The title of the decision is “Request for dispute resolution by the Canadian Independent Distributors Group relating to the distribution of specialty television services controlled by Bell Media Inc.” – but its boringness hides how much of an effect it could have on your cable or satellite television bills.
The case involves a complaint to the Canadian Radio-television and Telecommunications Commission from a group of independent telecom groups about their attempts to come to a deal with Bell Media over its specialty services like TSN, Discovery Channel and Space.
The cable companies formed an alliance called the Canadian Independent Distributors Group. Its members are:
- Bragg Communications (EastLink)
- Cogeco Cable
- Manitoba Telecom Services
- The Canadian Cable Systems Alliance, which represents more than 100 independent distributors including dozens of small-town companies and cooperatives
Of note is that none of these companies are vertically integrated – they don’t have specialty channels of their own. They argue in their complaint that Bell is using its ownership of some of Canada’s most popular specialty channels as leverage to give its affiliated television services better deals than it gives to independent cable companies.
Giving undue preference to an affiliated company is not allowed by CRTC rules. What’s more, when it became clear that mega mergers would create giant corporations with significant holdings in both television services and the cable and satellite companies used to distribute them, the CRTC set up a framework to ensure they weren’t abusing their positions.
The framework set rules for these companies, which include:
- forbidding them from setting “unreasonable” wholesale rates for specialty channels
- forbidding them from requiring minimum subscription numbers that would force people to pay for services they didn’t want
- requiring them to make services available on a stand-alone basis
- forbidding them from establishing an “excessive” activation fee
- in general, offering conditions to affiliated companies that are not offered to competing companies
This is all well and good in theory, but would it work in practice? Bell’s purchase of CTV and Shaw’s purchase of Canwest/Global certainly gives the impression that they believe they can gain an advantage through this vertical integration and that they believe there are benefits to controlling both sides of the equation.
The independent distributors group complained that Bell Media, in negotiating a new contract for its services, made unfair demands of them. Among them:
- Making no changes to how they package Bell Media’s specialty channels without first gaining Bell Media’s consent
- Setting minimum penetration levels so high, particularly for TSN and RDS, that the cable companies would be forced to force customers to carry those channels whether they wanted to or not
- Requiring high fees and interest be paid when new contracts are agreed to after the previous one has expired
- Refusing to include “non-linear rights” (i.e. video on demand and mobile) in the agreements
Bell Media responded by saying its services required a certain amount of revenue predictability, but offered an option called a penetration-based rate card, which adjusts wholesale rates based on the number of subscribers. The more subscribers, the lower the wholesale price per subscriber (the retail rate is at the discretion of the distributor). With that option, the cable companies would be free to offer services à la carte (but Bell would still require at least 50% of customers carry the most popular Category A channels like TSN and Discovery).
It also pointed out that more than 150 other distributors had signed an agreement with them.
Bell wouldn’t budge on “non-linear” rights, saying it isn’t regulated and has a high market value. Bell said it currently isn’t offering those rights to other distributors, but would be willing to provide the rights at commercially reasonable rates once they do.
The cable companies responded to Bell Media saying that while the penetration-based rate card makes sense in theory, if the price is much higher than the rates with minimum penetration guarantees, it wouldn’t solve the problem.
A win for Bell Media
The CRTC’s decision came down mostly on the side of Bell Media. While the commission has pronounced itself strongly in favour of consumer choice and à la carte subscription options, it said the older, bigger-budget specialty channels “will need time to adapt to an increasingly consumer-focussed environment.” It endorsed the variable rate system proposed by Bell, with the caveat that it would be unacceptable “if it had the effect of making flexible packaging options commercially unviable or resulted in a company that offers programming services using its market dominance so as to insulate it completely from the effect of consumers exercising choice.”
On the issue of what Bell called “incentives” to sign contracts on time, the CRTC agreed that such practices are commercially reasonable and did not order Bell to cease using them or to stop charging interest on retroactive balances.
And in the debate over “non-linear” programming rights, the CRTC also sided with Bell, saying it did not have to include those rights in negotiations with the cable companies and could negotiate them separately when it is prepared to do so.
The next stage, if the groups can’t come to an agreement before then, is arbitration. The arbitration process used here is called final offer arbitration, also referred to as “baseball arbitration” or “pendulum arbitration“. Both sides present final offers and the arbitrator chooses which one he or she thinks is more reasonable. The idea behind this form of arbitration is that it encourages both sides to be reasonable in their demands, and is likely to reward the side that is seen as being more conciliatory.
What does it all mean for me?
A lot still has to be determined at the arbitration stage. If the wholesale rate on the penetration-based rate card is too high, small cable companies won’t take advantage of it to offer consumers more choice. If it’s low enough that it makes sense to offer more packaging choice, we might see other cable and satellite providers try à la carte models. Currently choosing channels that way is available only in Quebec, and really only because of competitive pressure from Videotron that has forced Bell and Cogeco to do the same in Quebec but not elsewhere. Bell and Rogers both come out against more packaging flexibility for consumers, saying it’s either too complicated or consumers aren’t interested in it. (Bell Media even said at the hearing, when speaking of allowing Videotron to move to an à la carte model: “In hindsight, I wish that horse could be put back in the barn”)
But while the CRTC could have taken a strong stand in favour of consumer choice, it decided instead to stay on the side of some of the biggest money-makers in Canada. Channels like TSN, Space and Discovery are hardly in financial distress. Instead, they are the most profitable specialty channels and each make millions of dollars every year. Still, the CRTC has decided that it’s okay for big companies like Bell Media to impose minimum levels of subscribers for these channels, which means if not enough consumers choose them, cable and satellite companies can be forced to add them to basic packages and charge people for the channels whether they want them or not.
If there’s one bright spot, it’s that the CRTC believes that there’s an adjustment period here, and that eventually these specialty services will have to stand on their own two feet without this crutch of a minimum subscriber base. By the time of the next contract in a few years, all cable and satellite companies could be entirely free of contractual headaches that put limits on packaging flexibility, and consumer choice could reign.
Assuming we haven’t all moved to Netflix by then.