On Wednesday, the CRTC issued a notice of hearing, calling Channel Zero Inc. to appear in person to discuss issues related to its specialty channel licence renewal applications. Channel Zero owns Movieola (which was rebranded as Rewind in December 2012), Silver Screen Classics, AOV Adult Movie Channel, AOV XXX Action Clips and AOV Maleflixx. The licenses for all these channels expire in August. Channel Zero also owns CHCH TV in Hamilton, whose licence doesn’t expire until 2016, and U.S. channel Fight Now TV, which isn’t regulated by the CRTC.

The commission is calling the company to the hearing because of apparent non-compliance with the licences assigned to these channels. There are many issues, some more serious than others, from unauthorized change of control to failure to meet Canadian content requirements to airing categories of programming that the licences do not allow them to air.

So you can imagine what angle the media took in their stories about these applications: porn, porn, porn, porn, porn, porn, porn, porn, porn and porn. (I counted one story — in a trade publication — that wasn’t focused on that angle.)

Stories (mostly briefs) about this issue, all with the same angle, appeared in print editions of The Gazette, the Journal de Montréal, the Ottawa Citizen, Toronto Star, Vancouver Sun, Globe and Mail, Edmonton Journal, Saskatoon StarPhoenix, Regina Leader-Post, Windsor Star, National Post, Cape Breton Post, Victoria Times-Colonist, 24 Hours Toronto, the Edmonton Sun and a bunch of other publications. It even made it into Friday’s Philadelphia Daily News, Columbus Dispatch, The Economist and New York Times, has been translated into Danish and sparked poorly-researched editorials in the Globe and Mail, Calgary Herald and Vancouver Province and columns by Jonathan Kay, Ian Robinson and Kate Taylor (which the Globe also created a video for). And CBC’s As it Happens even interviewed a porn star.

The stories are not incorrect (although most stories have small factual errors). The CRTC believes the three AOV adult entertainment channels fell short of their 35% Canadian content requirement. But it also has the same issue with Movieola/Rewind, which is not a porn channel.

More importantly, there are far more serious and less amusing issues on the table here. Specifically:

1. Unauthorized change of control

The CRTC requires that anyone with a broadcasting licence waits for approval before engaging in any contract or other means that would change the “effective control” of that licence, that is the person or people who through direct or indirect ownership has the ultimate say. This is why any sale of a radio or television station or specialty channel requires CRTC approval first.

Channel Zero has a somewhat complex ownership structure. Unlike Bell or Rogers, it’s not a publicly traded company with lots of shareholders. But unlike smaller companies the majority control is not held by one person or family. Instead, it’s owned by a group of people. Making things worse is that the group of owners is different for the different licences. AOV Adult Movie Channel has six shareholders, for example, while the other two AOV channels have four.

The change in control has an interesting history. It stems from a lawsuit filed in 2005 by two of the partners in Channel Zero against the other two. According to this summary of the case, C.J. (Cal) Millar and Romen Podzyhun alleged that Harold Balde and Anthony D’Andrea (not to be confused with the mob boss of the same name) were engaged in no less than “planning a corporate coup” to take over the company, which involved leaking confidential information to a third party, “secretly changing profiles and passwords within the card access system of Channel Zero” and even installing spyware on Millar’s computer.

These allegations have not been proven.

Balde and D’Andrea were fired for cause, and so sued the other two partners, who countersued.

Finally in the fall of 2011, a settlement was reached, whereby D’Andrea and Balde were each paid $600,000 for their shares in the companies. (Specifically, $100,000 for each 25% ownership stake in Movieola, $440,000 for each 25% stake in Silver Screen Classics, and $60,000 each for each unspecified ownership stake in Channel Zero Inc.)

The documents filed with the CRTC also include an employment contract for D’Andrea, setting his salary at $100,000 a year plus bonuses. He’s currently the vice-president of production at Channel Zero and CHCH, according to his LinkedIn profile.

Under the new simplified ownership structure, a new company, 2308740 Ontario Inc., will become the new holding company which controls all of Channel Zero’s licences. The company will be owned 39.3% each by Millar and Podzyhun, and 21.4% by Chris J. Fuoco, who under the current structure owns with his wife 30% of CHCH, but none of the other licences.

The CRTC is concerned that the deal has already resulted in a de facto change of control without the commission’s prior approval. The share transfer agreement is explicit that the deal does not close until after it receives CRTC approval. Channel Zero applied for commission approval of the deal in January 2012, which amazingly is only being dealt with now. (In fact, it’s so old that it also includes CJNT in Montreal, which has since been sold to Rogers.)

There’s also the related issue of whether this transaction is the kind of change in control that should require a tangible benefits package. The CRTC requires that buying a television station or channel come with a package worth 10% of the transaction price that goes to funds and projects that help the broadcasting system. But is buying out two partners and bringing in another, creating a company in which no one person has majority control, equivalent to Bell purchasing all the assets of Astral Media?

In a related issue, the CRTC is curious about a business relationship between Drive Publishing Inc., the licensee of AOV Adult Movie Channel, and Diamond Media Inc., a company related to Channel Zero’s operations. It appears that Diamond is handling AOV’s expenses and getting all its revenue, which suggests that it’s Diamond, not Drive, which is the de facto owner of the channel. Channel Zero says that it’s assistance provided as part of an operating agreement and that Diamond Media does not exert control or influence over the channel.

It’s complicated by the fact that Drive Publishing and 1225520 Ontario Inc. (which is the licensee of the other two AOV channels) are “inactive” corporations that have no balance sheets. Channel Zero says they were only inactive in a financial sense but are still fulfilling their obligations as licensees.

Channel Zero says in its correspondence with the CRTC that much of the agreements between the various Channel Zero companies were informal oral agreements, since there are only a few people involved in ownership. This adds to the confusion.

2. Nature of service for Movieola

Movieola: the Short Film Channel launched in September 2001 with a licence that allowed it to broadcast short films from 30 seconds to 40 minutes in length. It had a very clearly defined niche. Unfortunately as it turns out people aren’t too crazy about short films, so in December 2012 Channel Zero rebranded Movieola as Rewind, a channel that airs full-length feature movies from the 1970s, 80s and 90s.

Among those on its coming schedule are Weekend at Bernie’s, Spaceballs, Canadian Bacon, Delirious, Groundhog Day and UHF. But the channel also airs short films, branded as “Homegrown Shorts”.

When I spoke to Millar at the time, wondering if this change was allowed by Movieola’s licence, he said that Channel Zero has other licences for unlaunched channels that could be used for the rebranded service.

As it turned out, it kept the same licence, and even though it has already rebranded, it is now asking the CRTC for permission to change Movieola’s nature of service to “dedicated to the broadcast of the best of musical, dramatic, comical, experimental and animated films and series.”

If that sounds incredibly broad, that’s because it is. This new licence would allow Movieola/Rewind to broadcast virtually anything.

Channel Zero justifies the change by saying it’s similar to channels like Action, Showcase Diva and the Hollywood Suite channels. Except that Action and Diva have specific genre limitations (action and romance), whereas Rewind’s proposed licence does not.

The main worry is that Rewind could become directly competitive with channels like The Movie Network, which is supposed to be protected against that sort of thing. Specialty channels are supposed to be specialized, and this one seems very much not.

There’s an argument to be made that entertainment-based specialty channels have become so generalized already and so competitive anyway that we should just do away with these kinds of protections and just allow anyone to set up a channel that broadcasts dramas, sitcoms and movies. But as the rules exist now, specialty channels have to be specialized enough that they don’t compete with legacy channels that still have genre protections.

3. Rewind’s licence does not allow it to broadcast movies

The more immediate problem is that Rewind’s new schedule blatantly violates its licence, which specifically doesn’t allow for the broadcast of feature films. Considering that airing movies seems to be its very raison d’être, that’s a pretty serious problem.

CRTC licences for specialty channels list the categories of programs that those channels are allowed to broadcast, based on this list. Most specialty channels can choose from among several of these categories, but with limits on some (documentaries, movies, animated programs and music videos commonly are limited to 10% of the schedule).

Movieola’s original licence allows it to select programming from categories 2a, 2b, 3, 5b, 7c, 7e, 7f, 7g, 8b, 8c, 11, 12 and 13, all of which has to respect the condition of licence that it be “short films ranging in length from 30 seconds to 40 minutes.”

Missing from that list of categories are some key ones: music and dance, drama series, sitcoms and feature films.

Asked in 2012 about why programs from music and dance and feature film categories appeared in Movieola’s logs, Channel Zero blamed a coding error. Asked again in February why more than 400 hours of movies had aired on Movieola/Rewind despite that being not allowed, Channel Zero again blamed “human error during the log submission process”, despite the fact that Rewind was clearly airing feature films.

Expect the CRTC commissioners to not be happy about this during the hearing.

4. Deficiencies in Canadian content and closed captioning

It’s not just the porn channels that have problems meeting quotas. Movieola and Silver Screen Classics also had issues with Canadian content, programming categories and closed captioning.

But a look at a chart the CRTC put together last month shows these issues have largely been fixed. All five channels met their closed captioning quota in 2012-13, and only one (AOV Maleflixxx) missed the 35% Canadian content quota that year. Despite all the juvenile jokes, AOV XXX Action Clips and AOV Adult Movie Channel had enough Canadian content and closed captioning in the last full broadcast year.

(Incidentally, if you’re wondering if closed captioning of pornography is even necessary, the answer is yes. Videotron tried to make the argument that it shouldn’t be required, but in 2009 the CRTC said they have to do it anyway.)

For CanCon, Channel Zero told the CRTC that it had made a mistake in interpreting the rules. It worked on the basis of an 18-hour broadcast day instead of a 24-hour day, and apparently wasn’t aware that evenings also must be 35% Canadian (to avoid bunching all CanCon at 6am). After 2011-12, when Channel Zero was made aware of the issue, the channels started meeting their quotas.

For closed captioning, Channel Zero noted that captioning was a commitment, but not a condition of licence. Nevertheless, it took measures to improve the amount of captioning and the quality of it, doubling the size of its closed captioning department and organizing more meetings to monitor quality.

“Simply put, Channel Zero has worked diligently over the last year, and kept in contact with Commission staff, to achieve full compliance across all of our services,” it wrote last month. It also says it has hired a full-time compliance monitor whose sole job will be to ensure that it’s operating its TV channels according to CRTC rules.

5. Channel Zero’s specialty channel licences haven’t been renewed in 14 years

Amazingly, this is only the first licence renewal for Movieola and other Channel Zero channels. The original licence was supposed to expire in 2007, but then had a series of administrative renewals extending the first licence term under the same terms and conditions. These renewals are given when the CRTC feels it doesn’t have enough time to properly consider a renewal application before the licence expires.

In other words, the CRTC has given itself an extra seven years of extensions to decide whether Movieola’s licence should be renewed:

• Sept. 1, 2007 to Aug. 31, 2009
• Sept. 1, 2009 to Aug. 31, 2010
• Sept. 1, 2010 to Aug. 31, 2012
• Sept. 1, 2012 to Aug. 31, 2013
• Sept. 1, 2013 to March 31, 2014
• April 1, 2014 to Aug. 31, 2014

6. Channel Zero wants to revoke the licences of its porn channels

Channel Zero applied last summer to revoke the licences of its three adult channels. This isn’t because it wants to shut them down, but rather because channels that have less than 200,000 subscribers can be made exempt from licensing, thanks to an order issued in 2012. These channels would still have obligations concerning Canadian content, closed captioning and advertising, and would have to follow a nature of service definition that has been approved for use by open-entry Category B channels (all of Channel Zero’s channels are in this category), but would be relieved from some of the paperwork involved in licensing (including the very licence renewal that we’re discussing here).

The hearing is scheduled for April 28 in Gatineau. Comments from the public on the renewals and issues of non-compliance are being accepted until April 4. They can be submitted here. Note that all comments, including contact information, form part of the public record.

UPDATE (Aug. 9): The CRTC has come down with its decision, accepting the transfer of ownership and licence renewals. It decided:

• The transfer of ownership is, in fact, a change in effective control, but only for Movieola, because Millar and Podzyhun can now, when voting together, control that channel.
• Because Movieola had value when it was sold ($1.2 million when you include the value of the leases it holds), this change of ownership triggers tangible benefits of $121,060. Since Channel Zero didn’t specify a plan for dispersement of that money, it will all go to the Canada Media Fund, payable over three years.
• Movieola, which has since been rebranded as Rewind, has had its nature of service radically altered. Instead of being focused entirely on short films, it is now a service “dedicated to short films and to action and adventure programming. Its action and adventure programming will ‘run the gamut’ from contemporary ‘popcorn’ action and adventure films and series to classical westerns.” Its programs (except for short films) must be at least 10 years old, a measure protecting it from competing directly with The Movie Network/Movie Central and other pay TV movie services.
• Movieola and Silver Screen Classics have had their licences renewed for only three years because of compliance issues with Canadian content, program categories and programming logs.

The decision makes no mention of the adult channels, whose licences don’t need renewal because they can operate under an exemption order.