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The analyst believes that there will be an increased focus on content deals and their contribution to the health of the overall business over the long term. And thanks to the presence of Netflix, higher content costs.

Astral and Corus apparently did not agree with Paramount on pricing and other terms during recent re-negotiations, chosing to drop the studio from the pay line-up, RBC Capital Markets analyst Drew McReynolds said in a research note. While such a move is not without precedent, it nonetheless opens the door to competition by allowing new “over-the-top” (OTT) services a stronger foothold in Canada.

He noted that Twentieth Century Fox and Paramount are the only major U.S. studios not currently under a pay television output deal with Astral and Corus. The two studios represented 30% of the Canadian box office in 2010.

If these over-the-top services are to succeed as a substitute for cable and satellite television over the long term, Mr. McReynolds thinks several things need to happen. Rights to premium programming needs to be secured, there must be the option for internet-enabled television in Canadian living rooms, and broadband must be affordable. He added that the extent to which a “TV Everywhere” strategy is successfully deployed by the incumbents will play a major role in therate of

substitution.

The analyst sees a limited near-term impact from OTT services, with no material effect on earnings, but negative sentiment on valuation. However, in the three to seven-year range, he anticipates higher programming costs due to increased buying power from OTT services will impact broadcasting margins.

For Astral and Corus, pay television is estimated to represent 24% and 21% and 16% and 11% of consolidated revenues and EBITDA, respectively.