This study was presented to the CRTC after the public hearing to review the regulatory frameworks for broadcasting distribution undertakings and discretionary services. As such, it could not be used by staff or commissioners during the decision-making process. This study is made available to the public and commissioners as of  23 January 2009.

Study of Canadian OTA Local News Economic and Audience Trends

FINAL



Nordicity Group Ltd.



Submitted to:

Canadian Radio-television and Telecommunications Commission (CRTC)

30 May 2008

Table of Contents:

Executive Summary and Conclusions

1 Context of this Study

2 Background

3 Description of Methodology

    Overall Approach

    Limitations and Challenges of this Study

4 Audience Trend Analysis

    Advertising Rates Analysis

5 Revenue Trend Analysis

    Economics of Local News for Broadcasters

6 Expenditure & Profitability Trend Analysis

7 Viability

8 Potential Options for the CRTC Regarding Local News

Executive Summary and Conclusions

In the context of the 1999 Policy Framework for Canadian Television, the Commission released OTA broadcasters from regulatory obligations to produce a specific number of hours of local news based on the assumption that there would be a strong, sustained business model for conventional OTA broadcasters to produce local news.

This assumption may no longer be valid. In recent years, stagnant advertising rates and declining audiences to local newscasts - juxtaposed with rising expenditures - have resulted in reduced profitability of local news. As this trend deepened, the potential broadcaster response has been to slash local news budgets by reducing staff, programming, and other expenses. The overall result of this trend has been to seriously impact the availability and comprehensiveness of local news programming in Canada.

Announcements of layoffs in local news staff and decrease in the ratio of local news expenditures to total programming expenditures between 2005 and 2007[1] are good indicators that broadcasters have tried to stabilize the viability of local news programming. However, these measures appear to have had little impact on the overall viability of news programming; overall, Canadian local news expenditures are estimated to significantly outpace revenues during the 2007-2008 broadcast year.

Figure 1: Estimated profitability of local news by market, 2007-2008 broadcast year[2]

However, a deeper analysis of financial results shows that local news continues to be viable in certain broadcast groups and even entire markets. In eight of Canada's nine major television markets one or more broadcasters were projected to turn a profit on local news in 2007-08. However, in six of those eight markets profitability will be limited to the one dominant local news broadcaster. In four of the markets, the single profitable broadcaster also had the highest local news expenditures.

The medium and long term implications of these trends appear evident.

• Audiences for local news will continue to fragment and decline as younger target demographics access the bulk of their news from the web and specialty services and/or demonstrate less interest in news from all sources than similar demographics in previous generations.
• And in any given market, where typically only the dominant broadcaster's local news is profitable, the secondary news providers - no longer seeing an opportunity to turn a profit on local news - will be driven by the motives of simply meeting their local programming requirements and reducing local news expenditures as much as possible.

One possibility (pessimistic) would have the secondary players adopt a US-style approach to 'local' news programs wherein, the news 'desk' for a number of stations is run out of a centralized location and only a news gathering vehicle is used to provide 'topos' (e.g. results of the local football team) but little other coverage of events in the local market. Such a reaction would leave only one comprehensive, high-budget, private local news option for viewers, bringing into question the diversity of local news choices and comprehensiveness of OTA local news programming that have traditionally been available to Canadians.

However, the future perspective contains a range of possibilities, not just the pessimistic one depicted above. Broadcasters still recognize news as their best option to engage the local community, and as the most efficient vehicle among local programming options to generate local audiences, therefore ensuring some amount of local news diversity in each market.

1 Context of this Study

The CRTC engaged Nordicity Group Limited to study economic and audience trends of over-the-air private broadcasters' local news programming.

2 Background

Local news programs[3] have long been considered by broadcasters, viewers and the Regulator alike to be a critical component of over the air (OTA) broadcasters' schedules in major Canadian television markets.

In the traditional broadcast economics model, there have been strong commercial and competitive incentives for OTA broadcasters to provide local news. In addition to generating loyal audiences and corresponding advertising revenues in their own time slots, local news programming also generates carry-over audiences for subsequent programming - especially into the evening period. In addition, broadcasters have traditionally used their remote news gathering units and personalities to establish their credibility and connection with local audiences.

It was in the context of this strong business model for local news that the Commission decided in its 1999 Policy to lift the requirements for the provision of local news by OTA broadcasters.[4]

In recent years, however, some OTA networks have cut back in the number and / or cost of their local newscasts.

In addition to the direct impact on viewers in the local markets, cutbacks diminish the diversity of local voices in broadcasting and beyond that, impact on diversity across all media.

In light of these developments, the CRTC engaged the consultancy in order to better understand the economics of local news of OTA networks.

3 Description of Methodology

Overall Approach

The profitability of local news by OTA broadcaster and by major market was estimated by calculating revenues based on data on rates[5] (CPRs) and audience data[6] and matching these revenues with corresponding expenditures as reported by the OTA broadcasters.

Three local news timeslots (noon, early evening and late evening) with local news programming expenditures[7] were analyzed on a market by market basis: Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Ottawa-Gatineau, Montreal, Quebec and Halifax, over the four-year period: from the 2004-05 to the 2007-08[8] broadcast years. In the cases of the Quebec and Montreal markets, data were provided for French-language local news programming only. The following broadcasters in English and French language markets were studied:

• CFCN, CICT and CKAL Calgary;
• CITV, CFRN and CKEM Edmonton;
• CIHF and CJCH Halifax;
• CFJP and CFTM Montreal;
• CJOH and CHRO Ottawa;
• CFAP and CFCM Quebec City;
• CKVR, CITY, CHCH, CFTO and CIII Toronto;
• CHAN, CIVT, CHEK and CIVI Vancouver; and,
• CKND, CKY and CHMI in Winnipeg.

Advertising rate calculations were based on the typical sale of 12 minutes of advertising per hour in local news programming.[9] The costs per 30 second spot were lowered by 15% to adjust for standard discounting by advertising agencies for long term customers, and an additional 15% to account for agency commissions resulting in an overall 30% discount. Net revenues were further discounted based on a typical 70% sell out rate.[10]

Audience trends were sourced from NMR and BBM according to the various markets.[11] Calculations were based on the difference in ratings between the 2004-05 and 2006-07 broadcast years for local news programs that spanned all three seasons.

Limitations and Challenges of this Study

Advertising rates data were only available for the current broadcast year (Fall 2007), and therefore revenues for previous years were derived by accounting for an average 2% year over year inflation rate and projecting back over the 2004/05-2006/07 study period.[12]

Audience data over the three-year period were not uniform in many cases primarily due to program re-branding,[13] consolidation of station ownership and changes in the length and/or timeslot of local newscasts from one season to the next. In order to make audience data comparable over the study period, ratings from re-branded or re-slotted local news programming were combined where appropriate.

In the interest of consistency over the entire study period, the former CHUM-owned[14] stations were grouped together where broadcast groups were compared.

Audience ratings data were not available for all of the networks where expenditure and other advertising revenue data were available. As a result, local news profits were not calculated for CFCN Lethbridge, CITV Red Deer, ASN Halifax, CIHF Saint John, and CKVU Vancouver.

Expenditure data - as reported by the OTA broadcasters, were agglomerated for all local newscasts by station and therefore profitability could not be calculated on a timeslot basis.

In the case of TVA, its local news expenditures in the Montreal market were calculated based on advice from the broadcaster that the same ratio of local news to all news programming hours (10%) could be applied to derive local news expenditures from all news expenditures.[15] [16] Therefore, corresponding revenue was calculated by applying the average of all CPRs provided for TVA in Montreal to 10% of TVA's news programming (2 hours/week).

4 Audience Trend Analysis

In light of the changeover in audience measurement systems and corresponding methodological issues in comparing audience ratings data pre and post the 2004-05 broadcast year,[17]our analysis of local new audience trends was limited to a three-year period: 2004/05 - 2006/07 (broadcast year). During the study period, the trend in local news viewership is clear, both overall and for, all possible perspectives - by region, broadcast group, French and English markets or time of day - local news viewership experienced virtually no growth, and in almost all cases it has seen a reduction, albeit modest in both key audience demographics - 18 plus and 25-54.

Although overall local news ratings for Canada dropped by only 0.2 points in the 18+ demographic and by 0.3 points in the 25-54 demo over the three-year period, this may represent the beginning of a more significant downward trend. National specialty channels for News, Sports and Weather, as well as the Internet, increasingly provide alternative and timely news choices for the Canadian consumer and reduce the necessity of local news viewing. And as the Internet generation continues to represent a larger portion of the key audience demographic, TV viewing overall, including viewing to local news, is likely to decline steadily. Indeed, this decline has already begun.

Viewing to private conventional television in the demographic English-language viewers, 18-34, decreased by an average of 2.4 ratings points per quarter hour between 1998 and 2007.[18] This compares to a decrease of only 0.2 points for English Canadians aged 35 and over during that same time. Similarly, in French Canada the 18-34 demo decreased viewing by 2.4 points over the same time period, compared to a decrease of only 1.3 points for French Canadians above the age of 34.

Much of this audience has shifted to the Internet. Online Canadians aged 18-34 increased their at-home Internet use by an average of 176 minutes per month between March 2007 and February 2008, when it reached 2480 minutes per month, or 83 minutes per day[19]. But while 5 million of the 6.2 million online Canadians in this demographic viewed news/information websites[20] in at home in February 2008, they were only at these sites for an average of 60 minutes a month. This suggests that although new platforms are involved in the reduction of television, and local news, viewing, they are largely used for news and information updates rather than viewing of news programs or sourcing of substantive news content, by Canadians aged 18-34. In short, the 18-34 demographic seems simply to have reduced news consumption habits.

The ratings decline among the 18-34 demographic is already widely recognized by advertisers. So although local news ratings are holding among the older demographics, there is large duplication of the news audience from day to day and station to station, therefore advertisers believe only two or three commercials per week are necessary to reach the older audience demographics effectively. In the table below, we summarize the changes in viewership to local news for the younger and older demographics, by news slot, over the study period.

Figure 2

While the stagnation of local news audiences has been fairly consistent across all markets, the French-language networks in Quebec City and Montreal, as well as the English language Halifax market, have experienced a slightly larger decline in viewership. On the other hand, Vancouver and Ottawa-Gatineau were the only two regions where local news ratings increased during the three year period. In the table below, we summarize the changes in viewership to local news for the younger and older demographics, by major market, over the study period.

Figure 3

Similar to the market analysis, local news viewership by network shows the largest decline being experienced by the French-language network TVA. While it was beyond the scope of this analysis to draw definitive conclusions for declining audiences on a market by market basis, it should be noted that SRC has historically performed much better than CBC in local news markets - typically dominant or a close second among broadcasters. Thus, declines in local news audiences in French language markets might be due to competitive factors as much as to viewing preferences of younger demographics. In the table below, we summarize the changes in viewership to local news for the younger and older demographics, by broadcast group, over the study period.

Figure 4

The positive news for broadcasters is that the overall ratings decline for local news has been modest and in some markets negligible. As well, while the third broadcast group in any given market tends to be the furthest from turning a profit on local news broadcasts, it is not losing viewers any quicker than other broadcasters.

Advertising Rates Analysis

Local news is predominantly a local times sale and local advertisers continue to be significant buyers of local news. Advertising rates have increased approximately 2% per annum thus no real increase when inflation is taken into account.

Local news is almost always available for purchase; even in high demand markets such as Calgary, it is rare to find news in a sold out position. As noted earlier, there is large duplication of the news audience from day to day and station to station therefore only two or three commercials per week are necessary for advertisers to reach the audience effectively.

Being the most-watched local news provider in a given market allows the dominant local news broadcaster in each market to charge disproportionately high advertising rates. For instance, in the Edmonton market the top-rated 6 P.M. local newscast draws about 30% more viewers than its next closest competitor, yet charges almost 60% more for 30 seconds of ad time than that competitor does[21]. As a result of these higher dollar charges, the sell-out rate of local news advertising remains at approximately the same as for the first-, second-, third- and fourth-most-watched local news providers.

Considering that both broadcasters enjoy the same advertising sell-out rate for local news as well as similar local news expenditures, the prospect for the second-rated newscaster to narrow the profitability gap between itself and the local news leader becomes more daunting if ratings increases aren't accompanied by incrementally similar increases in advertising rates. While this trend is not uniform across the country, it is a reality for the second-rated evening newscast in Calgary, Vancouver, Montreal and Quebec, in addition to Edmonton.

5 Revenue Trend Analysis

Based on the trends identified above, of negligible audience growth and stagnant advertising rates, local news revenues have essentially stalled. Once adjusted for inflation, real dollar value of local news revenues has not grown. Thus, local news is no longer attractive as a revenue generator for private broadcasters.

Local news revenues, however, continue to dominate overall local times sales as a whole as shown in the figure below. In 2006-07, the total local news revenue for the measured markets was 89% of the total local time sales. Feedback from media buyers would indicate that local news is still the best investment amongst local programming choices as audiences to other programming are too small to constitute an effective media purchase.

Figure 5: Calculated Local News Revenue and Local Time Sales for all Measured Markets

It should be noted that OTA industry figures are inflated by the Toronto market, where estimated local news revenues are almost double the revenue from local times sales because CanWest's CIII-TV in Paris Ontario and Rogers' Citytv Toronto do not report local time sales.

Figure 6: Calculated Local News Revenue and Total Ad revenue for all measured markets

When compared against the total of local and national time sales, local news revenue represents only 14% of the total as shown in the figure above. Again, this ratio is affected (negatively) by some of the broadcasters in the Toronto market being unable to sell local advertising. The contribution of local news to broadcasters' overall revenue seems even less significant when considered that spending on local news accounts for 17% of broadcasters' total programming expenditures.

Economics of Local News for Broadcasters

In evaluating revenue trends and the overall economics of local news, we considered issues such as

• Rate premiums for dominant leading newscasts;
• Revenues for local news in individual markets versus corporate revenues for the local news programming (sub)category;
• Value of local news to the networks from carry-over of audience and advertising revenues to subsequent programs and branding;

Given the low percentage of revenue generated from local news and the lack of viability of local news by the non-leading broadcasters, it would appear likely that broadcasters would be willing to forego advertising revenues generated by local newscasts in exchange for dropping their local programming requirements. In the context of the application and hearing of HDTV Networks Inc., which was seeking licence for a national OTA broadcast network without the requirement for local programming or local news, the CAB referred to the "significant and costly obligations to provide local news and programming that are typically the regulatory quid pro quo for holding an OTA licence in local markets."[22]

In the context that broadcasters are still required to meet their local programming obligations, some have thus undertaken steps to reduce these costs. For example, on the day CTV announced it was purchasing CHUM Ltd., CHUM laid off 280 employees and cancelled four local Citytv newscasts in Winnipeg, Calgary, Edmonton and Vancouver[23].

Technology has provided broadcasters with the opportunity to reduce operating costs through the use of consolidated master controls, digital editing centres and the use of virtual news sets, and correspondingly, to reduce broadcast newsroom staffing levels. CanWest Broadcasting announced such steps in October 2007 when it centralized its news operations to Vancouver, Edmonton, Calgary and Toronto, resulting in an overall staff reduction of an estimated 150 positions[24]. Continued lacklustre financial performance of the conventional television sector and the local news programming in particular, is likely to cause increased rationalization in newsrooms via technology.

In contrast to the situation of private broadcasters, CBC announced in April 2008, that it was increasing its resources to covering local and national news in Alberta by adding 25 new assignments for television journalists in Calgary and Edmonton[25]. While this represents a new departure by the public broadcaster after many years of cutbacks in local news programming across the country, this initiative could further reduce ratings of private broadcasters' local newscasts, directly impacting their profitability. As noted earlier, SRC local news already ranks first or second in most local markets in Quebec and is thus already a formidable competitor to the private OTAs.

The value of local news programming to private OTAs extends beyond pure economics to include the carryover of audiences from the local newscast into the national news and other early evening programming[26]. Local news also acts as a touchstone for broadcasters to connect directly with the community and build their brand by covering local events and appearances by their news personalities[27].

Local news continues to be the most cost effective vehicle - among local program choices, for a television broadcaster to meet CRTC license commitments. Local news is also a cost effective way to brand the station as 'local' within the community and provide a critical differentiator in an increasingly fragmented broadcast universe. However, business and profit imperatives will likely demand lower costs in future.

6 Expenditure & Profitability Trend Analysis

As local news revenue has grown steady with the rate of inflation, fluctuations in local news profitability are guided primarily by expenditure trends. Over the past few years all broadcasters to some extent have explored technical solutions such as consolidating master controls, virtual news sets, and other initiatives to control or cut costs. In spite of this, no relevant turnaround in the profitability of local news has been experienced. And as estimates place expenditure increases for 2008 at an overall average of 3.95%, profitability will continue to trend downwards.

Figure 7: Profitability of local news by broadcast group[28] ($M)

From the chart above its clear the losses resulting from the production of local news are not uniform across all broadcast groups with CTV and CanWest being at opposite ends of the financial spectrum:

• CTV, by virtue of having the most profitable local newscast in five of the seven measured English-language markets, turns a significant profit on local news.
• CanWest records substantial losses in its local news operations, by having the second, and in some instances first, most expensive local newscasts in all the market it serves, yet trails CTV in local news ratings (except in Vancouver).

One common trend across all broadcast groups is that profitability of local news is trending downwards for the current broadcast year. It should again be noted that local news expenditure estimates for 2007-08 were provided by the broadcasters, and none estimated a decrease. Looking at the three previous years shows that local news expenditure reductions were more significant than the 2% growth in local news revenues. In the case of CanWest, this produced a modest real increase in profitability.

However, the fact that profitability of local news is virtually stagnant or decreasing for all broadcast groups in the current year speaks directly to the overall viability of local news and the impact of the shrinking television audience.

7 Viability

Overall, a number of factors have impacted on the viability of local news including stagnating audiences and revenues, higher expenditures, disproportionately high advertising rates for market leaders, and increased competition from the public broadcaster limit the financial viability of local news to only one broadcaster in most markets.

In contrast to the market conditions in 1999, when local news most likely had a sustainable business model, most broadcasters now see the delivery of local news as an undue financial burden. For example, even in rich markets such as Vancouver and Toronto markets, the broadcaster with the second-highest and highest local news expenditures, actually loses the most on local news.

However, the overall viability of local news has not vanished completely. From a purely financial perspective, CTV turns a healthy overall profit on local news. The divestiture of the former CHUM assets to CTVglobemedia and Rogers Communications could also breathe new life into these stations' local newscasts. As well, 10 of the 26 individual stations studied profit from local news.

Local news viability extends beyond pure economic factors, including the carryover of audiences from the local newscast into the national news and other early-evening programming. Local news also acts as touchstone for broadcasters to connect directly with the community and build their brand by covering local events with appearances by their news personalities. As well, local news still represents the most effective production vehicle for a broadcaster to meet its local programming requirements.

These secondary objectives, however, could be met to varying degrees on a reduced local news budget. But the consequences of all but one broadcaster in each market focusing exclusively on profitability would negatively impact the diversity of news programming sources and comprehensiveness of coverage of the local community which have traditionally been offered to Canadians.

In its submission on the CRTC's Diversity of Voices proceeding, the Canadian Media Guild noted, "Companies have found they can make more money by being adequate, and limiting investment in newsgathering, than they can by being excellent, according to veteran Vancouver broadcaster George Orr….Media outlets then focus on covering the 'hand-out' stories of the day, instead of delving into issues that haven't been packaged in a media release."[30]

So while the viability of local news exists on various levels, the interpretation of viable local news programming may differ from one broadcaster to the next, as well as in the eyes of the commission.

8 Potential Options for the CRTC Regarding Local News

As a detailed analysis of go forward strategies was beyond the scope of this study, we provide a brief synopsis of potential options for the Commission.

1) Re-mandate a Minimum Number of Hours of Local News Programming

While this option would stem further cut backs in local news hours of programming (tonnage) and staffing, the economic imperative of broadcasters would likely lead to less comprehensive coverage, use of topos and repeat programming i.e. as a stand alone measure, it would do little to ensure any amount of quality in the programming.

In terms of best regulatory practice, we note regulators have generally not tried to mandate local news programming hours.[31]

2) Provide Additional Financial Resources to the OTAs such as requiring a portion of carriage fees to be allocated to the production of local news.

3) Monitoring

While it may not yet be time for the CRTC to reinstitute the provision for local news into the OTA policy framework, the status of local news, especially from the third and fourth broadcasters in a given market, should be monitored on a yearly basis. Also, given the scope of this study was limited to local news ratings over a three-year period and online use data were limited to 12 months, additional monitoring is called for.