Mr. Bettman: CBC is Losing Money on the NHL

A lockout of NHL players may actually save CBC money this year.  In a typical year CBC TV will broadcast over 100 NHL regular season and playoff games, occupying about 350 hours in the schedule and generating relatively large audiences which are sold to advertisers.  CBC has aired hockey on Saturday nights for going on 60 winters and some believe CBC and Hockey Night in Canada are synonymous in the public’s mind.  CBC Sales refers to HNIC as “the longest running and most influential program in Canadian television history.”  CBC management seems determined to renew the contract for the NHL and its executives and former executives seem to believe CBC would collapse without HNIC.  A psychologist would likely say that if the CBC were a person, it is addicted to the NHL.

Here we examine some of the facts about the NHL on CBC TV and other networks and consider what the real cost of HNIC is to the CBC. 

While CBC airs 100 or more NHL games each year, including exclusive rights to the Stanley Cup finals, sports specialty networks air a surprising number of NHL games.  This was a result of recent CBC NHL contracts, especially the contract that started in 2008-09, which resulted in CBC losing more of its exclusive rights to hockey. We examined the years 2010-11 and 2011-12 to determine what other NHL hockey is available to Canadian viewers: 

·        Sportsnet annually broadcasts over 200 NHL games on one or another of its four regional networks. 

·        TSN, like CBC has national rights, and airs just under 200 games on either its original TSN or TSN2 services. 

·        RDS broadcasts over 200 NHL games in a typical season, including all the Montreal Canadiens games.

·        NHL games are also available on NBC stations imported by cable/satellite, U.S. superstations such as WGN, Chicago and the NHL network.

·        Virtually all NHL games are also available via NHL Center Ice which can be purchased from your local cable/satellite operator or directly from NHL.com.  

There was a time when CBC TV had a distinct advantage over TSN and Sportsnet, which are only available on cable and satellite.  When CBC abandoned over-the-air broadcasting on July 31^st, it lost that advantage.  In many communities the only way to receive CBC is via cable or satellite.  In effect, sports specialty channels are now almost as widely available as CBC and they too capture large NHL audiences, although some of their games involve U.S. team match-ups that normally do not draw audiences as large as HNIC.  It is apparent that if the 100 or so games that currently appear on CBC TV were to be carried by CTV, for example, it would represent a fairly minor change for Canadian hockey viewers.

Former CBC executive with NHL's Gary Bettman

CBC in recent years has lost the rights to all other major league sports. At one point in time CBC had CFL, NFL, MLB and other professional sports but over the years the Corporation has been pushed aside by deep-pocketed sports specialty channels.  CBC’s management structure which puts senior people with little broadcasting experience at the negotiating table with the NHL, etc. has also no doubt taken a toll.  Other than hockey, CBC TV airs only about 120 hours annually of minor professional sports, consisting of horse racing, the Calgary Stampede, one tennis tournament and other bits and pieces. Perhaps as a result CBC has gone to great lengths to conceal the financial terms of its NHL contract, which expires in 2014, two years hence. 

Other Canadian networks have generally followed suit, perhaps fearing ridicule from their competitors over what they paid for rights.  Having a publicly-funded network bid for sports rights has engendered a desire for secrecy.  When U.S. networks sign deals with the NFL, NBA, MLB or the NHL, they are quite open about the amounts paid for rights.  For example, the 10-year deal signed last year between the NHL and NBC Universal has a price tag of $200 million annually, a substantial increase from the previous contract.  A number of analysts put the price of CBC’s current NHL contract at $100 million per season and the total cost of NHL contracts in Canada at just north of $150 million.  The $100 million CBC pays currently represents an increase of about 50% over the previous contract.

What does CBC spend on sports in general?  CBC in 2008, the last year it held Olympic rights, spent $180 million on sports programming.  This declined to $139 million the following year, the first year of the current NHL deal, and increased to about $150 million by 2011.  The cost of the NHL contract is a large part of this $150 million.  Also included in the $150 million would be the minimal amount spent on the other sports aired by CBC and the cost of HNIC production, especially all the salaries associated with HNIC, including the salaries of Don Cherry and Ron MacLean.  HNIC costs more than just the rights money sent to Gary Bettman in New York.  Thus, making allowances for the cost of technicians, play-by-play announcers, etc., the total cost of HNIC is probably closer to $125 million annually ($100 million for rights and $25 million for production).

What ad revenues do HNIC generate?  For years CBC has claimed that HNIC is a revenue generator, not only pays for itself but makes a profit and pays for other programming and is the jewel in CBC’s crown.  Given the management structure of CBC, it is unlikely that anyone, including the president of CBC, knows precisely how much revenue HNIC generates (and almost certainly not the total cost of HNIC).  In 2008, with the help of the Beijing Olympics, CBC had ad revenues of $253 million.  Revenues declined precipitously in 2009, as did the revenues of most companies during the 2008-09 financial crisis; they rebounded in 2010.  Last year total ad revenues of CBC were $246 million.  Does HNIC account for half of the total ad revenues of CBC TV?  Probably more like a third of the total revenues, with the hundreds of other programs on CBC accounting for the other two-thirds. 

Let’s say that HNIC accounted for 40% of 2011 total revenues, or roughly $100 million.  We have seen that the cost of the NHL rights and production of the NHL games is in the range of $125 million.  So, even with the generous assumption that 40% of all revenues are generated by 350 hours of hockey and the other 8,000 hours or so of the CBC schedule only generate the other $146 million, HNIC must be losing money today. 

The true cost of HNIC can’t be measured without considering the cost of selling the ads in hockey and other CBC programs.  CBC’s sales and promotion expenses have increased markedly since 2008, from under $50 million to over $80 million in 2011.  Some of the $80 million that CBC spends on sales, which, according to their sales department’s web site, has almost 100 managers, is spent on HNIC, perhaps $20-30 million.  This amount should be added to the real cost of HNIC to CBC. Adding in the cost of sales means CBC’s HNIC is losing tens of millions of dollars with the current NHL contract, perhaps as much as $50 million.

These expenditure and revenue data raise an interesting question. If HNIC is currently losing money on CBC is the current NHL contract affordable for CBC or any broadcaster?  The contract CBC negotiated with the NHL in 2008 gave CBC 100 or so regular season and playoff games and gave hundreds of games to TSN/Sportsnet/RDS at a combined rights cost of roughly half what the CBC pays.  CBC paid a very high a price and unleashed market forces that make the current NHL contract unworkable.  CBC may have priced everyone, including itself out of the future market for NHL games.  If CBC can’t make a profit on HNIC, how could CTV, Rogers or Global?  Gary Bettman, like the IOC, which sold the Vancouver-London Olympics at a price the Canadian market can’t support, faces a dilemma.  Neither CBC, CTV, Rogers or Global will want to pay the current fees for conventional TV rights.

CBC did without hockey when the players were locked-out in 2004-05 and fared surprisingly well, losing only a small proportion of  its audience that year, according to the CBC.  Of course, it wasn't competing against hockey and results would be more modest if it were.  As it approaches 2014 the CBC would be wise to think about programming strategies that do not include NHL hockey, as Radio Canada did years ago, which made SRC a distinctive and more vital service.  Initially there was a public (read: media) outcry and the CBC president was hauled before a Parliamentary committee to explain this horrible decision but within weeks it was all but forgotten.  CBC is losing money now on HNIC and will for another two years, if the players and owners can agree on a new contract. 

The good news is that by ending HNIC and assuming replacement programs can eventually generate the same revenue it will free up something like $150 million (rights costs, production costs and sales and promotion expenses).  That $150 million could be spent on new Canadian drama and other entertainment. CBC executives will argue of course that replacement programs for the 350 hours of hockey will cost hundreds of millions of dollars and bring in much less ad revenue.  They might even suggest that all this expensive programming has to go into the HNIC time slot. What they fail to recognize is that the replacement hours don't all have to be original drama that cost $500,000 an hour and new programs can be strategically placed in the schedule. Even if it is only $75 million in savings that would actually double the budget that CBC currently spends on Canadian drama and comedy and perhaps lead to a CBC television service that appeals to a broader spectrum of viewers.   

Note: all financial data provided by CRTC.

CBC Is So Transparent

CBC devotes a section of its web site to accountability and transparency.  To achieve these goals the Corporation is required by the government to publish quarterly reports on its performance.  The report for the first quarter of 2012-13 has just been released.  Inexplicably, the year's first quarterly report does not contain audience targets or past audience data for CBC's main TV and radio services and the report claims the data are not available. Audience data are obviously the most important CBC performance indicators, since they are the ones that tell us how Canadians are responding to CBC TV and radio.  The only audience data in the new report relate to cbc.ca and CBC News Network.  Data for CBC News Network come from exactly the same source as audience data for CBC's main TV/radio service, so clearly the data are available but CBC has chosen not to report them to the government.  Here is what the Corp included in the recent report:

Last year the first quarter's report for 2011-12  included the annual audience targets for radio/TV and the annual results from the previous year; results were then reported in subsequent quarters. Here is what the report looked like last year:

The quarterly report just issued made no mention of either targets for CBC TV or radio in 2012-13 or the performance in 2011-12.  The 2011-12 audience data are available of course and their omission in the most recent report raises serious questions about the integrity of CBC's reports to stakeholders.  Facing a CRTC licence renewal in November 2012, is it possible that CBC didn't want to reveal major audience losses, which would call into question its current strategy and future plans?

CBC TV: Domino Effect Snowballing into a Chain Reaction

Nordicity undertook a study for CBC in 2011 which concluded that advertising on CBC TV did not detract from its mandate and that eliminating advertising would be "devastating."  The study claimed that if CBC were to eliminate ads it would result in a complex chain reaction which would snowball and weaken CBC, the entire TV industry and even the Canadian economy.   Oddly enough, the study made no reference to the most obvious effect of eliminating ads, i.e., the effect on CBC radio services, which have already seen budgets cut to support CBC TV.   Just how much faith can we have in this Nordicity analysis?

Nordicity devotes about 12-pages of the 27 page report describing the BBC, PBS and to a lesser extent other public broadcasters from around the world to demonstrate that some public broadcasters have ads on their main channels, even if the two most notable ones do not. 

Most of the international analysis had appeared in another Nordicity study commissioned by CBC, the purpose of which was to demonstrate that Canada spends less per capita on public broadcasting than many other countries.  One study eagerly compares international broadcasters, while the other seems to say that models from other countries don't apply to Canada.  Besides seemingly contradicting each other, neither of the studies addressed the audience performance of CBC compared to other countries. 

Nordicity did in fact compare the audience performance of Canada (CBC) to other countries, the results of which are contained in a third study that can be found on the Nordicity web site. The latter was prepared for a U.K. audience and contains the following chart, which reveals why CBC TV, dead last among equals, is not as loved as the BBC or PBS:

CBC, according to Nordicity, generated the smallest audience for public monies spent of all the public broadcasters they examined.  When ad revenues were included, CBC did no better, as shown in this chart from the same report:

Why then does CBC have ads, if advertising revenue does not improve and may be detrimental to audience performance?

Nordicity offers a number of reasons, most of which are based on very simplistic arguments.  For example, Nordicity assumes that CBC would need to spend $349.1 million to replace the time occupied by ads (and sports programming which wouldn't  fit in a non-commercial schedule).  Wait a sec... CBC programmers would surely find ways of filling commercial spots, either with PSAs, promos or top-of-hour newscasts produced by CBC News at very little cost.  Movies or other inexpensive programming could replace sports at a fraction of the cost of the $100 million CBC spends on the NHL and the $50 million it spends on other sports. The rest of the Nordicity analysis was dependent on this obviously flawed assumption.  If the first domino doesn't fall, there will be no domino effect. 

The domino theory is a time-tested technique that CBC uses whenever anyone suggests change: claim that replacing anything (transmitters, the NHL, commercials, etc.) will be so expensive, the fall-out will snowball and completely disrupt everything and the only way forward is the status quo. The CBC trick is to choose the most expensive replacement possible, such as saying that hockey must be replaced with hundreds of hours of costly Canadian drama, making change impossible.  In the current environment with CBC facing a CRTC licence renewal, CBC is using a version of the theory, saying that without new sources of revenue, everything will collapse.

Let's examine some of the other claims and assumptions in the Nordicity study of CBC advertising. 

First, Nordicity dismisses PBS as a model for CBC to emulate because of its puny 1.3% audience. The Nordicity report refers numerous times to audience share and then slips in the reference to PBS's 1.3%.  Well, the 1.3% is PBS's prime time household rating, which can be found on its web site.  What is a rating point vs. a share point?   A rating point is the percentage of the population watching a station in the average minute. A share point equals the ratings for a station divided by the sum of rating points for all stations.  Since only about 35% of people are watching TV in the average minute of prime time, a 1.3% rating translates into a share of almost 4% (i.e., 1.3%/35%).  That is not much different than CBC TV's current share.  So the Nordicity report misleads readers about PBS and the applicability of the PBS model to CBC. 

A further check of the PBS web site reveals that 123 million Americans, or just under 40%, watch PBS monthly.  According to CMRI's 2011 annual Media Trends Survey PBS's monthly reach in Canada was almost 60%, meaning that Canadians see something of real value in what PBS has to offer, which isn't being offered by CBC.  PBS is so valuable to Canadians that about 1 in 5 donate to PBS-style funding drives, a phenomenon that we have tracked for the past ten years in the Media Trends Survey.

Second, Nordicity claims that the cost of  CBC sales is a paltry $24.4 million, which means there are modest savings to be had by eliminating ads.  Pardon me... $24.4 million wouldn't pay the salaries of the hundreds of people employed across CBC/Radio-Canada sales departments.  The actual cost of CBC sales and promotion was reported by the CRTC to be in excess of $136 million in 2011, data overlooked in Nordicity's report.  After making allowances for a small promotion budget, let's say proportionate to CBC radio's promotion budget, the real cost of CBC TV sales is likely over $100 million, enough to fund  replacements for sports programs and many other things.

Third, Nordicity projects that without the money from advertising CBC's audience share might fall to the level of TVO's share, 1-2%, and Radio-Canada's share to the level of Tele-Quebec's, 2-3%. Whoa... TVO had a budget of $64 million in 2011, while Tele-Quebec had a  budget of $83 million the same year.  CBC TV had public funding amounting to $464 million and Radio-Canada $375 million in 2011.  How could audience levels possibly fall to the level of services that had as little as one-seventh of CBC's funding?  This is another example of simplistic analysis by Nordicity, which robs it of credibility.

Fourth, Nordicity asserts that Canadians are accepting of ads on TV.  And that CBC provides a service to advertisers; were it to eliminate ads, some of the dollars would go to private stations but some would even leave the country!  No doubt the unnamed media buyers Nordicity says it interviewed for its study welcome CBC's presence in the ad market because, as Nordicity documents, CBC undercuts the rates of private TV stations.

We know that Canadians are actually not so accepting of ads on TV.  The Media Trends Survey has tracked attitudes toward advertising for the past decade and the great majority of us feel there are too many ads on TV, as shown in this chart:

Thus, it would seem that if CBC were to eliminate ads, it would meet with the approval of most Canadians, if not advertisers or media buyers who would pay higher rates to advertise on CTV, TVA, etc.  However, this issue has been around longer than Peter Mansbridge and won't go away easily.

Nordicity states that the ad rates of CTV and other stations would increase by 5-15% were CBC to be out of advertising. CMRI has been analyzing the advertising market for several decades and in our opinion rates would increase even more, especially among specialty channels such as TSN and Sportsnet, whose ad rates for NHL and other sports have been suppressed for years by several factors, including CBC's presence in the marketplace.  As mentioned, Nordicity confirmed that CBC rates are lower than those of private stations and this has long been a drag on the advertising market and on the revenues and profits of private stations. Increases in ad rates would not be the only thing that would happen.  Many private stations, especially cable specialty channels, have unsold inventory and this would more likely be sold if CBC spots were eliminated.

Nordicity claims that if CBC left the marketplace, only $275 million of the $367 million CBC currently grosses in ad revenue would revert to other TV outlets. In CMRI's view the private stations would see revenues increase by at least double this amount, making them far more profitable.  Being more profitable would allow the CRTC to demand more Canadian programming from the privates.  Nordicity asserts that the privates would only spend an additional $96 million on Canadian programming. The rights to CBC's NHL hockey, which presumably CTV or Rogers would pick up, represent more than this amount, once again demonstrating that Nordicity's analysis is incomplete and lacks credibility.  

The Nordicity study mixed up basic audience metrics, used seriously flawed assumptions, questionable data and made ill-formed projections based on that data; the study adds little to our understanding of advertising and the CBC.  CMRI is not advocating here that CBC TV should eliminate ads.  (There are several CBC channels that derive so little advertising that it makes little financial sense for them to chase after ad dollars.)  The main CBC channels, like the main channels of BBC and PBS, might provide a better service to the public if they were ad free (or if sales were better managed and advertising more controlled).  But this is something that CBC, the CRTC and the federal government should examine based on solid research and analysis.

The 2011 survey results are from CMRI's Media Trends Survey conducted November-December 2011 among a representative national sample of approximately 900 Anglophone respondents aged 18-plus.  Margin of error +/-3.3%.  The Media Trends Survey has been conducted for ten consecutive years and has surveyed over 15,000 Canadians in total in this period. It is the only survey to have measured media use and attitudes continuously over this decade. The Media Trends Survey is not sponsored by any one industry or affiliated with a media company.  Therefore, the surveys are scrupulously designed not to bias respondents into favouring one medium or media outlet over another.