The Company is subject to a number of risks and uncertainties, the more significant of which are discussed below. Additional risks and uncertainties not presently known to the Company may impact its financial results in the future.
Dependency on Advertising Revenue
The Company’s revenue is derived from the sale of advertising airtime directed at retail consumers. This revenue fluctuates depending on the economic conditions of each market and the Canadian economy as a whole. The Company takes steps to mitigate this risk by retaining a degree of geographic and sectoral diversification.
Other media compete for advertising dollars, such as print, television, yellow pages, outdoor, direct mail, and on-line services. In many instances, these competitors are targeting the same advertisers as radio broadcasters and advertising dollars often shift between the different media. While there is no assurance that the Company’s radio stations will maintain or increase their share of the advertising dollars, the Company does attempt to mitigate any loss to other media by creating long-term relationships with customers and providing innovative, high-quality campaigns. Over the past number of years, Radio’s percentage share of advertising dollars has remained relatively constant with the increase of on-line advertising coming from the decline in print advertising.
The Company faces competition in some of its markets which impacts the Company’s audience, revenue share and the level of promotional spending required to remain competitive. Any changes to the competitive environment could adversely affect the Company’s financial results. The Company takes steps to mitigate these risks by constantly modifying its product and performing market research to ensure it is meeting the needs of its listener base. The Company is sheltered from the effect of competition in many of its small markets as it is the sole station serving those communities.
New Market Entrants
In recent years, the CRTC had been awarding an increasing number of new FM licences in markets. While the Company benefited from this trend by being the recipient of some of these new licences, it has also been negatively affected by new competition in some locations. In all markets where competition is a factor, the Company continuously studies the market, including demographic trends and the needs of both customers and listeners, to have reasonable assurance that the programming offered is tailored to the requirements of the audience.
Impact of Regulation
The Company is regulated by the CRTC under the Broadcasting Act. Although this regulatory body provides a stable operating environment, the Company’s financial results may be affected by changes in regulations, policies and decisions made by the Commission. The current regulations with respect to the maximum number of broadcast licences held in any one market, the percentage of foreign ownership, the required level of Canadian content and other aspects of the regulations could change in the future. The Company actively monitors the regulatory environment to ensure it is aware of all risks and opportunities.
The licencing process creates a significant barrier to entry which provides a degree of protection for the Company in its existing markets. This also makes it difficult to enter new markets because a company either needs to be awarded a new licence (through the public process) or pay significant funds for existing stations in a market.
Regulatory Environment – Radio Tariffs
The Company is subject to certain fees. Licence fees are payable to the CRTC, while copyright fees are payable to collection societies which include the Society of Composers, Authors and Music Publishers of Canada (“SOCAN”), Re:Sound, the Canadian Musical Reproduction Rights Agency and Society for Reproduction Rights of Authors, Composers and Publishers in Canada (“CSI”), and the Audio-Video Licensing Agency (“AVLA”) based on rates set by the Copyright Board of Canada.
The collection societies can apply at any time to the Copyright Board for amendments to the fees which could affect future results. The CAB represents the interests of broadcasters by representing the industry at any hearings before the Copyright Board.
The Copyright Board heard proposals in December 2008 related to five copyright tariff proposals for commercial radio. Agencies proposing these tariffs included NRCC, SOCAN, CSI and two groups that had no existing tariffs AVLA/SOPROQ (representing record labels), and Artisti (representing performers). The CAB acted on behalf of the broadcasters to oppose any tariff rate increases. The Copyright Board issued its ruling in July 2010 on certain tariffs which resulted in a $3.0 million increase in copyright fees year-to-date, of which $1.8 million related to previous years. As a result of this ruling, copyright fees as a whole have increased from 7.3% to 8.9% of revenue, subject to certain exemptions for low use and low revenue stations.
During 2010 the members of the CAB decided to undertake a major restructuring of the organization. This included an assessment of the core activities to ensure it was meeting the needs of its members in today’s rapidly evolving communications environment. The members decided that the CAB would continue to exist on a smaller scale and focus its efforts on matters of central importance to the industry and provide certain administrative functions. The CAB will continue to represent private broadcasters’ interests on the matter of copyright reform. The Company is actively involved in this organization with a member on the Board.
Regulatory Environment – CRTC Part II Fees
Since 2001, the CRTC levied Part II licence fees on all Canadian Broadcasters. Broadcasters paid the fees in protest until December 15, 2006 when the Federal Court issued a decision stating the fees were not a valid regulatory charge. In 2007 because there had been no appeal of the 2006 court decision, the Company reversed the fees it had accrued and stopped accounting for these fees in its ongoing results. Then in April 2008, the Federal Court of Appeal reversed the December 2006 decision. At that time, the fees met the definition of a liability and the Company recognized the obligation retroactively to January 1, 2007. As a result, for the year ended December 31, 2008, the Company recognized $1.3 million in CRTC Part II fees of which almost one half related to 2007.
In October 2009, the Government of Canada and members of the broadcasting industry that were required to pay CRTC Part II licence fees announced they had settled the Part II licence fee issue. Under the terms of the settlement, the government agreed to waive the fees payable for the broadcast calendar years ending August 31, 2007, 2008 and 2009 that had not been collected due to the ongoing legal dispute. In exchange, the CAB agreed to discontinue its court action against the Government of Canada. The Government of Canada agreed to recommend to the CRTC that it develop a new Part II fee regime which would be capped at $100 million, indexed for annual inflation, effective beginning September 1, 2009.
As a result of the settlement, the Company reversed the total obligation it had recognized related to CRTC Part II fees which amounted to $2.0 million. Approximately $0.5 million of this total related to fiscal 2009; the rest related to prior years.
With the advent of new or alternative media technologies such as satellite radio, digital radio, the Internet, wireless broadcasting and podcasting, competition for broadcasting advertising revenue and listeners has, and will continue to increase. This increased competition could have the impact of reducing the Company’s market share, its ratings within a market, or have an adverse effect on advertising revenue locally and nationally. While such technologies could adversely impact operating results, the Company continuously seeks to achieve competitive advantages by keeping abreast of emerging technologies and enhancing its service offering to advertisers.
The Company and its subsidiaries are involved in various legal actions which arise out of the ordinary course and conduct of its business. Management believes any potential liabilities that may result from these actions have been adequately provided for and are not expected to have a material adverse effect on the Company’s financial position or its results.