A better bailout

Could a tax credit for advertising rescue the media industry?

A better bailoutOttawa is abuzz with speculation that the Conservative government may be preparing to selectively bail out Canada’s troubled private broadcasters. Tanking ad revenues—partly the result of the shakeout in the auto and financial sectors, two of the largest advertising categories—are threatening to sink parts of the industry. Rumours have swirled that a fund, said to be as large as $150 million, is being prepared to benefit CTV Globemedia and Canwest Global, the country’s two biggest private broadcast networks. For months, the broadcasters have complained to the CRTC that the industry’s revenue model is broken.

Last week, Canwest was granted yet another two-week extension from lenders, as it races to restructure its crushing debt. The Canwest-owned National Post had already announced that it would not print a Monday edition this summer in a bid to slash costs. The Canwest-owned Victoria Times Colonist will scrap its Monday edition altogether. CTV Globemedia, meanwhile, is not expected to renew the licences of several money-losing local stations due in August, and many believe this is just the start of a larger trend.

But financial troubles aren’t limited to the broadcasters. Newspapers, magazines and the CBC are also bleeding money, and critics have begun to question the fairness of a bailout targeted only at private broadcasters. “A direct and selective bailout for media companies is really not workable,” says Kin Lo of UBC’s Sauder School of Business. “Government will be seen to be buying favourable coverage—whether that is in fact the case or not,” compromising editorial independence. And a Canwest bailout would spark “enormous outcry,” given the government’s flat rejection of more support for the CBC in February, says Hugh Dow, chairman of Mediabrands Canada, a holding company for some of the country’s biggest media buyers.

Rather than an ad hoc media bailout, some experts are advocating tax breaks targeted at advertisers. Advocates say this would benefit all media, rather than just one or two private broadcasters, and would keep government away from the politically dicey business of picking winners. And, let’s face it, it’s the “losers” that government ends up picking—“the people who got into trouble in the first place,” says University of Calgary tax guru Jack Mintz. Canwest got into trouble because it took on too much debt, believing that consolidation of newspaper and TV assets would bring about efficiencies and profitability, says Lo. “It was a gamble, and they lost.”

With a tax credit, “only the best would survive in terms of where businesses choose to place their advertising dollars”—a “bottom-up approach, rather than a top-down approach,” says Jamie Golombek, managing director of tax for CIBC Private Wealth Management. And unlike a bailout, which simply helps troubled companies to cover costs, a tax credit would “create demand” for ad spending, says Tran Chung, of UBC’s Sauder School of Business, noting that many companies are currently sitting on the fence on advertising. Knowing that $100 in advertising will only cost them $50 or $60 after the tax credit would be enough to get many spending again, he says. “Business knows that advertising can protect current revenue and may increase future earnings.” Furthermore, ad spending forces retailers to hire people to create the ads, who, in turn, hire actors, producers and technicians to create the ads, who rent supplies, equipment, and so on, cycling money through the economy, Chung adds. Recently, the German government gave “a very large tax credit for people to turn in their old clunker cars,” and it had a “really big impact” on car buying, says Mintz. And early data on the government’s home renovation tax credit suggests that sector has seen an uptick in activity, Lo adds.

Not only does advertising prime the economy and encourage consumer spending—critical to bolstering spending broadly, and getting the economy rolling again—but companies that spend on advertising through the recession “emerge with a stronger brand presence and market share after,” says Sunni Boot, president and CEO of media agency ZenithOptimedia Canada. Indeed, recent studies have shown firms that kept ad spending stable or increased it during a recession fared better during the subsequent recovery than those that didn’t. “If you cut back advertising, people are less likely to recognize you, or understand your products,” says Dow.

To be sure, not everyone is in favour of an advertising tax break. With such “boutique tax credits,” government is still in a position of favouring some industries over others, says Kevin Gaudet, federal director of the Canadian Taxpayers Federation. “Profitable industries would then be paying high taxes in order to subsidize tax credits for less profitable industries.”

The question, Mintz says, is whether media need the assistance more than other industries, and indeed, whether Canada needs healthy and prosperous media.

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