Whoa there: CRTC Proposes Forcing Telcos to Fund Broadcasting

The CRTC has released a report regarding the future of programming distribution in Canada. The report proposes:

1. Dispensing with broadcasting distribution licenses in favor of “voluntary agreements”
2. Requiring telecommunications service providers to contribute to Canadian media production

PIAC is concerned about these proposals. Moving from licensing to voluntary agreements is not a bad idea in principle, but we feel it will only work if the CRTC is given a strengthened bargaining position beyond existing incentives it says it will use to entice programming distributors to help fund Canadian content. More crucially, requiring telecommunications service providers to contribute to Canadian production is fundamentally unfair because it forces telecom (Internet, wireless and home phone) users to subsidize programming they may not be able to afford. PIAC argued that if a contribution requirement is imposed on telecommunications, it should not apply to basic levels of broadband service which do not support video streaming. Rather, it should apply to revenues in excess of the cost of such a basic level of service (~$55/month). Although we oppose imposing a contribution requirement on telecommunications services, we are glad to see the Commission support this recommendation.

PIAC is, however, disappointed that the CRTC’s report remains focused on supporting Canadian content production rather than bringing Canadian perspectives to broad audiences. There is little mention in the report of the great contributions of Canada’s public broadcasters, CBC/Radio-Canada and the National Film Board. Nor is there any mention of the affordability of broadcasting in Canada, a crucial factor driving consumers to online services and limiting the reach of Canadian content.

“Voluntary Agreements” – Talk loudly and carry no stick?

Although we are not quite sure of what they are, legally, the proposal to rely on “voluntary agreements” in lieu of licensing is not entirely without merit, at least as a policy idea. Licensing is a significant barrier to entry in broadcasting markets, and has been used as a control point to ensure Canadian content funding and exhibition for many years; however, the time appears to have long since come that those markets (such as paid television) would benefit from greater competition. Voluntary agreements would also grant the CRTC, as regulator, greater flexibility to design obligations like exhibition requirements which are meaningful in the context of new service models involving personalized recommendations. The problem with voluntary agreements is that regulatory obligations are, generally, a net burden on broadcasters and a control point for the CRTC. Access to Canadian consumers is a bargaining chip in the game of regulatory poker that the federal government, largely through the CRTC, plays with private programmers, broadcasters and programming distributors. Without a sufficient incentive to offer, many broadcasting distributors may simply choose to give up those incentives and not to contribute to the promotion of Canadian content.

The proposal regarding voluntary agreements also makes a problematic assumption that production and distribution are integrated. The key incentive the Commission is able to offer is production tax credits. The Canadian Film or Video Production Tax Credit gives a tax credit to qualified corporations producing Canadian film or video productions. The program gives a refundable tax credit of 25% of qualified labour expenditures by a qualified corporation for the production of a Canadian film or video production. However, broadcasting distributors which do not do in-house production, like Telus, YouTube or Spotify, do not have production labour costs and therefore would not benefit from production tax credits. Broadcasting distributors which do have in-house production, like Bell or Netflix, would presumably have to produce their content in-house in order to take advantage of the production tax credit. This may negatively impact independent producers, which the Commission has traditionally supported.

Some commitments should not be voluntary. PIAC is particularly concerned that “protecting the privacy of Canadians and their data” is listed as a commitment that might be made in exchange for incentives. The protection of the privacy of Canadians is a legal obligation which is not to be traded for an extra half hour a week of a Canadian variety show.

If “voluntary agreements” are used as a means of regulating broadcasters, they should be used to advance the interests of consumers as well as producers. Commitments should include, for example, offering the broadcasting service: at lower prices; or at a discounted price to low-income Canadians; or offering content free of charge some time after its initial release. There is no point funding Canadian content if it is too expensive to be widely consumed.

If voluntary agreements are to be adopted in lieu of licensing, the Broadcasting Act must substantially strengthen, not weaken, the bargaining position of the regulator. PIAC suggests that a substantial tax – perhaps 20% of revenues – could apply to broadcasters unless they have negotiated out of that tax through a “voluntary agreement”.

Taxing Telecommunications – Robbing Peter to pay Paul (twice)

In contrast with voluntary agreements, which may be a good idea (or not) implemented in a bad way, requiring telecommunications services to contribute to the production of Canadian content is a bad idea implemented in a good (or at least equitable-­seeming) way.

As PIAC’s stated in its second intervention to the CRTC’s inquiry that led to this report:

91. Proposals to implement an Internet tax may also impact affordability.[1] It would be extremely unfair and counterproductive to low-income consumers if taxes on Internet services priced this group of Canadians out of the Internet market or forced them to sacrifice other necessaries like food in order to afford such service, particularly if funding continues to subsidize the production of content which is distributed on a monopolistic basis.

It is unfair that Canadian content, whose creation was supported by public funding, tax credits, and contribution requirements, is fully owned by private actors who may price the content such that few consumers can afford to access it. This distribution of content on a monopolistic basis (the rights-holder sets a price to maximize profit) is unfair and inefficient. This inequity becomes particularly galling when telecommunications users, who may not be able to afford access to this publicly supported content, are forced to contribute to production costs.

The Commission dismissed PIAC’s concerns surrounding affordability, arguing that their proposal is intended to be revenue-neutral such that any increase in telecommunications prices due to the contribution requirement is offset by reduced contributions from broadcasting distribution undertakings. This would only be true if all customers were both broadband and broadcasting distribution undertaking subscribers. For persons who are only telecommunications users, they will be subject to a contribution requirement where they previously were not.

The Commission also assumes broadcasting distribution undertaking (that is, your TV provider) prices would go down on the initiative of these companies – a thing we find extremely unlikely without a corresponding regulatory requirement to lower prices. In telecommunications, prices are constrained to some extent by competition from resellers supported by the Commission’s wholesale access policies. In broadcasting, which lacks such wholesale access pricing rules, broadcasters are just setting prices to maximize profit, so prices are likely affected to a much smaller extent by contribution requirements. As a result, contribution requirements are almost certain to be passed onto consumers in telecommunications to a greater extent than they are in broadcasting.

Frankly, it is rather shocking that the Commission would deem a 1% levy on telecommunications service provider revenues acceptable to fund the production of content distributed on a monopolistic basis when it was unwilling to impose a similar contribution requirement to support basic broadband affordability as PIAC proposed in the proceeding leading to Telecom Regulatory Policy CRTC 2016-496. And the bottom line for most consumers will simply be that they are now paying for CanCon from two pockets, their TV service and now their Internet service too.

However, one silver lining is that the design of the particular proposal put forward by the Commission appears to be based on PIAC’s proposal for how such a tax, if absolutely necessary, should be implemented:

For instance, contributions from these connectivity services could be based on a fixed percentage of the revenues of BDU and radio services, as well as appropriate telecommunications services earning more than a minimum exempted level of revenues.

In the submissions identified above, PIAC continued:

91… If an Internet tax is imposed, the tax should be based on a percentage of revenues that exceed the cost of a basic Internet service plan, in order to avoid pricing consumers out of the market.

92. The lowest speed tier sufficient to consume online video is 10-15 Mbps, which is typically associated with a usage allowance of 124 GB,[2] and generates average revenues of $57.43 per month per user.[3] Comparatively, speed tiers from 4-9 Mbps are typically associated with usage allowances of 64 GB[4] and generate average revenues of $53.00 per month per user.[5] If an Internet tax is administered, PIAC submits that the tax should apply as a percentage of average revenue per residential Internet service subscriber in excess of $55 to mitigate its impacts on low-income consumers and consumers without the bandwidth or usage allowance to actually watch videos online.

PIAC is glad to see the Commission appears to have adopted our proposed focus for telecommunications contributions on premium broadband subscriptions over basic broadband subscriptions, so as to not overburden lower-income Canadians trying to be frugal with their internet expenses with new costs.

The Commission’s Errors of Omission

PIAC is disappointed that the CRTC overlooked the important role of public broadcasters and the affordability of content. As we stated in our submissions:

14. Lowering the costs associated with Canadian programming increases the demand for that programming and increases their consumer surplus from watching that programming. By freely distributing its library across multiple platforms and by creating short form content suitable to online platforms, the National Film Broad has dramatically increased its viewership, from 10.6 million total views in 2006-2007, to 53.9 million views across all platforms in 2016-17.[6] Over the past three years, YouTube has seen a 400% increase in watch time for Canadian broadcaster content, with 90% of that viewership coming from outside of Canada.[7]

…

17. The high premium that Canadians place on distinctively Canadian content is reflected in strong consumer support for CBC/Radio-Canada and the National Film Board, which primarily create and distribute distinctively Canadian content. When asked what they believe will be the most effective tools for the creation and discovery of Canadian content in a digital world, most Canadians (54.7%) cited public broadcasters and content creators, with funding agencies coming in second at 45.3%.[8]

 

PIAC proposed increased support for Canada’s public broadcasters Canada’s public broadcasters produce high-quality, distinctively Canadian content, and much of it is distributed for free.

PIAC also proposed shifting the focus of public funding and mandated contributions. Currently, funding and contributions are used to support the creation of Canadian content which is then fully owned by the creators, who may demand a price for access which is unaffordable to many Canadians. This is unfair and inefficient. PIAC proposed shifting the focus of public funding and mandated contributions to acquiring the rights to compelling Canadian programming, so that it can be distributed for free across all platforms. To help stretch that funding to make more programming available, PIAC proposed that funding and mandated contributions should be used to acquire “second window rights” so that the creator can recover some or all of their costs from the initial release and those customers able to pay for the latest content.

We believe that these measures would help bring Canadian perspectives to broad audience by generating affordable content. We are disappointed these issues were overlooked by the CRTC.

We were however pleased by the Commission’s high quality analysis of broadcasting markets, with its detailed quantitative analysis of trends and interrelations. We hope to see such analysis in future CRTC decisions and hope that this analysis will ground evidence-based policy discussions around this report and any subsequent consultation process. The future of Canadian broadcasting is important enough to merit such rigorous analysis.

[1] See for example the proposal of the Community Media Advocacy Centre at para 4.

[2] CRTC, Communications Monitoring Report (2017) at Table 5.3.9.

[3] CRTC, Communications Monitoring Report (2017) at Table 5.3.8.

[4] CRTC, Communications Monitoring Report (2017) at Table 5.3.9.

[5] CRTC, Communications Monitoring Report (2017) at Table 5.3.8.

[6] National Film Board of Canada, “2016-2017 Departmental Results Report” (2017), online: http://onf-nfb.gc.ca/wp-content/uploads/2018/01/2016-17_DRR_NFB_TBS_Dec1.pdf> at 24; “Section II – Analysis of Program Activities by Strategic Outcome” (1 November 2007), online: <https://www.tbs-sct.gc.ca/dpr-rmr/2006-2007/inst/nfb/nfb02-eng.asp>.

[7] The Hamilton Spectator, “YouTube Channel Encore+ Resurrects Canadian TV Shows, Films” (9 November 2017), online: <https://www.thespec.com/whatson-story/7912952-youtube-channel-encore-resurrects-canadian-tv-shows-films/>.

[8] Government of Canada, “Canadian Content Consultations: Public Results” (26 August 2016), online <https://www.canadiancontentconsultations.ca/public-results> at “Looking ahead, what do you believe will be the most effective tools for ensuring the creation and discovery of great Canadian content in a digital world?”

Lexus or Walk: Think tank fails to justify telecom pricing

Every year, the Montreal Economic Institute (MEI) publishes a report seeking to prove that Canada’s telecommunications industry compares favorably with other jurisdictions.

Throughout its analysis, the MEI simply places too great a premium on having the latest and greatest technology. Consumers care far more about getting a fair price and high usage allowance. Allowing telecommunications carriers to exercise their market power sacrifices what consumers care about most for luxury options they would happily do without.

At its core, the MEI argues that even though Canadians pay more for telecommunications services than most other countries’ consumers, we have no cause to complain because we have access to more affordable options through flanker brands and we enjoy higher speeds and investment. It argues that even though Canadian’s bills are going up, the prices for a given service basket is actually declining.

Canadians do pay more for telecommunications services than most other countries. The Nordicity International Price Comparison Report commissioned by Innovation Science and Economic Development Canada shows that Canadian consumers pay dramatically more than our international counterparts for wireless data at the 1GB, 2GB, and 5 GB price levels – around $40-$50/month more than in the UK or about double their prices.

Figure 1: Nordicity, 2017 Price Comparison Study of Telecommunications Services in Canada and Select Foreign Jurisdictions

Flanker brands and resellers do offer slightly lower prices for the services levels covered in the Nordicity Report. Virgin Mobile, for example, currently offers 1GB of data with unlimited minutes for $55/month for Bring-Your-Own-Device customers in Ontario, compared with the $70.70/month price used in the Nordicity report (the Virgin offer includes”bonus data” for a limited time but remains the lowest cost option for that data allowance). The price is still high compared internationally, and moreover it is not fair to compare the lowest-priced offers in Canada to the highest-priced offers internationally.  A customer on US MVNO Tello would pay $14 USD/month ($17 CAD/month) for 1 GB of data with unlimited calling and texting. Looking at resellers only further highlights the monopolistic rents being paid by Canadian consumers.

Figure 2: Offer from US Reseller Tello mobile

These price differences do not reflect differences in the cost of service. Based on the costs found in the CRTC’s wholesale roaming rate setting, Bell’s costs to deliver an additional 1 GB data are $9.71 ($0.013281/1.4*1024). Since Canadian wireless customers use an average of 57% of their data allowance, Bell’s capacity cost to offer a plan with a 1 GB data allowance are approximately $5.55/month. Furthermore comparing across provinces the lowest prices are found in Saskatchewan, which has the lowest price in Canada due to competition from SaskTel, despite also having one of the lowest population densities in Canada. Network costs associated with differences in population density and terrain simply do not account for a significant portion of the cost premium paid by Canadian consumers.

Figure 3: Nordicity, 2017 Price Comparison Study of Telecommunications Services in Canada and Select Foreign Jurisdictions

Canadians do not care very much about network speeds. For example, in Public Mobile’s build-your own plan tool, 1 GB of 3G speed data costs $35/month, compared with $42/month for 4G speed data (both options with no calling or texting and Public Mobile’s bargain-basement customer support). Assuming both plans are priced competitively, this suggests consumers are willing to pay about $7/month to move from 3G speeds (~6 Mbps) to 4G-LTE speeds (~30 Mbps), with that willingness to pay exhibiting diminishing returns to higher speeds. The difference between UK average speeds (~25 Mbps) and Canadian average speeds (~45 Mbps) is likely only worth a few dollars per month to consumers at best, and only to high-end consumers with sufficient data allowances to make use of those higher speeds on a regular basis. 5 Mbps is sufficient to stream HD Netflix and would consume 1.8 GB/h. Moreover, the higher speeds on Canadian networks are in part attributable to monopolistic pricing, which forces Canadians to subscribe to plans with lower data allowances, reducing network congestion.

Investment in wireless facilities is, without reference to any corresponding increase in network quality, of no value to consumers. Canada is pursuing a facilities-based competition strategy which is intended to allow competing facilities-based providers to over-build the national carriers’ networks. This necessarily involves redundant investments which do not provide any value to consumers beyond (potentially) contributing to lower prices in future. Average wireless revenues from 2012-2016 were $21.26 billion a year of which reinvestments in plants and facilities were just $2.2 billion, despite 40-45% operating profit margins (earnings before interest, taxes, depreciation and amortization).

Figure 5: Telecommunications revenues and EBITA margins as reported in the CRTC Communications Monitoring Report, showing huge operating profit margins

Wireless prices for a given service basket do appear to be decreasing. The average price of 1200 min and 1 GB of data fell from $69.27/month in 2013 to $58.00/month in 2015, a 16% decrease. Other price brackets have seen smaller decreases. This is to be expected at technological advances continue to decrease the costs of delivering additional data. In the UK, the price of a 5GB plan fell from £195/month in 2012 to £54/month in 2016. Decreasing prices do not demonstrate that existing rates are reasonable, or that those decreases are not due to government intervention. In particular, regional price comparisons suggest that the regional players supported by the CRTC’s facilities based competition policy drive regional price reductions.

The MEI goes on to attack the Commission’s wireline wholesale policies, claiming that mandating reseller access to fibre-to-the home networks will “slow down the deployment of fibre networks by reducing the incentives of telecom providers to invest and preventing them from fully recovering the capital costs associated with their investments.” The CRTC sets wholesale rates which allow telecom providers to recover their costs – and a healthy profit margin beyond them. While different, higher rates or a cross-subsidy regime may be needed to ensure that investments are recovered in higher-cost areas, the CRTC’s wholesale access policy should theoretically have no impact on investment. The MEI entirely overlooks the massive savings and enhanced choice offered to consumers by resellers.

Unlike the MEI, which does not appear to have ever set foot before the CRTC, PIAC fights before the CRTC every day and sees the rationale for every decision it provides. The CRTC has massively deregulated the telecommunications sector – 95% of telecommunications revenues are generated by services which are not subject to retail rate regulation. The CRTC’s remaining wholesale and retail obligations address particular market failures which impact the interests of consumers. The point of wholesale policies is not just to stimulate facilities-based competition. The real value of those policies is that they prevent the exercise of wholesale market power, reducing rates for consumers and giving Canadians a greater choice of retail providers.

The MEI cites the December 2017 bring-your-own-device price war as evidence that competition is sufficient to protect the interests of users. The MEI entirely overlooks the implementation of the Revised Wireless Code on 1 December 2017, which allowed customer to have their devices unlocked for free, suddenly increasing the flexibility with which consumers could switch providers to take advantage of BYOD offers. That competition is attributable to the Commission’s Wireless Code, not a sign that it is unnecessary.

Figure 5: A rather over-enthusiastic CRTC graphic promoting the Revised Wireless Code which made phone unlocking free to facilitate BYOD competition effective December 2017 , immediately prior to the BYOD competition MEI cites as evidence the Code was unnecessary

The CRTC remains a necessary actor in Canada’s telecommunications landscape. Limited spectrum and high fixed costs mean that telecommunications markets will always be characterized by market power. There is a substantial gap between a reasonable return on the first-movers’ investment, and the prices they can get away with charging restrained only by the threat of entry by another facilities’ based provider.

But in discussing the role of general competition authorities, it is worthwhile to note the views of the Competition Bureau regarding Canada’s wireless markets:

• The Commissioner submits that the incumbents possess market power in retail mobile wireless services markets in Canada. […] The evidence put forward in the Brattle Report demonstrates that Canadian retail mobile wireless services markets are characterized by above‑normal profits and comparatively low service penetration levels. These are both indicators of market power. In addition, Canadian retail mobile wireless services markets are characterized by high concentration and very high barriers to entry and expansion.  Furthermore, such markets are characterized by other factors that, when combined with high concentration and high barriers to entry and expansion, create a risk of coordinated conduct in these markets. (Source)
• [A]s a result of coordinated behaviour among Bell, TELUS and Rogers, mobile wireless prices in Canada are higher in regions where Bell, TELUS and Rogers do not face competition from a strong regional competitor. Conversely, the Bureau concluded that where Bell, TELUS and Rogers face competition from a strong regional competitor, prices are substantially lower. The Bureau concluded that the lower prices are caused by the presence of a strong regional competitor who can disrupt the effects of coordination among Bell, TELUS and Rogers. (Source)

The difference between the CRTC and Competition Bureau, and the real reason for the MEI’s preference for a general competition authority, is that the Competition Bureau does not have all the tools it needs to effectively control telecommunications carriers’ exercises of market power, nor to fully protect the interests of consumers, rather than just responding to anti-competitive behavior in very specific ways.