Cable Wars Come To Canada

Regulators are at their best when they intervene in an industry to prevent harm, such as keeping unsafe food and drugs off the shelves, and preventing usurious interest rates. Not so good is when they attempt to coerce companies to offer products and services that they or their political masters, the government, desires. The latter approach is an unwarranted attack on the free market. I believe this is the proper way to judge the CRTC's action this week to say that cable companies must negotiate payment to the television stations to distribute their products to consumers.

Now, before we attack the CRTC -- whether justly or because of our personal beliefs -- we should spare some sympathy for the situation in which they find themselves. The government has to a degree left them to hang themselves by not being active in directing policy or modifications to the laws that dictate the CRTC's duties. It may be intentional, or it may be that they just want to focus on other important topics, of which there are many. Perhaps the government would prefer to watch the public stew on this for a bit before deciding on the most politically profitable approach.

The CRTC themselves have signalled that they would prefer the two sides would resolve this without the regulator's involvement. This stance is in the CRTC's self-interest, however it is also true that it would be best for everyone. By forcing the sides to negotiate, the CRTC hopes to deflect the attention focused on them. It isn't likely to work. They are in everyone's cross-hairs, as the large number of public statements from every side this week has shown. Let's look at some of these views before I come back to my own perspective of how the CRTC ought to act.

Let's start with John Doyle, writing for the Globe and Mail. I found his views to be particularly self-serving and wildly exaggerated. But he does get one thing partially right.

Both sides are treacherous, money-grabbing, hostile, egotistical forces.

The money-grabbing bit is certainly correct, although this is nothing dreadful; this is simply business, where the first priority is always to deliver a return on investment to its owners. It am continually amazed at how often some Canadians seem offended by the concept of profit, yet they live in a country whose affluence was created by free market, profit-seeking businesses. Without those profits, companies couldn't hire and pay salaries to people like John Doyle. Why is he not instead fuming at the networks who have squandered billions in pursuit of their own treacherous, money-grabbing, hostile, egotistical objectives?

Consumer greed for American popular culture disguised as a robust belief in the inherent integrity of the free market.

Ah, the customer is always wrong. So who is at fault here? Is it the networks who, rather than invest in Canadian content, live by the advertising placed alongside imported programs, and even lobby for blocking of similar content from US networks distributed by the cable companies? As Rogers Communications says:

"Endorsing Broadcaster-mandated blackouts of American shows is a new low point for the Commission," said Phil Lind. "In an age where consumers want to watch what they want when they want, the concept of denying content, which is available for free with an antenna or on the Internet, is so anti-consumer it's unimaginable."

Mr. Doyle's contempt for Canadians disgusts me. He wants to dictate how you and I should spend our money, whether through taxes or additional fees funneled back to the money-grabbing, and poorly run, networks.

The airwaves belong to the nation and the citizens are entitled to a say in the use of the airwaves. Broadband. Digital signals. That’s the airwaves, people. And nobody is entitled to a monopoly on the airwaves.

This is absolute nonsense. Access to the radio spectrum is justly regulated by the government -- not just the CRTC, but also Industry Canada -- since it is a scarce resource and there is large potential for interference between services. Cable, fibre and copper are not subject to the same scarcity and they do not make use a public resource other than access to rights-of-way. One of the important reasons cable is so successful is that it can support far more broadcast capacity than over-the-air broadcasters.

Let's move back to that press release from Rogers Communications. While I always cringe a bit when I read these sorts of self-serving items, I will say up front that, despite how much I despise this company as a customer of theirs, I sympathize with their position.

"The CRTC today has essentially placed a tax on all cable and satellite customers," said Phil Lind, Vice Chairman, Rogers Communications Inc. (RCI). "While the over-the-air broadcast sector has had financial challenges during a tough recession, the Commission has decided to penalize our customers and impose fees for services that are available free over-the-air for anyone with an antenna or on the Internet."

This is an important point, one that I touched on earlier. The cable companies have large profits and the networks are bleeding red ink. This fee, should it come about, is effectively an attempt by the CRTC, and the government by proxy, to play Robin Hood with a maple leaf by transferring wealth from the rich to the poor. They do this without regard to the reason why the poor became poor: their own incompetence. Have they forgotten Canwest?

It's become a Canadian tradition to transfer wealth around in the pursuit of egalitarianism. While this may make sense when it comes to government services, all the CRTC is doing is rewarding failing private enterprises by forcing the successful ones (or, more correctly, their shareholders) to pay them.

"As early as last year, the government signalled to the CRTC that it believed compensating the networks would be damaging to consumers. That message was interpreted by the industry as a sign cabinet may seek to overrule the regulator. "

"Private broadcasters lost $116-million before interest and taxes, wiping out an already meagre profit of only $8-million in 2008. However, they also spent more on foreign programming than ever before, a practice that was strongly criticized by the cable and satellite firms during the course of the debate."

Can you image the US government forcing Google to pay Yahoo! for the capital crime of successfully competing against them? This is why the government, and the regulator, should stay out of this battle: they do not want to rule on private business practices by, in effect, making one company responsible for the choices made by another company. Yet this is what the CRTC is proposing to do. They also display an unbelievable ignorance for the most fundamental dynamics of the cable business, and how they serve customers.

“They better be careful that they don’t impose it on the customer. Because the customer has an alternative that is free,” [von Finckenstein] said, referring to the ability of consumers to watch television on the Internet. “You work out the solution by which you keep your customers.”

Von Finckenstein is not a young man, yet he seems not to remember the 1970s when the cable industry came into its own after bleeding red ink for years from building their distribution networks from scratch. Originally, they did not care one whit about local programming. They only carried those signals because that is what customers wanted. It was a simple technical issue related to customer convenience: television sets only accepted one RF connection, and that could be connected to the cable feed or a roof antenna or rabbit ears. If the cable companies didn't carry local stations, customers would have to have to install switch boxes or manually change the connection at the backs of their sets. The cable companies' real business was to bring in distant stations, especially US networks, that the market hungered after. Carrying local networks was a purely technical solution to a customer problem.

If talks fell totally apart, the broadcasters would have to back up their position by unplugging their signal, which would not impress their advertisers much, or the cable companies would have to stop carrying the broadcaster’s feed, which would infuriate its customers.

Don Martin got it right. While it may come to this, as it recently did in the US, since the networks and the cable companies would both lose in the public's eyes, they would be wise to avoid doing this. Then again, maybe it would be a good thing. I already know people who have cut their cable service and gone back to receiving only over-the-air local stations. Many are finally realizing that TV is truly a wasteland, and a terribly expensive way to spend their leisure time.

With more and more people tuning out and going to the internet for their entertainment needs, especially the younger generations who are the most important audience to pursue, no amount of wealth transfer will save the networks. The cable companies will succeed regardless since they are in the driver's seat with respect to broadband. We will be hearing more about regulating Canadian content on the internet, but it will be smoke without fire since there is really no mechanism by which the CRTC can control this, and if they tried there would be such howls across the country that politicians would have to respond.

The networks will lose this battle. Maybe not this year or next year, or even the year after, but they will lose. In the meantime, if the CRTC insists on managing outcomes, well, let them focus on the CBC, a company created and funded by the government (for us). One of CBC's purposes -- why its existence is justified -- is to sponsor and distribute Canadian visual arts that may not reach an audience when the private media, or their customers, are not interested. As much as I like the CBC (and I really do, though only radio), the CRTC should stick to dictating content to this government-funded institution and not the private sector.

If the private sector can't earn a living by offering local programming or Canadian arts, let the market determine the result. It would be even more outrageous if they were to interfere more deeply by dictating that the cable companies not be able to raise rates to maintain their profits.