Archived — BGM/CHUM Technical Backgrounder
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November 28, 2007
I - Introduction
The Bureau's review of this matter was completed in February 2007, prior to the Canadian Radio-television Telecommunications Commission (“CRTC”) public hearings into the proposed transaction, which ultimately led to the CRTC denying regulatory approval for the proposed transaction. In spite of the passage of time and the fact that the transaction was not completed, the Bureau continues to hear expressions of interest about how it approached what would have been a major merger in an industry exposed to rapid technological change, competitive challenges and ongoing public discussion regarding media concentration in Canada. For these reasons, the Bureau is issuing this technical backgrounder.
Readers should exercise caution in interpreting the Bureau's assessment of this transaction as set out herein, and should avoid drawing overly broad conclusions as to how the Bureau is likely to analyze future activity in specific industries and/or by particular firms. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in this backgrounder are specific to this merger and are not binding on the Commissioner of Competition (“Commissioner”). The legal requirements of section 29 of the Competition Act (“Act”), in combination with the Bureau's policies and practices regarding the treatment of confidential information, limit its ability to disclose certain information obtained during the course of a merger review.
II - Background
In July 2006, BGM and CHUM announced their intention to merge and filed the necessary pre-merger notification documents with the Bureau. A formal inquiry was commenced under section 10 of the Act since, based on the available information, the Commissioner had reason to believe that grounds existed for the Competition Tribunal to conclude that the proposed merger was likely to lead to a substantial lessening or prevention of competition. Information was obtained, both voluntarily and through the exercise of formal powers under the Act, from the parties, advertising agencies, advertising companies, competing broadcasters, the CRTC, independent Canadian content producers, cable distributors, and industry associations. The Bureau also engaged economic and industry experts to assist in the inquiry.
In the course of the inquiry, to obtain detailed information concerning the competitive effects of the merger and to address the conflicting views offered by and elicited from industry participants, the Bureau obtained court orders under section 11 of the Act, compelling the production of documents and written responses to specific questions. The respondents to these orders included broadcasters, advertisers and advertising agencies as the primary participants in the television advertising industry. A number of the respondents requested this formal approach.
The Bureau also engaged industry and economic experts to undertake detailed analyses of the information, some of which was prescribed by the orders. The purpose was to address concerns raised by complainants and other interested parties. As work progressed, it became apparent that certain competition issues could be dismissed, and that the information sought to further the experts' analyses was no longer required. Rather than continuing to collect information relating to these issues, the Bureau chose to advise the affected parties that further production of such information was not required.
Based on the information collected in response to certain of the orders, and after conducting an in-depth analysis of the likely competitive effects of the merger, the Commissioner determined, in February 2007, that it was not necessary to continue the inquiry further, as grounds did not exist to challenge the proposed transaction before the Competition Tribunal. Immediately upon making that determination, the Commissioner advised the respondents to the section 11 orders that any further compliance with the orders then outstanding was not necessary.
(b) The Parties
BGM is a multi-media Toronto-based company whose assets include CTV Inc. (Canada's largest private TV broadcaster) and The Globe and Mail (Canada's largest national daily newspaper). The company also holds a 15% interest in Maple Leaf Sports and Entertainment 3.
BGM operates a conventional English language television network across Canada under the CTV banner and has an interest in 17 specialty television channels.
CHUM is a Canadian media company and content provider whose main business activities include television and radio broadcasting and television content production. CHUM owned and operated 34 radio stations, 12 local television stations (operated under the Citytv and A-Channel banners), 21 specialty television channels and a satellite-to-air cable service.
BGM's public announcement of the proposed transaction included a proposal to divest certain television assets in anticipation of the regulatory reviews required to complete the transaction 4. In the course of the Bureau's review, which necessarily examined the transaction without presuming any proposed divestitures, it was found that those assets were not, in any event, relevant to the likely competitive impact of the proposed transaction.
III - Bureau's Analysis
(a) Product Market
The television broadcasting industry involves two major business activities where firms compete: acquiring programming rights and selling television advertising during programme broadcasting. As to the acquisition of programming, the majority of prime-time English language television programming broadcast in Canada is produced in the United States. Canadian broadcasters typically acquire first time exclusive Canadian broadcast rights from major American studios in an annual auction process for new programming. When a broadcaster “wins” the right to a programme, they would then generally be granted incumbency rights for subsequent years. Therefore, each year, a broadcaster would be faced with renewing the rights for certain established programmes, and entering into an auction process for new programming.
The Bureau considered two areas regarding the potential for market power in the acquisition of broadcast programming. The first was the traditional “upstream” analysis that the merged entity would be able to exert monopsony power over programme sellers. This was dismissed in the absence of any supporting evidence.
The second concern was that the merged entity might have the power to hoard programmes or foreclose its competitors from acquiring programmes. The large number and variety of programmes, however, preclude this possibility. Moreover, the nature of the process for acquiring programmes, described above, provides the merged entity's competitors with preferential rights for programmes that they have historically purchased. This reduces the likelihood that the merged entity would be able to restrict sales of those programmes to its competitors. Since the merged entity would not have market power with respect to programming acquisition, this aspect of the merger was given no further consideration.
As to the selling of advertising during programme broadcasting, it is important to distinguish between conventional and specialty channel programming.
Each of the parties operates both conventional and specialty channels, which are broadly distinguished by their programming content. Conventional television stations broadcast a wide variety of programming over-the-air and through cable and direct-to-home (“DTH”) satellite operators in either analogue or digital format. In contrast, specialty channels are thematic and focus on a well-defined genre ( e.g., sports; all-news). Advertisers of certain narrowly-focused products find it advantageous to use specialty programmes to reach consumers who are attracted to a specific genre (e.g., golf club ads on The Golf Channel), while other advertisers may benefit from targetting a specific demographic. In the latter case, advertising on conventional channels is more efficient than advertising on specialty channels even though ad rates are significantly lower for specialty channels. This distinction is partly explained by the fact that specialty channels, in contrast to conventional channels, are subscription-paid. Furthermore, while specialty signals are transmitted on a national basis, conventional channels may operate regionally or nationally as part of a network.
The Bureau concluded that specialty channels, given their thematic nature and licensing restrictions, compete with conventional channels only at the periphery and appeal mainly to certain genre-focussed advertisers; they are a weak substitute for conventional channels for advertisers seeking a demographic target. The proposed merger did not raise competition concerns in terms of concentration or market share for specialty channels, and they were dismissed from further consideration given the vigour of post-merger competition.
Finally, to address the sale of advertising by conventional stations, which was the focus of the Bureau's inquiry, broadcasters supply perishable advertising time slots to advertisers, a large portion of which is purchased initially by advertising agencies. Regulations at the time of the Bureau's assessment permitted Canadian broadcasters to sell 12 minutes of advertising for each hour of programming.
Television advertising is a distinct product, according to contemporary industry views and literature, primarily owing to the fact that it provides superior reach and appeal to multiple senses simultaneously ( i.e., sight and sound). Other media are neither close nor acceptable substitutes; rather, most advertisers consider other media advertising as complementary to television. While the Internet has shown impressive growth as an advertising vehicle, at this time it does not challenge television as an advertising medium. The Bureau determined that this is unlikely to change within the one-year time horizon generally applied to market definition in merger reviews. 5
The Bureau also considered the extent to which American broadcasters offer an alternative to Canadian advertisers. On examination, and strongly corroborated by market contacts, the Bureau concluded that the appeal of American stations to Canadian advertisers is limited. This is owing to, among other factors, simulcasting 6 and the fact that Canadian advertisements on American stations are not tax-deductible.
Consideration was also given to dividing the advertising market according to the popularity of the programming with which it is broadcast, i.e., Top 20 shows versus Top 20 through 50 shows versus all others. Given CTV's relative strength in the Top 20 bracket, it would have been the sole competitor, and CHUM would have competed directly only in the “others” category. The Bureau chose not to divide the market in this manner, primarily owing to the fact that programme popularity tends to be unpredictable and unstable. All broadcasters face the difficulty of selecting next season's most popular new shows and the tendency for the viewing public to switch programme allegiance unpredictably. For these reasons, the relevant product market was not segregated on the basis of programme popularity.
Consistent with previous reviews of media industry mergers, and after due consideration of other candidate product markets, the Bureau determined that the relevant product market on which the Bureau's competitive effects analysis should focus was English language conventional-channel television advertising.
(b) Geographic Markets
Television advertising is purchased on either a regional or national basis. Five regional markets were identified where both parties have channels: Vancouver; Edmonton; Calgary; Winnipeg; and Toronto/Ontario 7. Since CHUM does not have a fully national network, these 5 regional markets were the focus of the Bureau's review.
(c) Market Share Analysis
The Bureau used standard industry measures to calculate market shares for the proposed transaction. Post-merger shares for English language conventional-channel television advertising in all but one of the identified regional markets exceeded the 35% threshold outlined in the Bureau's Merger Enforcement Guidelines . Concentration and market shares are only the first step in the Bureau's assessment of competitive impact, and the Bureau's analysis proceeded to a consideration of additional relevant factors as described below.
(d) Barriers to Entry
A regulatory barrier exists in the form of mandated CRTC approval for the issuance, transfer or modification of a broadcast licence. Past experience suggests this can be a time-consuming process.
There are significant sunk costs and upfront investments associated with entry into the television broadcasting business. Administrative costs, the regulatory approval process, the hiring of experienced personnel, the need to build or acquire transmission facilities and the acquisition of programming content are all considerable expenses that have to be absorbed before broadcasting can start. The facilities are specialized and have limited value outside of television broadcasting.
The Bureau concluded that barriers to entry in the Canadian TV broadcasting industry are relatively high, but noted that they were not so high as to discourage a recent application to the CRTC for a national, high-definition conventional network 8.
(e) Remaining Competition
Inasmuch as the relevant product market has been defined to be “English language conventional-channel television advertising”, there is some differentiation among the channels as indicated above. For example, prior to the CHUM acquisition, CTV was widely referred to as a “must-buy” for television advertisers with high-reach objectives. This would not change as a result of the merger. The strength of CTV in the highest-rated programming would not be affected by the acquisition of CHUM, since the latter tended to meet a complementary need. At the same time, the other major networks are expected to continue their pursuit of quality programming and meeting advertisers' needs.
As to television advertising space where top-show related exposure is not critical, the Bureau found that the advertising agencies do have credible options to the merged entity. In the past, agencies can and have shifted a certain portion of their advertising time purchases away from a given broadcaster to defeat what they have considered to be an unreasonable price increase. While the proposed merger would remove CHUM as an alternative, the lessening of competition would not be substantial as there was no reasonable prospect that CTV could effect a material price increase, owing to the effective remaining competition.
(f) Coordinated Effects
The inquiry indicated that broadcast networks compete aggressively for advertising accounts to strike a balance between maximizing returns and clearing perishable inventory. While broadcasters issue rate cards, they are widely regarded as only a starting point for complex price negotiations focussing on the advertising targets agreed upon by agencies and their clients. Direct purchasing by advertisers is relatively rare and the market is not fully transparent with respect to the actual prices paid. The major agencies also engage in a substantial up-front ad space buy in advance of the new season, moving pricing control from the broadcasters to the agencies. It is difficult for broadcasters to coordinate their pricing or restrict output ( i.e., reduce the minutes of advertising available per hour) without direct pricing control or the ability to monitor prices paid.
As noted above, even though the relevant product market has been defined as English language conventional channel television advertising, the variation in the quality of programming tends to distinguish broadcasters from each other and therefore complicates coordination. At the same time, not every advertiser requires or is willing to pay for premium time slots, although circumstances may lead to some of their ads airing at such times. Some premium ad slots will be allocated to advertisers who require a certain exposure for the ad but who do not necessarily require Top 20 spots. Vagaries of the broadcast industry, such as unexpected programme cancellation by content producers and changing popularity with viewers, can disrupt advertising plans formulated during the pre-season buy.
The Bureau concluded that this transaction would not facilitate coordinated behaviour among networks given the qualitative differences between broadcasters' programming, the pre-season selling of bulk packages to the agencies, and the inability of broadcasters to monitor prices.
IV - Conclusion
The Bureau recognized that CTV held a certain degree of market power in the sale of advertising pre-merger given its strong position in top-rated television programming. That market power would not be enhanced by acquiring the CHUM assets, owing largely to the marginal degree of overlap between top-rated and lower-rated programming that characterized the respective CTV and CHUM broadcast schedules. As to the acquisition by CTV of additional advertising space where top-rated exposure is not critical, the Bureau concluded that the remaining competition would be sufficient to ensure that there was no reasonable prospect that CTV could effect a material price increase and, therefore, any lessening of competition would not be substantial.
The Bureau concluded that the proposed transaction was unlikely to result in a substantial lessening or prevention of competition, and that no action by the Commissioner was warranted.
1 The broadcast industry is subject to regulation by the Canadian Radio-Television and Telecommunications Commission (“CRTC”) that also reviewed this proposed transaction; however, this backgrounder deals exclusively with the Bureau's review.
2 Now CTVglobemedia Inc. The name change was implemented on January 1 st , 2007 following a corporate restructuring. For the sake of consistency, this document refers to the company as BGM , which was its name at the time of this review.
3 Maple Leaf Sports and Entertainment owns the Toronto Maple Leafs, the Toronto Raptors and the Air Canada Centre, as well as two digital specialty channels, Leafs TV and Raptors TV .
4 The asset package comprised the A-Channel group of 7 conventional TV stations; the CBC-affiliated station CKX-TV in Brandon, Manitoba; ACCESS: The Educational Station; and 2 specialty channels, Canadian Learning Television and SexTV: The Channel .
5 The Australian Competition and Consumer Commission issued a document in August 2006 entitled “Media Mergers” , which anticipates continuing convergence between media formats. The circumstances under which such competition existed is was found to be presently rare, and the Bureau 's review of the BGM/CHUM found no evidence of such cross-media competition.
6 CRTC regulations stipulate that Canadian broadcasters may replace American advertisements with Canadian ads where the same programme is being broadcast simultaneously on both US and Canadian stations.
7 The Bureau concluded that , in Toronto , the relevant market might be extended to include all of Ontario since both the BGM and Citytv Toronto stations are available to nearly all Ontario households.
8 HDTV Networks Inc. is seeking a broadcast licence for an over-the-air high-definition network that would serve 8 major Canadian cities (Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Ottawa, Montreal and Halifax).
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