ARCHIVED -  Decision CRTC 98-487

Decision

Ottawa, 23 October 1998

Decision CRTC 98-487

CTV Sports Net Inc.

Across Canada - 199716776

Application processed by
Public Notice CRTC 1998-49
dated 19 May 1998

Transfer of Shares - Denied

1. The Commission, by majority vote, denies the application by CTV Sports Net Inc. (Sports Net) for authority to transfer a 20% voting interest in this licensee company from The Molson Companies Limited (Molson) to Rogers Broadcasting Limited (Rogers).

2. In the majority's view, there remains insufficient channel capacity on cable networks and insufficient competition among distributors to overcome concerns related to the potential for undue preference in the cable carriage of affiliated specialty or other such broadband services. Until these circumstances change, cable licensees and their affilates should generally be prohibited from acquiring or increasing their interests, held either directly or indirectly, in programming undertakings other than those that provide over the air radio or television services.

The parties

3. Sports Net is licensee of a national, English language specialty television undertaking. It is authorized to provide a service consisting of coverage of live sports events and other sports related programming, packaged in four distinct regional versions, for delivery to the subscribers of broadcasting distribution undertakings (BDUs) across Canada. The undertaking is one of a group of specialty services authorized by the Commission in September 1996. The service, which only recently commenced operation, is now available to BDUs across Canada for distribution to their subscribers.

4. Sports Net's current shareholders are: CTV Television Inc. (CTV) (40%), Molson (20%), Rogers (20%), and a non-Canadian company, LMC International Inc. (LMC) (20%). CTV holds effective control of the licensee by virtue of the terms of a voting trust agreement with Molson, as reflected in the terms of a shareholders' agreement.

5. The proposed transaction would have increased Rogers' shareholdings in Sports Net to 40%, which is the same percentage as that now held by CTV. Although the voting trust agreement between Molson and CTV would have been terminated upon the transfer of Molson's shares to Rogers, the licensee claimed that control would have remained with CTV. Sports Net noted in this regard the terms of the shareholders' agreement whereby, for the first licence term, responsibility for the day to day management and operational control of the licensee resides with CTV.

6. The proposed transaction comes as the result of a strategic decision by Molson to divest of its shareholdings in television broadcasting, including its 20% voting interest in Sports Net, and a similar voting interest in 3216195 Canada Inc., licensee of a pay per view television service. The latter transaction, in which CTV is the purchaser, does not require CRTC approval as CTV already controls the numbered company through its current ownership of 60% of the voting shares.

7. Rogers, in addition to its minority holdings in Sports Net and in a second specialty service (Outdoor Life), is licensee of the multilingual television undertaking CFMT-TV Toronto, and of a large number of AM and FM radio undertakings across Canada. It also holds indirect interests in licensed broadcasting undertakings offering French and English language pay per view, direct to home pay per view, and video on demand services in eastern Canada. Rogers is indirectly controlled by Rogers Communications Inc. (RCI), whose own diverse broadcasting holdings include ownership of cable systems serving more subscribers than those of any other single operator of BDUs in Canada. It also holds a minority interest in Canadian Satellite Communications Inc., licensee of a national satellite relay distribution undertaking.

Reasons for denial

8. In its 19 May 1995 report to the Government entitled Competition and Culture on the Information Highway (the Convergence Report), the Commission announced its policy framework for the development of fair and sustainable competition in the distribution of broadcasting and telecommunications services. The Commission noted that, while competition in the distribution of broadcasting services was evolving, the continuing market power of cable television companies and their control over the delivery of most broadband services offered the potential for preferential treatment of affiliated broadband services. It added that this potential created a need for comprehensive access rules, particularly in light of cable's limited channel capacity. Accordingly, the Commission established a number of guidelines, including the following:

Until there is sufficient capacity on cable networks, and until transparent access rules are in place to prevent undue preference affiliates of cable licensees should not generally be granted licences to operate, nor should they be permitted to acquire ownership or control of, programming undertakings other than over-the-air radio and television services.

9. In April 1996, less than a year following publication of its Convergence Report, the Commission issued its access rules (see Public Notice CRTC 1996-60). These rules, which satisfy one of the preconditions noted above, are now incorporated into the Broadcasting Distribution Regulations (the regulations).

10. In September 1996, the Commission licensed a number of new specialty services. At that time, the Commission anticipated that there would be greater channel capacity available through implementation of new digital technologies (for example, the roll out of digital boxes). The Commission further expected the development of a more competitive environment in the broadcasting distribution sector. It was with this understanding that the Commission licensed Sports Net and a number of other specialty services in which cable companies or affilates had ownership interests.

11. Subsequently, in Decision CRTC 98-226 dated 21 July 1998, the Commission denied, by majority vote, an application proposing the transfer of a 47.85% voting interest in Sportscope Television Network Ltd. (Sportscope) to Shaw Communications Inc. (Shaw). Sportscope is licensee of a national, English language specialty programming undertaking (Headline Sports) that, like Sports Net, is devoted to sports programming. Shaw is Canada's second largest cable operator after RCI. Shaw's other broadcast holdings currently include controlling or minority interests in six specialty services, controlling interests in twelve radio stations, and effective control of Star Choice Television Network Incorporated, licensee both of a national satellite relay distribution undertaking and a national direct to home satellite distribution undertaking.

12. In its Sportscope decision, the Commission stated the following:

In examining the current broadcasting distribution environment, the Commission finds that market conditions with respect to channel capacity and competition have not materialized to the extent previously anticipated. The Commission considers that the current channel capacity and the level of competitiveness are not sufficient to effectively mitigate any potential undue preference that may be conferred by cable operators on undertakings in which they hold an interest.

13. In the Commission's view, there has been no significant change in the broadcasting distribution market or, more specifically, in the channel capacity available to most cable television distributors (including RCI), in the time since publication of Decision CRTC 98-226. Accordingly, the Commission has denied the current application for authority to transfer Molson's 20% voting interest in Sports Net to RCI's affiliate, Rogers.

Interventions

14. Eight interventions were submitted to this application, and these have been considered by the Commission in reaching its decision. All but one of the interventions expressed concerns with respect to the proposal, most relating to the potential for undue preference. Several of the interveners argued in this regard that approval would place Rogers in a position to exercise negative control of the licensee company. They noted that, under the terms of the shareholders' agreement, the votes of at least two of Rogers' four nominees on the licensee's ten member board of directors would be necessary in order to satisfy the requirement that annual operating budgets be approved by 80% of the directors.

15. The Commission has also considered the applicant's letter of reply to the interventions. Among other things, the applicant argued that the undue preference provisions contained in section 9 of the regulationsprovide the Commission with an effective tool to deal with any situation involving undue preference by a broadcasting distribution undertaking. The applicant also claimed that the opposing interveners had ignored the fact that, under the shareholders' agreement, CTV would retain responsibility for the day to day management and control of the undertaking.

16. In the Commission's view, notwithstanding the provisions of the shareholders' agreement that confer responsibility on CTV for the day to day management of Sports Net, approval of the transaction would, at the very least, have increased Rogers' representation on the licensee's board of directors and would have brought into question CTV's ability to control the licensee company at all times and with respect to all matters.

17. The Commission, however, wishes to emphasize that its decision to deny this application is not based on any determination as to where control of the undertaking would reside following approval, but on its concerns regarding the potential for undue preference. The Commission agrees that this potential is present in any situation where a cable distributor has an ownership interest in a specialty service, regardless of the nature of that ownership interest. Such potential is particularly worrisome in the absence of sufficient channel capacity on cable networks to accommodate all licensed services. In the circumstances, the Commission considers that reliance on an after the fact finding of undue preference under section 9 of the regulations is not sufficient to ensure a competitive distribution market that is transparently fair. It is convinced that approval of the current application would have served to increase the potential for undue preference, and would thus not have been in the public interest.

Secretary General

This decision is to be appended to the licence.
This document is available in alternative format upon request, and may also be viewed at the following Internet site:www.crtc.gc.ca

Dissenting opinion of Commissioner David McKendry

I dissent from the decision to deny the application by CTV Sports Net Inc. (Sports Net) for authority to transfer a 20 per cent interest in the company from The Molson Companies Limited (Molson) to Rogers Broadcasting Limited (Rogers). Rogers now owns a 20 per cent interest in Sports Net. If Sports Net's application was approved, Rogers would own a 40 per cent interest in the specialty television service.

Rogers is a subsidiary of Rogers Media Inc., a company owned by Rogers Communications Inc. (RCI). RCI owns Rogers Cablesystems Limited, Canada's largest cable company.

Still in the public interest

In 1996 the Commission determined that approval of Sports Net's application for a licence to operate a specialty service with a 20 per cent ownership interest by Rogers was in the public interest. (Decision CRTC 96-601, 2952939 Canada Inc., carrying on business as S3 Regional Sports Service, Across Canada - 199600651, 4 September 1996)

If it is in the public interest for Rogers to own 20 per cent of Sports Net, it is in the public interest for Rogers to own 40 per cent of the specialty service, particularly because the 1998 Broadcasting Distribution Regulations ameliorate the undue preference concerns that existed in 1996. As the Commission noted in 1996, the issue of preferential treatment or access arises when a cable company participates in the ownership of a specialty service. (Decision CRTC 96-106, 1163031 Ontario Inc., Across Canada - 199600875, 4 September 1996)

In 1996 the Commission relied upon an expectation that a specialty service would not be given preferential treatment or access to distribution systems by any distributor that holds an ownership interest in the service. Today a regulation exists to deal with undue preference issues such as those raised by Sports Net's application. On January 1, 1998, the Broadcasting Distribution Regulations came into effect, providing transparent access rules. Section 9 states, "No licensee shall give an undue preference to any person, including itself, or subject any person to an undue disadvantage." When the Commission put section 9 in place, it stated that the section applies "to all matters related to the acquisition and distribution of programming services but will, more generally, apply to all broadcasting activities of broadcasting distribution undertakings." (Public Notice CRTC 1997-50, Broadcasting Distribution Regulations, 22 December 1997)

Sports Net distributed with 20 per cent ownership

Sports Net is generally being distributed by cable companies, including Rogers Cablesystems. Given that the service is being distributed with a 20 per cent ownership interest by Rogers, the increase in Rogers' ownership to 40 per cent has nothing to do with whether or not Sports Net will be distributed.

Rogers Cablesystems is doing nothing wrong by distributing Sports Net. The Commission approved Sports Net for distribution with a 20 per cent ownership interest by Rogers. Rogers Cablesystems and other cable companies are doing what the Commission allows the companies to do. Denying Sports Net's application to allow Rogers to increase its ownership from 20 per cent to 40 per cent of Sports Net does not change Rogers' ability to distribute the service.

Concern about non-distributed services misplaced

In 1996 the Commission authorized 17 specialty services, including Sports Net, for distribution by cable companies and other distributors. Four of the services were granted immediate access to distribution systems; these services are being carried by cable systems. Cable companies were not required to distribute the thirteen other services, including Sports Net, until the earlier of the deployment of digital technology by individual distributors or September 1, 1999. (Public Notice CRTC 1996-120, Introductory Statement - Licensing of New Specialty and Pay Television Undertakings, 4 September 1996) Nine of these services, including Sports Net, are generally being distributed by cable companies.

A concern may exist that four of the 17 specialty services approved by the Commission in 1996 for distribution are not being distributed by Rogers Cablesystems and other cable companies. This concern is misplaced. Almost one year remains until the deadline for carriage of these services. Three of these services and one other service now being distributed applied earlier this year to the Commission for distribution prior to September 1, 1999. The Commission denied the applications, emphasizing the need for regulatory certainty. (Decision CRTC 98-212, Canadian Learning Television Limited, Across Canada - 199800678, CHUM Limited (MuchMoreMusic), Across Canada - 199800686, Star Entertainment Inc. (Star TV), Across Canada - 199800694, The Partners of the "Report on Business Television" (ROBTv), Across Canada - 199713532, 7 July 1998)

Control by Rogers not relevant

Some interveners in Sports Net's application submitted that an increase in ownership from 20 per cent to 40 per cent would allow Rogers to control Sports Net in spite of CTV Television Inc.'s (CTV) 40 per cent ownership interest and the existence of a shareholders' agreement that gives CTV responsibility for the day-to-day management and control of Sports Net. I agree with the majority of Commissioners that Sports Net's application should be decided on the undue preference issue and not on where control would reside following approval of the application. The majority's decision states:

The Commission, however, wishes to emphasize that its decision to deny this application is not based on any determination as to where control of Sports Net would reside following approval, but on its concerns regarding the potential for undue preference. The Commission agrees that this potential is present in any situation where a cable distributor has an ownership interest in a specialty service, regardless of the nature of that ownership interest.

Regulatory certainty important

We are in an era of dynamic and rapid change in the creation and distribution of entertainment and information. Television can be viewed on personal computers; the Internet can be accessed on television sets. The Commission has authorized a telephone company to provide cable service; a cable company has been authorized to provide local telephone service.

Taking into account the objectives of the Broadcasting Act, the businesses that the Commission regulates must be free to arrange their affairs to meet the new environment's challenges and opportunities. Regulatory certainty is a contribution that the Commission should make to today's complex communications environment.

Regulatory certainty requires the Commission to be consistent with its precedent decisions relevant to Sports Net's application, assuming no significant change in the circumstances surrounding the precedents. As described above, the only significant change in circumstances since 1996 has been the introduction of the Broadcasting Distribution Regulations, a change that ameliorates concerns about undue preference or disadvantage.

Notwithstanding the Commission's majority decision (Decision CRTC 98-226, Sportscope Television Network Ltd., Across Canada - 199709391, 21 July 1998) to deny an application by Sportscope Television Network Ltd. to transfer an ownership interest to Shaw Communications Inc. (Shaw), several precedents exist with respect to the ownership of program services by cable companies. In addition to Rogers's existing ownership interest in Sports Net, Rogers owns one-third of Outdoor Life, a specialty television service. The company also owns 100 per cent of Viewer's Choice Canada Inc., a pay-per-view English language television service. Viewer's Choice owns 40 per cent of Canal Indigo, a French language per-per-view television service. Shaw, Canada's second largest cable company, controls three specialty television services; it has minority interests in three other specialty services. These ownership interests were determined to be in the public interest by the Commission.

Inconsistent and unwarranted intrusion

The denial of Sports Net's application flies in the face of the Commission's precedents for cable ownership of programming services and section 9 of the Broadcasting Distribution Regulations. The denial is also an unwarranted intrusion into the business affairs of Sports Net's shareholders because approval of Sports Net's application would not be in conflict with the objectives of the Broadcasting Act.