Drew McReynolds and Haran Posner are telecommunications analysts at RBC Dominion Securities
The CRTC launched the final phase of its “Let’s Talk TV” initiative on Thursday, calling for public hearings in September and a formal review of Canadian television’s very essence. McReynolds and Posner, having reviewed the program’s work so far, have offered this opinion in an analysts’ note.
Key CRTC proposals up for discussion
The proposed new television framework is based on a set of CRTC proposals with three intended outcomes: (i) choice and flexibility; (ii) the creation of compelling and diverse Canadian programming; and (iii) informed choices with recourse mechanisms in the case of disputes. The key proposals that could have the greatest impact include: (i) maximizing choice and flexibility, including offering channels on a stand-alone basis; (ii) eliminating simultaneous substitution; (iii) changing funding mechanisms for Canadian content; and (iv) eliminating genre exclusivity.
Regulatory risk rises as the scope of proposals is greater than expected
Although any television review by the CRTC was going to address important issues, we were surprised to see the sheer scope of proposals that are being put on the table for discussion. As a result, we believe the regulatory risk for investors from this review has increased. However, we also believe the proposed framework is a starting point for discussion, is intended to invoke new ideas and solutions, and is likely to evolve as the regulatory process fully plays out.
CRTC looking to take a balanced approach but “getting it right” will be difficult
As evidenced in the broadcasting notice, we continue to believe the CRTC will try to strike some form of balance between providing increased consumer choice and protecting levels of Canadian content spend and programming diversity. While we commend the CRTC for tackling a system that is increasingly and undoubtedly out-of-date, we believe “getting it right” (which necessitates instituting real change) will be extremely difficult and runs the risk of unintended consequences, particularly should the full scope of the proposals be seriously considered and in some form implemented.
Outcome of the review to result in lower television revenue
Consistent with our previously published views, we expect the outcome of this television review to result in lower television revenue for distributors, broadcasters and content producers. While there may ultimately be some benefits within the value chain, we fail to see how breaking the current television bundle (and moreover taking the lead on unbundling English-speaking television in North America) will be a net positive for the Canadian television industry.
A growth headwind for the distributors but not game-changing
Of all of the proposals within the proposed new framework, we believe implementation of the proposed packaging regime has the most relevance for the distributors and would result in accelerated cord- shaving and declining television revenue. However, we do not view such channel unbundling as game- changing for the companies in our telecom coverage universe given: (i) the relatively low contribution of television revenues to overall revenues as shown in Exhibit 1; (ii) our continuing view that Internet services are an effective hedge against inevitable cord-shaving and cord-cutting provided that the distributors maintain the ability to set Internet pricing; and (iii) the likelihood of less cord-cutting with greater packaging flexibility.