Canada: New CRTC Regulatory Framework For Vertical Integration

Last Updated: September 28 2011
Article by Fasken Martineau's Communications Law Group

The Canadian Radio-television and Telecommunications Commission (CRTC or Commission) has issued its regulatory framework on vertical integration within Canada's broadcasting industry (Broadcasting Regulatory Policy CRTC 2011-601). Vertical integration refers to the ownership, by one entity, of both programming and distribution undertakings, or, both programming undertakings and production companies. A public hearing was held in Gatineau, Quebec in June 2011 to determine whether new regulatory safeguards would be needed to prevent broadcasting companies – such as Bell, Shaw, Quebecor and Rogers – from obtaining an unfair competitive advantage over their competitors. The proceeding was triggered by significant consolidation within the broadcasting system as evidenced by the acquisition of CTV by Bell and Shaw's acquisition of Canwest Global.

In advance of the public hearing, the Commission indicated that it wanted to address several issues relating to vertical integration, including whether to establish rules with respect to exclusive content distribution arrangements, a code of good business practices or guidelines that would apply to companies, measures to protect independent broadcasters and distributors, a requirement to offer a "skinny" basic service and re-imposition of the benefits policy for transfers of control applications involving broadcasting distribution undertakings (BDUs).

In its Regulatory Policy, the Commission has adopted new rules prohibiting broadcasting distributors from acquiring exclusive rights to the distribution of programming on non-linear or ancillary platforms. It has also established a code of conduct for commercial negotiations and adopted specific measures to protect independent broadcasters and distributors.

The specific aspects of the CRTC's new regulatory framework for vertical integration are summarized below.

Exclusivity

The issue of exclusivity was raised by a number of parties to the proceeding. Several requested that the Commission prohibit total or partial exclusivity on new media platforms by entities. In its decision approving Bell's acquisition of CTV (Broadcasting Decision 2011-163), the CRTC had imposed a moratorium prohibiting Bell from entering into new exclusive programming agreements that would prevent it from making available to its distribution competitors, on commercial terms, mobile and broadband rights to television programming from its conventional and specialty services. The Commission also indicated that other entities would be expected to abide by the moratorium.

The Commission concluded that entities have both the opportunity and incentive to give undue preference by providing themselves with exclusive access, on various distribution platforms, to content that they control. This could result in a consumer having to subscribe to the distribution platform owned by that entity to have access to its exclusive content.

The Commission determined that the exercise of exclusivity with respect to the distribution on new media platforms of programming designed primarily for conventional television, specialty, pay and VOD services would result in harm to consumers and the competitiveness of the industry. It also concluded that the same harm would result if industry players that are not vertically-integrated (VI) entities exercised such exclusivity.

As a result, no person operating under the Exemption order for new media broadcasting undertakings (New Media Exemption Order) may offer programming designed primarily for conventional television, specialty, pay or VOD services on an exclusive or otherwise preferential basis in a manner that is dependent on the subscription to a specific mobile or retail Internet access service.

Consumer Choice in Programming Services and "Skinny" Basic

The Commission determined that there was insufficient evidence to support the adoption of a skinny basic service as a means to ensure affordability and choice to Canadian consumers. The Commission, nevertheless, expressed concern that a lack of choice and flexibility could motivate consumers to leave the regulated broadcasting system.

It therefore directs the VI entities to report by 1 April 2012 on how they have provided consumers with more choice and flexibility in the services that they can subscribe to, while at the same time providing them with the ability to only pay for the services they want to watch, such as a pick and pay model.

Independent Programming Undertakings

3:1 Ratio for Distributing Category B Services

The Commission recognised that, in an increasingly consolidated and vertically-integrated broadcasting system, there is a possibility that entities might prioritize the distribution of related services and of services related to other VI entities over the distribution of independent programming services, thus limiting the programming to which Canadians have access. It therefore decided that the current 3:1 ratio for distributing unrelated to related Category B services might not provide sufficient protection for independent Category B services.

As a result, the Commission decided that one of the three unrelated Category B services required to be carried by a BDU must be independent as a means to ensure that at least 25% of Category B services offered by distributors are independent.

Annual Audits of Subscriber Information

The Commission noted that it added an audit provision into section 15.1 of the Broadcasting Distribution Regulations, but also pointed out that additional measures may be needed. Accordingly, the Commission will be seeking comments from the public on specific provisions with respect to the conduct of audits, including:

  • standard information to be provided by BDUs to programming services annually and on receipt of an audit request;
  • the audit process, including step-by-step timeframes for the conduct and completion of audits; and
  • the method and timeframe by which auditors will be selected by parties and possible disputes resolved.

Independent BDUs

Carriage Terms and Tied Selling

The Commission found that vertically-integrated entities licensed to operate numerous programming services could potentially use their most popular services to leverage favourable carriage terms for programming services of lesser value. It also expressed concern with the alleged tied selling of programming services to BDUs on a wholesale basis, which would result in BDUs being obliged to offer consumers services they do not want.

Before the end of the year, the Commission will propose draft regulatory amendments that include a provision that all programming services must be made available to BDUs on a stand-alone basis. The Commission also included a provision to that effect in the Code of conduct.

Anti-Competitive Head Start

The Commission recognized that the practice whereby a programming undertaking makes its service available to a BDU without also making it available to all other distributors on reasonable terms and in a timely manner is effectively a form of exclusivity, since the result is a linear programming service that is made available solely on one distribution system for a certain period of time.

The Commission will therefore adopt a mechanism to ensure that programming services are made available to all distributors for launch even in the absence of commercial agreements. Accordingly, the Commission will require that, once a programming undertaking is ready to launch a new pay or specialty service, it must make that service available to all BDUs. Any BDU might then announce its intention to distribute the service. If a commercial agreement between the programming undertaking and the BDU is not reached before the launch of the service, the BDU might then file for dispute resolution with the Commission and distribute the programming service pending the resolution of the dispute.

Protection of Confidential Information

Commercially Sensitive Information

The Commission believes strong measures need to be in place to prevent inappropriate use of competitively sensitive information. It has therefore proposed that a properly-framed non-disclosure agreement would be the appropriate method to protect against the misuse of confidential information and to minimize the level of intrusion in the business functions of the entity. The Commission intends to issue a notice of consultation launching a follow-up written process to develop a record on this issue, with the objective of establishing a standard form non-disclosure agreement.

Publication of Financial Results of Specialty Services

The Commission will publish partial financial information for all independent individual specialty Category B and C services. The information to be published will include total revenues, total programming expenses, and total Canadian programming expenses. It will also publish complete financial information for all independent specialty Category B and C services on an aggregate basis.

Complete financial information for Category A services and those specialty Category B services owned or controlled by a VI entity will also be published.

Code of Conduct

The Commission concluded that there is a potential for abuse of market power and that clear guidelines are necessary to ensure that the Canadian broadcasting system remains competitive and healthy and delivers a diversity of high quality programming services to Canadians. The Commission therefore established a code of conduct to guide the commercial interactions between the various industry stakeholders and to ensure that no party uses its market power to engage in anti-competitive behaviour.

Negotiations, Dispute Resolution and Enforcement

Standstill Rule

The Commission believes that eliminating the threat of loss of service during ongoing disputes between programming undertakings and BDUs will aid in leveling the playing field during the negotiation process. The Commission also found that the implementation of such a standstill rule that will protect consumers from loss of service during such disputes.

As a result, during any dispute between an operator of a programming undertaking and the operator of a distribution undertaking concerning the terms of carriage of programming or any right or obligation under the Act, each licensee or operator shall continue to provide its services or distribute the programming services on the same terms and conditions as it did before the dispute.

Reverse Onus

The Commission confirmed its preliminary view that reverse onus provisions should be made applicable to all programming undertakings as well as to all BDUs with respect to undue preference applications filed with the Commission.

Affiliation Agreements

Some parties had requested that affiliation agreements, specifically those involving VI entities, be filed with the Commission on an annual basis. The Commission rejected this proposal.

Final Offer Arbitration

The Commission confirmed that final offer arbitration would be one of the mechanisms available to it and the parties to resolve a dispute.

Improving Timeliness of Dispute Resolution

As an additional means to encourage the speedy resolution of disputes, the Commission will introduce a mandatory mediation mechanism before a member of the Commission. Mandatory mediation will take place immediately following completion of the written record. Parties will be expected to cooperate fully in scheduling and attending the confidential mandatory mediation session within the week following completion of the record.

Tangible Benefits Policy

When the Commission considers applications for transfers of ownership or changes in control of programming undertakings, it applies a benefits test that requires the purchasing party to propose a set of financial initiatives that would yield clear and unequivocal tangible benefits to the Canadian broadcasting system. The policy has not applied to transfers involving BDUs since 1996, but the Commission proposed re-establishing the policy for BDUs as part of this proceeding.

The Commission concluded, however, that there was not sufficient grounds to support a reversal of its determination from 1996. As a result, the benefits test will not be applied to BDUs.

Access to Consumer Information Held by BDUs

The Commission noted that it is concerned that disclosure of customer information raises issues of a more fundamental nature about the customer/BDU/programming undertaking relationship and therefore raises legitimate privacy concerns. Given these concerns and the limited record relating to the issues on the record of the proceeding, it did not believe that it could implement any measures to mandate access by programming undertakings to customer information.

Monetary Remedies

The Commission acknowledged that, in order to impose administrative monetary penalties (AMPs) on specific entities, legislative authority would be required. However, where non-compliant behaviour causes specific harm, the Commission also indicated that it could make orders of restitution or compensation, and would even consider, in an appropriate circumstance, imposing a financial remedy in the form of an order to pay an amount into a fund for the benefit of the Canadian broadcasting system.

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