ARCHIVED - Broadcasting - Commission Letter to Look Communications Inc. Alleging a Breachof Section 9 of the Broadcasting Distribution Regulations by Rogers Cable Inc.

Letter

Ottawa, 7 April 2000

Our File:  CCB# 991026CC947L (B)
               4619-192 (L)

Gary Kawaguchi
Senior Vice President, Sales and Marketing
Look Communications Inc.
5415 Dundas Street West
Suite 301
Toronto, Ontario
M9B 1B5
FAX: (416) 233-5945

and

Pamela Dinsmore
Vice President, Regulatory
Rogers Cable Inc.
333 Bloor Street East
9^th Floor
Toronto, Ontario
M4W 1G9
FAX: (416) 935-4875

Re: Complaint by Look Communications Inc. Alleging a Breach of Section 9 of the Broadcasting Distribution Regulations by Rogers Cable Inc.

Dear Mr. Kawaguchi and Ms. Dinsmore:

Look Communications Inc. (Look) filed a complaint with the Commission alleging a breach of section 9 of the Broadcasting Distribution Regulations (the Regulations) by Rogers Cable Inc. (Rogers) in a letter dated 25 October 1999. In a letter dated 23 November 1999, Rogers provided its comments regarding this complaint and a number of questions posed by Commission staff. Look filed a reply to Rogers' comments in a letter dated 1 December 1999.

Positions of Parties

In its complaint, Look provided copies of proposed agreements between a property owner in Toronto and Rogers. The property owner could not be identified as a result of a confidentiality agreement with Rogers. Rogers proposed that the building owner sign a non-exclusive access agreement and separately enter into an exclusive marketing agreement (the Sample Agreement). While it would appear that the Sample Agreement provided by Look was not ultimately executed, Rogers stated that it has executed 27 substantially similar agreements with other building owners.

Among other things, the marketing agreements would provide building owners with a fixed signing bonus plus a percentage of the net revenues generated from the properties by Rogers (see paragraph 6 of the Sample Agreement).

The agreements would also prohibit building owners from entering into an agreement with any other service provider for provision of services competitive to those furnished by Rogers under which the owners receive compensation in any form. Any compensation that the owners receive for permitting another service provider to use the existing distribution system is deemed to be held in trust for Rogers and the owners must assign all such compensation to Rogers (see paragraph 7 of the Sample Agreement).

Look submitted that it is the Commission's goal (as set out in Public Notice 1997-150, dated 22 December 1997) to both facilitate end-user choice in broadcasting services and promote equitable competition among broadcasting distribution undertakings (BDUs). By virtue of its existing position and market penetration, Rogers, or any incumbent cable distributor, is able, in Look's view, to offer financial incentives to landlords which confer on the cable distributor an undue advantage since:

• the financial incentives may be supported by the existing revenue stream from existing customers in the buildings; and

• by tying the financial incentives to either exclusivity or achieving dominant levels of penetration in the building, landlords will have a strong financial disincentive to allow any competitor into their buildings.

Rogers argued that arrangements whereby multiple unit dwelling (MUD) owners market Rogers' cable television services do not contravene section 9 of the Regulations. In support of its position, Rogers stated, among other things, that:

• It is inconsistent for Look to argue that Rogers' marketing arrangements constitute an undue preference since it understands that Look has entered into a number of exclusive access arrangements with MUD owners and that Look has entered into several marketing agreements with MUD owners, which appear to be similar to the draft agreement attached to Look's complaint.

• Where Rogers has entered into a marketing arrangement with a MUD owner, competitive BDUs are not prohibited, under the terms of those agreements, from delivering services to individual units in the MUD, and the marketing arrangements do not prevent end-users from choosing an alternative provider.

• The emergence of marketing arrangements with MUD owners and property managers has been, in part, a direct response to their interest in creating a more desirable living environment for their tenants. For Rogers, these marketing arrangements provide it with the assistance of the property manager and/or MUD owner to increase revenue by selling more products and services.

• Rogers' agreements do not affect Look's ability to market directly to tenants in MUDs by telephone marketing, direct mailings and other distribution channels at its disposal.

In reply, Look stated that it has not executed similar marketing arrangements, and in particular, it has never included a "No Compensation from Others" clause in its marketing agreements. Look submitted that the fact that Rogers requires the property owner to forfeit any payment received from another distributor clearly creates a situation that is designed to eliminate end-user choice.

Decision of the Commission

The Commission notes that section 9 of the Regulations states:

No licensee shall give an undue preference to any person, including itself, or subject any person to an undue disadvantage.

In Public Notice CRTC 1997-150, the Commission provided a number of examples that, in its view, could constitute instances of undue preference. Specifically, the Commission stated that in a multiple unit dwelling where it is technically feasible to provide competitive access to individual units, an exclusive contract between the building's owner and a BDU would not be in the public interest and would generally constitute the conferring of an undue preference by the BDU on itself, in contravention of section 9 of the Regulations.

While this case does not involve Rogers executing contracts that expressly provide it with exclusive access to a building, the Commission considers that terms such as those included in the Sample Agreement would provide a strong disincentive to the building owner to permit other distribution undertakings to enter the building.

First, as noted earlier, under paragraph 6, a building owner would be entitled to 6.5% of the net revenues generated by Rogers in the building. Where Rogers loses subscribers in the building, the base upon which the 6.5% net revenue is calculated would be reduced, and accordingly, the building owner would receive a smaller payment from Rogers.

Second, pursuant to paragraph 7, if another BDU were to compensate a building owner for reduced payments from Rogers in order to access the owner's building, the compensation would have to be remitted back to Rogers.

Rogers argues that competitive BDUs are not prohibited under the terms of the Sample Agreement from delivering services to individual units in the MUD. The Commission acknowledges that a building owner might allow a competitor to serve tenants who prefer an alternative to Rogers. It nevertheless considers that the building owner would have a clear and strong incentive to keep the number of suites so served to a strict minimum in order to minimize the impact on the revenue stream from Rogers. The strong likelihood is that, but for these few suites, Rogers would effectively remain the building's sole service provider.

A building owner would thus be placed in the position of losing a portion of its revenue stream from Rogers, and would be unable to replace this amount by way of a new financial arrangement with a competitive BDU. As a result of the financial disincentives that would naturally flow from paragraph 7, Rogers would be able to position itself as, effectively, the exclusive provider in the building. As a result, the Commission considers that if a BDU were to execute an agreement with a building owner containing financial disincentives such as that found in paragraph 7 of the Sample Agreement there would not be the full open access that the Commission requires in order to achieve its policy of end-user choice as set out in Public Notice 1997-150.

Therefore, the Commission, by majority vote, considers that Rogers would be conferring an undue preference upon itself by executing contracts with provisions which included requirements such as those found in paragraph 7 of the Sample Agreement. Accordingly, Rogers should not enter into or enforce such provisions.

Rogers' Request for Confidentiality

Rogers requested that the non-abridged version of its response be granted confidential treatment on the basis that it contains commercially sensitive information that could be injurious to Rogers if publicly disclosed. Rogers submitted that disclosure of the number of marketing agreements that Rogers has executed and the number of MUDs covered by those agreements would significantly enhance the ability of competitors to target their marketing efforts to the MUD segment.

The Commission considers that the information provided by Rogers is at a highly aggregated level that would not permit a competitor to identify individual buildings. Accordingly, in the Commission's view, public disclosure would not be injurious to Rogers. Rogers' request for confidentiality is therefore denied.

In accordance with Commission policy, all correspondence relating to this matter will be placed on the parties' public examination files.

Sincerely,

Ursula Menke
Secretary General

Dissenting Opinion of Commissioner David McKendry

On October 25, 1999, Look Communications Inc. (Look) filed a complaint with the Commission pursuant to Section 9 of the Broadcasting Distribution Regulations. Section 9 states:

No licensee shall give an undue preference to any person, including itself, or subject any person to an undue preference.

Look submitted that a proposed marketing agreement between Rogers Cablesystems Limited (Rogers) and the owners of some multiple unit dwellings constituted an undue preference contrary to Section 9.

The agreement that is the subject of Look's October 25, 1999, complaint was not executed at the time of the complaint. Rogers, however, has entered into 27 agreements "that are substantially similar to the marketing agreement attached to Look TV's complaint."¹ As a result, the Commission's decision with respect to Look's complaint has ramifications beyond the case at hand.²

The proposed marketing agreement states:

The owners of the buildings in Schedule "A" (the "Owners") will sign non-exclusive access agreements and direct its property managers to exclusively assist Rogers in marketing its products and services.³

The nature of the marketing assistance is set out in the agreement:

. the Owners will permit Rogers to educate its superintendents and other property management personnel regarding Rogers' products and services and allow Rogers to promote exclusively Rogers' communication products and services to the residents of the Properties described in Schedule "A" (the "Properties") and allow Rogers to market such products and services by way of letter, brochure, information bulletins, seminars or other methods acceptable to the Owners, acting reasonably. The Owners will furnish periodic resident lists and other demographic information which will assist Rogers with its marketing efforts.⁴

Other BDUs eligible

The marketing assistance to Rogers by the owners does not preclude Rogers' competitors from marketing their services to the buildings' occupants. For example, competitors can market their services by mail, telemarketing, and advertising in various media. It is also important to recognize that the access agreement between Rogers and the owners states:

The parties acknowledge that the access rights granted to Rogers are non-exclusive.⁵

In other words, any broadcasting distribution undertaking (BDU) can market its services to the buildings' occupants and any BDU is eligible to obtain access to the buildings from the owners.

The notion of non-exclusive access is reinforced by the prohibition against bulk agreements with BDUs in the marketing agreement:

Rogers will provide services on a direct resident pay basis during this term. The Owners agree not to enter into any bulk agreement with another services provider during the term of this agreement.⁶

As Rogers states, "Bulk arrangements, by their very nature, result in a single BDU supplying bulk services in a building."⁷

With respect to compensation by Rogers to the owners, the marketing agreement provides that the owners of the properties receive "a signing bonus"⁸ upon execution of the agreement and a percentage of the net revenues generated from the properties by Rogers. Nowhere, however, does the agreement tie receipt of this compensation, including the signing bonus, to an obligation on the part of the building owners to exclude other BDUs or even to hinder their entry efforts.

No preference

Paragraph 7 of the proposed marketing agreement leads the majority of Commissioners (the majority) to conclude that, if the agreement is executed, Rogers will confer an undue preference upon itself. Paragraph 7 states:

During the term of the access agreements, the Owners shall not enter into an agreement with any other service provider to provide services competitive to those furnished by Rogers under this agreement using the Distribution System described in Schedule "B" under which the owner will receive compensation in any form. If any such consideration is received, [confidential names of the owners] will receive financial consideration in trust for Rogers and the same is hereby assigned to Rogers. If such consideration is received or to be received in kind, [confidential names of the owners] will be obligated to pay Rogers the cash equivalent.⁹

Paragraph 7 does not require the building owners to pay Rogers in all circumstances where the building owners are compensated by a rival BDU. It merely says that if a BDU other than Rogers uses Rogers' distribution system - that is, Rogers' property¹⁰ - and provides compensation to the owners for use of Rogers' property, the owners must pay the compensation to Rogers. It cannot be said that requiring one's competitor to pay for the use of one's property is conferring a preference, much less an undue preference, upon oneself. I note again that Rogers does not have exclusive access to the buildings and that Rogers' competitors are free to directly market to the buildings' occupants.

Generally accepted and common business practice

The marketing agreement provides that Rogers will pay the owners six and a half per cent of the net revenues generated from the buildings. The owners' compensation is tied to the owners' performance. The more Rogers' services that are sold with the marketing assistance of the owners, the greater the owners' compensation. This is a generally accepted and common business practice. It cannot be held that entering into what amounts to a commission relationship is conferring a preference, much less an undue preference, upon oneself.

Views of the owners not taken into account

In coming to my opinion about the disposition of Look's complaint I have not taken into account the views of the building owners who are included in the proposed agreement that is the subject of Look's complaint. I have also not taken into account the views of the other owners who have entered into substantially similar contracts. This is because the owners did not have notice of Look's complaint and, as a result, I have not had an opportunity to receive and consider their views. The owners' views do not form part of the record underlying the Commission's disposition of Look's complaint.

I presume the owners have views about Look's complaint because their economic interests and property rights are directly impacted by the Commission's disposition of the complaint. For example, the marketing agreements provide new revenues and cash flows to the owners and, as a result, contribute to the value of the owners' properties. In addition, the majority's decision impacts the owners' ability to use their properties and carry on their businesses. In this connection, I presume that the owners regard the terms of the contracts to be in their best interests because they have consented to enter into the contracts.¹¹ I note that Rogers has a range of contracts, including non-exclusive marketing contracts, available to owners. I note, as well, that other BDUs are entering into contracts with building owners. For example, Look recently stated that the company has "contracts with over a thousand buildings in our existing markets, and that represents more than 100,000 units."¹²

No undue preference

In summary, since I do not interpret the marketing agreement as conferring an undue preference on Rogers and since I have not had an opportunity to consider the views of the building owners, I do not find that Rogers would be conferring an undue preference upon itself by executing contracts with provisions that include requirements such as those found in paragraph 7 of the proposed agreement between Look and Rogers.

Footnotes

¹ November 23, 1999, letter to the Commission from Ms Pamela Dinsmore, Rogers Cablesystems Limited, at paragraph 30.

² Look's October 25, 1999, complaint identified four landlords in Ottawa and Toronto that the company believes have entered into similar exclusive marketing agreements with Rogers. October 25, 1999, letter to the Commission from Mr Gary Kawaguchi, Look Communications Inc., at paragraph 5.

³ Marketing Access Agreements Between Rogers Cablesystems Limited ("Rogers") and [confidential names of owners] for the Properties Outlined in Schedule "A", at paragraph 1. This is attachment "A" to the October 25, 1999, letter to the Commission from Mr Gary Kawaguchi, Look Communications Inc.

⁴ Id., at paragraph 3.

⁵ Id., Attachment "B", at paragraph 2.

⁶ Id., at paragraph 5.

⁷ Letter to the Commission from Ms Pamela Dinsmore, Rogers Cablesystems Limited, November 23, 1999, at paragraph 27.

⁸ Marketing Access Agreements Between Rogers Cablesystems Limited ("Rogers") and [confidential names of owners] for the Properties Outlined in Schedule "A", at paragraph 1. This is attachment "A" to the October 25, 1999, letter to the Commission from Mr Gary Kawaguchi, Look Communications Inc., at paragraph 6.

⁹ Id., at paragraph 7, emphasis added.

¹⁰ Id., Attachment "B", at paragraph 4. This paragraph states that Rogers is the owner of the distribution system.

¹¹ Letter to the Commission from Ms Pamela Dinsmore, Rogers Cablesystems Limited, November 23, 1999, at paragraph 12.

¹² Transcript, application by Look Communications Inc. for a broadcasting licence for a radiocommunication distribution undertaking to serve Victoria, Vancouver and the lower mainland, Abbotsford, Chilliwack, Kamloops, Vernon, Kelowna and Penticton, British Columbia, February 24, 2000, volume 4, at paragraph 6877.