TV networks dealt blow by CRTC

GRANT ROBERTSON,  From Friday's Globe and Mail

GATINEAU, Que. — Canada's biggest television networks will be forced to take a hard look at their business models in the months ahead after federal regulators blocked a proposal to collect millions in new fees.

The broadcast networks, led by CTV and Global Television, wanted to start charging cable and satellite carriers for their signals, which would have been worth $300-million to the big broadcasters as they confront a deteriorating economy.

But a decision by the Canadian Radio-television and Telecommunications Commission to deny the move will inevitably leave the networks with some tough decisions to make, said Leonard Asper, the chief executive officer of CanWest Global Communications Corp.

“We're going to have to go back and look at our business models once again,” he said Thursday.

“Nothing is too outrageous to consider.”

With the TV industry concerned about an economic downturn, CanWest is in a precarious spot with $3.6-billion of debt and limited financial flexibility.

Ratings service Moody's Thursday CanWest's rating under review.

Moody's said the move was “prompted by the likelihood that rapidly deteriorating general economic conditions will suppress advertising revenues while simultaneously causing business enterprise values to fall.”

The fees would have been worth about $75-million in annual revenue for Global TV, at a time when the networks have already started to see their profit margins erode.

While CTV is privately owned, CanWest is publicly traded, and is reliant on the advertising market for about 85 per cent of its revenue. Though Mr. Asper said he wasn't specifically referring to drastic cost-cutting measures such as layoffs, he said the big TV networks would have to start thinking hard about their operations in light of the fee proposal being refused.

The networks argued they should not be forced to give their signals free to distributors who turn around and offer them as part of their subscriber packages, and earn a healthy profit doing so.

The CRTC, however, said the networks failed to make a convincing argument that they needed the money.

“I'm trying to find a word that is sufficiently diplomatic here,” Mr. Asper said after the decision was handed down. CTV executives declined to comment, saying they were still reading the decision.

However, the CRTC did make a key concession to the networks to collect new revenue another way. The regulator said it would allow the networks to negotiate with cable carriers to charge for so-called distant signals, or time shifting. The networks estimate this is worth about $93-million for the industry.

But the signals fees were what the networks were really after. Unlike specialty channels, such as TSN, MTV and Showcase, which do charge monthly fees, customers don't pay for the national networks.

Arguing that the financial fortunes of network TV were are being eroded by competition from cable and other media sources, CTV and Global were proposing a fee of 50 cents per cable and satellite subscriber, which the distribution companies said they would pass onto consumers. The big networks rely solely on advertising revenue and have seen their profit margins drop to roughly 5 per cent, while cable margins – fed by those monthly fees – are as high as 20 per cent.

“While [the major networks] have shown a recent decline in profitability, they, as other enterprises, might first look at their own business plans before making a request for increased revenue from the commission,” the CRTC said in its decision.

“Neither the rationale for strategic initiatives by [over-the-air] broadcasters, such as recent major acquisitions, nor the basis for financing those initiatives or the impact of those initiatives on profitability were explained to the commission at the public hearing.”

The broadcasters had hoped to win the argument this time after they were turned down in their bid to charge fees in 2007.

Analyst Carl Bayard of Genuity Capital Markets said CanWest stood to gain the most if the fees were approved. “If fee-for-carriage is implemented in some form,” Mr. Bayard wrote in a research note before the ruling was released, “it could be a defining moment in CanWest's history.”