Third Service, Third Network: The CanWest Global System

Paul W. Taylor (University of Washington)

Abstract: The growth of the CanWest Global System as a third service in the Canadian Broadcasting System is examined with particular attention to its national infrastructure and non-network status. Through the internalization of international joint ventures and co-productions, CanWest Global might set a trend for Canadian broadcasters in a global, post- network, deregulated environment.

Résumé: La croissance du Système Global CanWest en tant que troisième service dans le système de radiodiffusion canadien est éxaminée avec une attention particulière envers son infrastructure nationale et son statut de non-réseau. A travers l'internalisation des Entreprises Internationales Jointes et des co-productions, ça peut être un modèle pour les radiodiffuseurs canadiens dans un environnement mondial, dérégulé, et post-réseau.

The CanWest Global System (CGS) is part of a fundamental shift in Canadian television yet it has been largely ignored in scholarly discussions of the country's broadcasting system and its future. The purpose here is to begin redressing this oversight because CanWest Global is changing the nature of television in Canada. This non-network System has proven itself to be highly profitable and highly adaptable to a rapidly changing global broadcasting environment. It is argued here that this is due to a unique and carefully crafted regulatory position, maximum cost-sharing between member stations, minimal technological integration, and the aggressive pursuit of international ventures.

The success of the CanWest Global System has not gone unnoticed by its private-sector competitors, particularly the stake-holding companies in the CTV television network. The System presents a model for organizing groups of television stations with all the benefits of network arrangements but with few of the restrictions.

This alternative arrangement presents regulatory problems. Much of the onus and financial burden for the creation of Canadian programming has rested on national network licensees. Competitive pressures and increasing deregulation make non-network arrangements such as CGS the new benchmark for the industry. As such, it challenges the Broadcasting Act's assumptions about the role that private-sector television is to play within Canada's cultural industries.

Network versus System

Perhaps CGS has been invisible to researchers because it does not fit the dominant industrial form in television broadcasting--the network. The publicly funded CBC and affiliate-owned CTV television networks differ widely from each other but they both subscribe to the conventional network model.

The network model provides a national infrastructure for the acquisition of programming and the brokerage of advertising time--so too does the System. At the regulatory level, the network model requires multiple levels of licensing requirements. Local stations, affiliated to a network or not, make promises of performance to the Canadian Radio-television and Telecommunications Commission (CRTC) as part of their conditions of licence. Networks make a further set of promises at the national level for a network licence, carrying a much higher dollar value as a trade-off for access to a larger audience and advertising revenues.

CGS has no national network obligations because each owned and operated station is licensed as an independent entity. This degree of carefully constructed and fiercely defended regulatory freedom has allowed CGS to become the most profitable television broadcasting entity in Canada.

The absence of a network licence keeps regulatory compliance costs down and provides a considerable competitive advantage. CanWest Global is clearly a leader in Canadian broadcasting. Its five nominally independent member stations reach 16 of the largest English-language markets in Canada and a potential audience of 12.8 million viewers (CanWest Global Communications Corporation, 1991a, p. 2). CGS reports operating profits of $59.2 million and net profits of $13.7 million on revenues of $225 million (CanWest Global Communications Corporation, 1991b). True to the quirks of the System and its unique corporate structure, the CRTC regards the component parts of CGS as both the first and second most profitable broadcaster in Canada (CRTC, 1992a).

The domestic advantages of the system approach have created a platform for international expansion, both in terms of program production and foreign station ownership. That the CanWest Global Communications Corporation, the parent company, is now a player in the international television market belies its relatively recent and humble beginnings 18 years ago.

The Genesis of a Third Service

The System approach reflects the vision of its chair and majority shareholder, Israel H. Asper, a lawyer and politician turned broadcast owner, for Canadian television in an age of globalization. CGS began with the patriation of an American border station in 1975. The call letters were inverted from KCND to CKND, and the North Dakota station was relaunched in Winnipeg as the genesis of a "third service" in Canadian television. By the time CanWest-controlled third stations were added in Regina (CFRE), Saskatoon (CFSK) (The Globe and Mail, 1987), and Vancouver (CKVU) (Greenspan & Hunter, 1987), they were already being called parts of a loosely knit "system." The Winnipeg-based broadcasting interest remained marginalized in the West, however, until a Manitoba court ended a bitter ownership feud by awarding CanWest control of CIII, the Global Television Network in Southern Ontario (CRTC, 1990).

It is ironic that the jewel in the CanWest crown is named for the very thing CanWest adamantly denies it is, or will ever become: a "network." In the world of CGS, semantics are everything. The word "system" is sacred, the word "network" is simply not allowed. In articles with titles such as "ASPERations" (Davis, 1990) and "Izzyvision" (Stackhouse, 1990), the popular and trade press have traced the evolution of what they called a third Canadian "network" despite Asper's insistence that it was a "system." The network-system debate came to a head with the CanWest takeover of Global in 1990.

The Defining Debate

The CRTC hearings on Global's transfer of ownership became a forum for defining the nature of a network. CTV lawyers argued that Global wanted to be "considered a network in name and practice, but not in licence" (Hylton, 1990, p. 2). CTV's licence required the affiliate-owned network to spend $88 million in 1990-1991 to fulfil its production commitments in its conditions of licence. For that period, Global and its Western system were required to spend half that amount--roughly $34 million for Global and another $10 million for CanWest stations (CanWest Productions Ltd., 1989).

The advantages of a system do not end there. Member stations in the system enjoy a national infrastructure for program acquisition and production in addition to the brokerage of commercial airtime on stations that reach from Ottawa to Vancouver. In a written statement to shareholders, CGS reported it "typically purchased programming on a `national rights' basis and then syndicated these national broadcast rights to affiliated or non-competing stations across Canada so as to maximize recovery of its initial purchase price" (CanWest Global Communications Corporation, 1991c, p. 15). Similarly, a wholly owned subsidiary--CanVideo Television Sales--handles national and regional advertising sales (ibid.).

The company's allegiance to individual conventional over-the-air television stations has reinforced its image as something other than a network. Two of the five Canadian stations do not have satellite up-links. This lack of technological connectivity protects CGS from the complaints of competitors about the "network" question. In the end, the CRTC accepted the apparent differences between Asper's system and a de facto network. The Commission was "satisfied that Global's present activities, whether by themselves or in combination with those proposed in its application... do not constitute a network as defined in the Broadcasting Act or as described in Commission Policy" (CRTC, 1990).

Expansion of the System: East, West, and Abroad

With the network question settled, CGS continued to work on completing the domestic System. CanWest's rescue bid for the troubled CFCF Inc. and Télévision Quatre Saisons in Quebec was stopped by an unfavourable tax ruling ("CanWest Bid for Troubled Broadcaster Fails," 1991). At the time of this writing, CGS had entered the competition for a fourth television service in Southern Alberta. The province has been a trouble spot for CanWest, having failed to close earlier ownership deals for existing stations in the past. Still, the Alberta application is ironic in light of persistent complaints from CGS that the introduction of a fourth television service in Manitoba had decimated the opportunities for growth for its third service in that market.

Similarly, CGS reversed its opposition to satellite-to-cable specialty services (McNeill, 1992). Following the CRTC's 1993 restructuring hearings and an internal CGS task force on specialty services, CGS decided to join in the competition for the next generation of Canadian cable programming services. At the time of this writing, CGS was proposing a 24-hour headline news channel. Perhaps not surprisingly, its conventional long-time rival, CTV, had also applied to launch a headline news service.

The specialty service application is being shepherded through the regulatory process by one of the two new divisions that will guide the company into the next century: CanWest Global Development. The other new division, CanWest Global International, reflects the increasing priority the company has afforded to global pursuits. Already, the international division has gained a firm foothold in New Zealand ("CanWest Expands Interests to New Zealand," 1992, p. 7) and Australia (Partridge, 1992b, p. B13) with minority ownership in TV3 and Ten Television Network respectively. The cost of the initial investments down under totals C$72 million.

The International Division is also pursuing station ownership as far afield as the former Czechoslovakia ("CanWest Ponders Czech TV Link," 1991b), Scandinavia, Switzerland, and the US (Murray, 1993, p. 38). The on-again off-again UK bid is back on again at the time of writing, despite a rejection by British regulators and a stormy relationship with partners CHUMCITY, Sony Pictures Entertainment, Thames Television PLC, and Time-Warner (Daly, 1992, p. 40). The Development and International divisions are working together on one other target: the United States. CGS Chair Asper has been meeting investment bankers in New York--an exercise he calls "blue skying"--to finance this international expansion (Partridge, 1992a). The patchwork quilt of independent stations around the world that Asper envisages as the future of his System is merely an extension of what CGS has been doing in Canada.

Deregulation, Co-productions, and Culture

There is no evidence that a global system, built local-station-by-local-station, is any less effective than a centralized, satellite-delivered global network. The carriage infrastructure allows CGS to share content costs across member stations. Originally, the Western stations pooled resources to produce current affairs, children's, and variety programming that helped each one meet its individual conditions of licence. Likewise, the promised $800,000 Global news expansion was cost-shared with CanWest stations (Thomas, 1991, p. 2), despite assurances to the CRTC that the expansion would not "blur the line between the independents' priorities and those of Global" (Global Communications Ltd., 1990, p. 12). Further, the current application for a headline news specialty service is contingent on leveraging existing resources and encountering only incremental costs in the creation of a new cable channel.

The production and broadcast of Canadian drama have been problematic for CGS. The CGS formula for cost-sharing and economies of scale did not fit with the realities of the TV fiction market. The cost of a US drama series is 10% of the cost of producing the same show at home. As a result, American programming dominates the prime-time schedules of CGS stations, which tend to take full advantage of simultaneous substitution regulations to maximize audience size and revenues. The Americanization of prime time on third services served as the lightning rod for Herschel Hardin's angry polemic, Closed Circuits: "Global, which was supposed to help defend the cultural border, had ended up moving the cultural border northward, with itself on the southern side" (1985, p. 185).

In a Global licence renewal seven years later, the CRTC expressed "concern that the licensee has not contributed to the Canadian broadcasting system as fully as it should have." The renewal specified that a fuller contribution would include $38.8 million per year in original production and at least three prime-time hours per week set aside for the broadcast of Canadian drama (CRTC, 1992a).

The same year, the CRTC deregulated television content to the degree that the number of dollars spent replaced the number of hours as the criterion for meeting conditions of licence (CRTC, 1992b). The shift from quantitative to qualitative measures mirrored a push for "television Canadians want to watch" by the Canadian Association of Broadcasters (CAB).

All of this was a necessary precursor to the current generation of CGS program production. The first example is the new Neon Rider, a series resurrected by CGS after being cancelled by CTV. Arguably, the development costs for Neon Rider had been paid before the series moved to CGS. The company's international division has also delivered cost-effective production opportunities for the System. CGS is the Canadian partner in Sweating Bullets, part of the CBS "crime time after prime time" line-up in the US, which is produced under the Canada-Israel production agreement. CGS is also one of three Canadian partners in Destiny Ridge, an international co-production with Germany's public network, ARD-Webung (Lacey, 1993, p. C2). Other co-productions are being developed with the System stations in Australia and New Zealand. All of these programs qualify as indigenous content in each partner country and for government incentives from each partner's home country.

Hoskins & McFadyen (1993) observe that international co-productions "may be beneficial, even necessary" for big-budget productions. They warn of a trade-off that goes to the heart of the role for private broadcasters set out in the Broadcasting Act. Rather than enhancing the cultural fabric of Canada, international co-productions bring with them the "loss of control and associated specificity" (Hoskins & McFadyen, 1993, p. 227).

The conflict between business and cultural imperatives was the focus of the federal task force chaired by Jacques Girard & J. R. (Ray) Peters (1991) that reviewed The Economic Status of Canadian Television. CGS joined the chorus of private broadcasters that insisted opportunities to maximize revenues were a pre-condition to meeting any cultural objectives. It wrote: "Being tied to only a cultural policy makes funding partners increasingly hard to find. Without these partners, the programs can't be produced" (Girard & Peters, 1991, p. 164). Asper sees the priority given to culture by the CRTC as a fundamental regulatory error: "I feel Canadian private broadcasters are called upon to perform major social, cultural and public services but are essentially bereft of the usual corporate incentives that are granted to shoe factories" (Davis, 1990, p. 12). It is worth reminding ourselves that, at the most rudimentary level, shoe factories do not use publicly owned leather to generate revenue. Conventional broadcasters use the airwaves that are still considered public property in Canada. That they hold frequencies in a public trust, their relationship to the government and the public must be different than those of other private enterprises.

The broadcast communications sector of the Canadian economy, however, is not without a number of unusual corporate incentives. The provisions of Section 19 of the Income Tax Act disallow the deduction of advertising expenditures directed at Canadians on foreign (American) broadcasting stations. In effect, Revenue Canada is helping to keep Canadian advertising revenues at home. Moreover, the revenue and audience potential of programming acquired from American sources is protected through cable regulations. Simultaneous substitution pumps $100 million of advertising revenue into the Canadian television industry.

Conclusion: A System for Change

The CanWest Global System has played a pivotal role in defining the post- network era in the Canadian television industry. There is evidence that at least one other major player has taken a lesson from CGS. Baton Broadcasting, owners of the Toronto flagship station of CTV, has repeatedly threatened to withdraw from the conventional network. It has launched the Baton Broadcasting Service (BBS). Originally created to handle the broadcast rights for Blue Jays baseball, BBS now acquires other programming for Baton stations in Southern Ontario and Saskatchewan. Should Baton break its ties with CTV, the service would likely be modelled after the CGS--that is, it would not be a network.

Given the trend toward deregulation, it is unlikely that network-style conditions of licence would be extended to these new systems and services. The more likely alternative is that those parties with network licences will seek relief from the comparatively onerous regulatory commitments. The window for Canadian programming can only shrink under such an arrangement.

CGS's move to international expansion and co-productions represents a market-based solution to a long-standing challenge to Canadian broadcasting. Private broadcasters have maintained that the Canadian population of 28 million could not sustain TV as a cultural industry without significant public incentives.

In an open economy, it is reasonable that those in the cultural industries should be able to pursue beneficial relationships offshore. However, the benefit of these strategic alliances (many of which were facilitated by Canada's web of official co-production treaties) is the amortization of production costs over larger populations--that is, viewers from two or more countries.

If the contribution to the fulfilment of domestic cultural objectives from private-sector broadcasters must decline in this restructuring in the name of corporate survival, what should be the future for the quid pro quo in tax laws and simultaneous substitution regulations? Clearly, measures such as simultaneous substitution and Section 19 of the Income Tax Act were intended to support a domestic industry. The move to a global platform by CGS and others should prompt a review of whether such domestic policies have been made redundant by these new international arrangements.

References

Canadian Radio-television and Telecommunications Commission (CRTC). (1990). Decision 90-1073. Global Television network transfer. Ottawa.

Canadian Radio-television and Telecommunications Commission (CRTC). (1992a). Decision 92-220. Global Television network licence transfer. Ottawa.

Canadian Radio-television and Telecommunication Commission (CTRC). (1992b, April 8). Public Notice 1992-28. New flexibility with regard to Canadian program expenditures by Canadian television stations. Ottawa.

CanWest bid for troubled broadcaster fails. (1991, September 11). Winnipeg Free Press.

CanWest expands interests to New Zealand. (1992, February). Broadcast Technology, p. 7.

CanWest Global Communications Corporation. (1991a, December 23). Annual shareholders information form. Winnipeg.

CanWest Global Communications Corporation. (1991b, December 3). News release: CanWest Global's earnings exceed prospectus forecast. Winnipeg.

CanWest Global Communications Corporation. (1991c, July 5). Preliminary prospectus. Winnipeg.

CanWest ponders Czech TV link. (1991, November 14). Winnipeg Free Press.

CanWest Productions Ltd. (1989, October 12). News release: CanWest will spend $10 million on drama. Vancouver.

Daly, John. (1992, June 8). Rebel with a global vision. Maclean's, p. 40.

Davis, Ted. (1990, February). ASPERations: He won the Global battle, and might just win the war. Broadcaster, pp. 7-11.

Girard, Jacques, & Peters, J. R. (Ray). (1991). The economic status of Canadian television: Report of the task force. Ottawa: Minister of Supply and Services Canada.

Global Communications Ltd. (1990, March 21). Response to questions from the CRTC letter of March 8, 1990. Hull, PQ: CRTC Examination File 900247800.

Greenspan, Edward, & Hunter, Jennifer. (1987, Mach 11). Asper locks horns with B.C. broadcasters. The Globe and Mail, pp. B1, 2.

Greenspan, Edward, & Hunter, Jennifer. (1988, March). Bicker, bicker: The unseemly scrap over Global TV. The Globe and Mail Report on Business Magazine, pp. 24-37.

Hardin, Herschel. (1985). Closed circuits: The sellout of Canadian television. Vancouver: Douglas & McIntyre.

Hoskins, Colin, & McFadyen, Stuart. (1993). Canadian participation in international co-productions and co-ventures in television programming. Canadian Journal of Communication, 18(2): 219-236.

Hylton, John D. (1990, May 23). Intervention re: CRTC Notice of Public Hearing 1990-6: Applications #900247800, 900250200 by Global Communications Limited. Hull, PQ: CRTC Examination File 900247800.

Lacey, Liam. (1993, June 26) "Set design by God" can't hurt TV's Destiny. The Globe and Mail, p. C2.

McNeill, Murray. (1992, February 21). Asper turning CanWest into specialty TV. Winnipeg Free Press, p. 53.

Murray, Karen. (1993, January 21). Weber tops new CanWest division. Daily Variety, p. 38.

Partridge, John. (1992a, March 27). CanWest checks U.S. market. The Globe and Mail, p. B13.

Partridge, John. (1992b, November 18) CanWest strikes deal for Australian TV station. The Globe and Mail, p. B13.

Stackhouse, John. (1990, May). Izzyvision. The Globe and Mail Report on Business Magazine, pp. 76-83.

Thomas, Reg. (1991, January 10). Memorandum: News Expansion. Toronto: Global Television Network.



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