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JANUARY 19, 2012
TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................................................. I A) B) a) b) C) D) E) a) b) c) F) INTRODUCTION & LICENCE FRAMEWORK ..............................................................1 SIRIUS XM CANADA’S FIRST LICENCE TERM ACHIEVEMENTS..........................4 Expenditures on Canadian content...........................................................................4 Exhibition of Canadian content ...............................................................................5 COMPETITIVE THREATS TO SIRIUS XM CANADA ................................................10 FINANCIAL PERFORMANCE & OUTLOOK ...............................................................13 A SINGLE REQUEST – AN APPROPRIATE CCD RATE ............................................18 Inappropriate Proxy ...............................................................................................18 Equity & Consistency ............................................................................................19 CCD Contribution Policy.......................................................................................22 CONCLUSION..................................................................................................................24 Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Table 11: Table 12: Table 13: Table 14: Sirius XM Canada Projected & Actual CCD Contributions....................................4 Audio Programming Regulatory Comparison .........................................................5 Canadian Content Comparison ................................................................................6 New Music & Emerging Artist Comparison ...........................................................6 Sirius Market Penetration and Canadian Population Distribution...........................9 Financial Performance of the Commercial Radio Industry (in $000s) ..................13 Financial Performance of the Pay Audio Industry (in $000s) ...............................13 Comparative PBIT Margins...................................................................................13 Financial Performance of Sirius XM Canada (in $ millions) ................................14 Sirius Market Penetration Trend............................................................................16 Sirius XM Canada Projected PBIT Margins by CCD Contribution Rate..............17 Comparative CCD Contributions...........................................................................20 CCD Contribution Rate of Canadian Commercial Radio (in $000s) ....................21 Comparative Financial Health and CCD Contribution Rate..................................23
SCHEDULE 1 RISK FACTORS IN SIRIUS XM CANADA’S 2011 ANNUAL INFORMATION FORM ...................................................................................................27
EXECUTIVE SUMMARY i. This Application seeks the renewal of the licence held by Sirius XM Canada Inc. (Sirius XM Canada) to operate a satellite subscription radio undertaking. This is the first renewal for such a service in Canada, and in keeping with Commission policy it is appropriate to look both forward and back in calibrating the obligations to be required by the Commission during the renewal term. Looking forward, Sirius XM Canada is in the process of completing the Canadian channel line-up that it plans to move forward with in the next licence term. That line-up will include compelling, relevant audio content showcasing the best in Canadian music, news and information, sports and comedy. And it is being created in a way that blends all the elements of listener preferences, contractual requirements, satellite bandwidth constraints and, of course, our conditions of licence. The outcome will be exciting, substantive content ranging from introducing emerging artists and new releases to a North American wide audience to the drama of the Stanley Cup playoffs to the discovery of Canada’s next top comic. Sirius XM Canada will have this new line up available for the Commission’s review prior to the renewal hearing. The record over the first licence term demonstrates substantial overachievement in a number of areas. Satellite radio has attracted more than 2 million subscribers of which 1.4 million are self-paying. As a result of the conditions of licence imposed on it, it has enabled the distribution to those subscribers of previously unheard of levels of new Canadian music, of music by emerging Canadian artists and of Canadian spoken word content. This content has been in both English and French and has been at its most successful in small Canadian communities that are underserved by other forms of regulated audio content. And, as a result of its arrangements with Sirius XM Radio Inc. in the United States, these Canadian artists have enjoyed continent-wide exposure. By the end of its first licence term this August, the satellite radio sector will also have contributed more than $52 million in Canadian content development (“CCD”)1 expenditures. This amount significantly exceeds the $41.5 million amount projected in 2004 at the first licence hearing, a hearing at which the concern was about underachievement rather than overachievement of these promises. By any regulatory measure, satellite radio has delivered on its conditions of licence and has made significant contributions to Canadian content, both with respect to exhibition and to expenditures. However, this has come at an enormous financial cost. Contrary to projections made at the time of licensing, satellite radio has never been profitable in Canada. In fact, on a combined basis, Sirius XM Canada has lost close to in its first 6 years of operation. The Commission’s CCD policy is clear. As it said in its 2006 Commercial Radio Policy, it sets CCD contributions that are commensurate with the financial health of the sector. And the financial health of the satellite radio sector is not good. It has a cumulative
The acronym CCD will be used in place of Canadian Talent Development (“CTD”) throughout this Supplementary Brief. A 2006 change in the Commission’s Commercial Radio Policy changed the name from CTD to CCD.
deficit of and last year, its best year ever (and a year that included at least a partial year as a single merged undertaking), it recorded a PBIT. And while the future does not look quite as grim, it is not going to be clear sailing either. The merger was a reaction, not a panacea. There are many storm clouds on the horizon of this business, and certainly more than there are for any of the other audio businesses that the Commission regulates. vii. Moreover, Sirius XM Canada has a high variable cost structure which other regulated services need not incur. A dollar of revenue from an OEM subscriber will incur a 15% licence fee to Sirius XM Radio Inc. in the United States, a 5% CCD contribution, approximately 6% for copyright royalties payable to Canadian Copyright collectives and This is before any costs incurred by Sirius XM Canada to subsidize the cost of the radio, programming, marketing and administrative costs. Sirius XM Canada also has two significant licence agreements with Sirius XM Radio Inc. that come up for renewal during the next broadcasting licence term in November 2015 and August 2017, respectively. It is possible that Sirius XM Canada may only be able to renew or extend those agreements with Sirius XM Radio Inc. on economic terms less favourable than current terms. Licence renewals present the Commission with the opportunity to recalibrate the obligations of its licensees. In this case, notwithstanding all of the negative financial pressures in the past, present and future, Sirius XM Canada is only asking for one change to its licence going forward. It wants the Commission to amend its CCD contribution from 5% to 0.5% of revenues. This will still be more in actual dollars than what is paid by every commercial radio licensee in Canada.2 The evidence in this Supplementary Brief shows why the Commission should make this change. It shows that the 5% was first imposed in 2005 as it was seen to be the same percentage as was paid by BDUs. The Commission however, has determined that satellite radio undertakings are not BDUs. Nor do BDUs pay CCD in any event. There is no longer a policy justification for the 5% figure. Like commercial radio licensees competing in a competitive call for applications, the two satellite radio licensees in 2005 agreed to elevated levels of CCD for their first licence to gain the Commission’s favourable ruling. Unlike those commercial licensees, however, satellite radio does not have an automatic reduction to 0.5% at the end of the first licence term. It has to ask for it and that is what this Application requests. To deny it would be inequitable. In fact, as is demonstrated in the Application, even if satellite radio had not lost any money in the first licence term, this is a change the Commission should make. The evidence compares the obligations of other Commission licensees and finds that satellite radio is clearly the outlier, and that it has far more onerous regulatory obligations.
Sirius XM Canada is not requesting the $1,000 flat fee on the first $1,250,000 of revenue that every commercial radio station benefits from.
And that is just with respect to regulated undertakings. The Commission has determined repeatedly that new media undertaking with whom Sirius XM Canada competes are exempt from regulation. The evidence also debunks any suggestion that the 5% was meant to compensate in some way for substandard exhibition conditions of licence. No other licensee has any requirement to air new Canadian programming. No other licensee has any requirement to air selections by emerging Canadian artists. And of course unregulated competitors have no obligations at all. Yet, Sirius XM Canada has been living for an entire licence term already with conditions that require that 25% of the musical selections on its Canadian channels be by emerging Canadian artists and that 25% of Canadian musical selections also be new Canadian releases. Moreover, the Canadian content level on each Canadian channel is 85% for music channels and 85% for spoken word on talk channels. The corresponding figures are 35% and zero for conventional radio. As well, the fact that Sirius XM Canada’s conditions of licence require that its Frenchlanguage music channels air 85% Canadian selections as well as 65% French-language selections means unprecedented opportunity both nationally and internationally for Canadian francophone artists. These are significant exhibition figures, and there can be no suggestion that an excessive CCD figure is required for the next licence term to compensate in some way for an insufficient battery of exhibition requirements. Indeed, the Commission first licensed Sirius XM Canada’s predecessor companies with a requirement for 8 Canadian channels which has now grown to 12 Canadian channels branded Sirius and another 13 branded XM.
xviii. Moreover, this Canadian content is delivered by satellite radio to places that commercial radio generally chooses not to serve. The satellite radio sector helps the Commission achieve its objective of bridging the digital divide. While satellite radio has a penetration rate nationally, it is disproportionately distributed. Sirius XM Canada is lucky to reach penetration in many of Canada’s larger urban centres but enjoys penetration rates of in communities with less than three radio stations. It thus serves a significant public policy goal of equalizing the audio opportunities for those Canadians outside major urban markets. xix. Sirius XM Canada is not requesting any other changes in this Application in the hope that the Commission would find adjusting the CCD to match that of renewal term radio licensees to be acceptable. The evidence demonstrates the need and the fairness of the requested CCD reduction. It accords completely with the Commission’s policy to establish realistic renewal term CCD figures for its licensees commensurate with their financial situation.
INTRODUCTION & LICENCE FRAMEWORK Sirius XM Canada Inc. (“Sirius XM Canada”) welcomes the opportunity to review the events of the last licence term and to explore with the Canadian Radio-television and Telecommunications Commission (the “Commission”) the current and future situation both of satellite radio and of the Canadian audio programming industry more generally. As mentioned in the cover letter, Sirius XM Canada is planning to allow the Sirius Canada licence to expire and is in the process of completing the Canadian channel line-up that it plans to move forward with in the next licence term. That line-up will include compelling, relevant audio content showcasing the best in Canadian music, news and information, sports and comedy. And it is being created in a way that blends all the elements of listener preferences, contractual requirements, satellite bandwidth constraints and, of course, our conditions of licence. The outcome will be exciting, substantive content ranging from introducing emerging artists and new releases to a North American wide audience to the drama of the Stanley Cup playoffs to the discovery of Canada’s next top comic. With the merger, Sirius XM Canada now has over 2 million subscribers and many more listeners. It is critical to design the best possible line-up to continue attracting more subscribers, converting those on free listening periods and retaining all of them, particularly in light of the strong competitive threats now readily available online. Sirius XM Canada will have this new harmonized channel line up available for the Commission’s review prior to the renewal hearing. Although satellite radio is now a fixture in Canada, there was a time only six and a half years ago when many wondered if the undertaking that now serves more than two million Canadians would ever be licensed. The Commission, over the numerous and, in some cases, vocal objections of many in the cultural industries in Canada, took a regulatory gamble. In June, 2005, it approved the entry into Canada of Canadian Satellite Radio Inc. (“XM”) and Sirius Canada Inc. (“Sirius”), the two companies that merged last year to become Sirius XM Canada.3 At the time, the Commission issued a news release which contained the following excerpt: “These decisions foster the objectives of the Broadcasting Act and balance the interests of Canadian consumers, the radio industry and the music industry,” said CRTC Chairman, Charles Dalfen. “These licences will harness new technologies for Canadians and give Canadian talent exposure to listeners across Canada and indeed, North America – both through new Canadian channels and air-play
Sirius XM Canada is not requesting the renewal of the licence previously issued to one of Sirius XM Canada’s predecessor companies, Sirius Canada Inc. XM Canada and Sirius Canada merged into a single undertaking in June, 2011. A second licence is unnecessary. Therefore the licensee of both the XM Canada and Sirius Canada services is applying, in the Application of which this Supplementary Brief forms part, for a new seven year licence term in respect of the Sirius XM Canada undertaking.
-2on U.S. channels. New and emerging artists should benefit especially from the airtime that is being reserved for them.” The newly-licensed services will add new programming to the Canadian broadcasting system. There will be more choice and diversity for consumers, particularly those in rural and remote areas, where broadcasting choices are limited.4 6. The Commission was correct on every count. The satellite radio industry has been an enormous boon to Canadian consumers and to the Canadian music industry. The distribution of new Canadian music and music by emerging Canadian artists has provided significant exposure for home-grown talent not only in Canada but across North America. On June 16, 2005, the Commission licensed both XM and Sirius to carry on Canadian “satellite subscription radio undertakings” by harnessing the U.S. services and Canadianizing them by adding local components.5 This was not without controversy. Among the many grounds of objection by interveners at the time was the inaccurate suggestion that the amount of Canadian content inherent in the satellite services’ proposed offerings would be too low to satisfy the requirements of the Broadcasting Act.6 After reviewing over 800 other interventions and conducting a four-day hearing, the Commission decided that licensing a Canadian version of satellite radio would, contrary to the assertions of the negative interveners, contribute to meeting the policy objectives of the Broadcasting Act. In so doing, the Commission imposed a novel, and significant, series of conditions of licence in order to meet the requirements of the Broadcasting Act. In order to ensure the greatest practicable use of Canadian resources, the Commission: • • • • • doubled the total number of Canadian channels compared to the initial proposal, and required that all such channels be made available to all Canadians; mandated a solid linkage ratio based on past precedent; increased by a factor of more than two the Canadian content exhibition requirements on satellite radio versus commercial radio; mandated the same amount of French language content on each channel as commercial radio; required new conditions of licence unique to any other regulated audio programming licensee in the areas of Canadian spoken word content, the amount of original Canadian programming on the Canadian channels, and significant airtime for new Canadian music and for emerging Canadian artists; and selected a CCD rate of 5% of revenues based on a comparison with broadcast distribution undertakings (“BDUs”)
4 5 6
News Release (June 16, 2005). Available online at http://www.crtc.gc.ca/eng/com100/2005/r050616 htm Broadcasting Decisions CRTC 2005-246 (XM) and 2005-247 (Sirius). See for example, the interventions of CIRPA, Friends of Canadian Broadcasting, CCSA, APFTQ, available at www.crtc.gc.ca.
-310. Although the Commission was satisfied, a few disappointed interveners were not, and launched five petitions to the Governor-in-Council. Ultimately, those petitions were denied and the satellite radio services applied for additional conditions of licence which the Commission approved and which remain in force today. Based on that finalized battery of conditions of licence, the two satellite radio licensees then signed long-term supply deals with their U.S. counterparts relating to a variety of matters such as bandwidth, branding, technical support, and programming, which the Commission closely scrutinized and then approved. The purpose of any licence renewal process is to take stock of what has been achieved by the licensee over the first licence term and, more importantly, to calibrate its obligations for the next licence term in accordance with its financial capacity. Canadian satellite radio has not had the benefit of its own policy review like terrestrial radio has. However, the Commission’s objectives for the most recent commercial radio policy review, which began following the licensing of satellite radio in the summer of 2005 and culminated in Commercial Radio Policy 2006,7 provide the type of guidelines necessary to consider the next seven years in the satellite radio industry. The public notice announcing that policy review stated the Commission’s objectives: To develop policies that assist in creating conditions for: A. A strong, well-financed commercial radio sector in both official languages capable of contributing to the fulfillment of the policy objectives set out in the Act. B. A commercial radio sector that makes effective contributions to Canadian artists through airplay of Canadian music, Frenchlanguage vocal music, and contributions to Canadian talent development (CTD) that are commensurate with the financial health of the sector. C. A commercial radio sector that provides listeners with a greater diversity of musical genres, and airplay for a greater variety of Canadian artists in both official languages. [Emphasis added]8 13. As the first licence term of satellite radio comes to a close, the Commission must now review the application of its policies in respect of Sirius XM Canada. It is appropriate that the Commission be guided by the policy considerations made explicit with respect to commercial radio generally. The evidence contained in this Supplementary Brief demonstrates that the satellite radio sector satisfies the exhibition criteria set out by the Commission resoundingly—but also demonstrates that the satellite radio industry’s CCD contributions, if left unchanged in the next licence term, will not be commensurate with its financial health.
Broadcasting Public Notice CRTC 2006-158, 15 December 2006. Broadcasting Public Notice CRTC 2006-1, 31 January 2006.
-414. The unique regulatory structure devised by the Commission for this new type of broadcasting undertaking has delivered to the Canadian broadcasting system benefits far in excess of those the Commission contemplated in the news release cited above. SIRIUS XM CANADA’S FIRST LICENCE TERM ACHIEVEMENTS Since receiving its first licence, Sirius XM Canada has done much to help Canadian artists and further the objectives of the Broadcasting Act. These accomplishments are particularly noteworthy with respect to CCD expenditures and widespread distribution of Canadian artists, including providing many rural Canadians with access to Canadian content. a) 16. Expenditures on Canadian content
Set out below are Sirius XM Canada’s estimated contributions to CCD at the time of licensing compared to actual contributions for broadcast years 2005-2011 as well as its estimated contributions for broadcast year 2012, now almost half complete. In its first seven years of operation, Sirius XM Canada will have contributed almost $52 million, more than $10 million in excess of the amount originally projected. Sirius XM Canada Projected & Actual CCD Contributions
20042005 1,417 20052006 2,098 20062007 3,403 20072008 5,363 20082009 8,313 20092010 9,708 20102011 11,065 20112012 (est.) [8th year not projected at time of licensing] Total
(in $ thousands) Combined Sirius Canada and XM Canada 2004 CCD projections Combined actual CCD contributions of Sirius Canada & XM Canada
41,367 (for first 7 years of operation)
Nil (launch in Q2 of 200506)
51,952 (for first 7 years of operation)
Even the projected amount of approximately $41+ million was believed at the time of licensing to be unrealistic and unobtainable by many. The apparent but erroneous belief at the time was the possibility that the companies might achieve such low penetration as to make CCD contributions framed as a percentage of revenue almost meaningless. Sirius XM Canada defied those expectations by attracting literally millions of Canadian subscribers and making CCD contributions to the Canadian broadcasting ecosystem that were well in excess of those original projections. However, it has done so at considerably higher cost than was anticipated.
-5b) 18. Exhibition of Canadian content
Equally impressive were Sirius XM Canada’s accomplishments in the exhibition of Canadian content. It is to be recalled that the Commission licensed Sirius XM Canada’s predecessor companies in 2005 with a requirement that each carry no fewer than eight original Canadian programming channels. That number of Canadian channels was deemed by the Commission to represent the number necessary to achieve the objectives of the Broadcasting Act and to balance the interests of Canadian consumers, the radio industry and the music industry. The Canadian satellite radio industry quickly overachieved on the exhibition front as well. Shortly thereafter, it applied to increase those minimum channel figures from 8 to 10, subject to subscriber penetration.9 The licensees exceeded those requirements as well and currently carry 12 Canadian channels under the Sirius brand and another 13 Canadian channels under the XM brand. As the following table demonstrates, any suggestion that satellite radio’s overall Canadian content requirements are insufficient are clearly without foundation. In fact, Sirius XM Canada’s robust exhibition requirements have generated results that demonstrate its strong contribution both in absolute terms and relative to other licensees. The table below sets out the minimum exhibition requirements of the Commission’s regulated commercial radio and satellite radio licensees.10 Audio Programming Regulatory Comparison
Commercial Radio N/A N/A 35% (Category 2) 10% (Category 3) N/A 65% None None None Satellite Radio 10 10% 85% 25% 65% 50% 85% 25%
Minimum Requirement11 Number of Canadian Channels Canadian Channels / Total Channels Canadian Content / Total Content of Station or Channel French Channels / Total Channels French Content Requirement per Station or Channel (Vocal Selections) Original Canadian Content / Total Canadian Content Canadian Content / Total Content of Station or Channel (Spoken Word) Emerging Canadian Artists / Canadian
9 10 11
Broadcasting Decisions CRTC 2006-37 and 2006-38, 10 February 2006. Unregulated audio programming options, a significant competitor to satellite radio, have no Canadian content requirements. Sources: For commercial radio, see Commercial Radio Policy 2006, Broadcasting Public Notice CRTC 2006-158, December 15, 2006 and the Radio Regulations, 1986; For satellite radio, see Broadcasting Decisions CRTC 2005-246 and 2005-247, 15 June 2005.
-6Minimum Requirement11 Content New Canadian Music / Canadian Content None 25% Commercial Radio Satellite Radio
It is clear from the foregoing that Sirius XM Canada has a comprehensive list of obligations. The sections below further elaborate on Sirius XM Canada’s success in the exhibition of Canadian artists. (i) Canadian Content – English and French Programming
The table below displays the disproportionately large contribution of Sirius XM Canada to the exhibition of Canadian content as compared to commercial radio. The Commission made the same observation in 2005, noting that Sirius XM Canada would exhibit over 500% more Canadian content than its commercial radio equivalent.12 Canadian Content Comparison
Display of Canadian Content13 1 Sirius XM Canada Channel = 5.4 Commercial Radio Stations
Canadian Content – New Music & Emerging Artists
The table below shows Sirius XM Canada’s performance with respect to its obligation to exhibit new Canadian music and emerging artists. Again, Sirius XM Canada has performed strongly in comparison to commercial radio. Sirius XM Canada has played, and will continue to play, a key role in delivering exciting new music and emerging artists to a national Canadian audience. New Music & Emerging Artist Comparison
Display of Canadian Content New Music14 1 Sirius XM Canada Channel = 6.0 Commercial Radio Stations 1 Sirius XM Canada Channel = 4.1 Commercial Radio Stations
Emerging Artists15 .
The new Canadian music and emerging Canadian artist obligations are, of course, unique to satellite radio. Commercial radio, with neither obligation, lags behind. The exposure of new artists and emerging music to all Canadians by Sirius XM Canada is unprecedented.
Broadcasting Public Notice CRTC 2005-61, June 16 2005, at para 81. Calculations are based on Commission requirements and an assumption of 12 songs/hour for commercial radio versus 17 songs/hour for satellite radio. Data from 2005 Music Use Study. Data from 2009 Emerging Music Study.
-726. Notwithstanding the extensive regulatory proceedings relating to Canadian emerging artists between 2006 and 2011, Sirius XM Canada remains the nation’s leader and the holder of the only CRTC requirement relating to new Canadian music and emerging Canadian artists in the country. (iii) 27. Canadian Content – Spoken Word
In the promotion of Canadian content, music receives the lion’s share of attention. However, spoken word programming is also a valuable part of Canada’s audio landscape. Sirius XM Canada, through its unique obligation to include at least 85% Canadian content on its spoken word channels, has done much to assist often-ignored Canadian spoken word artists. No other audio licensee has such a requirement relating to spoken word content. Indeed, commercial radio had its spoken word obligations removed in 1998. Sirius XM Canada thus performs an important function by providing spoken word artists, especially Canadian comedic talent, with the platform they deserve by including the same high percentage (85%) of Canadian content for spoken word as for music. On the XM platform, the NHL Home Ice channel is the only North American wide hockey channel and provides unique talk, updates, interviews and interactive audience participation. This Canadian talk channel is followed closely by the hockey world including NHL franchise owners, GMs, coaches, players and, of course, continent wide NHL hockey fans. The Sirius subscribers also have an equally strong and original hockey talk program, Hockey Night in Canada Radio, produced by the CBC uniquely for satellite radio. This 3 hour show airs 5 days a week throughout the hockey season and provides equally as compelling hockey talk. A further example of original talk programming is the only North American wide Canadian comedy channel, Laugh Attack. This channel provides a unique outlet for Canada’s burgeoning comedy industry and, with the need to be 85% Canadian, is dedicated to supporting Canada’s comedic artists from early training as amateurs through experienced professionals, these artists now have a North American audio stage on which to perform. (iv) Canadian Content – North American Platform
No discussion of Sirius XM Canada’s exhibition obligations would be complete without considering its impact in the United States. As Chairman Charles Dalfen articulated on the day the satellite services were first licensed by the Commission, These licences will harness new technologies for Canadians and give Canadian talent exposure to listeners across Canada and indeed, North America - both through new Canadian channels and
-8air-play on U.S. channels. New and emerging artists should benefit especially from the airtime that is being reserved for them.16 32. If emerging Canadian artists are struggling to obtain airplay on Canadian commercial radio stations, what is the likelihood of success of obtaining any airplay on commercial radio stations in the United States? Yet, as a result of a Canadian condition of licence imposed on a Canadian broadcaster, at least 21 million Americans are receiving a significant amount of Canadian content. This is valuable exposure that cannot be matched by any other Canadian audio licensee. In fact, Canadian artists agree as seen in the following comment by a Canadian musician who appeared at the merger hearing last spring. …we went down to Austin [Texas] for a festival and there were a few people who came up to me and said, "Yeah, I came out to check your band, I had heard you on XM." I can't get that from local Ottawa radio stations.17 (v) 34. Canadian Content – National Service
As seen, one of the key benefits as determined by the Commission in licensing satellite radio was the national platform for Canadian content that would now be made available. Therefore, no comparison of Canadian content can be complete without examining what this increased accessibility for Canadians to Canadian content actually means. The unique nature of satellite radio service means that Sirius XM Canada is able to fulfill the requirements of section 3(1)(k) of the Broadcasting Act better than any other regulated audio programming option. In effect, the reach and content provided by Sirius XM Canada puts rural Canadians on the same footing as urban Canadians. Commercial radio is not effective at serving rural Canada. There are fewer radio stations in smaller markets; in the smallest markets, there are no radio stations at all. Canadians who have no access to terrestrial radio also have no access to cable either. Without exposure to Canadian content, the efforts of the Commission will be in vain. This leaves Sirius XM Canada as a crucial source of Canadian audio content for many Canadians. The chart below demonstrates graphically how important rural Canada is to Sirius XM Canada (and, by extension, to the Canadian broadcasting system). This graph, using current account data for Sirius18 as of January 3, 2012, shows that the most important predictor of Sirius XM Canada’s success at converting customers into paying subscribers is the unavailability of terrestrial radio. The number of available radio stations is listed across the bottom. The line represents market penetration and it clearly shows penetration percentages decrease dramatically as the number of radio stations available increases. The solid area represents the Canadian population and it shows that population has a
News Release, CRTC, 16 June 2005. Transcript regarding Broadcast Notice CRTC 2011-6, Volume 1, 7 March 2011. Sirius XM Canada does not believe there would be any meaningful change if the corresponding data for XM Canada were added.
16 17 18
-9strong positive correlation with the number of radio stations. This demonstrates the importance of Sirius XM Canada to Canada’s rural population. Table 5: Sirius Market Penetration and Canadian Population Distribution
The data supporting the graph above provide a compelling story. Sirius XM Canada’s overall penetration rate is abou nationally. However, as can be seen, Sirius XM Canada has a penetration rate of in Canadian communities with less than three in cities with terrestrial radio stations. Conversely, the penetration rate plummets to 24 radio stations or more. Indeed, the number one determinant of the success of Sirius XM Canada in a given market is not income level, nor is it the make or model of the cars driven there. Rather, the most critical determinant is the number of radio stations. Furthermore, the geographic results of Sirius XM Canada’s predictive models show that its future high growth areas in Canada are virtually all remote. These results are consistent with the above. Smaller towns that are less well-served by terrestrial radio stations are more likely to have substantial penetration rates or growth potential than major cities, particularly along the Canada-US border. This information demonstrates the importance of Sirius XM Canada as part of the audio distribution mosaic in small communities across Canada. Given that Sirius XM Canada is the only regulated commercial audio provider in Canada with obligations relating to Canadian new music, emerging music and spoken word, that importance is magnified. Sirius XM Canada’s accomplishments are significant and far above what was expected at the time of licensing in 2005. However, they have been reached with difficulty. Moreover, Sirius XM Canada faces, and will face in the next licence term, a number of threats that are outlined in the next section.
- 10 C) 41. COMPETITIVE THREATS TO SIRIUS XM CANADA Satellite radio has been perceived as a threat to regulated audio by industry players and the Commission over the past several years. In its Commercial Radio Policy 2006, the Commission noted, In general, commercial radio broadcasters stressed that, since the Commission’s last review of radio in 1998… there has been a proliferation of alternative technologies for the distribution of music to consumers. In their view, it is likely that these devices will continue to proliferate and become more sophisticated and attractive in the next few years. While there is little evidence so far of an impact on broadcasters’ revenues, commercial radio broadcasters submitted that a significant effect on listeners’ habits is inevitable, and the financial performance of commercial radio stations may well decline as a result.19 42. In its resulting analysis, the Commission referred specifically to satellite radio as one of those “alternative technologies”. However, as was the case during the licensing process, and as was noted by the Commission, no quantitative evidence was presented supporting the assertion that satellite radio would harm commercial radio. In fact, what evidence there is regarding the threat satellite radio poses to commercial radio points to the exact opposite of what commercial radio has asserted. The Commission’s July 2011 Communications Monitoring Report, for instance, shows that private commercial radio has a 79.2% tuning share as compared to 2.5% for audio services, which includes not only satellite radio, but pay and specialty audio services, over-the-air radio stations and video services broadcast on cable and the Internet. Moreover, the only regulated technology on the list of emerging technology threats provided by the Canadian Association of Broadcasters in Commercial Radio Policy 2006 is satellite radio. In fact, the converse is true. Commercial radio is the main threat to satellite radio market penetration, most dramatically in urban environments. Even after six years Sirius XM Canada has been unable to make significant inroads in Canada’s major urban centres. It is a daily challenge to compete against dozens of free radio stations offering valuable local content to their listeners at the touch of a button. Where satellite radio is most successful, there are typically three or fewer commercial radio stations. Satellite radio serves markets where the choice of commercial radio stations is limited. Unfortunately for satellite radio, these smaller markets make up much less of the overall population, and the customers are more expensive to reach from an advertising perspective. And satellite radio is prohibited from targeting such customers with local advertisements or local programming.
Commercial Radio Policy, Broadcasting Public Notice CRTC 2006-158, December 15, 2006 at para. 4.
- 11 46. Thus, the satellite radio “threat” to commercial radio is an illusion. Much like commercial radio, Sirius XM Canada could arguably look to the Commission for a reduced regulatory burden in order to ensure it remains competitive in an increasingly crowded marketplace. However, the point of the foregoing comments is not to look for protection against market forces or competition. Rather, the sole thrust of this Application is to seek an equitable split in the financing of CCD obligations by terrestrial and satellite radio services in Canada. Sirius XM Canada is also targeted by unregulated competitors. These competitors, using new technologies, pose an even greater challenge for Sirius XM Canada—which is national and subscription-based, not local and free—than for commercial radio. Internet radio and radio that is available on wireless devices are complementary services to commercial radio, but are substitutes for satellite radio. Moreover, Sirius XM Canada customers must make a significant investment in hardware and pay a separate subscription charge, while most Internet and wireless radio is available to consumers at little or no additional cost. The advent of these delivery methods for new unregulated competitors poses far more of a threat to Sirius XM Canada’s business than to commercial radio, because of this higher substitutability. Satellite radio and new technologies are both non-local services accessed through mobile devices like smartphones and in-car auxiliary and Bluetooth connectors and that offer curated, commercial-free music and talk programming. In addition, terrestrial radio is more protected from new media given that radios are ubiquitous and ready to use. Yet, due to concerns about the growing threat of these unregulated options, the Commission refrained from increasing the regulatory burden on its commercial radio licensees. As well, the July 2010 decision by the Federal Court of Appeal20 puts Sirius XM Canada at further disadvantage. Neutral Internet service providers and possibly wireless carriers are not considered to be broadcasting when they transmit content to end-users, and as such they apparently fall outside of the purview of the Broadcasting Act. This further limits the powers of the Commission to mandate that other players in the system contribute proportionately to the objectives of the Broadcasting Act. The pervasive and dynamic threat of unregulated new technologies is very real. A short history dating back to when Sirius XM Canada’s predecessors, Sirius and XM, last filed licence applications in 2003 is instructive.21 At the time, the Commission was concerned about the spectre of grey market consumption of streamed audio programming that was curated and assembled in the United States. The music industry was broadly preoccupied with the online downloading of music: the first “peer-to-peer” file trading service, Napster, had declared bankruptcy the year before, although its new owner had promised to launch a legal version soon, and there was some speculation as to whether the latest
2010 FCA 178. Applications 2003-1885-9 (Sirius) and 2003-1081-3 (XM); Call for applications for a broadcasting licence to carry on a multi-channel subscription radio programming undertaking, Broadcasting Public Notice CRTC 2003-68, 23 December 2003.
- 12 newly-announced service called “iTunes”, by the computer manufacturer Apple, would do the trick. 51. Sirius’ and XM’s applications were gazetted in early 2004.22 Both companies participated in a public hearing in late 2004, were authorized to operate in 2005, and began operating as licensees very late in 2005. By that time, 10 percent of Canadian households relied on dial-up Internet, down from 20% at the time the applications had been filed. As many as 33% of the public had purchased music from a paid service, 22% had listened to radio online at least once, and 21% had used an MP3 player or iPod.23 Rumours of Apple releasing a combined iPod/cell phone to be known as the “iPhone” were only just beginning to circulate. Six years later, much has changed. Dial-up Internet has shrunk to less than 3%, to be replaced almost entirely by broadband. More than a third of mobile phones are smartphones, and in less than two years, most will be.24 Voice services and e-mail are only two of the thousands of applications that are available on modern handsets, whose ability to deliver rich audio and audiovisual programming and information to consumers is a major contributor to their popularity. Virtually all new cars come with auxiliary jacks, Bluetooth connections, or some combination of both. Pandora, a publicly-traded Internet radio application that competes for investment directly with Sirius XM in the U.S., regularly announces deals with car manufacturers. A list of competitors to Sirius XM Canada that did not even exist at the time of the licensing hearing in November 2004 would include the following: • • • • • • • • • 54. Apple iTunes (and its Genius playlister) Facebook Music Grooveshark last.fm Rdio Slacker Radio Shoutcast Deezer Rara
The foregoing demonstrates the very real threats that Sirius XM Canada has faced in the past and will face going forward. Sirius XM Canada requires equitable treatment from the Commission in order to properly compete in this industry.
22 23 24
Broadcasting Notice of Public Hearing CRTC 2004-6, 8 July 2004. CRTC, Broadcasting Policy Monitoring Report 2007. eMarketer, “Canadian Mobile Subscriptions to Climb 20% by 2014”, 10 June 2010 cited in CRTC, Navigating Convergence II, online: <http://www.crtc.gc.ca/eng/publications/reports/rp1108 htm>, Figure 6.
- 13 D) 55. FINANCIAL PERFORMANCE & OUTLOOK This section presents the past financial performance of Sirius XM Canada and its competitors and considers the financial projections for the next licence term for Sirius XM Canada. Commercial radio and especially pay audio are highly profitable industries, while Sirius XM Canada has been losing money at a disturbing rate. The table below demonstrates that commercial radio has enjoyed significant and consistent profitability year over year, continuing to maintain profitability through a severe recession. Financial Performance of the Commercial Radio Industry (in $000s)
2004 Revenues PBIT 1,226,653 204,722 2005 1,342,364 283,550 2006 1,419,395 285,176 2007 1,502,755 299,131 2008 1,593,679 337,787 21.2 2009 1,507,733 271,594 18.0 2010 1,551,759 298,384 19.2 TOTAL/AVG 10,144,338 1,980,344 19.52
PBIT (%) 18.2 21.2 20.1 19.9 Source: All figures from CRTC Annual Financial Summaries.
With respect to pay audio, Galaxie had representative publicly available financial statements until Stingray Digital Media Group (“Stingray”), a private company that also owns Max Trax, began operating it on behalf of CBC.25 Pay audio has been vastly more profitable than commercial radio, as can be seen below. Financial Performance of the Pay Audio Industry (in $000s)
2002 2003 13,275 7,500 56.5% 2004 16,254 9,560 58.8% 2005 17,217 10,573 61.4% 2006 20,235 13,454 66.4% 2007 21,838 13,772 63.1% 2008 22,146 9,013 40.7% Total/AVG 121,787 68,995 56.7%
Revenues PBIT PBIT %
10,822 5,123 47.3%
Source: All figures from CBC Annual Reports.
The effects of competitive pressures on Sirius XM Canada become extremely evident in the comparison of its financial performance against commercial radio and pay audio. Comparative PBIT Margins Industry Satellite radio Commercial radio 19.52 Average PBIT %*
Subsequent figures for Galaxie in CBC’s financial statements, and the explanations thereof, were substantially different from those of the prior decade and were not used in these calculations.
- 14 Pay audio 56.7
*Galaxie’s figures are for 2002-2008, commercial radio’s for 2004-2010 and satellite radio’s for 2006-2011. Data is from Sirius XM Canada’s financial statements, Communications Monitoring Reports and CBC Annual Reports, respectively.
The profit picture for Sirius XM Canada has been unacceptable. In contrast to the healthy performance of commercial radio and pay audio, Sirius XM Canada’s shareholders have not fared well. Through August 31, 2011, they have incurred a cumulative PBIT deficit of and a negative net income of Set out below are the PBIT and Net Income/Loss figures since inception. Financial Performance of Sirius XM Canada (in $ millions)
2003 2004 2005 2006 2007 Adopt Sec. 306426 2008 2009 2010 2011 Cum. to date
PBIT Net Inc./ (Loss)
In an effort to improve operations, Sirius XM Canada’s predecessor companies, Sirius and XM, announced a merger, which was approved last year by the Commission27. At the time, Sirius XM Canada’s parent company announced that, It is expected that a combined XM Canada and Sirius Canada will yield synergies of approximately $20 million (on an annualized basis) within 18 months of closing by allowing the combined company to better manage costs through improved efficiencies and greater economies of scale.28
Sirius XM Canada is pleased to report that it is on track to saving approximately $20 million as planned, but that amount is insufficient by itself to change the fortunes of the company. Since inception, the profit picture for the Canadian satellite industry has been negative. It has lost at the PBIT level during that time and that figure does not include interest payments. This was not the picture that was originally contemplated. At the time of the licensing applications in 2004, the financial projections showed that by 2011, the combined entities would be earning annual pre-tax profits of more than $77 million. Such an overwhelming differential between projection and reality is neither acceptable nor sustainable.
In February, 2008, the CICA-issued Handbook section 3064 “Goodwill and Intangible Assets”, which replaced other existing sections of the CICA Handbook. The adoption of section 3064 resulted in certain changes in assets and liabilities. Broadcasting Decision CRTC 2011-240, 11 April 2011. Sirius XM Canada press release. February 17, 2011. Available online at: http://www newswire.ca/en/story/775811/xmcanada-merger-with-sirius-canada-inc-approved-by-shareholders-of-canadian-satellite-radio-holdings-inc
- 15 64. This is the financial situation in which Sirius XM Canada finds itself as it approaches its first licence renewal. And as the projections shown in response to Questions 20 and 21 of the attached letter Application show, Sirius XM Canada is a long way from achieving the PBIT levels of other undertakings. Sirius XM Canada runs a complicated business, and is subject to a variety of possible risks. The majority of customers result from Sirius XM Canada’s agreements with auto manufacturers that operate in Canada to factory install satellite radios. Sirius XM Canada has a high variable cost structure which other regulated services need not incur. $1.00 of revenue from an OEM subscriber will incur a 15% licence fee to Sirius XM Radio Inc. in the United States, 5% CCD, approximately 6% of performance rights and . This is before costs incurred by Sirius XM Canada to subsidize the cost of the radio, programming, marketing and administrative costs. Thus, current economic conditions are particularly discouraging, because the recent difficulties of major American auto companies and the slow recovery of vehicle sales continue to plague subscriber growth. These issues are a product of the current economic downturn, the severity and length of which are impossible to predict. Sirius XM Canada also has two exclusive licence agreements with Sirius XM Radio Inc. that come up for renewal during the next broadcasting licence term in November 2015 and August 2017, respectively. It is possible that Sirius XM Canada may only be able to renew or extend those agreements with Sirius XM Radio Inc. on economic terms less favourable than current terms. In addition, Sirius XM Canada must incur all of the costs of acquiring, converting and retaining a subscriber, while its main competitors, both regulated and unregulated, face none of those costs. Conversion happens when a trial subscriber (i.e. one who has received a free—at least to him or her—subscription as part of the purchase of a car) becomes a paying subscriber. Nonetheless, although the financial situation of the last licence term can be expected to improve going forward, the Commission will appreciate the significant risk factors involved in Sirius XM Canada’s business. There are many risks other than those described above that face Sirius XM Canada. A number of these were encapsulated in the Annual Information Form issued in November, 2011 by Sirius XM Canada, excerpts of which have been included as Schedule 1. These risk factors and the foregoing discussion make it clear that there is no other broadcasting sector in Canada that faces such uncertainty over the next licence term. Certainly, other regulated audio businesses face more secure futures than the one facing Sirius XM Canada. Sirius XM Canada has provided the Commission with two sets of financial projections for its second licence term. It is important to understand the assumptions underlying them. A key variable in building the projections is the assumption about the number of subscribers. Sirius XM Canada currently has approximately subscribers of of whom about are self-paying. This corresponds to approximately Canadians.
- 16 Table 10: Sirius Market Penetration Trend
Although market penetration is still trending upward, it has slowed considerably since the launch in 2005-2006. And after being in business for more than 6 years, it is unrealistic to think that the Canadian satellite radio industry will experience explosive growth. Despite this stagnation, modest subscriber growth over the coming licence term is still year over year. The predicted, with an average subscriber growth of approximately major reason is that an increasing proportion of cars sold are satellite radio-equipped. This alone will drive some subscriber growth, because as people buy cars, they are also buying radios that enable them to become subscribers if they so choose. Of course, more subscribers translates into more revenues, but there is another factor that is predicted to drive some revenue growth. To increase the subscription rate, Sirius XM Canada has been offering deep introductory discounts. Going forward, Sirius XM Canada This will have the effect of marginally increasing the average revenue per user. In terms of costs, there are issues that are projected to have a significant effect. Positively, there are areas where Sirius XM Canada hopes to lower them, such as renegotiating supplier agreements on more favourable terms. However, there are also unavoidable cost increases such as All of the foregoing demonstrates that this is a very different, and difficult, industry with a unique business model. It has high operating costs and is dependent on the auto sector. This in turn requires the company to seek out and acquire, then convert, then retain, subscribers, all in an uncertain marketplace.
- 17 75. As a result of the foregoing factors, the financial projections demonstrate PBIT levels that Sirius XM Canada believes to be achievable. Again, it must be noted that PBIT does not account for the significant interest payments that Sirius XM Canada must make. This substantial obligation exists regardless of Sirius XM Canada’s performance. Furthermore, these payments alone can be the difference between turning a net profit or a loss. In the graph below, Sirius XM Canada presents two sets of financial projections where all variables are held constant except the CCD contribution levels. In the first, which displays a continuation of CCD payments at the 5% of revenues level, the average PBIT margin of Sirius XM Canada is over the next licence term. This is clearly too low, especially in light of the severe losses sustained by shareholders over the first licence term. Conversely, the projections using 0.5% of revenue, still more than renewal-term commercial radio licensees, demonstrate an average PBIT of over the next licence term, allowing for a reasonable margin, albeit far lower than the competition. Sirius XM Canada Projected PBIT Margins by CCD Contribution Rate
The variance is attributable solely to the fact that CCD is reduced in the second set of financial projections. The difference is significant over the coming licence term. Sirius XM Canada has already lost over the first licence term and will have made CCD expenditures of $52 million by the end of this fiscal year. As seen above, there is a daunting list of risks to Sirius XM Canada’s business. However, notwithstanding all of the potential risks and challenges, Sirius XM Canada has not proposed any changes to its licence other than to bring its CCD contributions into line with renewal-term commercial radio licensees at 0.5% of prior year’s revenue.
- 18 E) 79. A SINGLE REQUEST – AN APPROPRIATE CCD RATE Sirius XM Canada has not requested any changes to its licence other than a reduction of CCD to 0.5% of prior year’s revenue. The reasons for the requested CCD change can be summarized as follows (a) Inappropriate Proxy: The imposition of the 5% of revenue CCD condition of licence was patterned after the BDU Canadian programming contribution percentage. But this is clearly an inappropriate proxy. In fact, the Commission itself has rejected the idea that satellite radio services are equivalent to BDUs.29 Equity & Consistency: Like all would-be commercial radio licensees, Sirius XM Canada offered “Over & Above” CCD contributions at its competitive licensing hearing. Therefore, like all renewal-term commercial radio licensees, Sirius XM Canada should revert back to lower levels. Renewal term commercial radio stations pay 0.5% of revenues in CCD.30 It is inequitable to require the unprofitable Sirius XM Canada to pay higher rates than an industry earning a PBIT of approximately 20%. CCD Contribution Policy: Sirius XM Canada has already lost over the first licence term, yet will have spent $52 million in CCD by the end of this fiscal year. Even with the merger, Sirius XM Canada continues to face fierce competition going forward. Extending contributions of this magnitude would violate the Commission’s policy of ensuring that mandated CCD contributions are commensurate with the financial health of a given sector.
This Supplementary Brief has already demonstrated Sirius XM Canada’s unprecedented support of the Canadian broadcasting landscape, its competitive struggles and its troubling financial situation. The following discussion will focus on the original proposal to introduce a 5% of revenue CCD level, that there should at least be regulatory fairnessin the absence of symmetry- between the regulated audio players, and the Commission’s policy that CCD obligations are commensurate with ability to pay. The analysis makes it clear that commercial radio, not BDUs, represents the most appropriate comparator for Sirius XM Canada. a) Inappropriate Proxy
Looking back through the filings and the transcripts of the public licensing hearing, it is apparent that comparatively little attention was paid to CCD at the time of the establishment of the satellite radio licensing framework. Satellite radio was a new, unknown industry. The view held by some at that time was that satellite radio shared
Licence amendment for Sirius, Broadcasting Decision CRTC 2007-134, 11 May 2007, paragraph 8. Given the $1,000 flat fee on the first $1,250,000 of income, renewal term commercial licensees actually pay much less than 0.5% since that percentage is only paid on amounts over revenues of $1,250,000 annually. Sirius XM Canada estimates the effective rate at more like 0.44%-0.47%. Moreover, the Commission has recently (Broadcasting Notice of Consultation CRTC 2011-796, 20 December 2011), called for comments on the possibility of exempting commercial radio licensees from CCD altogether if their revenues are less than $625,000 annually.
- 19 similarities with BDUs. Thus, at the November 2004 licensing hearing, the same 5% CCD contribution level as for BDUs was selected.31 82. In hindsight, there was no policy logic in equating satellite radio companies’ CCD contribution levels to the 5% Canadian programming contribution level of BDUs. The financial contribution regime for video programming undertakings such as television and BDUs is completely different than for audio programming, and therefore direct comparisons are both difficult and unhelpful. The revenues of BDUs and the revenues of satellite radio undertakings support completely different underlying cost infrastructures and it is critical for tribunals charged with rate setting to take those costs into account in setting rates. This is a factor that is taken into consideration by the Copyright Board of Canada (the “Copyright Board”) in setting tariffs which it has done for BDUs and for satellite radio.32 Importantly, as the Commission is aware, BDUs effectively provide a “must-have” service. They enjoy penetration of more than 91% of Canadian homes, and, critically, are responsible for the delivery of high-speed Internet, itself a “must-have” service, to the vast majority of Canadians. By contrast, satellite radio is a truly discretionary expenditure and one that is linked to the sales of cars in Canada. Yet for three decades while cable was growing into the powerhouse that it is today, it made no financial contributions to Canadian programming funds. It was only in the mid-late 1990s, in a regulatory trade-off that effectively allowed the cable industry to keep half of its otherwise expiring rate increases in exchange for a contribution to the precursor to the CMF, that cable began making a financial contribution to such funds. In fact, the Commission already has a position on this issue, The Commission further notes that Sirius Canada is licensed to operate a SSR [satellite radio] undertaking, not a BDU.33 86. Accordingly, there is no regulatory justification for imposing a 5% of revenues CCD rate on a renewal term satellite radio undertaking. b) 87. Equity & Consistency
In attempting to put forward an equitable CCD contribution rate for the next licence term, Sirius XM Canada was guided by the approach the Commission has taken with commercial radio. The following chart compares the CCD contributions of Sirius XM
Transcript of November 2, 2004. Available online at: http://www.crtc.gc.ca/eng/transcripts/2004/tb1102 htm The Copyright Board’s most recent decision relating to BDUs’ copyright obligations is found at http://www.cbcda.gc.ca/decisions/2008/20080320-m1-b.pdf. The 1.9% of revenue for large systems is split 50%-50% with the programming services carried by the BDUs such that BDUs and programming undertakings subject to that tariff effectively pay 0.95% of revenues to SOCAN. This contrasts with the copyright tariff payable by satellite radio to SOCAN of 4.26%. See http://www.cb-cda.gc.ca/decisions/2009/20090408-m-b.pdf. Licence amendment for Sirius, Broadcasting Decision CRTC 2007-134, 11 May 2007 at paragraph 8.
- 20 Canada against the contributions of first term and renewal term commercial radio licensees.34 Table 12:
(in $ thousands) First Term CCD contributions of Sirius XM Canada First Term CCD contributions of all Terrestrial Radio Licensees Renewal Term CCD contributions of all Terrestrial Radio Licensees 6,427 9,001 8,457 8,611 10,68935 12,03136 N/A N/A 55,216
Comparative CCD Contributions
20042005 20052006 20062007 20072008 20082009 20092010 20102011 20112012 (est.) Total
This chart displays the imbalanced burden in CCD contributions. Furthermore, the $52 million contributed by Sirius XM Canada is greater than the CCD contributions of all 400+ Canadian renewal-term commercial radio licensees combined over the same period. During 2005-2010, the period in which satellite radio has operated as a licensed service in Canada, the Commission licensed 274 new terrestrial radio services.37 Cumulatively, those 274 new radio stations, which are still in their first licence term, contributed only more in CCD combined than did Sirius XM Canada over the same period. It is highly likely that, although 2011 and 2012 figures are still not available, Sirius XM Canada is already contributing more than all of Canada’s first-term commercial radio licensees combined.38
From the Commission’s 2011 Communications Monitoring Report, Table 4.2.12. Including satellite radio, the CCD contributions for 2009 would be $19,537,000. Including satellite radio, the CCD contributions for 2010 would be $22,061,000. Communications Monitoring Reports Given that the Commission only licensed 8 new services in 2009 and 1 new service in 2010 in competitive processes compared to 17 and 23 in 2007 and 2008 respectively.
34 35 36 37 38
- 21 90. The disproportionately high contributions of satellite radio as compared to commercial radio exist not only on an absolute basis, but by percentage of revenues as well. As can be seen below, the effect of a much lower CCD percentage tariff combined with the renewal term step-stair exemption levels ensured that the commercial radio industry as a whole paid only 0.92% of overall revenue in CCD. This amount even included all firstterm commercial radio licensees’ “Over & Above” promises. Canada’s first term commercial radio licensees paid an effective CCD rate of 2.05% of revenues while all of Canada’s renewal term commercial radio licensees paid 0.47% of revenues. CCD Contribution Rate of Canadian Commercial Radio (in $000s)
2004 First Term CCD / Revenues Renewal Term CCD / Revenues 2005 2006 2007 2008 2009 2010 AVERAGE
Total CCD/ 0.58% 0.66% 0.81% 0.79% 0.89% 1.44% 1.24% 0.92% Revenue Source: All figures from CRTC Annual Financial Summaries except CCD which is from CRTC Communications Monitoring Report. This figure excludes CCD payable as a result of transfers.
However, the fact that Sirius XM Canada has paid significantly higher CCD rates than first term commercial radio licensees is a matter of historical interest. Much more important is the fact that every first-term commercial radio licensee is relieved at the end of its first licence term of the “Over & Above” CCD undertakings offered during its competitive licensing process. No applicant ever intends that “Over & Above” contributions survive the first licence term, nor has the Commission ever extended them for commercial radio licensees, regardless of how much is promised. Rather, CCD contributions automatically revert to the much lower amounts established by Commercial Radio Policy 2006.39 Sirius XM Canada is no different. With respect to its first term CCD obligation, Sirius noted at the licensing hearing that, This is an impressive amount, unmatched by any applicant at this hearing…40
It is instructive to calculate CCD for Sirius XM Canada as if it was a renewal term terrestrial radio licensee. If one treated each channel as a separate service, the way each commercial radio station is treated separately, Sirius XM Canada would divide its
Broadcasting Public Notice CRTC 2006-158, 15 December 2006, paragraph 116. Transcript of November 2, 2004. Available online at: http://www.crtc.gc.ca/eng/transcripts/2004/tb1102 htm.
- 22 revenues by the number of channels and pay only $1,000 on the first $1,250,000 of revenue allocated to each channel. Licensees operating multiple terrestrial radio stations do, in fact, take advantage of the lower fixed contribution across all their stations, paying the higher 0.5% only in the event a station passes the $1,250,000 threshold. 94. In this manner, commercial radio operations with large revenues are still able to repeatedly benefit from the $1,000 fixed contribution. If one took a hypothetical operator with, say, 80 radio stations each earning more than $1,250,000 per annum, that owner would pay $80,000 on its first $100,000,000 of revenue. Sirius XM Canada, under its current regime, would pay $5,000,000. Even with the new 0.5% rate, Sirius XM Canada would pay $500,000 or more than 6 times what that owner would pay in CCD on that first $100,000,000 of revenue. And this is per annum, such that the disparity is magnified over a seven-year licence term. Applying the renewal term terrestrial radio discount on the first $1,250,000 of annual revenue would greatly decrease Sirius XM Canada’s annual CCD contribution. Nonetheless, Sirius XM Canada is not proposing to do this, although it is exactly what every commercial radio broadcaster in Canada does. As mentioned, Sirius XM Canada simply proposes to multiply its prior year’s revenues by 0.5%. c) 96. CCD Contribution Policy
The imbalanced burden in mandated CCD contributions is not linked to capacity to contribute either. However, as mentioned above, the Commission’s stated objective is to set, …contributions to Canadian talent development (CTD) that are commensurate with the financial health of the sector.41 [emphasis added]
Indeed, the Commission has considered profitability, not only revenues, when setting CCD rates for commercial radio42 and pay audio, 43 as well as Canadian programming expenditures for BDUs44 and specialty services.45 The repeated use of financial health as a criterion makes it clear that the Commission sees CCD expenditures and profitability as being intricately linked. As discussed above, commercial radio is highly profitable, while Sirius XM Canada is not even profitable at all. The following table highlights the stark imbalance between satellite radio on the one hand and commercial radio on the other.
41 42 43 44 45
Broadcasting Public Notice CRTC 2006-1, 31 January 2006. Public Notice CRTC 1998-41, 30 April 1998. Broadcasting Decision CRTC 2002-391 (Galaxie) and 2002-392 (Max Trax), 20 November 2002. Broadcasting Public Notice CRTC 2008-100, 30 October 2008. Broadcasting Public Notice CRTC 2004-2, 21 January 2004.
- 23 Table 14: Comparative Financial Health and CCD Contribution Rate
Industry Satellite radio Commercial radio (first term) Commercial radio (renewal term) 19.52 19.52 Average PBIT %46 CCD / Revenue % 5.00 2.05 0.47
* Commercial radio’s figures for 2004-2010 and satellite radio’s for 2006-2011. Data is from Sirius XM Canada’s financial statements and Communications Monitoring Reports.
Commercial radio has enjoyed healthy profit margins for many years. Yet when the commercial radio industry’s profit margins were under threat in the 1990s, the Commission re-examined that sector’s CCD contributions and set a minimum annual threshold of only $1.8 million for the entire industry.47 In Commercial Radio Policy 1998, the Commission confirmed this minimum contribution scheme, which was designed to maintain a basic level of CCD contribution while at the same time attempting to protect the financial health of commercial radio licensees.48 At the time, commercial radio was still benefitting from higher margins than those of Sirius XM Canada. It was only in 2006, when the Commission once again reviewed commercial radio’s financial situation and noted that it had enjoyed healthy profits for several years that its CCD obligations were marginally increased. The projected income statements filed by Sirius XM Canada’s predecessor companies at the time of their original applications predicted a cumulative deficit of approximately $100 million over the seven-year licence term, but a net income of more than $65 million by the final year. The actual figures are much worse. The company has a cumulative deficit of and another significant net loss for the year ending in 2011. If the Commission is to consistently apply its policy that contributions to mandated CCD be commensurate with the financial health of the sector, then a reduction in the CCD rate applied to satellite radio is required for the next licence term. As can be seen in the financial projections included as part of this Application, the PBIT levels do not become satisfactory even over the next licence period. In summary, the Commission thought that a maximum rate of 0.5% of revenues was a commensurate level of contribution for a commercial radio sector with a 20% PBIT. And, by licensing and re-licensing pay audio without raising its CCD commitment,49 the Commission has indicated that its rate is commensurate with a sector with excellent
47 48 49
The PBIT% of first and renewal term commercial licensees were assumed to be the same, because separate PBIT% data is unavailable. An assumption that renewal term stations have higher PBIT% would increase the first term CCD/Revenue %, but decrease the renewal term CCD/Revenue %. Public Notice CRTC 1995-196, 17 November 1995. Public Notice CRTC 1998-41, 30 April 1998. The Commission renewed the licences of Galaxie (Broadcasting Decision CRTC 2002-391, 29 November 2002) and Max Trax (Broadcasting Decision CRTC 2002-392, 29 November 2002) and also licensed Rogers (Broadcasting Decision CRTC 2007-147, 22 May 2007) and Stingray (Broadcasting Decision CRTC 2008-368, 23 December 2008) all without raising the traditional CCD rate despite the requests of intervenes who highlighted pay audio’s profitability.
- 24 financial health, as reflected in its 57% PBIT. The outlier in this regulated audio programming picture is clearly satellite radio. 103. For the foregoing reasons, Sirius XM Canada believes it not only deserves but requires the requested amendment to its CCD condition of licence. While the cost synergies created by the merger clearly help, they are not a panacea. The merger did not create a monopoly that has allowed (or will allow) Sirius XM Canada to recklessly raise its prices and thereby recover any continuing mandated obligations that are above and beyond those of its competitors. The merger was not about eliminating a competitor. Rather, the merger was an operational reaction to the American merger and to the competitive environment for audio programming undertakings that spurred it. With improvement of the economy, good management and a proper regulatory structure, Sirius XM Canada believes that its business is viable, and it certainly does not want to abandon its 2 million+ Canadian subscribers to the grey market. CONCLUSION Given its mandate and objectives, it has been shown that the Commission weighs the following factors when determining what level of CCD contribution is appropriate for a particular sector/licensee: (a) (b) (c) (d) (e) (f) 105. contributions by licensees in similar sectors; sector profitability; applicant/licensee profitability; type of licence (commercial, first term/renewal term, etc); threats from new technologies; and the sector’s/applicant’s exhibition requirements.
The most appropriate level of CCD contribution for Sirius XM Canada for the next licence term is that of renewal term commercial radio licensees, but without the benefit of the step-stair exemption. This Supplementary Brief has demonstrated that, (a) The Commission routinely calibrates required CCD contributions for different players in the Canadian broadcasting industry. Since by any measure Sirius XM Canada will be significantly over-contributing CCD funds compared to its competitors, both regulated and unregulated, it is time for such a routine calibration to take place for satellite radio. Sirius XM Canada has contributed much more CCD funding than the Commission and even interveners expected at the time of the licensing hearing in the fall of 2004. Sirius XM Canada has and will continue to exhibit the talents of Canadian artists in both French and English, and more particularly new Canadian selections and emerging Canadian artists, on a national platform in quantities unmatched by any of its competitors.
- 25 (d) Approval of this Application will remove an imbalance in the Canadian broadcasting system and would allow for sustainable competition between Sirius XM Canada and its competitors. Sirius XM Canada has always and will continue to play a higher percentage of Canadian content selections than any of its competitors. Both Canadian and non-Canadian Internet radio services are not required to make any contribution whatsoever to the Canadian broadcasting system notwithstanding that these services will have a much more detrimental impact on satellite radio services going forward than on any other licensed Canadian programming services. Sirius XM Canada faces far more threats to its business over the next licence term than does commercial radio. The commercial radio industry’s traditional practice is to promise an amount of CCD that exceeds the minimum in order to convince the Commission to license new services in response to competitive calls for applications. Never are such CCD promises carried into a renewal licence term. Invariably, the successful applicant moves to the much lower commercial radio industry model approved by the Commission. More than seven years after the hearing relating to the imposition of the 5% CCD figure on the satellite radio industry, it is appropriate for the Commission to recalibrate this figure just as it has in the past and will continue to do in the future for commercial radio stations. Sirius XM Canada greatly over performs in rural regions of Canada that other media either ignore or under serve. It also does this without the benefit of reduced CCD that non-competitive commercial radio licensees enjoy. Satellite radio has contributed materially more to CCD in its first licence term than first term commercial radio licensees. Other audio programming licensees are far more profitable than satellite radio licensees and will be for the foreseeable future. While Sirius XM Canada’s revenues have shown positive growth, this has been largely as a result of its radio subsidies and expensive customer conversion and retention plans, both of which have come at a significant cost to Sirius XM Canada during the first licence term. It is unrealistic to expect that CCD contributions should be taken off the top line in the same amount as suggested in 2004 without taking into consideration that current revenues would not exist had Sirius XM Canada not dug into its shareholders’ pockets to enable those costs to be incurred and thus revenues to be enhanced. over the first licence term and requires an Sirius Canada has lost adjustment of its CCD level to match that of its main competitor.
- 26 107. The worries and concerns expressed by interveners in 2004 have failed to materialize. Sirius XM Canada’s exhibition requirements exceed those of commercial radio, resulting in significant new Canadian content (in both English and French) being made available to all Canadians as well as internationally. Sirius XM Canada has materially outperformed even its most optimistic estimates from a CCD perspective and carries a disproportionate share of CCD obligations when compared to other audio programming undertakings. Sirius XM Canada is a valuable contributing member of the broadcasting community, with over two million subscribers. And all of this has been accomplished without having any discernable effect on other forms of audio programming. In licensing satellite radio in Canada, the Commission introduced unique and innovative conditions of licence to ensure that the licensees would make the greatest practicable use of Canadian resources under the circumstances. All Canadians now have the opportunity to enjoy a robust national offering that features more Canadian music and, in particular more emerging Canadian artists, than from any other Commission licensee. However, the examination of Sirius XM Canada’s CCD obligations as set out in this Application clearly demonstrates that to continue the 5% level of CCD contribution would be inappropriate. Setting Sirius XM Canada’s CCD level at that of commercial radio during licence renewal terms, 0.5% of revenues, commencing September 1, 2012, would restore that balance while ensuring that the policy objectives of the Broadcasting Act are met.
- 27 Schedule 1 Risk Factors in Sirius XM Canada’s 2011 Annual Information Form Risks Related to Our Business Current economic conditions may adversely affect our financial results and financial position. Demand for our service may be insufficient for us to continue being profitable. We rely on our exclusive relationship with Sirius XM for the provision of our Satellite Radio Services. We must maintain and pay copyright licence fees for music rights which may increase and become more costly than expected. Higher than expected costs of attracting new subscribers, higher subscriber turnover or weaker than expected advertising revenue could each adversely affect our financial performance and operating results. Our inability to retain customers, including those who purchase or lease vehicles that include a subscription to one of our Satellite Radio Services, could adversely affect our financial performance. Competition from traditional and emerging audio programming providers could adversely affect our revenues. Our business depends in large part upon automakers, whose sales are dependent on general macroeconomic conditions. Our service network, national broadcast studios or other facilities could be damaged by natural catastrophes, which would adversely affect our business. Adverse impact of litigation, claims, patent, copyright and other infringement could be material to our bottom line. Our service could be interrupted in areas where there is no direct line of sight access to a satellite or a terrestrial repeater, which would adversely affect our business. We rely on third parties for the manufacture and distribution of radios. A bankruptcy or financial difficulties of a third party with whom we have a significant relationship could harm our results of operations. We need people with special skills to develop and maintain our new service. If we cannot find and keep these people, our business could suffer. Our terrestrial repeater network may not provide an adequate level of reception.
- 28 We may from time to time modify our business plan, and these changes could adversely affect us and our financial condition. Rapid technological and industry changes could adversely impact our Satellite Radio Services. Consumers could pirate our Satellite Radio Services. Changes in consumer protection laws and their enforcement could damage our business. Risks Related to our Indebtedness We have substantial indebtedness and we may be unable to service our indebtedness. The agreements governing our indebtedness contain significant restrictions that limit our operating and financial flexibility. To service our indebtedness, we require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. We may be able to incur additional indebtedness, which could further exacerbate the risks associated with our substantial indebtedness. Risks Related to Our Principal Shareholders A small number of shareholders own a significant percentage of our voting shares and could significantly affect matters requiring a shareholder vote.
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