The Super Bowl and the Future of Canadian Broadcasting

 

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Source: shutterstock.com

To most readers of this blog outside Canada, to lump the Super Bowl and the future of Canadian broadcasting into one sentence must seem like a total non sequitur. Except that it’s not really such a stretch. The issue is not the actual Super Bowl game itself but the ads that will accompany it, broadcast on US host network Fox. For some stakeholders in Canada, the Super Bowl ads are the tip of the iceberg, signalling the first step in the unravelling a longstanding policy that has been important economically to the broadcast and creative sector in Canada. The core issue is all about the simultaneous substitution (so-called simsub) of Canadian ads into US programs distributed in Canada by Canadian broadcast platforms (i.e. cable and satellite providers). If this all sounds a bit arcane and complicated, it is– so let me explain.

The issue is product of Canada’s unique geography, a nation of some 35 million living alongside the United States, a country with ten times the population and home to the world’s most creative and influential television and film production. Almost 90% of Canadians live within reach of US broadcast signals, a situation facilitated by some US stations that set up shop just south of the border with the intent of marketing almost exclusively to Canadian audiences. When I was a kid way back when growing up in Vancouver, B.C., the signal of KVOS-TV, broadcast over the air from just across the border in Bellingham, WA, was our usual alternative to the CBC or the nascent Canadian private broadcasters. KVOS’ business model was to market US programs to Canadian audiences, supported by ads from Canadian businesses in Vancouver. (Vancouver, population about 2 million, and 85 km or 50 miles north of Bellingham, dwarfs the US border city, which has a population of about 80,000 today.)

It wasn’t about enticing Canadians to come south of the border to shop (although that happened) but rather to provide a popular platform, unencumbered by the Canadian content regulations applied to Canadian stations, for Canadian advertisers to reach consumers in their home market. In fact, if I recall correctly, KVOS even maintained a studio and sales office in Vancouver even though its signal was broadcast from Bellingham. Needless to say, competing Canadian stations (who had to meet Canadian content obligations as part of their licence conditions) objected. In the end, to keep the ad dollars at home in order to sustain local broadcasting, the Canadian government disallowed tax deductibility for advertising placed by Canadian firms on non-Canadian stations. This led to first of many trade disputes over content between Canada and the US.

Then along came cable or CATV. No longer did viewers have to pick up distant or not-so-distant signals with antennae, but had content delivered through cable or satellite platforms. US stations, picked up by the distribution platforms in Canada, were always among the core offerings to Canadian audiences. US programs were well made and were as popular with Canadians as they were with consumers in the US. The eyeballs went to the US stations, reducing the value of advertising on local Canadian channels. To fight back, the Canadian networks began to buy the rights to broadcast popular US programs in Canada. The argument was that by providing their domestic audiences with popular US programs, (and thus securing market share and advertising dollars), they could then support the production of Canadian programming, as they were required to do as a condition of their broadcast licence. The only trouble was that the US stations being distributed in Canada offered many of the same programs. Canadian consumers had got used to watching the US channels. The solution: simsub.

Beginning in the 1970s, the Canadian broadcasting regulator, now the Canadian Radio-television and Telecommunications Commission (CRTC), permitted Canadian domestic networks to request the simultaneous substitution of Canadian ads into the US programs for which they had purchased the rights, and which were broadcast simultaneously on Canadian and US networks. If requested, the platforms (cable and satellite distribution companies) were obligated to substitute the Canadian ads on the US feed of the program distributed in Canada, so that a Canadian viewer, whether watching “Friends” (as an example) on either NBC or a Canadian network, saw the same Canadian ads. It was Tim Horton’s over Taco Bell. This policy had the desired effect of putting more advertising dollars in the hands of the Canadian networks. It also led to another trade dispute with the US, but it soon became apparent that this policy actually worked well for content producers on both sides of the border. The US border broadcasters were not happy but the producers of US content now had a new rights market (Canada) to develop, a market that could afford to pay top dollar for popular US programs because advertising money in Canada was flowing to the Canadian networks. So what’s the problem?

As with any policy designed to deal with one aspect of a complex issue, there were side effects. One side effect was that Canadian programming, which was supposed to be helped by the advertising bonanza now flowing to Canadian broadcasters, was often relegated to second rate time slots. This was because, in order to keep their right to demand simultaneous ad substitution, the Canadian networks had to run the US programs that they had purchased at exactly the same time as the US programs were shown on competing US networks. US producers naturally tried to position their programs in the US in the most favourable time slot to attract their target demographic. This had the perverse (and unintended) effect of tying up most of the favourable time slots in Canada for US programs. Also, there were often problems with the ad substitutions; sometimes they cut off part of the programming or were not timed to coincide exactly with the US ads they were replacing. But still, the policy has persisted for more than 40 years, even in a time of rapid technological change.

There are those who argue that the time has come for simsub to go. The ability of Canadians to access content via Internet platforms has eroded the walled garden overseen by the CRTC. However, it took something as simple as the famous Super Bowl ads to really bring the situation to a head. The CRTC got an earful from a (relatively small) number of Canadians about being denied access to the original ads when watching the Super Bowl game in Canada, but this issue became the lighting rod that raised the whole ad substitution issue. Although the scope of its hearings was on whether to drop or revise the simsub policy generally, the CRTC in the end made just one change—for now. That change involved removing the requirement that Canadian ads be substituted during broadcast of the 2017 Super Bowl game in Canada, on the basis that the ads were an integral part of the program. This decision really set the cat among the pigeons.

Bell Media, owner of CTV, and the holder of the Canadian broadcast rights to the Super Bowl, was the first to object, but they were quickly joined by an unusual alliance of allies; the NFL, Florida Senator and former presidential hopeful Marco Rubio who complained that removal of simsub could undermine US-Canada relations, some Liberal Members of Parliament and ACTRA (Alliance of Canadian Cinema, Television and Radio Artists–the national union of professional performers working in English-language recorded media in Canada). Bell has filed an appeal in the Federal Court against the CRTC’s ruling, but it is unlikely the appeal will be heard in time to overturn the Super Bowl ad ruling for 2017.

Bell makes a number of arguments; the US ads may not meet Canadian advertising standards, simsub allows Canadian businesses to advertise their products to Canadian viewers, it fosters a strong and financially viable Canadian broadcast industry, contributes to the Canadian economy through job creation and ultimately helps generate the revenues that allow Canadian networks to provide sports and local news to Canadian viewers. Of course there is nothing to stop Canadian viewers from supporting all these objectives; all they have to do is watch CTV’s feed of the game rather than the one provided by Fox and they can see all the Canadian ads they want–but experience suggests that a good proportion of them will tune into the US feed to view the “real ads”.

It is somewhat unusual to have the NFL and Senator Rubio wading in to the debate on the side of maintaining Canadian ad substitution, but the reason is not hard to discern. Although Bell says it has a binding contract with the League through 2019, elimination of simsub would almost surely make the Canadian rights less valuable. In future, Bell or its competitors would pay less to the League to acquire the Canadian broadcast rights to the game as Canadian advertisers could not be guaranteed the full Canadian market. The lower rights fees might offset the drop in advertising revenue, a wash for Bell–but the NFL would be the loser, and thus their interest in maintaining the status quo.

However the status quo is the one thing that is unlikely to endure for too much longer in this era of rapidly changing technology, even though simsub has served the industry and the creative ecosystem that surrounds it relatively well over the years. The amount of revenue generated by simsub is not negligible. It is estimated that approximately $250 million of the approximately $1.2 billion (or 20%) of Canadian national television advertising revenues in 2015 came from simultaneous ad substitution. The freeing up of the Super Bowl ads is what the industry fears will be the first step on a slippery slope to elimination of simsub altogether, coming as it does at a time when the whole economic ecosystem of Canadian broadcasting and Canadian content is under stress and under review. Ad revenues for traditional broadcasters have been slipping as advertising dollars have migrated online. There has even been talk of the public broadcaster, (CBC) which receives over $1 billion in public funding annually, dropping advertising and ceasing to compete for ad dollars with its private sector rivals. In November of 2016, CBC President Hubert Lacroix floated a proposal whereby the TV network would drop all advertising in return for an increase in the amount of its subsidy by $400 million (the radio network is already ad free), an increase of $12 from $34 to $46 annually per Canadian resident. The CBC estimated that if it went ad-free, about 2/3 of its current ad revenues would be redirected to Canadian private broadcasters.

For the Canadian public broadcaster to go the fully subsidized route of the BBC is an unlikely eventuality but whether the CBC drops television advertising or not, it seems that Canadian broadcasting is on the cusp of change. Canada’s networks may need to find new ways to generate revenue beyond selling and substituting ads around popular US programs. It would be an exaggeration to say that the future direction of Canadian broadcasting depends solely on what happens with the Super Bowl ad substitution issue, but the outcome of this dispute will send an important signal as to future policy directions for the broadcasting industry in Canada.

© Hugh Stephens 2017. All Right Reserved.

Update: Following the big game, Bell Media reported that its ratings dropped in from 7.2 million viewers in 2016 to 4.47 million this year, a decline of 39%. This has been disputed with one commentator claiming, without any real substantiation, that the Fox feed in Canada attracted just over 800,000 viewers, thus giving Bell’s CTV an 85% market share, leading to his conclusion that simsub is irrelevant since Canadian viewers actually preferred the Canadian ad feed. This is unlikely as it would imply that the overall Canadian viewership on Fox and CTV combined dropped from 7.2 million in 2016 to just 5.27 million this year.  Given that the US audience remained almost steady (a minor decline in viewership in 2017 to 111.3 million viewers from 111.9 million in 2016), a collapse in Canadian viewership of the magnitude suggested just doesn’t seem credible.

Assuming the worst-case scenario from Bell’s perspective is accurate, will this lead to an overturning of the CRTC’s decision for 2018 and ensure that simsub remains a part of the Canadian broadcasting landscape, even for  Super Bowl ads? We will have to await the court decision, but my guess is that the simsub solution to retain ad revenues in Canada will be given a good hard look as part of the Trudeau government’s ongoing cultural review and that, because of the changing way in which consumers access content, its days may be numbered. If it is phased out, what will replace it in order to help maintain the financial integrity of Canadian broadcasting is an open question at this point.

 

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