This is part two of a five-part series. Part one is here.

The story so far: national independent media releases are economic and cultural goods, however the local advertising-supported media market is not large enough to justify their production. This is the case in every Western media market except the United States.

The networks will tend to fill free broadcast channels in these secondary markets with low-cost productions like sports, news, short documentaries, game shows, reality television, and soap operas.

To avoid our broadcast bandwidth being saturated with low-production-value programming the government can structure the market using its…

Cultural Toolkit

• Public Broadcasting — A commitment to high-value content from a public broadcaster stimulates local production by enriching the talent pool.
• Scheduling Rules — “Can-Con”. Some South American countries require a certain percent of total movie theater screen time be given to locally-produced films. This tends to drive production dollars to low-value content like childrens’ programming and documentaries, and (when allowed) syndicated re-runs.
• Production Levies — In France a percent of each ticket sold goes into a government-administrated fund for financing French film. In Canada 6% of subscription service revenues (pay channels like HBO) must be spent on new Canadian productions. In Australia it’s 12%.
• Local Ownership Rules — Government funding should be available on a more-and-faster basis for local productions. Hollywood hates locales that have this rule because they end up losing some ownership to locals, as the government dictates.
• Competition Policy — The government can regulate to create a market for indie production directly. Some countries do this by requiring the broadcast of new independent indigenous drama.
• Tax Incentives — The most-used strategy, including subsidies. For example the Lord of the Rings trilogy was made largely thanks to tax incentives from Germany and New Zealand.

The Canadian government uses scheduling rules in free broadcast markets. From 7pm-11pm, Monday through Sunday, eight hours of programming is required to be Canadian. This ends up filled with local news, sports programming, stand-up comedy, game shows, entertainment magazines, soap operas, and reality TV. All of this is low production value programming — ie, back to the ghetto.

The problem is in the implementation. Over the last twenty years Canadian viewership of the American border stations is down 50%. This is seen as evidence Can Con rules have been largely effective in growing the audience for Canadian content. Modifying scheduling rules to require spending on new high-value productions would magnify the positive economic effects of the rules (not only growing the market but also funding more of the content it wants).

The Subscription Television Market

89% of Canadian homes have cable, but only 36% of those regularly watch local ad-supported free channels. The balance watch a subscription service. This crushes the already-small advertising market by fragmenting the audience — a large chunk of viewers are simply not watching television advertisements any more. The same number of viewers and ad dollars are spread across more channels, some of which are inaccessible to advertisers. The market is a mess.

To return to free broadcasts for a moment, the total amount spent on new productions by traditional broadcasters last year was CAD 105.2 million, CAD 55 million of which came from the CBC. This is certain to decline. Rogers (CITY), for example, is cutting spending on Canadian production to zero while showing reruns to meet scheduling rules. Most government funding for Canadian production was in the form of one-time funds that were supposed to kick-start the industry. It hasn’t worked — the funds are now mostly dry, and the networks aren’t stepping in to replace the government (this is what happened to Traders).

In the subscription television market instead of scheduling rules the CRTC has imposed a production levy: 6% of revenues from subscription services must be spent on new high-value productions in Canada. Space, The Comedy Channel, Showcase, YTV, the Family Channel, etc. funded CAD 138.0 million in new productions last year, total.

This “Canadian Programming Expenditure” (CPE) rule has been a great regulatory success, and is cutting-edge as government regulations go — only Australia and France have similar rules.

The CRTC is in the middle of license renewal negotiations with all major television networks. They’ve been giving extensions on licenses the last few years to stack all major network license renewals into 2010. The plan is to audit the industry exhaustively once and then, probably, impose the CPE across the board (and possibly increase the rate from 6%).

The Cold Realities of the Market for Television Drama

The UK funds the BBC at, effectively, $115 per head. Ireland funds its public broadcaster about $60 per head. Canada, Australia, and New Zealand are all under $40, Canada about $33. Public broadcasting is a key component of the way the government interacts with the media market.

The BBC is the model to be followed. PBS doesn’t do high-value programming because of the size of the American commercial market and the BBC consistently does well by most international measures. By this standard the smaller English-language markets aren’t funding their public broadcasters effectively. Because of market fragmentation ad-supported public broadcasters like the CBC are paralyzed creatively — they can’t justify building high-value content for low-value bandwidth without government subsidy.

The UK is also a model for the future of television subscription services, which surpass the size of the BBC by many times, though with no obligation to produce local content. Canada can adopt the successful UK regulatory model and improve it by increasing funding to the CBC and by expanding the use of the Canadian Programming Expenditures rule.

But the television market is undergoing structural changes. Networks are cutting spending on high-value productions in America too. When NBC moved Jay Leno to their 10pm slot the business move they made was to trade ratings for a lower cost base. They traded five hours of television at USD 2.62 million per episode (USD 13.1 million total — and rising) for five hours of television that costs, in total, USD 2 million.

This math is not lost on the other networks. They’re wondering how many more commercial viewers that extra $10 million per week actually gets them. As they look at falling share prices, tightening credit markets, and the ravening hordes of pirates on the internet, network executives are becoming less likely to finance high-cost, high-value productions. Riskier investments with higher rewards are being traded for safe, predictable returns — comedy, sports, soaps, news, etc. — back to the TV ghetto again.

The Canadian government can and should use the “cultural toolkit” to build a self-sustaining national media market. Not only would this grow the economy, it would shield Canadian consumers from the collapse of the US drama market and might provide us with a few very valuable exports at a time the US is looking for cheaper, high-quality foreign content, all while giving citizens the chance to produce culturally-significant works.

Right now Canada has two major media exports: point of view documentaries (those in the vein of Michael Moore), and Degrassi: TNG.

In 2006 IBM released a study, The End of Television As We Know It, which pointed out that people are moving away from both subscription and advertising-supported television to a mix-and-match “personalized channel” way of watching.

I know anecdotally my generation watches TV entirely differently. We power-disc. We multi-channel time-shift. We watch online at work. We download. There are no commercials in the television I watch.

The Conservatives are taking a very short-sighted approach towards funding the CBC and supporting the Arts. As things stand new Canadian drama productions have entirely halted for at least the next two years, and likely the next five. CPE spending from subscription services is currently the only realistic source of funding for new productions in Canada.

The CPE production levy is also the first funding model the CRTC is likely to try to apply to new media.

Tomorrow at noon, the Economics of Film.

There were roughly five parts to Peter Grant‘s talk: “Why Local Drama?”, the Economics of TV, the Economics of Film, the Economics of New Media, and Regulatory Suggestions.