Montreal, April 12th, 2012 Dear Sir, I am writing on behalf of the undersigned to express our deep concern with

the recent launch of the CBC Music service and the very negative impact the launch of this service is having on the industry. The group of broadcasters listed below offer a comprehensive suite of music services in both the regulated and unregulated broadcasting industries in Canada, and in some cases, in international markets as well. Combined, the Canadian commercial broadcasters contribute over 210 million dollars per year for the use of music in television and radio. Commercial radio broadcasters and pay audio licensees alone represented over 100 million in royalty payments to Canadian copyright collecting societies and various rights holders in 2011. These figures are in addition to the approximately $25M paid annually by commercial radio broadcasters and services for the development of Canadian content and any amounts paid as part of change of control transactions of licensed undertakings, as mandated by the CRTC. In comparison, CBC Radio paid less than 3 million dollars to re:sound and Socan last year, the two main collecting societies in Canada. Commercial broadcasters represent the go to destination for a majority of Canadians that want to be informed and entertained. In 2007, commercial radio stations captured approximately 80% of total radio tuning per week, compared to approximately 8% for CBC radio1. CBC’s new Music initiative The CBC launched its CBC Music initiative with great fanfare a few months ago. This service appears to be advertising based for revenue generation and is available completely free to end-users. Extensive advertising supported this service launch during the recent Grammy Awards on Global Television, and the CBC continues to promote the service through announcements and advertisements on CBC Radio and other CBC properties. For example, several advertisements for CBC Music could be seen during the prime viewing time slot of Hockey Night in Canada on Saturday nights since the launch of the service. It has been an ongoing debate as to whether CBC should be allowed to use public funds to compete directly against private broadcasters for sports content or foreign television programs. It appears that this debate is now relevant to the radio and music industries as well. By launching its new CBC Music service, the CBC competes directly with established private broadcasters by offering a product that is not differentiated and that seems to focus a lot more on foreign content, rather than focusing primarily and predominantly on Canadian content, a key component of CBC’s mandate as defined by the Broadcasting Act. By listening to the service for a short period of time, one can clearly see that the programming on most stations has a relatively low level of Canadian content and features artists that are already well represented on most commercial radio stations across Canada. This was also observed by a reporter of the Globe and Mail that stated “But the service does

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http://www.crtc.gc.ca/eng/cancon/r_facts.htm

provide great range, and pulls music from all over the world instead of pushing a steady diet of Canadian content”2. The CBC Music service puts at risk business models that have been developed by private broadcasters. The most common business models consist of:  Subscription based services;  Advertising funded services; Because of the unique royalty structure of most on-line music services, which is based on a fee paid each time a song is streamed, it is very difficult to generate any profits from advertising-based business models for standalone music services. Popular services like Pandora in the United States for example have been losing money since they launched. It is therefore difficult to understand how the CBC intends on financing this service, without considering the possibility that it is funding it through the annual appropriation it receives from the Federal Government. In a March 12th article of the Globe and Mail, Chris Boyce, Executive Director for radio and audio at CBC was quoted saying “We do find ourselves in a different position than a private broadcaster because the kinds of questions I’m asking don’t necessarily depend on profit margins, at the same time, we need to look at building a sustainable business here. We need to look for revenue.”3 If companies like Pandora, with 100 million users, have not been able to break even since their launch over a decade ago, how does the CBC intend to do so in the much smaller market that is Canada? Mr. Boyce’s comment also raises very serious questions as to the level of planning that went into launching this service in the first place. One would assume that any reasonable manager would know exactly what the business plan anticipates in terms of costs and revenues BEFORE launching a service that can have such a negative impact in the market place. It could be argued that the CBC is using the preferential royalty rates it receives from the various collective societies because of its status as a non-profit public broadcaster to make the service viable in the long term. This argument has two main flaws; 1. Assuming the CBC is indeed leveraging lower royalty rate structures to launch a service that competes directly against private broadcasters, it would be subjecting these private broadcasters to an undue disadvantage under regulatory considerations; 2. If the premise of making the service viable is indeed that the CBC benefits from a lower cost model, it appears that they may not benefit from these lower rates for very long since societies, such as Socan, have already expressed concerns publically around the new service4. Chris Boyce, CBC’s executive director for radio and audio, said “SOCAN’s move isn’t unexpected, and the CBC acknowledges it will need to revisit its arrangements at some point”5.

http://www.theglobeandmail.com/news/technology/mobile-technology/stuck-on-a-train-with-cbcs-new-music-streamingapp/article2336723/ 3 http://m.theglobeandmail.com/report-on-business/music-industry-wants-more-royalties-fromcbc/article2365989/email/?service=mobile 4 “We currently have a tariff that applies to CBC’s online delivery of their [broadcast] signals,” he said. “And this [CBC Music] is a new thing they’ve got. We have to look and see how the new facts apply to the tariff, and that’s what we’re considering.” Paul Spurgeon – Socan VP of legal services (http://www.theglobeandmail.com/news/arts/music/cbc-vs-the-music-biz-how-muchis-a-song-worth/article2367090/ 55 http://m.theglobeandmail.com/report-on-business/music-industry-wants-more-royalties-fromcbc/article2365989/email/?service=mobile
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As such, it certainly appears that the CBC is using funds from its Government appropriations to sustain a service that directly competes with private broadcasters, at the expense of other core services that the CBC is supposed to be offering as part of its mandate. The CBC Music service was launched at a time when the Federal Government was faced/within an environment in which the Federal Government was faced with the obligation of reducing the funds it provides to the CBC. On April 5th, the Corporation announced how it plans on implementing the budget constraints it now faces. Some of these measures include a considerable reduction in the number of live music productions, a 50% of regional broadcast slots on Espace Musique and most importantly, the introduction of advertising and sponsorships on Radio 2 and Espace Musique. These actions further distances the Corporation from its mandate, while placing it directly on a collision course with private broadcasters who can only rely on advertising and subscription revenues to sustain their services. Broadcasters and technology companies around the world have been working very hard, jointly with the various members of the music industry, to implement services using sustainable business models. By educating the market place that there is value in music, private broadcasters have been successful in migrating customers from free, ad-supported services to paid services that generate upwards of $120 per year, per subscriber in certain countries. On April 5th for example, Archambault launched the ZIK.ca service, with prices ranging from $9.99 to $14.99 per month. CBC’s actions undermine the music and radio industries’ efforts and contribute in perpetuating the perception that music is free, a perception that the entire industry has been working very hard to change over the last decade. It also serves as a considerable disincentive for private, entrepreneurial companies, who invest millions of dollars every year to develop innovative technologies and to export Canada’s culture. It is therefore critical that immediate action be taken to minimize the extremely negative impact that this service is already having in the market place. One only has to read comments posted by readers to the various Globe and Mail articles recently published, and quoted in this letter, to see the extent of the damage this service has already had. In conclusion, we ask that the CBC be compelled to; 1. Justify its actions and explain how the launch of the CBC Music service is not competitive with existing services offered by private broadcasters, and how it is not damaging to the industry; 2. Confirm that the service is currently self-funded and if it is not, justify how it can be supported within the current context of budgetary constraints and, potentially at the expense of other core services provided by the Corporation; 3. Ultimately, cease the operation of the service until such time as it can demonstrate that the service helps the CBC achieve the objectives of the Broadcasting Act, without unjustifiably competing against the Canadian private broadcasters and damaging the established business models of the music industry. At a minimum, the CBC should be compelled to demonstrate how the CBC Music service is “predominantly and distinctively Canadian” per its mandate under the Broadcasting Act; We appreciate having the opportunity to make you aware of this issue and look forward to working with you in resolving this matter expeditiously.

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