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Conference Centre Centre de Conférences

Portage IV Portage IV

Outaouais Room Salle Outaouais

Gatineau, Quebec Gatineau (Québec)

May 28, 2003 Le 28 mai 2003

Volume 3


In order to meet the requirements of the Official Languages

Act, transcripts of proceedings before the Commission will be

bilingual as to their covers, the listing of the CRTC members

and staff attending the public hearings, and the Table of


However, the aforementioned publication is the recorded

verbatim transcript and, as such, is taped and transcribed in

either of the official languages, depending on the language

spoken by the participant at the public hearing.


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bilingues en ce qui a trait à la page couverture, la liste des

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Toutefois, la publication susmentionnée est un compte rendu

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Canadian Radio-television and
Telecommunications Commission

Conseil de la radiodiffusion et des
télécommunications canadiennes

Transcript / Transcription



Charles Dalfen Chairperson / Président

Andrée Wylie Commissioner / Conseillère

Joan Pennefather Commissioner / Conseiller

David Colville Commissioner / Conseiller

Cindy Grauer Commissioner / Conseillère


James Wilson Legal Counsel /

Sylvie Jones Conseillers juridiques

Tandy Greer-Yull Hearing Coordinator /

Coordonnateur de l'audience

Pierre LeBel Secretary / Secrétaire


Conference Centre Centre de Conférences

Portage IV Portage IV

Outaouais Room Salle Outaouais

Gatineau, Quebec Gatineau (Québec)

May 28, 2003 Le 28 mai 2003

Volume 3



APPLICATION BY 1163031 ONTARIO INC. / 595 / 3463


Application No. / No de demande 2002-0897-7



Application No. / No de demande 2002-0895-1





Application Nos. / Nos de demande 2002-0890-2, 2002-0889-4

Gatineau, Québec / Gatineau (Québec)

--- Upon resuming on Wednesday, May 28, 2003

at 0930 / L'audience reprend le mercredi

28 mai 2003 à 0930

3443 THE CHAIRPERSON: Order, please, ladies and gentlemen. Good morning, everyone.

3444 We have a preliminary matter this morning, announcing the birth of Cameron Grey Aldis, first grandchild of Vice-Chairman Colville; nine pounds, mother and baby doing well.

3445 Mr. Secretary, would you call the next item, please.

3446 MR. LEBEL: Thank you, Mr. Chairman.

3447 Item 7 on the agenda is an application by 1163031 Ontario Inc. to renew the licence of the national English-language specialty television service known as Outdoor Life Network, expiring 31 August 2003.

3448 The licensee proposes to increase its Canadian content from 30 per cent to 35 per cent during the evening broadcast period, to increase its Canadian content level from 30 per cent to 50 per cent during the broadcast day and to add the program categories as listed in the agenda.

3449 Appearing for the applicant is Mr. Rick Brace, and he will present his colleagues.

3450 Mr. Brace, I do understand that you have a correction to make on yesterday's record before you begin.

3451 MR. BRACE: Thank you, and good morning, everyone.

3452 Before we begin with our presentation for Outdoor Life Network, I would like to make one correction to the record.

3453 During our presentation for The Comedy Network yesterday, Commissioner Grauer asked what the impact would be to our revenue projections if our proposal to adjust our evening Canadian content level was not approved.

3454 We indicated that our revenue would decline by approximately $2 million over the next licence term. What we meant to say was that our revenue would decline by approximately $2 million, or $1.8 million to be precise, over each year of the licence term, resulting in a reduction of $12.4 million over seven years.

3455 If you have any questions about this, we would be happy to address it in reply.

3456 THE CHAIRPERSON: Before you begin your presentation, I think Commissioner Grauer has a follow-up question to your correction, if she may.

3457 COMMISSIONER GRAUER: So it is per year over the licence term as opposed to over the licence term.

3458 MR. BRACE: That is correct.

3459 COMMISSIONER GRAUER: Maybe I should wait and ask this in reply. I think I will wait to ask the question.

3460 THE CHAIRPERSON: Sober second thoughts.

3461 COMMISSIONER GRAUER: That's right.

3462 MR. BRACE: Thank you, Mr. Chairman.


3463 MR. BRACE: Mr. Chairman, Members of the Commission, my name is Rick Brace and I am the President of CTV.

3464 Before beginning our presentation, I would like to introduce you to the members of our panel.

3465 To my right is Anna Stambolic, Director of Outdoor Life. Next to Anna is Bart Yabsley, Executive Vice-President, CTV Specialty Television. And immediately to my left is Kim McKenney, our Director of Finance.

3466 Seated behind me are Elizabeth Duffy-MacLean, Group Vice-President, Regulatory Affairs and Kathy Robinson, our legal counsel from Goodmans.

3467 Since 1997, OLN has filled a unique niche in the specialty television landscape, attracting viewers with an adventurous spirit and a passion for the great outdoors. From skateboarding to sailing, from road trips to shipwrecks, OLN celebrates all aspects of outdoor recreation, conservation, wilderness and adventure programming. Only on OLN can audiences practise the art of flyfishing, learn about tortoises and experience paradise -- all in just one broadcast day.

3468 We have delivered on our promises, and we are proud of our accomplishments. Today, over 4.7 million OLN subscribers enjoy the best in outdoor recreation, conservation, wilderness and adventure programming. We have successfully reflected the varied regions and cultures of Canada, both on and off the air, and through our on-air hosts our programs and our staff.

3469 We have done all of this with one of the lowest wholesale rates of all of the analog specialty services.

3470 In our upcoming licence term we are looking forward to building on our strengths and broadening the appeal of our service. Our goals are to increase the diversity of our programming and increase OLN's advertising revenue through improved ratings. We are asking that the Commission approve two amendments to our licence to fulfil these goals. These amendments will give OLN the flexibility to offer a limited amount of programming drawn from Categories 6a and 7.

3471 I would like to start by talking about our strong commitment to Canadian programming. As part of this renewal we are committing to increase our Canadian content levels from 30 per cent to 50 per cent overall and 35 per cent during the evening broadcast period.

3472 Over the new licence term we will increase our Canadian program expenditures from approximately $15 million to over $32 million. We will also continue OLN's tradition of commissioning or acquiring high-quality Canadian programs, such as the "All-Strength Challenge", "Tanlines", "The Great Outdoorsman", "Lumberjack Challenge" and "Top Dogs", all of which have been staples of OLN's program schedule throughout the first licence term.

3473 Our Canadian programming has been a great success, both at home and abroad. Shows like "Drifters: The Water Wars" pitted two teams of adventurous and passionate Canadians against each other to face the elements while battling for a $60,000 buried treasure along Ontario's Trent Severn Waterway.

3474 In "Concrete Wave" we take viewers on a wild ride through the urban jungle, watching North American skateboarders test the limits of gravity.

3475 And "Don't Forget Your Passport" was a Canadian independent production that was a great success at home and has been sold around the world, bringing a Canadian perspective on the world to international audiences.

3476 None of these original Canadian programs would have been possible without OLN.

3477 MS STAMBOLIC: We have forged strong partnerships with independent producers, and for many of them OLN is their number one source of revenue. Some independent producers, like Ride Guide Productions and Sivell Communications, have built their business by supplying programming to OLN. Canadian viewers are fascinated by the "call of the wild". But wilderness and adventure documentary programming is expensive to produce, and there are few consistent markets for it.

3478 We are without question the most consistent outlet for such programming, and we have become a mainstay for independent producers in this field as a result.

3479 Our partnerships with regional independent producers have introduced new Canadian programs, like Ottawa producer Turner Thompson's "Cottage Country"; Edmonton's DMB Productions' "Chasing the Sun"; and Terrace BC's "Sportfishing with Tony Rutledge". More recently collaborations include JST Productions' "Concrete Wave" and Polar Bear Entertainment's "Top Dogs".

3480 We will continue supporting independent producers, thereby contributing to the growth and development of the Canadian broadcasting system as a whole. For example, we plan to sponsor and host independent production seminars to give producers the opportunity to pitch new programming initiatives, increase their exposure and network with their peers.

3481 We propose to maintain our commitment that 60 per cent of new Canadian productions come from arm's length sources. We also propose to maintain our existing condition of licence which requires no program development funds be remitted to OLN shareholders or affiliate companies.

3482 Canadians are outdoor people and the great outdoors is indigenous to our culture. OLN's programming attracts both viewers and doers and reflects the outdoor aspects of Canadian culture as well as our nation's regional and geographic diversity.

3483 In "Mission: Adventure", one of our original productions, hosts Ty Pullen and Mac MacLeod participate in unique outdoor adventures in truly unusual locations. Episodes have featured a climbing and rappelling race at Cape Enrage, New Brunswick; paddling the Nahanni River in the Northwest Territories, while learning about the cultural traditions of the Dene people who are native to the area.

3484 One of our newest independent productions is "Camp 'N TV", a half-hour weekly program that showcases Canada's best camping sites, lakes and outdoor activities.

3485 With the help of producers from communities large and small, OLN will continue to explore the Canadian wilderness in new and innovative ways in our next licence term.

3486 Let me also focus on our annual coverage of the Calgary Stampede. As Betty Algate of Alberta says, the Stampede is the "greatest outdoor show on earth" and showcases "rodeo and the western way of life".

3487 OLN is the first and only network to provide extensive nation-wide coverage of this celebration of western Canadian culture, and in 2002 we provided viewers across Canada with over 40 hours of coverage. The Calgary Stampede is consistently one of our highest rated programs, with viewers tuning in from coast to coast to coast.

3488 OLN's explorations go beyond geography to different cultures and peoples, with the aim of fostering a better understanding between Canadians both at home and abroad. Whether trekking through northern Canada with the local Cree and Inuit, or showcasing ancient settlements in Jordan or Cambodia, OLN hosts are guides to the unrecognized, exotic and compelling aspects of world cultures.

3489 Our highest rated program "Pilot Guides" reflects the cultural diversity of Canadians by offering information and insight from countries around the world.

3490 Our on-air hosts, like Farhan Lalji from Vancouver, and Bob Izumi, also reflect the cultural diversity of our programming. Many of our programs are hosted by women, as well as being about women.

3491 Off the air, OLN's operational staff is comprised entirely of women. OLN adheres to the policies, procedures and initiatives in CTV's Cultural Diversity Plan. These include the goals of creating an equitable and diverse workplace; enhancing our on-air reflection and portrayal; leading initiatives that advance the highest standards of the community; and fostering a creative climate for tolerance and exclusiveness.

3492 We at OLN are proud of our record of promoting Canadian talent. We have introduced several home grown on-air personalities as part of our programming, and we continue to serve as a training ground for up and coming production talent.

3493 Now for a glimpse of how OLN brings the great outdoors to Canadian viewers.

--- Video presentation / Présentation vidéo

3494 MR. YABSLEY: Today's specialty television landscape is extremely challenging and characterized by increasing audience fragmentation, with over 100 licensed Canadian pay and specialty networks; higher programming costs, which in the case of OLN, have quadrupled over the license term; and fragmentation in the advertising market. Improved audience delivery and higher advertising revenue is they key to the continued growth of OLN. Due to increased audience fragmentation, our audience numbers have flattened over the last four years and we are in the early stages of decline. Currently, OLN ranks at the low end of the range in subscriber revenue among analog specialty services. At ten cents, our maximum basic rate is one of the lowest. Our advertising revenues also rank at the low end of the spectrum. In 2002, OLN generated approximately $4.2 million of advertising revenue compared to an average of $10 million for the other analog specialty services.

3495 There's an incredible amount of pressure in the market right now, given the intense competition among BDUs and the risk to subscriber growth as more digital channels are licensed. OLN's outdoor wilderness adventure genre is becoming increasingly crowded as new services are licensed.

3496 For these reasons, we need higher revenues to grow: but we don't think increasing our wholesale rate is the answer for this network. To grow our service and make OLN more dependant on advertising revenue, we need to program the network to appeal to a broader audience, thereby increasing our ratings. This will translate into higher advertising revenue, which in turn will be funnelled back into high-quality Canadian programs through our Canadian program expenditures.

3497 MR. BRACE: We are requesting amendments to our conditions of license to permit a limited number of programming from Category 6a (professional sports), as well as certain drama programming from Category 7. In today's fragmented environment, it is essential for OLN to be able to differentiate itself from other networks.

3498 Adding these categories would increase our programming flexibility and help us appeal to a broader audience. This in turn will help boost our advertising revenue so that we don't have to seek an increase in our basic wholesale rate. Adding these categories would also bring OLN into line with other analog and digital specialty services, which are permitted to carry this type of programming, as long as it is directly related to the core mandate of our service. Most importantly, by adding Category 6a programming, we will bring some much needed clarity to the sports programming component of OLN's program schedule.

3499 We have always programmed underexposed sports and throughout our license term, the Commission consistently recognized all of OLN's sports programming as Category 6b-amateur. However, one of our programs, The All-Strength Challenge was recently certified as a professional sports program because the participants were eligible for a modest amount of prize money. There are many other underexposed sports that involve small amounts of prize money but are not typically considered truly "professional" sports. Consequently, our recent request to add Category 6a is simply to ensure that we have all the necessary regulatory authority to program the same kinds of sports that we have already been programming and we have programmed from the beginning.

3500 OLN does not propose to air major league sports events, such as professional baseball or football. Rather, we will offer - as we have from the beginning of our mandate - those sports currently considered "secondary" sports that are underexposed to Canadian views, and which clearly fall within OLN's nature of service. We are talking about events like America's Cup and the Louis Vuitton Cup, the Calgary Stampede and Professional Bull Riding. As we said in our written reply to interventions, if the Commission confirms that OLN is authorized to carry these types of underexposed sports under its existing conditions of license, the addition of Category 6a programming is not necessary.

3501 We know our viewers want this kind of programming, because they have asked for it. We have received a number of interventions asking us to program more rodeo. As Frank Besplugg of Lethbridge wrote, "please recognize the cultural value of our western heritage and include bull riding and rodeo broadcasts on the Outdoor Life Network". And our viewers Lynn and Roger Pratt wrote, "I am disappointed that I cannot view rodeos and bull riding events in my own province when rodeo is part of our lives here in Calgary. I believe I speak for all First Nations people."

3502 With respect to Category 7 programming, we wish to program a limited amount that is consistent with OLN's nature of service. Originally, we proposed Category 7 programming for up to 15 per cent of our schedule, but in our written reply to interventions, we have said we limit our Category 7 programming even further - to 5 percent of the broadcast year and, in the case of feature films, only one per week if the Commission deems it appropriate.

3503 In a highly competitive market, a specialty service must distinguish itself within its programming niche and capture the loyalty of audiences. The proposed amendments to OLN's license conditions bring clarity to our schedule and will the service broader appeal. Over time, this will help increase our audiences and advertising revenues. At the same time our proposals will have little or no impact on other broadcasters.

3504 I said at the beginning of this presentation that OLN had two key goals: to diversify our programming; and to increase advertising revenue through improved ratings. By achieving these goals we will be able to strengthen our commitments to the Canadian programming scene.

3505 This in turn will allow us to put more money into quality Canadian programming, contributing to the overall growth and success of the Canadian broadcasting system. We at OLN are proud of what we have accomplished in our first license term. We have carved out a unique programming niche and captured the imaginations of outdoor and adventure enthusiasts across the country. We have introduced new, distinct, high-quality programming in a genre not previously served; contributed to the growth and development of the independent production community; fostered and developed Canadian on-air and production talent; and made a real contribution in the areas of regional reflection, cultural diversity and on-air presence. We have managed to do all this despite having one of the lowest wholesale fees of any analog English-language specialty services. We will continue to strive to exceed our commitments and conditions of license throughout the next licensed term.

3506 One of the objectives of the Broadcasting Act is the enhancement of Canadian's national identity and cultural sovereignty. OLN does this every broadcast day by exposing our viewers to the majestic beauty of the great Canadian outdoors and showcasing Canada's proud outdoor culture. With your help, OLN can continue to fulfil this mandate and ignite the adventurous spirit within Canadian viewers.

3507 Mr. Chairman, Commissioners, we are ready to answer your questions.

3508 THE CHAIRPERSON: Thank you. Vice-Chair Colville.

3509 COMMISSIONER COLVILLE: Thank you, Mr. Chairman. Good morning, Mr. Brace, ladies and gentlemen. I may be a bit of a basket case this morning, so I hope that's not grounds for an appeal -- scare the daylights out of the Chairman here.

3510 Actually, I would like to start perhaps engaging the back row just briefly just clarify an issue I guess that was raised by staff during the deficiency process and this relates to the ownership question. And the issue was raised by staff and I guess in response to a deficiency question related to whether or not, in view of the ownership structure, OLN should create a separate programming committee to oversee the programming. You have indicated that you don't think that's necessary and I'm wondering if you might just highlight briefly for us why you think that is the case.

3511 MR. BRACE: If I could start the response, Mr. Commissioner. The structure that we have now, as you know, is 33 and 33 and 33 between OLN U.S., CTV and also Rogers Communications and within that structure the management group is comprised of the CTV organization. Our shareholders' agreement, by virtue of the way it is structured, clearly gives management at OLN the absolute discretion and authority over the programming schedule. All decisions are made there and, on an ongoing basis, it is completely at the discretion of that management team. As a result of that, we felt it may not be necessary. We did, however, look at the possibility and if the Commission felt it were a direction they would want us to go, we suggested that perhaps the structure that is surrounding MSN B.C., which has exactly the same kind of breakdown in terms of partnership, may be appropriate. Ms Robinson will comment further.

3512 MS ROBINSON: Yes, Vice-Chairman Colville. A response on this issue was set out, as you are aware, in our deficiency responses of February 24th and March 19th. And Rick has set out, I think, the basic submissions that we put forward to the Commission as part of that response, that the shareholders' agreement provides at section 3.11(d) that the holding company of which OLN U.S. owns a third will not control or influence any programming decisions and article 6.2(a) of the shareholders agreement specifically provides that CTV will be responsible for the day to day operation of both the holding company and the licensee. And article 4.6 of the shareholders' agreement contains a specific acknowledgement by OLN U.S. that it will not exercise control over the corporation or the licensee.

3513 As you are aware, there is also a services agreement in place between CTV and the licensee and that agreement has been filed with the commission and pursuant to that agreement CTV has been appointed the manager of the licensee. Now, we had said in our deficiencies that, for these specific reasons, we didn't feel that the establishment of an independent programming committee was required, that I guess is our principal position before you today.

3514 However, in the course of preparing for these proceedings, we had an opportunity to consider this issue further and if the Commission is of the view at the end of the day that an independent programming committee is required, then that is acceptable. And, we had thought that the structure that the Commission had put in place in its MSN B.C. decision was probably the appropriate one, given that the holding company structure is identical.

3515 COMMISSIONER COLVILLE: In terms of the services agreement between CTV and OLN, I have a copy here which refers to BBS, which I guess subsequently has been changed to CTV obviously, and clause 2.1 which talks about engagement, under article 2 (services). Okay, we there?

3516 MR. BRACE: Yeah, I'm fine, yeah.

3517 COMMISSIONER COLVILLE: It says "during the term of this agreement", it is BBS but I presume it is CTV, "agrees to provide the following services to the corporation and the licensee subject to and in accordance with any directions from time to time by the board of directors". Is that clause still -- what I have read what is currently in effect?

3518 MR. BRACE: Actually, the terms of that agreement are being currently renegotiated, but that certainly remains as part of it. Having said that, I think that the points that Kathy pointed out, the comments that she made, certainly indicate that the management team does have the discretion and the decision over the program schedule.

3519 COMMISSIONER COLVILLE: So, what would be the limits on the term when this refers "in accordance with any directions from time to time by the board of directors"?

3520 MR. BRACE: What it really refers to --

3521 COMMISSIONER COLVILLE: What constraints would be on the board?

3522 MR. BRACE: What is really refers to is the approval of the annual business plan if there were major capital requirements, that type of thing, that on an annual basis we would come together and talk about. But, in terms of the actual programming purchasing -- the scheduling, as I say, it does remain at the discretion of the management team.

3523 I think we can actually maybe indicate that little more fully with an example. We have both had and not had kind of arrangements with OLN U.S. in terms of programming that we made purchase from. In fact right now, we are in renegotiation of an expired agreement that really is just a rate card, it just sets a rate. It doesn't obligate it to purchase any number of hours, minimum or maximum, it is just a rate card. And there were two years early on in the license term where virtually no programming, for example, was purchased from OLN U.S. So, I think that really is a good indicator that really there was no emphasis or no force placed on any of our partners to actually purchase programming or actually govern the schedule. We have always had that ability at management's discretion.

3524 COMMISSIONER COLVILLE: And that is the sort of day to day working arrangement that you have?

3525 MR. BRACE: Exactly.

3526 COMMISSIONER COLVILLE: But there is nothing -- is there anything in the services agreement that would limit the board or preclude the board from directions that would relate to programming or does that come from the shareholder that are --

3527 MR. BRACE: It really comes from the shareholders.

3528 MS ROBINSON: That comes from -- if I could just hold it, that really comes from the shareholders' agreement, Vice-Chairman Colville, and the shareholders' agreement was drafted with particular sensitivity to the issues relating to control or influence over programming decisions and specific provisions were put in the shareholders' agreement relating to those requirements in cabinet direction and those are specific provisions which preclude the board and Outdoor Life, in particular, from controlling or influencing any programming decisions.

3529 I guess in our view in these circumstances given those specific provisions we had felt that there were steps which had been accorded to the requirements of the cabinet direction and felt in the circumstances, as our deficiency response set out, that a programming committee was not necessary.

3530 However, as I have said, despite these specific provisions and the answers that we provided on the public record, if the Commission is still of the view or at the end of the day is of the view that a programming committee is appropriate, that's something that would be acceptable.

3531 COMMISSIONER COLVILLE: Okay. And in your view would be something along the lines of the MSN B.C.

3532 MR. BRACE: As a matter of fact, I have some wording, Commissioner Colville, that I could maybe put into the record or at least have some thought that would just outline how they operate. It goes like this.

3533 We would propose that no individual who is a director or officer of the holding company would be eligible to sit as a member of the programming committee. This ensures that no executive from OLN U.S. will be on the committee.

3534 This is the same structure, as I say, that MSN B.C. operates under, so perhaps if the Commission deemed in its wisdom that's the direction to go, that might be an opportunity to take up on that example.

3535 COMMISSIONER COLVILLE: Okay. That's fine. I guess, Ms Robinson, your position would be that 311(d) of the shareholders agreement would limit 2.1 of the services agreement in terms of what the Board would be able to do.

3536 MS ROBINSON: Yes, sir.

3537 COMMISSIONER COLVILLE: I guess that in view of the fact that, as Mr. Brace you said, this services agreement is subject to renegotiation right now.

3538 MR. BRACE: That's correct. It just expired. We are in the process of renewing it.

3539 COMMISSIONER COLVILLE: Would another possibility then be to clarify the issue in the services agreement?

3540 MR. BRACE: I think that's an excellent idea, Commissioner Colville. We will have a look at that. That generally has some potential and we will have a look at what's in there.

3541 COMMISSIONER COLVILLE: And make it clear in the services agreement that the Board can't issue some sort of direction related to programming. That's the exclusive purview of --

3542 MS ROBINSON: Yes. I think, just to follow up Vice-Chairman Colville, I think that's certainly something that would be acceptable. It's something that's in place, as I said, in any event in the shareholders agreement.

3543 We had undertaken to file an updated version of the services agreement with the Commission as soon as it's finalized, but certainly I don't think there would not be any problem about including a provision to that effect in the services agreement if that provided a level of comfort to all parties, including the Commission.

3544 COMMISSIONER COLVILLE: And when would you expect to have a new service agreement completed?

3545 MR. BRACE: We have already drafted and actually we have shared our draft of the agreement with our partners. We would anticipate that certainly with the next -- before fall most certainly it should be ready to go.

3546 COMMISSIONER COLVILLE: Okay. All right. Thanks for that.

3547 Let's then move to I guess what the fundamental reason for your being here today which largely revolves around these additional program categories.

3548 Perhaps to start you can describe for us maybe why it is in a little more detail that you need to do this and maybe in the context of that, while I'm not looking for another reason to add to our dispute resolution potential exercise here, in view of your comment in your brief and again today that you only have a ten cent rate why you wouldn't have considered a rate increase.

3549 MR. BRACE: I believe, Commissioner, that we see our return as fair and adequate. We see that we have progressed. We do believe that, you know, even asking for a higher rate it would be impractical in this case based on our performance.

3550 Instead, we choose to go down the road of going to the marketplace and going the advertising revenue stream route. We think that that is a more appropriate way of kind of growing our service.

3551 We believe that improving quality, improving audiences and, therefore, improving advertising is a direction that is far more legitimate in this particular case than asking for a rate.

3552 We are prepared to stick with the rate, but we think we have an opportunity to grow the advertising stream and create a balance that, as we mentioned yesterday, is something more equal in terms of a ratio of advertising revenue versus sub-revenue to support the growth of the service.

3553 That is really the direction we want to go. In terms of the sports category, that really gets us into the whole description of clarification. That's where it really started for us.

3554 We have mentioned in the tape, we mentioned in our oral that we have always carried these types of programs. It's difficult these days to really find any sport, whether it be wakeboarding, which is kind of snowboarding on water or snowboarding for that matter, or just about any sport, whether it's rodeo, whatever it may be, any sport that doesn't have some kind of compensation, whether it's small prize money.

3555 We talked about our $60,000 buried treasure on "Drifters". There always seems to be some little pot of gold at the end of the rainbow. That ranges from, you know, a small amount, from a T-shirt to a small prize pot to people who actually earn their living to people who are deemed to be professional sports and actually at the top in the leap end of the sports world, the major leagues if you will and certainly sports that are really indigenous in terms of major leagues of this country.

3556 What we saw, and it really came as a result of this "All-Strength Challenge" thing, which is a funny little show which has people lifting cars and kind of pulling blocks of cement along the road, but there is some prize money involved.

3557 We saw that as more of an outdoor kind of fun activity with a bit of prizing in it rather than anything that could even ever be construed to be what we would even think of as a professional sport.

3558 Because of that concern, and by the way, that concern was expressed to the independent producer. It wasn't expressed to us. It came via the independent producer to us. It still hasn't been recertified, but there is a concern there.

3559 We have been doing that kind of thing. We have been doing it all along, whether it's Americas Cup, whether it's Louis Vuitton. There are many examples. Wakeboarding, we carry that. It's something that the audiences have asked for. It's something that the audiences appreciate.

3560 We want to be able to continue to do it. We have the low rate as you mentioned. In order to grow, we want to be able to continue to do and grow a little bit in this particular genre.

3561 COMMISSIONER COLVILLE: Just before we go too much further into detail on the sports issue, what I was wanting to get at the outset was more a sense of problem, if you will. I think it was Mr. Yabsley in the presentation this morning who was referring to -- yes, at the top of page 7:

"Due to increased audience fragmentation, our audience numbers have flattened over the last four years and we are in the early stages of decline."

3562 In your supplementary brief you talked about:

"In order to grow our service in the upcoming licence term and make OLN less dependent on subscription revenue, we need to strengthen the service to appeal to a broader audience, thereby increasing our ratings." (As read)

3563 I want to get a sense of what this problem is that we are trying to solve and then we can talk about --

3564 MR. BRACE: Okay. That's fair. Sorry to get down the road there on it.

3565 Our audiences, and really it has been for the last four to five years, have been absolutely flat. We have always had in and around a three share.

3566 We tried different program strategies, whether it's showcasing time blocks, whether it's making certain acquisitions, whether it's even creating an inhouse show which we actually did, to try and create different program strategies that could somehow raise the audience level.

3567 To this point in time we have had virtually no success. Now, in certainly the male category, 18 to 49, we have seen a slight decline. We have fallen below the 3 per cent.

3568 We have had kind of two things happening. We have had flat audiences, but we have had good advertising growth which means that we have done something right here. We have gone out and we have really been efficient in selling. You know, we can't deny and we are very proud of the fact that we have done well from the advertising side of the business.

3569 What we have seen though and what we are seeing this year is a real decline though. We are going to do this year a 7 per cent year over year advertising improvement as opposed to double digits which we had in previous years.

3570 Even outside of that, when you see flat audiences, that's always a concern. I mean you have to make it grow.

3571 The real incentive for us here, as I say, is to continue doing what we have been doing and with some very small additions. Really the one, and we mentioned it a couple of times here, is professional bull riding. I know for maybe those of us in the east you may say "Really? I mean this is your reason for coming to the Commission for a change for an additional category?"

3572 There are probably other examples, but it's the prime one. OLN U.S. has had tremendous success with this event. Anna in her schedule, as we pointed out, carried an extensive number of hours of the Calgary Stampede which really did well for us. That really brought to us from intervenors a great number of letters, really supported us going down this road and saying "You know what? This is a sport that maybe has some opportunity".

3573 We have the ability to acquire the professional bull riding tour. Obviously it sends chills up our spine because it's got the word "Professional" in front of it. You know, we have an unlimited amount of 6(d) we could carry, in fact 27 per cent of our schedule is what we really wind up carrying in terms of 6(b), and so we want to add it.

3574 You know, those who are concerned about us may say "Well, you know, you do that and it's like your nose in a tent and you know next week you're doing hockey".

3575 Well, I mean clearly that doesn't make a lot of sense at a ten cent rate and at a budget that we have established of $900,000 over the term of this licence for this type of 6(a) programming, I don't think we are going to get a lot of hockey in there.

3576 It really is these modest type acquisitions. That's really what's behind it.

3577 COMMISSIONER COLVILLE: I appreciate your enthusiasm. I guess the theory is no matter what he has, tell him we want professional sports and maybe by the end of this you will get it.

3578 I still want to stick at a sort of 30,000 foot level for a couple of minutes. When you talk about the audience is flat or decreasing, given you have been around now for a few years, I guess we have probably heard the term over the past few days over a number of different services that maybe these services, many of them are reaching maturity so to speak, that many of these services are by definition specialty target audience.

3579 Is it possible that you have reached your target audience and that it's understandable that once you reach this sort of level of maturity that that audience would flatten in any event and in fact that's something you probably should have expected?

3580 MR. BRACE: No. I still think there's room for growth. I think when we look across the spectrum, what other services are very niche are garnering, I think that there is room for growth. I think the way you do that is through special events or special series.

3581 You know, when you are playing with your program mix, what you want to do is create that balance of strong foreign programming, strong Canadian programming and some special events that really serve to drive, like Americas Cup for example.

3582 As a programmer and as a broadcaster especially, you know, I would never say that we are ever satisfied with kind of a -- you know, that we are kind of at a level we are going to stay at. There will be ebbs and flows. There is fragmentation in the marketplace and that has probably had some impact undoubtedly.

3583 If you have got 48 channels out there and there is some similarity certainly in programming as I look across the system, that's going to have an impact and, you know, we could maybe make the argument that in real terms just holding your own is a good thing. You know you have done a pretty good job just in being able to hold your own.

3584 We believe that there is an opportunity to grow a little bit and we think it's important, especially in view of the strategy towards growing advertising. As I say, if it has peaked and now declined that in any kind of an analysis becomes the concern that you have to address.

3585 COMMISSIONER COLVILLE: So where would you expect this growth would come from in audience?

3586 MR. BRACE: I think that through the special events like the series, like professional bull riding. I think that is the type of thing.

3587 Do I think it's going to be monumental growth? No, Commissioner, I don't. I don't think that we are going to be, you know, seeing shares that are approaching some of the major specialty services or what I would call mainstream major league sports services, not at all, not at all.

3588 It gives us at least some modest growth that we can hang our hats on because, as you know, in the selling process there are a number of ways you can sell programming. You can sell it by ROFs, which was always the way we started in the specialty business. Then you start in selling specific programs and specific events and time blocks.

3589 Really that's what we have kind of migrated to, from an ROF to time blocks to now where we can put some special programs into the schedule. By the way, both Canadian and foreign acquisitions that can really be our nuggets like "Drifters" and "The Water Wars" that we gave an example of and like Americas Cup and Tour de France, that kind of thing.

3590 This has just been kind of the next stage in that. Really, it's not a debate over growing our audience. We want to do that. It's really the parameters we can put around against what we are permitted to do.

3591 It gets back to that kind of logging discussion we had yesterday where there is really a lot of unclarity. We really do, you know, from time to time run into difficulties with the way something is logged because it's really interpreted kind of in a subjective way by different people.

3592 We really want to emphasize that we are not looking to kind of go beyond the nature of service, go beyond, you know, what we have committed to. We want to work within the realm of what we have already got.

3593 COMMISSIONER COLVILLE: So we would be looking at somewhat modest audience growth and presumably correspondingly somewhat modest advertising growth.

3594 MR. BRACE: And we have determined that with the new strategy if the industry average, and we said yesterday it was 4.5 per cent, we are seeing potentially 6 per cent growth, that kind of thing, year over year.

3595 COMMISSIONER COLVILLE: In suggesting the two new categories, the original proposal was for 15 per cent for the drama category and 15 per cent for professional sports, which would be over and above the 6(b), the amateur sports.

3596 I take your point about the confusion and I want to talk about that a little bit later.

3597 How did you go about deciding that we should have 15 per cent in each of these categories? It seems more than modest.

3598 MR. BRACE: Once again, if I could start with professional sports, really it is that confusion. If we look at 6(b), as I say, we have the unlimited ability to carry 6(b) programming. Obviously our programming schedule is not wall-to-wall amateur sports.

3599 We have the unlimited ability. Within that 6(b) there is some confusion. So really the 15 per cent contemplates some of what we are really doing, I guess. That is the concern.

3600 We thought 15 per cent would cover us for what we are already doing. That may be in the view of the Commission described and certified as 6(b), which may be 6(a) programming. As I say, when you have a sport like professional bull-riding, if you have the word "professional" on the front of it, it probably takes away a little of the debate we may have as to which category it may fall under.

3601 In terms of the drama programming, we started at 15 per cent but we were interested in the interventions we received. We acknowledged the interventions we received.

3602 In going back and reviewing what the relevant return on those categories would give us, we determined that really category 7 is not nearly as important to us. So we refined that down to 5 per cent on an annual basis and also only one movie a week, which gives us a modest opportunity, which is actually, especially in the 5 per cent area, consistent with what other services have in terms of drama.

3603 Obviously in that we are not looking to seek any kind of funding or go after any of the sources of revenue to support that programming.

3604 It is a very modest amount. Even looking at what it would bring and add to both audience and therefore advertising, it really is kind of a secondary opportunity but once again would give us a little more flexibility in developing the audiences in our program schedule.

3605 That was really the thought behind that.

3606 COMMISSIONER COLVILLE: I was intrigued by how easily or quickly you backed off on the 15 per cent on the drama to the five-plus-one movie. That is why I was asking why the 15 per cent in the first place.

3607 If you read your presentation today and your supplementary brief, this original plan seems pretty critical to you in terms of getting these amendments to build audience and obviously advertising. Presumably it is quite carefully thought out about the 15 per cent in both categories and then fairly significantly, I thought, backed off from the 15 to the five-plus-one movie.

3608 I would like to get a better sense of what was the thinking behind the 15 per cent, why was that so critical and then backing away from it.

3609 MR. BRACE: I think in the initial stages and when we filed the application we saw more of an opportunity on the 15 per cent side. When we saw the concerns that were raised in the interventions, we decided to go back and have a second look and say listen, there are some serious concerns that have been mentioned. There has been some sober thought put into these concerns. Why don't we have a second cut and let's determine what really our priority is so that we don't wind up with something that is kind of a diluted approach here. Let's refine it. And that's really what it came down to.

3610 We were probably in the opening stages, and with the submission, overly aggressive in the dramatic category and have subsequently backed down. That is all there really is behind it.

3611 COMMISSIONER COLVILLE: How important is drama then to this?

3612 I ask this in the sense of the issue of nature of service, and in asking the question at this point I don't mean that in terms of nature of service from the regulatory definition as much as it is as a viewer who wants to watch Outdoor Life because of the kind of programming in the video clip and the way you describe your service, and so on.

3613 What is the change here in terms of drama going to mean to your audience in terms of those who in fact you are targeting because they like that kind of programming? What is this going to mean to them as a viewer, setting aside whatever regulatory rule you might have around nature of service?

3614 MR. BRACE: Let me ask Anna to comment on that.

3615 MS STAMBOLIC: Thanks. When we did our research analysis and we looked at the addition of category 7 and category 6(a) combined, we thought we could experience somewhere around a 20 per cent growth in audience.

3616 At the outset, you look at that and you go that's fabulous. However, when you look at our declining audiences, back in 1999 we were at a .38 share and we have been declining rapidly since. We are just really trying to get back up to a level that we were experiencing back in 1999. With the increased fragmentation in the market, we have found that a lot of our program has been -- you can see it on a lot of networks.

3617 When we look at the numbers, we are not looking to catapult ourselves where we are quite high, because I think realistically that won't happen. We are just looking to bring ourselves back up to a level that is successful and viewers want.

3618 When we look at drama, we are looking at drama that fits within our nature of service: things like "Wonderland" that comes out of the United States. It is a drama, yes, but it is all based outdoors. It looks at rangers that experience the outdoor life, and I think it would be a great addition to our schedule. We know when we have done the analysis that we will have an increase in audience growth.

3619 MR. BRACE: I think with that it gives us the opportunity, especially with that type of programming, to sell it as a program block or as a program. It gives you a different approach to the industry. It is something that is a little bit outside of what you have traditionally been doing and can have some resonance, especially in the advertising world.

3620 As I say, it is not nearly as important, we feel, as clarifying and potentially adding 6(a), the sports category. But it is an opportunity that gives us a little more flexibility.

3621 COMMISSIONER COLVILLE: You have obviously done surveys of your audience. What do those surveys show in terms of why your audience has declined?

3622 MR. BRACE: I think the audience has declined particularly because we are starting to see a lot of similarities in programming on a lot of services; the fragmentation that Anna referred to.

3623 COMMISSIONER COLVILLE: Do you know that your audience is declining because they would rather see drama on OLN?

3624 MR. BRACE: No. I think what we have seen in our audiences, though, is that dramatic type programming has a bit of a halo effect, especially if it is with reference to your nature of service. There are certain movies and certain series that kind of lend themselves to an outdoor type mind, an outdoor type psyche.

3625 As I say, we really have modified our thinking on it, and it is not nearly the focus that we maybe had when we submitted the licence initially.

3626 COMMISSIONER COLVILLE: Given the modification, where would you cut back, setting aside movies, which you want to run one movie a week? In the other seven categories, what would be reduced from what you had originally contemplated?

3627 MR. BRACE: I think the number of series. If we look at the OLN schedule and how we construct it, at 15 per cent that would give you potentially the opportunity, although I don't think we would ever -- and that is another thought as well -- I don't think we would ever use 15 per cent. But the opportunity to carry a number of series.

3628 I really don't know that on the shelf there are all that many series out there that would fall into that category. It is really the series are the things where you would be in reduction on.

3629 COMMISSIONER COLVILLE: The series is what you would cut back on.

3630 MR. BRACE: Yes.

3631 COMMISSIONER COLVILLE: So you probably don't need 7(a).

3632 MR. BRACE: We probably don't need 7(a).

3633 COMMISSIONER COLVILLE: What about ongoing comedy series? How would an ongoing comedy fit in with your nature of service?

3634 MR. BRACE: Once again, there may be some small examples of that. What we thought was that 5 per cent at least gave us the flexibility. I don't know that we would want to kind of categorically go down the list and eliminate all of them. We would like to generally have the 5 per cent.

3635 COMMISSIONER COLVILLE: What would you want to run? I notice in reading through your submission there is reference made to programs like "Survivor" and other similar programs. I would not have thought they would fall into a drama category, in any event.

3636 MR. BRACE: Let me pass it to Anna. You have some examples you would like to discuss?

3637 MS STAMBOLIC: In terms of feature films, category 7(d), we would be looking at something like "Vertical Limit" or "Dante's Peak" that takes viewers sort of outside.

3638 The program I referred to earlier, "Wonderland", that would fall into category 7(a). There isn't a lot of product out there right now, and we do have to do a lot of digging to source.

3639 "Wonderland", it took us months to figure out that that was actually a dramatic series that would fall within our nature of service.

3640 The dramatic series, yes, we would like to be able to do; the feature films we would like to be able to do. Do we have a lot of it right now? No. There is not a lot of availability out there.

3641 We are hoping if we put the call out to say hey, there are broadcasters interested in showcasing movies, ongoing dramatic series that are related to outdoor programming of our nature of service, that maybe it will create a bit of interest to go down that avenue.

3642 COMMISSIONER COLVILLE: Do you have a sense that this is what your audience is looking for; and if so, how do you know that?

3643 MS STAMBOLIC: If I can refer to one of the viewer letters that we received, one of our viewers talked about looking at -- that he can't wait until the schedule is such that you can watch adventure racing and a sport and a lifestyle programming and then a drama all in one night.

3644 It is, I think, what viewers are looking for: a one-stop shop. From an advertising point of view, advertisers can maximize their dollars when they take that approach of a one-stop shop, where they can get their lifestyle, their sports, their dramatic series, they can utilize their money all in one place. It maximizes their dollars.

3645 I think from an advertiser's standpoint, we know advertisers want it. We also know that viewers want it, because they have expressed interest in seeing sort of that wide range of programming on our network.

3646 COMMISSIONER COLVILLE: I am concerned that if we end up with drama and comedy and a feature movie and professional sports, I am not sure we look like what we saw on the video here any more and whether we are not just a general interest television service without news and weather.

3647 MS STAMBOLIC: Sure, absolutely. I think that with the addition of those -- currently, we are already doing what you saw on that screen. The 6(a) that we are proposing is already what you have seen on that video. It is no different.

3648 COMMISSIONER COLVILLE: I have set aside sports. I know you want professional sports. I have that ingrained on my forehead. We will get there. We are just talking drama now.

3649 MS STAMBOLIC: Drama. In our nature of service we are looking for the drama that specifically refers to outdoor adventure, conservation, wilderness sort of theme based drama. We are not looking to air a "CSI" or something of that nature. We are specifically looking to showcase dramas that are thematically based in the outdoors.

3650 I think that is well within our nature of service, our definition.

3651 MR. BRACE: I guess what I would like to emphasize, Commissioner Colville, is the modest amount. As I say, it is not our biggest priority, most certainly, and we revised that I think in our response to the interventions.

3652 There is a modest amount out there. We think that it could potentially help to a certain extent.

3653 Is it kind of a headline for us? I would say no.

3654 COMMISSIONER COLVILLE: This modest amount would be run in prime time?

3655 MR. BRACE: Potentially, sure. If we are dealing with a movie, it would be potentially Sunday afternoon or in prime time, that kind of thing, but on a limited basis.

3656 As I say, the number of theatrical releases out there in terms of movies -- and they have to fit into our nature of service. There are a lot of restrictions around these that would pre-empt us from really carrying a lot. The maximum number of hours would be 300. I am not sure we would ever approach that.

3657 COMMISSIONER COLVILLE: This could be an hour a day plus a movie a week in prime.

3658 MR. BRACE: That is correct, potentially.

3659 COMMISSIONER COLVILLE: Well, potentially, but given the argument to want to do it, I presume the potential would be maxed out. I mean why wouldn't you.

3660 MR. BRACE: I think we would use it to the level that it provided return. You have to watch moving away from your core service. That, for any programmer, becomes a real issue.

3661 I remember back at TSN when we decided we were going to do kids' sports and that was our new big thing. We were going to introduce and kind of showcase this whole new thing called kids' sports, which really took away from the core strategy of what we did, which was major league sports.

3662 It didn't work out. It was more suitable and properly belonged elsewhere.

3663 Similarly, when we start moving on a service like OLN which does deliver what we saw here into something that starts to become, as you say, a service where all it needs is a news and a sportscast and maybe some weather and you have something that resembles more of a conventional network, I think that takes away from what we have created. That is not the intent.

3664 COMMISSIONER COLVILLE: I presume you people believe in the notion of one per genre of programming. So if you do, I guess the concern from a regulatory point of view is: How do we, collectively, you and us, fence this in?

3665 If we just say okay, it is 5 per cent of category 7 except for movies and one movie a way, how do we constrain this to your nature of service?

3666 I was thinking of it more in terms of sports, but I would like you to address it. In sports when you said we won't do anything indoors, it will all be outdoor stuff, I can think of a lot of sitcoms that are set entirely indoors but there is hardly a movie that doesn't have some outdoor element to it. So virtually any movie would fit into this category, wouldn't it?

3667 MR. BRACE: Well, no. And I think that is exactly the point. We do have to put fences around it. For us, it would be movies that concern themselves with the outdoors, not a movie where it actually had scenes that were filmed in the out of doors. I don't think that is the intent. These are movies whose subject matter would be the out of doors.

3668 As I look into it, that would be the kind of fence we would want to put around it or we would absolutely be prepared to put around it.

3669 COMMISSIONER COLVILLE: What would the fence be?

3670 MR. BRACE: The fence would be that it would have to obviously fall within our nature of service.

3671 COMMISSIONER COLVILLE: Outdoor people don't like fences.

3672 MR. BRACE: That's true. It would obviously have to fall within our nature of service. It would have to also subscribe to the outdoor wilderness and the various kind of keynotes that we have within our description of our nature of service.

3673 I would suggest that also the subject matter would have to concern itself with outdoors; in other words, it would have to be --

3674 COMMISSIONER COLVILLE: Would virtually any western movie fit into this?

3675 MR. BRACE: No. I would think it is man against nature is more the type of thing that I am contemplating, not dramatic occurrences that happen in "Gunfight at the OK Corral". That to me is not what I would consider to be an outdoor movie.

3676 I am just trying to think of the storm movie -- "The Perfect Storm". That type of thing where it is something that concerns itself with the outdoors and the struggle with the outdoors or the interaction with the outdoors.

3677 COMMISSIONER COLVILLE: That is how you would define it?

3678 MR. BRACE: Sitting here and putting as much thought into answering your question, perhaps it would make more sense for us to come back in reply and maybe establish some parameters that are more fully thought out in order to clarify the situation of what we are talking about here. Maybe that would be appropriate.

3679 MS ROBINSON: If I might add to that, with your permission, Vice-Chairman, the condition of licence No. 1, which relates to this service, talks about a national English-language specialty service devoted -- and I quote -- "exclusively to programs that deal with outdoor recreation, conservation, wilderness and adventure".

3680 To us, when we were taking a look at additional categories, it was clearly that overriding description of the nature of service which is still a condition of licence which would be applicable to all programming.

3681 It seemed to us that when you are talking about fences, that is a very significant and explicit fence that is already in existence.

3682 COMMISSIONER COLVILLE: I take your point, but I could see us down the road getting into some sort of a dispute over whether virtually any western movie deals with wilderness and adventure. "Indiana Jones" type movies deal with adventure. The "Stars Wars" trilogy or series deals with wilderness and adventure, I guess.

3683 It seems to me that this ends up pretty open ended, particularly in terms of movies and drama in terms of what you could do against that definition.

3684 MS ROBINSON: As Rick has said, it came to us, in putting this together, that what was already there was quite restrictive in terms of exclusively to programs that deal with outdoor recreation, conservation, wilderness and adventure that we have heard the question and the way that you have phrased it and we will give it some additional thought. But certainly, it appeared to us that what was there already was quite restrictive and was a significant sense in terms of its applicability to the categories that follow.

3685 COMMISSIONER COLVILLE: Okay. What would your position be in terms of the amount of Canadian programming that you would do within this drama category?

3686 MR. BRACE: In terms of the amount of Canadian programming, we really haven't contemplated what the mix would be. You know, we look at it rather as kind of our overall commitment to Canadian content on a whole, rather than breaking down by category what portion of it is going to be Canadian. But once again, we hear what you are thinking and perhaps in reply we can respond to that.

3687 COMMISSIONER COLVILLE: I'm just asking questions. I'm not thinking anything, my mind is on a baby 1,000 miles away. Had you given some thought then in putting this together that some certain minimum level, perhaps a maximum level, I don't know, would be Canadian or was it your expectation that the drama would be largely foreign?

3688 MR. BRACE: Well, what we have committed to is raising our overall Canadian content from 30 to 50 per cent and certainly, within that, anything we would be doing drama would have to be a consideration, so it would become part and parcel of that. In terms of actually doing a breakdown in the drama category of what portion would be Canadian and what portion would be foreign, we haven't contemplated that to this point.

3689 COMMISSIONER COLVILLE: I did note that your increase in Canadian would go to 50, but I take it most of this would be in prime time and your proposal for prime time is 35 per cent.

3690 MR. BRACE: Moving up from 30 to 35, that is correct.

3691 COMMISSIONER COLVILLE: So that 50 wouldn't necessarily apply against this?

3692 MR. BRACE: Well, we are moving from 30 to 35 in prime time as well, so there is an increase in prime time in Canadian.

3693 COMMISSIONER COLVILLE: Right, but not the corresponding one to the 50 per cent. So, are you prepared to -- I take it you hadn't given particular thought to how much the drama would be Canadian?

3694 MR. BRACE: That is correct.

3695 COMMISSIONER COLVILLE: And similarly, for the movies, I mean within the drama the movies?

3696 MR. BRACE: That is correct.

3697 COMMISSIONER COLVILLE: Is that something you would want to think about?

3698 MR. BRACE: Yes, we would.

3699 COMMISSIONER COLVILLE: Okay, then lets switch to your favourite subject, professional sports. I guess I must say I found this a bit confusing as I went though, as I guess you did, which is apparently what led you to this. In terms of trying to come to grips, just as with the drama, what kind of sports are in and what aren't in? And, I appreciate the, you know, your concern over the 6(b) and that you then want to add 6(a) to largely cover off what seems to be perhaps characterized as professional, which you thought would have fallen into the amateur category. But again, I guess as with the drama, then it seems to have the potential to open this sort of pandora's box that then opens it to virtually everything and it's kind of, well trust us we'll still do our nature of service, we're not going to do indoor sports and we're not going to do major league baseball, NFL or I presume the CFL football and NHL hockey. So, you take those out of the picture and I take it then that leaves virtually everything else. Is that the case as far you are concerned?

3700 MR. BRACE: No, I think it even goes beyond that. And really, you know, the financial projections that we have made I think establish that. As I say, we are not looking to do really anything that is beyond what we are already doing and it is that whole clarity thing. The logging conversation yesterday really didn't kind of bring to life the dilemma we are in where we are depending upon who looks at a program and who looks at an event some may consider professional and some may consider it amateur. In fact, it is so confusing that at this point in time even Sport Canada doesn't have a definition of amateur professional sport, they have given up because it really is difficult to determine.

3701 So, what we are left with is kind of building a framework for ourselves, which we have attempted to do both to give the Commission comfort that we are within our nature of service and certainly within the categories that we are permitted to operate under and also to give other services that carry sports the comfort that we are not looking to get into their backyards.

3702 So, what we have looked at doing and we have tried once again putting, as you say nobody likes fences, but we have tried putting some fences around what we are doing and we have kind of four points here. We said no major North American stick and ball sports, which include some of the ones you mentioned NHL hockey, CFL - NFL football, NBA basketball and major league baseball; a limit of 15 per cent on 6(a) and we can come back, I would like to discuss that one a little bit; all category 6(a) programming will be thematically limited to those sports which have an outdoor adventure wilderness theme to be consistent with the one nature service, things like the wake-boarding, like the professional bull-riding and like the snow-boarding which we have traditionally carried, rodeos; and only underexposed professional sports will broadcast.

3703 I am sure you have heard the word underexposed over the years more often, that I think it is probably an overexposed term. But really what we are talking about here is sports that really have less than two per cent exposure on television and in many cases have, what I would call, specific regional interest and some, in other words, niche regional interest and some interest beyond that. The Calgary Stampede being the very best example of that, which really did kind of provide us in the ratings a bulge as a result of carrying that programming.

3704 And then, in response to interventions we went further and just tried to clarify. As I say it does, at the end of the day, leave some subjectivity. It is very hard to be absolutely definitive on this, but we went on to say that in order to further allay the interveners concerns we state for the record that OLN's application of broadcast category 6(a) programming would not be necessary, provided that the Commission recognizes in OLN's license renewal decision that the broadcast of outdoor adventure themes, underexposed sports or sports programming primarily involving athletes/participants who are not generally dependent for their livelihoods upon salaries and/or prize money available to them through their participation in a particular event or events, including those broadcast during the first license term, falls within the regulatory definition of category 6(b) (amateur sports).

3705 So, that is paragraph 21, by the way, of our response to interventions and that we felt kind of gave some greater clarity. As we say, there really is kind of a debate within our own minds here of just what we need to ask for. We would like to walk away with clarity and walk away with, again I am sure that the Commission would like clarity as well, but the opportunity to continue to program our schedule the way we have and that is a concern for us now and we have seen what we do. We know that the audience wants this. We have had viewer and intervener support that is substantial for this kind of programming and we really want to give the assurance and I know that assurances is one thing but in practice sometimes changes. But our intent is clearly -- and if we can come up with a proper definition or if we can remain in 6(b) and have that flexibility, our intent is to live within the world in a niche that we have created. We are not looking to get into anything beyond that.

3706 COMMISSIONER COLVILLE: So, which do you think would be the easier solution to this problem then to allow you to do professional sports, 6(a) and then try to fence that in? Because I guess part of the concern I had was some of the examples that get thrown out that probably would fit this category of 6(a) that has been suggested and was I think included in the list somewhere was motorcycle racing and golf, for example. I guess that fits within your -- although I don't know how golf, golf was a suggestion, but that seems to me the way I play it, stick and ball. Although, it is stick and ball and chase it through the woods and it is certainly an adventure for me in golf when I go through the woods, so it guess it fits under category --

3707 MR. BRACE: There is also a lot of amateur golf or golf it is very low end, it has modest -- I mean that would be kind of a limited amount. There isn't a lot of that out there because we certainly won't be producing it, that is for sure. Golf is one of the most costly sports to produce, so it would have to be acquired and it would be that kind of situation.

3708 COMMISSIONER COLVILLE: But TSN runs golf, right?

3709 MR.BRACE: TSN runs all kinds of golf.

3710 COMMISSIONER COLVILLE: But generally TSN runs the Saturday and Sunday post-cut golf.

3711 MR. BRACE: Actually the Thursday/Friday is more the -- the PGA Tour, there is a significant deal with the PGA Tour and TSN also carries the majors. So, the Thursday/Friday appears on TSN with the -- generally speaking, not in all cases, but generally speaking with the Saturday/Sunday actually appearing for the most part on Global.

3712 COMMISSIONER COLVILLE: So, in the cases where you didn't have Thursday and Friday, could the Thursday and --

3713 MR. BRACE: No.

3714 COMMISSIONER COLVILLE: And that -- in the past, could the -- in the future could TSN do a deal for PGA and run Saturday and Sunday final and pre-cut run Thursday and Friday on OLN?

3715 MR. BRACE: No, and I say that first of all --

3716 COMMISSIONER COLVILLE: Under the definition they could though.

3717 MR. BRACE: Under the definition I suppose we could say that TSN could do that --


3719 MR. BRACE: Sorry, that OLN could do that. But in practical terms, TSN first of all would -- let me go back to the PGA tour. The PGA Tour has no interest in moving from conventional television for the weekend coverage to specialty and then to another tier of specialty for the Thursday/Friday. That would be something that it certainly would run against their grain. And secondly, the cost of acquiring that programming for OLN would far in excess of anything that we would have budgeted.

3720 COMMISSIONER COLVILLE: What about the LPGA or the Campions Tour?

3721 MR. BRACE: Same thing, same thing. That is not really our interest. I mean, any kind of golf that we would be carrying would be more in the -- and that once again falls into that grey area. That is where our dilemma is, in the genre of something that could be an amateur golf tournament.

3722 COMMISSIONER COLVILLE: But it would be stick and ball, see that is the problem. Even when you come up with your four criteria, we could pick almost any sport that you want to carry and it would fail, probably fail one or more of these tests.

3723 MR. BRACE: That is the issue we have, that in trying to put the fence around this and then trying to establish all of the criteria, it is a virtually impossible task to the extent that even poor Canada has given up on it. If I could just ask Bart Yabsley --

3724 MR. YABSLEY: Let me just add to that. I think, Mr. Vice-Chair, that is exactly the struggle that we have. If I could just back-up a second. When we were talking -- the thing that was occurring to me was how we are going to program this network and what we have tried to do with the amendments we have before you is really two things. We have to reverse the audience decline to deal with the advertising issue.

3725 So, what we are going to try to do is develop the schedule of sort of what I would call destination programming focused on what we have always done, the stuff you saw on screen, bring out some of the sports that people have shown a serious interest in and we got a number of letters, bull-riding keeps coming up, but we want the comfort to continue doing that. We will focus our schedule around that kind of programming, sprinkle in a little bit of dramatic programming that is related to the nature of service. It is not our intent at all to do golf. I mean, as we said in paragraph 21, we would be happy to continue doing what we are doing. And you asked what is easier? I think, in my opinion, that is what is easier, to clarify that the things we have done before are okay. We haven't done golf, golf is not in our plans, that really is TSN's bailiwick.

3726 COMMISSIONER COLVILLE: Well, Mr. Yabsley, I take your point. I don't mean to interrupt you, but here is the struggle I had going through this whole issue. I read the application and thought okay, we want to really change the nature of this service. We want to go pro-sports and I'm thinking okay, we can debate the stick and ball stuff, but we want to dramatically turn this around and we want 15 per cent drama. Then we come down to -- because we really have to turn the audience around, we come down to -- if we just modify 6(b) to allow us to continue to do what we have been doing, then we would be happy. So, I'm not sure how I make the connection to -- We have to change the programming to get new audience to get new advertisers, but we would be satisfied if you would just change the definition to allow us to keep doing what we have been doing.

3727 MR. BRACE: That is our point, is that within the schedule that we already have may of the programs, and I think even somewhere in the neighbourhood -- we have made a calculation like 70 per cent involved some sort of compensation like prize money and we have done that. Clearly it has passed the muster and until -- challenge was not an issue and fell within 6(b). Now the concern was raised as a result of this issue that we have to really get clarification. We would be absolutely pleased to stick with 6(b) and if we can understand that 6(b) includes the schedule of sports and the types of sports, which would include professional bull riding.

3728 There would be some sports that had the word "professional" on the head of them, but it is within the scope of what we have already done. That would be absolutely satisfactory. We would be happy to live under those kind of conditions.

3729 COMMISSIONER COLVILLE: Which largely wouldn't change the programming in the sports category.

3730 MR. BRACE: What it does, Commissioner Colville, is allow us to do the deal for professional bull riding. Right now we are actually holding off on some of those decisions on things like that.

3731 As limited as that opportunity in terms of a definition for professional sport is, we are actually reluctant to do those deals for this very reason. If we can just get that clarity, 6(b), we would be absolutely delighted to stay within that.

3732 COMMISSIONER COLVILLE: Maybe we should just say 6(b) plus professional bull riding.

3733 MR. BRACE: We thought about that, but you know, there is going to be a professional bicycle race. It is so difficult to just throw a rope around this.

3734 COMMISSIONER COLVILLE: Even the Americas Cup or the Louis Vuitton Cup, considering the money involved --

3735 MR. BRACE: Well, the money involved in the syndicates, I mean those are businesses that run those events. The people who actually work for a minimum wage and go back generally speaking to their regular jobs when it's done, but --

3736 COMMISSIONER COLVILLE: Except the crew of Alinghi. I understand they were well paid.

3737 MR. YABSLEY: It's really about exploiting some of the opportunities that are available in these under-exposed sports. It's not about radically changing the schedule to become another sports outlet.

3738 COMMISSIONER COLVILLE: Now, you mentioned Sport Canada. I guess this is a particular problem, I mean the discussion that we have been having. I think it's evidence of this -- my understanding from staff is that Sport Canada has developed a definition that's kind of roughly used where they define professional sports as:

"An event or tournament that is normally considered to be professional where one or more of the participants are paid for their appearance or awarded prize money based on their performance or where the goal of the organizers is to generate a profit for other than a not-for-profit organization." (As read)

3739 Then the amateur sports is:

"Anything that's not professional." (As read)

3740 MR. BRACE: Yes. We actually contacted -- I'm not sure when that was put out. I think that may be a bit dated because I know that in our last -- sorry, Anna is just pointing something to me here, maybe to point to the section. This is as of January 21. We went back to them to get clarification.

3741 I'm sorry, I had the wrong organization. I apologize. It's the Manager of the National Sport Policy. That's where we got it. He said that there was:

"... no official policy definition of professional sport although there has been numerous discussions at Sport Canada with regard to defining pro sports, but they have chosen not to adopt an official definition because they felt it was too much of a grey area." (As read)

3742 That's where we started with all of this because we thought if we can get from the governing bodies some kind of a definition that we can put on to this, then we could really start there.

3743 We were unable to do that and so we had to rely on more kind of our own fabrication of a definition and also, you know, really come back to what we have been doing on screen and how the Commission has been regarding the programming.

3744 That's where we are.

3745 COMMISSIONER COLVILLE: If we were to take your definition from paragraph 21 to your reply to interventions, you are satisfied that the programming you would want to do would all fit within that, including professional rodeo or professional bull riding.

3746 MR. BRACE: Yes. That is why we have authored it that way. You are looking at 21, are you?

3747 COMMISSIONER COLVILLE: Yes. The underlined section.

3748 MR. BRACE: Yes, the underlined section.

3749 COMMISSIONER COLVILLE: Now, based on your experience with TSN and CTV in general, is that likely to -- I guess if we adopted this as a 6(b) definition or a sub-category within 6(b) -- I mean I haven't really thought this through.

3750 Maybe counsel or staff would want to think about it or pursue this, whether that's going to compromise us elsewhere in terms of professional versus and amateur sports on other services or whatever.

3751 MR. BRACE: I believe Elizabeth who really looks after our logging might have a comment, might offer something to the discussion.

3752 MS DUFFY-MacLEAN: Thanks, Rick.

3753 Vice-Chairman Colville, I have had these discussions with staff. Actually, the definition of amateur wasn't an issue for TSN in the past, nor for OLN. The issue was raised really for us at OLN with the "All-Strength Challenge".

3754 The independent producer was told that that program has been certified as professional because there is an amount of prize money. In the past those types of programs have never been defined as professional sport so it is not a function of affecting how the Commission has dealt with it historically, nor with how TSN has defined amateur sport.

3755 The issue is going forward. The issue is that if you look at any kind of event that would have prize money, you would end up on TSN with ten pins bowling as professional sport. That's where the issue arises for us.

3756 I don't think you will see that for the Commission the issue would become convoluted in fact. It would simply be confirming what we have always known to be true, which is that an amateur sport is not defined by having a level of prize money involved in it.

3757 COMMISSIONER COLVILLE: So in the definition here I guess the critical thing for you is it's not so much a question of whether there's prize money, it's whether the athletes are depending on the prize money for their livelihood.

3758 MS DUFFY-MacLEAN: That's right. That's right. And having --

3759 COMMISSIONER COLVILLE: Is that the case in professional bull riding?

3760 MS STAMBOLIC: If I can just refer to two of our intervenor letters that came in. From Cathy Hunt says:

"The cowboy must pay his way to the rodeo and his entry fees to compete which are most times in the three figures. There are little or no compensations for cowboys if they are injured while getting to the rodeo and/or while competing, so these cowboys are not paid professional." (As read)

3761 And another one from Lister Canning:

"The cowboys pay out of their own pocket, no subsidies from any government department, and even pay their own way to the rodeos. There are many Canadian cowboys participating in rodeos all over the United States and we don't even get to see or hear of them on TV." (As read)

3762 MS DUFFY-MacLEAN: And the professional bull riding is certified as 6(a), as professional.

3763 THE CHAIRPERSON: I guess Waylon Jennings was right, "Don't let your babies grow up to be cowboys".

3764 MR. BRACE: Have them grow up to be curlers.

3765 MS ROBINSON: If I might, Vice-Chair, there was one thought or one question that you had raised a couple of minutes ago. It would be an appropriate time for me to comment on that.

3766 Your question was, I think, whether in providing the fences that we have proposed for outdoor licence that would have an effect on definitions used in other services I think was the question if I understood it correctly.

3767 I would say that the Commission can in a particular licence be quite specific about the restrictions that are applicable to the programming shown by that licensee. That's why we have the description on the nature of service. Then there are the program categories, but certainly the reason that we framed paragraph 21 in the way that we did was if the Commission felt that this was appropriate wording, it could be placed into the OLN licence and have specific applicability for that licence.

3768 In my view, that would be specific to that licence and then not have a concern that it would then change definitions in other licences.

3769 That was the reason that we framed paragraph 21 in the way that we did. We certainly anticipated that there would be questions about fences and appropriate limitations. This was wording that we felt would cover what we wanted to do and at the same time give the Commission a level of comfort that it was not going to extend beyond the fences that are set out there.

3770 The wording that is set out there was drafted in such a way that we felt that it could be included if the Commission felt it appropriate specifically in the OLN licence.

3771 COMMISSIONER COLVILLE: Okay. Now, Ms Duffy-MacLean, you just said something about professional bull riding is categorized as 6(a). By who?

3772 MS DUFFY-MacLEAN: By the Commission.

3773 COMMISSIONER COLVILLE: By us. Yes. Your view is that it would fit within the definition contained in 21.

3774 MR. BRACE: That's our point. Once again, the unclarity that rodeo is 6(b), but professional bull riding is 6(a).

3775 COMMISSIONER COLVILLE: So would it be your view then that having considered all of this, and I apologize if I have belaboured this too long, but that the simplest solution to your problem would be to not go to 6(a), don't bother with another 15 per cent, it just takes us down a rathole trying to define what professional is that fits within your nature of service, take what you have defined in 21, for your particular case at least, define that and let those sports, the stuff you are doing right now, allow that to qualify as 6(b) and that solves your problem.

3776 MR. BRACE: And we apologize for prolonging the discussion as well, but that is exactly what we want to achieve. We outlined in the oral and certainly here in 21. That is all we really need to do.

3777 COMMISSIONER COLVILLE: So fundamentally for sports we don't need to make a change other than to clarify --

3778 MR. BRACE: If we can offer a clarification, include it as part of our licence, then I think it gives us what we need, yes.

3779 COMMISSIONER COLVILLE: So what would it mean to OLN if we did that and didn't change the drama category at all?

3780 MR. BRACE: In terms of the drama category I think once again there is a small amount of programming that we can do. We have limited it. The drama category is also something that is available on a number of other specialty services, so it seems to be something the Commission has -- you know, even NHL Network, for example, has the ability to carry some drama, as do many other services.

3781 I think the addition of the category is expected to have a small impact in the overall schedule, but I don't think that it is going to be major as we outlined earlier.

3782 COMMISSIONER COLVILLE: As between the sports issue and the drama issue in terms of growing the audience and the advertising revenues, how would you characterize the importance of the two and how much of the growth would you attribute to sports and how much of the growth would you attribute to drama?

3783 MR. BRACE: We are attributing approximately 2 per cent of our growth -- sorry, 3 per cent of our growth to just organic growth. In other words, if we had no change in status quo, 3 per cent of that advertising growth is attributable to just the organic growth year over year of our schedule.

3784 Then we have got somewhere in the neighbourhood of 2 per cent that we would attribute to kind of this greater flexibility or at least greater clarification -- let's put it that way -- in the sports category and then drama would be a little bit of the rest.

3785 It's not even that clear because what we suggest is by scheduling some major event, what you do, as you know, you tend to drive revenue into adjacencies, into other parts of the schedule, but for I guess absolute simplicity, if we can look at that approach, that's kind of how we have broken it down, so maybe three in organic, two in sports and one kind of in drama, but as I say, it gets a little bit muddled because of how you use your premier properties to drive revenue in other areas.

3786 COMMISSIONER COLVILLE: So setting aside organic growth, two thirds of what you are looking for would be attributable to sports.

3787 MR. BRACE: That's right.

3788 COMMISSIONER COLVILLE: And one third --

3789 MR. BRACE: Aside from the --

3790 COMMISSIONER COLVILLE:  -- to drama.

3791 MR. BRACE: Aside from the overall, you know, ability to drive that revenue into other areas of your schedule.

3792 COMMISSIONER COLVILLE: And you are going to come back to us with a definition of drama --

3793 MR. BRACE: Yes, we are.

3794 COMMISSIONER COLVILLE:  -- and some thoughts on how much of that might well be Canadian.

3795 MR. BRACE: Absolutely.

3796 COMMISSIONER COLVILLE: And again I presume we could probably expect that all of the drama would be in prime time.

3797 COMMISSIONER COLVILLE: Well, once again, you know, I think that Saturday and Sunday afternoons may offer an opportunity as well, so I wouldn't suggest that all of it would be in prime time. I think, as you know, we would probably look at other opportunities as well.

3798 COMMISSIONER COLVILLE: We mentioned briefly earlier the issue of the increase, you referred to it, of the 30 to 50 per cent during the day and 30 to 35 per cent during the evening broadcast period.

3799 I guess I'm curious to know whether you were a bit shy to be a little more bold in the evening broadcast period and why the, you know, sense of why you are going to bulk up through the day and not during the evening.

3800 MR. BRACE: I think that the prime time period obviously is where our revenue is driven. You know, it's the balance that we create.

3801 OLN has a relatively small program budget on an annual basis. We spend in the neighbourhood of $4 million. We are going to move that. That will be in the next licence term. We will have spent $15 million on Canadian programming at the end of this licence term. That will move to 32 in the next licence term.

3802 That is a major commitment in terms of actual dollars. The ratio is around four to one in point of fact as to what we spend on a combination of foreign to Canadian, so in that mix $1 million would be spent on foreign programming and four on Canadian.

3803 It's a similar story to what we talked about in comedy yesterday where in order to build the Canadian content based on the expenditures you make because they are significantly higher costs, especially if you are getting into programs like "Drifters", you know, which is $35,000, $40,000 net, so it's a huge budget for OLN, you wind up with a certain number of original hours and now you get into that cycle of having to do repeats in order to achieve your Canadian content.

3804 Obviously that is going to have the same impact that we saw with comedy, that we talked about with comedy, where it is going to start to degrade the audience. It's going to start to decline.

3805 What you want to do is create kind of a rich mix of lower cost quality foreign programming along with the higher quality, albeit more expensive, Canadian programming and come up with a balance that allows your audience to grow without going the repeat route. Obviously there will be repeats, but not to the extent that we would have if we moved to 50 per cent in prime time.

3806 That is really what is behind that strategy in moving from 38 to 35 per cent. The 35 per cent was not something that was kind of just arbitrary. We actually looked at our performance and that's what we are kind of comfortably doing at this point in time. So that's why we are where we are now.

3807 COMMISSIONER COLVILLE: Mr. Chairman, this might be a reasonable time to take a break. I would like to pursue another couple of questions in this area and a related area and some of my colleagues may have some questions as well.

3808 THE CHAIRPERSON: Thank you.

3809 We will break for 15 minutes. Nous reprendrons dans 15 minutes.

--- Upon recessing at 1110 / Suspension à 1110

--- Upon resuming at 1130 / Reprise à 1130

3810 THE CHAIRPERSON: Order, please.

3811 Vice-Chair Colville.

3812 COMMISSIONER COLVILLE: Thank you, Mr. Chairman.

3813 I would like to come back to this issue that we were chatting about before the break, about the 30 to 35 per cent and why not higher and whether or not I suppose the drama is in, I guess particularly given the emphasis you have placed on the sports, the Calgary Stampede, professional bull-riding. I presume a lot of that kind of material is likely Canadian.

3814 I take the point that some of the drama -- the "Drifters" was the example you had -- may well be foreign, and some of the other stuff.

3815 Given the relative success of the service and your plans for growth for the future and your plans, as I say, to go from 30 to 50 per cent overall, why one wouldn't expect a little bit more of a bold commitment during the evening period; whether that is something you want to think about, as well, in terms of the framework for other answers that you are going to think about over the next day or two.

3816 MR. BRACE: Certainly we will think about that. However, I do want to emphasize the balance that we have created.

3817 As I say, the last thing we want to do is get into that repeat situation, where that is the way we achieve Canadian content.

3818 We have done numerous amounts of Canadian programming, and certainly it is all seen prime time. What we don't want to be doing is repeating it beyond its life expectancy on the air.

3819 The way we have built our schedule, as I say, is with the quality foreign programming -- which comes to us at significantly lower cost per hour and it is quality programming -- and the higher quality Canadian programming that we are going to develop by spending virtually $32 million over the next licence term, more than double what we have spent in the current licence term, in order to get that quality.

3820 I think in creating that balance, Commissioner Colville, where we have put our emphasis is on the quality side of the equation in investing in the higher quality Canadian programs, some of the bigger ones, as "Drifters", which is a Canadian program.

3821 Some of the acquisitions, like "Don't Forget Your Passport", which has done so well for us -- in fact, maybe it is appropriate just to talk for a moment, Anna, about some of the Canadian programs that we have put into the schedule, of a Canadian nature, that we are going to actually build even more of in higher quality over the next term.

3822 MS STAMBOLIC: Yes. Our accomplishments with working with the Canadian independent production community and acquiring Canadian programming over the last seven years has been quite substantial, and we are very proud of that.

3823 Some of the high licence fees programming that we have showcased on OLN have been things like "Treks in the Wild World", which you would never get anywhere else, not even in the United States; things like "Don't Forget Your Passport", where we pay the independent producer a significant amount of money to travel around the world and bring back a Canadian perspective for OLN.

3824 Things like "Urban Knights" that we are developing, that will actually be on air before the end of this licence term, looks at the outdoor community in an urban setting. That particular show is quite significant. We are investing over $50,000 per episode on those shows.

3825 With regard to "Drifters", we invested $455,000 for that particular show.

3826 If the prime time schedule is inundated with that type of programming, we have to ensure that there is enough room for other types of programming in there, such as the foreign programming, and we want to make sure that programs like "Drifters" or "Urban Knights" are not repeated to the point of absolute death.

3827 MR. BRACE: The other point is that the investments we have made, we are proud to say some of them have had international exposure. That is a good thing.

3828 There are two ways we can get the Canadian content. We can invest in lower cost programs and have a lower repeat factor or in higher cost programs that have a much higher repeat factor.

3829 We would prefer to go the higher quality. We have developed businesses for these Canadian independent producers. For some of them we have been their only customer. We have developed them from square one.

3830 I think Sivell Productions was one of those. They continue to have programs with us and continue to have the opportunity to sell their programs internationally.

3831 That is really the balance we like to draw, emphasizing the fact that the money is being spent and the commitment is there and that the balance you have in prime time is better achieved through quality rather than through repeats.

3832 COMMISSIONER COLVILLE: In the increase of going from 30 to 50 per cent, what are the programs that you are going to increase during the day that you could not run in prime time?

3833 MS STAMBOLIC: I can say that our fishing block is substantial on our network.

3834 COMMISSIONER COLVILLE: Sorry, which one?

3835 MS STAMBOLIC: Our fishing block of programs.

3836 COMMISSIONER COLVILLE: Nobody likes to fish in prime time?

3837 MS STAMBOLIC: Yes, they do. However, in terms of viewership we maximize our viewers during the day time. When we program our network, we look at historical analysis at what has done well in what time block.

3838 With fishing we have moved it. We have showcased it in prime time, late in the day, early in the day, and what works, what brings us the maximum amount of viewers is in an early morning block and an early afternoon block. That is what works for us.

3839 MR. BRACE: It is also a reflection of what we have done. The 30 to 50 per cent really reflects what we have achieved, as is the 30 to 35 per cent.

3840 So it is really a reflection of how we have balanced the schedule to this point in time.

3841 COMMISSIONER COLVILLE: You mentioned the $32 million, but that is still 37 per cent of your revenues projected. Correct?

3842 I am wondering, again given the success and your plans to grow the business, why you would not have seen this as an opportunity to perhaps put a greater percentage of your revenues into Canadian programming.

3843 MR. BRACE: The focus there, Commissioner, once again comes down to the fact of how much do we have to program the schedule.

3844 I mentioned earlier that we spend $5 million programming OLN on an annual basis, and the next licence term $4 million of that will be spent annually on Canadian programming and $1 million on foreign programming.

3845 If we moved to 50 per cent -- and we did look at that to just get a balance -- that would take our foreign program spend to somewhere in the neighbourhood of $725,000.

3846 In so doing, it greatly inhibits our ability to acquire the number of quality program hours of foreign programming that would be available to us.

3847 The percentage we feel is a little bit misleading if we look at the whole dollars that are spent, with 80 per cent of our budget being spent already on Canadian programming, both acquisitions and productions. To take that higher we believe is going to inhibit our ability to continue to get the high quality, as much high quality foreign programming as we would like to get.

3848 So what do we wind up with at the end of the day? We wind up with fewer quality program hours from a foreign standpoint, and theoretically we would continue down the road of investing in higher quality Canadian programming. You put that into the schedule, and now you are back into that repeat situation again.

3849 The only alternative would be more low-cost Canadian acquisitions, and quite frankly there is a limited amount of those in the marketplace.

3850 So it is that ability to balance. We feel that an 80 per cent spend on Canadian programming, real spend, real dollars spent, is significant. If we had a much bigger budget, it would be easier for us to accommodate a higher CPE, because of course you would still have higher amounts left for your foreign spend.

3851 To move it under a million dollars we feel would be detrimental. So that is our concern there.

3852 COMMISSIONER COLVILLE: When we talked about the drama earlier and you had not, if I recall correctly, given particular consideration to a level of Canadian drama within that -- is that right?

3853 MR. BRACE: That is correct.

3854 COMMISSIONER COLVILLE: The figure that we are talking about, the $32 million, does that get spent whether or not there is an addition of the drama category?

3855 MR. BRACE: Yes, Commissioner, it does. That is our commitment. That is our plan.

3856 COMMISSIONER COLVILLE: So if you do get the drama, how much of the $32 million gets spent on drama?

3857 MR. BRACE: Once again, because we have not really contemplated how much of the drama would be Canadian, we have not really apportioned it that way.

3858 The idea is that we are going to spend $32 million, and it would be on a mix, which would include all of the categories that are available to us obviously from a Canadian content standpoint.

3859 COMMISSIONER COLVILLE: So you are going to come back on that point.

3860 MS STAMBOLIC: I would just add one more point about the drama.

3861 The importance of drama for us is to bring back Canadian viewers week after week to our schedule. I think that is really important.

3862 When you asked earlier what do you want and why do you want it, it is just to build our audiences; to keep the viewers who are already watching OLN staying longer. With drama series we can create that.

3863 Unlike some of the other programs, for example, like the camping out show, it is one-stop shop. You come in for half an hour and you are out and you have your fill. But with a series it really creates a loyalty, a fan club, people who want to come back week after week. I think that is really important when we look at drama on OLN.

3864 COMMISSIONER COLVILLE: I think part of the concern, though, is we have a bunch of specialty services that were licensed to target a particular audience; they came with a lot of enthusiasm to focus on that particular niche in the marketplace, and that is why specialties were licensed.

3865 If any particular specialty, you or somebody else, starts to run up against a wall in terms of growth or starts to struggle in terms of audience retention, then the solution seems: Well, there are two big audience builders out there; one is drama and largely movies, and another is professional sports.

3866 So if only we could all go out and go after those two categories, we would all be happy. And all we end up doing is robbing each other's audience, depending on which blockbuster movie we have on which night of the week.

3867 MR. BRACE: We acknowledge your position, Commissioner. We will come back to you in reply with our comments on that.

3868 COMMISSIONER COLVILLE: Just a final point, going back to the sports.

3869 Am I correct that you have run "World Cup Soccer"?

3870 MR. BRACE: No, we don't. I think what you are referring to is the one occasion we ran "Euro 2000 Soccer", but not "World Cup Soccer".

3871 COMMISSIONER COLVILLE: Where would "Euro 2000 Soccer" fit in terms of your paragraph 21?

3872 MR. BRACE: We looked at it at that point in time as a sport. Because the athletes are playing for their country, they are not being compensated as amateur sport.

3873 COMMISSIONER COLVILLE: For that game.

3874 MR. BRACE: For that game.

3875 COMMISSIONER COLVILLE: But they are professional athletes.

3876 MR. BRACE: The athletes who play -- it is much like at the Olympics. Some of them are and some of them are not. They are a mix. But some of them certainly are professional athletes, yes.

3877 COMMISSIONER COLVILLE: I think those are all of my questions, Mr. Chairman.

3878 THE CHAIRPERSON: Thank you.

3879 Commissioner Grauer.

3880 COMMISSIONER GRAUER: Thank you. I have a couple of questions.

3881 One of the things I noticed in your oral presentation was you referred to how important it was to be a niche service, to differentiate yourself from other networks. But a lot of the discussion has been on broadening your appeal.

3882 I wonder if I missed something.

3883 MR. BRACE: No. I think it is the nuance. I think what we are talking about is broadening the appeal of our niche, and the 6(a), 6(b) thing that we talked at length about really defines the issue for us.

3884 We think our audience -- and we have been supported by intervenors that talk a lot about the rodeo and the bull-riding kind of thing. What they have said is: We look to OLN for this kind of programming. Traditionally you have carried this kind of programming. We wonder why you wouldn't be doing more of this kind of programming. And why are you kind of not doing this particular area?

3885 I think that is really the answer to that question. That is that we are really trying to achieve.


3887 One other question. When you were discussing with Commissioner Colville the addition of the program category, and given our concerns, he said we could be opening up a Pandora's box. I think your response was: We are not looking to get into the backyard of any of the other services.

3888 I am sure you were here the other day when Sportsnet was on. The irony of the fact that CTV, when Sportsnet was owned by CTV before they went on the air, opposed the addition of the regional feed for TSN because they said this will essentially cannibalize our principal business activity.

3889 Were you at TSN then?

3890 MR. BRACE: Yes, I was.

3891 COMMISSIONER GRAUER: I think it is fair to say that I had just arrived at the Commission and had no idea that the consequence of that decision we made was that we opened a huge hole through which TSN drove a big Mac truck.

3892 I think the number of hours, the possibilities, is something we really have to be mindful of in terms of the addition of program categories.

3893 Is that fair?

3894 MR. BRACE: I would like to comment on that simply because we have gone down that road.

3895 First of all, it is interesting because I am pleased that you --

3896 COMMISSIONER GRAUER: It is the consequences of program categories that I think we need to be mindful of.

3897 MR. BRACE: I understand. I am pleased you noticed I was here, because I think I was referred to as a ghost at the table. I must have been visible, at least on that particular day.

3898 I would like to position ourselves as more Casper the friendly ghost than the ghost at the table.

3899 I heard that discussion. Is it a Pandora's box or an argument that is being used to create a position?

3900 My position on that is that what we have really wound up with here at the end of the day is a lot of complementarity; that out of the gate TSN had no interest in doing regional sports. The only reason we ever went out and acquired regional sports was because the very first acquisition that S3, the regional network, made was the National Hockey League rights from TSN.

3901 In other words, our number one national property was the first acquisition that S3 made. And it left us with absolutely no hockey. So we felt that we really had no alternative but to go out and get some kind of hockey.

3902 Historically, once again looking at the Pandora's box, is it really?

3903 All that we have really done is that the Toronto Maple Leafs -- which we actually share those rights, by the way, with Sportsnet, interestingly enough.

3904 We did Raptors to a certain extent but elected to walk away.

3905 We did a limited amount of Montreal Canadians. They were more available. Sportsnet wasn't interested. And the Ottawa Senators; similarly, they were available.

3906 So all we are left with is a shared property in the Toronto Maple Leafs, hardly a Pandora's box.

3907 Similarly, once again in this world of complementarity and support, there is CBC. We actually share the Olympics with them. We share the CFL with them. We actually negotiated together. And we worked on the NHL agreement together.

3908 So I would hardly say that there really is this kind of critical ghost at the table type of environment that was maybe positioned. The Commission has heard some arguments from other that are clearly disturbing for us.

3909 When it tends to prejudice the kind of thing that we are promoting here, which is really just to be able to do what we have been doing, and which is really put under the guise of that horrid road we have gone done where everyone tries to take everyone else's property and everyone is actually in each other's backyard, what I would suggest is that we want to stick to our knitting. That is what we are proposing.

3910 TSN is predominantly a national service with one exception. Sportsnet interestingly has gone -- and I believe it, and they have demonstrated it. They are predominantly a regional service. They are doing that, with some national content. And similarly with Headline Sports. They have fit their niche with headlines.

3911 That has worked well. We actually provide highlights to Headline Sports that they use and in return they give us promotion for our programming.

3912 So there is in this environment I think a little more co-operation. There seems to be in this case a lot of paddling above the water and far less under the water, in my estimation. I would suggest to let that kind of cloud the issue that we are trying to raise here where professional sports is concerned tends to be misleading.

3913 COMMISSIONER GRAUER: Thank you, Mr. Brace.

3914 One other quick question, which is on the addition of the drama, particularly U.S. drama -- and you mentioned "The Perfect Storm" as an example of something you might do -- we hear so often, especially from conventional broadcasters, concerns about new entrants bidding up the price of U.S. drama when we really want programming dollars going to Canadian.

3915 I am wondering if you could respond to that in terms of the entry of more bidding into the U.S. drama.

3916 MR. BRACE: I'm sorry, I am not quite sure I understand, Commissioner.

3917 COMMISSIONER GRAUER: Maybe you can come back in reply with that. There is often an argument made by conventional broadcasters in particular, when we have a competing conventional licence, that they don't want to add another bidder for U.S. programming to the group. If it drives up U.S. programming, it reduces the availability of funds for Canadian programming.

3918 I think that was just a concern that I had, which was: Why would we want to add a bidder for U.S. programming?

3919 MR. BRACE: Once again, with kind of $900,000 in our budget to do all of these incremental things, it is a modest amount. People like Alliance Atlantis who are really probably the biggest are actually supported or suggested, maybe that is a better word, recommended that the five per cent be the limit, so they have acknowledged that. And, in addition, there are numerous other services form Animal Planet to Court TV that actually carry drama, as long as it fits within their nature of service. So, it is not kind of outside the context and outside the realm of what the Commission has decided historically. But, perhaps you are correct, we will come back with further clarification on that.


3921 THE CHAIRPERSON: Thank you, Mr. Brace, that outer life network image of the paddling was not lost on us. If you had discussed the relations among the competitors when you were representing the Comedy channel you would have had an appropriate comedic analogy for that.

3922 MR. BRACE: Well, we actually get along quite well with these people.

3923 THE CHAIRPERSON: I have two questions for you, one arises from yesterday. I thought that you had said, in regards to The Comedy Network, that your advertising revenues were now 49 per cent of your total revenues, is that what you said?

3924 MR. BRACE: That is over the license term. That is correct, yes. So, in other words, they grow to 49 per cent of our overall revenue, which we think is a real positive approach because of course the burden becomes lower on the consumer.

3925 THE CHAIRPERSON: Right. But currently that number is what, 41?

3926 MR BRACE: It is still in the 40 range, yeah.

3927 THE CHAIRPERSON: Thirty-nine. What would the number be currently for OLN?

3928 MR. BRACE: I will ask Kim just to -- you are going to have to do math in public here if you don't mind for a second, a famous Trina McQueen comment.

3929 MR. McKENNEY: Mr. Chairman, it is currently 34 per cent for ad revenue and we build that to 44 per cent by the end of new license term.

3930 MR. BRACE: So, that puts us right in the realm of the average, currently growing to something which is far more supportive from an advertising standpoint. We think that, as an industry direction, is the way we need to go.

3931 THE CHAIRPERSON: Okay. The numbers we have for end of 02 broadcast year are for Comedy 41 and for OLN 37, so I don't know whether that reconciles --

3932 MR. McKENNEY: I have concluded the projection for 2003 as well, so the full license term.

3933 THE CHAIRPERSON: So, what would the numbers be for this -- so for this year you are saying that they are 40 and 34?

3934 MR. McKENNEY: For the current year, 2003?


3936 MR. McKENNEY: On Comedy?

3937 THE CHAIRPERSON: On both, so pick the order in which you want to answer.

3938 MR. McKENNEY: I think I would like to get back to you on a Comedy one, I don't have the numbers here with me.

3939 THE CHAIRPERSON: Oh that is fine.

3940 MR. McKENNEY: So, your question is on the current year, 2003 year? Thirty-nine per cent on OLN would be advertising.

3941 THE CHAIRPERSON: Thirty-nine, so what was the 34?

3942 MR. McKENNEY: That was for the whole license term, the previous year.

3943 THE CHAIRPERSON: The previous license term?

3944 MR. McKENNEY: Yes.

3945 THE CHAIRPERSON: Okay, I got it.

3946 MR. McKENNEY: Which includes the 2003 projected year.

3947 THE CHAIRPERSON: Okay, so you are basically trending upward over the last --

3948 MR. McKENNEY: Correct, more of a reliance on advertising revenue.

3949 THE CHAIRPERSON: Okay, thank you.

3950 MR. McKENNEY: Thank you.

3951 THE CHAIRPERSON: Now, on page 9 of 10 of your opening remarks, Mr. Brace, the way you referred to Category 7 (programming) and your willingness to amend your proposal from 15 to five per cent of the schedule, one per week. You talk about distinguishing yourself in the competitive market and bringing clarity to your daily schedule and giving the service broader appeal to please audiences, advertising revenues, little or no impact on the broadcasting. I take those points, but looking at it from the point of view of the system as a whole and given the situation that we face in regard to Canadian English-language drama, how do you see your proposal as alleviating the situation and improving it in that regard?

3952 MR. BRACE: First of all, we are not proposing that any of this drama, the Canadian drama that we would put into the schedule, would access any of the funding. So, it is certainly not something that would kind of put a further burden on that already stretched situation that we have there and I think that that is probably the fundamental contribution that we make, that whatever we would do would be totally incremental and totally outside of any kind of extraordinary support.

3953 THE CHAIRPERSON: Do you have a projection for the amount of licensees you would pay for Canadian drama over the --

3954 MR. BRACE: No, we don't. Once again, I think that that was a bigger question that Commissioner Colville raised that we are going to have to come back with on reply.

3955 THE CHAIRPERSON: Thank you. I believe counsel does not have questions, so thank you very much ladies and gentlemen.

3956 MR. BRACE: Thank you.

3957 THE CHAIRPERSON: I will probably see you at the reply phase. We will now proceed with the next item, Mr. Secretary.

3958 MR. LEBEL: Thank you, Mr. Chairman. Item 8 on the agenda is an application by CTV Television Inc. to renew the license of the national English-language specialty television service known as CTV Newsnet expiring 31 August 2003. The licensee proposes to increase its wholesale rate by $0.11 per month.


3959 THE CHAIRPERSON: Mr. Brace, you have 20 minutes to make your presentation. Thank you.

3960 MR. BRACE: Thank you, Chairman Dalfen, Vice-Chairs, Commissioners, my name is still Rick Brace and I'm President of CTV. We are very pleased to be here today and before we begin I would like to introduce the members of our panel. On my left is Robert Hurst, the President of CTV News, beside Robert is Joanne MacDonald, the Vice-President of CTV News and to my right is Kim McKenney, the Director of Finance for CTV Specialty Networks. Behind me is Mark Sikstrom, and Mark is the Executive Producer of CTV Newsnet and beside Mark is Elizabeth Duffy-MacLean, Group Vice-President, Regulatory Affairs. And I'm pleased to say that with us today at the side table is Lloyd Robertson, the Chief Anchor of CTV News and Katheryn Robinson, Legal Counsel, Goodmans. Also joining us in the audience is Max Keeping, the Anchor at CJOH News and Mike Duffy, Parliamentary Reporter for CTV News.

3961 Mr. Chairman, I would like to acknowledge the overwhelming level of support that we have received for Newsnet and our license renewal. Five hundred and ten Canadians wrote in support of Newsnet. The letters came from viewers, labour leaders, business leaders, charities, chambers of commerce, mayors, members of provincial legislatures, MPs and Senators. We are encouraged by the common theme of these letters; Canadians use CTV Newsnet as an essential headline news service and an important news voice in Canada.

3962 Former Premier William Davis wrote: "CTV Newsnet has proven that it can deliver news headlines with impartiality and integrity, contributing to our democratic process through its unrivalled breadth of Canadian news coverage."

3963 The 510 letters are in these three big binders right here and I have read every one of them. It is fascinating reading. The letters say that Canadians are eager to know more about themselves and their country and that news is at the heart of being Canadian. These letters say that Newsnet plays a key role in Canada's daily conversations, that Newsnet has a responsibility to a vibrant democracy, a responsibility that specifically addresses some of the most important objectives in the Broadcasting Act: to safeguard and enrich our national identity, to expose the public to different views on matters of public concern. That is Newsnet's job.

3964 Steven Page, the lead singer of the Barenaked Ladies wrote: "I believe that CTV Newsnet delivers a valuable service to Canadians by providing an independent voice, one that is 100 per cent Canadian, which is essential when we are inundated with American news sources. CTV Newsnet offers us a distinctively Canadian perspective."

3965 That perspective is built on the news gathering efforts of CTV's local stations across this country. These stations have deep roots in each of their communities. CTV's dedication to local coverage, through our local stations, is the foundation that allows Newsnet to report regional stories to a national audience.

3966 Newsnet has enjoyed successes in its first six years. I am very proud of the Newsnet team lead by Robert Hurst, Joanne MacDonald and Mark Sikstrom. These people have a passion and dedication for news. During the War in Iraq, I would go down in the newsroom every day. Many of our correspondents covering the war, like Lisa LaFlamme, Tom Clark and Tom Kennedy worked 18 to 20 hours a day to give us the Canadian perspective on the war in Iraq. The editors assigning our daily coverage actually moved sleeping cots into the newsroom and also worked around the clock to ensure that Canadians had access to the latest news of the war. I salute this team, and the commitment that they have made for Canada through the broadcasting system each and every single day.

3967 CTV Newsnet is committed to delivering headline news with quality and immediacy. That's the basic principle of journalism: get it first - but get it right. Yet in doing so, we have had to adapt our service and our business plan to meet the evolving, demanding needs of Canadian viewers for more and more immediate coverage.

3968 When Newsnet launched, it was a cell-phone world, where a cal was 25 cents a minute. Today, it's a videophone world, where a call is $25 a minute. We have invested heavily in Newsnet to meet the growing expectations of Canadians to know more about their country and their world.

3969 Newsnet has lost money each and every year since its launch. By the end of our current license term, we will have spent millions more than we had originally planned in order to respond to viewer demands for the very latest in breaking news - the freshest headlines possible. The investment will be $22 million more than our original programming budget.

3970 We are requesting an increase in Newsnet's monthly wholesale rate. We believe an 11 cent increase is modest. Of the 510 letters of support for Newsnet, 430 Canadians specifically supported our proposed rate increase. The field research we commissioned shows that Canadians want an improved Newsnet and are prepared to pay for it.

3971 We also know that the rate increases just be justified and must contribute to the vitality and diversity of the broadcasting system. We're here today to explain how fundamentally important the requested rate increase is, so that Newsnet can continue and improve as an essential news voice in Canada.

3972 I would like now to introduce you to Robert Hurst.

3973 MR. HURST: When we launched Newsnet in 1997, we created a headline news channel that was, at the time, state of the art. The idea back then was to cover Canadian news headlines 24 hours a day, by marrying CTV's national and international coverage, with the rich news material from our 21 local stations.

3974 We travelled across North America to study the best ideas and the latest technologies. We built the most efficient all-news channel that was available in 1997. The news was recorded and played back from a file server. This was the all-news model of the 1990s and it was the model that launched many broadcasters all-news channels back then. North-West Cable News in Seattle, Chicago-Land News, TVA's Le Canal Nouvelles, and it was the model that we chose for Newsnet. In fact, we modelled Newsnet after CNN Headline News, which had just introduced a file server system of pre-recorded newscasts.

3975 In 1997 this model served Newsnet's viewers well. We had visits from many broadcasters from around the world who wanted to study the latest in all-news designs. Delegations came from China and Japan, from broadcasters who were planning to enter the all-news business themselves.

3976 But the demands of our viewers changed and with that the all-news business changed. New technology allowed us to move faster and quicker. Portable satellites helped us to cover the Ice Storm in Quebec and Eastern Ontario and they took us to Pangnirtung for the Queen's arrival for a State Visit. And, you have seen our video phones transmitting live pictures from the battlefield in Iraq. The news business is a continuing quest for immediacy.

3977 CNN Headline, two years ago, moved away from a recorded playback system and went to a live anchor format. CNN did that to report the news with more immediacy and that's what Newsnet needs to do now. Newsnet will have spent, by the end of our license term, $55 million covering Canadian stories at home and overseas and, as Rick Brace pointed out, that is $22 million more than our original programming budget. We believe this was the right thing to do for two reasons. First, we needed to ensure that Newsnet remained a credible all-news service, competitive with American all-news channels. Second, we needed to ensure that Canadians had a reliable second national news voice, an alternate national news voice, from a private network that is trusted and respected by Canadians.

3978 I will turn now to Joanne MacDonald, who will outline how our service has evolved and improved.

3979 MS MacDONALD: We hired more Canadian journalists. Our original plan called for a staff of 46. That number now stands at 51 full-time employees. In addition, we have spent millions in hiring freelancers and independent journalists.

3980 Producing competitive, timely newscasts also required a greater ability to gather the news in the many regions of this country. For example, On February 1st high school students from Alberta were caught in an avalanche in Revelstoke, British Columbia. We immediately needed to answer questions that viewers were asking. Were there survivors? Why were the teenagers on a school trip that put them in such danger? This was a story of public concern. Viewers were expecting answers immediately, not an hour or two or three later.

3981 We needed crews in the field, reporters on site, and once the news was gathered, satellite feeds to deliver the latest information of this terrible tragedy. And it is every day, Newsnet's role to illuminate, to explain and inform Canadians about issues of public concern, such as Newsnet did in its coverage of: Swissair Flight 111 off Peggy's Cove, Nova Scotia; with safety problems with the water supply in North Battleford, Saskatchewan; and the SARS public health crisis.

3982 The war in Iraq was also an important illustration of the role CTV Newsnet has to play for Canadians. During the first three days of the war, ratings showed Canadians tuned to CNN in large numbers. But the, by the fifth day of the war, Canadians began returning to CTV Newsnet and other Canadian news sources. We heard from our viewers as they became disenchanted with the CNN coverage.

3983 As Oleg Perelygin, a Newsnet viewer, wrote in a letter of intervention:

"I was particularly grateful for this service during the recent war in Iraq, as watching American headline networks such as CNN becomes tiresome, and a Canadian perspective is quite refreshing."

3984 With your approval of our licence renewal and our request for a rate increase, Newsnet will move to a live anchor format, just like CNN Headline did two years ago. We will deploy more reporters and camera crews so we can be more immediate.

3985 Simply put, we will cover more stories, from more locations, from more regions and with more immediacy. This is Newsnet's mission, which speaks to the fundamentals of the Broadcasting Act to reflect Canada, its regions and to illuminate its multicultural and multiracial nature.

3986 MR. HURST: Commissioners, the CBC has not intervened on our application for a licence renewal and a rate increase.

3987 We take from this that the CBC now believes, as we do, that there is a place for both CBC Newsworld and CTV Newsnet in the Canadian broadcasting system, each of us telling Canadian stories in our way and each of us making the other better.

3988 However, there is, we submit, a fairness issue involved. The resource level that CTV Newsnet has at eight and a half cents to serve Canadian viewers is vastly inferior to the resource level of CBC Newsworld at 63 cents.

3989 When CBC Newsworld was licensed in 1987, its wholesale fee was a minimum 25 cents. Three years after it launched CBC Newsworld was granted a rate increase to 55 cents. Three years ago Newsworld requested a second rate increase which was granted in order to reflect Newsworld's changing business and viewer demands.

3990 We also believe there is a fairness question in subscriber fees paid to foreign news channels that are available to Canadians.

3991 Canadian BDUs to not publish the fees they pay to CNN or to CNBC. We believe that CNN receives between 25 and 40 cents per subscriber per month. That means that CNN alone receives between $25 and $35 million a year in subscriber fees from Canada. That is more than four times what the BDUs pay to Newsnet, yet we compete with these foreign services every single day.

3992 In fact, none of these American channels has a single resident in Canada -- not CNN and not CNBC.

3993 Newsnet directly responds to the fundamental principles of the Broadcasting Act. Our job and our only job is to report on Canada and to have Canadian eyes overseas. Newsnet is 100 per cent Canadian content, 100 per cent. While other news Canadian news channels are programming documentaries and talk shows and such, Newsnet is always reporting Canadian headlines and at times Newsnet is the only national source of Canadian news.

3994 MS MacDONALD: We have been overwhelmed by the response from Canadians to Newsnet's request for a rate increase. Asking people to pay more for anything is a challenge, but Canadians seem ready to pay for what they see is a valuable service that informs them and helps them understand what's going on in their world.

3995 Let me share a couple of the letters with you. Ken and Irene Ball wrote:

"CTV Newsnet's request for a modest rate increase over the course of seven years seems but a pittance to ensure it continues to deliver a much needed 'Canadian' view of world events and local stories."

3996 Christopher Dornan, Director of the School of Journalism and Communication at Carleton University, wrote:

"Given that the cost of my own monthly TV bill is becoming increasingly burdensome, I am loath to lend my support to any application for a rate increase. Nonetheless, I endorse the CTV Newsnet petition for additional charges."

3997 Mr. Dornon goes on to say:

"-- it is no secret that (Newsnet) is strained. I daresay it is evident on the screen. Newsnet has a top-flight staff, but there are not enough of them. This country needs its journalism, but it needs it robust and robust journalism needs resources."

3998 Other Canadians also wrote: Joyce Milgaard and Nina Karachi-Khaled of the Canadian Council of Muslim Women and 428 others, expressing their support for this essential headline news service and their willingness to pay more for CTV Newsnet.

3999 We also commissioned the Pollara research firm to conduct a national quantitative survey. The survey showed that 92 per cent of respondents said it's important to have Canadian news services, yet 50 per cent said they turn to U.S. services like CNN because those channels are more immediate and 70 per cent said they would pay more if Newsnet was better and more competitive.

4000 Newsnet has five anchors on staff. We would like you to listen to each of them now in their own words.

--- Video presentation / Présentation vidéo

4001 MR. ROBERTSON: Mr. Chairman, Commissioners, I am pleased to have the privilege of being able to spend some time with you here today.

4002 As we watched those youthful anchors -- Ravi Baichwal, Scott Laurie, Dan Matheson, Marci Ien and Kate Wheeler -- we were watching, I hope you can agree, the future of television news in Canada. With these people, and others like them, Newsnet has the potential to become an ever more vibrant service in this vigorous and diverse country of ours.

4003 Now, I remember vividly the day Newsnet was launched, October 17, 1997. Prime Minister Chrétien and I pushed the button that sent that signal right across Canada. It was a heady day full of grand ambitions, a young crew dreaming of telling our stories in our own way and ready to take on CNN.

4004 Now, I have had the advantage of a front row seat, watching while they tried to fill all of that air time. My gosh, that is a lot of air time. It's a phenomenon our colleague Mike Duffy calls "feeding the bear". But we soon noted that Canadians were developing a hunger for breaking news with their own domestic stories as leads, a hunger for details and a hunger for a greater understanding of the ebb and flow of the sometimes complex events that mark our daily lives.

4005 I have often heard my Newsnet friends giving vent to their frustrations -- viewers complaining about the repetition while they struggle to be immediate, when the majority of their service has to go on tape, tape as close to air time as they can get it, mind you, but tape nevertheless.

4006 They know, we all know, that the effort has to be made to be live all the time. We also know that you just can't accomplish that at eight and a half cents a subscriber.

4007 Those of us who have worked in the news business for a long time increasingly appreciate one of the fundamental ideals of our business, free and competitive news operations, and many of them are essential to fully functioning democracies like ours.

4008 CTV Newsnet is today providing a significant alternative Canadian voice in our country's affairs. If this country has only CBC Newsworld in the Canadian all news TV spectrum and a Newsnet that lacks immediacy, our daily national conversation and debate is sure to be diminished.

4009 In working alongside the Newsnet team every night, I can tell you they are a noisy bunch, but they are a noisy bunch because they are passionate about what they do. I see them chasing stories all across the regions. These are always important stories, but they might not have the weight to make the CTV national news and therein you see the unique contribution that Newsnet makes to our system.

4010 When I started in news there was only one Canadian television news voice which was, of course, the CBC. In the fifties and early sixties our chief competitors were the United States networks with large numbers of Canadians receiving their daily diet of television news from Huntley and Brinkley at NBC and Walter Cronkite at CBS.

4011 But through the seventies and eighties as Canadian television expanded, more resources were deployed to tell our own stories. The result is that very few Canadians tune in any more to the nightly newscasts on NBC, CBS and ABC. Network news on conventional television in Canada has matured and we can all be very proud of this accomplishment.

4012 I share with my colleagues the deep concern that if Newsnet doesn't move to live anchors, it simply won't be credible to an increasingly sophisticated television news audience. It won't be competitive and more and more Canadians will drift away to CNN, CNN Headline News and CNBC, all fine in their own ways, but with a different perspective on our country and on the world.

4013 I know the people of Newsnet can do the job you need them to do for the sake of the future health of our television environment and for the sake of this Canada we all treasure so much.

4014 I appreciate the opportunity to speak to you.

4015 Rick.

4016 MR. BRACE: Thank you, Lloyd.

4017 Chairman Dalfen, Vice-Chairs, Commissioners, you have heard how committed we are to a strong, vibrant Newsnet, a service that we believe is an essential alternate Canadian news voice in the Canadian broadcasting system.

4018 We would be pleased to answer your questions.

4019 Thank you.

4020 THE CHAIRPERSON: Thank you, Mr. Brace, ladies and gentlemen.

4021 Mr. Brace, picking up perhaps where we left off on the last item on the ratio of advertising to subscriber revenues for CTV Newsnet, the numbers we have for '02 are 43 per cent advertising. What would the number be for '03?

4022 MR. BRACE: I will just confirm that with Kim McKenney. The number for '03 would grow to 44 per cent.

4023 THE CHAIRPERSON: Forty-four per cent.

4024 MR. BRACE: Yes.

4025 THE CHAIRPERSON: So that's a little higher than "Outdoor Life" and closer to comedy..

4026 MR. BRACE: That's correct, currently, with comedy moving to, you know, much higher to the 50-50 range as we move through towards the licence term.

4027 THE CHAIRPERSON: And in terms of the English analog average we have for '02, 41 per cent. You have confirmed that Newsnet is at 43 per cent, so just a tad above the average.

4028 MR. BRACE: A tad better, that's correct.

4029 THE CHAIRPERSON: Continuing with the numbers, Mr. Brace, we have tried to compare the status quo projections with rate increase projections and then divided back as a percentage of the 11 per cent wholesale rate increase that you are seeking.

4030 What we show essentially is that the expenses represent a little over four cents of that going forward, depreciation just under a penny and profit six, six of the eleven. Is that roughly --

4031 MR. BRACE: If I'm understanding the question correctly, you are looking, Mr. Chairman, at the kind of increase that we are going to receive in revenue as a result of 11 cents --

4032 THE CHAIRPERSON: Correct.

4033 MR. BRACE:  -- and what that would kind of equate in terms of how it's --

4034 THE CHAIRPERSON: We can do it in total dollars if you like.

4035 MR. BRACE: We see it a little bit differently. We have a bit of a different breakdown, but I would be happy to outline that for you.


4037 MR. BRACE: The total increase in revenue we have got based on 11 cents is $57 million over the licence term, so it would be an incremental $57 million. Of that $57 million, $30.4 million we see as what would allow us to continue with the upgrades and improvements that we have already made.

4038 THE CHAIRPERSON: How much would that be again?

4039 MR. BRACE: $30.4 million. Then beyond that we get into an additional amount which would include the future upgrades which would take us to an entirely live format. The entirely live format includes more than just anchors. It includes facilities, it includes source or enough facilities, but includes resources such as satellite feeds, reporters and journalists and that kind of thing and obviously technicians.

4040 That would take the expenditure to a total of $45.1 million, so we have got another $25 million or so in upgrades along the way. That leaves then at the end of the day $11.9 million. By the way, that does include inflation along the way as well.

4041 That would leave us with $11.9 million over the licence term or roughly $1.7 million a year which would equate to a fairly modest margin of somewhere in the neighbourhood of 16 per cent which is below the industry average of between 19 and 20 per cent. That seems to be where the average is hitting right now.

4042 That's how we kind of fashioned our plan and based our calculations.

4043 THE CHAIRPERSON: Well, I'm with you on the revenues, roughly 52-some in subscriber revenues and an additional 5.7 in advertising. We will go through those in a moment.

4044 I lost you on the expenses. The total expense differential we have is 19.6, with or minus without the increase, a million.

4045 MR. BRACE: Just let me ask Kim McKenney to comment on that. Can you give clarification on that point?

4046 MR. McKENNEY: Sure. As Rick indicated, part of the priority number one was for ongoing commitments, so the investment we have already made in the improvements. That's the first number he referred to, the $30 million. That's an ongoing --

4047 THE CHAIRPERSON: Right, but looking at projections, net difference.

4048 MR. McKENNEY: The net difference we have is -- sorry, what was the question?

4049 THE CHAIRPERSON: What is the net increase in total expenses with approval minus without approval?

4050 MR. McKENNEY: It's $17.5 million.

4051 THE CHAIRPERSON: $17.5 million. So that's correct and then when you add in -- that's programming and production.

4052 MR. McKENNEY: Right.

4053 THE CHAIRPERSON: Then when you add in the others you get 19.6.

4054 MR. McKENNEY: Right. We have some increased overhead of about $2 million, mostly related to inflationary.

4055 THE CHAIRPERSON: Okay. Then we have depreciation of 4.3, just under, resulting in 34 dropping down to the PBIT line.

4056 MR. McKENNEY: That's correct.

4057 THE CHAIRPERSON: That's how we get the six cents.

4058 MR. McKENNEY: That's correct. We are in sync there.

4059 THE CHAIRPERSON: Okay. I guess the question that falls out of that initially is the question of reasonableness. Is it reasonable that of the increase over half that increase flows directly to your bottom line?

4060 MR. BRACE: That's what I really need to clarify here because it's the very crux of our plan. If I could just outline what we are really talking about here. If I could just take a moment or two.

4061 It needs to be understood that we made investments to serve viewers better, you know, the 510 kind of interventions suggested out of the gate. That has been the $22 million in incremental expenditures that we have had during this licence term.

4062 The net result of that has been a $16 million loss on the bottom line, so that's how we get to that point in time. That's where we are right now.

4063 Our intent obviously is to carry that forward. So if we carry that forward into the next licence term, what we are looking at is that will take $30.4 million. That's where the 30.4 came from on an ongoing basis just to maintain the investment level and the commitments that we have already made.

4064 Then part two in our first commitment is to continue with these improvements and then if we had no fee increase, we would, you know, have to look at potentially falling back to something that is less of a service and that's a concern for us obviously.

4065 Our additional priority falls into adding improvements. That's the part, that's the next portion that Kim described, the incremental anchors, taking us to a full live situation, the satellite feeds and so on and so forth.

4066 Then of course our third priority is to deliver a modest margin. So as opposed to, you know, the amount in the news licence term, the amount that you mentioned falling to the bottom line, we look at it -- first of all, we have got to catch up. We have got to get, you know, back to kind of a break-even point.

4067 In order to do that, fully, you know, six cents just gets us there. It just covers off what we are doing. Then we move on to the further investments. At the end of the day really only a small portion you know equivocates to what we call profit, just over two cents of the 11 cents. It really amounts to $11.9 million or $1.7 million per year that would fall to the bottom line, giving us, as I say, a 16.28 per cent margin.

4068 Joanne and Robert sat down and outlined a comprehensive business plan, some of which we would certainly be happy to share with you, some of the examples of what we are going to do, and then arrived at the end of the day at this is what it's going to cost.

4069 Out of that we said: Okay, if that is what it's going to cost us and we are going to earn then, or attempt to earn, a modest return, what is a reasonable sub-fee to arrive at, and that is where the 11 cents came from.

4070 THE CHAIRPERSON: Right, and I take what you are saying, but I guess somewhere along the line you obviously have to say: So far we feel that our PBIT is in the minus range, although improving from a minus 53 in 1998 up to minus what now? About nine?

4071 MR. McKENNEY: Yes, that would be correct. For 2000, minus nine, and for 2003 our projected is minus eight.

4072 THE CHAIRPERSON: Minus eight. So you have managed through skilful management and sales to get yourselves out of the deep hole into a shallow hole.

4073 MR. BRACE: Actually sales have been a key portion of it, and there have been some other synergies as well. We have 21 stations across the country. One of the big changes came when we started to use and access those stations as a kind of a guarantee. When we were a network, of course, it was something that we had in the plan, but it was really at the discretion of the station. So as a result of now having those stations under our umbrella, we were able to access these added synergies to the plan, but really sales, I think, are the deciding factor.

4074 We have improved significantly in the sales region year over year.

4075 THE CHAIRPERSON: Right. I am curious as to -- and I guess it goes to the general issue of what is an appropriate PBIT for a service such as yours because at the end of the day, once you have met your costs, there is a return that a shareholder is seeking. You pick a number, and that number was just under 17 and that then again affects the price.

4076 Now, if we look at Newsworld, their current PBIT is nine. So you pick a PBIT that is double that. I am not suggesting or not suggesting that nine is an appropriate number, but I am looking at, we have been discussing criteria for rate making and the three that continually seem to come up are return, some notion of value, "consumers like us and they are willing to pay", and competitors. Here is the competitor test that we are looking at.

4077 Why would you think that a PBIT of roughly double Newsworld is appropriate in this --

4078 MR. BRACE: Rather than look at Newsworld as kind of a comparative, although obviously it is in the genre of news that is there, we thought --

4079 THE CHAIRPERSON: But you chose it as your fairness example. So I am --

4080 MR. BRACE: What is that?

4081 THE CHAIRPERSON: You chose it as your fairness example. Obviously, it depends who you choose as your comparators, but since you chose that --

4082 MR. BRACE: But in terms of the PBIT, we thought that the industry average was probably more of a comparison, and even at that I think we arrived at the low end, understanding that our initiative here we believe is noble. I mean, it's to really answer the viewer responses. We feel that it's there for us to have a return on that investment and, no, we didn't compare our PBIT to CBC. We have chosen, and I think fairly so, to compare it to industry average. As I say, we have arrived at the low end of the industry average. That was really the thinking.

4083 THE CHAIRPERSON: Right. And so the price of doing that is to impose a fee on subscribers going forward of 52 million, of which 34 million, as I say, drops to the bottom line, or two-thirds of that, to get you where you want to be. That is the way the dollars will flow, so that two-thirds of that increase on subscribers will flow to the bottom line.

4084 MR. BRACE: No, no.

4085 THE CHAIRPERSON: Well, 52 million was the number we agreed was subscriber increases.

4086 MR. BRACE: But we are also making some margin on the average. We are showing advertising growth as well.

4087 THE CHAIRPERSON: I understand that, but I thought you agreed with me that the PBIT over the seven-year period differential would be $34 million.

4088 MR. BRACE: That's true.

4089 THE CHAIRPERSON: So I am just dividing 34 over 52 and that is roughly two-thirds. Seventeen times three is 51.

4090 MR. BRACE: That's correct.

4091 THE CHAIRPERSON: Doing math in public.

--- Laughter / Rires

4092 THE CHAIRPERSON: And your justification for what would appear to be a pretty heavy burden on subscribers is that it gets you to where you want to be live all the time, I assume.

4093 MR. BRACE: But of that, if I am understanding correctly because I think this is an important point, is that clearly $30.4 million of the increase goes towards just getting us to break even, and that was a conscious decision we made to make that investment.

4094 In other words, we could have handled this two ways, I suppose. We could have said leave it as a server-based facility, risk the potential of becoming irrelevant. Don't consider immediacy until we get to the licence renewal or come, I suppose, in the middle of a licence period, but we have elected to do it this way. Then come to the licence renewal with something that we believe is a comprehensive plan, understanding that we have already invested $22 million.

4095 So that if I look at it that way, really of the overall investment we have made, the vas majority, other than 11.9, will go to the bottom line.

4096 So I guess I look at it a little bit differently in that of the $57 million really, other than 11.9 million in PBIT, the rest is going to support the service. That is expenditures to support the service.

4097 THE CHAIRPERSON: I have to admit I don't follow that in doing this great analysis we did. I follow the logic of what you are doing, but I don't follow the math quite as well because we agreed that your total additional expenses, leaving aside capital investments, your total expenses over the next term would be 19.6.

4098 MR. BRACE: Perhaps what might be helpful is if we provided a schedule in reply to just kind of demonstrate how we got to where we are.


4100 MR. BRACE: That may clarify it for you.

4101 THE CHAIRPERSON: We may be able to reconcile. I don't think it would be that difficult. If you could do it by the end of the week, again that would be --

4102 MR. BRACE: Because I think that the way we have done it clearly illustrates that really the vast, vast, majority is going to improving that. Really there is only 11.9 million that is also the bottom line as we see it out of this increase.

4103 THE CHAIRPERSON: It will be interesting to see how math in private differs from math in public. We will look forward to that.

4104 I want to ask you about your depreciation number, Mr. Brace, simply because it seems to be a lot higher than what you have been doing traditionally. Is this just the fallout of your additional capital investment? Your depreciation is 4.3 over the next period, considerably higher, I believe, than what it was previously. I believe your projected depreciation, for example, for year one without an increase would be 43 and with an increase 655,000.

4105 MR. BRACE: I will turn to Kim McKenney here, but, yes, I believe you described it as correct.

4106 Kim?

4107 MR. McKENNEY: Yes, I can confirm that the depreciation is the $4.8 million and a function of --

4108 THE CHAIRPERSON: The 4.8 or 4.3 over the licence term?

4109 MR. McKENNEY: It's 4.8.

4110 THE CHAIRPERSON: So 4.8 total minus statu quo. Do you have that figure?

4111 MR. McKENNEY: I don't actually.

4112 THE CHAIRPERSON: Our total is 4.3, subject to checking, and the reason why it's that much higher, why would that be?

4113 MR. McKENNEY: Are you talking about a $500,000 increase then, 4.3 versus 4.8?

4114 THE CHAIRPERSON: It's actually 612,000 each year over the period times seven -- alternating 612,000 and 613,000 for a total of 4.289 increase over the status quo.

4115 MR. McKENNEY: On average over the first six years of the licence, the depreciation has been in the range of 800,000 a year. Over the next term the average is in the neighbourhood of 700,000. So on average our depreciation is actually being reduced.

4116 THE CHAIRPERSON: Right, but if you look at your projections without a rate increase over the next licence term, you will that the total is only 460 for some average of about 80 --

4117 MR. McKENNEY: Are you comparing to the status quo?

4118 THE CHAIRPERSON: That's what I have been doing all along.

4119 MR. McKENNEY: Oh, I am sorry. Yes, obviously there would be a reduction in some of our capital that we would have to do based on the improvements that we would make in the system.

4120 THE CHAIRPERSON: And the flip side of that is with the expenditure of the capital you will incur these additional depreciations.

4121 MR. McKENNEY: That's true.

4122 THE CHAIRPERSON: What is the total capital that you are projecting to expand over the period?

4123 MR. McKENNEY: Maybe my colleague could help me with that.

--- Pause

4124 MR. McKENNEY: With the proposed improvement, the capital over the period is 5.7 million. Under the status quo we would only have a $700,000 capital expenditure.

4125 THE CHAIRPERSON: And the depreciation on that 5.7 million, is that the 4.3 --

4126 MR. McKENNEY: That would be the difference, I believe, yes.

4127 THE CHAIRPERSON: Thank you.

4128 In terms of the program and production costs which will increase if you are approved for the increase over you would otherwise have, some 17.5 million, how many additional bodies would that represent?

4129 MR. BRACE: I am going to turn to Joanne MacDonald to describe some of the additions we would make, but just in quick calculation here it's in the neighbourhood of over 20 that we would be adding along the way.

4130 Joanne?

4131 MS MacDONALD: In terms of the improvements going forward, we would be looking to move to a live anchor format, like CNN Headline did two years ago. That would be anchors and editorial teams to support those anchors.

4132 We would also be looking to increase our field reporting staff so that we can be more immediate, we can report news more quickly and we can cover more stories in the region.

4133 THE CHAIRPERSON: Which would give some of Mr. Dornan's students jobs which is presumably why he is in favour, rightly, of this increase from his point of view even though he doesn't like his monthly bill going up. I understand.

4134 So 20 some is the answer to what that would represent in terms of additional personnel, mostly journalistic jobs.

4135 MS MacDONALD: Yes, journalistic jobs. In the last term we went from 46 to 61. We have also substantially increased the amount that we spend on freelancers to help us gather the news, report the news more quickly, make the newscasts fresher. So there would be the positions that would be full time and the additional increases we have already made both on staff and on the freelance hirers -- journalists, technicians, camera crews, reporters.

4136 THE CHAIRPERSON: What are your subscriber projections for the next licence term? Where is that assumption of an increase in subscribers?

4137 MR. BRACE: Kim can outline it here for you.

4138 MR. McKENNEY: It's at Appendix 5A.


4140 MR. McKENNEY: Our general assumptions are that the overall sub-count will be flat to what we are at right now. That is based on the recent trending in the cable industry where we see negative growth. Over the period, we have negative growth of about 0.3 per cent on the cable subscribers side, and we see DTH continuing to grow at about 2 per cent.

4141 In terms of the universe, the gross universe, we see it essentially flat to what it is at this time throughout the seven-year period.

4142 THE CHAIRPERSON: We will revisit that in reply because the CCTA has, I think, taken exception to some of those projections.

4143 MR. McKENNEY: Could I just make the point that all of our subscriber estimates are based on our paying subs. So that is the actual remittance that all the BDUs provide to us. It's an accurate number. Some of the variances in the discussions that have been occurred, I would assume, are because some of these organizations are using the gross subs, not discounting subs for Quebec penetration, complementary subs, these types of variances in the numbers.

4144 THE CHAIRPERSON: That's useful and we may be revisiting this at the intervention phase, but I think most of the applicants for rate increases have suggested that the count they are using are paying subs which makes sense more than anything else.

4145 MR. McKENNEY: Right.

4146 MR. BRACE: There is a significant difference, actually, if I look at it a little. For example, in year one the gross subs are 9.9 million and we are on basic and we are only getting seven million paying subs. So when you take into account the VIP accounts, the Quebec accounts, that kind of thing, there is a significant difference in where we are.

4147 MR. McKENNEY: But even the paying subs, the subs on a tier, for example, or in basic that the organizations may be quoting would exclude like all the discounting, some of our deals, and that type of thing. So the actual subs that were paid would be the numbers that we are using.

4148 THE CHAIRPERSON: Are these are analog and digital subs, your seven million?

4149 MR. BRACE: Yes.

4150 MR. McKENNEY: That's correct.

4151 THE CHAIRPERSON: You can break those out, of course.

4152 MR. McKENNEY: Certainly.

4153 THE CHAIRPERSON: And when you break them out, say your analog subs, do you have -- I guess it's just a matter of doing the arithmetic here which I haven't done. Do you get a revenue per sub per year figure? Analog, let's say.

4154 MR. McKENNEY: Yes, we could do that, certainly.

4155 THE CHAIRPERSON: I am just wondering where it sits relative to the current wholesale rate. You haven't got that number handy?

4156 MR. McKENNEY: Revenue per sub?


4158 MR. McKENNEY: No, I don't actually. I could do the calculation.

4159 THE CHAIRPERSON: I think your assistant may.

4160 MR. McKENNEY: Are you referring to the rates that we...?

4161 THE CHAIRPERSON: Currently. I mean, your allowed grade is 8.5 and you are probably earning a little less on average because --

4162 MR. McKENNEY: That's correct, because of the discounting I have been referring to.

4163 THE CHAIRPERSON: How much less roughly? What is it? Do you have the numbers?

4164 MR. McKENNEY: It's not substantial. Most of our subs are at 8.5 right now. We have some francophone subs that pay substantially less than that and some tier subs that pay a little bit more than that. But we have a schedule that we could provide.

4165 THE CHAIRPERSON: Thank you.

4166 Now, your advertising revenue, which we discussed before, the differential again with and without the increase, you think you will garner an additional 5.7 million of advertising revenues over the period as a result of the increase.

4167 Can you elaborate on how that will work and why that will work and why so small an amount relative to the excellent changes that --

4168 MR. BRACE: I will turn to Kim in a moment. Once again, it does come down to a function of the improvement in the service is going to drive more audience -- we saw that, for example, during the war in Iraq -- any major events like that, especially where we can be more immediate which we really made an effort to do during that time period. You see audiences coming to you, but generally speaking the live format is going to drive some audiences and once again that is going to give us an increase in revenue.

4169 In terms of why isn't it significant or double digit, I think that, once again, we fall within kind of industry standards and also I don't think we are going to see audiences that are going to be some improved as to take us to that next level or to a substantial double-digit increase.

4170 Kim, go ahead.

4171 MR. McKENNEY: Sure. Our recent trending on advertising revenue for the current 2003 broadcast year is flat until next year. So we don't have any growth at this point. Our audiences have really levelled off.

4172 What we have assumed in the plan is that with the improvements we will have year-over-year increases of 6 per cent. Under the status quo scenario we cut that in half to the industry average of 3 per cent.

4173 So we are being somewhat aggressive under the status quo scenario, assuming that we cannot increase our audiences. We are still building in a 3 per cent increase in the status quo scenario.

4174 THE CHAIRPERSON: You have been enjoying double-digit growth, around 20 per cent. Your 2002 over 2001 year-over-year is 18.5 per cent increase.

4175 MR. McKENNEY: I believe that is correct.

4176 THE CHAIRPERSON: What is 2003 over 2002?

4177 MR. McKENNEY: As I mentioned, in the proposal I believe we built in about a 2 per cent increase.

4178 THE CHAIRPERSON: Is that all it is?

4179 MR. McKENNEY: Yes. In our current trending we are level to last year. So the actuals that we are trending at at this point -- and that is a function I believe of the service maturing and the audience really just being maintained, or even declining in some respects.

4180 THE CHAIRPERSON: That's interesting. I mean, we are getting reports -- I think Commissioner Grauer mentioned one yesterday, a press report indicating that certainly for the fall season the ad revenues seem to be up considerably. That may be U.S. --

4181 Do you have any comment on that?

4182 MR. BRACE: I think what Commissioner Grauer commented on, I believe were conventional numbers of 13 per cent. There may be opportunity there, but certainly in the specialty markets we are not seeing that.

4183 Kim, do you have a further comment on that?

4184 MR. McKENNEY: I think it depends on the genre to a certain extent. We saw in the OLN presentation that our growth is about 7 per cent this year, so we still seem to be maintaining some level of growth.

4185 On Newsnet it is a fully ROS service. Audiences are flattening and it seems like we have not been able to grow that this year. Although we had expectations that we would, that is not how the trending has gone so far this year.

4186 MR. BRACE: Robert, you had a comment on it?

4187 MR. HURST: Just a quick one in terms of Commissioner Grauer's comment about The Wall Street Journal article.

4188 This is an all news channel. We don't have the ability to sell big blockbuster movies, big sports events and superbowls. We do have big news events, like wars and disasters, and all the advertisers flea. The strength of our service and our ability to sell advertising really is rooted in one thing, and that is our ability to be credible and immediate all the time.

4189 We have one program. It's news. And we can't kind of bump. We don't have a fall launch on Newsnet to unveil all of our new programs, because we do one: and it is the Canadian news.

4190 THE CHAIRPERSON: It is interesting. Again the ratios don't help here. If we are talking about averages of advertising to subscriber revenues, I think you were stating with some pride that in the other services, and this one, your advertising percentages are trending upwards. Yet if we look at the $52 million to $5.6 million ratio, another way of characterizing this rate increase is that for almost a nine or 10-to-1 ratio pulls $52 million on subscribers so that you can derive revenues of $5.6 million.

4191 It seems again not a happy ratio.

4192 MR. BRACE: It is not. It is a fact of life. We just looked at Newsworld's advertising growth, and it is like 1.1 per cent year over year. It is probably relative to that.

4193 I think Robert made a good point on the different types of sales that we make on a news-type service as opposed to a general interest or another specialty channel.

4194 THE CHAIRPERSON: And yet those ratios as your current rate were a lot better. Understandably the arithmetic is a lot better. Your PBIT wasn't anything to write home about.

4195 MR. BRACE: That is correct.

4196 THE CHAIRPERSON: What you are saying is, you are telling us that the nature of the beast is such that basically to get reasonable PBITs you really have to shatter those nice ratios you were moving towards and really alter them substantially to maybe what, a two-to-one ratio of subscriber revenues?

4197 And you are saying that that is the nature of the beast, if I am hearing you correctly.

4198 MR. BRACE: I think it is, yes. It really is. As a ratio, if I look at ad revenue to sub revenue, it is much different. It is much lower on Newsnet than it is on some of our other channels.

4199 Ad revenue is 33 per cent of our overall revenue and the remainder being sub revenue. So it is significantly different. And that is during the new licence term that we are anticipating.

4200 If we are growing on The Comedy Channel to kind of a 50/50 level, this one is substantially behind.

4201 What it really demonstrates is that this type of service, which we believe is fundamental to the broadcast system and, more than that, provides an alternate voice, the only alternate voice in this country to what Newsworld is doing, we think it deserves more support.

4202 We believe by virtue of the interventions, and even the research we did, that that is supported. So we are not being unduly punitive, we don't believe, to consumers. In fact, we believe we are going to deliver them far more value for that money.

4203 THE CHAIRPERSON: I am going to move on to another topic, but I think we will break now for lunch and resume at 2:00 p.m.

4204 Nous reprendrons à 14 h 00.

--- Upon recessing at 1255 / Suspension à 1255

--- Upon resuming at 1405 / Reprise à 1405

4205 THE CHAIRPERSON: Order, please. À l'ordre, s'il vous plaît.

4206 I announced that owing to the pace at which the hearing is proceeding overall, we are going to be starting with interventions on Friday rather than on Monday.

4207 The Secretary will be in touch with a number of you to see whether your availability coincides with a desire to move up the intervention list.

4208 We will now continue with the questions.

4209 Gentlemen and ladies, I wonder whether you could tell me whether you have a cost-related breakdown of the new initiatives that you would propose under your approval scenario that you could share with us.

4210 MR. BRACE: Yes, we do, Mr. Chairman. I would be pleased to share it with you.

4211 What I would really like to have Joanne do is elaborate on the components, because there are several components that we are going to initiate over time, over the term of the licence.

4212 The first component is the continuation of the improvements we have already made. In other words, we are already partially live, and that over the next licence term is going to cost us what I mentioned earlier, the $30.4 million in order to continue doing the upgrades that we have already achieved.

4213 What we will do is we will kind of go back and forth and do a little tag team here.

4214 THE CHAIRPERSON: All right.

4215 MR. BRACE: Maybe you can talk about what we have already done.

4216 MS MacDONALD: Sure. In terms of the money that we have already spent, we have more staff, 15 more people on staff. We spent lots more on freelance. We have increased our freelance hire substantially. And satellite and microwave feeds.

4217 The reason we did that was to be more immediate, to respond to what the viewers wanted, to be able to bring news to the screen as it was happening.

4218 Let me give you an example: SARS.

4219 When the SARS outbreak hit in Toronto, you could really see how the news world had changed. At the height of that crisis, officials were briefing two, sometimes three times a day. We needed to bring those developments to the screen as it was happening, to explain it in context, to have reactions. That required more resources, more feeds, more people, more reporters, more journalists to be able to do that. And to be able to tell that kind of a story in Canadian context.

4220 I want to refer to one of the intervenors who wrote. This was on the SARS story.

4221 Ray DeNure, who owns DeNure Tours, said:

"Far too often my customer is influenced by what they see on CNN. During the tragic events that have damaged the travel industry in the last two years, my customers have been heavily influenced by television news. They are glued to their sets and often call our office with questions before we have a chance to interpret news and form a response. In particular the perspective that CNN gave on SARS has been incredibly damaging even to the Toronto-based customer. This shows that a viable Canadian organization is needed to compete with American broadcasting." (As read)

4222 That is why we made the investments that we did; so that we could be more immediate, we could be live, we could serve the viewer, we could be less repetitive, and we could have the news as it develops on the air. SARS is a very good example of how we did that.

4223 MR. BRACE: So that $30.4 million, Mr. Chairman, is directly related to on-screen improvements, and it is also important to note that it is part of our status quo calculation. I think that might be one of the disconnects that I had earlier that maybe I wasn't able to communicate.

4224 That is clearly in the status quo that we presented.

4225 MR. McKENNEY: And the reason for the loss in the status quo.

4226 THE CHAIRPERSON: I guess you are going to suggest a reconciliation in a chart you are going to present. Is that it?

4227 MR. BRACE: We will do that, absolutely.

4228 THE CHAIRPERSON: What I would really like you to focus on is the incremental, because what you are going to do anyway you are going to do.

4229 MR. BRACE: That is what we need to be absolutely clear on. We can't afford to continue doing what we have done.

4230 That is the issue. If we went with the status quo and went ahead and spent the $30.4 million, just as we spent the $22 million over the last licence term, we never, ever climb out the hole.

4231 THE CHAIRPERSON: We risk the disconnect again. I appreciate that.

4232 MR. BRACE: All right.

4233 THE CHAIRPERSON: What I am saying is I want you to tell me what we are going to get for the incremental addition --

4234 MR. BRACE: I guess what I am trying to decide is that the $30.4 million is already incremental. But the other incremental things.

4235 THE CHAIRPERSON: The $19.6 million that is total expense is more with the approval than without.

4236 MR. BRACE: Number two is that we are going to start to move in the first year to more of a live situation. That will cost us $6.4 million.

4237 Once again, I will throw it to Joanne.

4238 MS MacDONALD: What we are really doing there, Commissioners, is moving to a live anchor format like CNN Headline did two years ago, so that we are live on the air all the time. We can get the news on the air as it happens, explain it with a Canadian context to viewers at the time that it is developing.

4239 For example, when the mad cow story broke in Alberta, that was a story that was happening in northern Alberta several hundreds of miles away from our stations. We needed to get to that story. The story of mad cow then moved to Saskatchewan. There were elements of the story in B.C. There were officials briefing in Ottawa about the significance of how many Canadians were at danger; did you need to be worried about beef in this country.

4240 So we need the resources to be live on the air so that we can tell that story on an ongoing basis as it develops, with immediacy.

4241 So our plan calls for a move to a live anchor format so that we are live and the supporting editorial team that it needs to do that, to be less repetitive and to have news material that is always fresh.

4242 We are also looking at putting more news-gathering resources in the field: a team in the east, a team in the west, that will be able to respond to these stories, be able to travel, be able to get up to Peace River or northern Alberta to the farm where this is happening, so that we can be there and be immediate.

4243 That is what the viewers told us they wanted.

4244 For example, in the response to interventions even the people who supported Newsnet, many of them talked about the service being a good service.

4245 But Kevin Snelgrove, who is a viewer, said:

"I often feel the news on CTV Newsnet is repetitive. As an avid news-watcher it is frustrating to hear the same thing over and over." (As read)

4246 Sean Griffin said:

"If that service were to be enhanced --"

4247 THE CHAIRPERSON: Ms MacDonald, I don't want to interrupt you, but it is not responsive.

4248 I am trying to get you to respond to what I am looking for.

4249 I am looking for a breakdown. Mr. Robertson was talking about the dreams of the service, and I know why you all dream. The reality of the service is excellent. I am sounding more and more like an accountant, I understand, but I need an accounting here.

4250 What I would like you to do for me, if you could, now or in a filing, is break down the incremental expenses in programming and production, technical, sales and promotion, admin and general, and tell me what those are and why you need the rate increase to incur those expenses.

4251 I understand the goal that you are trying to achieve on the screen.

4252 MR. BRACE: Commissioner, in that light what we propose to do, then, when we get into the administrative and that kind of detail, we will position that as a reply.

4253 If I could beg your indulgence, I will give you some of the headlines.


4255 MR. BRACE: Of the $6.4 million that really gets us into the live anchor format with the addition of some anchor and editorial production --

4256 THE CHAIRPERSON: Excuse me again so that we don't have a disconnect.

4257 Where do I see the $6.4 million? Where do I find it in your financials?

4258 MR. BRACE: In programming costs.

4259 THE CHAIRPERSON: In incremental programming costs?

4260 MR. BRACE: That is correct.

4261 THE CHAIRPERSON: It would not be incurred without the price --

4262 MR. BRACE: On your list, if you look at the $17.5 million, it is the variance that you see there. That is where we are going --

4263 THE CHAIRPERSON: $6.4 million of that is what you are talking about.

4264 MR. BRACE: That is correct. And that will include --

4265 THE CHAIRPERSON: Then we will only have about 11.1 to go.

4266 MR. BRACE: That will add ten additional journalists for us.

4267 THE CHAIRPERSON: Thank you.

4268 MR. BRACE: The $4.1 million -- and that will be along the way that we will spend that -- will include the addition of some east-west editorial chase teams and an additional four staff in terms of reporters and a camera fly-pack.

4269 In addition to that, $4.2 million will be kind of the last phase of what we are talking about that then moves us into a fully live anchor situation. So the last place that will become live will be in the morning and in the afternoon. That adds eight additional journalists.

4270 We apologize for testing your patience on this. That is the outline.

4271 THE CHAIRPERSON: Does that cover the $17.5 million roughly?

4272 MR. BRACE: Yes, pretty close; 15. Then the other two million -- I would like to introduce you to Rick Nichols, who has joined us, to maybe expedite the matters. Rick is the Business Manager of CTV News.

4273 MR. NICHOLS: The additional gap here that we are talking about between the $15 million and the $17 million, there is some additional inflation on top of that. We provided for some additional funds that we were not sure exactly how they would be divided between the live and the anchor, of approximately $2 million.

4274 So that is kind of the gap difference.

4275 THE CHAIRPERSON: So practically all of that $17.5 million is that initiative to go from tape to on-screen. You have broken it down in terms of both the bodies and the resource and the equipment that you need to have to do that.

4276 MR. BRACE: That is correct. That is our commitment.

4277 THE CHAIRPERSON: If I go down that list beyond the 17.5 to the million and a half for sales and promotion, that is again primarily directed towards advertising revenues?

4278 MR. NICHOLS: If I could answer that, really what that relates to are revenue-related type costs that we have. Obviously you can see with the rate increase the difference we are talking about of $52 million of subscription revenue and $5 million of advertising, that comes with additional revenue-related items, whether it be the CRTC fee, whether it be commissions. That really is the roll-up on that.

4279 THE CHAIRPERSON: That is where you put CRTC fees, in sales and promotion?

4280 MR. NICHOLS: Absolutely. We have no change in our technical costs between the two models.

4281 THE CHAIRPERSON: Thank you. I think we are there.

4282 MS ROBINSON: Mr. Chairman, just so there is clarity in terms of the record on this issue and what you have asked that we provide, I know that you and Mr. Brace have gone back and forth on what we have called status quo. In the sheet that we are going to be providing to you, there will be a category which is called ongoing commitments to improvements already in place.

4283 Those will be improvements which have been made already to increase the live aspect of the service.

4284 While they have been referred to variously here as status quo, I think we need to be clear on the record that it is not a given that those improvements would remain in place in the absence of a rate increase.

4285 So the sheet that you will be getting from us will essentially have three categories in it: the first being the ongoing commitment to the improvements already in place, with a number attached to that; second, the additional improvements to better serve viewers; and third, the margin to make the business viable.

4286 I don't know whether my colleagues are in a position now to give you a breakdown on the first category or if that is of interest to you at this point in time, which is the ongoing commitments to the improvements already in place.

4287 That is a large part of what the fee increase that is being requested will be funding.

4288 THE CHAIRPERSON: If I am understanding you, Ms Robinson, that cross cuts the financials that you have filed, the status quo financials and the others.

4289 I am not saying your status quo projections are going to be amended.

4290 MS ROBINSON: In fairness to the Commission, when we have -- and I think Mr. Brace may want to jump in on this. When we have a business that is in a substantial loss situation, as we look forward to the next licence term on that, continued and significant losses are not an option that CTV would look at.

4291 So there has been a commitment to additional improvements during the past licence term, and there is a comprehensive business plan on a going-forward basis. But I think it would be misleading to the Commission to suggest that without a rate increase these improvements that have been made to date would stay in place.

4292 THE CHAIRPERSON: I hope I am not hearing you incorrectly. Your status quo projections that you are requested to do are not arithmetic. They are your best projections, as I understand it, of what the business would look like if you didn't get the rate increase.

4293 What I hear you now saying is that that isn't the case; that you would not continue to take a million sum loss per year. If that is the case, then it seems to me that your status quo projections should show that.

4294 This isn't just an exercise in saying here is some arithmetic going forward. This is your information to the Commission as to how your business would look if you didn't get the rate increase.

4295 If there are corrections to make to it, then by all means you had better make them.

4296 MR. BRACE: I think we need to refile something here to take away the confusion. Obviously, what we have done I don't think, is address our explanation as well as we needed to, so we will do that.

4297 THE CHAIRPERSON: I have no problem with you isolating what you have done.

4298 MR. BRACE: We understand.

4299 THE CHAIRPERSON: But I need to know that I can rely on these financials of your status quo. And if you won't put up with losses, something else will have to give to give you a better bottom line.

4300 MR. BRACE: That is the point, is that --

4301 THE CHAIRPERSON: But that is what we need to know.

4302 MR. BRACE: Yes and what we had done here, mistakenly I think, is that we looked at the status quo as if we were going to continue making investment despite the ongoing loss and our position is entirely different. That is the issues, is that we can't continue to make that investment and sustain a continued loss, that's not practical. So, I think what we need to do is revise what we have called the status, I'm not sure if even the status quo is the correct word, but our forward approach if we didn't get the increase and I think that that is maybe the --

4303 THE CHAIRPERSON: Maybe status quo wasn't the word, but we certainly want to get from it a knowledge of what your business will look like without the rate increase.

4304 MR. BRACE: That is fair and we have to adjust, as I say, we would have to make adjustments for that.

4305 THE CHAIRPERSON: Now I guess there is even greater pressure to do it quickly because we will probably be starting the interventions --

4306 MR. BRACE: Yes, absolutely.

4307 THE CHAIRPERSON:  -- by about midday Friday, so if you could do it before that it would be much appreciated. Okay, well I'm glad we have cleared up the fact that we didn't have -- so this really, I think these are going to be follow-up questions which probably have to do on -- in the light of that new filing. Because I was going to ask you about -- I know you have broken down your new initiatives, which you now haven't given me, is the real implications of your denial. This discussion, in effect, suggests that -- that discussion is still to be held and if you could, so that we can expedite the process and so interveners can be on notice, if you could in filing any revised "status quo" projections, also detail the assumptions and the breakdown of what changes from what was in the original status quo filing and the new one that you are going to file, so at least you have narrative there that helps explain what the implications of the denial would be from your point of view.

4308 MR. BRACE: I apologize once again. Understood, so what we will do is propose -- we'll put forward a filing that suggests if we didn't get the rate increase what our business would look like from a practical standpoint, what we would actually intend to do.

4309 THE CHAIRPERSON: Now I take it, as you have said and as Ms MacDonald said before she was so rudely interrupted, these are in favour of your live anchor initiative. One of the reasons you give for that is that this will stabilize or improve your viewing to Newsnet. Now, staff at the Commission has gathered some data on the four news services CNN, CBC Newsworld, CTV Newsnet and CNN Headlines, and you mentioned in the -- I think in your presentation today as well, but in your application that CNN Headline moved to the live anchor format during prime time hours in January 01. As we look at the improvement in their ratings in Canada they haven't really given them much of a bounce, they go from a zero here to .1 and they go to 01 and in 01 we had 9/11 and so that probably gave --

4310 MR. BRACE: Yes, you see the spikes during the major world events, absolutely.

4311 THE CHAIRPERSON: What makes you confident that it will improve your audience in light of CNN Headlines' experience?

4312 MR. BRACE: I think that is the fundamental route of the service, is that Canadians want Canadian news from a Canadian perspective. And so whether it is world stories like 9/11 it has to be from a Canadian perspective and the only place that Canadians can really get that are from either Newsworld or an alternate of course, the one we choose them to come to, is Newsnet. That is the fundamental difference between CNN and Newsnet or even Newsworld in this country. So, getting to the live format, we believe is fundamental, that is where we will get the lift.

4313 I would suggest that perhaps some of our audience is going elsewhere for more immediacy, perhaps to Newsworld and perhaps elsewhere. But clearly, the bulk of the complaints that we get relate to the fact that quite often we're not live, that it is a repeat format. And we really do get into a conundrum sometimes where if a story is changing on an ongoing basis, because of the format that we use and the technology that we use we have to wait, in may cases, up to half a hour or even longer before we can update that story. I think in the fast paced way that the world moves today that we're not answering the needs of Canadians and their demand for immediacy in not being able to do that in a more efficient way.

4314 THE CHAIRPERSON: When I look at the viewing statistics they show that CNN takes a bump up from one share to a 2.2 share from 2000 to 2001 and goes back down after that 9/11 year to 1.5, but that is still more than double Newsworld and five times yours and 15 times Headline news. I guess my point is that CNN Headline news doesn't appear to have gained Canadian viewers as a result of shifting to the live anchor format.

4315 MR. BRACE: Our numbers kind of mirror the same thing. We'll spike obviously when there are big events and come down, but we believe that even as it stands now we're still albeit not as good an alternative, but we're an alternative to the U.S. feeds, especially for that Canadian perspective. So that where we are losing kind of on the immediacy, we are still gaining in terms of Canadian perspective, which I think is what makes sense and certainly our viewers have supported that. What we want to be able to do is eat more into that share of CNN. What we want to be able to see is --

4316 THE CHAIRPERSON: CNN Headline or--

4317 MR. BRACE: Sure, CNN Headline or CNN News from that standpoint. We want to bring Canadians that are perhaps lingering longer on CNN or other services back to Canada and we think this will give us the opportunity to do that.

4318 THE CHAIRPERSON: Okay, but I'm not clear how if, as you say, CNN and CBC Newsworld are the prime rate competitive all-news long form services and you and Headline News are the headline competitors. I don't see how you drive any comfort from what their going to a live anchor format did for their audiences in Canada. I don't see how it--

4319 MR. BRACE: I don't think that for their audiences in Canada that was a big impact. Of course, unless you are talking about major events. Really, it is more of an opportunity for us that we believe that by going to this more immediate live anchor format that it will garner more attention for us. And, as I say, that is what the 510 interveners are telling us, that need to be live and we believe it. I just think it's the way it is today. We have moved from kind of television war in Vietnam where you waited two, three, four days for film to come back to now where you can get live coverage from the battlefield via videophone, that's very compelling and I think that we need to be in that ball park if we are going to compete effectively.

4320 THE CHAIRPERSON: Okay, I have your answers. Let me ask you about the relationship between the Newsnet service and the CTV mother ship newsroom. Would you describe briefly what synergies there are, what exchanges, who does what for whom?

4321 MR. HURST: The CTV mother ship, as you call it, provides the base for CTV Newsnet. Not only the national news operation and our international news gathering bureaus, but also the CTV stations across the country that are charged to do and do supper time, late night, many of them do noon newscasts. Those 21 stations provide the kind of the bedrock, the core for an early warning system for CTV Newsnet when stories are happening and stories are breaking. Joanne talked about the mad cow thing a couple of weeks ago. When Swissair 111 went down, our first early warning that something was happening at a time when we didn't know anything and there's confusion when stories are breaking, came from ATV.

4322 So, CTV Newsnet is the 24 hour all-news headline service. The Network News operation provides correspondence at international bureaus who fundamentally file for the National News with Lloyd Robertson, the Morning Show and also will contribute to Newsnet on a continuing daily basis. When there are very large stories going that require continuous, more resources, we pool those resources between the Network News operation and the local news operation when Revelstoke, British Columbia there were several avalanches this past winter, one of them involving a high school class from Calgary, Alberta. We get the early warning probably from our local newsroom and then we apply and then we send crews to file for the National News, the supper time news. If we find that there is continuous news coverage because headlines are breaking or developments are going on, we will send in a second reporter, maybe a third reporter. If we think we are going to be going for a day or two we will get a live capability which might be a satellite truck, which might be a microwave truck and on the horizon, which might be a videophone. Does that answer your question?

4323 THE CHAIRPERSON: It does, yes. How do you cost out the use of that equipment as between the services?

4324 MR. HURST: CTV Newsnet accesses all of the resources, the operating cost resources, essentially for free. CTV Newsnet accesses all of the capital resources, the trucks, the new tires, that's all free for CTV Newsnet. CTV Newsnet does pay an operating fee if there are additional charges to cover a story. Let me give you an example, a SARS news conference. This last thing with SARS in Toronto happened on a weekend. Our local newsroom and our local Toronto News Bureau is not necessarily staffed enough, resources and reporters through a Saturday night and a Sunday night. I think that may have happened on a Friday night or a Saturday night. If there is overtime beyond someone's shift, national news, local news, then CTV Newsnet will pay that incremental cost to cover that story. Is that helpful?

4325 THE CHAIRPERSON: That is helpful. In your financials, going backward and going forward, how much per year would flow from Newsnet for these incremental costs or other costs back to CTV?

4326 MR. HURST: I'm going to pass this how much per year --

4327 THE CHAIRPERSON: Per year.

4328 MR. HURST:  -- would flow --

4329 THE CHAIRPERSON: In your expenses and under any of the four categories. Are any of the four categories of expenses on our proforma, do any of those go back to CTV and, if so, how much per year --

4330 MR. HURST: I'm going to ask Rick Nichols and maybe we will start with the large expenditure category, which is Canadian programming costs. Rick.

4331 MR. NICHOLS: Let me start with the one thing when you talk about the full -- like Bob talked about the incremental costs. We can't track that, we don't treat it that way. Each program department has its own independent decisions. So, in a case like that, the overtime that Bob was talking about, we wouldn't be tracking that, that would be a specific direct incremental cost of Newsnet and just part of its program. But we don't track it as a transfer of costs if you owe from CTV News to this service.

4332 THE CHAIRPERSON: Could I just interrupt you there and ask why not? In the sense that you get presumably a bill from CTV or some --

4333 MR. NICHOLS: It is not from CTV. We get bill for the overtime from the reporter and the overtime would be paid for and charged directly to Newsnet.

4334 THE CHAIRPERSON: And you pay the reporter directly?

4335 MR. NICHOLS: Pay the reporter directly.

4336 MR. HURST: CTV News pays the --

4337 MR. NICHOLS: There is no add-on, there is not extra charge. It's a direct payment.

4338 THE CHAIRPERSON: Oh, I see, so you have incurred that reporter's charge, overtime, you pay that --

4339 MR. HURST and Mr. NICHOLS: Exactly.

4340 THE CHAIRPERSON:  -- he keeps track of his time in that --

4341 MR. HURST: On the programming operating side there is no kind of transfer or any payment for an amount of news material supplied to Newsnet, it is all direct incremental cost in the field. If an overtime bill goes directly to the guy in the back row and he pays it directly into the pocket of the camera reporter --

4342 THE CHAIRPERSON: So, you would assume his salary is paid for and, in effect, you get that free, but if he has to work overtime or incurs additional expenses he will bill you directly and you pay him?

4343 MR. HURST: That is correct, he bills us directly.

4344 THE CHAIRPERSON: Okay, I understand.

4345 MR. NICHOLS: The things that we do share is on a large story basis, we treat it as a pool. Basically over the term of the license for the big breaking news for the first six years we have estimated those costs to be $1.9 million over the term and what that is is CTV News -- shared things like whether it would be the Iraq war, whether it would be our federal elections we have had throughout the term, the large breaking news where we needed to pool additional resources. In addition, there is some events within or I will call our management departments within CTV where we have incurred additional incremental costs within those departments since Newsnet launched and we're filling those at the incremental basis and that's about $7 million over the term.

4346 The final piece where there is a charge from CTV to Newsnet is in the management fee and the management fee you see that in the admin and general line and that's I believe over the term of the license, it's $3.3 million over the term for the current license.

4347 THE CHAIRPERSON: So, is that all if it?

4348 MR. NICHOLS: That is it, yes.

4349 THE CHAIRPERSON: And, the $1.9 for the fast-breaking news, where would that be booked?

4350 MR. NICHOLS: In the programming section.

4351 THE CHAIRPERSON: And the $7 million?

4352 MR. NICHOLS: In the programming section.

4353 THE CHAIRPERSON: And the $3.3 in the admin and general.

4354 MR. NICHOLS: Yes.

4355 THE CHAIRPERSON: Okay, so that's a total of what $12.2?

4356 MR. NICHOLS: About $12 million.

4357 THE CHAIRPERSON: And that's over the whole term?

4358 MR. NICHOLS: Over the six year term.

4359 THE CHAIRPERSON: Over the six year term. What are you projecting going forward, if that amount will be for the next term, that $12.2?

4360 MR. NICHOLS: Starting with the management fee basically, starting at a half a million dollars a year with inflation, so it gets, over a seven year term to be close to $4 million.


4362 MR. NICHOLS: Actually, $3.8 million over the seven years.


4364 MR. NICHOLS: We have assumed that the breaking news component which is a bit of an assumption and I have to admit remember we did these plans back before the Iraq war, so we have assumed that to be approximately a half million dollars a year, so for seven years about $3.5 million. So, an increase because we expect to be more in the breaking news. And then that leaves the other, the transfer of the $7 million and there has been no change to that. So, other than the fact we're adding a year, so it would be just over $8 million.

4365 THE CHAIRPERSON: I see. So that $12.2 will go to, what is it, about 15, a little over 15 is that what you get?

4366 MR. NICHOLS: Correct.

4367 THE CHAIRPERSON: The management fee goes for part of Mr. Brace's services and the like, Mr. Hurst --

4368 MR. McKENNEY: That includes things like human resources that are provided by the CTV operation, legal, financial and accounting, general management, business affairs, overhead type costs.

4369 MR. HURST: May I just add a little question to the category that you have called the breaking news fee. It isn't so much breaking news, but these are large stories that we see out in the distance that require special budgets beyond our daily operating budget to cover the news of the day. So, they are the Iraq war, they would be liberal leadership convention where we will get together weeks before and do a whole budget and we come up with a factor and a percentage of this whole budget that belongs to CTV Newsnet and it's quite a small factor.

4370 So, it's not really a charge back to CTV News or a subsidy, it's really a direct cost of the cost of CTV Newsnet's continuing ability to cover the Iraq war or to cover continuously some other -- it's part of what is a pooled cost, but CTV Newsnet really gets on that special event budget which are important critical news events for us to cover. They really get an incremental value from the CTV system and one of the examples of that was the Iraq war where we sent a lot of people into the region and we did an immense amount of coverage for three weeks and CTV Newsnet really got a bargain, because if they had to amount that on their own it would have been 10, 15, 20 times the cost.

4371 THE CHAIRPERSON: Pooling and incrementality presumably saves you some dollars.

4372 What's the method you use for allocation of the costs when you have pooling?

4373 MR. NICHOLS: Well, the only place we are talking about that in this case is the breaking news and we have looked at 25 per cent which in the case, as Bob said, of the Iraq war as an example, just on CTV News and the Canada AM coverage we needed, it would have only been one reporter with a camera in Baghdad, but for the service Newsnet we added an extra camera.

4374 On a stand alone basis, Newsnet would have had to pay for their own camera and reporter. In this case they were only charged 25 per cent, so a significant saving, which is why we said we said we could bring the synergies to the table.

4375 THE CHAIRPERSON: Okay. And the management fee I guess is recognized as what, time allocations roughly and you end up picking a number that's a lot less than you can buy all that talent for if you had to go out and buy it directly.

4376 I wonder why we are having these technical glitches.

4377 MR. McKENNEY: That's correct. It's based primarily on the size of the different specialties, but it's consistent across all the specialties that we have and the digital networks that we have as well.

4378 THE CHAIRPERSON: You divide it roughly by gross revenues.

4379 MR. McKENNEY: More on head count I would say.

4380 THE CHAIRPERSON: On head count.

4381 MR. McKENNEY: And the number of people involved in each operation. For example, your HR function would be significantly more for comedy versus OLN that has very few staff.

4382 THE CHAIRPERSON: Right. Okay. Thank you. Other synergies, I notice in your application that you have a relationship with APTN. Do you have any with any other services?

4383 MR. HURST: Yes. TVA.


4385 MR. HURST: When we launched with TVA the Canal Nouvelles, we had a joint partnership and a news exchange. That contract and partnership was running out at the end of last year.

4386 When we were writing our application, we were in negotiation with TVA and we have since concluded a new partnership to exchange materials between CTV Newsnet and the Canal Nouvelles and the main CTV network and TVA. We are doing some technical stuff to exchange material on a much faster basis by some distribution, internal distribution material that we have.

4387 APTN and TVA are two of our critical partners at CTV Newsnet.

4388 THE CHAIRPERSON: What would you say are the benefits you derive from those relationships both in qualitative and in quantitative terms?

4389 MR. HURST: I will talk about TVA and Ms MacDonald will talk about APTN a little bit.

4390 Quantitative is a good question. I guess the question is how much material a day on Newsnet would we get from TVA. Mark Sikstrom, how much material would we get every day from TVA?

4391 MR. SIKSTROM: It wouldn't necessarily be daily, but certainly weekly and it depends a little on the news cycle in Quebec. Certainly during the recent provincial election there we were exchanging quite a bit of material. It would tend to ebb and flow with the news cycle in Quebec, but it's a regular arrangement.

4392 As Bob alluded to, we are bringing them in to the distribution network we call Gateway which is a digital MPEG based system that allows everything to flow over data lines rather than satellites and fibre feeds. It's very efficient and it will really increase the number of items and content that we share on a daily basis.

4393 THE CHAIRPERSON: Have you been able to ball park cost savings that you would get or you don't look at it that way. You just look at it as additional value rather than --

4394 MR. HURST: We haven't ball parked cost savings, but it's been enormous. We have in Quebec a very strong English language station, CFCF of course. We have a national news bureau, but we don't really have anything up in Chibougamau or even across in this area beyond CJOH. Up in the Gaspe we have no real in-living news gathering capability.

4395 TVA has an enormous news gathering capability across Quebec and a feed-in capability and a live microwave capability. It's enormous value for us talking on the qualitative side of this to be able to access our pictures. Our news desks are talking every day.

4396 They have access to all the material that we shoot across the entire country and around the world. I guess I can say this. We are having discussions with TVA right now about them joining our bureau in Washington. TVA -- we are having early discussions. They had come us. You have got facilities there, you got bureau, you have got space for us, so we are having those discussions now.

4397 I don't think I should go any further than that.

4398 MR. SIKSTROM: If I might add just in terms of putting a value on it, one of the reasons we don't have a dollar value that we could put on it -- I mean we could probably sit down and scribble an estimate, people and feeds and whatever, but since our agreement does not involve any transfer of money between the two entities -- we don't pay them and they don't pay us for any of these services -- we don't have a number that we can attach to it.

4399 THE CHAIRPERSON: I presume it's the same with APTN.

4400 MS MacDONALD: Yes. In terms of APTN we had in Toronto and in Vancouver an APTN reporter sitting in our newsroom sitting with us. They take part in our daily news meetings, so we know what they are doing and they know what they are doing.

4401 They are also hooked up to Gateway, the digital feed service that Mark referred to, so they have access to all of our material.

4402 Then we are looking, for example, with the upcoming Assembly of First Nations meeting in Edmonton in July and really doing cooperative coverage there, so we are working together, sharing the studio, sharing space.


4404 MR. HURST: Just again if I might conclude in terms of the quality of this material. I mean these partnerships are critical to CTV Newsnet because it gives us the ability to have a lot more regional reflection and draw stories from the regions that we wouldn't normally do. It gives stories from the regions and on networks like APTN and on TVA stories that are carried on Newsnet that would not be seen unless Newsnet was there.

4405 THE CHAIRPERSON: I assume your TVA relationship allows you to tap into LCN as well. Is that right?

4406 MR. HURST: Absolutely. Yes.

4407 THE CHAIRPERSON: Good. Well, I think those are all my questions for the moment.

4408 Commissioner Grauer.


4410 Two questions. First, I just wanted to follow up a bit on a discussion you were having with the Chairman with respect to the incrementality of some of these costs, the CTV News and the local stations.

4411 I want to make sure I understand. You mentioned the SARS crisis in Toronto and having to put someone on because the station didn't have someone on in the middle of the night.

4412 What I wonder about when I hear that is in Canada's largest city with the station that is the largest news station in Canada's largest city that you wouldn't have people on.

4413 That leads me to a concern that if cutbacks are happening in news in local stations that we have heard a lot about, there were a few, is it then being shifted over to Newsnet to pick up the slack on some of the cuts?

4414 Perhaps you could --

4415 MR. HURST: Yes. Good question. I think perhaps I may have -- by using that example I may have perhaps given you the wrong impression.

4416 On a Saturday night, on a Friday night, and I apologize because this thing happened last Friday and Saturday night when that SARS scare came back. I know it was in the evening.

4417 We are staffed in the evening on the national news and the local news operation in Toronto to a certain level. I don't know precisely how many reporters there would have been assigned to the night staff on a Friday or a Saturday night at CFTO, but it would have been say two or three and the same with our Toronto news bureau. They do a rotating shift through the weekend.

4418 Here now is a story of immense importance that needs another reporter. SARS is coming back to southern Ontario which has the potential to hit the economy of the entire country.

4419 Have there been cutbacks, and this is your question, that have been shifted over to CTV Newsnet? The answer in this organization is no. I would say a similar thing -- we know British Columbia quite well, you much better than I.

4420 Last summer our station in Vancouver did award winning work when a fishing boat tragically flipped over in the Fraser River and the Coast Guard scuba team couldn't go and save them or make an attempt to save them. It was a story that went on for about three or four days, maybe perhaps longer than that.

4421 Our station there gave us, and they dug that story through night and day, through weekends, and they gave that to Newsnet and we carried a lot of that story on Newsnet until there was in effect a flip in the decision.

4422 Our station and our situation in Vancouver as we in fact have made significant investments in that station is to be able to better cover that region and that in turn helps CTV Newsnet.

4423 It's a good question: Are you offloading these costs over to an all news channel and we are not.

4424 COMMISSIONER GRAUER: I don't mean to interrupt you. I don't mean offloading as much as budgetary pressures come along and there you are in Canada's largest city and SARS bursts our again absent Newsnet. Wouldn't CFTO have said "We have got to put someone on overtime. We can't miss this news conference".

4425 I'm not saying, you know, that we can absolutely be precise about every single episode. It's one of these things I think when we are looking at a basic subscriber increase with a service on basic and you have guaranteed access rights, we really need to be thinking about shareholders paying for it as opposed to subscribers and what's coming out of local.

4426 MR. HURST: Commissioner, I just want to give you comfort. CFTO in Toronto would have covered that story on overtime if required for the CFTO news.

4427 That story also required Newsnet overtime costs and we are covering both because the story requires it because Canadians need to know that story and CTV Newsnet needs to know that story like now, not at 11:30 or two o'clock in the morning or the next morning.

4428 COMMISSIONER GRAUER: Thank you. One other quick question.

4429 Mr. Cassaday, when we were talking to Teletoon the other day, spoke about operating their regulated companies as a portfolio. Did I understand you when you talked about -- you were carrying forward the $22 million cumulative loss over to the next licence term.

4430 You don't run these as a portfolio then, your services.

4431 MR. BRACE: We certainly try and realize synergies where it's possible. I think we have identified many here today, but we look upon each business as an autonomous business plan. I think that that is the way that we can measure the individual success.

4432 Suffice it to say and it was demonstrated here today that Newsnet, if we look at that, gets a great advantage from CTN News as does many of our other specialty services from the infrastructure which is in place which is impossible to calculate just what that benefit is in real terms.

4433 Certainly we run our businesses as autonomous business units, but you can't avoid the overlap and in fact we encouraged the synergies where possible.

4434 A good example of that would be promotion time. We offer promotion time for all of the specialty and digital services and conventional for that matter across our suite of properties. There is no transfer of cost for that in order to make up for it. It's seen as something that is positive and supports the individual services.

4435 COMMISSIONER GRAUER: One of the things that struck me as we were having the discussion, the discussion I had with comedy yesterday about their desire to reduce their evening Cancon, notwithstanding the fact that they made $17 million more than they were projected to make over the course of the last licence term. OLN I think made $14 million more than projected over the course of the last licence term.

4436 What I'm wondering is if you want to carry forward your losses, perhaps some of those profits over the last licence term might be reinvested in programming.

4437 MR. BRACE: It's an interesting consideration. One of the issues we do have with that is our different ownership structures. They aren't all under the same umbrella. I'm not sure the partners at OLN would be comfortable with us assigning some of their good fortune to some of our other services.

4438 COMMISSIONER GRAUER: Perhaps the comedy people would.

4439 Thank you. Those are my questions.

4440 THE CHAIRPERSON: Thank you very much.

4441 That is the end of this phase of your application process.

4442 Mr. Secretary.

4443 MR. LEBEL: Thank you, Mr. Chairman.

4444 We will now hear items 9 and 10 on the agenda jointly which are, first, an application by HGTV Canada Incorporated to renew the licence of the national English-language specialty television service known as Home and Garden Television Canada expiring 31 August 2003, and an application by History Television Incorporated to renew the licence of the national English-language specialty television service known as History Television expiring 31 August 2003.

4445 The licensee proposes to add program categories as indicated in our agenda.

4446 THE CHAIRPERSON: Whenever you are ready.

4447 MR. LEBEL: You have 40 minutes to make your presentation.


4448 MR. MacMILLAN: Good afternoon, Mr. Chairman and Members of the Commission. My name is Michael MacMillan. I am the Chairman and CEO of Alliance Atlantis Communications.

4449 We are here today, as you know, to present the renewal applications of History Television and Home and Garden Television Canada which is known also as HGTV Canada.

4450 Let me first, please, introduce our panel, all from Alliance Atlantis Broadcasting.

4451 Immediately to my left is Phyllis Yaffe, CEO. To her left is Mark Rubinstein, President and COO, and Andrew Callum, Senior Vice-President, Finance. On my right is Rita Cugini who is the VP, Regulatory Affairs and Business Development.

4452 Behind us in the second row, starting closest to you is John Gill, Senior Vice-President, Factual and BBC Channels, Norm Bolen, Executive Vice-President, Programming, Kirstine Layfield, Senior VP, Lifestyle Programming and Vanessa Case, Vice-President, Programming, HGTV Canada.

4453 Also at the third table is Harvey Rogers, Senior VP, Operations and Engineering, and Frank Pulumbarit, Vice-President, Interactive.

4454 Over the new few minutes we plan to give you a brief progress report on how the two Alliance Atlantis channels before you at this hearing, History and HGTV Canada, are doing.

4455 We will discuss the role of Canadian specialty services, where they have succeeded and the challenges that we think we are going to face in the future.

4456 Finally, we will go through each of the issues that you have raised in your Public Notice and indicate where we stand.

4457 We think the Commission's specialty policies have given rise to a wonderful success story. Specialty services, with their niche programming and targeted audiences, provide expanded viewing opportunities for Canadians, allowing them to find the programming that interests them. A strong, successful and diverse specialty service offering has fostered consumer choice.

4458 In that regard, Canadians are blessed with more television choice than most other countries throughout the world, and Canadians have unparalleled access to both domestic and international programming.

4459 The onset of specialty television has increased the number and diversity of players within our broadcasting system. In addition, specialty television makes a significant contribution to the health of our cultural industries, developing and supporting the independent production community and all of the creators who are dependent on that work.

4460 We are very proud of the accomplishments of History Television and HGTV Canada. They are very focused and distinctive services with unique program niches. They are exactly what the Commission had in mind when it began licensing specialty services.

4461 These two services are part of a family of specialty services operated by Alliance Atlantis Broadcasting. We now operate 12 specialty services, and have a significant interest in six more.

4462 Each service has its own special role to play. We find that there is a real synergy in being able to operate them as a group.

4463 Alliance Atlantis is committed to the success of its broadcast services. We are in the specialty television field for the long haul and we believe that specialty television has limitless potential.

4464 I would like now to turn to Mark Rubinstein who will make some comments about the new digital universe.

4465 MR. RUBINSTEIN: Commissioners, I would like to briefly outline the distribution environment that we see over the next seven years.

4466 These hearings are taking place in the midst of a fundamental transition in how Canadians will receive their television choices. The transition from analog to digital offers both opportunities and challenges to both HGTV and History.

4467 We are excited about the emerging digital platforms -- VOD, SVOD, Interactive Television, to name but a few. We are also cautious about the negative impact that these and other platforms could have on our existing subscriber base.

4468 Digital technology has without question increased the selectivity of television consumers. As viewers get the enhanced ability to choose channels more narrowly, there may well be an erosion in penetration and audience numbers, particularly for the "analog" channels that benefitted from cable packages.

4469 We are finding that as digital penetration increases, consumers are becoming more -- not less -- price sensitive.

4470 That is why we have taken a relatively conservative view of future growth for the analog specialty services, particularly narrow niche services like History Television and HGTV Canada.

4471 In View of this distribution uncertainty, we have also decided not to ask for changes in the approved wholesale rate for basic carriage for either History Television or HGTV Canada at this time.

4472 This does not preclude us from negotiating increases in our discretionary rate in particular cases. But to be conservative, we have used a constant blended wholesale rate in the projections filed with the applications.

4473 Given the pressures on our subscriber revenue base, we have become more reliant on advertising revenues which, of course, is the riskiest part of the business.

4474 Why is it risky? One of the reasons is the fact that television viewing is a zero-sum game. The hours of viewing per week have remained relatively constant over the past 20 years.

4475 So what is happening is that the number of viewers is not growing; rather, subscribers are dividing their viewing among many more different services. As a result, enhanced viewer choice is a double-edged sword.

4476 Yes, it allows consumers more choice, and provides companies with opportunities to expand their channel line-ups, but it creates more competition for viewers' attention within that limited amount of time that people spend watching television.

4477 The result is that we do not expect viewing to increase significantly for History and HGTV over the next seven years, and therefore we have projected that our ad revenue will increase only modestly for these services.

4478 I would now like to turn to Norm Bolen, the Executive Vice President of Programming, who will highlight some of the achievements of History Television.

4479 MR. BOLEN: Commissioners, since it launched in October 1997, History Television has successfully established itself as Canada's leading destination for viewers seeking fascinating programming on historical subjects.

4480 We are particularly proud of our success because we managed to meet two difficult challenges.

4481 The first challenge was that back in 1997 there was very little programming out there focusing on Canadian historical themes. No one was producing or airing that kind of programming. To meet that challenge we had to go out and commission history programming specifically for the service from independent producers. The results have been incredible.

4482 We have licensed over 750 hours of independently produced original programming for the channel over the licence term. Our licence fees have helped to finance more than $120 million in new Canadian productions. And we have given work to a whole new group of independent producers that are building on their success with our channel.

4483 Our second challenge was to put together a schedule that would be consistently interesting to viewers, despite the fact that many people still think of history as the study of dead people. And here we were quite innovative.

4484 We built our schedule around theme days, and theme weeks. If it's Monday, the programs are all about the 20th Century. If it's Tuesday it's time for programs on ancient civilizations, and so on. We mixed the best historical movies and documentaries from around the world with our original Canadian programs.

4485 This eclectic mix of Canadian and International programming bas been one of the keys to History Television's success. We have attracted a whole new type of viewer -- one that values quality programming, programming that surprises you, programming that also enlightens you.

4486 Our audience with its diverse ethnic make-up is looking to us for stories about Canada' s past as well as a Canadian perspective on world events that resonate with people whose roots are from other countries, as well as stories that originate in their country of origin.

4487 History Television has incorporated a diversity policy into its Producer's Guidelines, in an effort to ensure accurate and fair portrayals of minority groups in its programs. To quote from it:

"We expect our producers to give proactive consideration to qualified individuals who are representative of women, visible minorities, aboriginal peoples and people with disabilities in their search for talent".

4488 History Television's programming staff works diligently to ensure this policy is met, from the initial consideration of the proposal to the production's delivery. History also seeks out programs created by filmmakers from the communities they are documenting. This allows for the diverse voices of Canada to be heard telling their own history.

4489 The results have been terrific. We are now in over five million Canadian homes. Our overall Canadian content level for the broadcast year has steadily increased from 30 per cent when we launched, to a level of 50 per cent as of this coming September 1st.

4490 While we are seeing a number of digital services beginning to cover some of the same ground, we think we have developed a unique rapport with the subscribers to our service.

4491 My colleague, Kirstine Layfield, the Senior Vice President of Lifestyle Programming, will give you a brief overview of HGTV Canada's equally impressive success story.

4492 MS LAYFIELD: The HGTV Canada channel is the source of information for Canadians interested in building and remodelling, decorating and interior design, gardening and landscaping and crafts and hobbies.

4493 Like History television, we also had to face the challenge that there was very little original Canadian programming in our genre when we launched in 1997. So it had to be created. We partnered with the Canadian production community to take lifestyle programming to a new level, creating unique genres of television and top-rated Canadian programs.

4494 We introduced new Canadian celebrities and assisted in expanding the independent production community. Throughout HGTV's seven-year term, we have licensed over 1,600 hours of original Canadian production, of which over 1,000 hours has come from the independent sector, representing a total commitment of over $45 million in license fees.

4495 Our dedication to perfecting and expanding this genre of television has paid off. Our target audience has doubled between 1999 and 2002, and Canadian productions consistently dominate our top 10 rated weekly programs. Many have gone on to win awards and enjoy international success.

4496 There's a long list of Canadian program titles and independent producers provided in our application. Many of these producers created lifestyle programming for the first time for HGTV Canada. We are proud of what they have produced and proud of the fact that we now reach over 4.5 million subscribers with these shows.

4497 Because of the nature of the service, our strategy for marketing HGTV Canada is unique. An integral part of the plan is promotion involving our on-air talent. We are a host-driven network. The hosts promote their HGTV shows and we in turn promote and build host personalities. Our hosts are not only stars of their programs, but also are respected experts in their field and are part of a new and growing line-up of Canadian celebrities.

4498 They are recognized not only across Canada, but also in some cases internationally. They appear at numerous consumer shows across Canada, such as "Canada Blooms", the "Interior Design Show" and the "Edmonton Home and Garden Show", and draw record-breaking attendance at these events. Also HGTV Canada's presence in the community has been recognized through programs such as "Evergreen", a national non-profit environmental organization.

4499 HGTV Canada seeks to ensure that we are representing a multicultural community with all programming seen on the network. With our original productions being led mostly by on-air hosts, we cast for the role across the country, always looking out for the most suited and most diverse individuals.

4500 Our acquired programming is chosen with much consideration of our diverse Canadian audience and their programming preferences. Many HGTV programs, whether acquired or commissioned, include a supporting cast of characters, many of whom represent cultural minorities and perform in the roles of designers, artisans, horticulturalists and tradespeople, just to name a few examples.

4501 New initiatives such as HGTV Canada's national star search contest will further expand our reach across Canada and into its communities, speaking to ail cultural groups and inviting all Canadians the opportunity to take part in helping to shape the future of programming on HGTV Canada.

4502 MR. PULUMBARIT: Mr. Chairman and Members of the Commission, I am responsible for the interactive component of History Television and HGTV Canada.

4503 We use a variety of interactive tools including web, e-mail, multimedia and online discussion forums to enhance the programming offerings of both History Television and HGTV Canada, and make them more attractive to Canadians.

4504 seeks to make the topic of history, both Canadian and worldwide, more interesting and accessible to viewers. The stories of History Television are retold online complete with multimedia presentations, interactive guides, timelines, maps, and so on.

4505 The "Chiefs" website, for example, which we co-developed with Galafilm, extends the educational value of the "Chiefs" series by providing in-depth historical accounts of the aboriginal experience in Canada, biographies of each Chief profiled in the program and a variety of other related content.

4506 We also use the discussion forums at to further develop the unique rapport we have with our viewers. The forum's topics and viewer responses are evidence of this vibrant Canadian online community and are a rich source of feedback for our programming team which uses this information when making programming decisions.

4507 The HGTV Canada website,, provides practical ideas, do-it-yourself information and project plans which flow from the channel's programming. Organized by season, the site extends the channel's practicality and application to the lives of Canadians. When Canadians want to renovate their homes or create a new landscape or garden they first watch HGTV Canada for inspiration and then visit for actual plans and instructions.

4508 We are now routinely using to reach out to our audience, and engage them in new and exciting ways. For example, is the central point of entry for our cross-country talent search for new network hosts.

4509 We continue to explore new interactive applications to increase the popularity of our programs and expand their reach to new technology savvy audiences.

4510 Finally, through our relationships with independent web artists, multimedia developers and technology application providers, we are playing an important role in developing new Canadian talent in the emerging area of interactive media.

4511 MS YAFFE: I want to turn now to the scheduling of our Canadian programming.

4512 As of September 1, 2003, both History and HGTV will be subject to a 50 per cent Cancon rule for the broadcast year. The History level was based on a sliding scale, so the 50 per cent level did not apply until after we reached five million subscribers.

4513 In the application before you, we had asked to keep that sliding scale so that we might reduce the Cancon level back to 40 per cent if we dropped below five million subscribers. However, we note that CFTPA has expressed concern with that in its intervention. They want the 50 per cent overall level to stay where it is no matter what happens to our penetration.

4514 As Mark Rubinstein has indicated, we are not confident that our penetration will stay the same, let alone grow, given the move by digital consumers away from big packages. However, in response to the CFTPA, we are prepared to stay with the overall level of 50 per cent for History Television for the broadcast day -- 6 a.m to midnight -- and to abandon the sliding scale approach.

4515 We have not applied to change the rule that puts the Canadian content on History Television in evening hours at 33 per cent. We know this is a lower level than some other services, however we think it is justified because of the nature of the program genre.

4516 History programming is a special kind of programming and most of the world's history did not happen in Canada. That means that we really need room in the evening hours to bring world history to canadians, history programs carefully selected from around the globe that have special meaning to Canadians from that part of the world.

4517 We also use the evening hours to bring historical period movies to Canadians and there are very few Canadian historical movies that are available to include in the schedule.

4518 If we increase the canadian content level in the evening hours to 50 per cent, we are concerned that the ratings and ad revenue from those hours will decline, and we will be unable to bring the full diversity of world history to our evening viewers. So that is why we think the 33 per cent level continues to be appropriate for evening hours.

4519 MR. RUBINSTEIN: I would now like to address the issue of Canadian program expenditures.

4520 HGTV Canada currently has a Canadian program expenditure requirement of 50 per cent of revenue. History Television has a requirement of 34 per cent. These levels have served the system well and we are seeking no changes in these requirements for the upcoming renewal period.

4521 The Commission has asked us whether we could increase the History expenditure levels on Canadian programs.

4522 We realize that with an expenditure requirement of 34 per cent History Television is lower than some other specialty services. We also realize that History Television had its best year ever last year, with strong financial results.

4523 However, as we have noted in our application, we are reluctant to change the expenditure requirement. There are a number of reasons for this, and I would like to highlight them briefly.

4524 First, we think that it is reasonable to judge our performance over our whole "family of services," and not just one. While the History expenditures level is lower than average, we have a number of services far outperforming the average for specialty channels. Life Network, for example, has a Canadian expenditure level of 71 per cent, way higher than most other services.

4525 So while the levels may differ from service to service -- some are higher and some are lower -- the whole family of services should be looked at since they all share various levels of programming, promotion, technical, management, and other like resources.

4526 In the case of History Television, it did have a good level of profit before interest and taxes last year, but our other analog services were far below that level. The average PBIT ratio for all of our analog services combined was only 25.4 per cent.

4527 If you look at the financial performance of the analog channels operated by the six major ownership groups, you find that Alliance Atlantis was in the bottom half last year.

4528 This is shown on Table 1 attached to the notes for our presentation.

4529 So, for example, CanWest Global, Corus and Astral all did much better than we did, with Bell Globemedia and CHUM close behind us.

4530 So the high performance of History Television in 2002 was something of an anomaly and should be put in the context of what happened to our family of services as a whole which was below the median level for the six major ownership groups.

4531 Another relevant measure of financial performance is the revenue and profit level of each service measured in absolute dollars. Here History Television's revenues ranked only 21st out of 51 channels, and its PBIT level ranked only tenth in 2002.

4532 A further critical point to note is that History Television's profit levels are projected to decline over the next licence term. This is caused by a number of factors.

4533 First, subscriber levels. We are now facing increased competition as consumers consider their various packaging options from all the new digital services, including services like Discovery Civilization, which has a much lower Cancon scheduling quota, and because it's a Category 2 service, no expenditure rules at all.

4534 As I mentioned earlier, we think the penetration of History Television will be difficult to maintain as consumers move to smaller and smaller digital packages. In fact, the subscription revenue this year for History Television is already shaping up to be well below the forecast we filed in our application.

4535 Second, advertising. As viewing is fragmented over an increasing number of services, and the amount of viewing per service goes down, we expect that it will be harder and harder to maintain the ad revenue for History. History has always been a tougher sell to advertisers than a product-oriented service like Home and Garden.

4536 So again the risk is quite high that our ad revenue on History may decline, although we do project a modest annual increase over the next seven years.

4537 We have filed our seven year projections with the Commission and, as you will see, if the present conditions of licence were to apply, our PBIT level will be dropping to only 33 per cent by year seven. So History Television will not be at an abnormally high level of profit with its current conditions of licence.

4538 If the Commission were to require our Canadian content expenditures level to rise from 34 per cent to 50 per cent over the next licence term, however, this would have a drastic impact on our financial performance. Under that scenario, our PBIT level would drop to only 16 per cent in year seven, significantly lower than the average PBIT ratio last year of any of the six major ownership groups.

4539 Given our overall track record, and the risk factors facing us, therefore, we think the expenditure requirements for History and HGTV Canada should be left at their present levels. The history format is a narrower niche than many other services and is much riskier to operate.

4540 We think we have reached the right balance between quality and quantity of our Canadian content programming on History Television. We are very reluctant to interfere with a winning formula. And as you can see, if measured on the basis of the overall profits of our family of analog services, and our overall Canadian content levels, we think the Alliance Atlantis family of services is making a significant contribution.

4541 MS YAFFE: I will now turn to the nature of service.

4542 We think it is important for the Commission to continue its efforts to ensure that each specialty service is unique by granting genre protection. Efforts must be made to ensure that the existing services licensed by the Commission continue to maintain their unique characteristics and do not stray from their original licence conditions to compete with other existing services.

4543 We have proposed very minor changes to the service description for the two services in front of you today. We have asked to add "games" to the list of possible program categories for HGTV and History, and we have proposed to add up to 5 per cent Canadian original drama on HGTV Canada in its genre.

4544 We think that adding game shows would give us added flexibility to create programs that try to make history more interesting and accessible to viewers, a matter that is always a challenge.

4545 As to the question of adding Canadian drama to the categories allowed in the HGTV licence, we note that this has been opposed by only one intervenor, namely Global Television. However, it has been strongly supported by the unions. It is also a major recommendation of the Trina McQueen report, although we strongly disagree with her suggestion that drama on new specialty services should be disentitled to receive CTF support.

4546 It is also important to note that adding drama does not change the niche occupied by HGTV. Any Canadian drama that is commissioned for the service will still be related to the subject of home and gardens.

4547 Given the current crisis in the financing of Canadian drama, we think that every opportunity should be taken to support Canadian drama, and HGTV Canada, like other specialties, may be able to play a small but meaningful role.

4548 MR. RUBINSTEIN: We now want to turn to the issue of time zones. You have asked whether the Commission should change its present policy of applying the watershed hour in the violence code only to the time zone where the service originates.

4549 As we stated in our licence renewal application, History Television strives to ensure that any depictions of violence, adult situations and coarse language are handled in an appropriate manner and scheduled sensitively. The nature of HGTV's programming is such that violent content is just not an issue for this network.

4550 We do not believe that there is a need for a shift in the violence code to address various time zones. History Television and HGTV are both members in good standing of the CBSC. Since their launch in 1997, HGTV has not received any complaints regarding violent content, and we have received only one complaint that dealt directly with violent content on History Television.

4551 In short, the viewer advisories mandated by the CAB Code of Ethics do work.

4552 As digital is deployed by cable companies, BDUs will sometimes enquire as to whether or not there are plans to provide a separate western Canada feed for certain services in an effort to provide time shifting opportunities for their customers. History Television has not received any enquiries of this nature from any cable company or DTH provider.

4553 I would now like to turn to Harvey Rogers who will deal with the issues of descriptive video and closed captioning.

4554 MR. ROGERS: We have noted the points raised by the representatives of the visually impaired community in their written interventions. We are very sympathetic to their concerns, but we are also constrained by limitations in the technology employed by BDUs which are not in our control. Simply put, adding descriptive video on a third audio channel will not reach our subscribers at present.

4555 Canadian analog specialties are delivered to the cable headends using digitally compressed feeds. At present, the existing headend IRD is only capable of a two-channel stereo output. The current infrastructure of the delivery system does not support a secondary DVS audio channel. There are also other aspects of the delivery issues that tie into DVS not being received widely across Canada.

4556 We are hopeful that these issues can be resolved. If they are, and provided there is distribution among a significant number of BDUs, Alliance Atlantis is prepared to make a commitment to provide two hours of described Canadian programming per month for the first three years after the distribution issues are resolved. Our commitment increases to three hours per month in years 4, 5 and 6. Finally, we will provide four hours a month in year 7.

4557 In terms of the impact such a commitment would have on our operations, we have determined that over the seven years of our licence term for both channels the operating expense of providing described video services would amount to $1,350,000. That cost is not included in the financial projections filed with our applications.

4558 With regard to closed captioning, History and HGTV Canada will be in full compliance with the requirement that 90 per cent of the schedules be closed-captioned by the end of the first licence term, and we are committed to ensuring that this level of closed-captioning will be maintained over the next term.

4559 MS CUGINI: Mr. Chairman, Members of the Commission, you have heard from the History Television and HGTV Canada programming teams about some of the great strides we have made in our programming when it comes to reflecting Canada's cultural diversity on our services. Our commitment to the principles of cultural diversity go beyond on-screen presence, reflection and portrayal. Cultural diversity is a corporate objective of Alliance Atlantis.

4560 As the Commission is aware, we have filed our Diversity Best Practices Plan as part of these licence renewal proceedings, and we would like to thank the International Council for Diversity in Film and Television for qualifying this plan as "impressive" in its written intervention.

4561 We have already instituted some of the objectives outlined in the plan. One such initiative is the implementation of the Alliance Atlantis Diversity Committee. All three divisions of the company will be represented. Participation on this committee is voluntary, and members come from all departments and range from employee level to senior levels of management.

4562 This committee's mandate is to reflect on best practices as they relate to diversity and equity within the workplace, to identify potential barriers and to make recommendations for improvement. It will provide consultation to management on best practices in order to support the achievement of our diversity goals.

4563 We believe that the work of this committee will provide a depth and breadth of knowledge and experience that will enhance an environment that is already inclusive and reflective of cultural diversity.

4564 Our second key objective is to increase our communities of contact and community outreach. As such, Alliance Atlantis has participated in the Fil Fraser lecture series on Diversity in the Media and sponsored activities for the Black Business and Professional Association, as well as the Filmmakers Association of Visible and Ethnic Minorities. We played an active role in the development and success of the Innoversity Conference held just last week in Toronto, and Alliance Atlantis was represented at the Minister's Forum on Culture and Diversity held here in Ottawa last month.

4565 We are active members of the Task Force for Cultural Diversity on Television, and Alliance Atlantis chairs the CAB's Joint Societal Issues Committee. Phyllis is the Chair of the Canadian Abilities Foundation, an organization dedicated to improving the lives of Canadians with disabilities.

4566 These activities are designed to not only inform our communities of contact of the Alliance Atlantis commitment but, perhaps even more importantly, they allow us to be informed of ongoing developments in the area of fair, accurate and non-stereotypical portrayal of cultural diversity in all ares of our business.

4567 With these steps, we believe that we have laid the groundwork for an effective diversity plan which allows measurement of progress and accountability.

4568 MR. GILL: History Television is amongst Canada's leading specialty broadcasters in its efforts to support the country's independent production sector.

4569 Its programs cover a wide range of historical topics depicting Canadians and the Canadian experience. From war heroes to political scandals, shipwrecks to early settlers, stories are brought to the audience through our partnerships with independent producers and directors.

4570 History Television's allocation to independent production increased nearly 250 per cent between its first broadcast year in 1998 and the 2002 broadcast year. The number of supported projects each year more than tripled, from 13 to 41.

4571 As History Television has grown, so has its commitment to regional producers. Yearly spending on productions from regional producers has nearly quadrupled since the channel launched. Table 2 attached to the notes for our presentation contains a list of recent projects created by regional producers.

4572 Productions commissioned by History Television have also garnered numerous nominations and awards in canada and around the world. Table 3 contains a list of recent award winners.

4573 A good example of our partnership with the independent sector is History Television's work with Frantic Films. Producers Jamie Brown, Christopher Bond and Ken Zorniak approached us in 1999. They proposed a unique programming idea, in which two couples would spend a year on the Prairies, living as settlers did over 100 years ago. With only tools from the time, the settlers would break the soil, build a home and live off the land, surviving heat, cold, insects and possibly starvation.

4574 History Television took on the project, even though no broadcaster had ever done anything like it before in Canada. When it went to air in 2001, the finale of "Pioneer Quest: A Year In The Real West" was the most highly rated documentary program ever aired on Canadian specialty television.

4575 Frantic Films had created a new genre of television in Canada and followed up with two more successful series: "Quest for the Bay" and "Klondike: The Quest for Gold". A fourth Quest series for History Television is currently in production in Newfoundland.

4576 When History Television works like this with independent producers, relationships are built and fostered to ensure that their companies and their programs develop, mature and succeed.

4577 Jamie Brown has gone on to sell his Quest programs in the United States and overseas. His efforts as a producer were recently acknowledged when he received the Lion's Gate Award for Innovative Producer.

4578 This is just one of many examples of History Television's commitment to the development of new Canadian talent and programming. The result is quality, award-winning television productions that resonate with our audience. The support of independent producers will continue to be a key activity for History Television upon renewal of its licence.

4579 MS CASE: HGTV Canada also has had an impressive relationship with the independent production community across the country throughout its licence term. The range and volume of series produced for the network has given us many opportunities to explore new relationships with independent producers and to continually seek out fresh ideas.

4580 These fresh ideas created new genres of television programs and produced shows which have garnered numerous nominations and awards both in Canada and internationally. Most recently, HGTV Canada received a record number of 2002 Gemini nominations, eleven in total. Further details about these nominations and additional information about the many impressive accomplishments of this network are listed in Table 4, attached to the notes for our presentation.

4581 As HGTV has grown, so has our reach to a culturally diverse audience. It is important that our programming and our relationships with independent production companies reach across the country so that we can reflect on-air the cultural features of their distinct communities. HGTV is a national network, and we are proud to represent the multicultural make-up of Canada.

4582 Current programming which illustrates HGTV's commitment to promoting on-air cultural diversity include the series "Love By Design", where Barbadian host Richard Yearwood balances home makeovers and potential new relationships; "Home to Go", where Asian designer Christina Song, along with a co-host, works with homeowners in need of an affordable makeover; and "Sue Warden Craftscapes", which travels across Canada to feature artisans in their own communities such as Whitehorse, Yukon. And there are more.

4583 Upcoming HGTV Canada is excited about our plans for a national star search initiative that will take place this summer across the country to uncover new and interesting faces and talent for the channel.

4584 Currently, HGTV supports a range of regional producers across Canada, and examples of these efforts are listed in Table 5.

4585 HGTV Canada has succeeded in enticing new producers to the genre of lifestyle television. We have given many small and medium sized companies opportunities to develop, produce and deliver programs for the network. The first series from Ottawa production company Mountain Road Productions, "Lofty Ideas", has sold internationally and to the U.S.

4586 Other Canadian production companies such as Brillig Pictures and Boland Productions, who made their first national series for HGTV Canada, have gone on to more successes.

4587 Throughout our development process, HGTV commits considerable funds every year toward developing new programming and talent for the network. It is not just the financial commitment that makes this process work. We invest much time and money in the creation of new shows and, to that end, guide producers new to the genre.

4588 HGTV is proud of its track record and its commitment to the independent producers from across Canada, helping to develop emerging young talent in this unique genre of television.

4589 MS YAFFE: Mr. Chairman, I want to add a few words in conclusion.

4590 Our two services have had a remarkable success over their first licence term. That success is measured not only in terms of presentation and audience but most importantly in a significant investment in diverse and unique Canadian programming. That is strong evidence that the current regulatory structure for these channels works and works well.

4591 The prospects for the next licence term are less certain. We face much greater competition, more subscriber choice and much more risk. We have not proposed any significant changes to our licence conditions for the next term. We think this is the best approach to ensure that our channels continue to make a significant contribution to the system.

4592 Thank you, Mr. Chairman. That concludes our opening remarks. We would be delighted to respond to your questions.

4593 THE CHAIRPERSON: Thank you very much.

4594 We will resume in 15 minutes for questioning. Nous reprendrons dans 15 minutes.

--- Upon recessing at 1540 / Suspension à 1540

--- Upon resuming at 1555 / Reprise à 1555

4595 THE CHAIRPERSON: Order, please.

4596 We will begin with questioning on HGTV and then we will proceed to questioning on History, and then a number of other Commissioners may have questions overall, if that is all right.

4597 We will begin with Commissioner Pennefather.

4598 COMMISSIONER PENNEFATHER: Thank you, Mr. Chairman.

4599 Good afternoon, everyone.

4600 I have a number of questions, and I will toss them to you, Mr. MacMillan or Madame Yaffe and you will decide. There are some areas that I might make a mistake and go directly to the person, such as Mr. Rogers or Ms Cugini on a couple of issues.

4601 In fact, I am going to start with cultural diversity.

4602 I am aware of the Diversity Best Practices document that is in the public file, and you discussed this matter at length in your application and your deficiencies.

4603 I think the only thing I would like to hear a little bit more on with regard to HGTV is a few more specifics.

4604 On page 18 of your application you yourselves say that:

"While these activities --"

4605 And "these activities" were attendance at events, the representation on committees, et cetera.

"...may at first glance not apply to programming, it is through our participation in these various efforts that the assorted participants can inform the staff --" (As read)

4606 This sensitization approach is very laudable, and congratulations on what you have accomplished in this area. I am interested in how you plan to translate that into specific steps that you will take in terms of HGTV, or perhaps other services as well, as regards on-air presence, as regards the kind of programming you commission.

4607 As you know, in other circumstances we have asked for very specific corporate plans in that regard which go beyond and include a best practices document but are more specific to the timing, the steps, the management, but also production decisions and who is making them and how those various goals you have will actually become effective.

4608 Could you comment on where you are at on a specific corporate plan in this regard, if you will, and how it will affect HGTV.

4609 MS YAFFE: I can, and I am going to ask Rita and Vanessa to help me on this.

4610 I think from a programming point of view Vanessa can give you a little more sense of how we go about making sure that our guidelines are used by the producers we engage to create most of the programming, and also how we create that on-air look that reflects the cultural diversity of Canada.

4611 As for the company and its cultural diversity plan as we submitted it, I think Rita mentioned it in our opening remarks, but it is a priority of the company itself and that of course then translates into an array of cultural diversity inside the company which we hope will sensitize each of the programmers and help them make their decisions.

4612 I think we mentioned one of our most recent efforts which is launching now, and that is a national cross-country search for more hosts for Home and Garden Television. We are always looking for talent, but with this particular search which we are doing nationally and we are doing using our Web site, we are paying particular attention to looking for that diversity that I think we all strive for and feel we could improve on.

4613 That is a step that is under way right now.

4614 Let me go to Vanessa to give you some sense of how it works in our programming department, and then Rita can add anything she wants on the company's side.

4615 MS CASE: Some examples of how we are very aware of trying to seek out the best examples in cultural diversity on HGTV -- I think the best example to use right now would be our producer guidelines.

4616 All the programmers within HGTV and the programming departments of all the Alliance Atlantis networks everywhere we go, those producer guidelines clearly state that we are looking for opportunities at all times to open the doors to all cultural groups within Canada. We want to ensure that we are meeting those needs and every opportunity, as we cast for roles and look for participants in our programs.

4617 Our programs allow for many examples of various cultural groups to be on air. That is because the programs not only involve hosts; they involve professional experts, be it gardeners or artisans or designers, all the areas that cover HGTV's line-up of programs, genres of television.

4618 It also involves homeowners and various guests and participants. Within all these characters and so many of HGTV's shows we feel that we do and will continue to always look for opportunities to make it as diverse as possible within the episodes that we broadcast currently on air.

4619 Rita, do you want add something?

4620 MS CUGINI: In a more general sense, when we looked at developing this plan, we looked at it from basically a four prong approach and that was how do we -- as I said in the opening, enhance the inclusive environment at Alliance Atlantis for the staff that is currently there. I think that one of the most effective things that we've done was to start the Alliance Atlantis Diversity Committee. As I said, there are 17 people who sit on that committee because we really thought it was important to have the perspective of the staff and they will be the one, this committee will be the force that will drive the recommendations that will be brought forward.

4621 The other area, of course, is recruiting new staff. How do we let everybody else know of how welcoming and inviting Alliance Atlantis can be and is. We have established a recruitment campaign with something called the Equity Network and every time a new job posting is posted it reaches 15 associations targeting women, 30 associations aboriginal peoples, 18 targeting people with disabilities and eight associations targeting visible minorities. So, we have to cast our net wider to be able to attract a more diverse and qualified workforce. The on-air presence Vanessa has already talked about. And, of course, increasing our communities of contact so that the world knows of the Alliance Atlantis plan and people sitting around these tables go into schools and talk at career day and we go into Ryerson, we have an internship program with Ryerson targeting specifically visible minorities and we have taken on some of those students in intern positions.

4622 We are, thanks to our merger benefits, one of the founders of the Alliance Atlantis Banff Executive Training Program to train managers in the art of television and we are committed to ensuring that visible minorities attend that training session. So, it really is a comprehensive approach that we've taken.

4623 COMMISSIONER PENNEFATHER: This comprehensive approach would be part of a plan. Do you have any comment on your ability to table such a plan with the Commission perhaps in the next few months?

4624 MS CUGINI: Yes, we would be happy to.

4625 COMMISSIONER PENNEFATHER: I assume that that plan, apart from inclusive of training of managers and sensitization includes some form of valuation of results?

4626 MS CUGINI: Yes we, of course, because we are subject to the Employment Equity Act do file an annual report with the HRDC and we find it a useful tool to track how we are doing. Right now we know, for example, that 61 per cent of our management are women and we are very proud of that number and we can see therefore where the gaps are and where we have to work harder to increase percentages in the others areas.

4627 COMMISSIONER PENNEFATHER: Indeed, and that would of course include the results on air and what your commission, who you are commissioning it from and what we're seeing on the screen.

4628 MS CUGINI: Yes, it was another applicant, I can't remember which one, but said -- it was the same issue our on-air staff, are employed by the production companies so we, my HR department, tells me can't legally survey them and ask them to fill in the survey to which of the four groups they qualify. But interestingly enough, we had this discussion around the Alliance Atlantis Committee and in our next meeting the committee members will report back on what they have found in looking at our networks and what they see and perceive to be the presence of visible minorities or members of the four designated groups on our networks. But, again, that is an internal survey just of what we see on the air.

4629 COMMISSIONER PENNEFATHER: We also asked a couple of other applicants, and you did mention in your opening remarks that you include the groups persons with disabilities and you mentioned Madam Yaffe's presence on the committee. But I just wanted to raise that with you and to assure that you are looking at this whole area of persons with disabilities in your plan and your ability to offer opportunities to be inclusive in training programs and in production eventually.

4630 MS CUGINI: Absolutely. Our plan includes all cultural groups, all ethnic minorities, aboriginals, people with disabilities, sexual orientation. Vanessa can give you examples of programming specifically on HGTV where there is a presence of people with disabilities. We have provided accommodation within our building for the staff members who are people with disabilities and will continue to do so.

4631 COMMISSIONER PENNEFATHER: Okay, I think as part of the plan, both a management plan and a production plan is of interest to the Commission. Because, obviously, to reflect Canada as it is today and evolving, this cultural diversity plan is crucial. So, we would hope that that would be part of it.

4632 MS CUGINI: Absolutely.

4633 COMMISSIONER PENNEFATHER: Let me turn then -- continue on production and go to what you have called the minor amendments. At the beginning of your supplementary brief you say that HGTV has become Canada's premiere source of information for those wishing to watch the very best of programming dedicated to, as per your license, building, remodelling, decorating, interior design, gardening, landscaping, crafts, hobbies and special interests.

4634 On the next page as well, referring to the minor amendment, you say that you will continue to be a destination for home and garden programming. Today, as well in your remarks, you mentioned, Mr. MacMillan, the success story of specialty services and I believe if I read it right that you relate that success to their niche programming, to their targeted audiences, to what people have come to expect of these unique programming niches.

4635 Now you have proposed a minor amendment to your service, that is to add category 7(a)(b) and (c) and category 10. Perhaps you could elaborate on why you want to add these categories, but particularly the drama category, and what I'm very very interested is finding out is why you do not feel that this addition of drama would not be a significant change to your nature of service. As I said, I just quoted from the license, from your nature of services described in the current license. You know, as well, that you have achieved a considerable success with the formula you have. And, as you have said yourself this afternoon, why tamper with successful formula? Can you explain why you have chosen to make this proposal to us?

4636 MS YAFFE: Yes, I would be happy to. Home and Garden is certainly the destination for people looking for information and entertaining programming about homes, gardens, design. And, you are right, we strongly believe that a focused channel will do much better than an unfocused channel and so we are proud proponents of that theory as to why our services do so well. But Home and Garden is certainly -- we don't see the addition of drama to the Home and Garden as a divergence from that theory. As a matter of fact, we think that our particular focus, which was to add Canadian original drama to the genre and to limit it to five per cent of the schedule, was really more in an effort to address a couple of other issues.

4637 One, as you know, as the Commission knows very well from having commissioned Trina McQueen to look into the issue, Canadian drama has faced an enormous struggle over the last few years. Specialty television is growing day by day in terms of its ability to deliver audiences. If you add up the percentage of audience that is now viewing speciality in Canada, both to foreign and Canadian specialties, it would be 52 per cent of all viewing. That is, 52 per cent of all viewing in Canada right now goes to Canadian and foreign specialty channels and 48 per cent goes to Canadian conventional and foreign conventional stations networks.

4638 So, we think we've shown that there is a growing trend of the audience moving to specialty channels and as we looked at both those issues, that the audience is moving there and yet drama is suffering tremendously in this country. We thought, here is an opportunity to give those channels that do not have drama in their license the ability to contribute to what is an absolutely important field that we feel very strongly about and that is the need for Canadians to see drama, particularly drama series on their television stations. And we added, in our request, not to dilute the nature of the service, but to focus it particularly closely to the fact that all drama commissioned for HGTV would be original Canadian drama related to the genres of Home and Garden, so we would not broaden it to anything that happens on the planet. We have a very clear focus. So, we don't actually see it as diluting the value of the channel, we actually see that it would add more entertaining program in our niche and we think of it as a good policy objective for the system in general and I suppose at the end of the day it would be fair to say that when we were applying we thought, you know, we've been talking about this to a lot of people. We certainly talk about it in our view of drama in the world and not bring it to your attention now, we would be remiss in not trying to do this.

4639 COMMISSIONER PENNEFATHER: Well, there is that whole discussion and I'm sure we will get back to it and my colleagues will probably have some general questions, but we are having a discussion about a particular service with me and that is HGTV. And I think it is fair to say that we have a balancing act and we have a, as you well described yourself, a formula that has worked which includes keeping very niche focused oriented services. Your audience has also become very attached to this service, as we can see by the results you have obtained in revenues and audience and PBIT, how do you think they will react to this change? The loyalty is there for the service as it stands and that includes how to practical advice oriented programming, which is what's in the license nature service in peak viewing hours whenever you want it. How do you think people will react? Aren't you taking a risk?

4640 MS YAFFE: Well, the audience has taught us a lot and I will say that on HG what we have learned over the years is that we will attract a larger audience by moving not away from the genres by concentrating on the genres, but giving a more entertaining format for the viewer to watch. The strictly "I'll show you how I do it" channel has a very limited niche and we've learned that over the years. We started with more of those programs, to be fair, they are less expensive and they are easier to produce. But we learned that if we added more outdoor shooting and more hosts who had a broader variety of subjects to cover, who would go to different neighbourhoods, show different stores, different kinds of design ideas whatever, we would get a bigger and bigger audience.

4641 So what we have learned is our loyal absolutely devoted audience is happy to watch some of the actual instructional shows, but even more loyal and occasional viewers can be brought to the service the more we broaden, not the content, but the approach to that content.

4642 COMMISSIONER PENNEFATHER: Well, lets talk about that approach to that content. You used an example Will & Grace in your application in your deficiencies and I would like to know how you would go about determining the kind of drama you would do, what criteria you would use to maintain the themes of building, remodelling, decorating, interior design. In fairness, I think I could say to you that I watch Will & Grace on a conventional channel, I would then see a similar show on Home and Garden Television, I'm not watching a niche service any more. If I can watch the same drama and many have, currently on television, themes such as remodelling, decorating, interior design, gardening, etc. and you yourself have named a few of them. Can you tell us how you intend to keep to what is this genre, which is your nature of service, using the drama approach?

4643 MS YAFFE: We talked about this a lot in preparation for today and Vanessa has a fairly concrete proposal to offer you, which I would like to go to her for in a minute. But, I wanted to just say that -- I just want to reiterate our entire request for drama on HG is to do original Canadian drama that would be commissioned for HGTV, so you would not have seen it anywhere else before. This would be its first broadcast, it would be adding not just to the service but to the number of hours of Canadian drama in the system. So it certainly -- I appreciate that your example is only to say if we did a show like that you might have seen a similar kind of show. But this would be the launch pad for something that would truly fit the genre of HGTV and to be clear we said how could we give you the comfort that the drama would not be a happy comedy between two people, one of whom happened to be in a house. You know, I can appreciate your view is how will I ever know that you can be contained in this world. So, maybe I'll ask Vanessa to add the language we thought would work in terms of this definition.

4644 COMMISSIONER PENNEFATHER: You understand what we are getting at and certain comments as well on the broader issue here, on nature of service and the importance of genre and we've raised that point and you are offering us an example of saying that I can maintain the genre while moving into other categories. And as per previous discussions earlier today, it is difficult sometimes to see where that line is drawn and where everybody just doesn't become a similar service. If you say it is that great a draw for audience, the temptation will be to not have the system which you described as so successful but to have very similar services across the board.

4645 MS YAFFE: And you are right, we feel very strongly about genres and we feel even more strongly about genre protection. So, we certainly don't want to be the source of that confusion either for you or for the system or for the audience because that's the risk, in our view, no channel should take. But maybe I can ask Vanessa to tell you how we would define that issue.

4646 MS CASE: I think what is very important here is this new definition, this new category, would be very exciting for the reason that it would only really enhance HGTV's current program schedule by keeping core to the current themes that you see on the network and that being gardening and decorating. So, to Phyllis' point in terms of ensuring that we don't stray from the genre, the characters that we see being part of any Canadian original dramatic productions on HGTV would be -- the central theme and even the central characters would be focused around the core themes of our networks is the best way to put it.

4647 They would be decorators, interior designers, they would be architects, gardeners, landscapers and all of those related fields to our current network. We would not want to stray from that, as we know that is exactly what the HGTV viewer is looking for and that is currently not offered to anybody in a Canadian original program or a Canadian original drama.

4648 COMMISSIONER PENNEFATHER: Excuse me for interrupting, but is that what the HGTV audience is looking for, a half hour show which is an actual fiction show just because somebody is gardener? Is that what they are looking for?

4649 MS CASE: I would say that they are looking for even more unique was than we currently can offer them programming related to those genres on HGTV. Phyllis touched on the fact that some of the original programming, the early days of HGTV, perhaps was more studio bound and we have expanded on that. We have listened to our audience, we have learned what they like and we have expanded and gone into the field and created new types of programming around that area and this is just an extension of that, but still keeping very core to the theme that you see on HGTV.

4650 COMMISSIONER PENNEFATHER: Well, as you said just before -- I appreciate it is a difficult area to be precise unless we were sitting here looking at the actual dramas you have in mind, but you can understand our concern and I would ask you to comment more generally at this point how important you see, in fact, this business of limiting or not drama programming in light of the competitiveness factor within specialty services. You have raised some concerns about the future and your financial future. Just how important is this genre protection as we go forward?

4651 MS YAFFE: We believe that genre protection is one of the most important fundamentals of the specialty broadcast business in Canada. It certainly by far -- the biggest concern we would have in comparing it to what we would like to try to do to improve the situation for Canadian drama. I mean, I'm sure it must have crossed your mind, we also have a Canadian drama service called Showcase and we do create many hours of original Canadian drama there and we are very proud of that. So, if this was our effort at saying is there another place -- is there reason why each service, which is prohibited from playing Canadian drama, could not contribute to more hours of drama being created in this country without reducing the genre. And clearly, we did not come and ask for foreign drama on HGTV, we did not come and ask for feature films on HGTV, we came with a very specific policy objective as well as understanding that these are interesting programs to make. Dramas are complicated and expensive and risky, but overall restricted to exactly the genre of the channel with a five per cent limit on the schedule and by no means an effort to go to that five per cent over night. We thought we would test the audience's acceptance. Of course, if the audience tells us that it is a bad idea you can imagine we would go back to something we knew they would want to watch. But we have never yet seen them not watch a design or a gardening show in a different format if we expand outside of the very narrow definition of information. Our audience partly wants information and partly wants to see beautiful things being made and other people's homes and gardens created around the world or people having their homes redone and watching them when they come back to see how that house has transformed.

4652 "Trading Spaces", unfortunately not a show on our channel but on TLC, is the number one specialty television show in the United States right now. It's a design show. It's primarily a -- of course they do go in and renovate somebody's house without them knowing, but at the end of it, there is something very dramatic that happens.

4653 The results get revealed. You don't wait to the end to see how that house looks because you have seen that. You wait to the end of that show to see how those people respond when they walk back in their home and see it is completely transformed.

4654 It's very dramatic. It's very appealing. It has been hugely successful here and around the world. So yes, drama does take it another level.

4655 Clearly it's scripted and it would have that extra component of being scripted, but I think the whole world of home and garden design programming has gone very close to that already and has not limited its audience. As a matter of fact, it has expanded it.

4656 COMMISSIONER PENNEFATHER: Are you planning to schedule as I have a proposed schedule here, so it's a plan for presentation in peak viewing hours?

4657 MS YAFFE: Yes. We certainly would give it pride of place.

4658 COMMISSIONER PENNEFATHER: Are we talking about series? I know you have (a), (b), (c) as categories --

4659 MS YAFFE: Right.

4660 COMMISSIONER PENNEFATHER:  -- but is it more series you are thinking of?

4661 MS YAFFE: Yes. We think a very small series would be where we would start.

4662 COMMISSIONER PENNEFATHER: To what extent will these programs also appear on other Alliance Atlantis services such as Showgate?

4663 MS YAFFE: A second window in Showcase might be a thought, but I think because we see it as so much a focus on the HG audience, I think we would wait to see how it performs before we would move it anywhere else, so I think it would have pride of place and lots of marketing and promotion on HGTV to see if we can build an audience there.

4664 COMMISSIONER PENNEFATHER: When you say original, I understood it to be commissioning original new product as opposed to acquiring. Am I correct?

4665 MS YAFFE: Yes, you are correct.

4666 COMMISSIONER PENNEFATHER: I will come back to that point after. We will come back to this point. You can see that we are looking at a balancing act here in terms of the various policies that we have and the points that you are making.

4667 Your current exhibition requirement as we noted it is 50 per cent of the broadcast year and 50 per cent of the evening broadcast period to Canadian programming.

4668 MS YAFFE: Right.

4669 COMMISSIONER PENNEFATHER: Now, in asking us to change the category to add the category 7(a), (b), (c) and category 10, you are still proposing to maintain your current exhibition levels.

4670 MS YAFFE: Right.

4671 COMMISSIONER PENNEFATHER: This would mean that some of the Canadian programming you currently have would no longer be available. Can you give us some sense of what we are going to lose as a result of adding these new categories if we are in the same 50 per cent?

4672 MS YAFFE: I think generally there may be a little stealing from Peter to pay Paul, but overall we would try and maintain almost as many new series on HG as we have right now.

4673 We certainly know that design, you know, and gardening, but less so, but design is a very transient world. What is exciting today will be boring next year and we can't count on last year's shows to appeal as much as this year's.

4674 There may a dilution or a reduction of some of the original hours, but I would assume that it would be perhaps fewer episodes of some of the shows we make rather than we are moving some of the important titles from the schedule. We certainly wouldn't do that.

4675 We have created huge successes with designer guides and lots of others. They are fundamental to the schedule and could not be removed.

4676 COMMISSIONER PENNEFATHER: Considering -- let me just ask you. I know you made your point clear that you would prefer to stay at the 50 per cent, but assuming that you are proposing the addition of these categories and at the same time we are looking at the importance of niche programming, the importance of the one per genre policy, what is the feasibility of increasing this Canadian exhibition percentage to, say, 55 per cent in the evening period?

4677 MS YAFFE: You know, everything is -- Canadian content is always an important discussion because there are those balances, but from our point of view this isn't -- it's not a change in the nature of the service, it's not reducing the focus on gardening and design.

4678 Our view is that it's well situated to occupy part of that 50 per cent that we do right now. We don't really see it as diverting the audience into something extra. We see it as just entertaining them more rather than, you know, informing them more, which some of our shows do. I don't think we see it as particularly appropriate.

4679 I also just want to be clear. We disagree with Ms McQueen when it comes to these hours of specialty drama in that her view is if we were to get this as a condition of licence, we must be able -- we must perform this condition, we must immediately produce whatever number of hours she says, I guess six and a half hours of drama.

4680 Our view would be we would dip our toe in the water and see how it went and be very careful, not just about this genre but to make sure we had a good idea and that it was going to work with the audience. It's a difficult row to hoe, drama. As you know, it's incredibly complicated.

4681 We don't see that just by adding this to our list of available types of programs we should, nor would we want to, take on the responsibility of committing to actually produce it in any particular year. One year we might decide to do it and in many years we might not have a good idea and just might not run drama at all.

4682 The same for game shows, by the way. We don't see them as a mandatory part of our schedule. They are just adding to our opportunities to create more entertaining programming in our genre.

4683 COMMISSIONER PENNEFATHER: You don't feel that the core programming, the information programming which is the core of your nature service, would be affected by the addition of what I assume would be more expensive programming, namely the commissioning of drama?

4684 MS YAFFE: Well, you are right in that drama is more expensive than many of our other shows, but I would say we have really come a long way.

4685 One of the wonderful things about watching channels like History and HG develop is some of think it's wonderful, some of the business people think it's less wonderful, but you learn that you have to spend more to get the audience if you really want to grow.

4686 With HGTV we have learned that we have had to create more and more expansive programs with bigger and bigger budgets in order to attract the very substantial growth in audience we have had.

4687 We are closer to where we would need to be in licensees than we would have been at the beginning of the licence. The strictly information-based programs are clearly less expensive by a long shot than what we produce today.

4688 Yes, there is more to go on the drama side, but we are not that far removed in terms of average licensees for half hours for some of our very expensive shows. We think we could manage it.

4689 COMMISSIONER PENNEFATHER: I'm looking at your financial results over the last licence term without these categories. I'm looking at a fairly positive picture actually.

4690 We see a very comfortable situation for you and in fact achieved revenues considerably more than what was projected at the time.

4691 What I want to try to get at here with you, and we will stick to HGTV if you don't mind --

4692 MS YAFFE: Sure.

4693 COMMISSIONER PENNEFATHER:  -- what the cost benefit is to you for the addition of these categories as proposed, how necessary it is. Mr. Rubinstein talked about the changing distribution environment. You make a comment on page 7 in your application about the need for this flexibility, otherwise genres are growing popularity and we need to have access to them to get our audience.

4694 I'm assuming you mean by that drama, but you have done quite well without it actually, if I read these numbers correctly.

4695 Could you give us some indication as precisely as possible what you see as the impact of this amendment on (a) your subscriber growth and (b) your advertising revenues.

4696 MS YAFFE: Yes. To be honest, we have not sat down and said to ourselves "What are the sort of net results of adding these genres in terms of a financial projection?" We never did that.

4697 We asked ourselves "What more can Home and Garden do in the broader context of Canadian production?" At the same time as we were applying for this, we were deeply engrossed in the issue of where is the future for Canadian drama.

4698 Our view of this was really from a policy perspective "Is there something to be gained in the overall system if we allow specialty channels to add this to their genres?", not a business decision about HGTV. We never sat down and said "Well, it will grow our audience by 3 per cent and our ad revenue and, therefore, this is a good thing and we must have it".

4699 This was much more from our perspective of feeling there was more that specialty could do in this very important area of drama. To us it is nice to have. It would be wonderful I think to give specialties the opportunity to do this. We don't believe specialties should be relegated to the back seat of television in Canada where rules should be -- we should be restricted from contributing when we choose to.

4700 Is this a business opportunity for us? I don't think so. I mean I think it would be a long time before we would see our return on these kinds of programs add to our bottom line.

4701 On the other hand, we may be wrong. We might luck into the wonderful one drama that works forever and that would be a wonderful, terrific success. It took as many years to have those kinds of successes on other channels, so we would assume that it may not happen in this licence term.

4702 COMMISSIONER PENNEFATHER: Well, I appreciate your being forthright about that because obviously you want to launch into the broader discussion. We find that very interesting, but I have to look at HGTV. I gather what you are saying is you don't really need these amendments.

4703 MS YAFFE: Michael.

4704 MR. MacMILLAN: That's true. This service will continue to thrive if you do not give us these amendments. Absolutely that's the case. We think it would help the channel. It would be, as Phyllis said, a "nice to have".

4705 We think we can improve the channel a little bit with it, but to be clear, we thought that it would be a bit perverse of us to show up here at this hearing without proposing that we be allowed to commission original drama for HGTV considering the amount of noise we have made about the appalling state of Canadian drama and the role that specialty could play.

4706 We didn't want to come here without at least offering that in this case, for example.

4707 Also, I take your point very much about genre protection. It is our clear view that genre protection is far more important than giving us drama on HG or game shows on HG.

4708 MS YAFFE: Just to add to that. I think we just want to underline that adding to drama in general to all services clearly from our point of view does endanger the genre and the specificity of the channel.

4709 We haven't supported it for any of the licences that are before you. We find that not to be helpful to continuing to focus on the nature of service.

4710 We thought original Canadian drama, limited to the genre of the channel, was an addition rather than a detraction to that genre specificity.

4711 COMMISSIONER PENNEFATHER: I wasn't going to raise it, but you did. I found the contradiction obvious, that you were opposing it in other cases, but we are all struggling with this.

4712 MS YAFFE: But we never opposed it when it was -- as a matter of fact, we recommended it for others. We heartily endorse everyone joining us in the seating frenzy for Canadian drama on specialty television. I'm afraid we don't see it now. We know it's a difficult row to hoe.

4713 We are not suggesting we have the total answer to the question of Canadian drama. Our view is if you have a specific genre, you can add original Canadian drama too. You know, I really am hard pressed to figure out why that is a disservice to the system.

4714 COMMISSIONER PENNEFATHER: Let's continue on that and look at HGTV and I will ask you a few questions about what if the drama category was there, again looking at the benefits to the system and to the public.

4715 We are looking at a historical growth that is very positive and, as you say, the service will continue to thrive. With that let's assume for a moment that you do have the drama category as supposed.

4716 Your current commitment of 50 per cent of the previous year's gross revenues to Canadian programming. At this point I would like to ask why you insisted in your application to stay at that 50 per cent. I think a case could be made that considering the kind of programming you currently offer, that may be appropriate, but considering the addition of drama, wouldn't you be in a position to offer increased Canadian expenditure than 50 per cent of previous gross?

4717 MS YAFFE: I think it would be the same response as I had to the adding to the hours. I think it generally would be, you know, to rob Peter to pay Paul, if that's the expression.

4718 Yes, we would certainly have to pay more for drama than we would for some of our low end shows, studio-based shows, but I think we have sufficient revenue given that, as you have seen, we have a very healthy service with growing revenues and have been able to contribute many millions of dollars more each year to Canadian production.

4719 No, I think we would be able to manage a very limited number of original Canadian hours of drama within the 50 per cent. I want to stress we don't see this as a panacea, we don't see it as 20 per cent of our schedule. We said the maximum would be 5 per cent of our schedule.

4720 If we did six half hours of drama, that would be a good thing. If that became popular -- we often at Showcase have started with six half hours of a series to see whether it worked. That's not a bad starting point, go from that, maybe the next year do another six.

4721 If you can build from there, carry on, but never go above that 5 per cent, so no, we think we could handle it within the 50 per cent.

4722 COMMISSIONER PENNEFATHER: I would be concerned and I assume other producers would be concerned. We have a list at the back of the presentations today from both History and HGTV producers across the country who have over time created a good relationship. Their careers have been enhanced by your being there, running the kinds of services you run now.

4723 MS YAFFE: Right.

4724 COMMISSIONER PENNEFATHER: Wouldn't it affect that group of producers if you moved into this new category?

4725 MS YAFFE: Well, yes. I wouldn't assume so because we have actually had quite a crossover. Some of the people who have been our first and foremost producers for History and Home and Garden more on the documentary side or lifestyle side on HG have actually made dramas for us as well.

4726 We know about independent producers. They are flexible, to put it mildly.

4727 No, we think we would give them an opportunity actually to try something different, but to be very, very clear, our view of what these half hours might be, six of them, maybe seven if we started, would be -- if we were to take the very popular hosts of some of our shows and allow them to function in a drama without stretching too far, we have used probably the same production company and incorporated what are pretty off-the-wall programs today and actually turned them a little bit more to be real scripted dramas, but not strayed very far from the characters and the companies we have worked with that are successful and well-known on the station.

4728 Our view of -- I guess even from the bigger policy issue, are there enough resources in specialty to create drama at any level that's significant is a very good question. I think only if we try to do what we are capable of doing.

4729 Will we do the medical drama at HGTV? No. Will we do the cop show drama in a garden at HGTV for an hour? No. We will do something that takes our format, maybe some of our hosts, the designer guards, you know. I can see them having fun being scripted and twist that a little bit to take advantage of what we have already built in the system and to use those talents as well as the producers who make them to come up with something that just adds to the system.

4730 COMMISSIONER PENNEFATHER: Just on the independent production, just a clarification. It's probably a small glitch, but you can look into this and get back to us.

4731 Supplementary brief at page 45 indicates that 1,700 hours of original programming has been produced with the independent sector for $53 million in licence fees, but in the presentation today and in your application we refer to 1,600 hours original production of which 1,000 is from the independent sector for $45 million in licence fees.

4732 MS YAFFE: Right.

4733 COMMISSIONER PENNEFATHER: So could you check which is right?

4734 MS YAFFE: Yes. I'm sure we can.

4735 COMMISSIONER PENNEFATHER: The reason I'm into this subject obviously is the 65 per cent commitment to the independent production sector and along the same lines considering should you be in the drama category, would you not consider increasing that let's say to 75 per cent which is often the discussion which you yourself have afforded in many other instances.

4736 MS YAFFE: Right. We have suggested a 50 per cent level of commitment to the independent production sector on HGTV for very good reasons. It partly explains the 1,000 and 1,600 hour difference.

4737 Sixteen hundred hours or seventeen hundred, and we will figure out which is right, are the total number of hours of Canadian original production. About 600 of those would have been produced by Alliance Atlantis or our internal production facility.

4738 Those would primarily be -- first of all, they would be non-priority programming kinds of programs. As you know, our licence in its last phase didn't address the question of whether or not Alliance Atlantis could produce for HGTV. It was unregulated.

4739 When we looked at what we as a broadcaster would do, we said our chore, our task is to create some of the daily shows, the non-priority information-based, almost disposable -- yes, disposable shows that come and go very quickly and are really the sort of host-driven guests arrive, talk about something go off and our next guest arrives kind of show that would be akin to a morning show on a conventional television network or an afternoon information-based show.

4740 Those are of course non-priority programs, and they are done very much in that sort of factory-like approach. They happen every day. They get made and then they go. They are not very appealing to independent producers. They have no international sales, and they certainly don't have second and third window sales, because they actually come to an end when that event has transpired.

4741 That would be the difference between the 1,600 and the 1,000. The 1,000 would be the hours we commissioned from independent producers, and that was our choice. Whenever we got to a priority-like programming choice for HGTV, we used independent producers to do that.

4742 Some of the more internationally acceptable and high-end design and garden shows are clearly made for us by independent producers. We have done the more studio-based disposable shows.

4743 When we looked at going forward, we thought the balance of 50 per cent was a good balance. It allows us to continue to produce those shows, those factory studio-based shows, and yet to continue to work with independent producers for the more high-end, more internationally viable shows.

4744 COMMISSIONER PENNEFATHER: Another way to look at this, if we flip the telescope around: If you were to go ahead with this and get into the field of drama with HGTV, as well as the many services that you mentioned, what do you feel the impact would be on the fund?

4745 Don't you think this would create again so much pressure on the public funds that it would be, to some extent, counter-productive?

4746 MS YAFFE: You are right that there might be more applicants. I would first of all suggest that there are not very many people in the specialty world in this kind of service who would be lining up to make drama. I don't see it as a huge number of applicants.

4747 We do feel very strongly that specialty television deserves to have as much opportunity to use the CTF as conventional television does. We don't see it as an inherent right of any one group of broadcasters to have access to money that is both public and that through the cable and satellite system comes primarily from selling our products to our customers.

4748 We don't feel a sense of entitlement to it, but we don't feel that we are lesser citizens at the table and should be restricted from coming up with great programs and being able to access that funding, whether it is private through the distribution sector or public through taxpayers.

4749 We know that is not always the view of conventional television, and we understand that. But we have a great deal of difficulty taking second-class citizenship in this particular field.

4750 As for the fund itself, we very much believe that there is a lot of pressure on the fund and there will continue to be. We would love to be able to come up with others with a better system for funding television in this country, but we don't actually think by allowing this 5 per cent we would jeopardize the entire funding situation for television.

4751 COMMISSIONER PENNEFATHER: I take it that all is resolved with the 5 per cent limit.

4752 MS YAFFE: The five...?

4753 COMMISSIONER PENNEFATHER: You have proposed Canadian drama at a 5 per cent limit.

4754 MS YAFFE: Yes.

4755 COMMISSIONER PENNEFATHER: It would appear to me, as we go through these discussions with the pros and cons, you are saying that the 5 per cent limit resolves the concerns we may have.

4756 MS YAFFE: I would say two things. One is the genre; that it must be, as we defined, that the main characters must be related to the genre. So it wouldn't just be good enough to have a garden in the show. We would insist on the main characters being related to the field, and we would insist that it be focused on either gardens or design. And we would also limit it to the 5 per cent.

4757 So yes, we think we have built a mix of assurances we think will give the Commission some comfort that we have not lost our minds completely and tried to invent a whole new kind of television inside HGTV. We certainly would not go further than casting for the first few years to see how it worked.

4758 COMMISSIONER PENNEFATHER: I have a question on the duplication of programming with the Life Network. I think this was addressed in deficiencies.

4759 To be clear, you described three programs which have been aired on both Life and HGTV, and this is from a circumstance in your licence that said there would be no duplication.

4760 Are these the only ones that are duplicated; and if not, do you plan to have duplication between the two services increase?

4761 MS YAFFE: We don't plan to have it increase. It was a commitment going in, I think, and it was a good one the Commission asked us to undertake as HGTV was born. It was right and good for us to be able to differentiate the service from Life Network.

4762 If you recall, Life Network's slogan at the time was "television you can use". It was really informational and instructive.

4763 We have moved very far away from that in terms of the programming on Life Network, and I think we have just come out of some research we did on Life Network and know very clearly our viewers see us a real life stories. The reality genre that is based in real life stories is what Canadians think of Life Network as. Certainly very little of that actually overlaps now with Home and Garden.

4764 It was a good strategy to differentiate the two, and we were happy to do it at the beginning. We find it less useful now. There are one or two design shows which actually are kind of reality shows that work on both channels. So we have done it a little bit.

4765 We don't intend for it to grow. It is at a fairly minimal level. We think the channels have differentiated themselves so strongly in the marketplace that no one could possibly think of Life Network and Home and Garden as being the same any more.

4766 COMMISSIONER PENNEFATHER: That may be so, but let me ask you a question: If you think there would be a limit to the overlap, do you know what level that would be; and if so, could you tell us what that would be?

4767 MS YAFFE: I think it would be somewhere around 10 or 15 per cent.

4768 COMMISSIONER PENNEFATHER: Ten or 15 per cent?

4769 MS YAFFE: Yes, I think so.

4770 COMMISSIONER PENNEFATHER: Obviously there might be the chance we would limit that.

4771 MS YAFFE: We would not be unhappy about that. We rarely put those programs in prime time on Life Network, so it would easily be accommodated.

4772 COMMISSIONER PENNEFATHER: I have a question of described video. I will take advantage while you are here.

4773 You have been clear in your application and deficiencies, and again today, about what the situation is. Let me just probe a little further.

4774 First of all, let me be clear that you have made a commitment, should the technical issues be resolved, to two hours per month, as I understand.

4775 What is your comment on that being two hours per week, as per other commitments and the recommendations of the NBRS?

4776 MS YAFFE: I will deal with NBRS in a minute.

4777 On the two hours per week, that is a conventional television rule, as we understand it today. I appreciate that specialties related to conventional television where some of the program is shared from that bigger entity might not find it difficult to get to the two hours per week. We would find it enormously difficult.

4778 We did that calculation, and whereas we think our program costs inside Alliance Atlantis for the amount of hours we have suggested in the application would take us to about $1.3 million, I think it goes over $5 million if we were to go to the two hours per week.

4779 Of course, you could repeat them endlessly and get away with it, but I don't think that would be doing anybody much service.

4780 We would rather introduce two hours of new programming into the system a month, and it goes to three and then it goes to four over the term of the licence. We think that that, given the fact that we have no downloading of that kind of programming from any other service, would be appropriate.

4781 COMMISSIONER PENNEFATHER: The point can be made that part of your programming, should it remain as it is entirely, some of it is already well audio described and there is that part. But again, if drama becomes part of your roster, there is a circumstance in which I think described video becomes more important.

4782 Have you included the drama component when you gave us the 1.3-something of costing?

4783 MS YAFFE: No, we had not assumed it would be assigned to any kind of programming. We just said that would be what it would cost to describe that many hours as we have suggested in the application.

4784 You are right that there are many shows on HGTV which really basically we do describe what is going on as the program goes on. You probably don't need it for those.

4785 There are others, on the other hand, where you really would do a service to add descriptive video. So obviously we would not focus on the more informational instructive shows. We would try to do the more visual shows where that would be missing information for the visually impaired.

4786 COMMISSIONER PENNEFATHER: I was wondering if Mr. Rogers could give us a little more information.

4787 You have described what we have heard many times about where the problem is in terms of the audio feed that is missing.

4788 Do you have any sense of the costs that are involved in solving this problem and how soon it could be solved?

4789 We have some commitments at the table that the material could be prepared but it can't be received. Do you have any further comment that can help us get some sense of where this is heading?

4790 MR. ROGERS: Yes, I can give you an understanding of the arc, starting at the internal side in our own studio going right out to the subscriber.

4791 First of all, any plant would have to be changed from a two-channel service to a three-channel service, because you are adding that extra channel. There is a cost borne to the program service for that.

4792 Depending if they were a new channel starting up building a service, it would be included in their build. So you would not see that as an incremental. If we were taking an existing plant and going from a two to a three, you probably could see somewhere in the neighbourhood of maybe $250,000 being put across the whole system to be able to bring three channels to the modulator to get out to the BDU.

4793 The second part of the system is to go from the backhaul, which means going from the output of the station to the BDU delivery system.

4794 Let's talk about satellite. In the specialty side we are delivered via satellite to the cable headend. So our signal going from the station to the satellite uplink needs to be improved from a two-channel to a three-channel, again an additional cost, probably another $6,000 or $7,000 a year just to move that into a three-channel position.

4795 I am not adding the costs just at the moment. I am just giving it piece by piece.

4796 The last part is to get up to the satellite. At present we have all booked two-channel services. We need a three-channel service. That would be about $15,000 a year per channel to bring in another 200 kilobits of information.

4797 It also becomes an issue for the uplink provider. As you add this 200 kilobits, you become a megabit. Once you add in the number of megabits per channel on the transponder, you run out of bandwidth.

4798 So one of the big issues is how do we solve all this incremental? It is not just Home and Garden and History, but ask all the channels to go into extra megabits for audio description, we are going to run into a problem of there is not enough capacity.

4799 So yes, there is a cost to us but there is also going to be a capacity issue.

4800 When we get to the headend, the IRDs that we use are two-channel. So we would have to have those changed. I am not saying who is changing them. I am just saying they must be changed out.

4801 Then once we get to a three-channel modulator, that is about another $1,800 to have that switched out. If the modulator and the cable company has no sat capability, it is another $525 to add it to it.

4802 On top of that, a lot of the cable companies are changing to a digital system. So there is a whole reworking for this to happen. It will get to the television set at that point.

4803 When you start adding all these little incrementals up, it is a costly venture.

4804 COMMISSIONER PENNEFATHER: I see that. I assume that heads are being put together, though, to try to resolve this. As we progress towards the digital world, surely there will be some solutions to capacity problems.

4805 MR. ROGERS: Yes. I believe it has been mentioned before, and the Commission is aware, that the CSUA has struck a task force on this. We have developed an RFI, a request for information, and there is a document available if you wish to see it.

4806 It outlines not only the distribution issues but also the issues of the visually impaired. How do they use the EPG? How do they know what channel to turn to? There are all these other societal issues.

4807 Yes, there is a committee. We started to have a meeting in Montreal where we had members from the Commission down there, the CAB, program services. We brought up people from PBS, who are the originators of the descriptive video service, and we are all starting to think about what is the efficient and economic way to make this happen so that we are not all spending gaggles of money to try and deliver the service.

4808 It will take time, and it will take energy.

4809 COMMISSIONER PENNEFATHER: Thank you. That is very informative.

4810 Those are my questions. I hope you don't mind my having dug around a little bit in your garden and planted a few seeds perhaps. You have painted an interesting picture of where HGTV is going.

4811 I apologize for that. Thank you, Mr. Chairman.

4812 THE CHAIRPERSON: Thank you.

4813 On to History. Commissioner Colville.

4814 COMMISSIONER COLVILLE: Thank you, Mr. Chairman.

4815 Good afternoon, ladies and gentlemen.

4816 I am not quite sure how to start here.

4817 Ms Yaffe, you said at the close of your comments: Our two services have been a remarkable success. I guess looking at the numbers one would have to agree with that assessment and conclusion: number one in PBIT margin; number 12, I think it is, in PBIT dollars. That is quite a success.

4818 I hope I am not embarrassing my colleagues here when I say, to be frank, I am somewhat surprised, perhaps underwhelmed, maybe shocked wouldn't be too strong a term. Given the position that you have taken in public about promoting drama and what you commented here today -- I think, Mr. MacMillan, you said it would be perverse if we did not propose more drama.

4819 I see the success that you have had up to this point in time, but then it seems like the bottom has fallen out or the roof has come crashing down, or is going to over the next term.

4820 I listened to Mr. Rubinstein say "we have taken a relatively conservative view of future growth, given the pressures on our subscriber revenue base"; "we have become more reliant on advertising revenue, which is the riskiest part of our business"; "all that is happening is the number of viewers is not growing and the result is that we do not expect viewing to increase significantly for History and House and Garden Television over the next seven years. So don't ask us to do any more."

4821 When I look at your annual report to shareholders, you say at page 16:

"Our established operating channels, including History Television and House and Garden Canada, continue to deliver very strong results during fiscal 2002. Advertising revenues from our operating channels grew 23.8 per cent year over year and our ratings continue to show solid growth."

4822 And continuing on:

"In a year when many observers expected advertising revenues to decline, we delivered exceptional results with total advertising revenue from both operating and developing channels up 27.2 per cent over the last fiscal year. We have had an exceptionally strong sales team which consistently provides clients with effective and innovative solutions. Because of the strength and variety of audiences that are attracted to our channel brands and high quality content, we are able to offer advertisers a wide array of solutions to reach key audiences."

4823 And on the next page:

"Our brands have allowed us to attract strong audience levels."

4824 And you go on to say:

"Our programming has consistently delivered the kind of audience support that successfully attracts advertisers. Going forward, we will continue to seek ways in which to further enhance our reputation for excellent programming, bringing more of the best Canadian and international television to our audiences." (As read)

4825 I don't get the same sense that the business is going to collapse from reading your annual report that I did from the statements that you made here today.

4826 I wonder if you could enlighten me. It must be that I just don't get it.

4827 MS YAFFE: I am going to ask Michael to answer in a minute, but I want to start by saying that I don't think our view of the future is that the sky is falling.

4828 I think we think that some of the better years for these services have just happened, for very clear reasons. They were young and they were growing fact, and they are now mature services. So many of the spurt years of growth are behind us.

4829 I think we talked a little bit about the uncertainty of the future as people move away from big packages to smaller packages, to more discretionary buying of channels, and I think we see that as a major concern. Not for the viewer. Clearly they will get the opportunity to choose what they wish, and that is the way the system has moved.

4830 But for a service that has managed to get to 5 million homes after five, six years, we do see that there are some risks in terms of our ability to sustain that base. And we have projected a slightly smaller subscriber base over this next term. With that, we will therefore have to grow our advertising revenue to continue to grow the channel.

4831 History is a very difficult genre to sell advertising in. We have been terrific at it, and we are proud of that. I think when you compare it to Home and Garden you will see there is a very big difference in terms of our ability to sell this channel, even though it has in many ways a much bigger audience.

4832 Those are some of the issues that have set the stage for our concern about changing any of the conditions for the service.

4833 Let me ask Mike to add to that.

4834 MR. MacMILLAN: Thanks. I would reiterate I don't think we have suggested in our application or in our remarks this afternoon -- and if we have, I would sure like to set the record straight. We are not and have not suggested that the sky is falling; that the world is about to collapse. Our projections for the future show continued healthy channels, both of them.

4835 That said, the eye-popping significant percentage increases in ad dollars or even subscriber fees for that matter are huge percentage increases when one starts from almost nothing in 1997. By definition, the first few years are substantial percentage increases.

4836 Our margins have fallen and are continuing to fall, and that is in all of our public information.

4837 I would say that our view of the world -- and we have said this publicly. I say it in every quarterly report to shareholders, every analyst call, every place I speak.

4838 Our view is that the impact of the digital channels and the success of the digital channels will surprise all of us. I believe that the digital channels five years from now are going to be, if not eating the analog's lunch, giving them a darned good go.

4839 We think the country is going digital. We think that over half of homes are going to be digital within 24 months. We see in that environment on satellite and cable, those channels being packaged in the same packages as the existing analog channels. There is going to be serious downward pressure, I believe, on subscriber fees going forward.

4840 Inevitably the penetration of all the existing analog channels is going to decline. I say that in every forum, public and private, and I would repeat it here again today.

4841 Our only salvation -- which I hope is a very important one and why we do think that the future is going to be decent -- is in the growth in advertising revenues.

4842 We are for sure in the analog world facing significant downward pressure -- not in the cents per sub wholesale rate but the simple falling of the actual penetration rate for the existing channels.

4843 Those channels will be in the same packages as the digitals. Our digital channels get a higher cents per sub rate than our analogs. We get 25 cents per sub for the analogs and 35 for the digitals. The digitals mostly have no Canadian content spending obligations. Everybody else's channels are in approximately the same boat as ours.

4844 Head to head, the digitals are going to clean up.

4845 I know that may sound like far-fetched science fiction, but that is what we see in the next seven years.

4846 In that context, we think that it makes great sense to continue. We didn't ask for a subscriber fee increase. It would have been great to have it. It would be great to have more Canadian content spending. Given the uncertainty ahead, we thought and we still think it is most prudent to simply keep with the same financial inputs that we currently have; i.e., the same subscriber fees and the same Canadian content spending.

4847 COMMISSIONER COLVILLE: So notwithstanding the profitability and the margin, I take it there is some risk going forward. But given the success, I was, as I said, surprised: notwithstanding the success we have had, don't ask us to do a minute more. Don't ask us to spend a penny more, percentage-wise, than what we have already done.

4848 My sense was given you folks as individuals have been several of the champions of Canadian content, I would have expected you to come here and say: Here we are. We have come back after a licence term. We have been a huge success. We are going to come to the plate and show you that we can do more.

4849 MS YAFFE: I appreciate that we have been clear in our view, which is Canadian programming works, works with audiences and can be a success. We believe in it. We believe it in this genre even more than we did when we first got the licence.

4850 What we have seen is with very careful, long and hard work we can actually make some history programming attract very, very significant audiences. It doesn't happen in every show, and it doesn't happen all the time. But we know we can do it.

4851 That has taught us that it takes a lot of work and a lot of time and effort to get one show that really does -- for instance, "Pioneer Quest" changed the way History Television's programming can possibly be made.

4852 We take a great deal of pride in what we have accomplished there, but we don't think it is easy to replicate every day in every show we make.

4853 Our view is that this is not just a kind of programming we are proud to have invented but one that we would love to be able to do more of. As we said, we have continued the series and we will do one in Newfoundland this summer.

4854 Those are the gold standard of programming on History Television. Many more of the shows never get to be quite that successful.

4855 The mix is what makes the channel a success. So we continue to do some shows that we think have broken the mould. We continue to do some shows that do okay. We continue to do some shows that we wish did better.

4856 Even more important is we have to bring people to a channel called History. For a lot of people, it is about as exciting when you go through the list of channels as the textbook you brought home that said "history" on it, that you put down the minute you got home and never wanted to open again. We have to find a way to get people to watch this channel, because it doesn't inherently say: Come and watch me. This is going to be fun and this is going to be television, like all television should entertaining at least at some level.

4857 One of our strategies has been a very careful plan to balance the mix of programming, to make sure that we have drama, that we have movies, that we have big, big audience builders where we can promote our Canadian shows. We take every opportunity to do that.

4858 So I would say that the careful mix of foreign and Canadian has been what has allowed us to grow the channel as much as we have.

4859 Fundamental to it all is: our success is your success, and it is the success of the system which says a percentage of your revenue will go to Canadian production. So as we grow, we continue to add more to the never-ending need to create more programming, but not if we disturb what I think is a pretty good balance that is working right now.

4860 That is another of the very important reasons we thought yes, you could ask for more Canadian content; yes, we could have asked for higher subscriber fees. But what is working is the mix. I think it is a mistake, as we look out to see what we have to accomplish over the next seven years, what is there in front of us to destabilize the channel at this point in its history, so to speak.

4861 COMMISSIONER COLVILLE: That raises a number of issues. I would like to get a better sense of why we see a problem that Mr. MacMillan and Mr. Rubinstein have indicated is going to be a problem in terms of shrinking subscriber revenues because of fewer subscribers.

4862 I will just finish up on a thought at this point, although I don't know how appropriate it is to go down this road.

4863 I am one of the loyal regular viewers of House and Garden Television, and I must say as a regular viewer, if I had to pick six channels and do away with the other 70-some-odd, HGTV would be one of the ones I keep.

4864 But you are worrying me that you might lose me when you start talking about putting drama on there. Sitting here looking at these two channels -- and it is interesting that we are doing these together -- I found it curious that you would come to us saying: Well, we want to take House and Garden and put some drama on it, but don't ask us to do a minute more in prime time of drama on History.

4865 Why wouldn't you have come to us and said: Gee, we have a 49 per cent TBIT. We have the money. We don't need another penny or two of subscriber revenue because we are making money with this thing. We want to show you what we can do by adding some more Canadian drama on the History.

4866 Leave my House and Garden alone.

4867 MS YAFFE: We do do some dramatization on History, and it has been a lesson for us. We have done, for instance, the "War of 1812". It had a lot of recreated history in it. That was a very big show for us, a very big budget and very successful.

4868 Those redramatizations of the war of 1812 are a lot more expensive than asking the designer guys to find a scripted format to do what they do.

4869 So when we compare the two -- we have the ability to do drama on History today, and we try to use it at moments when we find it appropriate inside a format that allows us to limit the costs and the risks. Historical drama is by far the most expensive production on the planet.

4870 We actually are the producers of -- I am sure no one on the planet could have missed that we produced a mini series called "Hitler: The Rise of Evil" for CBS and CH a few weeks ago. That was a four-hour mini series, and its production costs were $12 million American, times two. So we are talking about $24 million American for four hours of drama that created huge audiences. It worked very, very well from our perspective in terms of bringing the issues to a big number of people, but those are costs that dwarf anything that anybody in this country could ever approach doing in terms of creating historical period drama.

4871 We have aspirations, but we don't see ourselves going to that level.

4872 COMMISSIONER COLVILLE: I am not suggesting it needs to be a $12 million period historical drama. You have asked to do game shows on History.

4873 MS YAFFE: Yes.

4874 COMMISSIONER COLVILLE: I know you already do game shows like "Toolbox Challenge" on House and Garden. I guess that qualifies as a game show.

4875 MS YAFFE: Not really.

4876 COMMISSIONER COLVILLE: So here we have let's do game shows on History but we will do drama on House and Garden. I am just confused as to what motivates this.

4877 MS YAFFE: I hope it is not confusing. We certainly don't see ourselves reducing the quality of the shows on History Television because we didn't want to add more original drama. We already have the ability to do original Canadian drama on History. There is nothing limiting us. We have done pieces of it.

4878 COMMISSIONER COLVILLE: But you could do more.

4879 MS YAFFE: We could always do more. We found it works best when we put it inside a documentary and recreate the parts that work best in drama, not unlike, for instance, the People's History which did that very successfully. We do that all the time.

4880 We found that shows like "Pioneer Quest" and "Quest for the Bay" and "Klondike: Quest for Gold", although they are not the drama of script, they are as dramatic as television gets in this country.

4881 "Pioneer Quest" still remains the highest rated documentary reality show -- and it truly was reality -- ever shown on a specialty service in Canada. That has been a much more successful approach than trying to truly recreate an historical drama.

4882 We think we have a better mix. We think we have a better answer to that question on history. I think that is where I would like to leave it.

4883 MR. MacMILLAN: The only thing I could perhaps add is in terms of game shows on History, the kind of thing we are thinking of perhaps is a quiz show. We are not thinking of some of the other more radical game ideas. A quiz show that dealt with history, including Canadian history, might be a very entertaining and relevant way to bring history forward in a very effective manner. That is what we are thinking about.

4884 COMMISSIONER COLVILLE: Let's go back for a minute. Maybe you could explain for us, in a little more detail than what was in the application, how it is you see the subscriber base shrinking, which is going to lose you subscriber revenue.

4885 I understand, I think, the point you are trying to make; that as we move more and more to the digital world, the packages are going to get smaller. We may not have individual pick-and-pay channels, but the packages themselves will get smaller.

4886 I would have thought that the offer that is going to be made to the consumer is going to be: If you could buy History or House and Garden on an individual channel basis for three bucks or you can buy it as part of a package of four channels for $4.50, or whatever -- I am just picking numbers out of the air -- there will be a very strong incentive for me to buy the package rather than to buy on standalone. And even if I buy it on standalone, the price is going to be high enough that depending on the deal you strike with the BDU, perhaps you end up being made whole, to use a term that has been used for a number of years.

4887 Maybe you can help us better understand where you see the shrinking of the subscriber base going to be.

4888 MS YAFFE: You have certainly raised a whole bunch of issues there that we are happy to discuss.

4889 COMMISSIONER COLVILLE: You raised them.

4890 MS YAFFE: On the pricing side.

4891 We are very happy to discuss them, because they are the heart and soul of what we see as one of the big issues facing us.

4892 I am going to ask Mark to take you through the details. I would like him to address, as well, the pricing side and what is our view of how pick-and-pay, which exists today -- it isn't not happening; it is happening -- how that works in terms of how we are paid.

4893 MR. RUBINSTEIN: Thanks, Phyllis.

4894 Commissioner Colville, there are at least three fundamental elements at play that we see over the next seven years. They are evidenced today. The application was filed six months ago, and the trending that we see is showing an exacerbation of the problem.

4895 Here are the three issues from our point of view.

4896 The first is in terms of looking at History's financial performance, two-thirds roughly of our revenue stream is subscriber distribution revenue. So if there are vulnerabilities in that area, it is going to have a more significant impact on the overall financial performance of the channel.

4897 In the application we have shown that where we see the most significant erosion is on the cable distribution side of the equation. History, of course, was launched as an analog channel. Its primary subscriber base received the service through analog means. That is still the case today, notwithstanding the growth of DTH.

4898 What is happening is that as cable operators accelerate the roll-out of digital, the way in which you used to get your television, including History Television, is being marketed in a fundamentally different way because many of those operators have many other objectives besides selling television services.

4899 For example, if I move into a cable area, I want to get television service. The customer service person I speak to tells me about this great thing called digital television but by the way that is also coupled with high-speed Internet opportunities and maybe cell phone or wireless opportunities, and we want you to be a VIP customer of ours. Programming does not in that example take a front seat all the time.

4900 In particular on those kinds of bundling strategies, as the distribution industry calls them, they are designed such that the number of services that will at one point be offered may be quite small. To a consumer, if I am more focused on Internet and I am focused on my basic core number of channels and now I am being asked to choose from just five or just ten amongst a dizzying array of expanding programming choices, that can be problematical.

4901 I think that is one element of it.

4902 It gets equally complicated if you go from being a cable customer to a satellite customer. So now how am I being asked to choose my channels? Now I am being asked to choose packages.

4903 Lots of research is done, and these companies know what is a ceiling for most consumers.

4904 Let's assume for the sake of argument it is $50 or $55. The proposition is we have 12 packages to choose from. Here is our first offer. It's seven packages for $55.

4905 They know that beyond $55 the acceptance rate and the up rate declines significantly, so it is seven out of 12. What happens when History happens to be in that eighth package that you kind of would have wanted, but you know what at $50, $55, I feel that that's about all I want to spend on television and it's going to be regrettable that a couple of services I used to like I really can't justify going to that next price point. So, that's point number two.

4906 COMMISSIONER COLVILLE: Do you have evidence of that?


4908 COMMISSIONER COLVILLE: The reason I ask that is because, as you probably know, I live in Halifax and the cable operator there offers a bundle which includes Cable including a number of tiers, local telephony and high speed internet service for $99. Many of the people on the street that I used to live on bought the bundle for $99. Why? Because they could get all of what they got before and all the telephone service they wanted and all the internet service for a lot less money than the three would have cost them separately so they wanted to buy it all just at a lower price.

4909 MR. RUBINSTEIN: Certainly on the satellite side, Commissioner, we're told that based on their own -- there is logic to their pricing and marketing plan. It is not by accident that if their first foray to get the biggest number of subscribers to take packages is priced at seven for $50 or $55. Their research had told them that that's the price point at which they are going to get the largest number of people taking that offer. And we have been told that to go beyond that you see a very significant decline. Unfortunately, we don't control the marketing directly, it is the distributor that has the direct marketing relationship with those subscribers and we are in their hands to a great extent. The assumptions in our application are certainly on the basis of what we are told, week in and week out, about what is happening and what their plans are.

4910 I'm just going to finish up on two other points. The third point in terms of erosion is the piracy issue. I mean, who would have thought sitting here five years ago or seven years ago that we would have estimates of up to a million Canadian households not taking any Canadian services or not paying for them and they are a direct loss and if that continues unabated and we, of course, are being proactive with others in trying to stop it. But if that continues, that continues to be a syphoning of the system that affects history, it affects all programming services.

4911 The last point about pick and pay, which is, well certainly, if it does become a true a-la-carte opportunity for consumers, surely you will get a large enough number of history subscribers to take it on a stand-alone basis at some increased amount. Whether or not we would be able to negotiate an increased amount to make us whole is debateable. But, probably more importantly, our advertising revenues will be decimated because all of a sudden if your households have dropped by 90 per cent and you are only in 10 per cent of the households you used to be into, there is no way we will be able to grow let alone maintain our ad revenues. So, those are some of the important factors that we see today and we think are going to be challenges for us on a go forward basis.

4912 COMMISSIONER COLVILLE: All of which suggests to me that, as you say, you are at some risk putting your hands in the BDUs, whatever they would be, satellite, cable, over the air to be the primary marketer of your product, if you will. I presume this phenomenon to the extent it is happening now or is going to happen is going to put, it would suggest to me, a greater reliance on you and other specialty services to get out front and market your service to the public, so it is going to be a must buy on my list of channels so that you maintain the subscriber levels that you have been able to achieve.

4913 MR. RUBINSTEIN: And that is true, the fundamental problem we face is that we don't hold the direct relationship with that viewer/consumer. We can have the most brilliant marketing and if we say call 1-800 History Television and they say I live in Halifax and I'd like to subscribe to History, we cannot take that order and frankly we have not yet figured out, with the industry, an efficient way to make that happen and this system is not going to change. So we need to find a way to work with the distributors, the industry does, so that when we do get out front and put creativity and dollars into marketing that in fact we are moving the needle in terms of subscribers.

4914 But when you have distributors who in some cases aren't primarily focused on that, and they have other products they want to sell besides Canadian programming services and, fair enough, we are not disputing that, you can see where the challenge might be.

4915 COMMISSION COLVILLE: I take your point on this, Mr. Rubinstein, and I don't disagree with it, but it is a potential problem, it is the challenge that Alliance Atlantis is going to have to face, but I don't imagine your shareholders or this executive team is in the business of losing subscribers. So, I presume you are going to be working to maintain the subscriber base at as high a point as you can. So, I don't think you want to leave us with the impression that the enterprise is in significant risk of losing a lot of subscribers over the next while.

6911 MR. MACMILLAN: We don't want to leave anybody with the impression that we think that the sky is falling. We do want to leave you with the impression, as we have told everybody, including our shareholders constantly, that we do expect the number of scribers I do to decline.


6913 MR. MACMILLAN: Yes. And, given that and given the uncertain environment and what I believe will be a spectacular rise in the success and take-up of the digital channels, that we are not here with cap in hand. We are not here asking for a roll-back in what we are spending on Canadian content. We are not asking for an increase in subscriber fees. We re saying we will make due and be self-reliant and we will fight these battles and we will be successful and we will try to make sure that decline in subscribers is not too bad at all and that we can hold it where it is so that our future can be successful. But we're not here asking for extra subscriber dollars to help that.

6914 COMMISSIONER COLVILLE: No, I understand that.

6915 MR. RUBINSTEIN: Commissioner Colville, can I just ask -- one more point which I think is important to put on the record, which is this. Over the past two or three years as DTH has accelerated and has led the distribution industry in terms of deployment of digital, that has to a certain extent mask what is going on in the cable industry and it took us a while to figure that out when you analyze the data, but it's true. And that is why, historically, over our existing, our current license term, whatever erosion may be going on in the cable landscape had been compensated for by good growth on the DTH side. But as you go forward you can see the trends that are happening.

6916 No one thinks that DTH will continue to grow at the same clip it has been growing at. In fact, on a percentage basis I thing most would agree that, in terms of incremental deployment of digital, Cable will now start to lead in that sector. On a percentage basis Cable will do a better job of getting more boxes out than DTH will in terms of getting more dishes out. So, that kind of compensation factor we had going on in our current license term will not be there to the same extent on a go forward basis.

6917 MS YAFFE: If I could just add, the other factor that is at work here and will continue to be at work for a very long time is that fight for market share between Cable and DTH, a massive war that is going on right now. And really, keeping a customer is what counts, not how much they buy. So where as we always like to think that the distributors and the programmers are in the same battle, sell as much as you can, at the end of the day not losing your customer to another distributor is really now the name of the game for the distributors. So, we have watched some distributors offer pick 10, take it all -- you have to take it all, it's a great price, we'll give you a great price advantage. Well, if that's won't work, pick 10. Just pick 10 and stay with us and if that won't work, pick five and just stay with us. So, we're does that leave? If we are there, not answering the phone, not saying five of those services better be Home and Garden, Showcase, History, Life and Food, we've got lots of issues with how that is going to roll out and I think that is a reality that we are in, it's a good reality for the consumer. It is more difficult for the programming services than it ever has been.

6918 COMMISSIONER COLVILLE: Picking up on some specific issues, you had noted in your application this very issue of declining audience and refer to your sliding scale in terms of Canadian content. And in your presentation today you said based on the intervention from, I guess it was CFTTA, you decided to stick to the 50 per cent and that's fine. I guess I just wanted to pick-up on the notion of the sliding scale itself and I guess, in my reading of it, I didn't come to the same interpretation of the sliding scale that you seem to have come and that is that the scale slides up and down.

6919 In my view, the scale only slides in one direction and I think if you read the words of the condition -- I don't find the word decreasing anywhere in the condition. You are shaking your head in the affirmative. Would you agree that in fact -- My understanding is the sliding scale was put in place to help some of the channels when they started with a small number of subscribers to be able ramp up to a given percentage. I think it is fair to say the expectation on the part of Commission is once you got there that's where you are at regardless of what happens thereafter.

6920 MS YAFFE: We may have interpreted it differently in the past but we are, as we said today, we are happy to live with that 50 per cent at this time, going forward.

6921 COMMISSIONER COLVILLE: Regardless, this isn't just a case of responding to CFGPA's --

6922 MS YAFFE: No, and I appreciate that was our view, but not maybe the correct view or certainly not the Commission's view of how that sliding scale worked.

6923 COMMISSIONER COLVILLE: So, given all of our discussion then and talking about sliding scales, what would your reaction be to a sliding scale for the evening Canadian content, given that you are one of the lowest ones now? I know staff put to you what the financial situation would be at 50 per cent and if that was a case of going to 50 per cent and the numbers are still positive.

6924 MS YAFFE: Right. Well, they are but, obviously, there is a very change in the health of the network if it were to go to the total of 50 per cent spending requirement. I'm not sure if you are talking about broadcast or spending at this point, but I'm happy to talk about them generally for a minute.

6925 COMMISSIONER COLVILLE: We can talk about both.

6926 MS YAFFE: Okay. I thought you'd go there. I guess really we'll go back to -- one of the issues for us about specialty, one of the things we think has truly worked about the specialty system is that at the time of licensing, at the time of creating these channels, they were crafted not just on a business plan and a presentation but on a set of conditions of license that worked for that genre that dealt with the issues presented by that kind of channel. That is why we have wholesale rates that go from $0.25 in this case to over $1.00 for some other channels and those were appropriate decisions that were made and they kind of set the stage for what the channels were set on their path to do.

6927 We believe that the foremost issue that was in the front of people's minds when they set this level of Canadian content in prime time was to make sure that we represented the full universe of a subject that really does cover every possible part of the world in its presentation. One of our most popular nights is Tuesday, Ancient Civilization, truly a fantastic avenue for us to explore as programmers, not a particularly good Canadian content night. When it comes to Ancient Civilization we don't make programs about that time in Canada's history, we don't know much about it, but we do know about some of the most important and interesting things that happened in the Euphrates and other parts of the world.

6928 So, we think that the conditions which, with the sliding scale going to 50 per cent over all of the broadcast day, the 33 per cent in prime time was created at that time to allow us to have flexibility to truly represent the world's history to Canadians, not just because it is interesting and informative, not just because lots of Canadians come from other countries and would like to see their own cultural histories displayed on television for them and their children to know more about their founding history. But because that truly does make us an international or truly reflective of the world's history. Not a parochial channel with the focus only on Canada. So, because of the nature of this service, we think that this is an appropriate balance for its Canadian content in prime time in terms of exhibition. I think that is one of the strengths of the specialty regime. It was created that way because it worked for the genre.

6929 I think the notion that others do things different -- we do things differently at Life Network too, we're 82 per cent -- 82.5 per cent Canadian content throughout the day, all the time, on Life Network because it was a service that could support that. It is about the reality of Canadians' lives, it is perfectly suited. But it doesn't work for History and we think it would be wrong to suggest that all of the specialties should live in one kind of exhibition regime.

6930 COMMISSIONER COLVILLE: I'm not suggesting one kind of exhibition regime. Again, it comes back to the notion that -- I mean, there were certain conditions put in place, it was a pretty risky venture at the time when you were first licensed, nobody knew that the future was going to hold for you. Everybody was talking digital at the time, it ended up being analog carriage. It ended up being far more successful than you or we anticipated would have been the case and credit to you for doing that and I don't mean in these questions to suggest you are not doing great things with this service and other services, you do and you are.

6931 The issue is the returns would suggest you could probably do more and I agree with you on the History situation that it's tremendously informative to learn about ancient civilizations in the history of the world, but I think it is generally acknowledged in this country that we are probably one of the countries where Canadians tend to know their own history precious little and that we could really do a lot better job of educating Canadians more about their own history. And you do a good job of that, I don't want to diminish that. The question is, given -- or the issue is it seems to me, given the profitability of your service and the relatively low level it suggests to us you could do more.

6932 MR. RUBINSTEIN: Commissioner Colville, where we have tried to focus some of the discussion is between looking at where we've been and where we're going. And in the response to deficiencies we have put forward, at the time we filed this, what we saw the impact being if the assumptions we had made about the various conditions of license, which we currently operate under, would change. And, when you go through that analysis you can see various conclusions there. Under one scenario we would find ourselves with an EBHDA by your seven of the license term in a 16 per cent range and I think we'd be struggling to try and figure out how we can allow that to happen, given the other factors that we've demonstrated.

6933 So, we have put before you the direct financial impact on the channel if some of these changes were to take place.

6934 COMMISSIONER COLVILLE: What is it that got you to 16 per cent, was that the 50 per cent right away?

6935 MR. RUBINSTEIN: The combined, yeah, both proposals.

6936 COMMISSIONER COLVILLE: So, what would be reasonable in the alternative?

6937 MR. RUBINSTEIN: Well, what would be reasonable --

6938 MS YAFFE: I'm so glad you asked him.

6939 MR. RUBiNSTEIN: You know I think what would be reasonable --

6940 COMMISSIONER COLVILLE: Your picture was right beside his on that page in the report.

6941 MR. RUBINSTEIN: Yeah, I was hoping to be behind a curtain when that picture was taken, but it didn't happen. Well, I don't want to evade the question, but it actually goes to the second point I was going to make and if I can finish that point then I'll maybe give some context to the answer which is this.

6942 We thought a lot about this and really the question on the table is it's evaluating the particular performance of one channel against another. The questions we asked ourselves were -- we didn't envy you because the question becomes "how do you do that". We hear a lot about percentage terms, but of course that's only meaningful if you look at the revenue base of a channel against that percentage of profitability. You have channels that have much higher revenues, much lower profitability in percentage terms, but in absolute terms are doing very well.

6943 When you start getting into comparisons, are we doing comparisons for the services that just launched and were licensed in the same round as History, why would that be? Should we do it against all specialty and pay services? We're now all competing against each other after all, we're all in various stages of performance.

6944 Should we do it on -- should we look at revenue as a pretty important factor in determining this? It is a service that's generating a hundred million dollars in revenue. Should that be looked at much differently than a service that's generating $20 million?

6945 COMMISSIONER COLVILLE: Probably, but we are just looking at this one.

6946 MR. RUBINSTEIN: Okay. As you start to do comparisons, how important is it in terms of how integrated the approved wholesale rate is? If for various reasons a channel has three times, four times the wholesale rate of another and that flows down to overall financial performance, how important is that?

6947 Lastly, the mandate of the channel, which is that every service contributes to the system and to Canadian programming and production and the various objectives of the Act in very different ways.

6948 COMMISSIONER COLVILLE: Well, I mean you posed these rhetorical questions and I guess I look at it as history currently has the lowest evening Canadian content level of any English language specialty service. History television has the highest PBIT margin of any specialty service at 49 per cent. It is ranked twelfth in terms of PBIT dollars.

6949 Now, all of that put together and all of the discussion we have had suggests to me that given the history of this History channel, it could probably deliver more than what you have done for the last term both in terms of the 33-1/3 per cent and in terms of the per cent of the CPE.

6950 I guess what I would like to get a sense from you is if 16 per cent is too low, what would be reasonable in terms of an increase to evening content and per cent of revenue in terms of your return in your opinion?

6951 MR. RUBINSTEIN: We would like to think about that and probably come back to it. I don't want to harp on a point that maybe has been made too many times, but I think it is pretty critical.

6952 It is one thing to say, you know, we have taken a snapshot of where you are. We rode along with others a great wave in time. This is not saying the roof is falling, but it is saying we are going through a much different environment over the next seven years.

6953 It is our responsibility as managers of these businesses and as licensees to you to say it's not going to be as it was. Then the question becomes, and that makes some conservative assumptions about various revenue factors, if four years from now we are at a PBIT which is at -- take a figure, you know, 20 per cent, but we have a condition of licence that's been changed three years prior based on historical financial information, we don't think that's doing the best service to the channel.

6954 As Phyllis has said, you know, the great thing about the formula in terms of spend is that for every dollar more that we generate, a percentage goes back into Canadian programming.

6955 I will leave it at that.

6956 MS YAFFE: I will just say we do need to think about that. We haven't got an answer for you today. We will come back Friday or Monday or whenever the appropriate time is with our suggestions.

6957 I have to just say one other thing. I appreciate that you are focusing on this service and you have looked at numbers for this service.

6958 You often hear Alliance Atlantis say good things about Canadian programming and our commitment to it. That hasn't changed one tiny little bit even though we haven't suggested raising our spending or hours here.

6959 On the other hand, we look at our services as a family of services. I appreciate your looking at History today and that's your job, but we came to you today integrated. We did HG and History together for a very important reason.

6960 We don't see ourselves as running one service and another in some divided world. We bring together the totality of our family of services. We think that there are some important numbers that that creates as well for you to take a look at.

6961 Some of our services obviously don't have anywhere near the PBIT of History and so as a contributor to the system, we take a great deal of pride in what we have accomplished. As a matter of fact, our view is the average of our commitments over our five analog services is the highest in the industry. That's fine with us.

6962 That we have created seven digital services that continue to flog it out in the world of digital and take huge resources from our company, that's fine with us too, but it does bear on the issue of how much we can push what is a successful mix of programming for the viewers with the contributions we are very proud of there as well.

6963 I will leave it at that.

6964 COMMISSIONER COLVILLE: As you said, I'm doing my job, we're doing our job and we are. I don't want to sound too negative about all this, nor are we trying to penalize success here. You have been very successful. I guess our job is to see if those successful players in the business can contribute more because the failures certainly aren't going to be able to do it.

6965 We have got to count on the successful players, the people with imagination, the people who have got the kinds of ideas to help stimulate Canadian drama like you have and you have spoken about in public.

6966 If people like you can't do it, I don't know where the hope is going to be to achieve that sort of thing. That's why we want to pursue this and that's why I'm confident that you can do more than the 33 per cent, maybe as much as 50 which cuts your EBIT dollar in half, but still leaves it considerably positive. There's the bookends. We will see where you come back.

6967 One other point before we finish. You talked in your application about the business of getting programs -- the limitation on programs from your own operation. I'm failing with the right term here now. You didn't refer to that at all or, if you did, I missed it in your presentation, your oral presentation this afternoon.

6968 Was there a reason for that?

6969 MS YAFFE: No. I think we felt it was in the application. I think we have gone to the --

6970 COMMISSIONER COLVILLE: I would have thought that was a pretty significant point for you.

6971 MS YAFFE: Well, History Television was created with the condition that 5 per cent of its schedule could be produced by shareholders.


6973 MS YAFFE: There is now only one shareholder. That condition is not a difficult one for us. Because it's of schedule it has a pretty big horizon to it.

6974 What we suggest is that it could be normalized to be the 75 per cent from independent producers, 25 per cent from Alliance Atlantis regime which seems to be popular and we think appropriate.

6975 We thought that was more or less kind of -- they both work for us, we could live with either, but they weren't particularly I guess -- it doesn't make huge change to where we are already. It may actually turn out to be less production from Alliance Atlantis than the 5 per cent of total schedule.

6976 Either way we would be perfectly happy with it.

6977 COMMISSIONER COLVILLE: I don't understand. Can you explain that.

6978 MS YAFFE: Well, 5 per cent of the whole schedule, every hour, every day, or 25 per cent of the production.


6980 MS YAFFE: We don't see it as a --

6981 MR. MacMILLAN: We didn't think that  -- it was a bit of a wash from your perspective.

6982 COMMISSIONER COLVILLE: Which is why you didn't really draw our attention to it.

6983 MS YAFFE: Right.


6985 Well, Mr. Chairman, I think those are all my questions. I'm sure some others may want --

6986 THE CHAIRPERSON: Right. We are going to break now and resume in the morning.

6987 Mr. MacMillan, you undertook in your presentation. You said "We will go through each of the issues you have raised in your Public Notice and indicate where we stand". I notice you have gone through seven of the eight.

6988 The one you haven't gone through is "The Commission will also examine the criteria to be used in setting wholesale rates".

6989 MS YAFFE: Right.

6990 THE CHAIRPERSON: Whether inadvertent or not, perhaps or not, I will alert you to that. You can comment on it now to start the discussion or you can save it for the morning because I want to take up a number of the points that Mr. Rubinstein mentioned in that discussion.

6991 I know other Commissioners have other questions as well. You can talk about them now or the morning.

6992 MR. MacMILLAN: Perhaps we will leave it and if you like deal with it in the morning. I think we didn't address it because, as we mentioned 20 times, since we didn't apply for a rate increase we didn't think we were talking about it. We would be happy to discuss it in the morning.

6993 THE CHAIRPERSON: Mr. Rubinstein says we will go from a PBIT of X to Y. Y is bad, relative to what is bad, relative to what measure. I think it would be useful as part of this overall proceeding to explore that and indeed in reviewing the merits of your arguments which turn on that very point.

6994 So until tomorrow 9:30, see you then.

6995 We also have another question we would like you to think about for tomorrow morning from Commissioner and Vice-Chair Wylie.

6996 COMMISSIONER WYLIE: Yes. It's not unrelated, but it's addressing it from another perspective.

6997 Although you haven't addressed wholesale rates, you have addressed the idea of looking at the whole stable which I think you may well be at this time the only ones who have that. You have indeed attached a table with various PBITs.

6998 I would like you to tell us how you would propose that we do this, look at the family of services, given the Commission's licensing history and its reporting requirements.

6999 By licensing history I mean when you were licensed, how long the service has been there, whether there have been amendments and when they were renewed and the reporting requirements which are one by one.

7000 When I look at your table 1, then I ask myself what do we do with CHUM? We don't ask any more of them ever because they have a very low PBIT on Pulse 24. And what do we do with CanWest because they have got a 46 per cent PBIT? Presumably we are not supposed to do anything to History even though it has a very high PBIT.

7001 If another service doesn't, you want to average it. How do you propose we do that as a regulator considering the licensing history and the reporting requirements?

7002 MS YAFFE: Happy to.

7003 THE CHAIRPERSON: Have a good evening and we will see you at 9:30. Nous reprendrons demain matin à 9 h 30.

--- Whereupon the hearing adjourned at 1752, to resume

on Thursday, May 29, 2003, at 0930 / L'audience est ajournée à 1752, pour reprendre le jeudi

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