ARCHIVED -  Decision CRTC 94-670

Decision

Ottawa, 23 August 1994

Decision CRTC 94-670

Shaw Cablesystems Ltd., on behalf of DMX Canada Ltd.

Edmonton, AlbertaMontréal, Quebec

Reconsideration of Decisions CRTC 93-235 and CRTC 93-236 Concerning Applications for New Pay Audio Programming Undertakings.

Further to a Public Hearing held on 21 April 1994 in the National Capital Region, the Commission has reconsidered and heard the matters set out in the Order in Council P.C. 1993-1799 dated 23 September 1993. Upon reconsideration of these matters pursuant to Section 28 of the Broadcasting Act (the Act), and for the reasons set out herein, the Commission, by majority vote, rescinds Decisions CRTC 93-235 and CRTC 93-236.

I Background

a) The 1993 Licensing Decisions

In Decisions CRTC 93-235 and CRTC 93-236, both dated 25 June 1993, the Commission approved applications by Shaw Cablesystems Ltd., on behalf of DMX Canada Ltd. (Shaw), and by Cogeco Radio-Télévision Inc. (Cogeco) for broadcasting licences to carry on new pay audio programming undertakings. In each case, the Commission granted a licence term of five years.

The undertakings were to deliver audio programming via satellite to cable television affiliates across Canada for distribution to their subscribers as discretionary services. Both applicants proposed services consisting of music that would be primarily digitally-recorded, packaged by format or theme, and delivered without commercials and with little or no spoken word. Each musical format was to be distributed on its own digital audio channel.

Cogeco's service was to include 38 such channels at the outset, most of them containing programming produced by Cogeco's U.S. partner, MusicChoice (formerly Digital Cable Radio). MusicChoice is one of two producers of satellite-delivered pay audio programming services currently operating in the U.S. Six of the 38 channels were to carry programming produced in Canada, with two of these devoted to French-language music. A seventh channel of Canadian programming would have been added in the second year. The Canadian content of two of the Canadian-produced channels was to be 100%, while the remaining five were to have a minimum of 50% Canadian music content.

Shaw proposed to offer 33 digital audio channels upon commencing operations. The programming for three of the channels was to be produced in Canada and one of them was to have featured French-language music. The remaining channels were to contain programming produced in the U.S. by International Cablecasting Technologies Inc.(ICT), a competitor of MusicChoice and 20% shareholder in the applicant company. An additional Canadian-produced channel was to be added in each of the first two years of operation. The application provided for minimum Canadian music content levels on these five channels of 30%, 40%, 50%, 60% and 100%, respectively. By condition of licence, Shaw was required by the Commission to add two more Canadian-produced channels before the end of the fourth year of the licence term, each having a minimum Canadian content level of 30%.

Cogeco proposed to deliver its Canadian-produced programming via land line to New York City, from where it was to be uplinked to a U.S. satellite alongside the programming produced by MusicChoice. For its part, Shaw intended to make use of Canadian satellite facilities to deliver its Canadian-produced programming channels to affiliates. The non-Canadian channels produced by ICT were to be transmitted separately to cable head ends in Canada via U.S. satellite.

Both applicants proposed to set aside a minimum of 2% of their gross annual revenues for copyright payments pending a decision by Copyright Board Canada on an appropriate structure to govern the fees that would be paid by these new digital audio services.

The Shaw application was heard at the 21 September 1992 Public Hearing in the National Capital Region, and the Cogeco application was heard at the 17 February 1993 Public Hearing in Moncton. Although their applications were considered under separate public processes, Shaw and Cogeco both indicated their preparedness, prior to the hearings, to accept a licensing framework that would have them compete for distribution by cable television affiliates nationwide, both against each other and against other similar services that might be licensed in the future. They also offered commitments that, in their negotiations with potential affiliates, they would not insist on the exclusive distribution of their respective services on cable undertakings. Each was satisfied that it would be able to operate as a viable enterprise despite the presence in the market of another similar service.

b) The Order in Council

Following publication of Decisions CRTC 93-235 and 93-236, three petitions were submitted to the Governor in Council. Two of the petitions presented the concerns of the French- and English-language music industries and artistic communities regarding the Commission's decisions. Further concerns were expressed in a petition submitted by Telesat Canada Inc. By Order in Council P.C. 1993-1799, the Governor in Council referred the two decisions back to the Commission for reconsideration and hearing, with specific regard to the following matters raised by the petitioners:

The Governor in Council is of the opinion that it is material to the reconsideration and hearing that the Commission fully assess the availability of recorded Canadian music in the formats utilized in digital audio services and explain:

(a) why the said undertakings cannot make greater use of Canadian music content; and

(b) the rationale for the approval of different levels of Canadian music content for the two licences.

The Governor in Council is of the further opinion that it is material to the reconsideration and hearing of these decisions that the Commission fully consider and explain:

(a) why the said undertakings should not make maximum use of the resource of Canadian telecommunications facilities for the distribution of Canadian programming in Canada; and

(b) the rationale for not requiring that these services be received in all parts of Canada.

On 8 October 1993, the Commission sent letters to Shaw and to Cogeco inviting them to submit any comments or amendments they might wish to make to their applications in light of the concerns raised in the Order in Council.

Shaw and Cogeco, by letters dated 19 and 30 November 1993, respectively, filed their comments on the matters raised in the Order in Council. In response to further questions, Cogeco submitted additional information on 21 January 1994. The applicants filed proof that copies of the materials submitted to the Commission had also been sent to all parties who intervened to the original applications.

All interveners of record were invited to submit written comments on the matters set out in the Order in Council, and on the above- mentioned comments of Shaw and Cogeco on these matters. As noted earlier, the Commission's reconsideration of these matters has been further to a public hearing on 21 April 1994.

II The Hearing

a) Discussion of the Amendments to the Applications

In response to the Commission's invitation to amend its application, Shaw advised that it would commence operations with six Canadian-produced channels, rather than the three it had initially planned to offer in year one. Although its conditions of licence stipulated that a seventh Canadian-produced channel be added by the end of the fourth year, Shaw proposed to add this channel in the fifth year. Shaw committed to increase the minimum Canadian content of four of these channels to 50% from the 30% and 40% levels required in Decision CRTC 93-235. The Canadian content of a fifth channel was to remain at 50%, and the two remaining channels would program Canadian content exclusively. According to Shaw, the overall Canadian music content of its Canadian-produced channels would thus increase from 48.6% to a minimum of 64.3%. Based upon there being a total of 33 channels within the service, this would translate to an increase in the minimum Canadian content level for the service as a whole from 9% to approximately 12%, the latter being essentially the same level that Cogeco had proposed in its original application.

Shaw indicated that, in addition to the French-language vocal music it had initially proposed for one of its Canadian-produced channels, the formats of three of its other channels would contain "substantial components" of music by Francophone composers and musicians, and that it was considering an additional French-language format for one of the two additional channels required of it under its conditions of licence.

For its part, Cogeco proposed to commence operations with seven Canadian-produced programming channels instead of the six originally proposed, and to add two more at the beginning of each of the second and third years of operation, for a total of eleven such channels. French-language vocal formats would occupy four of these channels instead of the two channels initially contemplated. Cogeco indicated that these changes would increase the minimum overall Canadian content of the service from 12% to 17%.

Cogeco advised that all eleven of its Canadian-produced programming channels would be distributed to affiliates using a Canadian rather than a U.S. satellite. This applicant also proposed to alter its commitment regarding copyright payments from a minimum of 2% of gross annual revenues to an amount, representing approximately 20% of its annual wholesale revenues, which would be charged to cable subscribers as a pass-through fee. According to the applicant's projections, this would yield a payment to rights holders over a seven-year period, some twelve times larger than the amount originally estimated.

By far the most critical change to this application came about as the result of Cogeco's conclusion that it would no longer be possible for it to compete head to head with Shaw across the country. Instead, Cogeco insisted that its proposal would be financially viable only if it were to be licensed as a monopoly service with territorial exclusivity.

In explaining this departure from its original application, Cogeco noted the incompatibilities between the digital audio system hardware that it and Shaw propose to use for their respective services, and the substantial capital costs that cable affiliates will incur for receiving equipment and decoders in order to make either pay audio service available to subscribers. According to the applicant, cable operators may opt to offer one, but certainly not two such services; nor would they likely switch between services once having made their initial decision.

Cogeco also emphasized the additional costs attached to its commitments for increased Canadian music content and compensation to copyright holders. Cogeco claimed that the higher wholesale rate it would be obliged to charge cable affiliates, combined with its proposed copyright pass-through fee, would render it unable to compete with Shaw.

The applicant also cited the increased competition for subscriber dollars and the diminished channel capacity that would result from approval of any of the applications, then pending before the Commission, proposing new pay and specialty services.

Cogeco claimed that these two factors would serve to delay the roll-out of pay audio and increase the financial risk for anyone seeking to offer such a service.

Accordingly, Cogeco proposed that it be licensed exclusively to serve the Atlantic provinces, Quebec, and all of Ontario except for the greater Toronto area. Under this plan, Toronto and the remainder of the country would become the exclusive licensed territory of Shaw. Cogeco claimed that this division would leave both applicants with access to approximately the same number of subscribers of Class 1 cable systems. It also confirmed that it would be unwilling to accept a licence on terms other than these.

When asked to comment on Cogeco's proposal for a licensing framework that would establish territorial exclusivity for the two pay audio services, Shaw noted that it rejected this plan when the suggestion had first been advanced by the other applicant in meetings following issuance of the Order in Council, and emphasized at the hearing that it remained firmly opposed to such a scheme on the grounds that a competitive framework would better serve the consumer and the broadcasting system. Based upon its research, Shaw claimed that to increase the Canadian-produced channels or their Canadian content beyond the numbers or levels proposed in its amended application would raise the cost of the service to a point where the service would no longer be attractive to enough cable undertakings or to a sufficient number of their subscribers to make it financially viable:

Given all these factors, the business plan became economically unviable.... We would rather compete and have the potential of surviving.

Shaw confirmed that, even if its application was approved and Cogeco's denied, it would not be prepared to increase its commitments regarding the number of Canadian-produced channels or their Canadian content. Later at the hearing, Shaw offered the following observation:

There are essentially two issues that the Commission must address. First, is the level of Canadian content... approved for these services appropriate, given the availability of Canadian music; and second, should the Commission change the licensing approach in its original decisions and grant exclusive rather than competitive licences.

b) Interventions

Those interveners of record to this proceeding who expressed support of the applications include Telesat Canada Inc., which noted Cogeco's amended proposal to transmit its Canadian-produced channels using Canadian satellite facilities. Among the other interveners were several cable television licensees and their industry association, the Canadian Cable Television Association, which also supported the introduction of pay audio services. Most within this group supported the non-exclusive, competitive model proposed by Shaw.

Firm opposition to both applications was set out in interventions submitted by various national and provincial societies, associations, unions and guilds representing the broad spectrum of Canadian recording artists, musicians, composers, music publishers and record producers. Representatives of eight of these groups, as well as those of the Canadian Broadcasting Corporation, appeared at the hearing to elaborate upon their concerns.

It was the contention of most of these interveners that neither applicant has responded adequately to the concerns raised in the Order in Council or to the objectives of the Act. Notwithstanding the amendments made by Shaw and Cogeco, virtually all of the appearing interveners were of the view that, in both cases, the overall level of Canadian content, the number of Canadian-produced channels, and the number of French-language channels remain inadequate. Some interveners recognized that the specialized music formats would permit only a modest level of Canadian content on certain channels, even on a Canadian-originated service. Most, however, stressed the importance they place on having the Canadian music content of any pay audio service spread evenly throughout several formats, just as it is on individual conventional radio stations and within the services of other licensed music-based undertakings, rather than to have Canadian selections concentrated within a relatively small number of channels.

Some interveners argued that there has been insufficient study of the availability of Canadian content that would be appropriate for the types of specialized music formats proposed. Some asked that the current process be postponed pending release of the findings and recommendations of the Music Industry Task Force. Others continued to argue that the Commission should first conduct a policy review on the question of pay audio services.

In this context, it was also argued by some interveners that the process followed to date has made no provision for consideration of other, competing applications, including those that might come forward with proposals for an "all-Canadian" service, or those that might make use of cheaper, non-proprietary hardware. They suggested that confirmation of a decision approving either of the present applications would effectively rule out the possibility of any of these developments occurring in the future.

Further, several of the opposing interveners expressed the view that both applicants, and Shaw in particular, have failed to put forward meaningful proposals for the provision of compensation for copyright.

III The Commission's Determination

The Order in Council asked the Commission, among other things, to fully consider and explain why the services should not make use of Canadian telecommunications (such as satellite) facilities for the distribution of Canadian programming. This particular issue was raised by Cogeco's proposed use of a non-Canadian satellite to deliver its Canadian-produced programming channels and, in the Commission's view, was resolved through Cogeco's amendment to its application whereby it would contract with Telesat Canada Inc. for delivery of these channels.

The Order in Council also asked the Commission to explain its rationale for not requiring that these services be received in all parts of Canada. This concern addressed the fact that the satellite facilities used by the American partners of Shaw and Cogeco do not have a large enough footprint to deliver their U.S. programming channels to the far north of Canada or to eastern Newfoundland.

At the hearing, Shaw stated that the capital and operating costs of its proposed service would be such that the operator of a cable system with fewer than 10,000 subscribers would not likely find it economically feasible to offer the service. Cogeco advised that, for essentially the same reasons, it had included only the licensees of Class 1 cable systems as potential affiliates under its business plan. According to both applicants, therefore, the only community potentially affected by the U.S. satellite coverage limitations, that is to say, the only community whose cable system has enough subscribers to possibly justify the capital expenditures required to offer a pay audio service, is St. John's.

The Commission notes that the potential concern surrounding this matter was effectively removed at the April hearing as a consequence of the commitments offered by both applicants to deliver the U.S. portion of their respective channel packages to St. John's using land lines or microwave facilities.

The Order in Council also asked the Commission to explain why the undertakings cannot make greater use of Canadian music content, and to explain as well the rationale in its 1993 decisions for approval of different levels of Canadian music content for Shaw and Cogeco.

In Public Notice CRTC 1993-94, which served as the introduction to those decisions, the Commission noted, among other things, the new and untested nature of pay audio services in Canada, the fact that they were to be fully discretionary, that they would likely appeal to a very small number of subscribers across the country, and would ultimately be competing for access to these same subscribers in negotiations with prospective cable television affiliates. The Commission therefore decided to accept what it then believed to be, in the case of each undertaking, "the greatest practicable use of [Canadian] resources." The Commission stated clearly, however, that the minimum levels of Canadian music content it approved for the two services would remain fixed for a period of five years only:

The Commission... considers that the number of Canadian-originated channels required of both applicants, and the Canadian content levels specified for these channels, are reasonable minimum conditions to be met during the initial years of operation. The Commission's determination in this regard is based in large part on the fact that the marketability of pay audio programming services remains to be tested in Canada. For the same reason, however, the Commission considers it reasonable to issue licences for a term of five years only. This period will enable the applicants to establish their operations and will allow the Commission, at the time of licence renewal, to assess whether the Canadian content requirements noted above should be maintained or increased, taking into account the financial performance of these services in the Canadian cable market.

The Commission has given careful consideration to the amendments proposed by the applicants in response to the issues raised in the Order in Council, and the views and concerns of all interveners regarding the adequacy and appropriateness of these amendments.

In the Commission's view, the organizations whose representatives spoke on behalf of Canada's artists, musicians and composers gave particularly articulate voice to the concerns of their members regarding the potential impact that digital audio services could have on their interests.

The Commission would emphasize, however, that its original decisions called for a further assessment, at a later date, of whether the financial performance of the proposed undertakings would permit any increase in the levels of Canadian music content or in the ratio of Canadian-produced programming channels within the new pay audio services.

On this matter, the Commission is satisfied that there is a substantial amount of Canadian musical selections that could be featured in a digital audio service. However, this must be weighed against the costs currently associated with the satellite delivery of such Canadian-produced channels, and the impact of these costs on the potential viability of a wholly Canadian-originated digital audio service.

As for the question of copyright payments, the Commission notes that, as of 1 January 1994, a legislative scheme has been put into place by which those entitled to such payments are able to assert their claim.

Notwithstanding the foregoing, the Commission considers that the amendments made to these applications following issuance of the Order in Council, and more specifically, Cogeco's insistence upon territorial exclusivity, have brought about a fundamental change to the context of this proceeding. Given Shaw's preference to compete for cable television affiliates across the country, and Cogeco's clear assertion that it would be unable to implement service unless it is granted territorial exclusivity, the Commission's determination in 1993 to license both applications is no longer an option.

Thus, as was suggested at the hearing, the two questions before the Commission are whether to change its original licensing approach by granting territorial exclusivity, and what would be the appropriate level of Canadian content in the event it were to do so.

With regard to the first question, the Commission has determined that it would be inappropriate at this time to depart from its original licensing approach and grant Cogeco's request for territorial exclusivity. Accordingly, the Commission is not prepared to confirm its approval of Cogeco's application, as amended. To do so would not be in accordance with the Commission's usual practice in such circumstances of first holding a competitive licensing process. Nor would it meet one of the concerns raised in the Order in Council, in that approval of Cogeco's application would extend the availability of a digital audio service to only half the country at this time; it would also preclude the licensing of a competitor to Cogeco in the future, within Cogeco's exclusive territory.

Further, to approve Cogeco would be to ignore a matter of considerable importance from the Commission's perspective, that being the question of whether the service, with the higher wholesale rate and copyright pass-through fees proposed by Cogeco, would remain attractive to a sufficient number of cable television affiliates and their subscribers to ensure its viability, even with the territorial exclusivity the service would have in much of eastern Canada. The Commission notes in this regard the potential difficulties Cogeco, itself, sees in marketing a digital audio service coincident with the launch of the recently-licensed pay and specialty services, particularly given the channel capacity limitations these services may create for certain cable systems.

The Commission is equally concerned that, to deny Cogeco and to grant a licence to Shaw, even on a non-exclusive basis, would provide the latter with a de facto monopoly in the Canadian market, initially at least and, potentially, over the long term as well. Given the high start up costs, and the projections by both applicants indicating a very small Canadian market for pay audio services, the Commission agrees with Cogeco's observation that, once a cable licensee elects to offer its subscribers one such service, it would be most unlikely to switch to or add another. The Commission notes that Shaw did not dispute Cogeco's assessment in this regard.

On this basis, although a third party might contemplate applying for a licence to offer a similar service in the future, the licensing of Shaw, at this time, would discourage any such prospective competitor from coming forward, given the likelihood that Shaw would be able to capture a commanding portion of the potential market before the authority for a new service could be implemented.

This determination brings the Commission to its examination of whether the Canadian creative and other resources to be employed within the service proposed by Shaw, under its amended application, are sufficient to satisfy the requirements of paragraph 3(1)(f) of the Act.

The Commission remains of the view that, given the nature of the service, including the proposed number of channels and the very specialized nature of the musical fare on each, it would be impracticable for a Canadian pay audio undertaking to make predominant use of Canadian creative and other resources in the creation and presentation of programming. The Commission must therefore assess whether Shaw's proposal represents the greatest practicable use of these resources, given the fundamental change affecting the context of this proceeding. In the circumstances, given that licensing Shaw would be tantamount to granting that company a Canada-wide monopoly, the Commission has concluded that the level of Canadian content proposed by Shaw falls short of what would represent the greatest practicable use of Canadian creative and other resources. Accordingly, the Commission is not prepared to confirm its approval of Shaw's application, as amended.

Allan J. Darling
Secretary General

DISSENTING OPINION OF COMMISSIONERS PETER L. SENCHUK AND GARTH DAWLEY IN THE MATTER OF DECISION CRTC 94-670

In Decisions CRTC 93-235 and 93-236 dated 25 June 1993, the Commission approved two applications for pay audio programming services by Shaw Cablesystems Ltd., on behalf of DMX Canada Ltd. (Shaw) and Cogeco Radio-Télévision Inc. (Cogeco). The decisions followed two separate hearings before two different panels of the Commission. The two approved services were authorized to use digital technology for the delivery of commercial-free, CD-quality music services to Canadian cable subscribers 24 hours a day.

In September 1993, the Governor in Council referred both decisions back to the CRTC for reconsideration and hearing by Order in Council P.C.1993-1799.

The order stated that the Governor in Council is of the opinion that it is material to the reconsideration and hearing that the Commission fully assess the availability of recorded Canadian music in the formats utilized in the digital audio services and explain:

a) why the undertakings cannot make greater use of Canadian music content; and

b) the rationale for the different levels of Canadian music content for the two licences.

The order further directed the Commission to fully consider and explain:

a) why the said undertakings should not make use of the resource of Canadian telecommunications facilities for the distribution of Canadian programming in Canada; and

b) the rationale for not requiring that these services be received in all parts of Canada.

Subsequent to the receipt of Order in Council P.C. 1993-1799, the Commission held a Public Hearing on 21 April 1994 for the reconsideration of Decisions CRTC 93-235 and 93-236.

After a careful and thorough review of the documentation and evidence presented in the course of that public hearing, it is our opinion that the Commission should have confirmed Decision CRTC 93-235 granting a licence to Shaw to provide Canadian cable subscribers with a national pay audio service. We contend, and are fully satisfied, that Shaw addressed and satisfied all of the issues raised by the Order-in-Council P.C. 1993-1799.

We agree with the majority opinion that Decision CRTC 93-236 approving the Cogeco application should be rescinded. The revised application's exclusive regional nature would make it unavailable to all Canadian cable subscribers, a change differing too substantively from the application approved in the decision the Commission was directed to reconsider.

Faced with the spectre of an impending multi-channel universe, the Commission is increasingly calling for Canadian programs of high quality, rather than Canadian programs in greater quantity. In the recent decisions licensing new specialty services the Commission noted that pending developments in the communications environment, in particular the advance in new delivery systems such as high powered Direct Broadcast Satellites (DBS) and the implementation by the cable industry of digital video compression (DVC), were generating new challenges for the broadcasting system.

The Commission concluded that prompt action was necessary to ensure a strong presence in the multi-channel universe. This included the provision of a diverse and attractive package of Canadian conventional, specialty, pay television and pay per view services offering a high quality mix of Canadian and foreign programming.

We find a significant lack of consistency between the Commission's vision of the future expressed in previous decisions and this majority decision that denies a licence to a digital audio service that could make a strong contribution to the quality, attractiveness and diversity of Canadian offerings to cable subscribers.

We still consider that a Commission decision to allow Canadian entrepreneurs to put new digital audio technology to work for Canada would have helped to keep our broadcasting system in the forefront of communications. We are of the view that these innovative new services would provide a valuable national window of exposure for Canadian musical talent, as well as offer Canadians more choice and the availability of narrowcast channels that serve their individual tastes.

Given the advances with cable technology with respect to the utilization of spectrum space not utilized for video, along with accessability to space between channels for digital audio services, we are confident that channel capacity would be sufficient to accommodate both the newly-licensed Canadian Specialty services and a new pay audio programming service. We are satisfied that the Commission can take appropriate measures to ensure that recently-licensed specialty TV services would take precedence in cable spectrum space over a pay audio programming service.

The decision not to license a digital audio service at this time will, in our opinion, allow U.S. based systems with no commitment or requirement to provide Canadian music, whether now or in the future, the opportunity to enter Canadian homes through means of DBS. Once such a service becomes available, the likelihood of any Canadian based service attaining viability would be reduced. As well, Canadian subscribers to cable TV are denied the opportunity of hearing Canadian recordings in high quality digital format, and Canadian performers are denied an audience for their art.

In addition, in contrast to the recently licensed new specialty TV channels, which will be packaged with other TV services to be accepted or rejected as a package, digital audio would be a true "pick and pay service", available to those cable subscribers desirous of a niche pay audio programming service for a monthly fee.

As we prepare our electronic industries for the much touted information highwayand the realities of a global communications community, we will be faced with other non-traditional kinds of services, such as video games and others, many of which will provide no element of Canadian content. We believe that it is better to license services containing a reasonable amount of Canadian content as early as possible to prevent foreign niche services lacking any significant Canadian element from intruding into the Canadian market. We believe the regulatory structure must more quickly respond to recognize the rapidly changing communications environment and changing consumer needs and desires.

We consider it to be both desirable and necessary that Canadian entrepreneurs be encouraged to take their rightful place at the leading edge of communications technology to serve to the greatest advantage our country's creative community. The approval of the digital audio service application of Shaw would have seized such an opportunity with the inclusion of programming content by Canadian artists, made available to Canadian cable subscribers to the benefit of the Canadian broadcasting system.