.

We believe it is imperative to develop more targeted and effective measures to incent the exhibition of Canadian content during peak viewing periods where market forces will not achieve this goal. As part of this analysis, the definition of priority programming and peak viewing periods should be revisited. Priority programming is currently defined to include a mixed bag of programs i.e. Canadian drama, music and dance; Canadian long-form documentaries; Canadian entertainment magazines; and regionally-produced programming in all categories except news, information and sports. It is not at all apparent that the economics of producing Canadian entertainment magazine or reality television programming suffers from the same challenges as Canadian drama programming, or that this type of programming merits specific regulatory incentives. Consideration should therefore be given to targeting peak programming obligations to a narrow class of services, which will not be supported by the marketplace, and imposing targeted exhibition obligations which require television services to broadcast a minimum number of hours of these types of Canadian programs between 7 and 11 pm during the regular television viewing season when most Canadians are watching television.

Recommendation 6-1

The selection of programming with priority status should depend, in part, on a detailed assessment of the economics of producing different types of Canadian content as well as the Canadian demand for this content during peak viewing periods. As noted above, it is not apparent that it is not economical to produce Canadian entertainment magazine programming, reality or game show programming or that the Canadian market will not, on its own, drive demand for this programming during peak viewing periods. With regard to costs, we note Guy Fournier's statement in his report on French-language drama:

In our view, an assessment of the effectiveness and rationalization of CPE requirements is merited. On their face, expenditure requirements can be problematic in the sense that they fail to promote efficiency.⁴⁰ On the other hand, expenditure requirements, including in particular obligations to contribute a portion of revenues to funds to support Canadian content, are applied broadly to other classes of broadcasting undertakings including, most notably, radio and distribution undertakings. As discussed above, some licensees have a combination of requirements both to exhibit specified quantities of Canadian programming and to spend specified amounts on Canadian programming production. Due to application of the Commission's benefits policy, there is no consistency in application of these requirements to licensees, particularly in the OTA television and specialty services markets. It is not clear why a similar approach should not be adopted generally with respect to private commercial television services.⁴¹

Recommendation 6-2

Simultaneous Substitution

Simultaneous program substitution has long been thought of as an important mechanism to increase the value of acquired Canadian rights in American television programs. By requiring cable networks to substitute the Canadian signal and related advertising for the American signal and related advertising of a simultaneously scheduled program, Canadian broadcasters can maximize the value of their American acquired programs. In theory, they can then use this extra revenue to help subsidize the production of Canadian programming.⁴²

In our view, it is time to re-examine this proposition. If one looks at the examples of program schedules for the CTV and Global Television networks during the regular season peak viewing period (in Appendix C) one can see that, with very few exceptions, they are filled with American programs scheduled at the same time that the American networks have scheduled the same programs.

In a very real sense, simultaneous substitution appears to be dictating the scheduling of Canadian English-language OTA television networks - almost to the exclusion of Canadian programs in peak viewing periods. This approach may be producing extra revenues to help finance the production of Canadian programs - but it is also discouraging the scheduling of those Canadian programs in a time slot in which most Canadians watch television. Simultaneous substitution is very clearly a two-edged sword. It pushes Canadian content into less popular time slots, or into the summer months when new American shows are not being aired and fewer people are watching television. In other words, simultaneous substitution pushes Canadian content out of the time slots on OTA television services when the greatest number of Canadians are watching and which have the greatest revenue potential.

By increasing the value of non-Canadian program rights, simultaneous substitution also tends to increase the costs of these rights. As discussed above, English-language private conventional OTA television licensees have been spending an increasing percentage of their revenues on foreign content. To the extent that simultaneous substitution pushes up the costs of foreign content, it reduces the net benefit of simultaneous substitution to the Canadian broadcasting system.

We do not have the data to make specific recommendations to change the current approach to simultaneous substitution - but we do question the net benefit that simultaneous substitution provides to the system and whether there might not be other more direct and effective means of retaining the revenues associated with simultaneous substitution. The aim of such measures would be to repatriate the scheduling of both Canadian and American television programs in a manner that is more conducive to achievement of the objectives of the Broadcasting Policy for Canada.

Recommendation 6-3

Independent Television Production

As discussed in Chapter 2, sub-paragraph 3(1)(i)(v) of the Broadcasting Policy for Canada states that the programming provided by the Canadian broadcasting system should "include a significant contribution from the Canadian independent production sector."

As shown in the table below, this objective is addressed in a number of different ways for different categories of television services.

These requirements have the effect of pushing production of Canadian programs to the independent production sector and out of the broadcasters' own production facilities.

There are signs that this policy may not be working in a manner that is most conducive to the production of Canadian content in the current economic and technological environment.

Some private broadcasters have stated publicly that the current model is inhibiting them from producing more Canadian content and from exploiting the ancillary rights associated with the productions they help to finance. As rights management becomes increasingly important in the "new media" environment, and as the costs of production continue to escalate, they say it is time to reexamine whether the current model enables the industry to respond in the best way possible to the new environment.⁴³

Outside Canada, we are increasingly witnessing the combination of the production and distribution functions in large, well-financed, companies that are then better able to finance production and manage distribution and rights in an increasingly complex environment.

This is not to say that the Canadian independent productions should not continue to be licensed by Canadian broadcasters. Independent production is important from the perspective of diversity, regional expression, and the employment of creative Canadian talent.

We simply question whether the pendulum has swung too far in one direction in a way that may impede the ability of the Canadian broadcasting system to respond in an adequate manner to the new environment, and in a manner that produces more high-quality Canadian programming.

The current "expectation" that 75% of priority programming broadcast by OTA television services be produced by unrelated persons is clearly more than a "significant" portion of priority programming. It is even more than "preponderant." Similarly, the requirement for pay, PPV and VOD to source all or virtually all programming from unrelated producers is clearly more than "significant".

In the French market, as stated previously, the fact that the market is smaller represents an added challenge in producing high-quality dramas based on the current model of independent production. The CRTC should therefore consider the possible advantage of allowing the broadcaster's internal production organization to contribute to that broadcaster's Canadian content and production of dramas. This may prove to be more economical and it would help to address the rights management issues that Canadian broadcasters currently face in exploiting the full economic value of Canadian production.

Recommendation 6-4

7. ACCESS

As discussed in Chapter 2, without access by Canadians to Canadian programs and Canadian content, the comprehensive objectives in subsection 3(1) of the Act relating to such content would not be fulfilled.

In recent years, much of the debate relating to "access" has focused on access to carriage by BDUs. Concerns about this form of access have increased since the fairly recent evolution of BDUs into the role of both distributors and significant content providers. This dual role of BDUs has raised concerns about the non-discriminatory treatment of competing programming services offered by the BDUs' competitors. As the BDUs' video-on-demand subscription services start looking more like the pay television and pay-per-view services offered by other licensees, and as the CRTC moves towards adopting a regime that entails fewer carriage rights for specialty services, BDUs have an increasing opportunity to afford preferential treatment to affiliated programming services.

The CRTC has broad powers to regulate access to BDUs by programming services, including the power to mandate carriage of specific programming services, to regulate terms and conditions of carriage, to arbitrate disputes over access, and to regulate the use of the BDUs' networks to promote programming services.

In the past, the Commission has tended to micro-manage access to BDUs. This was considered necessary at a time when analog channel capacity was relatively scarce. Advances in digital and other technologies have alleviated many of the concerns related to access and carriage - but the proliferation of new programming services has not allowed the access issue to disappear.

The fact that we are at a cross-roads from a technology perspective also tends to complicate the issue, as we still have an analog cable television service with limited capacity, and digital cable service with abundant channel capacity - but only a sub-set of total subscribers - and HDTV services that are still in their infancy - but will inevitably require a lot of channel capacity. In this environment, regulatory oversight is still required.

However, we believe that it is possible to simplify the existing regulatory framework and to introduce a greater role for market forces and of consumer choice.

Access Rights

As discussed later on in this report, we believe that the priority carriage rules in section 17 of the BDU Regulations, and the power conferred on the Commission in paragraph 9(1)(h) of the Broadcasting Act to designate other programming services for compulsory carriage by BDUs, are important tools at the Commission's disposal to ensure that Canadians have access to specific programming services that the Commission considers are important to achieving the policy objectives in subsection 3(1) of the Act.

We favour the maintenance of a basic service that exhibits a high-level of Canadian programming, and we favour the continuation of a "buy-through" requirement that requires Canadians to subscribe to this basic service before buying other discretionary services. We see this as an important part of the equation if the Commission is going to consider increasing the options available to consumers to purchase discretionary services in a more consumer-friendly environment.

We suggest that consideration be given to further enhancing the visibility of discretionary services that provide high-levels of Canadian content, significant Canadian program expenditures or perform a public interest function by tying access rights to the contribution that a service makes toward furthering the objectives of the Broadcasting Act. Under this kind of model, for example, carriage rights would vary depending on the level of Canadian content or Canadian program expenditures a licence achieves. The Commission could consider establishing tiers designating the carriage rights attached to different levels of content required. This type of model might also be used to encourage the exhibition of certain types of Canadian content, such as drama, that are considered to be in short supply. This type of model might incent licensees to increase their Canadian content and expenditure commitments, in order to gain better access rights.

Incentives might include such benefits as compulsory carriage, subscription fees, inclusion in the basic service or even channel placement. We consider that this approach would have merit over the existing framework that has rewarded discretionary services with carriage rights based more on their launch date than on their merits.

Recommendation 7-1

Channel Placement

There appear to be divergent views on the importance of channel placement. We recommend that this issue be assessed. If it is determined that channel placement is still important to the success of programming services, consideration should be given to requiring that Canadian services, particularly those that satisfy high Canadian content thresholds, receive better placement on the BDU dial than non-Canadian services. In assessing this issue, consideration will also have to be given to the impact of channel placement on the overall demand for Canadian programming services and the ability of BDUs to differentiate themselves from other BDUs in a competitive marketplace.

Recommendation 7-2

Carriage Fees

The requirement to regulate carriage or wholesale fees should be investigated in light of the relative bargaining power of parties. A must-carry obligation appears on its face to enhance the bargaining power of a programming service, provided that the service is entitled to seek carriage fees. We note, in this regard, that the U.S. has implemented a regime whereby OTA television broadcasters in a local market may elect, each year, whether they wish to: (i) have must-carry status and no fee for carriage; or (ii) negotiate retransmission consent agreements. While this regime would appear to introduce a measure of flexibility into the system, and more scope for market forces to play a role in determining access fees and carriage, it is not clear that this approach is likely to be effective where there is an imbalance of bargaining power between a programming undertaking and a distributor. Further investigation of this issue is required to assess and establish principles for when ex ante regulation of wholesale fees is required and when ex poste dispute resolution procedures will be sufficient to address an impasse in negotiations.

We have also recommended in Chapter 6 that the Commission conduct an additional assessment of revenue sources available to different classes of private television undertakings including OTA television services. This could include an analysis of fees for carriage of private conventional OTA television services that satisfy significant Canadian content thresholds and assessment of the issue of fee for carriage of private conventional OTA television services that satisfy key Canadian content criteria, including local programming.

Carriage of Related Services

We would also propose eliminating some of the existing requirements that inhibit BDUs from carrying affiliated programming services. For example, the current rules require the BDU to carry five specialty services for each related specialty service that they carry. In our view, this type of rule may inhibit carriage of new Canadian programming services without necessarily addressing the issue of discriminatory conduct.

In order to offset the ability of BDUs to engage in anti-competitive conduct in respect of their own or related programming services, we recommend that the Commission strengthen both its test of discriminatory conduct and its enforcement mechanisms, as discussed further below.

Preponderance

As already discussed, "access" in the context of the Broadcasting Act implies more than access by programming services to BDUs. It also implies access to Canadian content by Canadians.

There has been considerable debate over the past few years as to whether BDUs should have to offer Canadians a "preponderance" of Canadian programming services - or ensure that a preponderance of the services actually subscribed to by a given subscriber consist of Canadian programming services.

At the present time, the BDU Regulations prohibit BDUs from offering a non-Canadian specialty service unless it is "linked" to a Canadian service. Another rule prohibits the offering of non-Canadian tiers.

In Review of the regulatory frameworks for broadcasting distribution undertakings and discretionary programming services, the CRTC proposed a new rule that would require BDUs to ensure that customers receive a simple preponderance (51%) of Canadian programming services (based on all services received).⁴⁵

We agree that the CRTC's proposal would provide for a simpler form of regulatory prescription.

In our view, consumer demand should play a greater role in the Canadian broadcasting system, as it does in other sectors of the economy. Forcing Canadians to subscribe to truly "discretionary" services that they do not want, in order to get one they do want, is precisely the type of regulation that may drive consumers to the Internet, pay-per-view and on-demand types of services. If the Canadian broadcasting system is to remain relevant and attractive to viewers in an age of watching "anything, anytime," it needs to adapt to the new environment.

If some of the other measures we have recommended were adopted, we could see a strong "Canadian" basic service emerging that would consist of programming services that satisfy significant Canadian content thresholds. If that type of basic service were offered, and a "basic buy-through" were required, we would be less concerned about which of the discretionary services customers select. We would permit more competition between Canadian programming services to develop while continuing to limit access by non-Canadian services to the Canadian market.

Recommendation 7-3

Dispute Resolution and Enforcement

Consistent with the recommendations of the Telecommunications Policy Review Panel in the telecommunications context, we believe that a shift to greater reliance on market forces in the broadcasting sector must be accompanied by enhanced dispute resolution mechanisms that address, efficiently and effectively, competitive disputes and include credible sanctions on anti-competitive conduct.

While BDUs are already subject to an undue preference prohibition in section 9 of the BDU Regulations, the onus lies on a complainant to demonstrate on a balance of probabilities that the BDU has engaged in discriminatory conduct that results in an "undue" preference or disadvantage to any person, including the BDU itself. In many cases, a complainant will not have access to the evidence necessary to satisfy this requirement because relevant examples of the BDU's conduct with respect to third party or self-dealing will not be publicly available. Accordingly, we recommend that, consistent with the test found in subsection 27(4) of the Telecommunications Act, the onus of demonstrating that the BDU has not conferred an "undue" or unreasonable preference or disadvantage be shifted to the BDU, once an allegation of discriminatory conduct has been established.

Consideration should also be given to asking the Minister of Heritage to consider the possibility of tabling legislation to grant the CRTC a power to impose administrative fines similar to the amendments proposed by the Telecommunications Policy Review Panel to the Commission's powers under the Telecommunications Act. In our view, the Commission's power to revoke broadcasting licences, and the criminal sanctions in the Act are not very practical means of enforcing regulatory obligations - except in the most egregious cases.

Recommendation 7-4

Recommendation 7-5

8. RELATIONSHIP BETWEEN COPYRIGHT AND BROADCASTING REGULATIONS

A functioning, orderly market for program rights is one of the essential foundations of a viable television broadcasting industry. Broadcasters need to be able to secure exclusive rights to programs in order to build audiences and earn advertising and (in the case of specialty and pay services) subscription revenue. Program producers need to fully exploit the rights to their programs in order to maximize their economic return and to invest in future productions.

Rights to television programs are generally licensed within specific geographic areas and across specific distribution platforms. New episodes of a weekly hour-long drama are typically licensed for exhibition by an over-the-air broadcaster in each local market. Where a network acquires the rights to a program, it might acquire the national rights covering all of the markets in which it operates over-the-air broadcast stations. Past seasons of the same drama may also be licensed on a national basis to a specialty service. In each case, the ability of the broadcaster to earn revenue from the program is based on the assumption that the same episodes of the same program are not available on a competing platform or from a competing broadcaster.⁴⁶

Program rights are a matter of contract between the program producer (or distributor) and the programming undertakings that acquire the rights to exhibit the program. The rights being licensed through these agreements are created by the Copyright Act⁴⁷ which provides for both civil and criminal sanctions where those rights are infringed. While the Commission's mandate under the Broadcasting Act does not directly relate to the protection of copyright in television programs, there are many instances where issues pertaining to broadcast regulation have overlapped or had an impact on issues relating to copyright in programming.

As can be seen from the cases described later in this chapter, the Commission has sometimes used its regulatory powers to explicitly protect programming rights while in other circumstances it has declined to act when it viewed a particular issue as being an issue of copyright law or policy and therefore outside its mandate. As these examples demonstrate, there is a case for the Commission paying closer attention to issues relating to copyright and copyright policy when it is exercising its authority to regulate the broadcasting system, and for the Commission to coordinate its efforts with those government bodies that are responsible for copyright where there is an overlap between broadcasting regulation and copyright policy or enforcement as it relates to broadcast undertakings.

An obvious example of the Commission's use of its regulatory powers to protect programming rights is its requirement for BDUs to perform simultaneous substitution when the same program is being shown on both a distant television signal and local television signal.⁴⁸ The simultaneous and advanced substitution regime is described in greater detail in the chapter that reviews the BDU Regulations. Its objective is to protect the value of the local rights to television programming acquired by over-the-air broadcasters in that market. Under the traditional rights market, once a broadcaster has acquired the exclusive rights to broadcast a particular program in a local market, no competing broadcaster can acquire the rights to that same program in that same local market during the same period. However, where a BDU serving that local market distributes distant signals (over-the-air signals that originate in other markets), it is possible that one of the distant signals might be carrying the same program for which the local broadcaster has acquired the local rights. Without regulatory intervention, the result would be that the program would be shown twice in the local market by two different broadcasters - the local broadcaster that has the rights to broadcast the program in the local market and the distant broadcaster that has the rights to broadcast the program in its home market, but does not have the rights to broadcast the program in the local market.

To address this situation, the Commission has, since 1971, required larger cable systems to replace the signal of the distant broadcaster with the signal of the local broadcaster where the program is being broadcast simultaneously on both signals.⁴⁹ The result is that, while the program is being broadcast, the signal of the local broadcaster occupies two channel spots available to subscribers, and the distant signal is not available at all. This substitution preserves the exclusive program rights acquired by the local broadcaster, which enables the broadcaster to maximize the economic value of the advertising time sold in the program.

The other copyright interest that is implicated by the distribution of television programs on distant signals by BDUs is the rights of the owners of the copyright in the programming. In 1988, the Copyright Act was amended to provide a right to communicate works to the public by telecommunication.⁵⁰ The retransmission of television programs in local and distant signals by BDUs, implicates the right to communicate to the public by telecommunication. Concomitant to the creation of this right, the Copyright Act was also amended to create a statutory license to facilitate the ability of BDUs to clear the rights in the programming on the local and distant signals that they distribute to subscribers. This obviates the exorbitant transactional costs and administrative burden of each BDU trying to individually licence the right to communicate to the public by telecommunication each television program carried on each over-the-signal retransmitted by the BDU.⁵¹

The statutory licence sets the conditions that a BDU must satisfy in order for the communication to the public by telecommunication of television programs on retransmitted signals not to be an infringement of copyright. There are five such conditions:

The statutory licence clears the rights to programs carried on both the local and the distant signals carried by BDUs, although royalties are only payable with respect to the programs on distant signals.

The royalties referred to in the fourth condition are set by the Copyright Board through a tariff-setting process established in the Copyright Act.⁵² The Board last certified the distant signal retransmission tariff for the years 2001 to 2003.⁵³ Pursuant to that tariff, a BDU with more than 6,000 subscribers pays royalties in the amount of 70 cents per subscriber per month. The royalties are split among a number of collectives that represent those that own the rights to television programs, including Canadian and foreign producers, Canadian and U.S. broadcasters, and sports leagues. For the years 2004 to 2008, the collectives and the BDUs have reached an agreement to increase the rates payable in each of the years covered by the agreement. In 2008, the final year covered by the agreement, the rate for retransmission systems serving more than 6,000 subscribers will be 85 cents per subscriber per month. This payment of royalties, along with the other conditions, clears the rights necessary for the BDUs to retransmit all of the programs on all of the local and distant signals they carry.

The second condition to the section 31 statutory retransmission licence explicitly refers to the Broadcasting Act and establishes a direct link between the copyright regime and the Commission's regulatory authority over the broadcast system. As a result of this second condition, changes to the Broadcasting Act or to the regulations enacted by the Commission pursuant to the Broadcasting Act that effect the regulatory treatment of retransmitters (i.e. BDUs) also have the effect of changing the conditions required to satisfy the statutory retransmission copyright licence established in the Copyright Act. Therefore, changes in broadcast regulations can result in unintended consequences for the copyright system unless the copyright regulatory scheme is amended to react to the changes in the broadcast regulatory system.

A well-known example of a situation where the Commission's exercise of its jurisdiction over broadcast regulation had a direct impact on the copyright system that prompted the Government to amend the Copyright Act in response, involved the development of Internet retransmission of television signals by Canadian Internet sites iCrave TV and JumpTV.

In July 1998, the Commission announced a public proceeding under both the Broadcasting Act and the Telecommunications Act to examine the increasing availability of communications services delivered and accessed over the Internet referred to as "new media."⁵⁴ The Commission invited comments on:

In May 1999, the Commission issued a public notice in which it announced that it would not regulate new media activities on the Internet under the Broadcasting Act.⁵⁵  The rationale for that decision are discussed in the next chapter of this report.

On December 17, 1999 the Commission issued an exemption order for new media broadcasting undertakings in which it exempted persons who carry on new media broadcasting undertakings from any or all of the requirements of Part II of the Broadcasting Act or any of the regulations made pursuant to Part II of the Act.⁵⁶

At about the same time that the Commission issued its New Media Exemption Order, a website called iCrave TV launched in Canada which provided Internet users with access to streams of the broadcast signals of seventeen U.S. and Canadian over-the-air broadcasters. In response to complaints from the broadcasters, and from the rights holders in the programs accessible from its website, iCrave TV claimed that its activities were not an infringement of copyright since it met the conditions necessary to benefit from the retransmission statutory licence established by section 31 of the Copyright Act. iCrave TV took the position that it was a new media broadcast undertaking covered by the Commission's New Media Exemption Order, and that its activities were therefore lawful under the Broadcasting Act. iCrave TV was sued in the U.S. under U.S. copyright law on the basis that its retransmissions were available to Internet users outside Canada.⁵⁷ iCraveTV's method of trying to block access to its retransmission service by people outside Canada was to ask users to input their telephone area code. Users who input a Canadian area code were granted access to the retransmission service while users who input a foreign area code were denied access. As U.S. Internet users were able to input Canadian area codes and access the retransmissions, the U.S. court issued an injunction prohibiting iCrave TV from allowing U.S. viewers to access the signal. As part of an eventual settlement agreement with the rights holders, iCraveTV agreed to stop its retransmission activities approximately two months after it first launched its service.⁵⁸

In early 2001, a year after the iCraveTV settlement, another Canadian company, called JumpTV, announced plans to offer a similar Internet-based retransmission service which would provide access to Canadian and U.S. over-the-air signals. Unlike iCraveTV, however, JumpTV did not immediately launch its Internet retransmission service. Instead, it filed an application with the Copyright Board asking the Board to set the royalties that would be payable to rights holders by JumpTV pursuant to the statutory retransmission licence. JumpTV argued that it could not pay under the existing retransmission tariff that applied to traditional BDUs since the royalties established by the tariff are determined by the number of subscribers the retransmitter serves. As JumpTV's business model was based on advertising revenues rather than subscriptions, it argued that it required a different method for calculating the retransmission royalties it would pay to the rights holders. JumpTV also claimed that, unlike iCraveTV, it could effectively block access to its service from Internet users outside Canada by deploying technology that could trace the origin of the IP address being used by the person seeking to access the service.⁵⁹

In June 2001, the Industry Department and the Department of Canadian Heritage issued a discussion paper on application of the statutory retransmission licence to the Internet.⁶⁰ Shortly after the discussion paper was released, JumpTV withdrew its application to the Copyright Board for a retransmission tariff.

In December 2001, following the consultation process initiated by the June discussion paper, the Government introduced legislation to address the applicability of the statutory retransmission licence to the Internet. As originally introduced in the House of Commons, the bill would have permitted Internet retransmitters to benefit from the statutory licence so long as they satisfied certain conditions that would be established by regulation.⁶¹ The regulations were not drafted at the time the bill was introduced, and the Government stated that no Internet retransmitters would be able to operate pursuant to the statutory licence until the regulations establishing the conditions had been enacted.

However, when the bill was referred to the Heritage Committee for hearings in May and June of 2002, the Committee heard from a number of witnesses representing broadcasters and rights holders who were very concerned about the impact Internet retransmission could have on traditional television programming rights markets. They argued that if signals were retransmitted from Canada and were available over the Internet to viewers all over the world, the ability of rights holders to economically exploit the programs carried on those signals would be negatively affected. In response to these concerns, the Committee amended the bill to explicitly exclude from the statutory retransmission licence those undertakings whose operations were lawful under the Broadcasting Act only by virtue of the New Media Exemption Order that had been issued by the Commission in 1999.

The bill, as amended by the Heritage Committee, was passed by the House of Commons on June 18, 2002, effectively ending any further experiments with Internet retransmission of Canadian and U.S. over-the-air television signals by third parties in Canada.

Shortly before the legislation was passed by the House of Commons, the Government decided to involve the Commission in the examination of Internet retransmission by issuing an Order-in-Council directing the Commission to initiate a public process to seek comment with respect to:

In July 2002, in response to the Order-in-Council, the Commission issued a call for comments concerning Internet retransmission of over-the-air signals.⁶³ In addition to the issues raised in the Order-in-Council, the Commission also asked for comments on the potential impact of Internet retransmission on the broadcast system, the measures available to restrict the territorial reach of Internet retransmissions to protect program rights, and whether the regulation of Internet retransmission undertakings would contribute to the objectives set out in section 3 of the Broadcasting Act.

The Commission issued its Report to the Governor in Council in January 2003.⁶⁴ It concluded that Internet retransmission could not be considered a substitute for the activities of existing broadcasting or distribution undertakings. However, the Commission relied on evidence that there was no completely workable method of ensuring that Internet retransmissions are geographically contained to conclude that Internet retransmission could have a serious negative effect on the existing rights market for television programming. It acknowledged the concern that if Internet retransmitters were to have access to the statutory retransmission licence established in the Copyright Act, foreign rights holders might be reluctant to licence their programs to Canadian over-the-air broadcasters if those programs could then potentially be retransmitted over the Internet to viewers in markets around the world.⁶⁵

However, the Commission concluded that because the Government had amended the section of the Copyright Act that established the statutory retransmission licence to explicitly exclude undertakings operating pursuant to the New Media Exemption Order, which would include Internet retransmitters, it would not be necessary for the Commission to amend the New Media Exemption Order or to require the licensing of Internet retransmitters in Canada. The Commission noted that there would be a full review of the New Media Exemption Order at the appropriate time.⁶⁶

While the Internet retransmission case is arguably the best known example of Commission regulatory policies having an impact on the copyright system, it is not the only example. The Commission's implementation of regional licensing of cable undertakings and an exemption order for small cable systems also had a direct impact on the copyright system, which the Commission decided it could not address because copyright issues are outside the Commission's jurisdiction.

In 2001, following a review of some aspects of its approach to licensing and regulating cable distribution undertakings, the Commission proposed to implement two specific changes. First, it proposed to exempt from licensing and regulations cable systems in rural and small communities with fewer than 2,000 subscribers. Second, it proposed to implement a system of regional licensing to group cable undertakings under common ownership in the same region under one licence, as opposed to having a licence for each individual undertaking.⁶⁷

During the consultation process on the regional licensing initiative, the Canadian Cable Television Association (CCTA), and the Canadian Cable Systems Alliance (CCSA) both raised with the Commission the concern that a change to regional licensing could increase the amount of copyright royalties payable by some cable systems. The source of this concern was the fact that copyright royalties payable pursuant to the distant signal retransmission tariff are based on the number of subscribers served by the cable retransmitter. Systems that serve fewer than 2,000 subscribers pay a flat fee of $100 per year; systems with between 2,001 and 6,000 subscribers pay according to a scale in which larger systems pay more per subscriber than smaller systems. Systems with more than 6,000 subs pay the maximum rate per subscriber. At the time the Commission was proposing to implement regional licensing, the level of payment was based on the number of subscribers "in a licensed area."

The CCTA and CCSA were concerned that once the Commission adopted regional licensing, the region and not the individual undertaking would be considered the "licensed area" so that undertakings under common ownership with less than 6,000 subscribers would be grouped together under a common regional licence and would have to pay more per subscriber than the applicable rate for each undertaking.

The cable associations expressed similar concerns with respect to the Commission's proposal to exempt cable systems with fewer than 2,000 subscribers from licensing. As noted above, these cable systems currently benefit from preferential copyright royalty rates as required by the Copyright Act.⁶⁸ The definition of "small system" is established by regulations made by the Governor-in-Council pursuant to the Copyright Act. At the time the Commission announced its intention to issue a small cable system exemption order, the Definition of Small Retransmission Systems Regulations⁶⁹ defined small systems by reference to the number of premises served in the same "licensed service area." The CCTA was concerned that if small cable systems were exempt from licensing, they would no longer have "licensed service areas" as required by the Definition of Small Retransmission Systems Regulations, and would therefore not qualify for the small system preferential royalty rates established by the Copyright Board.

In response to the cable companies' submissions on the effect of the small system exemption order on copyright liability, the Commission concluded that, because the exemption order would apply at the level of the individual cable system, subscriber levels would not be aggregated across several systems and therefore the order would not increase the level of retransmission royalties paid by the systems affected by the order. The Commission did not address the question of how systems that were exempt from licensing requirements could have a "licensed service area" as required by the copyright regulations.⁷⁰

In response to the concerns raised about the regional licensing initiative, the Commission indicated that changes to the copyright system would have to be made in order to deal with any effect from regional licensing:

In 2003, the Commission adopted the changes to the BDU Regulations required to implement regional licensing.⁷² In the notice adopting the amendments to the regulations, the Commission took note of its statement in Public Notice 2001-59 that it would be up to the copyright collectives to update their royalty payment regimes to reflect the regional licensing approach. It also noted that, in the more than two years from the date the Commission announced its intention to implement regional licensing until the changes to the regulations were announced, no changes had been made to the copyright system to reflect the change to regional licensing. As a result, the Commission indicated that it would delay the implementation of regional licensing until the changes to the copyright system had been made:

The Definition of Small Retransmission Systems Regulations⁷⁴ and the Definition of "Small Cable Transmission System" Regulations⁷⁵ were amended in May 2005 to reflect the changes to the Commission's approach to regulating small cable systems. The regulations were amended to repeal those sections of the Regulations that referred to "licence" and "licensed area" and replace them with a new definition of "service area" that would apply equally to licensed and exempt undertakings. Similar amendments were made to the Local Signal and Distant Signal and Distant Signal Regulations⁷⁶ in 2004. With these amendments to the various regulations, the copyright system had been adjusted to reflect the changes to the broadcast system initiated by the Commission.

It is clear that the broadcast regulatory system administered by the Commission is inextricably linked to copyright; both as it applies to the program rights acquired by programming undertakings and as it relates to the copyright royalties paid by broadcasters and by BDUs. As a result, the Commission can, in exercising it regulatory authority, have a direct impact on the copyright system. Other agencies, such as the Copyright Board, are then forced to react to these regulatory measures.

As will be discussed in greater detail in the next chapter of this report, the emergence of the Internet as a platform to deliver broadcast quality video will present significant new challenges to the broadcasting regulatory system. Many of the observations made by the Commission regarding New Media and Internet retransmission in 1999 and 2001 about the nature of the Internet are no longer valid and need to be re-assessed. For example, developments in geo-blocking technology mean that material made available over the Internet can now be restricted to a specific geographic territory. Effective geo-blocking means that content can now be licensed for exhibition over the Internet on a territory by territory basis, consistent with traditional broadcasting programming rights markets.

Therefore, a broadcaster who has acquired the broadcast rights for a particular program in Canada may now also be able to acquire the Canadian Internet rights to that same program so that past episodes of the program can be archived and be accessed by viewers in Canada from the broadcaster's website on an "on-demand" basis. Licensing television programs for parallel distribution over the Internet provides value to viewers, and it also increases the economic value that broadcasters are able to derive from their websites.

JumpTV of Toronto, which abandoned its plans to be an Internet retransmitter in 2001, has re-emerged as an Internet broadcast distributor and claims to be one of the largest authorized Internet distributors of international television signals in the world. JumpTV offers television signals from more than 75 countries, primarily on a subscription basis but with some video-on-demand and pay-per-view options as well.⁷⁷ JumpTV has acquired the rights to the content it offers by acquiring the appropriate Internet rights from the services that it offers.

The distribution of television programming over the Internet, whether by Canadian broadcasters or by entities such as JumpTV, is exempt from regulation by virtue of the New Media Exemption Order. Current contractual arrangements to license television programming for distribution over the Internet are taking place despite, or perhaps because of, the lack of any regulatory requirements, restrictions or protections.

Recommendation 8-1

9. NEW MEDIA

"New media" is the term used by the CRTC to describe broadcasting services delivered and accessed over the Internet. "Broadcasting" in this sense has the meaning ascribed to it in subsection 2(1) of the Broadcasting Act, which includes ".any transmission of programs, whether or not encrypted, by radio waves or other means of telecommunications for reception by the public by means of broadcasting receiving apparatus." Since the definition of "program" in subsection 2(1) is extremely broad,⁷⁸ and the definition of "broadcasting receiving apparatus" includes any devices capable of being used for the reception of broadcasting,⁷⁹ most Internet content is subject to CRTC jurisdiction. Only "visual images, whether or not combined with sounds, that consist primarily of alphanumeric text" and significantly customized information services⁸⁰ are excluded by statute.

The Broadcasting Act therefore casts a very wide net. Activity falling within the definition of "broadcasting" is subject to the requirements of Part II of the Act unless an exemption order is issued pursuant to subsection 9(4). As discussed previously, in order to issue an exemption order, the Commission must be satisfied that compliance with the requirements in Part II of the Act "will not contribute in a material manner" to the implementation of the broadcasting policy set out in subsection 3(1).

New Media Exemption Order

In 1999, following a public consultation process,⁸¹ the CRTC decided to exempt from licensing (without imposing any terms and conditions) new media services delivered and accessed over the Internet.

In deciding to issue an unconditional exemption order for new media services, the Commission noted that:

In making this determination, the Commission underscored the rapid change that had occurred in the industry within a short period of time and observed that this evolution was likely to continue, though not necessarily in a linear fashion, towards audio and video applications.

The Commission noted that while the new media industry was highly diversified, it consisted primarily of alphanumeric text. In this regard, the Commission commented that the ability to deliver long-form programming of an acceptable technical quality was emerging slowly, particularly with respect to video. In terms of new media content available in 1999, the Commission was of the view that it complemented the existing programming of Canadian broadcasting undertakings involved in new media, or provided a means for expressing diverse viewpoints to niche markets not adequately represented by traditional media.⁸³

The Commission ultimately considered that licensing new media would not contribute in any way to its development or to the benefits that it had brought to Canadian users, consumers and businesses. In the Commission's view, the circumstances that created the need for regulation of Canadian content in traditional media did not yet exist in the Internet environment. The Commission opined that market forces were providing a Canadian presence on the Internet, with statistics indicating that Canadian websites represented about 5% of all Internet websites. Though the Commission admitted that there were difficulties in attempting to measure Canadian-based online content, it found that no convincing evidence had been submitted in the proceeding to suggest that visibility of Canadian content on the Internet was a problem. The Commission acknowledged that the likely reasons for the success of Canadian content on the Web were as follows:

a) the Internet was still primarily a text-based information medium with a strong appeal to local and regional interests;

b) this content had low production values;

c) it was relatively inexpensive to produce; and

d) it was in demand by Canadians who wanted access to local, regional and national information such as the weather, sports and news.⁸⁴

Looking to the future, the Commission was not ready to accept that Internet programming would become a substitute for traditional broadcasting media. The Commission highlighted three reasons for this:

a) First, the Commission noted that it would be necessary for the Internet to deliver broadband content.

b) Second, the Commission noted that it was not clear whether the existing economic model - whereby Canadian broadcasters can acquire discrete Canadian rights for American programming - would exist on the Internet.

c) Third, the Internet access penetration rate was only at 20%; moreover, other technological barriers previously alluded to still needed to be addressed in order to transmit broadcast quality of audio and video services over the Internet.

Nor did the Commission express significant concern over the impact of new media on traditional broadcasting. In terms of advertising, the Commission found no evidence of a negative impact on advertising revenues of regulated broadcasters in television or in radio. The Commission observed that difficulties in accurately measuring audience sizes on the Internet meant that advertisers remained cautious in approaching new media.⁸⁵

In our view, the Commission's approach to new media in 1999 was consistent with the legislative framework of the Broadcasting Act and with the policy objectives and regulatory policies in subsections 3(1) and 5(2) of the Act.

The Commission's test was fully consistent with the objective in subparagraph 3(1)(d)(iv), which specifies that the Canadian broadcasting system should be adaptable to scientific and technological change, as well as paragraphs (f) and (g) of subsection 5(2) which specify that the system should be regulated and supervised in a flexible manner that ".does not inhibit the development of information technologies and their application or the delivery of resultant services to Canadians"; and ".is sensitive to the administrative burden that, as a consequence of such regulation and supervision, may be imposed on persons carrying on broadcasting undertakings."

As regards the other requirements of Part II of the Act, and in particular the policy objectives respecting Canadian ownership and control, Canadian content and use of our national languages, the Commission appears to have addressed the statutory test in section 9(4) in a responsible way based on the factual record of the proceeding and the state of Internet technology in 1999. It should be emphasized however that the Commission's determinations were very clearly based on a 1999 view of Internet technology and the Commission did not in any way discount the possibility that technological changes could alter its determinations. As discussed below, significant changes in Internet technology and services in the past eight years have in fact taken place, which raises the question of whether the conclusions reached by the Commission in 1999 remain valid today.

Exemption Order For Mobile Television Broadcasting Undertakings

In Regulatory framework for mobile television broadcasting services,⁸⁶ the Commission announced that certain mobile television broadcasting services provided via cellular telephones by Bell Mobility, TELUS Mobility and Rogers Wireless were delivered and accessed over the Internet and thus fell within the scope of the New Media Exemption Order. At the same time, the Commission called for comments on a proposed exemption order relating to mobile television broadcasting undertakings providing mobile television services that were not delivered and accessed over the Internet and thus did not fall within the scope of the New Media Exemption Order.⁸⁷

The Commission limited the scope of the new exemption order to undertakings using point-to-point technology, thus excluding the new broadcast-based mobile technologies using point-to-multipoint delivery. Point-to-point technology is telephony-based and can require considerable network bandwidth since each user requires a separate data stream, whereas point-to-multipoint technology has the potential to produce a higher quality signal and support a longer battery life. Given the limitations of point-to-point technology, the small size of the screen and the type and range of programming offered by mobile broadcasters, the Commission was of the view that the exempt services were unlikely to have a significant impact on traditional broadcasters and did not need to be made subject to the same obligations as BDUs.⁸⁸

While the Commission noted that the delivery of content over closed networks did not raise the same territorial rights issues as were relevant to the exemption of Internet-delivered mobile television services, it held that it was nonetheless important for broadcasters to have control over whether or not to subject their signals to retransmission. This is because the delivery of broadcast signals via point-to-point technology and their reformatting for display on a small screen generally lead to a reduced quality signal. The consent of broadcasters to the retransmission of their signals is therefore a condition of the exemption order.

The Commission also expressed concern that, insofar as there are no ownership requirements for resellers, it might be possible for non-Canadian companies to offer mobile television services in Canada. Accordingly, the Commission required that any exempt entity be eligible to hold a Canadian broadcasting licence.⁸⁹

The criteria imposed on exempt undertakings are as follows:

Evolution of New Media

Much has changed since the Commission first commented on the limitations of the Internet to deliver multi-media services:

• the Internet is no longer primarily a text-based information medium;
• while there are still limitations on bandwidth, significant advances have been made since 1999 in the development of high-speed Internet access services and Canadians have shown robust demand for these services;
• multiple platforms have developed for the delivery of digital media;
• while much of the video programming available on the Internet is in short-form format, conventional broadcasters and rights holders are increasingly making long-form programming available;
• advertisers are starting to devote more resources to Internet advertising and, in some cases, have diverted advertising dollars away from conventional television.

In this new environment, some stakeholders in the Canadian broadcasting system are voicing concerns about the suitability of our existing statutory and regulatory framework for addressing the impact of new media on the Canadian broadcasting industry.

The upgrading of traditional uni-directional coaxial cable networks to support bi-directional broadband delivery of digital television services has led to the utilization of this network for the provision of high-speed Internet access services to the mass consumer market, with an estimated 95% of cable television subscribers now having access to high-speed Internet.⁹¹

The development of ADSL services by the telephone companies has provided an alternative source for high-speed Internet access, and advances in broadband mobile wireless services have led to a proliferation of new delivery technologies and devices capable of delivering broadband services to consumers. New WiFi networks are springing up in urban areas, providing broadband access to the Internet, and the mobile wireless networks are now providing 3-G services to consumers of cellular and PCS communications services. New satellite technology is also filling in the broadband coverage gaps in rural and remote parts of Canada.

While public acceptance of the Internet as a source of conventional programming content has been relatively slow to materialize, the widespread availability and popularity of broadband access to the Internet in Canada, North America and the rest of the world, coupled with advances in streaming and other communications technologies, has spurred mass audiences to try these new services. The new media environment is starting to change as new Internet-based programming services emerge that are much closer to conventional television in content, quality and delivery.

The sudden and unprecedented popularity of YouTube, with its audience-generated content, led to its sale in 2006 for $1.65 billion. Other "social content" Internet sites, such as Facebook, have resulted in over 34 million active members in just three years of operation.

Joost provides conventional television programming from such suppliers as MTV, Viacom and National Geographic. Unlike its predecessor, Joost is clearing program rights for its Internet service and is providing worldwide distribution of its service using a regional advertising model.

JumpTV provides access to over 240 broadcasters in more than 70 countries, providing direct competition with other third language services in Canada.

Apple TV is also providing conventional television content for display on its hand-held devices. However, this same service can be downloaded on a computer and displayed on conventional television sets that are computer-compatible.

Sling Shot can redistribute conventional programming recorded on personal video recording devices (PVRs) and can redistribute it via the Internet to other users, who can again display it on any number of devices, including computer-compatible television sets.

Major American television networks have begun to make episodes of their conventional television shows available on the Internet the day after their initial broadcast. In Canada, broadcasters have also begun to experiment with Internet-based shows. The CBC and other Canadian networks have also begun to make some of their programs available on the Internet and more recently, some Internet-only programming has been exhibited - such as the post-game shows following NHL playoff games in 2007. The Internet also provides an important outlet for specialty channels - some of which have had difficulty obtaining carriage rights on conventional BDUs.

The surge in popularity of Internet-based programming services has also begun to attract significant advertising revenue. In 2006, Internet-based advertising amounted to approximately 6% of ad dollars in both Canada and the United states - breaking through the $1 billion barrier in Canada.⁹² Moreover, it is predicted to continue to grow at a high rate over the next few years - possibly cutting into the revenues relied upon by conventional broadcasters to support their operations and their Canadian content obligations.

It is not yet clear exactly what this means for the Canadian broadcasting system. Obviously, if Canadians start watching more programming services on the Internet, and less on conventional television, advertising dollars will continue to follow the viewing audience and the underpinnings of Canadian content regulation in Canada will be threatened. The question arises whether there are measures that can be taken to decrease this threat, or whether the whole system needs to be rethought.

The Internet differs in certain respects from other previous technological threats to the Canadian broadcasting system insofar as it provides users access to worldwide content - not just content originating in Canada or south of the border. This makes the enforcement of other forms of protection, such as copyright laws, less effective than they might be in a North American context.

While "geoblocking" has proven to be effective in blocking access to American content when the owner of that content has an interest in maintaining a system of geographic licensing, it is not effective where programming rights are ignored and the site offering the content is operating outside of copyright laws. Therefore, while Joost and the American television networks may be blocking access by Canadians to content already licensed to Canadian broadcasters, not all sites are doing the same.

In addition, if American producers of television programs start selling Internet distribution rights separately from Canadian television distribution rights (which they have not yet started to do), Canadian broadcasters could face competition from the very programs that they purchase from U.S. distributors, without the benefit of simultaneous substitution. Similarly "genre protection" and tiering and linkage rules have no application to the Internet or to websites located outside of Canada.

Other than copyright laws, there are no protections currently in place to shield Canadian broadcasters from the effects of Internet-based programming. Even the income tax laws that protect Canadian broadcasters by denying Canadian advertisers deductions from advertising expenses incurred on U.S.-based broadcasting undertakings or in U.S. publications, do not extend to the Internet.

The television industry could be in for the same kind of revolution that the music industry has recently been through. Kids are listening to and purchasing more music than ever. However, they are not necessarily purchasing CDs from record stores. They are accessing a growing percentage of their digital music online. The large music producers were slow to respond to this change. Canadian broadcasters and Canadian regulators need to be better prepared.

The big question for the Canadian broadcasting system is how can we adapt our system to harness the power of the Internet to further our cultural objectives?

As discussed above, Canadian broadcasters are already starting to adapt by setting up their own Internet sites to cross-sell their programming services and to extend their brand awareness. The Commission has noted this development and has encouraged it. Moreover, the Commission has stated that it is open to considering specific incentive proposals designed to expand the scope or nature of such activities.⁹³

The recent report by the CRTC Task Force on the Canadian Television Fund (CTF) has also recommended some changes designed to take advantage of the possibilities presented by the Internet for promotion of Canadian content. These measures include:

• Establishing a new media funding stream of up to $25 million from current CTF revenues;
• Allocating an appropriate portion of new sources of revenue to the new media funding stream; and
• Waiving the broadcast licence fee for projects destined for mobile platforms.

The Task Force also recommended that the current log jam between broadcasters and independent producers respecting new media rights be broken by establishing a 50/50 sharing of net revenues from the exploitation of new media rights.⁹⁴

These are all steps in the right direction of encouraging the exploitation of Canadian programming on the Internet and other new media outlets. Even if it is not yet clear that conventional television viewing will decline, it is very clear that the viewing of programming on Internet-based new media outlets will increase. Recent statistics show that it is not just the youth that are viewing online programming. A December 2006 survey of the online activities of adult high-speed Internet users found that 4% download TV programs; 5% download movies; 6% watch TV on the Internet; 22% listen to the radio; and 29% watch videos. The percentage of high speed Internet users participating in these online activities all increased compared to December 2005.⁹⁵ An increasing percentage of the "boomer" segment of the population are now spending more time and money online, and advertisers will increasingly strive to reach this audience online. In addition, in the longer term, the Canadian broadcasting industry will have to prepare itself for the possibility of a new generation of Canadians who may not view television as the logical source of programming entertainment and news.

As discussed in chapters 4 and 8, the CRTC is not the only governmental agency with responsibility in the broadcasting sector and it ought not to be left alone to come up with solutions to the complex interaction between new media and the Canadian broadcasting system. In our view, this is an issue that requires a cooperative effort by all governmental agencies that have responsibility in this sector. Canada needs a national policy for electronic media, and needs to have available all of the tools of government to give effect to it. This likely includes copyright, fiscal measures, and new programs to incent Canadian participation in new media ventures.

Principles of smart regulation require Canada to develop a policy response that is implemented across different elements of the Government acting in a concerted fashion.

It is no longer possible to separate out the issues of Canadian content and new media. The two are inextricably linked, as recognized in the recent CTF Task Force Report. The model used to fund Canadian programming content, predominantly through independent production, and exclusively for television presentation, may no longer be the appropriate model for encouraging the type of multi-pronged initiative that will be needed to address conventional broadcasting, New Media and a variety of new digital distribution outlets.

In our view, the solutions to this issue lie not in imposing new regulatory restrictions on Canadian companies - but rather in encouraging them to stake out territory on the Internet, and in facilitating the production of Canadian new media content for the Internet. In our view trying to regulate Canadian content on the Internet will simply hold Canadian companies back from exploiting the opportunities presented to them to maximize Canadian content and Canadian revenues on the Internet. To regulate Canadians, while the rest of the world competes in an open market, would in our view be counterproductive and would not achieve the objectives of the Broadcasting Policy for Canada.

In our view, the answer also lies in ensuring that the Canadian broadcasting system adapts to some of the trends that the Internet has spawned in order to remain relevant. These trends include a desire on the part of many consumers for content "anywhere, anytime," the desire of younger consumers to have an interactive experience with digital media, the desire of advertisers to be able to target relevant audiences with interactive media, and the development of new "communities of interest" that are not necessarily tied to local or regional geographic areas.

Recommendation 9-1

Recommendation 9-2

Recommendation 9-3

Recommendation 9-4

10. CLASSES OF BROADCASTING UNDERTAKINGS - AND THEIR REGULATIONS

10(a) Regulation of Private Conventional English and French-language Over-the-Air (OTA) Television Services

Television broadcasting has been regulated in Canada since its introduction in the early 1950s, first by the CBC, and from 1958 until 1968 by the Board of Broadcast Governors (BBG). The centerpiece of television broadcasting since its inception was, and continues to be, minimum Canadian content requirements.

The BBG promulgated the Radio (TV) Broadcasting Regulations in 1959, setting out general obligations of television licensees, including minimum levels of Canadian content.⁹⁶ In 1970 the newly-created CRTC announced new Canadian content regulations⁹⁷ for radio and television, and promulgated new Television Broadcasting Regulations.⁹⁸ Those regulations tightened considerably the Canadian content requirements for television broadcasters.

Over the next fifteen years minor amendments were made to those regulations, and in 1986 the CRTC commenced a detailed review of the regulations which culminated in the issuance of the Television Broadcasting Regulations, 1987.⁹⁹ These regulations, as amended, continue, twenty years later, to incorporate the primary regulatory obligations of private conventional English and French-language OTA television services. The requirements imposed by the Regulations are supplemented by other Commission policies that are implemented through conditions of licence and expectations and in decisions approving the issuance, renewal or transfer of ownership or control of private conventional OTA television licensees. The primary regulatory obligations applicable to private conventional OTA television services are described below. Generally applicable policies, relating to matters such as ethnic broadcasting, aboriginal broadcasting, closed captioning, diversity and transfer of ownership and control, are described in other sections of this report.

In Public Notice CRTC 1999-97, Building on Success - A Policy Framework for Canadian Television (the "1999 Television Policy") the Commission announced a number of significant changes to the regulatory framework for OTA television services, including most notably, Canadian content obligations. Although the CRTC did not vary the basic preponderance requirements for private conventional English and French-language services - 60% overall and 50% in the evening broadcast period - it introduced peak period exhibition requirements, modified the definition of priority programming to include a number of additional program genres, and eliminated the general requirement for private commercial OTA television services to spend a percentage of their advertising revenues on Canadian programming in under-represented genres. In its 1999 Television Policy the CRTC also amended the existing drama incentive regime and in a series of subsequent decisions, introduced a new incentive regime based on access to additional advertising minutes.

More recently, in Determinations regarding certain aspects of the regulatory framework for over-the-air television,¹⁰⁰ the CRTC addressed a number of critical issues facing this sector of the broadcasting industry. The Commission denied OTA broadcasters' request for fees for carriage, announced the elimination of the cap of twelve minutes per hour of advertising by OTA television services, and revised its policy on the transition to digital broadcasting. The CRTC indicated that it would address Canadian content exhibition and expenditure requirements of OTA television broadcasters, and the role of independent production, on a case-by-case basis at licence renewal.

Canadian Content Requirements

Canadian content regulations and policies fall broadly into three categories: obligations to broadcast a preponderance of Canadian content; obligations to broadcast Canadian content at peak viewing times; and genre incentive programs.

At present, there are no general obligations regarding expenditures on Canadian programming by conventional OTA television broadcasters. However, many OTA licences include expenditure obligations which implement benefits approved in respect of transfer of ownership requests or commitments made during licensing or renewal proceedings.

Prior to the 1999 Television Policy, private conventional English-language television services were generally subject to expenditure or exhibition requirements (and in some cases both) for Canadian content in under-represented genres. In general, broadcasters earning in excess of $10 million per year in advertising revenues were permitted to choose between a condition of licence specifying a minimum percentage of advertising revenues to be spent on Canadian programs or requiring a minimum level of exhibition of Canadian entertainment (excluding news programming) programs during the evening broadcast period. Some large broadcasters were subject to conditions of licence relating to both expenditures on and exhibition of Canadian content. Smaller English-language conventional television licensees were generally subject to expenditure requirements tied to revenues. The Commission eliminated these requirements in its 1999 Television Policy to streamline its regulations and give licensees more flexibility in the increasingly competitive environment for both viewers and advertising revenues, and to address concerns about the complexities and inequities associated with the expenditure requirements.

Preponderance of Canadian Content

Section 4 of the Television Broadcasting Regulations, 1987 specifies that, with the exception of ethnic and remote television services, private television licensees are required to devote:

• Not less than 60% of the broadcast year¹⁰¹ to the broadcasting of Canadian programs;¹⁰² and
• Not less than 50% of the evening broadcast period¹⁰³ to the broadcasting of Canadian programs.

These provisions were first introduced in CRTC regulations applicable to private conventional OTA television services in 1970. (Comparable regulations can be traced back to Canadian Radio Broadcasting Regulations promulgated in April 1933.) The purpose of these requirements was described by the CRTC in its notice announcing a review of these regulations in 1986 as follows:

In its 1986 proceeding, the CRTC proposed to modify the regulations so as to permit a reduction in the 60% Canadian content requirement to 50% if a licensee maintained the percentage of its gross revenues allocated to Canadian programming expenditures (CPE) at a pre-determined level, based on historical levels. The purpose of this proposal was to address the increasing expenditures by OTA television licensees on non-Canadian content. However, the proposal was not well-received and was not implemented.

The predominance rules established by the Regulations continue, in our view, to effectively target the over-arching policy objective in paragraph 3(1)(f) of the Act of ensuring a predominance of Canadian content on private conventional OTA television services.

Canadian Content at Peak Times

The largest multi-station groups (CTV, Canwest Global, TQS and TVA)¹⁰5 are required by condition of licence to broadcast on average over the broadcast year at least eight hours per week of priority Canadian programs during the 7 pm to 11 pm peak viewing period. Priority Canadian programs are: Canadian drama, Canadian music and dance, Canadian long-form documentaries, Canadian regionally-produced programming in all categories except news and information and sports, and Canadian entertainment magazines.¹⁰⁶ Regionally produced programs are programs produced outside of Toronto, Montreal and Vancouver.

The purpose of these requirements is to "ensure that a range of diverse programming and a sufficient number of hours to attract audiences to Canadian programming will be available, especially given the high proportion of U.S. entertainment in the peak time schedules of private broadcasters."¹⁰⁷

Prior to the 1999 Television Policy, the Commission required conventional broadcasters to implement strategies to develop under-represented program categories. These categories were primarily drama, music, children's and documentary, with increasing focus leading up to 1999 on drama, music and variety. In the 1999 Television Policy, the Commission expanded the definition of priority programming to include long-form documentaries, Canadian entertainment magazines and regionally-produced programming. The intent of the latter was to address "the need for the Canadian broadcasting system to better reflect, in its peak time programming, the different regions of the country."¹⁰⁸ Entertainment magazine shows were added to the list of priority programming as a mechanism to attract larger audiences for Canadian content. The Commission reasoned that "[a]udiences might be more attracted to Canadian programs if they were better informed through television programs about the Canadian entertainment industry and its performers."¹⁰⁹ With regard to long-form documentaries, the Commission indicated that their inclusion as priority programming would ensure the continued success of Canadian documentary production.

In its licence renewal decisions for large multi-station groups, the Commission further indicated that it "expects" these licensees to ensure a reasonable distribution of Canadian programming throughout their broadcast schedules and that Canadian programming is not disproportionately scheduled during lower viewing periods, such as the summer months and Saturday nights.

While we do not question the requirement to broadcast certain types of Canadian content genres - perhaps because they are particularly important to telling Canadian stories and/or are underrepresented during peak viewing periods - we do question the effectiveness of the current rules.

It appears, for example, that these rules have been largely ineffective in ensuring the exhibition by private OTA broadcasters of Canadian drama and long form documentaries during peak viewing time in the regular broadcast season. A review of most broadcast schedules indicates that the peak viewing period requirements are largely satisfied by Canadian entertainment magazine type shows, and Canadian versions of American game and reality television programming. Moreover, the ability to average the amount of Canadian content broadcast during peak viewing periods over the broadcast year permits broadcasters to push Canadian content into lower viewing portions of the week (Friday and Saturday) and of the year.

As discussed in Chapter 6, there is also a clear tension between the simultaneous substitution rules and the peak viewing period requirements applicable to OTA television services. The simultaneous substitution rules provide an incentive for broadcasters to simulcast popular American content (rather than Canadian content) during the peak viewing period, when the American programs are also broadcast by American stations.

Recommendation 10(a)-1

Recommendation 10(a)-2

Recommendation 10(a)-3

Genre Incentives

The Commission has established programs that are intended to incent the broadcasting of Canadian drama programming by OTA television licensees. The programs fall into two categories: time credits which facilitate satisfaction of peak viewing period Canadian content obligations; and advertising incentives.

(i) Time Credits

Canadian drama programming broadcast during the peak viewing period is subject to time credits which can be applied by stations controlled by the large multi-station groups to satisfy their obligations to broadcast Canadian content during the peak viewing period. They cannot be used by these stations to reduce the quantity of Canadian content otherwise required to be broadcast.¹¹⁰

A 150% time credit can be applied to a program that is a dramatic program¹¹¹ broadcast between 7 pm and 11 pm that is aired on television for the first time on or after September 1, 1998, has a duration of at least 30 minutes, is a recognized Canadian program that achieves 10 points for using Canadians in key creative positions, and contains a minimum of 90% dramatic content.

A 125% time credit can be applied to a program that is a dramatic program broadcast between 7 pm and 11 pm that is aired on television for the first time on or after September 1, 1998, is at least 30 minutes long, and is a recognized Canadian program.

The time credits can be claimed for up to three broadcasts by each licensee of a qualified program occurring during the two-year period following the date of the first broadcast of the program by a conventional or specialty licensee in the same market. For a series, the two-year period commences on the date of airing of the first episode.

To incent the production and exhibition of Canadian drama programs, the Commission permits OTA television licensees to broadcast additional advertising minutes if Canadian drama exhibition, expenditure and/or viewership targets are met or exceeded. The advertising incentive programs are different for English and French-language broadcasters due to the differences in viewing habits and expenditures of these services.

The advertising incentives available to English-language OTA broadcasters are intended to promote production and broadcast, viewing and expenditures on English-language Canadian drama. Accordingly, English-language services are permitted to broadcast additional advertising minutes when they exceed specific targets for broadcast hours, viewing and expenditures on original English-language Canadian drama. An original program is, subject to certain exceptions, a program that, at the time of its broadcast, has not previously been broadcast by a licensee.

In the case of French-language Canadian drama, advertising incentives have been established for the purpose of maintaining the level of original Canadian drama programming broadcast by French-language services during peak viewing periods. French-language stations are permitted to increase advertising minutes when they broadcast original French-language Canadian drama in excess of an eligibility threshold which is set at 65% of the average number of hours of drama programming broadcast by the licensee over the three broadcast years preceding announcement of the incentive program in 2005.

Until recently, total advertising per hour, inclusive of incentives, has been capped at 12 minutes. As discussed below, the Commission has announced that it will eliminate the time limits on advertising by OTA television broadcasters in stages over the next two years.

Claims for advertising incentives must be based on broadcast of, or expenditure on, Canadian drama programming that is incremental to any expenditure or broadcast benefits or licensing commitments.

In the 1999 Television Policy, the Commission expressed the view that the marketplace could be expected to ensure sufficient production and exhibition of children's and news programming, therefore specific incentives for these programming genres were not necessary. Children's drama programming is however eligible for the time credit incentives, if it is broadcast during the peak viewing periods. Children's drama programming is also eligible for the advertising incentives if it is broadcast at an appropriate time for its audience. Some licensees are also subject to conditions of licence specifying minimum exhibition requirements for children's programming based on benefits or licensing commitments.

The 2007 Broadcasting Policy Monitoring Report does not include a detailed analysis of the impact of the drama incentive programs. However, data in the 2006 Report suggested that these programs had not been very effective. For example, in the 2004-2005 broadcast year, average viewing of Canadian drama was down for both CTV and Global, and neither of these multi-station groups met their viewing target levels. In the same period, only Global met or exceeded its expenditure target; expenditures by both CTV and CHUM declined in the period and neither company met its target. Perhaps even more telling is the large number of advertising credit minutes that were not utilized by English and French-language broadcasters. The 2006 Monitoring Report did not break out the numbers for conventional and specialty television stations. Overall, however in the 2004-05 broadcast year, conventional and specialty television stations claimed 3 hours and 16 minutes of advertising incentive minutes, of which just under 2 hours were used. TVA and TQS claimed 125 minutes of advertising incentive minutes but only used 62.5 of these minutes. Accordingly, a very significant portion of advertising minutes were not used, indicating that there was little incentive value to these minutes.

In terms of overall viewing, Canadian content represented 67% of viewing of English-language conventional private television services in the 2006 broadcast year, the same level as in the previous year. Viewing of Canadian news programming remains high on English-language services, at 98%, while Canadian drama represents only 8% of drama viewing on these services, down from 10% in 2005. In the case of French-language conventional private television services, Canadian content represented 71% of content viewed on these services, up from 69% in 2004. Canadian content was 75% of drama viewed on these services, while 100% of news viewed on these services was Canadian.

Finally, total expenditures by private conventional television services on Canadian drama declined by 15% in 2006 relative to the previous year.

These data all suggest that the drama incentives, at least in the case of English-language OTA private conventional services, have not been effective. Moreover, advertising incentives will have no value when the limits on advertising are totally eliminated in 2009, and will have marginal incentive value, at best, over the transitional period to 2009.

Recommendation 10(a)-4

Independent Production

Major OTA television broadcast groups are expected to source 75% of the priority programming they broadcast from independent producers. (In some cases, specific quantitative requirements to source programming from independent producers have been imposed by condition of licence, but in general this requirement is imposed as an "expectation" and not a condition of licence.) A producer is "independent" for these purposes if the licensee and its related companies own less than 30% of the equity of the producer.

This expectation, which is monitored through detailed annual reporting requirements, implements the objective in subparagraph 3(1)(i)(v) of the Broadcasting Act that the programming provided by the Canadian broadcasting system should "include a significant contribution from the Canadian independent production sector."

As discussed in Chapter 6 of this report, we are recommending that the Commission study the pros and cons of reducing the requirements on broadcasting undertakings to use high percentages of independently produced programming. This review should include consideration of economies of scale and scope in production, rights management issues, and incentives to maximize returns from Canadian programming. At the same time, the Commission should consider rationalizing the independent production requirements of different classes of television undertakings and, in the absence of clear regulatory distinctions, imposing common obligations on these services. This would improve the transparency and competitive neutrality of the regulatory regime. We recommend that this be done in a staged manner and that following any such reduction or rationalization, the CRTC should carefully monitor the impact of the changes on Canadian content production and independent producers.

Recommendation 10(a)-5

Local and Regional Programming

In the 1999 Television Policy, the Commission eliminated the general requirement for OTA licensees to make quantitative commitments to broadcast specific amounts of news or other local programming. The following policies, however, remain in place to promote local and regional programming by licensees:

• Licensees that do not provide local programming are generally not permitted to access local advertising revenues;
• As discussed above, the definition of priority programming includes regionally-produced programming; and
• The Commission expressed the expectation in Public Notice CRTC 2004-93 that licensees commission priority programming from all regions of Canada. Licensees are required to demonstrate at licence renewal how they intend to meet the demands of local audiences, through local programming. In some cases, specific conditions of licence have been imposed in respect of local programming obligations.

These policies implement the objective expressed in subparagraph 3(1)(i)(ii) that "the programming provided by the Canadian broadcasting system should . be drawn from local, regional, national and international sources". The general policy against local advertising by private conventional OTA television licensees that do not produce local programming is also intended to provide some measure of protection to OTA television services that do produce local programming from revenue losses resulting from the distribution of out-of-market signals.

As indicated earlier, we believe there is logic to linking access to local advertising revenues to the provision of local programming services. We wonder, however, how much the market would naturally limit the ability of national services to tap into local advertising revenues. Also, while the requirement to source programs from various regions of the country is founded in an objective of Canadian broadcasting policy, we wonder if it makes sense to layer this requirement on top of peak viewing period priority programming obligations. Presumably, this issue would be addressed in the assessment which we have recommended of the existing definition of priority programming.

Common Ownership

The Commission's Common Ownership Policy generally limits a single party to owning no more than one conventional television station in one language in a given market. In addition to referencing paragraph 3(1)(i) of the Act, the Commission has also recognized that this policy serves to maintain competition in each market. Exceptions have been granted to sustain: (a) strong locally focused programming in smaller communities located adjacent to large urban centres or (b) the financial ability of the licensee to provide local programming. Where exceptions have been granted to the one station per market policy, the Commission has generally imposed conditions of licence requiring the provision of programming that is distinct from the programming of the "sister" station. The Common Ownership Policy was recently enforced in the CTVglobemedia decision.¹¹²

The Common Ownership Policy addresses diversity objectives, as well as the subsidiary objective of preserving competition in relevant markets.

As discussed in more detail in Chapter 11(a), we believe that the case-by-case approach applied by the Commission to common ownership remains appropriate.

Cross-Media Ownership

Issues related to vertical integration and media cross-ownership have been addressed by the Commission on a case-by-case basis. The Commission has, for example, required all of the large multi-station groups that also own newspaper operations to abide by codes of conduct which require independent management of news departments and the maintenance of separate management structures for broadcasting and newspaper activities. (Common news gathering activities have been permitted in some, but not all, cases.) These licensees have also been required to establish a monitoring committee to handle complaints concerning compliance with the code of conduct and to file an annual report on compliance with the Commission.

The Commission has also, on a case-by-case basis, imposed conditions of licence restricting programming overlap and separate management of programming by station groups. (For example, in the recent CTV decision the Commission directed CTV to propose conditions of licence regarding program overlap in the event CTV decides to retain the CHUM A-channel stations, and indicated that a condition would be included in CTV's licence requiring there to be separate management of the CTV and A-channel station groups in the event that CTV decides to keep the A-channel stations.)

Given increasing levels of media concentration and the importance of ensuring a diversity of independent new voices, we do not recommend any changes to the case-by-case approach followed by the Commission.

Advertising

At present, conventional television station licensees are restricted, by regulation, to broadcasting 12 minutes of traditional advertising per hour (subject to the application of the drama credits discussed earlier).¹¹³ However, in Public Notice 2007-53, the Commission announced that the hourly cap on advertising minutes will be gradually eliminated over the next 3 years as follows:

• Effective September 1, 2007, licensees will be permitted to broadcast up to 14 minutes of advertising per hour during the peak viewing period of 7 pm to 11 pm;
• Effective September 1, 2008, the limit will be increased to 15 minutes per hour during all viewing periods; and
• Time restrictions on advertising will be entirely lifted effective September 1, 2009 "unless significant contrary factors are brought to the Commission's attention".

Infomercials are not advertising for the purposes of the hourly limit on advertising minutes. Infomercials are permitted subject to several requirements: they must not be embedded in the body of a program, must not be directed to children, and must be clearly identified as paid commercial programming.

As discussed above, licensees are generally prohibited from accessing local advertising revenues, unless they provide local programming content. This requirement is enforced by condition of licence.

In addition to quantitative restrictions on advertising, the Commission also exercises jurisdiction over advertising content. Licensees are, by condition of licence, required to comply with applicable industry standards and codes, including the CAB Broadcast Code for Advertising to Children as well as other codes respecting programming content.

Also, the advertising of alcoholic beverages is expressly addressed in the Television Broadcasting Regulations, 1987, which provide that a licensee may only broadcast a commercial advertisement for an alcoholic beverage if the sponsor of the ad is not prohibited from advertising by provincial legislation, the ad is not designed to promote general consumption of alcoholic beverages, and the ad complies with the Code for Broadcast Advertising of Alcoholic Beverages. The Commission has directed broadcasters to ensure balance through the broadcasting of educational messages on the negative effects of inappropriate alcohol use. To enforce this requirement, licensees are required to report in their annual return educational initiatives that have been undertaken to address alcohol-related problems.

Regulations governing advertising by OTA television broadcasters appear to rest in the general objective expressed in paragraph 3(1)(g) of the Act that "the programming originated by broadcasting undertakings shall be of high standard." Restrictions on advertising also appear to be motivated by a desire to protect the revenue base of existing broadcasting licensees of various classes and are used as an incentive for the production and exhibition of local programming.

As a general matter, the content-based restrictions on advertising by commercial OTA television licensees going forward appear to be effective and minimally intrusive.¹¹⁴ We question, however, the need for a transitional period for the elimination of the current cap on advertising minutes. Given that these broadcasters have not used all of their drama advertising incentive minutes, market forces appear to impose effective incentives to limit advertising. This suggests that there is not a requirement for a transitional period to eliminate the cap on advertising minutes.

Recommendation 10(a)-6

Fees for Carriage

One of the most hotly-contested issues before the Commission in its most recent review of the regulatory framework for private conventional OTA licensees was the ability of these undertakings to seek fees for carriage of their respective signals from BDUs. At present, and in contrast to speciality television services, OTA television services receive no wholesale fees from BDUs for their signals.

In Public Notice 2007-53, the Commission declined to implement fees for carriage of OTA television services. In reaching this conclusion, the Commission noted first that it was not convinced that the OTA industry has experienced a permanent decline in profitability. The Commission went on to conclude that absent evidence that fees for carriage of OTA television services would not negatively affect the financial health of specialty services, it was not convinced the implementation of fees for carriage for OTA television services would yield a net benefit to the broadcasting system:

In Chapters 5 and 6, we have proposed that the Commission conduct a detailed assessment and rationalization of the sources of revenue available for private television services. If the Commission decides to take action on this, one of the issues it will have to consider is fees for carriage for OTA television services.

Quality and Balance in Programming

The Television Broadcasting Regulations, 1987 prohibit licensees from broadcasting anything in contravention of the law, abusive comment or pictorial representation, obscene or abusive language or pictorial content, and false or misleading news.

Licensees are also required by the Regulations to allocate time for the broadcasting of partisan political broadcasts during an election period on an equitable basis to all accredited parties and candidates.

In addition to these regulations, the Commission has promulgated a series of policies related to controversial programming, open-line programming, gender portrayal, political broadcasts and violence. These policies address the requirement for balance in programming, as well as specific issues such as gender portrayal and violence. Licensees are required by condition of licence to adhere to the CAB Sex-Role Portrayal Code for Television and Radio Programming and CAB Voluntary Code Regarding Violence in Television Programming. This condition of licence is suspended as long as the licensee remains a member in good standing of the Canadian Broadcast Standards Council.

These requirements implement the objectives of broadcasting policy that relate to quality and balance in the programming provided by the Canadian broadcasting system (paragraphs 3(1)(g), (h) and (i)).

In our view, the rules governing quality and balance have been and remain effective and minimally intrusive. We do not propose changes in these requirements.

Transition to Digital/HD Programming

In Public Notice 2007-53, the Commission announced significant revisions to its policy on digital migration of OTA television services. The Commission had previously imposed no fixed deadline for the conversion to digital, preferring instead to rely on a market-driven approach. Noting that the pace of transition had been very slow, and that Canada was lagging considerably behind the U.S. in this area, the Commission determined that:

• A mandatory shut-down date of August 31, 2011 should be adopted for analog television transmission. OTA licences will only be authorized for digital transmission after that date. This policy may be subject to exception in northern and remote communities where no digital OTA will be provided.
• The construction of OTA digital facilities is at the discretion of licensees. However, privileges such as priority carriage and simultaneous substitution will be retained in respect of digital services only, in order to encourage the provision of local and regional digital OTA services.
• OTA television broadcasters will be required to file digital roll-out plans in their licence renewal applications.

The following elements of the digital broadcasting policy announced in Public Notice CRTC 2002-31 remain in place:

• The Commission will continue to consider applications by new entrants for licences to provide digital-only service on a case-by-case basis in accordance with existing policies relating to market entry and the issuance of calls, where appropriate, for competing applications.
• Canadian content obligations applicable to analog services apply equally to digital services. Licensees of existing analog services granted transitional DTV licences are allowed to broadcast a maximum of 14 hours per week in HD programming that is not duplicated on the analog version of the service. A minimum of 50% of the unduplicated HD programming must be Canadian, and all unduplicated programming must be in HD format. Licensees are also encouraged to ensure that two-thirds of their schedule is available in HD format by the end of 2007.
• Applications by existing OTA broadcasters that accord with the transitional digital policy and are based on the Industry Canada allotment plan will receive fast track consideration. If existing analog licensees do not apply for a DTV licence within a reasonable period of time, or otherwise demonstrate that they are not ready to proceed on a timely basis to make use of the spectrum allotment, the Commission will consider applications by new entrants.

These policies seek to implement the objects that "the Canadian broadcasting system should . be readily adaptable to scientific and technological change (subparagraph 3(1)(d)(iv)) and that "private networks and programming undertakings should, to an extent consistent with the financial and other resources available to them . be responsive to the evolving demands of the public" (subparagraph 3(1)(s)(ii)). In addition, subsection 5(2) specifies that the broadcasting system should be regulated and supervised in a flexible manner that "is readily adaptable to scientific and technological change."

We believe that it will be important to monitor the transition of OTA television services to digital distribution closely over the next few years to ensure that the transition is proceeding effectively and efficiently. We note that some stakeholders have suggested that the costs of implementing digital transmission technologies cannot be justified, given the relatively small segment of the population that continues to receive OTA television services directly off air.

Any changes to the CRTC's digital television policy must dovetail with Industry Canada spectrum decisions. We note also that any elimination of OTA services has implications for the status and treatment of local stations, and the treatment of disenfranchised customers that rely solely on OTA services. At 10% of listeners, this is not an insignificant segment of the population.

New Licenses

In Public Notice CRTC 1998-, Additional National Television Networks - A Report to the Government Pursuant to Order in Council P.C. 1997-592,¹¹⁵ the Commission concluded that few if any markets in Canada could sustain the licensing of new local stations without "seriously impinging on the ability of existing licensees to fulfill their obligations under the Broadcasting Act." The Commission therefore concluded that it should not consider licensing a new English or French-language OTA television network.

The Commission has however signalled that it will consider applications for new digital television services in individual markets. Applicants for new OTA television licences must demonstrate that there is a demand and market for the proposed new service.

This policy is intended to ensure that new entry is viable and will not undermine the continued ability of existing licensees to meet their service obligations.

Effectively, this approach protects existing licensees from the full impact of market forces as new entry only occurs if the Commission determines that the market can bear further competition. However, once entry is permitted, all licensees effectively compete for both viewers and advertising revenues.

Recommendation 10(a)-7

Logs and Records

Section 10 of the Television Broadcasting Regulations, 1987, requires television licensees to retain logs of all programs broadcast for a period of one year. The program log must be provided to the Commission within 30 days of the end of each month together with a certificate of accuracy. Licensees are also required to retain recordings of all programming for four weeks following the date of broadcast and, if the Commission receives a complaint during this period or otherwise wishes to investigate a matter, an additional four weeks on notice from the Commission within the initial four week period. This recording must be provided to the Commission on request.

All licensees are also required by section 12 of the Regulations to file an annual return to the Commission on or before November 30 of each year, and an annual program schedule for the following year on or before September 1. Finally, a licensee shall provide a response to any Commission request regarding its ownership, programming or any other issue within the Commission's jurisdiction that relates to the licensee's undertaking.

These obligations are directed at ensuring that the Commission is able to perform its monitoring, supervisory and enforcement powers. As discussed in Chapter 4 of this report, smart regulation dictates that regulation be based on the best possible information available. Logs and records provide this data. It is however essential that the information collected be relevant to achieving the specific policy objectives of the Commission. For this reason, the Commission should ensure that it is collecting the right sort of data.

We do not recommend any changes to the current logging and reporting requirements. However, to the extent that existing drama incentive programs are eliminated, or new regulatory measures enacted, the information required by the Commission will change over time.

Recommendation 10(a)-8

10(b) Community Broadcasting on Television

The Broadcasting Act specifically recognizes, in section 3(1)(b), that the broadcasting system is comprised of "public, private and community elements." The reference to a community element within the Broadcasting Act was added to section 3 in the 1991 Broadcasting Act.

The 1986 Report of the Task Force on Broadcasting Policy (Caplan/Sauvageau Report) had previously noted as follows:

CRTC policies on this issue predate, of course, by several years both the 1991 Broadcasting Act and the 1986 Caplan/Sauvageau Report.

Community broadcasting includes both television and radio broadcasting. The essential characteristics of community broadcasting which are consistently reflected in CRTC policies for both radio and television, are that such programming:

• is drawn directly from a local community and provides opportunities for access by that community,
• should be targeted to communities within localized areas, and
• should complement, rather than mirror, the type of programming that is available from mainstream commercial sources or the CBC.

The Commission's policies relating to community radio broadcasting are discussed in a separate section of this report.

Community Broadcasting on Television

Community broadcasting in the television sector has its origins with community channels on cable. Community over-the-air television has also developed in a few areas as a stand-alone, low-power, over-the-air service, but community channels on cable blazed the trail.

In its earliest policies on cable television, the CRTC identified the potential for that industry to provide local community-produced programming on a dedicated channel, complementing other available television programming. This was regarded as one of the key contributions cable television could make to the Canadian broadcasting system.¹¹⁷ This view was repeated and amplified twenty years later when the Commission stated, "[t]he provision of adequate financial resources to support the community channel remains the cable licensee's principal contribution to the public in exchange for the privilege of holding a cable television licence."¹¹⁸

The CRTC's 1976 Cable Television Regulations continued to serve as the model for existing community television regulations and policies - with some small modifications. The key requirements in the 1976 regulations were:

Notably, even though the CRTC required licensees to operate a community channel, it did not impose a specific minimum expenditure requirement on community programming, but it did expect cable television licensees to allocate a reasonable percentage of gross revenues to the community channel.

The most significant changes that have taken place since 1976 to the cable community channel policy have been removal of the mandatory requirement that all cable operators (except the very smallest) provide a community channel, and the broadening of the programming scope for community-based television services.

Removing the mandatory requirement for all Class 1 and Class 2 cable systems to provide a community channel arose directly from the introduction of competition in the mid-1990s to the BDU sector. In the context of reviewing all cable regulations to accommodate the new competitive framework (which is discussed in the BDU section of this report) the Commission noted its concern that new competitive entrants into a particular BDU market might face difficulties offering a competitive community channel, and also that a competitive channel could divide resources between the competitors, resulting in a lower quality programming product overall.¹¹⁹

Also, the Commission concluded that, after more than a quarter century of operation, cable community channels had reached "a level of maturity and success such that it no longer needs to be mandated." The Commission referred to the natural incentives cable operators have to maintain a community channel, including the fact that community channels provide "cable operators with a highly effective medium to establish a local presence and to promote a positive corporate image for themselves."

The Commission provided cable operators with a further incentive to fund their own community channel. It allowed larger cable operators (i.e. Class 1 systems serving more than 20,000 subscribers) to direct 2% of the 5% of gross subscription revenue that they are required to contribute to Canadian expression under the current BDU Regulations to finance the operation of their own community channels and, in the case of small cable operators, up to the entire 5%.¹²⁰

In light of these incentives, the Commission concluded that cable operators would continue to provide community channels even without a regulatory requirement to do so.

The Commission may well have been correct in its determination. The 2007 Broadcasting Policy Monitoring Report shows, for example, sustained financial contributions by cable operators to community channels and minimal, if any, decline in the number of cable operators making a financial contribution to community channels.¹²¹ At the same time, the total number of community channels reported by the CRTC in its report, The Future Environment Facing the Canadian Broadcasting System declined between 2002 and 2006 from 197 to 133. It may be that this decline in number is attributable in part to smaller cable systems being exempted from licensing in this period and, therefore, no longer being counted. It is also notable that some consolidation in community channel programming has been approved by the Commission, resulting in larger "communities," and more shared programming between communities.¹²²

While the Commission has relieved cable operators from the mandatory requirement to offer a community channel, it has also "hedged its bets" in order to ensure that community programming, in one form or another, will continue to be provided.

In 2002, the Commission released a new combined policy for community media which, among other things, opened up the opportunity for licensing and required distribution and (in some cases funding) of new "community programming services" and "community-based television programming undertakings."¹²³

Specifically, the Commission decided that in situations in which a Class 1 or Class 2 licensee elects not to provide a community channel, an independent "community programming service" could be licensed and also granted carriage rights as a mandatory basic service. A Class 1 or Class 2 licensee would also have to pay the entire amount of its contribution to Canadian expression for the community channel (i.e. 2% or 5%) to this independent community programming service. The service would need to be a non-profit organization with membership, management, operation and programming provided by, and reflecting, the community served.

Also, the Commission provided for licensing of new "community-based television programming undertakings" to be offered as digital-only services, or as low-power over-the-air services, which would be distributed by BDUs on a digital basis.

The Commission adopted a relatively "open-ended" and case-by-case licensing approach for these new undertakings which would allow it to evaluate the number of community-based services already licensed, the availability in the community of local OTA services, and of available channel capacity, and the potential impact of a new entrant on local radio and television services in small markets. To encourage innovation and diversity of voices and ownership, the Commission decided that these undertakings could be operated on a for-profit basis. One such service has subsequently been licensed and launched.¹²⁴

In addition, therefore, to the natural incentives to offer community programming, cable licensees are also motivated by the possibility that if they do not make a community channel available, someone else will - and they will be required to fund it and distribute it!¹²⁵ There is also the potential for new entrants in urban areas to launch a new community-based low-power OTA or digital cable service which, while it would not need to be funded by the cable licensee, it would be distributed on cable as a digital service.

Traditional cable community channels, and the new independent OTA community programming services are subject to substantially the same content rules. These rules reflect the original principles for community programming noted above - with refinements having been developed over the years. In particular:

• All community television services must offer at least 60% local community television programming, which must be reflective of the community and produced by the licensee or members of the community in the licensed area;
• no non-Canadian programming is permitted;
• other than the 60% local community television programming, Class 1 and 2 licensees are limited to programming consisting of advertisements of broadcasting services they distribute (no more than two minutes per hour), promotional and sponsorship messages, still image programming accompanied by the audio feed of a radio station, government information programming, public service announcements, provincial legislative proceedings, and non-local community television programming;
• Class 3 licensees have greater latitude to offer complementary programming (including, for example, educational programs, children's programs, and alphanumeric content) and may offer up to 12 minutes of advertising if they operate in a market without a local television or radio station;
• at least 30% (and up to 50% in the case of Class 1 and 2 licensees, depending on demand) of all programming must be "access programming", which is programming actually produced by community members;
• in certain instances, particularly in the province of Quebec which has a separate policy regime for independent not-for-profit community television corporations, 20% of all programming must be made available to these "television corporations", with a minimum of four hours for each such corporation when there is more than one in a particular market
• cable licensees are required to actively promote citizen access to the community channel, and Class 1 and 2 licensees must distribute at least one billing insert per year promoting citizen access; and
• licensees must abide by logging and logger tape requirements.

The newer community-based OTA television programming undertakings are subject to somewhat less stringent programming requirements and are permitted to broadcast traditional advertising up to twelve minutes per hour. They are limited, however, to local ads.

It should be noted that while the CRTC's policy reflects a new framework for digital television services and low-power services in an urban setting, the new policy now also applies generally to all low-power OTA stations, including those in remote areas. In areas where the new policy was more precise or imposed greater requirements - such as minimum levels of Canadian content, and a specified amount of local programming - the Commission has stated that it is willing to consider departures from the minimum requirements by condition of licence.

Assessment

The restrictions and limits on advertising on community programming services are motivated by two assumptions. The first is that advertising creates an incentive to avoid controversy, to avoid innovation and experimentation and to prefer high production values and mass appeal over citizenship participation and access. At least in the 1970s, it was also assumed that cable programming undertakings, with no CPE obligations, could make a direct contribution to the broadcasting system without relying on commercial advertising.

Over time, some flexibility was added to generate more revenue for community services through limited sponsorships, and also to promote other broadcasting services. The net effect of these changes has been to layer on rules respecting sponsorship in community programming that are somewhat arcane in detail.

We question the assumptions that underlie the existing restrictions on advertising on the cable-operated community channel. Advertising does not necessarily imply any particular value system or approach to programming and is not necessarily inconsistent with community access programming - no matter how radical or experimental. Community-based newspapers, for example, and many "radical" magazines - of all persuasions and viewpoints - provide regular community news, commentary and opportunities for expression, and are still supported to varying degrees by advertising dollars. They manage to survive, and sometimes prosper, while providing valuable community service and reflecting diverse voices.

We also note that many cable community channels already have community programming committees that make programming decisions for the cable companies so this could also mitigate against concerns of mediocrity.

Advertising sales could go a long way to dealing with the issues of cross-promotion of related brands and services which the Commission now regulates through restricting self-promotion opportunities to 25% of broadcasting services promotions. If the advertising time had commercial value, then self-promotion would be limited by the opportunity to generate actual revenue from ad sales - as it is now on commercial television stations.

The restriction on the sale of regional and national advertising on independently operated community channels is also questionable. In the commercial radio and television sectors, the Commission limits the sale of local advertising only to those stations that provide local programming. There is no reverse prohibition on the sale of national advertising. Why should there be such a restriction on community programming? Removal of these restrictions would be consistent with our general theme of trying to maximize revenue for the Canadian broadcasting system.

Recommendation 10(b)-1

At present, there seems to be little interest on the part of entrepreneurs in establishing community based television undertakings. Just one application for a new digital-only cable service has been reviewed by the Commission (and turned down) since the policy change was announced in 2002,¹²⁶ and very few new applications for community-based low-power OTA television services have been approved.

Recommendation 10(b)-2

Historically, DTH BDUs have not been permitted to provide a community channel because their satellite coverage was not limited to a "local community." Concern was expressed that if DTH BDUs provided programming that was more national in scope, it would compete with other regional and national services.¹²⁷

In our view, if the DTH providers want to provide more Canadian programming and more outlets for "community" expression, they should not be discouraged. In our increasingly "narrow-cast" world and in the world of the Internet, communities are less frequently described in terms of geography and more often in terms of community of interest.

Since one of the objectives of the Broadcasting Policy for Canada is to "encourage the development of Canadian expression by providing a wide range of programming that reflects Canadian attitudes, opinion, ideas, values." and "be drawn from local, regional, national . sources," and since the Canadian broadcasting system is required to be "readily adaptable to scientific and technological change," the time has come to reassess the role of DTH in providing an outlet for this expression. In our view it is conceivable that a format can be developed for regional expression on a national platform giving rise to an exchange of ideas across the country. This type of platform might make television more relevant in an environment where the Internet is currently providing a world stage for "local" expression. The regulatory system should be encouraging more Canadian outlets for this form of expression - not limiting it.

Recommendation 10(b)-3

10(c) Pay Television

Brief History of Pay Television Regulation

The prohibition on broadcasting commercial messages, which is set out in paragraph 3(2)(d) of the Pay Television Regulations, is the distinguishing feature between pay television undertakings and specialty programming television undertakings. It has been a defining aspect of the regulation of pay television services in Canada since 1982. The restriction was established in order to limit the impact that this new type of programming undertaking would have on conventional OTA television stations that relied entirely on advertising revenues.

The pay television industry has been operating in Canada for almost twenty-five years. In March 1982 the Commission licensed five general interest pay television services, one multilingual pay television service and one specialty television service.¹²⁸

In that Decision, two national pay television services were licensed (one French language, Premier Choix, and one English language, First Choice) that were to be operated by First Choice Canadian Communications Corporation ("First Choice") and three regional services, serving Alberta, Ontario and Atlantic Canada respectively.¹²⁹ In addition, C Channel was licensed to operate a performing arts pay television service, and World View Television was licensed to operate a multilingual pay television undertaking.

On the heels of that Decision, in November 1982 and in February 1983, the Commission licensed two additional regionally-based general interest pay television services.¹³⁰ Also in 1983, the Commission approved an application by Allarcom to extend its Alberta pay television service into Manitoba, Saskatchewan and the Northwest Territories.¹³¹

In these Decisions, the Commission established a highly competitive licensing framework for pay television by issuing licenses for more than one general interest pay television service in each market. As noted, in Decision CRTC 82-240 the stated rationale was to use pay television as a means to "maximize opportunities for Canadian program production."¹³² At the same time, the Commission established licensing conditions for each pay television service that, for the first time, required a broadcasting licensee to satisfy obligations that included both Canadian content exhibition requirements and Canadian programming expenditure (CPE) requirements.¹³³

It did not take long for the early optimism that greeted the first licensing decisions to fade. By the end of 1983, the performing arts specialized pay television service (C Channel) and one of the regional pay television services (Star Channel) had already ceased operations. A merger of the two French-language services (creating Premier Choix:TVEC) and the acquisition of the regional undertaking serving British Columbia and the Yukon (Aim Broadcasting) by its Alberta counterpart (Allarcom) quickly followed in 1984. Finally, in July 1984, in response to the ongoing crisis in the pay television market, the Commission approved a fundamental restructuring of the industry which ended the experiment of competitive licensing by establishing two regional English-language services, and one French-language service. The non-competitive regional licensing policy for pay television services continued to apply until 2006.

In addition to the changes implemented in 1984, the Commission was subsequently forced by adverse market conditions in 1986 to alter a number of the licensing obligations that had been imposed on the pay television licensees. In particular, the Commission approved applications that significantly reduced the Canadian content and CPE requirements. While licensing obligations have subsequently increased as each license has been renewed, today the conditions imposed on Canada's three pay television licensees are considerably less onerous than those originally established in 1982.

Today, Canada's pay television industry is in a strong financial position. There are currently six services operating in Canada. All six are controlled either by Astral Broadcasting Group Inc. (Astral) or Corus Entertainment Inc. (Corus).¹³⁴

An application to operate a seventh pay television service was approved in May 2006 when the Commission made an exception to its one service per genre licensing policy and authorized Allarco Entertainment Inc. (Allarco) to operate a competitive national English-language general interest pay television programming undertaking.¹³⁵

Current Pay Television Regulations and their Rationale

Programming Content

As with other types of programming undertakings, pay television undertakings are prohibited from broadcasting programming that contains certain types of content. Specifically, subsection 3(2) of the 1984 Pay Television Regulations, prohibits pay television undertakings from broadcasting programming: (a) that contains anything in contravention of the law; (b) that contains any abusive comment or abusive pictorial representation on the basis of race, national or ethnic origin, colour, religion, sex, sexual orientation, age or mental or physical disability; (c) that contains any false or misleading news; (d) that contains any commercial message; (e) and (f) programming that is produced by the licensee.

The first three content types that are prohibited in paragraph (a), (b) and (c) of subsection 3(2) are common to all programming undertakings and are designed to ensure that the programming broadcast by licensees is consistent with the "high standard" objective in paragraph 3(1)(g) of the Broadcasting Act. We recommend that they all be retained in order to ensure continued high standards of broadcasting in Canada.

As indicated above, the prohibition on broadcasting commercial messages, which is set out in paragraph 3(2)(d) of the Pay Television Regulations, is currently one of the key distinguishing features between pay television undertakings and specialty programming television undertakings. As discussed in Chapter 5, we are recommending that this prohibition on advertising be reviewed by the Commission.

Recommendation 10(c)-1

The prohibition on broadcasting programming (other than filler programming) that is produced by the licensee, contained in paragraphs 3(2)(e) and (f), was introduced in the 1984 Pay Television Regulations. The rationale for this provision was to "ensure that, upon Astral's purchase of First Choice and SuperEcran, Astral would not be given an unfair advantage over other Canadian independent production companies due to its ownership interest." While the Commission's thinking on this has evolved somewhat since 1984, the objective of ensuring that independent producers are the source of Canadian programming for pay television undertakings continues to be the underlying rationale for the presence of this provision in the regulations.

As discussed in Chapter 6, we are of the view that requiring pay television licensees to acquire 100% from third parties is excessively restrictive and inhibits the creation of Canadian content by entities that might otherwise be able to contribute to the production of new Canadian content. We therefore recommend that the Commission start reducing this prohibition, initially by at least 25%, and begin monitoring the effect of doing so on both the production of Canadian content and on the independent production industry in Canada.

Recommendation 10(c)-2

Logs and Records

The requirements relating to the maintenance of a program log or a machine readable record of programming have also been imposed on all pay television undertakings through the Pay Television Regulations since 1984. The current rules set out in section 4 require licensees to enter into the logs specific types of information and program codes, to retain the logs for a period of one year, and to furnish the logs to the Commission each month. In addition, under subsection 4(4) of the Pay Television Regulations, a licensee is required to retain a clear intelligible audiovisual recording of all of its programming for a period of four weeks, or for a longer period where there has been a complaint if the Commission wishes to investigate the programming.

As noted in Public Notice CRTC 1984-3, pay television licensees are required to maintain program logs and accounts in respect of programming expenditures "so that the conditions of licence governing Canadian program exhibition and expenditure may be effectively enforced." That rationale continues to apply today and for that reason no changes are proposed to this section of the regulations.

Under section 5 of the Pay Television Regulations, each licensee is required to file with the Commission an annual return that sets out its statement of accounts. In addition, each licensee is required to respond, at the Commission's request, to any complaint from any person and any inquiries relating compliance with self-regulatory codes. These requirements have been consistently imposed on pay television undertakings since 1982.

These requirements to furnish information to the Commission are necessary to the fulfillment of the Commission's mandate and should not be changed.

Unlike the other provisions in the Pay Television Regulations, section 6.1, which prohibits a licensee from giving an undue preference to any person or subjecting a person to an undue disadvantage, was only recently added to those regulations in 2001. Subsection 6.1(2) further provides that a licensee shall be considered to give itself an undue preference if the licensee distributes a pay-per-view program for which the licensee has acquired exclusive or other preferential rights.

The impetus for including subsection 6.1(2) in the Pay Television Regulations was a dispute involving PPV rights for NFL Sunday Ticket programming that Rogers had acquired for distribution on terrestrial pay-per-view services, but which were not made available by the NFL to Bell ExpressVu for distribution on DTH PPV services.¹³⁶ In that case, Bell ExpressVu argued that Rogers' acquisition of those program rights for distribution on terrestrial PPV services breached the undue preference provision in section 9 of the BDU Regulations. While the Commission was not persuaded on the facts of that case that any preference Rogers may have obtained was "undue", the Commission noted that the circumstances of the complaint highlighted the absence of a regulation for pay television licensees that addresses the matter of pay-per-view licensees acquiring programming on an exclusive basis.

In addition to the restrictions on acquiring exclusive preferential PPV program rights, the Commission has also established, in subsection 6.1(1) of the Pay Television Regulations, a prohibition on granting undue preferences and disadvantages that mirrors the prohibition in the BDU Regulations. In Public Notice CRTC 2000-150, the Commission recognized that a licensee of multiple programming services could confer upon itself an undue preference in negotiating the terms of carriage for all its services, or that distributor-affiliated programming services could potentially confer an undue preference on the distributor to which they are affiliated. It therefore proposed amending both the Pay Television Regulations and the Specialty Services Regulations in a manner similar to the provision applicable to distributors.

To our knowledge, the Commission has not, to date, ruled on a dispute under section 6.1 of the Pay Television Regulations that involved a pay television undertaking.

At a time when concentration and consolidation of ownership is so prevalent in the Canadian broadcasting system and when distributors are becoming more and more involved in the ownership and operation of programming services, there is a continuing need for an undue preference provision in the Pay Television Regulations. The only change that we would recommend to this provision is to reverse the onus so that the licensee that is alleged to have granted the preference or disadvantage has the burden of demonstrating that its actions were not unduly preferential or disadvantageous.

Recommendation 10(c)-3

Each pay television undertaking is subject to a condition of licence relating to its nature of service. This condition of licence defines the geographic scope of the licence and the nature of the programming that can be offered on the pay television service. By identifying the nature of the service offered, the condition of licence also assists the Commission in applying its licensing policy for pay television that generally precludes the licensing of a directly competitive pay service.

As noted above, the one licence per genre policy has been a cornerstone of the Commission's regulatory framework for pay television undertakings for more than two decades. It was originally implemented in the mid-1980s to stabilize the pay television industry. The policy has ensured that each pay television service is financially able to meet its regulatory obligations. The policy is also designed to ensure diversity in the broadcasting system. The policy has succeeded. Today, the pay television industry has become robust and financially stable and able to make significant contributions to furthering the objectives of the Broadcasting Act. The latest statistics on the pay television industry issued by the Commission indicate that in 2006 the PBIT margin for the combined pay television, PPV and VOD industries was a very healthy 25.88%.¹³⁷ The combined revenue for these industries was just over $482 million in 2006, which represented an increase of 17.7% from 2005.¹³⁸

When the Commission first implemented its non-compete model for licensing pay television undertakings in Decision CRTC 84-654, it recognized that the Canadian market could not support a competitive licensing model for Canadian pay television services. While the Commission maintained the view that a competitive market environment for pay television was desirable in theory, it emphasized that "approval of the proposed reorganization is now necessary for the survival of pay television."¹³⁹ The Commission also noted that the perceived similarity of the movie services offered by the general interest pay television undertakings, and the small number of dual subscriptions in the areas served by two pay television service providers was a clear indication that the competitive licensing model introduced in 1982 had not worked as originally planned.

The one service per genre licensing policy has been consistently applied for the past twenty-two years. An application to operate a pay television service known as The Family Channel was approved in November 1987.¹⁴⁰ That new service was to be fully discretionary and provide programming for children and youth audiences. The Commission concluded that its programming would complement the existing pay television services operated by First Choice and Allarcom, which offered more adult-oriented programming. It would not, therefore, compete directly with the existing pay television services. Similarly, the Commission approved applications to operate two new regionally-based pay television services, originally known as "The Classic Channel" and "MovieMax" in 1994.¹⁴¹ In Decision CRTC 94-278, the Commission authorized Allarcom and First Choice to operate services consisting of Canadian and foreign feature films copyrighted at least five years prior to the broadcast year in which they are broadcast. Given the limitations placed on the programming to be broadcast by the two new services, the Commission did not consider them to be competitive with the existing pay television services. There was no suggestion therefore that the Commission was abandoning its regional non-competitive licensing model.

The only exception to the non-competitive policy occurred recently when the Commission authorized Allarco to operate a new national general interest pay television service.¹⁴² In that Decision the Commission emphasized that the English-language general interest pay television industry had become financially stable, and that the introduction of a single competitive service would not have an undue negative impact on the existing English-language general interest pay television services:

The Commission's decision to approve only one of four competing pay television applications, and to thereby grant an exception to its general licensing policy for pay television, was based on its assessment of the financial strength of the pay television industry and the impact that the entry of another service provider would have on the existing licensees. At the same time, the Commission recognized that a decision to add multiple players to the industry would not likely enhance diversity and would, ultimately, weaken the ability of existing players to contribute to the production of Canadian programming and to otherwise meet their regulatory obligations.

Recommendation 10(c)-4

The Commission has imposed, by way of conditions of licence, obligations relating to the exhibition of Canadian programming on each of the seven pay television services. The two regional general interest English-language pay television undertakings, TMN (Astral) and Movie Central (Corus), the national French-language pay television undertaking Super Écran (Astral), the Family Channel (Astral) and the recently approved national pay television service operated by Allarco, are each required to devote to Canadian programming (a) 30% of the time between 6 pm and 11 pm to Canadian programs and (b) 25% of the remainder of the time during which the service is in operation. Given that MoviePix and Encore Avenue are generally prohibited from distributing copyrighted programming that is less than five years old, their Canadian content requirements are slightly less onerous. Each service is required to devote (a) 20% of the time between 6 pm and 11 pm to Canadian programs and (b) 20% of the remainder of the time during which the service is in operation to Canadian content programming.

While we are not equipped to comment on whether the current Canadian content percentage requirements should be adjusted, there is little doubt that the imposition of content requirements has ensured that there is shelf space available for Canadian programs on the pay television platform. As discussed in Chapter 6, we recommend that the Commission undertake a review of Canadian content rules applicable to all licensees with a view to simplifying and rationalizing the requirements across various licence classes. We also recommend that the Commission investigate collapsing some classes of licence in order to equalize obligations on competing services. The outcome of that review may necessitate amendments to the current requirements reviewed above.

The Commission has imposed a variety of CPE requirements on pay television licensees. Generally, these expenditure requirements represent a percentage of the revenues achieved by the service in the previous broadcast year. In the case of TMN, for example, if the average number of subscribers achieved by the service exceeds 820,000, it is required to expend on Canadian programming 32% of the previous year's revenue. In addition, with the exception of MoviePix and Encore Avenue, each pay television licensee is required to make contributions to script and concept development that range from $700,000 per year for Super Écran to $2 million per year for the new pay television undertaking operated by Allarco.

As with Canadian content requirements, these CPE requirements are, in most instances, significantly lower than those that were first imposed on pay television licensees between 1982 and 1984. In Decision CRTC 82-240, the CPE requirements ranged from 15% of the previous year's gross revenues for the short-lived Star Channel to 50% for the almost equally short-lived Ontario Independent Pay TV service.

Apart from these requirements, the applicants had also made numerous commitments to invest monies in certain funds or initiatives and/or to provide support to regional producers or genres of programs. First Choice, for example, committed to establish a fund of $1.5 million to stimulate the early production of Canadian programming and also agreed to contribute, during the last three years of its initial licence term, 5% of its gross annual revenues toward script and concept development. For its part, Allarcom committed to invest 100% of its profits from the pay television operations into independent Canadian production, projecting that this would amount to more than $20 million over the licence term. In addition, Allarcom indicated that 2% of its gross revenues would be contributed to script and concept development. Ontario Independent Pay TV made commitments that were similar to those of Allarcom, with the exception that 2.5% of its gross revenues would be devoted to script and concept development.

While the total expenditures that each pay television undertaking makes on Canadian programming have increased over the years, as a result of increasing gross revenues, the rationale for maintaining CPE requirements has not changed. In Decision CRTC 84-654, the Commission noted that the objective is to "ensure that its regulatory requirements with respect to Canadian content achieve the desired objectives of enhancing the quality and distinctiveness of Canadian programming, and generating new opportunities and revenue sources for the program production industry in Canada."

That objective remains at the centre of the Commission's CPE requirements, and is as valid today as it was in 1984 when the Commission approved a restructuring of the pay television industry.

However, as discussed in Chapter 6 of this report, we are recommending that the Commission undertake a thorough review of CPE and other Canadian content requirements both within classes of licence and between classes where traditional class distinctions have eroded. This review may result in amendment of the policies discussed above.

10(d) Specialty Television Services

Brief History of Specialty Television

The current regulatory framework for specialty services has its roots in the 1983 proceeding that resulted in the issuance in 1984 of licensing decisions for MuchMusic, Action Canada Sports Network (now TSN) Telelatino and Chinavision (now Fairchild).

The Commission issued its first call for applications to operate new Canadian specialty programming services in 1983.¹⁴⁴ In its Notice, the Commission acknowledged the increasingly competitive nature of the broadcasting industry "brought about by the rapid expansion of a variety of technologies, and the consequent need for prompt action with regard to the introduction of new programming services to provide diversity and expand the range of discretionary services offered on cable systems." The Commission went on to point out that its objectives in licensing specialty services were to:

In an introduction to its 1984 licensing decisions for the first specialty services, the Commission emphasized that it expected the discretionary services to be offered on a national user-pay basis, and to enhance the diversity of programming available and to complement, rather than duplicate, existing OTA television or pay television services. The Commission also expressed the expectation that these services would stimulate the Canadian independent television production industry, and that they could, through linkage requirements, facilitate the marketing of pay television services.¹⁴⁵

When it had announced the hearing to consider these first specialty service applications, the Commission indicated that it would also be willing to allow the carriage of certain non-Canadian specialty services by cable distributors, provided that such services would "contribute to, and do not adversely affect, the development of the Canadian broadcasting system."¹⁴⁶ This was the genesis of the Commission's "genre protection" policy, whereby non-Canadian services that would compete with Canadian specialty services would not be authorized for distribution in Canada. This meant that competitive foreign superstations, premium pay services or other programming services that would be incompatible with the Commission's policy would not be authorized for distribution in Canada.

The Commission's policy in this respect was more fully articulated the next year when it introduced the licensing decisions for the four new Canadian specialty services and established tiering and linkage rules for cable:

The first two licence applications to operate specialty services were approved by the Commission in April 1984.¹⁴⁸ In one case, the Commission considered that there were two applicants (CHUM and Rogers Broadcasting) that could provide a well-financed music service,¹⁴⁹ but only issued a licence to CHUM on the grounds that it was not convinced, based on the size of the potential Canadian market, that more than one video music network should be licensed at that time.¹⁵⁰

The two multilingual specialty service applications, to operate Telelatino and Chinavision, were approved the following month.¹⁵¹ A year after that, the Commission approved the Life Channel application to provide a health and lifestyle specialty service.¹⁵²

The Commission established for each of these new services conditions of licence that: (i) limited the nature of the programming that each could broadcast; (ii) set Canadian content requirements; and (iii) required specific expenditures on Canadian programming. In addition, the Commission established an expectation for each service that it would not distribute local advertising, and that it would not carry more than eight minutes of advertising material per hour.

Shortly after the Life Channel decision, the Commission expressed concern that these three services, in particular, had experienced considerable difficulty in reaching network affiliation agreements with cable systems.¹⁵³ The Commission, therefore, called for comments on issues relating to access and the carriage of pay and specialty services.¹⁵⁴

The Commission had also expressed concerns, in its earlier decisions, about the absence of French-language specialty services. In 1986, the Commission approved an application to amend the MuchMusic licence to permit the partial substitution of its English-language service by the French-language service, MusiquePlus, for distribution to affiliated cable undertakings serving francophone markets in eastern Canada.¹⁵⁵

In August 1986, the Commission called for new applications to operate additional specialty services.¹⁵⁶ The Commission indicated that its consideration of these applications would be guided by the following general principles and objectives:

In response to that call for applications, the Commission approved nine specialty services, and one pay television service (Family Channel). In approving these applications, the Commission outlined its approach to the regulation of the expanding specialty service industry in Canada.¹⁵⁷ It began by pointing out that in licensing new services it had sought to address its concerns about the lack of French-language services. The Commission therefore licensed five French-language services (Canal Famille, MétéoMédia, MusiquePlus, TV5, RDS). As for the concern about the potential negative impact on conventional OTA broadcasters, the Commission emphasized that the nature of specialty services, which are targeted to specialized audiences, would minimize any negative effects on OTA broadcasters. It also highlighted the fact that Canadian pay television and other discretionary services were by then enjoying considerably greater financial stability than in the past.

To help ensure the success of the French-language services, the Commission established a carriage model for these services in francophone markets called "take one, take all." That meant that any Class 1 cable system that chose to carry one of those new services would have to carry all of them. They would also have to be distributed on basic cable.

The four new English language services were licensed as "optional to basic" services, which meant that if a Class 1 or 2 cable system chose to carry one or more of the services, it would have to be distributed as part of the basic service.

In addition, the Commission changed the carriage status of MuchMusic and TSN, to "dual carriage."¹⁵⁸ This meant that a cable system that chose to distribute one or both of those services would have to distribute them as part of the basic service, unless MuchMusic or TSN agreed to distribution on a discretionary tier.

As for the obligations imposed on the newly-licensed specialty services, the Commission established requirements relating to the nature of service, Canadian content and Canadian program expenditures. The Commission also imposed advertising limits by way of conditions of licence and established wholesale rates for the new services. In doing so the Commission noted that "such regulation is necessary to promote the provision of fair and equitable access."

By 1990, there were a total of twelve Canadian specialty services in operation and the Commission decided that it would be appropriate to introduce regulations of general application to apply to this new class of undertakings.

In its Public Notice introducing the very important Structural Public Hearing, the CRTC announced that it would make a number of changes to its Distribution and Linkage Rules.¹⁵⁹ The Commission changed the carriage status of each specialty service licensed to that date to "dual status" (which meant that they would have to be distributed as part of the basic service unless the cable system and specialty service agreed to distribution on a discretionary tier), and it revised the linkage rule for Canadian specialty services so that each Canadian specialty service could be linked in a tier with only one non-Canadian service.¹⁶⁰

In 1994, the Commission approved applications to operate eight additional specialty services.¹⁶¹ The six English language services (Discovery, Life, Bravo, Showcase, CMT and WTN) and Canal D were all licensed as "modified dual status" services, which meant that they would have to be distributed on a discretionary tier, unless the cable system and specialty service agreed to distribution as part of the basic service. RDI, on the other hand, was licensed as a "dual status" service. As was the case with the 1987 round of licensing, the programming "nature of service" description, Canadian content, program expenditures and basic wholesale rates were all regulated via conditions of licence.

In April 1996, the CRTC issued its policy on Access Rules which required cable distributors to distribute all specialty services appropriate for the market, subject to available channel capacity.¹⁶²

Later that year, in September 1996, the Commission licensed twenty-two new specialty services. All were granted modified dual status. However, four of the services (Teletoon, NewsNet, History and Comedy) were granted immediate access rights. The other services were all licensed for digital carriage, which meant that the Access Rules would not apply to them until September 1, 1999. At that time, a cable distributor that had achieved digital penetration of more than 15% would be entitled to distribute the services on a digital basis, otherwise they would have to be distributed on analog.

The majority of the 1996 licensed specialty services were launched on a third analog tier by most cable distributors prior to the September 1, 1999 deadline.

While the Commission announced in 1997 that it would delay consideration of any new English-language specialty service applications,¹⁶³ it did consider several applications to operate new French-language specialty services. Decisions relating to those applications were issued in 1999 with the licensing of four new French-language specialty services (Canal Évasion, Canal Z, Canal Histoire and Canal Fiction).¹⁶⁴ After reviewing analog capacity reports provided by cable distributors, the Commission concluded that the addition of four new specialty services could be accommodated in francophone markets. The Commission granted discretionary carriage status to the four specialty program services, but required distributors to ensure that the four services would be offered together as part of the same discretionary tier.

In each of the above noted rounds of licensing of new specialty services, the Commission's approach was largely consistent. The Specialty Services Regulations have not changed appreciably since 1990, and the conditions of licence imposed on each specialty service were similar in each of the three rounds of licensing that took place in the 1990s.

In 2000, however, all of that changed. In Licensing framework policy for new digital pay and specialty services, the Commission set out a new licensing framework for digital pay and specialty services.¹⁶⁵ The framework was designed to take advantage of the expanded distribution capacity and flexibility of digital technology, while taking into account the risks inherent in launching new services on a digital-only basis, where the potential subscriber base would be considerably smaller. It was also the Commission's expectation that the regulatory framework would encourage the rollout of digital distribution technology, and would provide:

Within this framework, the Commission decided to license two types of specialty services, namely Category 1 services, which would benefit from carriage by all broadcasting distributors that make use of digital technology, and Category 2 services, which would be licensed on a more open-entry basis. In addition, whereas, Category 1 services would benefit from genre protection, both with respect to Canadian specialty services and non-Canadian satellite services, the programming formats of Category 2 services would only be protected from those non-Canadian satellite services that would be "partially or totally competitive" with the Canadian service.

In its Category 2 licensing framework, the Commission established basic minimum licensing criteria for Category 2 services, which included minimum required levels of Canadian content. It also took the position that there would be no predetermined limit on the number of Category 2 licences that might be issued. Category 1 services, on the other hand, would be required to maintain higher levels of Canadian content (which would be comparable to those established for analog specialty services), and would also be required to make specific Canadian programming expenditures.

In November 2000, the Commission announced that it had approved license applications to operate a total of 283 new Category 1 and 2 digital specialty services. Consistent with the policy proposed in Public Notice CRTC 2000-6, the 21 Category 1 services (16 English and 5 French) were guaranteed access on a digital basis to Class 1 and 2 cable systems and to DTH distribution undertakings. The 262 newly licensed Category 2 specialty services, on the other hand, would have to negotiate for carriage with distributors.¹⁶⁶

Current Regulatory Framework

Licensing Approach

As noted above, the Commission established a new licensing framework for both digital pay and specialty services.¹⁶⁷ Prior to that point, the Commission typically issued a call for specialty service applications and then approved only those applications that it considered would make the most significant contribution to fulfilling the objectives of the Broadcasting Act. The Commission had announced that it would licence two distinct classes of digital pay and specialty services: Category 1 services which would enjoy both digital access rights and genre protection, and Category 2 services which would have neither.¹⁶⁸ Following the year 2000 round of licensing, the Commission would only issue licenses on a going forward basis for Category 2 digital services.

In the wake of that decision to establish an "open-entry" approach to the licensing of Category 2 services, the Commission was flooded with new applications to operate such services. The Commission recently noted that since this new open entry licensing policy for Category 2 services was announced it had, as of December 31, 2006, authorized a total of 579 Category 2 services, of which only 79 have launched and remain in operation!¹⁶⁹ The Commission then pointed out that the resources required to process these Category 2 applications were disproportionate to the number of services that have become operational.

Depending on whether the CRTC decides to accept other recommendations made in this report to streamline the regulations governing specialty channels and to reduce genre protection between Canadian specialty services, it may be possible to move to an exemption order for processing certain categories of Canadian Category 2 digital specialty services that would have limited amounts of Canadian content and hence no access rights.

As discussed in Chapters 6 and 7, we propose that the Commission consider linking carriage rights to Canadian content levels. Under this proposal, specialty services with the lowest permitted level of Canadian content would have no guaranteed carriage rights. They would be permitted to operate in the same genre as other specialty channels (with possible limited exceptions where the Commission determines that the service in question is important to achieving the policy objectives in subsection 3(1) of the Act and market cannot support a competing service). Such services could be identified in advance by the Commission and included in a list.

The Commission could then formulate an exemption order for this category of specialty services setting out the applicable obligations, rights and reporting requirements.

Recommendation 10(d)-1

Programming Content

As in the case of OTA television services, specialty services must adhere to a set of programming content requirements that prohibit the services from broadcasting programming that contains certain types of content. The prohibitions set out in section 3 of the Specialty Services Regulations provide that no licensee shall broadcast programming that contains: (a) anything in contravention of the law; (b) any abusive comment or abusive pictorial representation on the basis of race, national or ethnic origin, colour, religion, sex, sexual orientation, age or mental or physical disability; (c) any obscene or profane language of pictorial representation; or (d) any false or misleading news.

The Commission first applied the prohibition on abusive comment on specialty services in the 1987 round of licensing. By that time, it had already been a feature of regulations governing the licensing classes of OTA television, radio, and pay television. The decision to extend these prohibitions to specialty services was not a hotly contested issue.

Section 4 of the Specialty Services Regulations also contains a prohibition on the advertising of alcoholic beverages unless certain conditions that are set out in the provision are met. Those conditions are the following: (a) the sponsor is not prohibited from advertising the alcoholic beverage by the laws of the province; (b) the commercial message is not designed to promote the general consumption of alcoholic beverages; and (c) the commercial message complies with the Code for Broadcast Advertising of Alcoholic Beverages.

Requirements relating to the advertising of alcoholic beverages, in one form or another, have been imposed on specialty services since the first licenses were issued in 1984. They were also incorporated into the Specialty Services Regulations in 1990. It has been noted by the Commission that "a primary objective of these regulations is to ensure that alcohol-related commercial messages do not promote the greater use of alcohol or represent the consumption of alcohol as a necessary part of any social activity or as a necessity for the enjoyment of life."¹⁷⁰

In our view the requirements of sections 3 and 4 of the Regulations are consistent with the objectives in paragraphs 3(1)(g) and (h) of the Broadcasting Act, which require the programming originated by broadcasting undertakings to be of high standard and that broadcasting undertakings take responsibility for the programs they broadcast.

In our view, the prohibitions continue to be valid as a means of ensuring that specialty services do not abuse the privilege granted to them in their broadcasting licenses. It also enables the CRTC to take action if a licensee ignores its responsibilities.

Political Broadcasts

Under section 6 of the Specialty Services Regulations, a specialty service undertaking that provides time on its service during an election period for the distribution of programs, advertisements or announcements of a partisan political character, must allocate the time on an "equitable" basis to all accredited political parties and rival candidates represented in the election or referendum.

The requirements relating to the equitable allocation of political broadcasts were set out in both the Radio Regulations, 1986 and the Television Broadcasting Regulations, 1987, and were incorporated into the licence conditions of specialty services in 1987, by reference to the OTA Television Regulations.

In our view, the rationale for having this section is a valid today as when it was first imposed on specialty services in 1987. Its presence in the Regulations furthers the objectives set out in paragraph 3(1)(d) of the Act that require the broadcasting system to "safeguard, enrich and strengthen the political fabric of Canada", and "encourage the development of Canadian expression by providing a wide range of programming that reflects Canadian attitudes, opinions, ideas and values."

The requirements relating to the maintenance of a program log or a machine readable record of programming have been imposed on specialty service undertakings since their inception, initially through conditions of licence and in 1990 through the implementation of the Specialty Services Regulations. The current rules set out in section 7 require licensees to enter into the logs specific types of information and program codes, to retain the logs for a period of one year, and to furnish the logs to the Commission each month. In addition, under subsection 7(4) of the Specialty Services Regulations, a licensee is required to retain a clear intelligible audiovisual recording of all of its programming for a period of four weeks, or for a longer period where there has been a complaint or the Commission wishes to investigate the programming.

As is the case with respect to other types of undertakings, specialty service undertakings are required to maintain program logs and accounts in respect of programming expenditures to allow the Commission to ensure that those undertakings are operating in compliance with the Canadian program exhibition and expenditure requirements. We therefore recommend retention of section 7.

Under section 8 of the Specialty Services Regulations, each licensee is required to file with the Commission an annual return that sets out its statement of accounts. In addition, each licensee is required to respond, at the Commission's request, to any complaint from any person and any inquiries relating compliance with self-regulatory codes. These requirements have been consistently imposed on specialty services dating back to 1984.

We consider that the requirements to furnish information to the Commission pursuant to section 8 are necessary to the fulfillment of the Commission's regulatory mandate and should be retained.

Section 9 of the Specialty Services Regulations prohibits a specialty service undertaking from entering into a program delivery agreement with a non-Canadian. This prohibition is intended to prevent non-Canadians from controlling the precise time when a program is to be scheduled for broadcast on a specialty service and thus to be indirectly exercising control over the programming and scheduling of a Canadian service. The provision was imposed on specialty service undertakings in 1990 as part of the implementation of the Specialty Services Regulations. In our view, this provision is justified as a means of ensuring that the Canadian broadcasting system is effectively "controlled by Canadians" in accordance with paragraph 3(1)(a) of the Broadcasting Act.

We do not propose any changes to this section.

Section 10.1 of the Regulations prohibits a licensee from giving an undue preference to any person, including itself, or subjecting a person to an undue disadvantage. It was inserted in the Regulations in 2001 and mirrors the undue preference provision included in the Pay Television Regulations.

The Commission has noted that a licensee of multiple programming services could confer upon itself an undue preference in negotiating the terms of carriage for all its commonly-owned services, or that programming services could potentially confer an undue preference on an affiliated distributor.¹⁷² The provision was added to the Regulations to prevent such conduct.

Section 10.1 has, on at least one occasion, formed the basis on a complaint to the Commission.¹⁷³ That complaint, brought by Videotron ltée, was ultimately dismissed on the grounds that actions of RDS did not amount to the granting of a preference or disadvantage. However, it is not difficult to see how a licensee of multiple specialty services could use its bargaining power as leverage against some BDUs, and thereby obtain advantages that would be undue.

At a time of increased concentration and consolidation of ownership in the Canadian broadcasting system, and increased cross-ownership of programming and distribution undertakings, we consider that there is a continuing need for an undue preference provision in the Specialty Services Regulations. Given our view that the Commission should move away from micromanaging the conduct of licensees, and should focus its efforts on establishing and enforcing performance objectives, we believe that this provision will become increasingly important in regulating the relationship between programming and distribution undertakings.

For the same reasons that we believe distributors should bear the onus for demonstrating that a preference or advantage is not "undue" we recommend that section 10.1 be amended to reverse the onus so once evidence of a preference or disadvantage has been established, the licensee that has granted the preference or conferred the disadvantage has the burden of demonstrating that its actions did not amount to an undue preference or disadvantage. In most instances, the party engaging in the alleged discriminatory or preferential conduct will be the party with access to the evidence of its own practices; therefore, it makes sense to place the onus on it to demonstrate that ostensibly discriminatory conduct does not result in an undue preference or disadvantage.

Recommendation 10(d)-2

Each specialty service licensed by the Commission has a condition of licence that defines its "nature of service." By identifying the programming nature of the service to be offered, the Commission has been able to apply its "one service per genre" policy both to the licensing of new Canadian specialty services and with respect to the addition of new non-Canadian services to the Lists. The "one service per genre" policy serves to protect from competition those specialty services distributed on an analog basis, and to those Category 1 specialty services that were approved in 2000.

Under its policy, and with an exception for Category 2 services, the Commission generally requires that specialty services be complementary in their programming, and not compete head-to-head with one another in terms of programming. While Category 2 services may be competitive with each other, the Commission does not generally license a Category 2 service that would be directly competitive with an existing analog pay or specialty service, or with a Category 1 digital specialty service.

As noted above, the origins of this policy stem from 1984, with the first licensing decision of a Canadian specialty service. The Commission approved the application by CHUM to operate a music oriented specialty service, and denied a similar application by Rogers Broadcasting on the grounds that the size of the Canadian market would not support more than one such service in that genre.¹⁷⁴ While the Commission may not have realized at the time that it was articulating a policy that would come to define, in many respects, its future approach to licensing all Canadian specialty services, the reason given for licensing only one music service did become the rationale for licensing only one service per genre in each of the specialty service licensing rounds to follow.

Over the years, the rationale for the genre protection policy has been three-fold. First, it is designed to encourage diversity in Canadian broadcasting by ensuring that new applicants offer Canadians distinct types of programming services. Second, it is intended to help ensure that those specialty undertakings licensed are able to satisfy their regulatory obligations. Third, it recognizes that in a country the size of Canada, the market may not be able to support the licensing of more than one service per genre and still ensure that the services are able to make a maximum contribution to the exhibition and production of Canadian programming.

With respect to the application of the genre protection policy in the context of non-Canadian satellite services, the Commission had fully articulated this policy in 1984. As noted earlier, the Commission also established linkage rules for cable which applied to the distribution of approved non-Canadian services. The Commission concluded that it would not be in the interest of the Canadian broadcasting system to allow the carriage of non-Canadian satellite services that would be "either totally or partially competitive" with Canadian discretionary services.¹⁷⁵

This policy of restricting access to the Canadian market by those non-Canadian services that are totally or partially competitive with a Canadian specialty service has remained the key feature of the Commission's approach to authorizing foreign services for distribution in Canada over the past twenty-three years.

It is important to note, however, that while both genre protection policies have been applied in Canada since the inception of specialty service television, those policies have evolved considerably over time as the number of genres recognized by the Commission have been expanded and fragmented, to the point where it is sometimes difficult to denote when one programming genre begins and another ends. The fragmentation of the genres has allowed for the licensing of multiple Canadian specialty services that compete to acquire the same programming and to attract the same audiences. In the area of sports programming for example, the Commission has licensed both TSN and Sportsnet, with TSN to operate a national sports service, and Sportsnet a regional sports service. However, when the programming schedules for both are compared, it is readily apparent that the nature of programs aired on the two services that are licensed to operate in distinct genres are virtually the same.

While a similar fragmentation of genres has been experienced with respect to the authorization of non-Canadian satellite services, the Commission appears to have been more consistent in its approach. There is no doubt that the Commission has over the past decade adopted a much more flexible approach in determining whether a particular non-Canadian satellite service would be either totally or partially competitive with an existing Canadian specialty service. The Commission has authorized in recent years a range of services to be distributed in Canada - including Bloomberg Television, RAI, RTPi (and a significant number of other general interest third language ethnic services) - that had either been denied access to Canada in the past - or most certainly would have being denied prior to 1997 on the basis that they would have been deemed to be at least "partially" competitive with an existing Canadian service. In this respect, today the Commission appears to apply its policy relating to genre protection and competitiveness only to those non-Canadian satellite services that would be deemed to be "totally" competitive with an existing Canadian service.

Given that the number of genres recognized by the Commission in recent years has expanded to the point where there is little or no distinction between many of them, and in light of the fact that the Canadian market has shown that it is now capable of supporting, in some cases, multiple services operating in these overlapping genres, we believe it is time for the Commission to revisit aspects of its genre protection policy.

The current policy that generally requires that specialty services not compete head-to-head with one another should be revised in a manner that takes into account the reality that exists in the Canadian broadcasting system and the fictional notion of a multiplicity of genres. Specialty services that make significant commitments to Canadian content, Canadian programming expenditures, public safety, or perform some other public interest function should be rewarded with preferred access and carriage rights in the manner suggested in Chapters 6 and 7. New Canadian specialty services that do not make the same commitments should be left to negotiate carriage rights - but should be allowed to enter the market on an open basis (subject only to genre protection of services designated by the Commission on an exceptional basis).

With respect to the genre protection policy that prevents the authorization of non-Canadian services for distribution in Canada where they would be either totally or partially competitive with an existing specialty service, we believe that this policy (with small modifications) continues to be appropriate as a means to ensure that the objectives of the Act are achieved. However, if the Commission takes this approach, it should not resort to splitting genres as the means of letting new services into the system. It should enforce its policy, and remove non-Canadian services from the Lists that have "morphed" their services into a genre already occupied by a Canadian service.

Recommendation 10(d)-3

Wholesale Rates

Prior to 1987, the Commission did not regulate either the wholesale or retail rates of specialty services. In 1987, in response to rising concerns relating to fair and equitable access, the Commission agreed to regulate wholesale rates for specialty services distributed on the basic service. The Commission therefore established a regime for wholesale rate regulation to ensure that specialty services would achieve revenues necessary to meet their regulatory obligations, while at the same time taking account of concerns about subscriber rate increases for cable service.

The approach adopted in 1987 was uniformly applied to the specialty service industry in both the 1994 and 1996 rounds of licensing, and continues to be applied today to those specialty services that were licensed for analog distribution. (This is so notwithstanding that the basic subscriber fees charged by the BDUs have ceased to be regulated by the Commission). Given that Category 1 and Category 2 services were not permitted to be offered as part of the basic service, the Commission did not establish wholesale rates for these services.

As noted, the original rationale underlying the Commission's 1987 decision to regulate basic wholesale rates was to ensure fair and equitable access for specialty services to cable systems, which would, in turn, allow each service to achieve the revenues needed to fulfill its regulatory and licensing obligations. More recently, regulated wholesale rates have been used for a slightly different purpose as well. They have provided BDUs and specialty services with a starting point for negotiations regarding distribution on discretionary tiers, and have also been used by the Commission in this manner when resolving carriage disputes between BDUs and specialty services.

More recently, the Commission acknowledged in its Digital Migration Framework that regulated wholesale rates could serve as a useful point of reference when negotiating distribution on a discretionary digital tier.¹⁷⁶ The Commission addressed in that Public Notice the issue of whether, in an environment where basic cable rates are no longer regulated, it would be appropriate for wholesale rates for the digital distribution of analog pay and specialty services to be set by negotiations between the parties, rather than by regulatory fiat. The Commission concluded that it would be appropriate to cease regulating wholesale rates in a digital distribution environment:

While regulation of wholesale rates is consistent with the policy objective in paragraph 3(1)(t) for distribution undertakings "to provide reasonable terms for the carriage" of programming services, the Commission needs to assess whether the BDU market is competitive enough to replace regulation as the means of establishing wholesale fees with respect to both analog and digital distribution.

While it is true that the regulated wholesale rate has been used as the starting point for negotiations between specialty services and BDUs, it is also true that the Commission has not, except in a few specific instances, reviewed whether rates that were originally established continue to be appropriate in an analog or digital distribution environment.¹⁷⁸ Some of the rates were established in 1987, in an environment that was quite different from what exists today. Seldom has the question ever been asked - is the basic wholesale rate for a given specialty service commensurate with the nature of the service and its value to consumers? If the Commission is not willing to do that, then perhaps it is time for the Commission to eliminate wholesale rate regulation for analog distribution, as it has done with respect to the Category 1 and 2 digital specialty services, and as it proposed to implement in Broadcasting Public Notice CRTC 2006-23, with respect to the digital distribution of the analog specialty services. It could then apply section 9 of the BDU Regulations on a complaint basis if parties were unable to negotiate commercial rates.

Since 1984, the Commission has placed restrictions on the nature and amount of advertising that specialty services may contain. Each of the licenses of the original four specialty services (MuchMusic, TSN, Telelatino and Chinavision) were subject to "expectations" that prohibited the services from distributing local advertising, and which provided that no more tha