As expected, the CRTC ruled yesterday that it will require cable and satellite companies to offer a mandatory basic service capped at $25 per month (which may include U.S. channels) and a pick-and-pay alternative for individual channels no later than December 2016. As also expected, the doomsayers are out in full force, trying to explain why a low priced service and more consumer choice will lead to higher cable bills. The Globe and Mail’s Kate Taylor predicts “my bet is that most Canadians will find themselves piecing together a smaller cable package that will cost just about the same as the old behemoth.” The National Post’s Terrance Corcoran says that no one will buy the basic bundle and that “what is clear is that, when viewers start picking [bundles and channels], the amount they end up paying could go up.”
Yet that analysis runs counter to what business analysts expect to happen. Maher Yaghi of Desjardins Capital Markets says the changes could “lead to a reduction of $5 to $10 in monthly [revenue per user] as customers get the option to choose the channels they want to watch and move discretionary money toward OTT (over-the-top) services such as Netflix.” Canaccord Genuity analyst Dvai Ghose suggests even bigger declines of $9 to $21 for some customers. In fact, Ghose notes that “current entry-level TV monthly prices for the large BDUs are as follows: Bell Fibe TV $45.95, Rogers Cable $40.48, Shaw $39.90 and Videotron $38.00 and Telus $34.00 ($29.00 if bundled).” A $25 service is obviously going to result in reduced spending for those consumers.”
Critics keep claiming that the changes will result in billions in lost revenue. For example, Friends of Canadian Broadcasting says that more than $2 billion per year could be lost under a pick-and-pay system. The CRTC rejected those claims, but if they are even close to correct, how do you take $2 billion out of the system? By having consumer spend less on broadcast services. It simply makes no sense to suggest that broadcasters will earn less, broadcaster distributors will earn less, but somehow consumers will spend more.
Beyond the obvious economics, critics like Taylor and Corcoran emphasize that consumers will have to piece together bundles or more expensive pick-and-pay channels in order to get what they want. For example, Taylor says consumers will be looking for U.S. channels in their package. They can be included in the basic $25 service, but if they are not, they will be forced onto a higher tier. The fallacy with this analysis is that it thinks of consumer choices as limited to the cable system. This might have been true years ago, when consumers had few other choices (OTA the exception) than purchasing cable services.
No longer. Cable and satellite must now compete with streaming services such as Netflix, sports packages, and (soon in the U.S.) HBO and something that looks a lot like basic cable from Apple. The price points of streaming services are far lower than a cable bill of basic plus lots of bundles or individual channels (there is also an Internet bill, but consumers are buying Internet access with or without streaming services).
Cable and satellite services can try to piece together a crappy basic service without U.S. channels or set high fees for individual channels. But in a competitive market, there will be a strong disincentive against doing so. My bet would be that the major cable providers will include U.S. channels on basic because that is what the market wants and if they don’t, many will simply walk away altogether. Indeed, it was Rogers that specifically asked for the U.S. networks to be included on the basic package. The same is true for high prices for standalone services. Some might be pricey, but typically when there are no other alternatives to the same programming. When consumers have other options – streaming sports packages rather than TSN or Sportsnet rather than TSN – the market will keep prices in check.
Some Canadians will obviously continue to buy expensive bundles or retain their existing service. Old habits are slow to change. But they do change (as the newspaper or music industry can attest). With the new changes, those who currently purchase basic service will certainly save money. Moreover, the next generation of potential subscribers – my kids and my students – will only subscribe if cable or satellite offers better value than the online alternatives.