It’s been nearly a week since the CRTC handed down its momentous decision that will break apart Canada’s existing television system by forcing service providers to offer standalone channels.
The process will get underway by March 2016 at the latest, with TV providers having to introduce basic packages of local and news channels at no more than $25 a month. Full pick-and-pay channels and smaller theme packs will then have to be offered by December 2016.
Some Canadians won’t have to wait, though, since several smaller TV providers have been offering such services in parts of the country for some time now. The same goes for bigger players such as Bell and Videotron in certain markets, such as Quebec.
VMedia in one of those providers. The Toronto-based company has been selling services in Ontario since 2013 that are uncannily similar to what the CRTC has mandated. VMedia also sells home internet and phone services and now has about 16,000 customers, with about half subscribed to its skinny basic and a la carte TV options.
Anyone wanting to get a sneak preview of what the CRTC’s new pick-and-pay universe might look like would do well to browse the company’s offerings. I chatted with VMedia partner and advisor George Burger about what the CRTC decision will mean for smaller companies like his, the bigger providers and for consumers. Here’s a condensed version of that conversation:
What did you think of the decision?
It’s quite remarkable the measures and policy directions that the CRTC has actually been taking for quite some time now. I think the chairman has set a direction that conforms with his own vision of where things have to evolve. I don’t think it came out of nowhere.
I recall going back about three years when the Bell Astral hearings were happening, the first time, and it was clear what direction this new commission and chairman were taking. It was largely a direction where consumers are treated with at least as much respect as industry players and incumbents. That’s been the common thread. It’s been very, very consistent so in that sense I’m not surprised by the outcome.
What does the decision mean for VMedia?
When we set up our business model and how we wanted to package our channels for the market, it was identical to what the commission has decided on. Our objective was to provide as skinny a basic as possible and then to provide small theme packs and a bunch of channels on a la carte or standalone basis.
The only thing that stood in our way with coming up with a model that looked exactly like this was the way the license agreements from the program suppliers [such as Bell/CTV and Shaw/Global] were structured.
We approached it with a certain amount of naivete, not having looked at the contracts and to some extent being misled by the [existing pick-and-pay] experience of Quebec, which again is somewhat similar to what the commission has come up with.
It took my very first phone call to my very first [channel] supplier to say, ‘Look I just took a look at your draft contract and it says I need ‘X’ penetration and I have to have packages.’ I said, ‘I’d like to do what you’re doing in Quebec,’ and they said, ‘Well that’s Quebec.’
There was no gun at our head that said these [extra] channels need to go into our skinny basic, but what happened was that the economic conditions that were attached to those channels were such that it would be completely irrational and self-destructive not to do it that way.
As a result, we built a skinnier basic package than most others out there, which was for the past two years priced at $24.95, if that rings a bell. The difference was that we had 18 or so speciality channels in it, like YTV, the TSN channels, E!, MuchMusic, MuchMoreMusic and so on. The circumstances required us to make our skinnier a little bit fatter than the commission has mandated it to be.
Similarly, with our UChoose channels, we have about 70 channels that are available on a standalone basis and of them, about 45 are available for you to package at a lower per-channel price.
Again, that’s a situation where we would have welcomed putting all of our 150 channels into the UChoose store, but our contracts do not allow us to. They only allow us to do so with 70-odd channels.
That’s going to change now. As of March 2016, all of those channels are going to be available through our UChoose store. We’re very happy with it. We’re all set up for it.
How did you manage to get your service off the ground without these rules in place?
What we said very clearly is that we’re providing the maximum amount of choice that the contracts allow. Among other [broadcasting distribution units, or BDUs], for their own models and revenue targets, they choose not to do it as flexibly or with as much choice as we do. We knew that going in and we knew it was our key differentiator.
What you see with us now is how far the contracts will let you go. If there’s another BDU out there that doesn’t do it like this, it’s because they were not able to get the benefit of having contracts structured this way or, more likely in the case of the larger ones, they choose not to provide as much variety.
Frankly, if they did, I doubt this whole process would have happened. If everyone had been charging $24.95 for a skinny basic like we did, the commission wouldn’t have bothered in the first place.
What’s it going to mean for incumbents?
This is tied into the most compelling aspect of the decision, which is the structuring of the Wholesale Code. The code is now going to be embedded in the regulations so that it has the force of law, whereas up until now the code of conduct was just an agreement on how we’re going to proceed.
Ultimately, it all ended up in a dispute resolution process that didn’t really have the optimal opportunities for outcomes, especially when dealing with smaller players.
Whether it was an independent BDU seeking a fair deal for channels or it was a channel group seeking proper exposure for their channels among the vertically integrated entities, it was always a case of David versus Goliath, especially in a financial sense. At the end of the day, a proceeding before the CRTC was going to take time and money.
Now the Wholesale Code is embedded in the regulations so if somebody breaches it you file a complaint and you don’t have to go through the whole dispute resolution process. You submit a complaint to the CRTC and they take over. Moreover, the language of it means the CRTC is going to be proactive with the Wholesale Code.
All of those things are very strong measures compared to the existing environment. What that means is there’s a greater likelihood that the incumbents are going to have to provide fair deals.
We don’t quite know what that means yet, but in a world without penetration guarantees, you’re still not out of the woods. If a vertically integrated entity has a very popular channel and you don’t reach their [required] penetration level, they can’t yank the channel from you. Currently, they can and then your ability to compete as an independent BDU… well, you’re done. You’re toast.
Why is penetration even a requirement? Why do they care how many of your customers subscribe to a channel?
It has to do with advertising. The more people that watch, the more advertising revenue they get. And by definition, if you’re in 30% of the homes, fewer people are going to be watching you than 70%.
But then you’ll say, those 30% are the people who actually want to get this channel. But apparently 30% or 40% of viewership—I may be a little high on that—comes from surfing, or accidentally stumbling onto that channel. If you’re no longer on a channel package, you’re no longer going to catch that person’s eye and you’re not going to get the advertising volume.
I see the overall economic logic in this and I get it, but the situation is somewhat rife for abuse because of one big issue. We’re talking about big vertically integrated entities, but if you contrast it with the United States, it’s not even close. In Canada, close to 90% of the channels are concentrated in the hands of four companies.
They happen to have a gigantic interest in controlling those channels to drive their larger business. They don’t wake up in the morning thinking, “I don’t have VMedia as a customer yet, I want to get VMedia as a customer.” They wake up in the morning and think, “I wish VMedia wasn’t around, because then their customers would be my customers.”
In the United States, you don’t have that situation. When [Disney CEO] Robert Iger wakes up at ABC, he doesn’t think about selling bundles [of services] to someone driven by ESPN because he’s not in the carriage business. All he cares about is getting ESPN into as many homes as possible, and if that means VMedia, Comcast, he doesn’t care as long as he gets his money.
You currently charge between $1.50 to $2.25 per channel. Do you think that’s going to change, and what will the big players charge?
Until now there’s been two categories of channels, Category A and Category B. Most of the channels that are in our UChoose store are Category B because Category A have a history behind them. That’s Showcase, History and so on, where they have pretty deep penetration and they want to keep it that way. [The channel suppliers] don’t want to pull them out of packages because they’re very popular and wind up driving packages.
But now the Category A designation has been taken away from them, which means I have the leverage, such as it is, of saying, ‘I don’t want to carry it unless you let me put it this way.’ Now, they’re going to make it available in the UChoose store.
What they’re going to charge for the regular Category A channels like Showcase and Slice, it’s kind of hard to tell.
Conceptually, they’re not very different from a lot of the Category B channels in terms of value to the viewer, but there’s a logic to Category A channels being treated as special because they had higher Canadian content requirements. But that’s also no longer the case [thanks to a separate CRTC decision].
All specialty channels now have the same CanCon requirements, so they should all be in that category and it may be that those Category A channels end up being priced roughly the same in pick-and-pay areas as we currently have.
However, what are you going to do with drivers, like sports? That’s going to be the real question mark. According to these rules, you’re going to be able to get Sportsnet on its own, so what will Rogers [which owns Canadian Business] charge for it? It’s really hard to predict.
Until the dust settles a year or two into this new era, you’re not really going to know what the steady state is for Sportsnet. How are you going to know how much revenue you’re going to be able to count on, both on the advertising side and on the subscriber side? That’s going to be tricky. There are very few models to look at. The U.S. is not where we are yet.
You service is delivered over IPTV, right?
Yes, Internet protocol television.
How do you manage a quality of service? You had some problems in the past so how have you navigated it?
Ours is definitely a managed service, it’s not over the top [like Netflix]. We deliver our content directly from our head end into our leased Internet facilities direct to the set-top box at the other end. In terms of method of delivery, it’s only marginally different from what the incumbents like Telus or Bell provide.
The most important issue is that the quality of our service is largely dependent on bitrate. That’s a whole other area of regulation that we’re sliding into, and we’re going to slide into it in this discussion because they’re totally interrelated…
Exactly. It’s a telecom issue, but right now it’s inextricably intertwined with competitive television.
Right now, we have to keep our eye on bitrate because the more [TV service] we push out, the higher our Internet costs become. Because our Internet costs are artificially set at a tariff, which happens to be in our very strong view set at an exceedingly high rate in relation to the actual costs to the incumbents, we wind up having to keep our bitrate at a manageable level. In our case, that’s roughly about three megabits per second.
Somebody like Bell, which doesn’t have those constraints because at the end of the day it’s their water—and how much water they push down to you makes no difference because it’s all their water—they wind up giving seven or eight megabits. Therein lies the difference in terms of quality.
Having said that, because necessity is the mother of invention, we have managed to tweak and improve our encoding and compression systems to the maximum extent possible given the technologies available and we’ve got an image that’s roughly half of the bitrate of Bell that probably is about 80% as good.
We have improved tremendously since we launched. The gulf is not as great, but it’s still a problem for us because we want to be able to use a higher bitrate. That’s why this CBB issue is a sensitive one for us, for every other independent ISP that wants to get into this space, because the more popular you become the more expensive your service gets.
Is it inevitable that the CRTC is going to have to come back to CBB and revise the rates?
It’s very clear the government and more importantly the public want competition in Internet services because it’s rife for uneconomic pricing. We’ve created an environment where independent ISPs have been able to grow – not necessarily flourish, but grow.
However, there’s a limit there on their growth and unless you can layer on other services and have those that the public wants—83% of the public has double-play or triple-play services—it’s very hard for an ISP to wrest the Internet business away from a household without taking the TV business with it. That means your potential market is really circumscribed—maybe 18% to 20% of the market.
You need to go to that other 80% to give them a choice, and one way to do that is by having a TV service. VMedia realized this early in the process and that’s really been our focus, but every ISP is going to go down this road.
If you continue to have a usurious CBB structure, then they’re not going to get ahead. [Smaller ISPs] may layer on margin because they’ll have another service, but that margin is going to get chewed up by the amount of the bandwidth that new service consumes.
The regulators have to understand—and they do, let me be clear—that the CBB aspect is very important to the future. It’s going to be very interesting to see what they come up with with the wholesale wireline policy process. There is simply no basis in reality for the current CBB pricing. The prices the incumbents have put forward are unfair and unreasonable.
So the CRTC now has wholesale rules for broadband and for television. How does the regulator justify not creating a wholesale market for wireless?
That’s a very good question and I’ll answer you completely candidly. At VMedia, we’ve been very, very principled as focusing on being in line with competition and consumers interests. We firmly believe that what we do is good for us and for consumers because we provide competition and more choice.
In the case of wholesale wireless, yes, there’s no question we’d like to add a mobile phone service to our bouquet. We’d love to be a quad play. But if we want to be principled about it, right now the regulators and policy makers have taken a very concerted effort to introduce a certain level of competition in the wireless space through the empowerment of smaller players—in particular Wind—which has laid the groundwork for, if not a multitude of wireless service providers, then at least four.
In every market right now in the Internet space, TV space and phone space, there are two providers. In Ontario, yes you may have Shaw beaming down [TV service], but when was the last time you saw an advertisement for Shaw Direct? It’s a duopoly.
That’s not the case in wireless. Every kind of economic analysis generally tends to shore up the belief that four players in a market is plenty. I’m not taking a view either way, but I am saying that for us right now that’s not a burning issue. If it turns out that they do go with [wholesale rules], believe me we’ll be out there trying to participate. But it’s not what’s keeping us awake at night.