Saturday 8 December 2012

CBC 'Factortions' at CRTC Licence Renewal (Part Three)

At the recent CRTC licence renewal hearing CBC management distorted and contorted basic facts about staffing, salaries, schedule content and revenue models.  To be fair, CBC senior management is facing unprecedented financial challenges but  misconstruing basic facts will not yield a good result for the public broadcaster.  The licence renewal hearing brings into question the efficacy of the strategic planning process at the Corporation.  Below is the third and final factortion presented by the CBC:

Factortion:  Ad revenue for Radio 2/Espace Musique
CBC has requested approval to run commercials on two of its radio services.  The Commission’s decision may be viewed by future historians as a pivotal moment in Canadian public broadcasting. 

CBC engaged Strategic Inc. to forecast the potential revenue of commercials on Radio 2 and Espace Musique.  CAB in turn commissioned two research organizations to prepare estimates of the potential commercial revenue of the two radio services.  Friends of Canadian Broadcasting also asked CMRI to forecast revenues. During the last day of the hearing CBC’s research consultant was asked about the three competing forecasts and discounted them. The other forecasts all strongly suggested that CBC had under-estimated the revenue that would be realized from commercials on CBC radio. This was perhaps the key issue discussed at the hearing. 

The revenue model used by CBC’s research consultant is in all likelihood low-balling the potential revenue, although it is difficult to determine this because Strategic Inc. does not appear to have put its actual calculations on the public record.  The three competing approaches all showed exactly how they made their forecasts.  The limited information that has been filed by CBC contains serious errors, which are discussed below.  While it is tempting to dismiss this as simply “dueling researchers,” the Commission should study the various forecasts and determine which is more credible.

CMRI estimated potential commercial revenue using a well-recognized “top down” approach that employed revenue per tuning hour.  This model was criticized by the consultant because it was “theoretical.” The CBC’s research consultant also dismissed the other two analyses, which used a variation of the Strategic Inc. “bottom-up” approach.  Essentially, the research consultant claimed that all the competing forecasts were theoretical versus the bottom-up “practical” approach used by the CBC’s consultant. 

The consultant explained why she thought the practical approach was superior to the theoretical approach.  She explained the differences in the competing forecasts by virtue of the fact she had “customized” her forecast market by market. In its filing of April 20, 2012 the CBC said “Current audience shares would remain essentially the same” and the revenue projection “assumed…(s)ell out rates…by market” and “calculate(d) rates by station and by hour in the schedule.”  As mentioned, details of how this was done do not appear to be on the public record.  Strategic Inc. did not file a report of its analysis.  However, customization simply means the forecast is based on a greater number of assumptions.  The consultant had to make assumptions for several factors in a series of markets and therefore the CBC forecast has more risk than the market averages used by the CAB in its two forecasts.

CAB’s forecasts and that of Strategic Inc. all used a bottom-up, market by market approach. However, Strategic Inc. in a 2004 report[1], which was submitted to the Commission in a proceeding on local avails, explained the problems of the bottom-up approach: it “relies on several subjective factors” and “The challenges in this approach lie in the accuracy of its component parts and the fact that much of needed information is not publicly available or in an audited form.”

After reading the transcript it is unclear exactly what the consultant said was lacking in the CMRI approach, which used the average revenue/listening hour in private radio to forecast CBC’s potential revenue.  It is not surprising that the CBC’s research consultant had difficulty clearly enunciating weaknesses in the revenue per listening hour approach used by CMRI.  It is because she argued that it was a superior method when Strategic Inc. filed the above research with the CRTC on behalf of CTV in 2004.

Here is what Strategic Inc. said to the Commission in 2004 about the approach used by CMRI: it is “a better approach” than the bottom-up approach and “Using a “revenue per hour of viewing” model recognizes the critical role audience achievement plays and is based on the actual tuning…. In this approach to valuation, factors that affect the ability to generate revenues are built into the model, such as varying demands across markets and sell out rates.”

The last sentence in the quote summarizes the strengths of the approach used by CMRI and explains why the CMRI forecast differs from the bottom-up, practical approach used by Strategic Inc.  The revenue per hour of tuning method requires fewer assumptions, i.e., factors that affect tuning levels, sell out rates, market-by-market demand and seasonal variation are “built into the model” and can be empirically verified.   

After reading the transcript of what the CBC’s consultant said on the final day of the hearing, CMRI examined the data she referred to in more detail. On August 13, 2012 (Appendix C) CBC put limited information about its revenue forecast on the public record, at the Commission’s request.  That document and the one CBC filed on April 20th contained the projected revenues by station and in total for the two radio services.  The August 13th document showed sell out rates by market and projected audience shares, which on the first day of the hearing CBC’s consultant said were used to make the forecast.  In year one sell out rates ranged from about 9% to over 40%, without explanation.  Many markets showed substantially higher sell out rates in the later years but projected revenue did not follow suit.

Most importantly, in that August 13th filing the CBC’s projected audience shares, which determine revenue, for each CBC station were significantly at odds with the published BBM data sourced by CBC in cities such as Montreal, Ottawa, Windsor and Quebec City. In other words, there were errors in the CBC forecast.  For example, Radio 2’s share in Anglo Montreal was shown in the CBC forecast at 1%, when it has been about 2.5% for the past few years. In Windsor the CBC forecast put Radio 2’s share at 0.004%, when it has been about 1% (250 times higher than the number used in the forecast).  In all cases where there were errors, the audience shares were lower than published BBM data sourced by CBC and this would have had a very substantial negative effect on the revenue forecast.  BBM only publishes select markets, so there may be other discrepancies. In addition, on April 20, 2012, not only did CBC say that “current audience shares would remain essentially the same (as today)” but CBC said about its forecast that “projection of audience growth has been minimal as both services are approaching maturity.”  Yet, the CBC August 13th filing (Appendix C) showed 5 of 14 of Radio 2 stations more than doubling audience share a few years later, presumably also errors in the forecast.   These errors should invalidate the CBC/Strategic Inc. revenue forecast.

The bottom line: this is not a case of “he said, she said” but a case of “she said, and then she said.”  Strategic Inc. has previously strongly endorsed the top-down revenue/tuning hour approach in a very similar if not identical situation.  Strategic Inc. used it in the 2004-05 CRTC proceeding and referred to it as the best of three different approaches.

Both the facts and history have been contorted. The top-down revenue per listening hour approach has previously been accepted by the Commission and by Strategic Inc.  In this proceeding CBC has used a “subjective” approach, to use the words of Strategic Inc.’s 2004 report, and it should be considered potentially flawed and capable of manipulation.  In fact, a detailed examination of the information CBC filed about the forecast reveals that it is seriously flawed and rife with errors.  Three competing forecasts that fully explained their calculations strongly suggest that CBC has low-balled the potential revenue from radio advertising.

Understanding and incorporating basic and complete facts about the broadcasting environment is critical in strategic planning. The CRTC has an important role to play in helping the CBC understand this environment.  If such serious factual errors and misunderstandings, which have shaped CBC's current strategy, are not challenged by the CRTC, the errors, repeated often enough, will become conventional wisdom and Canadians will be left with a CBC that will not serve their needs.

[1] “Impact Analysis
Addition of Commercial Inventory on US Services carried on Cable,” Strategic Inc., October 4, 2004


No comments:

Post a Comment