LETTER TO THE EDITOR: Confusion reigns over Shaw's Canwest benefits package
Cartt.ca
July 27, 2010
CARTT.CA'S UPDATED STORY on the Shaw/Canwest deal seeks to fill in “incomplete data” on Shaw’s proposed benefits package of $23 million for a transaction reported at $2 billion. That’s not a typo. We estimate that this comes to 1% of the value of the transaction. Since Commission policy dictates 10% for benefits it’s fair to ask: Are we missing $177 million? Let’s look at the numbers.
In their main application, Shaw ascribed a value of the transaction at $475 million. At that point, they were proposing a benefits of $23 million, which would be spent on the conversion to digital of some transmitters outside of the mandated areas for conversion. That is no benefit, but simply a cost of doing business.
Once the transaction became much larger with Shaw’s acquisition of Goldman Sachs’ interests in the former Alliance Atlantis specialty services, the value increased from $475 million to $2 billion, resulting in Shaw being set to become the largest vertically integrated communications company in Canada. However Shaw argues that the bulk of this increase in value should not be considered for the purposes of determining the appropriate amount of tangible benefits because what they purchased from Goldman Sachs did not give them any control, since Goldman was a foreign investor and thus did not have any control over the Canwest assets in the first place.
So according to Shaw, no transfer of control occurred in that part of the transaction thus reducing the value of the transaction from $2 billion to $506 million. But the question is, do we really believe that Shaw will not now control the full panoply of Canwest/AA assets?
Shaw stuck to its guns on the meagre $23 million in benefits and it is only after much prodding by the Commission in numerous deficiency questions that Shaw finally agreed to respond to the hypothetical question of what additional benefits package they would propose “if the Commission were to determine that [Shaw’s] proposal was not sufficient and/or appropriate.”
And what do they propose?
Shaw’s new spin on the benefits package is that they are offering $203 million, or just over 10% of the transaction, but that would include some $95 million in benefits money already owed by Global as a result of the Canwest/Alliance Atlantis merger. In effect, if forced by the CRTC to increase benefits from $23 million, Shaw would pay monies already owed by the company it is acquiring. In fact, Shaw has actually suggested that the Commission would itself be the one doing the double counting if they were to impose a benefits requirement on Shaw that didn’t include what was already promised as part of an earlier transaction.
Shaw also mentions several times the alleged financial hardship of Canwest as a rationale why benefits should not be paid. And yet didn’t Canwest just a few weeks ago report a solid return to profit in its third quarter. Indeed its operating profits have doubled to $150 million from $74 million in the third quarter of 2009.
Shaw also proposes to spend on additional programming content, new media content such as mobile and VOD applications and new morning news shows. It suggests that this adds yet another $85 million to the benefits pot. Sounds like another cost of doing business. Isn’t this money they would be spending in any event just to compete with CTV? There is no mention of any of these monies going to any third party initiative.
So, once one discounts from the proposed package all the monies which are already owed under promises made with respect to a previous transaction and monies merely associated with the cost of doing business, one has to wonder if Shaw has proposed any true tangible benefits at all.
You have to read the reams of deficiency questions and responses to get any sense of what Shaw is now alleging that they are proposing. That is a problem for the CRTC because as it moves to increase the level of vertical integration in broadcasting by enhancing the dominance of the top three cable companies, there are already concerns being raised by many non-integrated distributors, broadcasters and producers as to how to ensure access and prevent the exercise of undue preference.
On its face such vertical integration poses a threat to access and diversity, so it would be nice to think ,at least in return for upping that risk, that the CRTC got the minimum required benefits for independent creators, along with some safeguards to help the independents sleep at night.
Michael Hennessy
senior vice-president, regulatory and governmental affairs,
TELUS
Wednesday, July 28, 2010
Monday, July 19, 2010
Did the save our local TV debate just jump the shark?
In Saturday's blog I asked I whether the focus on net neutrality might be obscuring more immediate issues of vertical integration in broadcasting. Today's blog asks whether, in light of increased vertical integration the whole fee for carriage /value for signal debate is about to go off the rails or "jump the shark" in terms of its storyline. Broadcasting regulation is not net neutral in the sense that there are all types of mandatory/priority carriage requirements and rules that prohibit the carriage of certain channels. The reasons for this go back to the goal of ensuring that there is an adequate contribution to Canadian programming. That is what the fee for carriage/value for signal issue is about. But what happens when the broadcasters negotiating fees with distributors are owned by the most dominant cable distributors? How do you prevent anti-competitive outcomes in terms of the fees negotiated when broadcasters owned by dominant carriers are negotiating with smaller competitors?
Where net neutrality and broadcasting intersect, is in adherence to the principle of access to ensure diversity and choice. There has long been a central premise under the regulated broadcasting system, that Canadian content providers, particularly independent producers, need access to broadcast distribution platforms, that exclusive distribution is discriminatory, that the system must promote diversity and choice in content and that both broadcasters and distributors cannot engage in undue preference to provide direct competitive advantage or advantage to affiliated properties. The CRTC has also signaled that issues of undue preference in broadcasting apply to exempt platforms like wireless and Internet. Ensuring compliance, we believe, is going to be the CRTC's biggest challenge as it allows the broadcasting industry to become more vertically integrated.
Increasingly there has been a move to increased regulatory support for more consolidation and vertical integration in order to achieve scale in content and to respond to increased competitive pressures from over-the-top Internet content. That led first to major consolidation in broadcasting (CTV/CHUM, Global/Alliance Atlantis) and now between broadcasting and cable integration. There are many issues that need to be addressed in terms of vertical integration including, the whole issue of fee for carriage.
Unless you never watched TV or read newspapers you can't have missed the "save our local TV" vs "stop the TV tax debate" that ultimately led to a national movement to shoot all broadcasters, distributors and regulators that were responsible for this endless exercise in annoying Canadians as they tried to watch TV in the privacy of their dens. The debate was so annoying that it led to an acceleration in the adoption of PVRs to avoid advocacy ads.
A year later you would be forgiven for scratching your head and asking what was it all about in the end. Cable and satellite providers were cast as evil destroyers of local voices and diversity, a position earned in part by efforts of some to kill the Canadian Television Fund. it was argued that only the recently consolidated broadcasters, like CTV and Global, could save Canadian voices by imposing a tax on rich cable companies to pay for local TV production . While broadcasters were making money, they clearly couldn’t afford to simultaneously pay the debt incurred by takeovers of half of the independent broadcast sector as well as increase spending on Hollywood product and still support local TV anymore.
Anyways the collapse of the system was near, unless the regulator stepped in to save local TV and tax cable and satellite. Since no one likes imposing taxes or fees the CRTC, in a flash of marketing brilliance, decided that fees were bad and cable guys et al. should negotiate with broadcasters on "value for signal".
But here is the rub. Somewhere in the middle of this never ending debate, the major broadcasting industry began to disappear. CTV sucked up CHUM and A-Channel and then had to spin off the local CITY properties to keep all the specialty channels. So CITY, the original independent, became part of the Rogers empire and A-Channel continues to exist on life support. TVA the largest private in Quebec was already owned by Quebecor the primary cable company in Quebec. And now Shaw is in the midst of a takeover of Global TV including all the old Alliance Atlantis properties.
Net result of all the regulatory shenanigans over the past 4 years . Half the independent broadcasters are gone along with whatever unique diversity they brought to the table and the separation of carriage and content is pretty much a spent idea. Unless of course you happen to be an independent distributor about to be forced to negotiate a tax with/and for your competitors or an independent broadcaster competing for platform space.
I would submit that the so-called value for signal approach is about the worst process to choose in a market dominated by vertically integrated distributors . In effect the top 3 cable companies now, or may soon own 3 of the top 4 private broadcasters. Any so called value for signal negotiations, assuming the Courts bless the concept, are not neutral like a tax or contribution fee would be. As an example the CRTC sets a telecom contribution fee on all carriers to support access to telephone service in high cost areas but that fee is applied as a percent of revenues and is thus competitively neutral.
Value for signal negotiations on the other hand favor the vertically integrated players and create all kind of opportunities for gaming. For example:
• The fee established between a vertically integrated broadcaster and its cable owner can be waived or set high to impose costs on competitors that the vertically integrated distributor can absorb through cost accounting or cost allocation.
• Since the vertically integrated owners are the largest cable distributors they could argue for a volume discount that smaller competing distributors cannot achieve.
• Vertically integrated carriers could negotiate nominal fees amongst themselves since their mutual payments net out and again it is in their common interest to increase costs of satellite or IPTV competitors.
Now it may be that if Quebecor, Rogers and Shaw are going to own most local TV in Canada there is no need for anyone from consumers to non-integrated carriers to pay a fee to save local TV anymore. Arguably the black knights have become the white knights and have over a billion in free cash flow to do the job for themselves. It seems to me that local TV just got "saved" by the three most profitable broadcast distributors in the country. Surely as part of the regulatory tradeoff in terms of loss of diversity and independent voices for vertical integration, the major cable companies could fix their new affiliates financial problems without the help of their competitors.
This is neither crazy nor completely self-serving. Rogers and Shaw hate fee for carriage, and oppose such in Federal Court. Quebecor wants fee for carriage but on a revenue neutral basis where independent broadcasters that compete with its own content properties would receive less in affiliation payments to offset significant increases in distributor charges. That plan is arguably still not so good if you are an independent distributor competing with Videotron or one of a small number of independent broadcasters competing with TVA.
However if it is determined that it is ok for the top 3 cable companies to own 3 of the top 4 private broadcasters and still receive a fee from competitors, and if the Court gives the go ahead to levy such a fee, then it is incumbent on the CRTC and/or Heritage Minister to make sure that (a) contribution is based on total broadcast revenues just like it is based on total revenues on the telecom side and that (b)the the revenues flow to an independent local TV fund that ensure the money flows to whatever is determined to be necessary to subsidize.
That is the easiest way to prevent undue preference and to increase diversity in the face of vertical integration. Perhaps the Shaw Canwest hearing is a good place to start this debate.
Where net neutrality and broadcasting intersect, is in adherence to the principle of access to ensure diversity and choice. There has long been a central premise under the regulated broadcasting system, that Canadian content providers, particularly independent producers, need access to broadcast distribution platforms, that exclusive distribution is discriminatory, that the system must promote diversity and choice in content and that both broadcasters and distributors cannot engage in undue preference to provide direct competitive advantage or advantage to affiliated properties. The CRTC has also signaled that issues of undue preference in broadcasting apply to exempt platforms like wireless and Internet. Ensuring compliance, we believe, is going to be the CRTC's biggest challenge as it allows the broadcasting industry to become more vertically integrated.
Increasingly there has been a move to increased regulatory support for more consolidation and vertical integration in order to achieve scale in content and to respond to increased competitive pressures from over-the-top Internet content. That led first to major consolidation in broadcasting (CTV/CHUM, Global/Alliance Atlantis) and now between broadcasting and cable integration. There are many issues that need to be addressed in terms of vertical integration including, the whole issue of fee for carriage.
Unless you never watched TV or read newspapers you can't have missed the "save our local TV" vs "stop the TV tax debate" that ultimately led to a national movement to shoot all broadcasters, distributors and regulators that were responsible for this endless exercise in annoying Canadians as they tried to watch TV in the privacy of their dens. The debate was so annoying that it led to an acceleration in the adoption of PVRs to avoid advocacy ads.
A year later you would be forgiven for scratching your head and asking what was it all about in the end. Cable and satellite providers were cast as evil destroyers of local voices and diversity, a position earned in part by efforts of some to kill the Canadian Television Fund. it was argued that only the recently consolidated broadcasters, like CTV and Global, could save Canadian voices by imposing a tax on rich cable companies to pay for local TV production . While broadcasters were making money, they clearly couldn’t afford to simultaneously pay the debt incurred by takeovers of half of the independent broadcast sector as well as increase spending on Hollywood product and still support local TV anymore.
Anyways the collapse of the system was near, unless the regulator stepped in to save local TV and tax cable and satellite. Since no one likes imposing taxes or fees the CRTC, in a flash of marketing brilliance, decided that fees were bad and cable guys et al. should negotiate with broadcasters on "value for signal".
But here is the rub. Somewhere in the middle of this never ending debate, the major broadcasting industry began to disappear. CTV sucked up CHUM and A-Channel and then had to spin off the local CITY properties to keep all the specialty channels. So CITY, the original independent, became part of the Rogers empire and A-Channel continues to exist on life support. TVA the largest private in Quebec was already owned by Quebecor the primary cable company in Quebec. And now Shaw is in the midst of a takeover of Global TV including all the old Alliance Atlantis properties.
Net result of all the regulatory shenanigans over the past 4 years . Half the independent broadcasters are gone along with whatever unique diversity they brought to the table and the separation of carriage and content is pretty much a spent idea. Unless of course you happen to be an independent distributor about to be forced to negotiate a tax with/and for your competitors or an independent broadcaster competing for platform space.
I would submit that the so-called value for signal approach is about the worst process to choose in a market dominated by vertically integrated distributors . In effect the top 3 cable companies now, or may soon own 3 of the top 4 private broadcasters. Any so called value for signal negotiations, assuming the Courts bless the concept, are not neutral like a tax or contribution fee would be. As an example the CRTC sets a telecom contribution fee on all carriers to support access to telephone service in high cost areas but that fee is applied as a percent of revenues and is thus competitively neutral.
Value for signal negotiations on the other hand favor the vertically integrated players and create all kind of opportunities for gaming. For example:
• The fee established between a vertically integrated broadcaster and its cable owner can be waived or set high to impose costs on competitors that the vertically integrated distributor can absorb through cost accounting or cost allocation.
• Since the vertically integrated owners are the largest cable distributors they could argue for a volume discount that smaller competing distributors cannot achieve.
• Vertically integrated carriers could negotiate nominal fees amongst themselves since their mutual payments net out and again it is in their common interest to increase costs of satellite or IPTV competitors.
Now it may be that if Quebecor, Rogers and Shaw are going to own most local TV in Canada there is no need for anyone from consumers to non-integrated carriers to pay a fee to save local TV anymore. Arguably the black knights have become the white knights and have over a billion in free cash flow to do the job for themselves. It seems to me that local TV just got "saved" by the three most profitable broadcast distributors in the country. Surely as part of the regulatory tradeoff in terms of loss of diversity and independent voices for vertical integration, the major cable companies could fix their new affiliates financial problems without the help of their competitors.
This is neither crazy nor completely self-serving. Rogers and Shaw hate fee for carriage, and oppose such in Federal Court. Quebecor wants fee for carriage but on a revenue neutral basis where independent broadcasters that compete with its own content properties would receive less in affiliation payments to offset significant increases in distributor charges. That plan is arguably still not so good if you are an independent distributor competing with Videotron or one of a small number of independent broadcasters competing with TVA.
However if it is determined that it is ok for the top 3 cable companies to own 3 of the top 4 private broadcasters and still receive a fee from competitors, and if the Court gives the go ahead to levy such a fee, then it is incumbent on the CRTC and/or Heritage Minister to make sure that (a) contribution is based on total broadcast revenues just like it is based on total revenues on the telecom side and that (b)the the revenues flow to an independent local TV fund that ensure the money flows to whatever is determined to be necessary to subsidize.
That is the easiest way to prevent undue preference and to increase diversity in the face of vertical integration. Perhaps the Shaw Canwest hearing is a good place to start this debate.
Saturday, July 17, 2010
Time to worry more about vertical integration than net neutrality
I was reading the submission, and it's a decent submission, from the Directors Guild of Canada on the Digital Economic Strategy and one of its recommendations, that gave me pause, was to have the CRTC proactively monitor net neutrality. Now I don't really care too much, assuming my company isn't buried in paperwork but I don't get the emphasis. To me net neutrality is a vague and nebulous concept that tends to mean different things to different people.
Why not hit the nail on the head and just lobby the CRTC under its existing powers to vigorously address vertical integration in terms of carriage and content? That is something that is more precise and more relevant . Heck why wait for a Digital Strategy (could be a long wait re content) and go right at the heart of the matter in the Shaw Canwest Global Hearing which we hear is scheduled for around Sept 25 (rumor)?
Think about it. Three/four years ago there was all this angst about threats to diversity in broadcasting if CTV took over the CHUM assets or Global took out Alliance Atlantis. Then we went through the angst of the save our local TV/fee for carriage debate because the allowed takeovers help put CTV/Global finances in the sink and someone (disributors) had to bail them out for spending too much and overpaying for Hollywood product. Flash forward to September, and all of a sudden there is now even more concentration and independent broadcasters are disappearing faster than the ice cap while the three largest cable companies now own,or are about to own, most of the broadcast assets in a more consolidated fashion than everyone was fussed about three years ago.
Seriously, why the fuss about net neutrality? When TELUS looks at the disintegration of carriage and content we worry about having to negotiate and pay fees to our cable competitors to support their integrated content properties, while they can write themselves a truly blank check.(Nice solution to FFC from their point of view).
We worry that broadcast content from those integrated properties will not be available on our mobile and Internet platforms even though the CRTC says its undue preference rules apply to these platforms. Heck we have to go to the CRTC today just to get access to broadcast content for VOD from at least one integrated broadcaster even though it is clearly obliged to provide it under the rules.
Given the negative attitude towards Canadian content , local TV and/or the CMF from some distributors you would think independent broadcasters, Associations and Guilds would be as, or more, worried about access for their content to platforms for broadcast distribution and less concerned about access to the Internet. The latter may soon be the easiest window to access for independents. Sadly making noise about net neutrality may be reasonable in principle but right now it seems to me like its barking up the wrong tree at the wrong time and in the wrong place.
Why not hit the nail on the head and just lobby the CRTC under its existing powers to vigorously address vertical integration in terms of carriage and content? That is something that is more precise and more relevant . Heck why wait for a Digital Strategy (could be a long wait re content) and go right at the heart of the matter in the Shaw Canwest Global Hearing which we hear is scheduled for around Sept 25 (rumor)?
Think about it. Three/four years ago there was all this angst about threats to diversity in broadcasting if CTV took over the CHUM assets or Global took out Alliance Atlantis. Then we went through the angst of the save our local TV/fee for carriage debate because the allowed takeovers help put CTV/Global finances in the sink and someone (disributors) had to bail them out for spending too much and overpaying for Hollywood product. Flash forward to September, and all of a sudden there is now even more concentration and independent broadcasters are disappearing faster than the ice cap while the three largest cable companies now own,or are about to own, most of the broadcast assets in a more consolidated fashion than everyone was fussed about three years ago.
Seriously, why the fuss about net neutrality? When TELUS looks at the disintegration of carriage and content we worry about having to negotiate and pay fees to our cable competitors to support their integrated content properties, while they can write themselves a truly blank check.(Nice solution to FFC from their point of view).
We worry that broadcast content from those integrated properties will not be available on our mobile and Internet platforms even though the CRTC says its undue preference rules apply to these platforms. Heck we have to go to the CRTC today just to get access to broadcast content for VOD from at least one integrated broadcaster even though it is clearly obliged to provide it under the rules.
Given the negative attitude towards Canadian content , local TV and/or the CMF from some distributors you would think independent broadcasters, Associations and Guilds would be as, or more, worried about access for their content to platforms for broadcast distribution and less concerned about access to the Internet. The latter may soon be the easiest window to access for independents. Sadly making noise about net neutrality may be reasonable in principle but right now it seems to me like its barking up the wrong tree at the wrong time and in the wrong place.
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