Features

The Economics of Internet Television in Canada

How the costs flow downstream to the independent producers and what can be done about it

Canadians watch the most online video and spend more time on the internet than any other nation in the world. Online video reaches 90.5% of all Canadians, and 3.4 billion videos were viewed in November 2009. As for the availability of traditional video offerings online in Canada, CTVglobemedia, Canwest, CBC/SRC, the Canoe Network, and Corus Entertainment have all had increased growth in viewership: there were increases of 36.5%, 11.7%, 23.0%, 19.7%, and 32.5%, respectively.

Canada’s online video supremacy should be good news for Canadian content producers, but sadly this is the not the case. Canadian producers, especially those in documentary, rarely share the success of online video. They receive pittances as licence fees for their programming (if anything), and are continually pressured into giving away all of their new media rights, which often go unused or unmonetized.

Despite the similarity to the programming strategies of terrestrial broadcasting, internet broadcasting has its own set of costs, revenues, and issues. The value chain of internet broadcasting devalues Canadian programming rights because it has yet to monetize online video content properly. As the broadcasters figure out how to attract new audiences and solidify their revenue models, they pass the buck to the producers.

The Current Revenue Models for Internet Streaming
There are three major business models for internet broadcasting: ad-supported, subscription, and transactional. Ad-supported operates similarly to traditional television models where the streaming content is interrupted by commercials throughout the program, whereas subscription-streaming allows subscribers to access video content for a yearly fee. Finally, transactional services allow for users to pay a small fee to download or rent the program.

Canadian broadcasters combine these models to maximize revenue. CBC provides The Tudors on its ad-supported video player on its website, but also sells it on iTunes and Mobovivo. Canwest has Testees and Trailer Park Boys available on Showcase’s online video player and through Rogers’ subscriber-based portal. Although such a strategy fragments the audience, the multiple revenue streams recoup some of the infrastructure costs of having an adsupported online video player. The ad-supported model has yet to generate enough revenue to cover its total costs.

Although the major costs for an ad-supported online video player (licences, bandwidth, content delivery networks, storage, encoding, presentation, and advertising) set the operating budget for the business model, licences, promotion, and presentation affect the producers most directly. In order to generate revenue from an adsupported internet broadcasting player, broadcasters are recommended to keep all costs, especially royalty rights, as low as possible. The presentation of the content must cater to the internet audiences, who expect a unique and interactive experience that usually combines promotion and new content production.

Producers are begrudgingly familiar with the low fees for new media licences. Some broadcasters offer no licence fee, others $100, and some $500. Depending on the broadcaster, the licences for new media rights may be part of the broadcasting licence fee. The licence fees could simply be for streaming rights, or they could include VOD, iTunes, download-to-own or rent rights.

While Canadian producers are given very little for their internet streaming rights and new media rights, the owners of American programming are compensated quite substantially. Canwest paid a handsome sum for the streaming rights of its most popular non-Canadian programming. Sports are the only kind of Canadian programming whose internet rights secure large licence fees (sometimes more than the television rights).

Attracting the Internet Audience
Internet users demand a different experience from television: they want an immersible, interactive, and social experience. Broadcasters must create unique portals and websites in order to fulfill these expectations. Interactive and value-added content distinguishes the broadcaster’s streams from a pirated stream. It lures audiences in. Usually, producers create the content without any additional compensation.

Audiences expect high-quality and interactive additional content. Value added content consists of and is not limited to mobisodes, webisodes, podcasts, behind-the-scenes footage, social media platforms, and games. Now that producers are expected to have a multi-platform content strategy, they must develop and create internet-based content as well as original material. This allocates time and resources away from the original production. In addition, producers may not have the skills or resources necessary to create the value-added content, and will have to hire interactive digital media consultants and producers to make their multi-platform project successful.

There are numerous funds that help producers create this new content: the Quebecor Fund, the Bell Broadcast and New Media Fund, the Canadian New Media Fund (CNMF), and the Canadian Television Fund’s (CTF) Digital Media Pilot Program. Unfortunately, most of the funds require a broadcaster contribution to greenlight projects. In addition, the CNMF and CTF Digital Media Program merged into the CMF (Canadian Media Fund) on April 1st.

According to the Canadian Association of Broadcasters, the online ad revenues from online video portals do not outweigh the costs of maintaining them. Advertisers do not pay the big ad buys for internet video. Advertising firms look at internet broadcasting through a rear-view mirror, and impose their expectations from television ads. The opaque audience information, format of ads, and measurement decrease the revenues for broadcasters of online video ad.

Nevertheless, internet audience metrics allow for advertisers to target niches more effectively. Internet video in the future may function better than television, but the audiences will be smaller. Recently, Quancast has teamed up with numerous American television stations to create better profiles of internet-user demographics (income, age, gender, location). Furthermore, Nielsen has announced that it will start measuring online audiences. However, these changes may not reach Canada anytime soon.

In the meantime, producers bear the brunt of the system. They are paid very little or nothing for the licence fees for the content they provide. They pay extra costs to create new content to drive more viewers to the portals to drive up the advertising revenues. The question of who owns the rights of extra content is also unanswered.

CTF, CFTPA, CRTC, and Terms of Trade
Lower ad buys equals lower value for the rights, but that does not mean that these rights have no value. Over the last ten years, the Canadian Television Fund, the Canadian Film and Television Production Association (CFTPA), and the Canadian Radio-Television and Telecommunications Commission (the Commission) have actively intervened in policy and funding to ensure fair value for internet streaming rights.

As early as 2002, the guidelines of the CTF stipulated that broadcasters could not include additional rights of a CTF-funded project as a part of the television licence fee. These rights must be valued and paid for separately at a fair market value. Additional rights included: home video, merchandising, new media, non-theatrical, and internet distribution.

However, the CFTPA argues that the guidelines have not prevented broadcasters from pressuring producers from handing over additional rights. Recognizing that broadcasters were rapidly converging horizontally and vertically, the CFTPA has been lobbying for the implementation of terms of trade agreements that would provide producers fair compensation for their programming rights—especially additional rights—at broadcaster licence renewals and reviews of television regulation.

In 2008, the CFTPA and the private broadcasters attempted to negotiate a terms of trade agreement, but they reached an impasse. It suggested the following framework (table 1).

Table 1 (taken from the draft) breaks down the CFTPA’s master licence agreement:

The table demonstrates that the CFPTA wants to shift towards a revenue-sharing system. Given that the advertising revenues and transactional revenues are so small, would such a system provide more revenues to producers than a flat licence fee? Probably not, but the use-it-or-lose-it clause of the terms of trade would allow for producers to monetize their rights on their own. It’s not just an issue of revenue, but of control over the monetization of the content in a multi-platform media world.

Meanwhile, the Commission has supported the negotiation of terms of trade agreements between large conglomerates and the CFTPA, on behalf of the producers, in order to stabilize the financing of the independent production community. Instead of intervening in the negotiations, the Commission created a requirement for broadcasters to have a terms of trade draft with any seven-year licence renewal application (the CFTPA argues that any licence should have terms of trade drafts attached). The Commission has also stated that they will not intervene in negotiations between the CFTPA and the broadcasters (the CFTPA argues that the current impasse between the parties merits such intervention).

CRTC Extends the New Media Exemption
In addition to supporting terms of trade negotiations, the Commission has decided to continue to exempt new media from broadcast regulation, but now will monitor new media broadcast holdings. However, in 2009, it stated that it would consider whether internet Service Providers, because they provide the tubes for content, should help subsidize the creation of Canadian content as other broadcast distribution undertakings do. Rather than make the decision itself, the Commission sent the case to the Court of Appeal.

The Commission’s decision to exempt new media from regulation has allowed for it to prosper, as can be seen by the increase in online video viewing and penetration but recent new media undertakings such as Rogers On-Demand Online and Société Radio-Canada’s Tou.tv demonstrate that broadcasters are buying even more non-Canadian programming in the absence of regulation. Both have content partnerships with many channels unlicenced by the Commission. Rogers also commissions non-Canadian new media content: Vuguru’s online programming.

The Impact on Television Production
Although television continues to be the major commissioner of video content, the rise of online video has numerous effects on the industry, especially for producers. Over the last 10 years, producers have lived with decreasing multi-service licence fees so that the broadcasters could confront audience fragmentation. However, now that broadcasters are trying to offer programming on multiple platforms, the licence fees are not equal to the project costs.

Combing extra costs for additional content with tiny or no licence fees for additional rights (or the requirement to hand over additional rights), and decreasing licence fees for multiple windows have cut the overall production budgets for producers. They are expected to do way more with less. In addition, other technical costs have been created: HD programming increases budgets by 25% per project.

Meanwhile, broadcasters have chosen to try to own the entire value chain by creating the content themselves. Owning the content allows for broadcasters, especially convergent companies, to reduce costs and fully exploit the ancillary rights (DVD, educational sales, new media rights) of programming, and consequently, creating more revenue streams. It is clear the broadcasters wish to own the copyright of the content so that they can exploit as many revenue streams as possible. Regardless of the lack of subsidies and tax credits that broadcasters don’t have access to, the recent CMF guidelines have given them increased access to public funding.

Now, independent producers are directly competing with the broadcasters for public funding.

However, some broadcasters have more convergent assets than others. These companies can derive the most revenues from their copyrights, because they can use the infrastructure of those assets to deliver content. Regular broadcasters compete directly with these convergent giants; they have to build the infrastructure to compete with them, or pay to use the facilities of their competitors.

Maintaining a multi-platform programming schedule requires broadcasters to make cuts in some places to pay for the new technology. Through a combination of in-house production, decreasing licence fees, making producers create the value-added content, and additional rights and multiple window rights grabs, the broadcasters subsidize their lack of infrastructure by pushing the costs onto producers.

Internet broadcasting has made television only one part of an on-demand programming cycle, and the producers are expected to pay for the paradigm shift. With less money to work with, and more content to create, the television production community is strained to maintain their livelihoods.

TV or Not TV, That Is the Question
At CFTPA’s Primetime 2010, producers were told that in order to succeed in the multi-platform digital world they must think of themselves as content entrepreneurs. Moreover, as funds are drying up and in-house producers have access to them, independent producers must seek alternative financing. Otherwise, producers must accept their place in the new value chain.

Producers cannot afford to pay all the infrastructure costs of an online video portal. However, there are online video aggregators such as blip.tv, babelgum, and lifeforcetv.com that allow producers to eliminate those costs. Using these services, a producer can create ad revenue by inserting ads into the content. By using multiple video aggregators, they increase audience share, and more ad revenue. CBS licences out its programs to online video aggregators. Its online video generates the highest online ad revenues of any American broadcaster.

Another possibility lies in sponsorship. An advertiser can sponsor the cost of the infrastructure and production. Seth MacFarlane, the creator of Family Guy, has an online video channel sponsored by Burger King. Easy to Assemble is sponsored and created by IKEA.

Much like MacFarlane, the younger generation of user-generated content producers and stars of YouTube know how to market to their following: where they go, their audiences will follow. User-generated content and professional video productions both have the same audiences. Television producers have to start thinking about their brand in a similar fashion to the YouTube stars.

Webseries producers also diversify their revenue stream through merchandise. The webseries Pure Pwnage sold shirts and other merchandise. Merchandise has served musicians well recently. Television producers should consider exploiting this market in an age where the derivatives can be worth more than the original product.

Despite any new revenue streams and pre-existing government funding, television licence fees remain the undisputed source of funding for video programming. Furthermore, audiences expect content to be on whatever platform they wish: a multi-platform strategy includes television.

Television is far from dead—3D TVs and programming will rejuvenate the living room, which may also increase costs for producers much in the same way as HD has. Television is becoming an increasingly volatile environment for producers; they are expected to do more with less for less.

Thinking Outside of the Box (TV)
In the world of TV, the broadcasters are the primary financiers. As television becomes just a platform, broadcasters are simply another investor. Producers need to wean themselves away from the broadcasters and find multiple investors to decrease the broadcasters’ control over additional rights.

In order to do so, there must be combined licencees and investors that can replace TV licence fees. Funds must no longer need a TV licence as a trigger to greenlight projects. Producers must use social media to promote and direct their audiences to their content to increase advertiser attention. They have to cut out the middle man and go directly to advertisers to sponsor or pay ad buys for their content.

A unique combination of multiple revenue streams, multiple windows and different licencees for the content may be the only way to guarantee control and monetization. When the broadcasters lose financing power, there will be more windows and more monetization of content over different platforms. Producers want to be able to say when, where and what their licences will be in this new value chain. If they are savvy and aggressive enough, hopefully, some will break through and create new monetization models.

Cameron McMaster is an independent media policy consultant and analyst. Currently, he is working as the policy and research coordinator for the Documentary Organization of Canada

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