Proceedings of the Subcommittee on
Communications
Issue 10 - Evidence
OTTAWA, Wednesday, November 25, 1998
(10)
The Subcommittee on Communications of the Standing Senate Committee on Transport and Communications met this day at 3:30 p.m. to study Canada's international competitive position in communications generally, including a review of the economic, social and cultural importance of communications for Canada.
Senator Mira Spivak (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: Please proceed.
Mr. Peter Miller, Executive Vice-President and General Counsel, Canadian Association of Broadcasters -- New Media Task Force: The CAB represents the vast majority of private broadcasters in Canada, including radio, television, and now specialty services.
We want like to thank you for this opportunity to speak to you, since the topic you are discussing is very important to us. It is an important issue for private broadcasters and for public policy. We are glad to be here.
We were encouraged that your introductory paper on this subject pointed out that there already is a shift from traditional media to new media. That puts you ahead of most. As broadcasters and as new media providers, our members are aware of this shift and its potential consequences.
We see it developing in two phases. We are presently in the middle of the first phase, that is, competition for people's time. With that comes increased competition for everything, from advertising to e-commerce to program rights.
The second phase will be the evolution of new media into a truly mass entertainment medium. The Internet currently does not carry much content that you could call "mass entertainment." At the same time, looking down the road, we see the Internet carrying significant amounts of content that will compete directly with television and radio.
Included with our opening statement is a diagram chart, and I would ask you to look at it at this time.
What this chart purports to show is that there will be considerable direct competition between traditional television and radio broadcasting, and new media, but also areas where the two retain their core strengths.
On the far right of the chart, you see the Internet shown as the ideal medium for activities like data searching and on-line gaming. On the far left, you see digital television and digital radio as the media where audiences will look for the highest-quality appointment and event programming, such as championship games and popular sitcoms, and for local community connections.
In the middle will be this area of considerable overlap, of both competitive and complementary activity, including mass entertainment, of which video-on-demand might be an example. In any event, competition for viewers' revenue and for programming content in that middle area will be intense.
Mr. Glenn O'Farrell, Vice-President, Regulatory Affairs, Global Television: Currently, the main impact of new media on broadcasting is competition for people's time, not necessarily for revenue. There is already some evidence that households with Internet access spend less time on television and radio. This seems to be most true of young people aged 12 to 24 years who, within 10 years, will be a key demographic group for our advertisers. We have already seen some mass events, such as the publishing of the Starr report, for example, where the Internet came into its own, providing information in a way that traditional media could not.
Broadcasters are already responding to the shift by developing new media technologies of their own such as digital radio and digital television. These will bring interactivity to their traditional businesses. Many are also adding some of their own information and entertainment services to the Net and extending the usefulness of their newscasts. Even smaller broadcasters such as CJYM in Kindersley, Saskatchewan, provide innovative services like on-line agricultural data and up-to-date weather reports on the Internet. Such services reinforce the strong historical connection between broadcasters and their communities that will be increasingly important as both new and traditional media become more globalized.
This graphic illustrates that television and radio will become increasingly interactive, while new media will expand on a base of interactive graphics, text and data, to look more and more like broadcasting. We will use our strong brands to establish a Canadian presence in the interactive world, transmitting program-enhancing information to smart sets and Internet "appliances" like Web TV.
Broadcasters are already beginning to branch out into the new media, treating it as an opportunity, but also realizing the broader threats that it poses to the Canadian broadcasting system.
From a revenue point of view, the new media is clearly both an opportunity and a threat. Internet advertising revenue has grown at the absolutely amazing pace of more than 200 per cent per year over the past few years, and projections for the U.S. this year are over $2 billion.
When the world's largest advertiser, Procter & Gamble, holds a conference called "FAST - the Future of Advertising Stakeholders" to address Internet opportunities, you know that Internet advertising has arrived and is a competitive threat. There is no definitive evidence yet that this development is affecting broadcasters' bottom lines, but radio's share of advertising has been declining over the past 10 to 15 years, while TV's share has been constant. We cannot afford to stand and watch as the Internet takes a significant share of the advertising pie.
Internet advertising has not yet become a big news story for Canada, and the totals for such advertising here, as estimated by the Internet Advertising Bureau of Canada, are only 1 per cent of those in the United States. However, this does not reflect total Internet activity in Canada. We have many users and many sites, about 5 per cent of the world's total. The low levels of advertising may be the result of the global nature of the Web. Advertisers do not need to go to Canadian sites when U.S. sites will reach Canadians such just as easily. The big traffic generators are the American sites and search engines, and so that is where advertisers, both U.S. and Canadian, want to be.
Since broadcasters depend on ad revenue for their survival, we have no choice but to get involved and improve our services to our advertisers, especially those who are looking to do e-commerce. As e-commerce becomes more and more important, an advertising medium without an e-commerce tie-in will find it difficult to survive. Our industry must develop the potential of both digital television and digital radio to keep pace with other ad media, and we will need to be on the Internet as well.
[Translation]
However, one trend which undoubtedly will become more prevalent in the long-term then that of broadcasters moving into new media fields is that of new media taking over certain components of the broadcasting industry.
There are already thousands of radio stations on the Internet offering full, 24-hour programming through technological processes such as Real Audio. Some also offer news files. Many radio and music services exist only on the Internet and these unlicensed operations are in fact broadcasting operations.
Internet video is still not ready to compete with prime time programming, because the quality of the images still does not measure up. However, with the Internet, the pace of change is very rapid and there is no need to buy a new television set to take advantage of technological advances. All a person has to do is download a new program.
Quite conceivably, in perhaps a mere five years down the road, the quality of the video image on the Internet will be superior to that captured through VCRs. Others have also envisaged such a future. US television producers are already vying for Internet programming distribution rights. However, exclusive Canadian Internet distribution rights cannot be bought. There are no borders to the Internet, which could spell the end of domestic markets.
When the day finally comes when the Internet is capable of displaying quality live action video, we will have reached the second stage of the process of transforming the Internet into a mass entertainment medium. When this day comes, everything will change for the Canadian broadcasting industry because our borders will truly be open. We will have access to television stations from around the world and exclusive Internet video services will be a reality. We will be dealing not with a multi-channel universe, but rather with a mega-channel universe.
[English]
At the same time, our industry will be going through its own digital transition. The coming digital revolution is both a challenge, since we must find big investment dollars, and an opportunity for growth. Digital is not just better television or better radio, it also gives us an opportunity to provide interactive, new media programming from our own transmitters and more sophisticated advertising and marketing opportunities to advertisers.
You can see it depicted here. The view of the CAB is that the new media and broadcasting will be increasingly competitive, but also, hopefully, increasingly complementary.
Mr. Hal Blackadar, General Manager, CFNY-FM: What does this mean for public policy? Until now, regulation has controlled market entry of foreign services into Canada, in return for obligations on Canadian broadcasters to create more Canadian programs than a small market like Canada would otherwise be able to finance. However, such regulation will not work when someone can set up a server in Los Angeles to serve Kelowna and Fredericton over the Net.
Moreover, attempts at traditional content regulation are most likely to hinder effective public policy. Canada must have active and aggressive new media companies providing Canadian content. For example, if the CRTC tries to become involved in licensing services on the Internet, it probably will not affect any foreign operations, but it will slow down the progress of Canadian operators. Perhaps even more importantly, it would also cause a huge outcry from Canadian Internet users, who have already assumed a role as global consumers on the Internet, and who view unimpeded worldwide access as a right.
However, it is not just a question of absence of regulation. As new media moves into its second phase and competes more directly with broadcasting, we will also need to lighten the regulatory burden on broadcasters. The obligation-based public policy model will not be ultimately sustainable, and competition from the United States satellite services already offers a significant challenge. The situation will worsen in three key ways when new media enters the second phase of competition with the traditional media: First, foreign competitors already have direct access to Canadian consumers. Second, the pressure on broadcaster revenue from new media competition will make it more difficult for Canadian broadcasters to contribute to the system in traditional ways. Third, the lack of entry barriers to Canada's mass entertainment market will mean that separate Canadian rights to popular international programs will not be available. This will make it impossible for broadcasters to continue funding Canadian content from good returns on foreign programming, and means that the regulatory burden on traditional broadcasters must be reconsidered.
Yesterday we urged the CRTC to begin a process of considering the appropriate trigger points for regulatory relaxation. Such indicators could include: a significant decline in traditional media's advertising share and significant increases in Internet advertising; second, significant decreases in audience time spent on radio and television; and three, consumer uptake of high-speed Internet technology that will enable them to receive high-quality audio and video from the Internet.
The broadcasting industry is one of our best competitive hopes in new media, both globally and at home. Broadcasters are known and trusted by Canadians in information and entertainment programming, and have the expertise and the brand names to develop new media content that Canadians will use.
Currently, few, if any, Canadian broadcasters are making money on the Internet, but we are making new media investments, and our shareholders are wondering when they can expect a return. We are holding back on anything major because of our concern about the advertising market and other economic uncertainties, and also because we do not know what the regulator will ask of us in either our traditional or new media businesses. If broadcasters continue to be heavily regulated, they will be severely hampered in competing against unregulated companies serving Canadians over the Net.
Ms Cynthia Rathwell, Legal Counsel, Canadian Association of Broadcasters -- New Media Task Force: While imposition of a traditional regulatory model in new media is unacceptable to Canadians, we do think there is a positive role for public policy in Canadian new media development.
After all, the same dilemma will occur for new media that currently exists for television: How do we offer a high-quality Canadian product, good enough to compete with the best the world has to offer, with the resources of a small market? How do we maintain the successes that broadcasting has achieved in the face of the growth of global new media?
We ourselves must compete globally, since exporting has important economic benefits for Canada, and public policy should look at supporting that activity. However, we also need to create content that tells Canadians about Canada, and that is a different problem. The benefits of distinctive Canadian content are both cultural and economic, but the resources of the domestic marketplace cannot usually amortize the costs of truly competitive content. If our total ad revenue remains at only 1 per cent of the U.S., the difficulty of financing competitive content will be severe. We need public policy to help; the question is, how?
The best way that we can suggest is through incentive programs such as tax credits, loan programs, equity investment programs. The kind of initiatives that have contributed to the success story in Canadian television can also be applied to the Canadian new media.
However, there are differences. New media is a marriage of content and technology, and technical innovation is often as important as the content. Our public policy also needs to support the inherently risky research and development that will keep our content developers on the leading edge.
Another difference from television is that there is totally open access to the Net, that is, no barriers to entry. There is no distinction between broadcasters and producers. Since anyone can set up a Web site, public policy will need to reflect that. Incentive systems for new media should be completely accessible by all new media players, including broadcasters. In fact, we should be encouraging broadcasters to become involved and use the synergies of their existing media operations to create Canadian new media content that will be successful with the public.
We also need a fast and simple system to permit new media content to become publicly accessible before someone takes the next technological step and leapfrogs the competition. Any incentive system for new media must be unified, fast, and easy to operate if it is to be effective.
Mr. Miller: We see new media and broadcasting becoming increasingly competitive over time, offering consumers similar content, and competing for the same revenue sources.
To meet both cultural and economic needs, Canada will need to be ready to meet that competition with a new public policy framework, and we have 12 specific recommendations in our handout. Out of those emerges a basic, three-pronged new media strategy that should guide public policy.
First, our public policy approach should use incentives to encourage new media risk-taking and entrepreneurship in all players, including broadcasters.
Second, we must recognize that traditional content regulation in new media is unacceptable to Canadian consumers and would discourage investment. Canadian Internet users put a high value on free access to a world of information, and any attempted restrictions would arouse enormous resentment and put a chill on the whole Canadian new media effort.
Third, we should keep a close watch on the development of competition between broadcasting and new media and evaluate current broadcast regulation accordingly. Appropriate trigger points that indicate when it is time to lighten the regulatory burden on traditional broadcasting for competitive reasons should be explored.
Radio and television are great Canadian cultural resources. Every day we experience our communities and our country anew in the entertainment and information programming we find on Canadian stations. Canadian broadcasters provide a cultural resource that no global provider can imitate, and one we can ill afford to lose. However, if we cling to the old regulatory models while the world around us changes, we will lose it.
The Deputy Chairman: In case we do not have time here for all our questions, we will table them, and if you would respond afterwards at your leisure, that would be helpful.
Mr. Miller: We would be happy to do that.
Senator Bacon: We are just back from a trip to Europe, and it is interesting to read your presentation and hear from you today.
Digital TV and the Internet might radically change the way we watch television. Can you give us an idea of how broadcasters will offer their services in the future, and do you think Canadian broadcasters are ready to face the coming challenges?
Mr. Miller: Firstly, digital television is more of a cost than a benefit. It will require immense investments to the tune of something like $500 million for the entire Canadian industry. That investment in transmission facilities to put out digital signals we do not see being recouped in revenues, largely because for the first decade, we are likely to be transmitting digital television to a virtually non-existent audience.
Our motivation to move to digital comes from our sense that we cannot be the only analog providers in a digital world. We know we must be there, but the transition will be very difficult.
Incidentally, we are already moving to digital in our studio facilities and in our equipment, but we have been able to amortize the cost through operational savings and the life cycle of our equipment. In this next stage however, there are no similar operations benefits or savings, primarily because over the transition period of 15 years, we must transmit in both analog and digital so that all Canadians have access.
We see three potential revenue opportunities, of which the first is non-traditional data broadcasting services. For example, broadcasters might choose to move into the paging business.
The second is multiple roots for our programming. Digital provides extra capacity for channels that may bring us additional advertising revenue, possibly even subscription revenue. Third, and the one that brings us closest to new media, is interactivity. Both digital radio and digital television will have elements of interactivity, but they will not be as completely interactive as the Internet because they will not be one to one. However, we will have the ability to download a lot of programming that users can select at their will, so that there is interactivity, but not the same as on the Internet.
Senator Bacon: Do you think that Canadian broadcasters are ready to face the coming challenges?
Mr. Miller: I do not think we are ready, because unlike telecommunications and high-tech industries, we do not have an R & D culture. We do not experiment in the same way that technology industries do, but we must adopt that culture, because otherwise we will be behind the eight ball. The next 15 years will bring great changes in the nature of our business, and I do not think the vast majority of broadcasters are ready for it. However, there are a number of broadcasters sitting at this table who are thinking ahead.
Mr. Blackadar: On the capability of broadcasters to compete, I will confine my remarks to the radio portion. In 1990 in this city, we launched the first digital radio broadcasting in North America, known as the Eureka 147 system. The receiver was so huge that we had to transport it in the back of a minivan, leaving room for only two passengers.
Committee members have recently returned from Europe, where the analog system is now the common standard. The Eureka 147 digital radio system is replacing the analog system, for example, in Great Britain and France, in Germany, Australia, and a number of the South American countries. The United States is the only holdout. I say "only" the United States, because that is a big piece of the puzzle.
Clearly, we are headed toward a digital world, but Canadian broadcasters, and radio broadcasters specifically, have difficulty contemplating a huge investment in research and development when the profit margin is very modest. From 1990 to 1994, the private radio industry in Canada lost $160 million, and the pre-tax profit in 1997 was about 7 per cent. The amount allocated to research is relatively modest.
If Canadian broadcasters are going to invest the required human and financial resources to be part of this new media program, some incentives that are part of a larger cultural policy must be developed. In a very global sense, if we are the only group in the broadcast system that is regulated by what I call "old regulations," and new players become part of this new media, it will be very difficult for us to find the resources for the needed research to bring our current products up to date with the digital world. We do have a challenge ahead of us.
Frankly, one reason we wanted to appear today was to talk about the important role of public policy. It is very much an area for review, and we on the radio side clearly have some major challenges ahead of us in light of very weak profit margins.
Mr. O'Farrell: Conventional television is advertiser supported only, so any business activity based on an advertiser-supported business model is competing with us.
The overall industry is not ready, although it is clear that certain companies are more ready than others. As to the end result, I do not know if you have seen any demonstrations of Web TV. You can sit in your living room watching a television set, and with a remote control device that is a keyboard and a mouse, you can split your screen and watch TV on one side, whether a conventional television station or something else, and simultaneously browse the Web about the program content, or about any other thing that you may be interested in. That presents a very real, unfamiliar threat to us, even in the very competitive conditions we live with now.
We sell advertising time to advertisers in return for the number of viewers that we deliver. How will advertisers regard those viewers in the future when potentially, they can be so easily distracted from what is being sold?
In recent months, we have noticed that a large number of major U.S. companies are spending a great deal of money on a question that I will simplify for you as follows: What are the advertiser needs of the future? They are based on the demands that they are setting for themselves, and that is, any service that has an interactive element to it produces tracking information about the consumer. That becomes valuable to an advertiser in broadening the relationship, in making a better connection with the end user.
Go back to the Web TV concept, and think about television and Internet services as we now know them. There are great opportunities in the capacity to track, for advertisers, information that they may wish to have about who is watching, so they can better target that advertising.
It is still so difficult to predict to what extent these advertisers will demand accountability in this new medium, that I do not know who is ready.
Senator Bacon: It is predicting the future.
Mr. Miller: We have done well as an industry to set up two bodies, Digital Radio Research Inc. and Canadian Digital Television, in a sense pre-competitive bodies, to help us move ahead, and that has been very successful. It has allowed us to make sure we are prepared to make that transition.
The other element of public policy, both in digital radio and television, is we must remember that one of the foundations of conventional broadcasting is universal access.
In radio we know this implicitly. We have almost forgotten that TV is free over the air, but 25 per cent of Canadians still rely on free, over-the-air television. In television particularly, we could go digital on the cable system or the satellite systems with very little costs. The expensive part is travelling over the air to that 25 per cent of Canadians. Therefore, if it is important for public policy reasons to continue to do that, we will need some public policy support. We do not yet know what form that support should take. It may be incentives or other arrangements, but that huge investment in maintaining those free, over-the-air facilities will be a major preoccupation over this next period.
Senator Bacon: You mention on page 9 that you urged regulatory relaxation before the CRTC. Some people argue that the impact of the Internet on radio and television broadcasting will render obsolete some of our policies that use quotas to ensure a Canadian presence in our electronic medium. Do you agree with them?
Mr. Miller: I think we do. You can imagine that it is difficult to appear before a regulator and tell them that they cannot regulate or they will not be able to regulate. We felt it was necessary to indicate to the commission that not only was it difficult to regulate new media, but that that had implications for their ability to regulate us.
Like so many things, it is a question of timing. New media will not necessarily start to have a negative effect on our bottom lines for two to three years, so we could wait and see what happens, or wait five years, if that is what it takes.
We must prepare ourselves for that eventuality, and we must have an environment that encourages broadcasters and others to make those investments in R & D. If regulatory obligations are excessive, then we will not be able to do that.
As to whether any regulation is sustainable, we do not believe that all regulation must disappear. We expect that reasonable CanCon levels could continue for some time, but the operative word is "reasonable." We were quite surprised and alarmed that the commission, after 30 years of 30 per cent CanCon on radio, chose today to increase it to 35 per cent. That does not make a lot of sense to us. However, I do not think that in the foreseeable future we would object to a reasonable level.
Senator Maheu: The bottom line is, you do not want to see regulation, and I imagine that neither does any public media producer. It is much easier to pick up American programs than to encourage our Canadian artists and our Canadian talent, which the CRTC, for example, as well as the Canadian government, believes is essential.
How do you think Canada could go about regulating the Internet, since it is not exactly an easy thing to control? It is important for us to focus on technology, not ideology. Can we have your comments?
Mr. Miller: I hope we have not left the impression that we do not like regulation. As you can appreciate, in some ways, regulation has made a lot of broadcasters very rich. The difference is, whereas historically regulation has been able to balance the benefits and the obligations on a moving-forward basis, future regulation will increasingly only be able to impose costs or obligations, with no corresponding benefits.
Today, the CRTC can provide us with benefits. They can protect our markets, keep out U.S. signals, and give us priority carriage on cable. They can do various things to help us. On the Internet, they cannot provide us with anything, so what can they reasonably extract? We are not here bashing the regulator or regulation. We are saying there must be a different model for the future.
It is interesting to consider what that model will be, because we have been looking at this issue for some time, and in some papers that I wrote a year or so ago, I actually stated that you could regulate the Web with an incentive-based model.
In some ways, my ideas have not changed but my terminology has, because we have discovered that when you use the word "regulation," a lot of people become hostile. When you talk to Canadians about regulating the Internet, they become upset. If you look at the CRTC Web page for this hearing, where they invited comments, they received many from people who said, "How dare you think about regulating the Web"? Whether we like it or not, the notion of regulating the Internet is inflammatory, so we have chosen not to use that term.
There are things you can do, and this is why we talked about an incentive-based model, where instead of obligations and benefits, there are rights and privileges. A Canadian new media provider, developing and disseminating Canadian new media content on a Web site, would have the right to access certain incentives, be they funds or tax incentives or advertising deductibility. So forget the terminology and the ideology, and call it what you want. It is a model to support Canadian content and Canadian artists and Canadian talent. By no means are we suggesting that we abandon public policy and abandon our successes, and I certainly hope we have not left that impression.
Mr. O'Farrell: If we look at the small, private sector company that came across the Canadian-American border in 1975 to establish itself in Winnipeg, and then look at CanWest Global today, yes, the regulatory system has worked very well. It allowed this company to grow into a quasi-national company with networks in Australia, two national networks in New Zealand, and we just lit up an Irish network in September.
That has given us an opportunity to export Canadian broadcasting expertise, but it has also allowed us to export Canadian programming into other jurisdictions because of our relationships there. None of that would have been possible without regulation. If you stop and think about it, it is the old model that is the problem, not regulation itself, and not the concept of having cultural goals enshrined in legislation and an industry motivated to achieve them. How do we achieve those goals?
The arrival of the new media by virtue of Internet applications has created a different paradigm that must be addressed. We will continue to do news and sports programming as long as it is feasible, because there is generally a profit margin in those categories. We will continue to do documentaries, because generally you can make a small and reasonable profit. From the private sector perspective, you can survive on those.
The difficulty is with the dramatic programming series that must go head to head with the mega-budget series coming out of Hollywood. The commission is turning its attention to that and asking how we can do more. Maybe it is not about doing more, but about doing it better. Perhaps we should put our resources into fewer but better projects that Canadians will watch.
Speaking to the Quebec experience that you both know very well, when you look at the production budgets of some of the programs that have extremely good ratings, whether on TVA or Radio-Canada, and compare those to the budgets of the blockbusters coming into English-speaking households, it is amazing how well they can do. However, there are all kinds of specific reasons as to why that part of the broadcasting system is different.
I am sure that Daniel Lamarre and the people at Quebecor, from the perspective of TQS, will agree that the Internet will affect them too. While the French component has different economic realities, the old regulatory model will need to be modernized from that perspective too. Mr. Miller speaks of incentives that will propel people to realize their business dreams in Canada, rather than regulation that will cause them to say, "I have a great idea. Do I put it together in Ottawa or in Rochester? Do I do it in Laval or Plattsburg?" The idea will make it onto the Internet somehow; the question is, over what barriers? Put the barriers down and put incentives behind the ideas.
Mr. Blackadar: Many people have said, and I personally believe, that the Canadian broadcasting system is the finest in the world because it has been a combination of public policy, regulation, and entrepreneurship. It has been an orderly growth as a result of what the government does, what the CBC does in the public sector, and I hope what we as private broadcasters are doing, playing a role within a confined geographic space, from St. John's to Victoria.
The government's approach to the broadcasting system has promoted a very orderly growth that has benefited companies like Mr. Farrell's CanWest, my own company, Shaw Communications, and many others, large and small. It certainly has benefited the CBC. This system has had many benefits.
The existence of regulation in many forms has benefited the broadcasting system as a whole too. We have developed Canadian talent on radio to a large degree as a result of those regulations, but we now find ourselves on a much bigger playing field. When we talk about new media, we are really talking about the Internet. We are talking about digital broadcasting, whether it is radio or television, but that is simply a way to convey the same signals over the air that we have in the analog world.
The Government of Canada is as responsible as any body for introducing the world standard of digital audio broadcasting. Canada was at the forefront, with the government, the CBC, and the private broadcasters putting up money to finance it.
As a result, we can tell the world that the newly available digital audio broadcasting is a result of your public policy.
We now find ourselves with the huge dilemma of the Internet, designed by the U.S. government, designed by the military to withstand nuclear attacks, and it is everywhere. It is pervasive, and our problem is the same as everybody else's, that is, trying to figure out what is our role out there.
Now if our role is to be a traditional broadcaster, with a commitment to Canadian talent and other things, that is fine, provided there are some public policy incentives that allow us to go further, allow us to make those investments that others, such as Rochester, San Diego, or Germany, do not have to meet, but we do. We would like to be on a level playing field, or at least on a different playing field that says if we continue to build Canadian culture and content, there will be some incentives. That will be the Canadian message, that we can continue to go forward.
This is not a very big country. When you look at the size of the Internet content developers out there, such as the Microsofts of the world, the Canadian players are very small in comparison. We are looking to the government to develop some kind of public policy that will not subsidize us, but will provide an incentive so that if we do move forward with Canadian content, there is some benefit for us.
We are not opposed to the ends that regulation serves. If we have left you with that impression, I apologize, for it is quite the reverse. Now we must find some other way to make this whole thing work.
The Deputy Chairman: We have just come back from Europe, where they have come up with a number of papers and policy statements. They are still in transition, but one of the things that they understand very clearly, as I am sure we do here, is that broadcasting products are not the same as other products. The broadcasting business is not the same as every other business, so it is not just a question of a profitable enterprise. It is a question of the identity and the culture and the education of a country. I know you understand that very well and I do not want to lecture you. That is their initial premise.
They are facing exactly the same problem that we are, which is the American colossus, not only in terms of money, but in terms of the seductive nature of their culture.
You are presenting the beginnings of a public policy model here, although I am not sure I understand it completely. It seems to me that you are saying, take away most of the regulations, give us incentives. I do not know how that is different from subsidies, and it does not guarantee any results in terms of Canadian content in my view. It might, but it might not.
Actually, there is a difference between the development of the television broadcasting system and the radio in Canada, because radio has been a tremendous success, and I am not sure, in terms of featuring Canadian content, that television has. Coming from Winnipeg, I am very familiar with the Global operation, and it seems to me that you made a lot of money out of picking up American programs, which are far less expensive than Canadian ones, and expanding abroad.
Now we have the new media, but we still have the same old viewers who want entertainment and sports. Can you delineate what you think is the new model, and have you looked at Europe? One of the things they are talking about is how to provide incentives for private broadcasters to put more money into production. That is not quite what I am hearing from you.
From a public policy point of view, which is what we must be interested in, we want to maintain the soul of a nation, and that happens through broadcasting. There is nothing more powerful. We have a slightly different perspective from you people, because you are in business, and quite rightly, you must make money, and you would like to combine these things. Can you elaborate on your model for the new media in terms of regulation and incentives?
Mr. Miller: Our ideas are very much in sync with what I have heard is occurring in Europe. I have read a recent report on multimedia from a standing committee of the U.K., and I have seen some other material.
The Deputy Chairman: European Commission.
Mr. Miller: I am perhaps not as up to speed as you are, but I have tried to pay attention. A few things emerge from my review of what is happening in Europe. Firstly, it is increasingly a European rather than a domestic policy, and that is very interesting. In particular, when the EC introduced a 50 per cent European content quota on broadcasting, domestic quotas officially disappeared. They recognized that their issue is the U.S., not each other, and therefore they have rationalized the broadcasting business to some extent and come up with this unified European content quota.
The other point that you make, about incentives and partnerships, is precisely along the lines that we are talking about. Let me go from that to your other point about public policy and what its objectives and tools are.
One mistake that occurs in public policy is that our instruments become our objectives. A regulator with a quota will think the objective is filling the quota. However, the objective is not 60 per cent on television or 30 per cent on radio, it is having Canadians watch Canadian programming and listen to Canadian radio and Canadian music.
You may have heard that in the most recent television policy review, we told the commission that the objective should be Canadian viewers watching Canadian television, and that policy should be oriented towards that. If that means perhaps a smaller number of better programs that generate better audiences, they can be exported. That then recoups the costs, allows us to do more and better Canadian programs, and you have an economic cycle that meets both the public policy objective of Canadians watching Canadian programming and our business interests.
As we have said, the Broadcasting Act established a public sector and a private sector, not a public and a non-profit sector. Neither we nor the government nor the CRTC take the view that profits are a bad thing. Profits are absolutely necessary. While Global is an industry leader, and we all wish we were as successful as they are, their profits are in no way out of line with those of comparable industries, such as telecommunications or cable or industries in the U.S. As pools of capital become increasingly fluid and pension funds control the destiny of companies, if reasonable profits are not returned, the cost of capital goes through the roof and needed investments cannot be made. It is important to recognize that profitability is not a bad thing.
We must focus more clearly on the objective of Canadians watching Canadian programming and listening to Canadian music and local service in order to come up with a completely different model.
The Deputy Chairman: You are making a good argument for the maintenance of a public broadcasting system.
Mr. Miller: It is both. As we have recognized, the public broadcaster can do certain things that the private broadcaster cannot do, but if you relegate all motives and objectives to the public policy, you will marginalize Canadian music and Canadian programming. Therefore you need both, and there are certain things the public broadcaster can and should do.
You astutely ask if we are talking about subsidies. Well, there are only two models for public policy; one is based on structural measures that result in some kind of cross-subsidy, and the other is direct subsidy. Global trade agreements are increasingly recognizing that at the end of the day, the subsidy model is the only one that survives trade scrutiny and can work in a borderless world. The structural model only works if you can put up barriers, as in broadcasting, and broadcasters have been able to do things that do not make money and cross-subsidize them with the things that do. However, that model will no longer work, so when we talk about incentives, we are indeed talking about some measure of public subsidy. If something were in the public interest, then it would appear to be a reasonable thing to do.
Our model says that broadcasting is becoming increasingly like publishing and the print business, where there are no barriers. Public policy on the magazine industry in Canada, and for the publishing industry in general -- with the one exception of advertising deductibility, which will remain a key factor in new media -- is based on subsidies.
Mr. O'Farrell: There is a great deal of misunderstanding in Canada about conventional broadcasting as it relates to American programming. There is one fundamental rule that all broadcasters must abide by, that is, programming must be 60 per cent Canadian overall, and 50 per cent in prime time. Global stations do not air more American programming than CTV, or anybody else for that matter. It is exactly the same percentage.
Were we luckier in buying American programs that had higher ratings, or were they luckier than we were? Perhaps, but the bottom line is, the commission allowed cable companies to serve communities across the country and distribute American services for a fee.
The regulatory system therefore created competition in our domestic markets, but without reciprocity, of course, since there were not very many Canadian stations to choose from on cable in the U.S. Then we were suddenly faced with foreign competition, and we make money in this business by creating a profit margin against a program. Even if the ABC station on your cable service brings you Ally McBeal, or whatever it is, a Canadian station can buy the Canadian program rights, and by virtue of simultaneous substitution, have the American signal deleted. It is a program right, a property right, that you are allowed to use and enjoy here. It is through the profit margin Canadian broadcasters generate by airing Ally McBeal, and selling advertising to Canadian advertisers to reach Canadian audiences, that we subsidize the unprofitable components of our Canadian programming.
In the Quebec marketplace, there are extraordinarily high ratings for a program like La Petite Vie.
The Deputy Chairman: I do not understand it, but I watch it.
Mr. O'Farrell: We consider a program a hit in Canada if it attracts an audience in the hundreds of thousands. Even in Quebec, with those extraordinary audience levels, Omertà would not be produced without government funding. This is a small country and these are huge production costs, and we must remember that amortizing such costs over a small population base is not always a profitable undertaking.
Mr. Miller: Of course, the fundamental difference between radio and TV is the cost of production. For example, it is much cheaper to produce a CD of music than a drama program. It is as simple as that.
The Deputy Chairman: It is exactly those costs that make it almost impossible for Canada, and we do not have distribution. That is recognized in Europe too.
What will be the role of the broadcaster in terms of the Net? If people can access it for free, how are you going to make money out of this? You might be wiped off the map.
Mr. Miller: It is dealt with in this chart we showed you.
The Deputy Chairman: I am talking about money, and why you do not want to become Webcasters like Yahoo and Infoseek.
Mr. O'Farrell: We certainly do. What is the future really all about? It is interesting that everybody seems to share a level of concern, and the more informed you are, the more concerned you become. Our company and Mr. Blackadar's, and other broadcasters, have perhaps three to five years to adapt and become transition friendly. If they fail to do so, and remain steadfast in their current orientation as conventional broadcasters, there is no doubt that there will be many casualties.
We can adapt by doing more R & D, but we also need the support of a public policy based on the continuing importance of cultural sovereignty in this country, whether expressed through broadcasting, narrowcasting, or Netcasting. We think that the Canadianization of our content is the key to remaining relevant, but we cannot Canadianize content that is unprofitable, because we will go out of business. Perhaps we must focus on money-making programming such as news, sports, and documentaries. We can do it in these areas, and we would like to do it in long-form drama.
Traders is one of Gobal's best Canadian dramatic series, but it still does not break even. For every $1.45 that we spend, we receive $1 in revenue.
Senator Maheu: I want to pick up on something Mr. Miller said earlier when you were talking about the Europe Community and European content. There is a preference in theory for European content, but in practice, every country is insisting on domestic content. What is your reaction to that?
Mr. Miller: My understanding is, that is based on their business interests. In France you will have French domestic content, and in Britain you want British domestic content. The 50 per cent EC quota probably comes close to being the domestic quota. That is different from us. We must fulfil a strict 60 per cent Canadian content requirement, so we do not have the luxury of justifying 40 per cent on a business basis, and acquiring the other 20 per cent from England and New Zealand. A private broadcaster like Channel 5 in the U.K. must hit that 50 per cent, but it might be done with 30 per cent domestic, and some other programming from elsewhere in Europe.
Senator Bacon: The cost of producing quality television programming is increasing, the multiplicity of TV stations is fragmenting advertising revenues, and the Internet will fragment the TV audience even further. Under these circumstances, how can the television industry continue to meet the challenge of producing good-quality programming?
Mr. Miller: This chart, which my colleague informs me he does not agree with, tries to point to phase two. It says that there will always be a case for television to show that Superbowl game on Sunday, or Traders or Seinfeld on Thursday night. Why would people all want to watch a good dramatic series at a particular time on a particular evening, if the Web could theoretically allow them to download it when they want?
People are creatures of habit, and they like having an appointment with the television to watch a favourite show. For example, they like the fact that they watch Mansbridge at night. That is an advantage. You bring your family together, you talk about the program with your colleagues around the office cooler, and that core strength remains and, I submit, represents somewhere in the order of 60 per cent to 70 per cent of conventional television.
That is our lower boundary if we are smart, but the difficulty is that we are too reliant on those American hits, and unless we can make a business out of Canadian hits, we may not have anything to show. Going back to your earlier point, fragmentation is changing the whole production payment structure. The conventional broadcaster formerly paid for everything, but now the network might show a program two or three times, then it might go to a specialty broadcaster. The interesting question is, where will the Internet be in that order? Will it be the first to air that show? For example, if you want to watch Seinfeld the day before it airs on the network, you can pay 50 cents to do so, or you can watch it for free on television the next day. No one knows if that is what will happen. Any one window generates less revenue, so as a producer, you must combine more windows to make it happen. That makes it more complicated, but it does not make it impossible.
The fact that anyone can become a producer on the Web is both a benefit and a disadvantage. How do you get people to come and find you? The beauty of broadcasting is that it is an aggregator, a programmer, so when I tune to YTV or MuchMusic or Global, I know I will get something, and I may be attracted to that brand. What is the equivalent on the Web? Our view is, as you have hinted, that equivalence will emerge in the form of portals and brands, and we must make sure we are a part of that.
The Deputy Chairman: That is a huge opportunity if you can seize it, because in my view, people will watch not only what is good, but also what they get used to. You can educate them.
They are currently educated to watch American television, but that is not necessarily inevitable.
Mr. Miller: In specialty services, YTV owns kids and MuchMusic owns youth. They are heavily into Web sites, new media, and are run by smart people who will make sure that they own that brand. They are well positioned to extend their business on to the Web, unlike some other specialty services.
There are at least two business model options for radio. One is to take advantage of its strengths, its "localness," its immediacy, its portability, and make sure it is that community base that everyone accesses, so that whether it is on the computer or in the car, people are tuning to their favourite radio station.
The other possibility is this increasing format segmentation, where you move beyond your community, but are known for promoting leading-edge emerging artists, as is Mr. Blackadar's company. Fragmentation leads people to make very different business choices, based on the challenges they face, and hopefully, smart broadcasters will find those opportunities.
Mr. Blackadar: Just because we are creatures of habit, we must be careful not to assume that those habits are set in cement. There are a lot of changes occurring out there. For example, statistics indicate that there are two groups very heavily involved with the Internet. The first group is kids, tweens, teens, roughly from the age of four or five up to the early 20s. The second is the one that I fall into, the 55 plus group.
It is interesting that the highest-use time on the Internet in Canada is 10:30 at night. We see that in homes where the Internet is available, television viewing is reduced by approximately three hours, and those households also listen to less radio. Many people are finding that television shows and radio content no longer attract them because they are looking for interactivity.
I suspect that you and I are probably clicking on The Globe and Mail fund report at night to find out how our funds did, and no doubt you are checking on some others, as we all are. That is starting to take away business from the traditional television and radio.
In my own radio environment, the big challenge is the cost of our Web site. I am on my seventh revision, it costs more each time, and there is no financial return from that site.
My business is trying to entertain people between the ages of about 16 to 28 or 29, and it has been fun doing it.
The challenge is to make sure that we are able to move with our audience, and obviously there is the opportunity to move to the Net and to Webcasting. We do not really have a choice, because we will be nothing more than roadkill if we do not. We must move with it, but there is little revenue stream to offset the costs.
We have a commitment to Canadian content, and we not only exceed it, but I do many interviews with Canadian acts that I put up on the Web, and for which there is a great demand. I brought some Web page material with me showing that people in the Netherlands, Tokyo, and Brazil were listening to my station on the Internet because it is the home station to which Mr. Miller referred. It is local content that they are taking with them, because they want to hear Canadian acts.
The Deputy Chairman: Plus it is very good radio that Americans want to listen to if they can.
Mr. Blackadar: However, for us to be where we need to be, I need to allocate more and more resources to the Web, because I suspect that in the very near future, just like television, we will find that traditional consumer habits will start to fall away. There are so many interesting things on the Internet that you will find people devoting less and less time to radio. Now the cost of getting on the Net is becoming less expensive every month, and with the available interactivity, more and more people are moving over. It is amazing to see what has happened in a very short period of time.
The Deputy Chairman: Why is it that newspapers are flourishing as never before in spite of the new media?
Mr. Blackadar: I am not here to answer for the newspaper business.
The Deputy Chairman: I am suggesting that the old media will probably continue to exist.
Mr. Blackadar: We must recognize that the Internet is one form of the medium. Most of us can drive a car, but some people have trouble doing so. Similarly, there are many people who will go through life without a computer, and there are some people who cannot type. So we all have things that we can do, but clearly the Internet is one form that exists.
If you look at what some newspapers are doing, you will see that The Toronto Sun, for example, now has "auto.com." You can buy and sell cars on the Internet, which will have an impact on traditional methods.
It would be wrong for us to leave you with the impression that we are about to fold up our tents and die. We are not, and we will move to the Internet because we must. As long as we are not impeded by unnecessary regulation, we will make the transition.
The Deputy Chairman: We have not explored your proposed model in its entirety, so if you have any further comments on that, I would like to hear them.
Do you think that Internet service providers should be taxed 5 per cent of gross revenues to help pay for multimedia content, just as cable and satellite TV and other systems are taxed?
Mr. Miller: We spent quite a bit of time on this issue, and one of the dissenting voices came from the owner of Silk FM, which is a station in Kelowna that is also an ISP. He was not interested in this idea.
It is important to recognize that for the cable companies, it is 5 per cent on their broadcasting revenues that goes to support Canadian programming, not 5 per cent on the telecommunications revenues. If you tried to apply that today, you would not gather any revenue, and since no one is yet broadcasting, we concluded that such a move was premature. It is a model that perhaps should be looked at in the future, but we do have some sympathy with the arguments for ISPs. They are building their businesses right now and they are not making any money. You would hurt the Canadian providers. AOL Canada would be unhappy, but they would pay it. It is premature because you might put an Istar or a Canadian ISP out of business.
Mr. O'Farrell: Cable operators are awarded basic monopolies in their respective territories, not unlike broadcasters' privileges to operate television stations, and this 5 per cent is one way in which they pay for that monopoly.
Mr. Miller: You are correct that our model is not fully defined, and we do not pretend otherwise, but we think we have some of the elements, the details of which we would be happy to share with you, and our 12 recommendations flow from that.
We believe that radio and television and specialty broadcasters will be part of the new media, but the real issue, and the one that preoccupies us the most, is how Canadian they will be.
The Deputy Chairman: Thank you very much. It was very good of you to share your time with us, and we will send you the remaining questions.
We require a motion to seek an extension for the tabling of the report.
Senator Bacon: I so move.
The Deputy Chairman: Is it agreed?
Hon. Senators: Agreed.
The Deputy Chairman: I shall request that the date for the tabling of our report be extended to March 31, 1998.
The committee adjourned.