Profs. Michael Trebilcock and Edward Iacobucci, with lawyer Lawson Hunter, have written a commentary in the Financial Post arguing against the CRTC's proposal to require TV providers to provide "pick and pay" channel selection options for consumers ("CRTC’s mandatory pick-and-pay proposal deeply misguided," September 25, 2014). The article is based on a report prepared by the authors for the C.D. Howe institute ("Let the Market Decide: The Case Against Mandatory Pick-and-Pay").
Read the article on the Financial Post website, or below.
CRTC’s mandatory pick-and-pay proposal deeply misguided
By Lawson Hunter, Michael Trebilcock and Edward Iacobucci
September 25, 2014
In the Throne Speech of Oct. 16, 2013 and by Order in Council in November 2013, the federal government requested the Canadian Radio-Television and Telecommunications Commission (CRTC) to make a report as soon as feasible on the ability of Canadian consumers to subscribe to pay and specialty television services on a service-by-service basis in a manner that most appropriately furthers broadcasting policy for Canada.
Further to this Order in Council, the CRTC has released a set of tentative proposals for expanding subscriber flexibility in choosing television programming on a service-by-service basis or building their own packages. That is; they would not leave the choice of packages available largely up to the discretion of broadcast distribution undertakings, or BDUs, which include cable, satellite, and telecommunication service providers.
Many of the CRTC’s proposals are deeply misguided and are largely an exercise in futility in light of the technological revolution that is unfolding in the communications sector (broadly defined). The government should leave BDUs the discretion to choose program offerings and packages so as to maximize their own revenues and overall consumer welfare.
At present, BDUs are subject to various regulatory constraints on the packages they may offer. One example is the requirement that they distribute a basic service of local news and broadcasting channels to all subscribers before providing other types of programming services. Other requirements mandate that in any package offered by a BDU, a preponderance of programming services are Canadian broadcasting services. Obviously, mandating that BDUs provide all programming to subscribers on a service-by-service basis, without any constraints, would put at risk this preponderance rule, which has hitherto been regarded as one of the bedrocks of Canadian broadcasting content policies.
The trend is away from traditional “push” programming to “pull” consumer preference, where consumers have choices in what, when and where to watch video content. The demographic evidence is that younger consumers, who grew up in the Internet age, are much more resistant to the traditional “push” industry model. While “pick-and-pay” or “build-your-own package” proposals seem to be consistent with the movement from “push” era to “pull” era communications technologies, the government and the CRTC seem not to fully understand why BDUs bundle.
There is a superficial appeal to the argument that good policy would grant consumers the freedom to buy whatever channels they want, and not to buy those that they do not. After all, in many other market contexts, consumer choice prevails. When a shopper buys groceries, for example, she does not have to buy a banana in order to buy a lemon. The Order in Council from the federal government that mandated an examination of pick-and-pay was probably motivated by an intuitive preference for consumer choice among television subscribers. What this apparent appeal to free-market instincts misses, however, is that the bundles that BDUs presently offer also reflect a market choice by self-interested sellers.
In fact, sellers make the decision to bundle products all the time. Even a grocer bundles when it sells a bag of oranges, or three bags of milk together. In a context closer to the one at hand, newspapers bundle different sections with a variety of news into a single product – local news, business news, sports news, entertainment news, and editorial opinion sections are all purchased when a consumers buys a paper. The question, then, is not whether BDU bundling departs from market principles, but whether the motivation for bundling reflects some kind of market failure that pick-and-pay regulation would address. The relevant kind of market failure would concern competition: that the bundling somehow reflects or contributes to a shortfall of competition. It is not plausible that bundling hurts competition; most likely, bundling allows for price discrimination, which is not a practice that should invite regulatory intervention.
Given the robust competitive landscape for video content, the most plausible explanation of bundling by BDUs concerns price discrimination. Bundling can assist sellers in extracting consumer surplus. Buyers have different preferences, and thus different demand, for different products. However, variation across buyers in their willingness to pay for a particular product does not necessarily imply variation across buyers in their willingness to pay for a bundle of products. Just as diversification in a stock portfolio reduces variance in the portfolio’s return, bundling can reduce the variance across consumers in their willingness to pay. This allows the seller to charge a price for the bundle that better maximizes its profits.
Competition law in Canada has moved in exactly this direction, with amendments to the Competition Act in 2009 that not only decriminalized price discrimination, but removed reference to the practice altogether.
Competition will affect the ability of BDUs to profitably bundle regardless of regulation. If consumers dislike bundles, they will increasingly be able to shift with little cost to alternatives on the Internet such as Netflix, or channel-affiliated websites. Indeed, there already is evidence of the BDUs adopting strategies to respond to competition. In Quebec, for example, Videotron offers the option of relatively narrow bundles of channels to its subscribers. In addition, Rogers and Shaw recently announced the creation of a streaming service similar to Netflix, called Shomi. Establishing an elaborate regulatory regime to deal with a practice that will soon be subjected to even more intense competition would be a mistake.
