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In order to meet some of the requirements under this Act, the Commission's transcripts will therefore be bilingual as to their covers, the listing of CRTC members and staff attending the hearings, and the table of contents.
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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TRANSCRIPTION DES AUDIENCES AVANT
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
VARIOUS BROADCAST APPLICATIONS /
PLUSIEURS DEMANDES EN RADIODIFFUSION
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
Portage IV Portage IV
140 Promenade du Portage 140, promenade du Portage
Gatineau, Quebec Gatineau (Québec)
October 24, 2005 Le 24 octobre 2005
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.
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès‑verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio‑television and
Conseil de la radiodiffusion et des
Transcript / Transcription
VARIOUS BROADCAST APPLICATIONS /
PLUSIEURS DEMANDES EN RADIODIFFUSION
BEFORE / DEVANT:
Charles Dalfen Chairperson / Président
Joan Pennefather Commissioner / Conseillère
Richard French Commissioner / Conseillier
Helen del Val Commissioner / Conseillère
Ronald Williams Commissioner / Conseillier
ALSO PRESENT / AUSSI PRÉSENTS:
Chantal Boulet Secretary / Secrétaire
John Keough Legal Counsel /
Valérie Lagacé Conseillers juridiques
Jane Britten Hearing Manager /
Gérante de l'audience
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
Portage IV Portage IV
140 Promenade du Portage 140, promenade du Portage
Gatineau, Quebec Gatineau (Québec)
October 24, 2005 Le 24 octobre 2005
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
PRESENTATION BY / PRÉSENTATION PAR:
Spotlight Television Limited 8 / 40
Romen Podzyhun and C.J. Millar (OBCI) 172 / 964
Gatineau Quebec / Gatineau (Québec)
‑‑‑ Upon commencing on Monday, October 24, 2005
at 0930 / L'audience débute le lundi
24 octobre 2005 à 0930
seq level0 \h \r0 seq level1 \h \r0 seq level2 \h \r0 seq level3 \h \r0 seq level4 \h \r0 seq level5 \h \r0 seq level6 \h \r0 seq level7 \h \r0 1 THE CHAIRPERSON: Good morning, ladies and gentlemen.
2 Bonjour, mesdames et messieurs, et bienvenue à cette l'audience publique.
3 My name is Charles Dalfen, and I am the Chairman of the CRTC. I will be presiding over this hearing and will be joined on the panel by my colleagues: Richard French, Vice‑Chair, Telecommunications, to my right; Joan Pennefather, National Commissioner, to my left; Helen del Val, Regional Commissioner for British Columbia and Yukon; and Ronald Williams, Regional Commissioner for Alberta and Northwest Territories.
4 The Commission team assisting us includes Hearing Manager and Senior Policy Analyst, Jane Britten; John Keough, Senior General Counsel; Valérie Lagacé, Legal Counsel; and Chantal Boulet, Hearing Secretary.
5 Please speak with Ms Boulet if you have any questions with regard to hearing procedures.
6 For those of you who find change difficult, I know that the room has been set up in the new way for broadcasting hearings, but we discovered that at the forbearance hearing in telecom it actually worked very well to have a face‑to‑face discussion. We decided to adopt a convergence method of ordering the room, so we are going to try this way of holding the hearings and would welcome your feedback on whether you think it is preferable or not compared to the previous method.
7 At this hearing, as you will know, we will be studying five applications to carry on a national pay television undertaking.
8 The panel will begin by studying the proposal from Spotlight Television Limited to operate a national English‑language general interest pay television programming undertaking to be known as Spotlight. Programming would consist of limited series and long‑form drama, comedy series, feature films and long‑form documentaries, and occasional major international sporting events and concerts.
9 The applicant proposes to exhibit 30 percent Canadian content from 6:00 p.m. to 11:00 p.m. and 25 percent for the remainder of the day. It proposes also to spend 32 percent of the previous year's gross revenues on Canadian programming by the third year of the licence term.
10 We will next hear the application from Romen Podzyhun and C.J. (Cal) Millar for a licence to operate a national English‑language pay television programming undertaking to be called The Canadian Film Channel. The programming would be entirely Canadian and would include feature films, short films, mini features, documentaries and animation.
11 The applicant proposes to spend approximately 50 percent of the gross revenue in each year of the licence term on Canadian programming.
12 This will be followed by the application from Allarco Entertainment Inc. to operate a national pay television programming undertaking to be known as Allarco Entertainment. The majority of programming would consist of feature films, original series, specials and dramatic mini‑series, in high definition format. Canadian content would be 30 percent from 6:00 to 11:00 p.m. and 25 percent for the remainder of the day.
13 The applicant proposes to spend 32 percent of the previous year's gross revenues in the second and subsequent years of the licence term on Canadian programming.
14 Enfin, nous étudierons deux demandes présentées par Groupe Archambault inc. pour exploiter un service national de télévision payante de langue française et un autre de langue anglaise, appelés tous deux BOOMTV. La programmation comprendrait des longs métrages, des sports, des dramatiques pour la télévision et des événements. La requérante propose d'offrir 30 p. 100 de contenu canadien entre 18h et 23h et de 25 p. 100 le reste de la journée. Elle propose également d'investir 20 p. 100 de ses revenus annuels dans les émissions canadiennes.
15 As stated in the Notice of Public Hearing, this hearing will consider whether exceptions should be made to the Commission's existing digital licensing framework, including its policies regarding the licensing of services which may be directly competitive with existing services.
16 As part of this consideration, the panel will focus on the following issues:
17 1. the benefits to the Canadian broadcasting system in licensing a new general interest pay television service, particularly with respect to contributions to Canadian programming;
18 2. the capacity of the English and French pay television markets to absorb the entry of additional general interest pay television services;
19 3. the impact this would have on existing services, including the impact on the program rights market; and
20 4. the appropriateness of granting digital access rights to new pay services and the capacity implications for broadcasting distribution undertakings.
21 Maintenant, je vais demander à la secrétaire, Mme Chantal Boulet, d'expliquer les procédures que nous suivrons.
22 Madame Boulet.
23 THE SECRETARY: Thank you, Mr. Chairman.
24 Avant de débuter, nous améliorons sous‑ligner quelques points autocratiques qui contribuerons au bon déroulement de cette audience publique.
25 First, when you are in the hearing room, we would ask you to please turn off your cell phones, beepers, Blackberries and other text messaging devices as they are an unwelcome distraction for our participants and Commissioners and they cause interference on the internal communication system used by our translators and others.
26 We would appreciate your cooperation in this regard throughout the hearing.
27 We expect the hearing to take one week. We will begin each morning at 9:30 and finish each afternoon around 6:00 p.m. We will let you know of any schedule changes that may occur.
28 The Papineau Room, which is located just outside the hearing room, will serve as the examination room where you can examine the public files of the applications being considered at this hearing.
29 As indicated in the agenda, the telephone number of the examination room is (819) 953‑3168.
30 There is a varbatim transcript of this hearing being taken by the court reporter at the table in front of me. If you have any questions on how to obtain all or part of this transcript, please approach the court reporter during a break. Please not that the full transcript will be made available on the Commission's website shortly after the conclusion of the hearing.
31 Finally, given that all applications being considered at this hearing are competing, we will proceed with the four‑phase process as follows.
32 First, we will hear each applicant in the agenda order, and each applicant will be granted 20 minutes to make his presentation. Questions from the Commission will follow each presentation.
33 Dans la deuxième phase, les requérantes comparaîtrons à nouveau dans la même ordre afin de présenter leurs interventions aux demandes concurrentes. Les requérantes disposerons de dix minutes de faire leurs présentations et des questions du conseil peut suivre chaque intervention.
34 In Phase 3, other parties will appear in the order set out in the agenda to present their appearing intervention, and ten minutes will be allowed for each presentation. Again, questions from the Commission may follow.
35 La quatriéme phase fourni l'occasion à chaque requérante de répondre à toutes les interventions sousmise à leur demande. Les requérantes comparaissent dans l'ordre inverse et disposent de dix minutes pour répondre. Le conseil pourra poser des questions suivant les répliques.
36 Now, Mr. Chairman, we will proceed with Item 1 on the agenda, which is an application by Spotlight Television Limited for a licence to operate a national English‑language general interest pay television programming undertaking to be known as Spotlight.
37 The applicant proposes that service be distributed on a digital basis, with entitlement to access under section 18(5) of the Broadcasting Distribution Regulations.
38 Appearing for the applicant is Mr. George Burger. Mr. Burger will introduce his colleagues, after which he will have 20 minutes to make his presentation.
39 Mr. Burger.
PRESENTATION / PRÉSENTATION
40 MR. BURGER: Good morning, Mr. Chairman and Members of the Commission.
41 I am the President and CEO of Spotlight Limited. It is my pleasure to introduce my team.
42 To my far left is Ted Doering. Ted Doering is a market research expert with Delvinia Interactive, but he was formerly with Millward Brown which conducted the market research that is contained in our application.
43 To Ted's right is Larry Tanenbaum. He is the Chairman and Chief Executive Officer of Kilmer Van Nostrand. The Kilmer Group is a private holding company and is providing financial support for this application.
44 Next to Mr. Tanenbaum is Craig Gibson. Craig Gibson is the President of Chord Corporate Financial. He was formerly a senior partner with KPMG, leading its Media and Communications Group. He is one of the leading consultants in the broadcasting and cable industry in Canada.
45 To my left is Charlotte Mickie. Charlotte Mickie is a sales executive with Celluloid Dreams, which is an international film sales agency. She has a global reputation as being one of the leading sales agents in the world and we worked together for quite some time at Alliance Communications.
46 To my right is our counsel and advisor, Peter Grant, of the firm of McCarthy Tétrault.
47 To his right is Gary Smith. Gary Smith is the President and Chief Executive Officer of Bell ExpressVu. Bell is also an investor in Spotlight. Prior to joining Bell ExpressVu, Gary was a senior executive with BSkyB in the U.K. and has extensive experience in the pay television field.
48 And to Gary's right is Lori Rosenberg. Lori Rosenberg is also with Bell ExpressVu. She has an extensive background in the conventional and specialty television sectors. That includes being with Alliance Communications during the launch and the building of Showcase.
49 So that is our team.
50 I will now begin our formal presentation.
51 I want to start by telling you how delighted I am to be able to put this application forward. I have been working almost fulltime on this project for over three years, and I can't tell you how thrilled I am to be in front of the Commission with our team.
52 Indeed, I will go a little further and say that to be here at this moment in this room, with this terrific team, is a bit overwhelming, but I will try to be cool.
53 The pay television field has always been of interest to me. I became very familiar with pay television in my years at Alliance Communications and I have made an extensive study of that market, both in Canada and around the world, since then.
54 What that study has shown is that the pay TV sector in Canada is not performing the way that it should be. Penetration of pay TV is a fraction of what could be achieved. Consumers in Canada could have a much broader choice than is currently available to them. Support for Canadian films from the pay TV sector could be many millions of dollars higher than what we have today. And all that is missing is competition.
55 What we hope to bring to this sector is a new vision, one that reinvigorates the pay TV platform to the benefit of consumers, and one that enthusiastically embraces the original policy objectives that led to the creation of pay TV in Canada in the first place ‑‑ to support and energize, with private capital well spent, the production of top‑quality Canadian drama, in particular the feature film industry.
56 Indeed, the idea of competition in pay TV harkens back to the original vision of this Commission in 1982 ‑‑ a vision of a national pay TV licensee competing across the country with a number of regional licensees.
57 Of course, we have the regional licensees ‑‑ the two incumbents, Astral and Corus. What we are missing is a new national player.
58 Spotlight seeks to be that new player. Spotlight Television intends to be a critical and positive new force in the development and financing of Canadian feature films and original dramatic programming.
59 To accomplish this objective, I believe we have brought together truly a great team.
60 A key part of the team is the Kilmer Group, which will spearhead the financing of spotlight. I would like to ask its Chairman, Larry Tanenbaum, to speak further.
61 MR. TANENBAUM: Thank you, George.
62 As you know, the Kilmer Group has a strong reputation as a builder and investor in all things Canadian. Our interests range from construction and infrastructure, to private equity, and to sports and entertainment. The sports assets include my part ownership of the Air Canada Centre, the Toronto Raptors and ‑‑ given our proximity to Ottawa, I hesitate to mention ‑‑ the Toronto Maple Leafs.
63 When George Burger first approached us to finance his new venture, his vision struck a chord ‑‑ namely, the interest and passion for broadcasting that I have had for many years.
64 In the early 1970s I was one of the founding investors in a cable television company, CUC, which at the time we sold it in 1994 was Canada's fifth largest cable company.
65 During our ownership of CUC, I was an early investor in YTV, the children's channel. I've never lost my interest in the broadcasting business, and I remain involved in six currently launched or about to launch digital specialty channels.
66 George's proposal with Spotlight ‑‑ which set this process, including this hearing, in motion ‑‑ is timely, original and well‑researched, with a capable leader at the helm. We would not be financing it if we didn't think this was a good long‑term investment with immediate consumer appeal. We are highly confident that Spotlight can be another great Canadian success story, one that we will develop and grow into a major new Canadian media enterprise.
67 Thank you.
68 MR. BURGER: Thanks very much, Larry.
69 In building our team, we were pleased in July to welcome Bell ExpressVu aboard as a strategic and financial partner. The President of Bell ExpressVu is Gary Smith.
71 MR. SMITH: Thank you, George.
72 As George mentioned, before I joined Bell ExpressVu last year, I was a senior executive at BSkyB, which runs one of the most successful satellite television businesses in the world.
73 Bell ExpressVu is in a highly competitive business, and we are constantly looking at what consumers want. One thing is very clear: consumers want more movies and they want more movie options than they currently have from Canadian suppliers.
74 This is a natural opportunity for us. In fact, until George and Larry revealed themselves last April, most of the industry thought that we were the mystery applicant that led to call for applications. We considered a variety of ways to become involved in this process, and after a careful look at Spotlight's application, we have concluded that it is the right application at the right time.
75 Introducing real competition in premium pay TV movie services, significantly expanding the movie and original drama offerings available to consumers, will be welcomed by Canadians and will also help keep the illegal U.S. services at bay.
76 MR. BURGER: Thanks very much, Gary.
77 Now I would like to address the real opportunity that competition presents to the Commission and to the public.
78 The first point to make is that the market for premium movie services is under‑served in Canada. The penetration rate of the incumbent English‑language premium pay TV services is still only about 20 percent of the English‑language cable and satellite households.
79 This is well below what is achievable in a vibrant, competitive market. Competition has created a dynamic, aggressively promoted high‑value entertainment option for consumers in the United States. Not surprisingly, the comparable penetration level for the premium movie services is approximately 50 percent.
80 There are five different premium movie services in the U.S. market, each with its own completely differentiated selection of movies and other programming. Half of the subscribers to pay television in the U.S. take more than one pay service. For example, most subscribers to Showtime also take the most popular service, HBO.
81 In the U.S., indeed even in Canada, their pay TV services are well‑known household brands.
82 In contrast, the Canadian pay TV services have relatively weak brand awareness and do not provide the kind of choice in movies that consumers want.
83 There is a real market gap here, which we determined in the course of our market research. Ted Doering carried out our market research, and I will ask him to speak further about it.
84 MR. DOERING: Thank you, George.
85 Our research surveyed 1,000 English‑language cable and DTH subscribers, and it shows that there is overwhelming consumer appetite for a competitive model, one that offers twice as many opportunities to watch to‑quality recent movies and original programs.
86 The interest is strongest among existing pay TV subscribers. Here we found that 93 percent agree that Canadian viewers should have more choice in the number of pay TV services that are offered, and 46 percent would pay an incremental $10 to $12 per month for an additional pay TV service.
87 Among non or former pay TV subscribers with digital cable or DTH, 57 percent said that they would consider subscribing to pay TV if Canada moved towards a more competitive model.
88 The research also shows substantial dissatisfaction with the incumbent services.
89 Nearly 40 percent of homes with digital cable, or DTH, are former subscribers to the incumbents. Twenty‑two percent of former subscribers stopped subscribing because they felt it was not worth the money, and an additional 18 percent stopped subscribing because of insufficient top‑quality recent movies and original programming.
90 Only 20 percent of existing customers report being very satisfied with TMN; while only 26 percent are very satisfied with Movie Central. In addition, 27 percent of the incumbent subscribers report being less than satisfied.
91 These numbers indicate that there is a considerable pent‑up demand for more choice in pay television.
92 MR. BURGER: Thank you very much, Ted.
93 Early on in the process, we engaged one of Canada's most experienced financial consultants in the broadcasting field to refine our model and validate its assumptions.
94 Craig Gibson will now walk you through our numbers ‑‑ I think literally.
95 MR. GIBSON: Mr. Chairman and Members of the Commission, I would now like to refer to a few of the charts that are up on the easels in front of us.
96 On these charts we are looking at English‑language households only.
97 The first of these shows our projections for growth in the number of cable or DTH households with at least one premium pay service.
98 The time line takes us from the current period through the end of the first seven years of operation of Spotlight. The blue line represents our projections in the continuing monopoly environment. The red line represents the impact of Spotlight and competition, and the green line represents U.S. penetration throughout that same period.
99 As you see, the U.S. penetration, based on projections by Kagan Media Research ‑‑ considered by many to be the world's leading media and entertainment research organization ‑‑ will be well over 50 percent.
100 But with competition in Canada, we project that the Canadian penetration rate will rise from its current level of just over 20 percent to about 32 percent of cable or DTH subscribers in 2013. This is still less than 60 percent of the projected U.S. penetration levels.
101 In making these projections, we have factored in a number of assumptions, of course. We have assumed that competition will lead to lower wholesale rates. We have also assumed that with distinctive movie scheduling on the competitive services, there will be a significant number of multi‑pay subscribers.
102 The implications for the pay television revenues are shown on the second chart, and are dramatic.
103 In this chart, covering the same time frame, the blue line represents the incumbent gross revenues under the ‑‑ no, that can't be right. The green line must be the monopoly. The blue line is with competition from Spotlight, and the red line represents combined revenues of Spotlight and the incumbents.
104 As you see, the total revenues for the competitive model rise significantly over seven years, compared with the monopoly model.
105 But where the difference generated by competition is the greatest is on the Canadian content expenditures. That shows up on this chart No. 3.
106 Here the lower line represents the status quo monopoly Canadian content expenditures, and the red line is those expenditures with competition.
107 When you compare the competitive model with the status quo monopoly model, the difference over that time frame, this gap, if you will, is $170 million in incremental Canadian content expenditures in the first seven years of the competition with Spotlight.
108 To put this amount in perspective, expenditures on Canadian drama by all the conventional private networks combined have only averaged approximately $60 million a year over the last five years.
109 MR. BURGER: Thank you, Craig.
110 The pay TV market has been a monopoly for 20 years. Competing with the two regional incumbents will not be easy. Their entrenched position gives them enormous advantages. We have addressed this in our application with a specific proposal to ensure that the incumbent pay services do not abuse their dominant position.
111 Let me turn now to our Canadian programming.
112 Spotlight's fundamental policy objective will be to provide new capital and broad exposure for Canadian feature films. Indeed, given the requirement that 32 percent of the gross revenues from pay TV must be spent on Canadian content, Canadian feature film and television drama producers, and the people they employ, are collectively the single largest stakeholder in the pay TV market. They are our partners.
113 Our projected Canadian program expenditures over the next seven years of our licence are shown in the chart over to my right. As you will see, it starts at $15 million for the first four years of operation and builds to $51 million by Year 7.
114 Consider that for a second ‑‑ an amount close to Telefilm's annual feature film budget, coming from pay television. And that's just from us.
115 Finally, pay television will have the potential to become the driver of Canadian drama, particularly feature films, that it was always meant to be.
116 The introduction of a new well‑capitalized player among the ranks of Canadian broadcasters represents not only a new source of financing, but a way to leverage the pay TV platform so that it grows substantially as a whole.
117 To talk about the implications for the independent film sector, let me introduce Charlotte Mickie.
119 MS MICKIE: Thank you, George.
120 My background is in film acquisition, distribution, sales and financing. I have been involved in the financing of many Canadian films like "The Sweet Hereafter", "Leolo" and "New Waterford Girl".
121 When I was with Alliance Atlantis, we took an active role in optioning books, finding writers and seeking directors. I am now in the business of acquiring and selling independent films around the world.
122 This is a challenging time for independent films. The introduction of a new pay TV "green light" for Canadian films will make a big difference, and it is no wonder that so many Canadian producers and distributors welcome the Spotlight application. It will not only be a new source of funding, but an alternative source of funding as well, giving producers a much needed extra door to turn to.
123 A Canadian pay TV budget rising from $15 million to $51 million a year to spend on Canadian programming would have a tremendous impact.
124 First, it will allow more scripts to be developed.
125 Second, it will allow scripts to be better funded, resulting in a better finished product. Spotlight's script and concept development funding of $1.5 million a year will be a big factor in this regard.
126 Third, it will enable Telefilm money to be spread over more projects.
127 And finally, it will allow more films to be made without Telefilm funding. Even without Telefilm support, the Spotlight dollars can attract support form other sources in Canada and abroad, if the projects are well developed.
128 Spotlight's proactive, supportive approach to feature film production will be unique in Canada, modeled on the highly successful distribution direction taken by BBC Films and FilmFour in Britain; NHK in Japan; Arte and Canal Plus in Europe; HBO, Showtime and IFC in the U.S.; and many others.
129 There is a real potential for films that do not follow the formulaic mainstream focus of the Hollywood majors, and that is where Spotlight could have a major impact.
130 MR. BURGER: Thank you very much, Charlotte.
131 Before I continue, I would like to turn the floor over to Craig Gibson, just to make a slight correction to the record.
132 MR. GIBSON: Thank you, George.
133 I'm sorry, I misspoke. The chart is correct and the words in the document are correct as well. Those lines were not mixed up.
134 MR. BURGER: Just to clarify, the blue line, the middle line, is the incumbents in a monopoly model, and the green line reflects a bit of an attrition in their expectations, their projections, due to competition. And, of course, the red line is the combined market.
135 In the first two years alone, Spotlight will invest $35 million in Canadian feature films, as well as in original drama and long form documentaries.
136 Over the licence period, Spotlight will seek to be the catalyst in the production of three to six feature films a year, as development partner, licensee and equity investor.
137 We have developed a number of financing models for Canadian feature film productions, and it is clear that Spotlight's financial contribution will be invaluable. It will facilitate more and better scripts, by adding capital to the development pool of funds, and it will increase the value of the Canadian territory, support the producer and, as Charlotte has indicated, it will make it possible to spread existing Telefilm support over many more film projects and in many cases substitute for Telefilm itself.
138 From a consumer perspective, Spotlight will deliver compelling programming, reinvigorating the pay TV sector as a whole.
139 With a national marketing strategy, we will drive awareness not only of what Spotlight will have to offer, but of pay TV as the best‑value home entertainment proposition.
140 We want to bring to pay TV a new vision, one in which we define ourselves as critical players in the development and financing of feature films.
141 We will also play a similar role in the development and financing of original drama under the Spotlight brand. In that connection, we will seek out the best projects presented to us by producers across Canada.
142 Sometimes we will present our ideas to them, for them to produce jointly, with our financing assistance, although we will not be a production company ourselves.
143 The most important consideration in green‑lighting Spotlight‑branded content, whether it be feature films or original drama, will be that they are financed as needed to reflect the vision of its producers, that they push the envelope in terms of excellence and subject matter, and that they drive the Spotlight brand.
144 Most importantly we will be partners with Canadian producers not just in the sharing of our subscriber revenues, not just in achieving their creative vision, but in providing complete transparency in our role as the principal source of financing.
145 In summary, we believe we can help elevate pay TV to a new level, and with it the excellence and popularity of Canadian feature films and television drama.
146 Thank you. We would be pleased to answer your questions.
147 THE CHAIRPERSON: Thank you, Mr. Burger, ladies and gentlemen.
148 Vice‑Chair French.
149 COMMISSIONER FRENCH: Mr. Burger, welcome, and welcome to your team. You didn't sound the least bit overwhelmed to me.
150 I want to start by talking about programming, because it seems to me that the necessary condition for a favourable verdict on the part of the Commission has to depend, at least in part, on the Commission's confidence that what appears on the screen will represent an increment of interesting and attractive television fare for the client, for the customer.
151 You have in effect made a claim that you are aware of, and could acquire, a significant amount of foreign programming, untapped foreign programming, which I presume to be foreign programming that is not available to anyone except the black and grey marketers, by black and grey market customers, if them.
152 When I look at your application ‑‑ and by the way, when I look at the applications of Allarco and Archambault ‑‑ I am struck, frankly, by the absence of any empirical evidence demonstrating that that content exists.
153 I am wondering what you can do to help me in that regard.
154 You have made some, I repeat, fairly definitive and aggressive claims that there is a large amount of programming out there which you would like to bring to Canada and which, if it exists, the Commission would be interested also in providing access to for Canadians. But the evidence is absent.
155 How can you help us to get a grip on that question?
156 MR. BURGER: I think I have what I think is probably a good answer, and then I think we also have a better answer.
157 The good answer is that in fact there are many feature films available around the world, largely of course from the United States in terms of our audience taste, that is available that is not necessarily shown on the incumbents.
158 Right offhand, there are several Canadian distributors who have told me that their films don't get picked up by the incumbents, one or the other of them or both of them from time to time. As it happens, three of the Hollywood studios are not carried across Canada right now.
159 I think just there, there is product. But that is not where we are going.
160 The Kagan Group estimates that there is about 450 to 500 feature films that are released in the U.S. market, or should I say the North American market, annually. Of that, I would say, according to them, roughly 35 to 40 percent, perhaps a little bit more, represents MPA or studio product.
161 In the first instance, that means that there is quite a volume of feature films available. I don't think the assertion has been made by the incumbents that they show all feature films that are released every year. I don't think that that is the case, but I stand to be corrected.
162 That is the first answer.
163 In addition, I also want to point out in that regard that there is a growing amount of original programming that is a substantial contributor to the pay television market and to pay television audiences. That is a growing amount. It is not just HBO and Showtime, but the other studios are getting into the game as well. Over time, I expect that that amount of original programming will grow and we will need an outlet.
164 The other element that I think is important is to really change a little bit the fixation on the issue of first run or not first run. I think the attempt to define pay television as solely a platform for first run feature films is an attempt to frame the agenda for the purposes of this process.
165 Certainly in the United States ‑‑ and in many other markets around the world ‑‑ it is not necessarily strictly a first run channel. What premium pay TV is, is a channel where top‑quality, uncut, commercial‑free programming is available to audiences.
166 I think it is a rather lax approach to programming to assume that if you put on first run, that is ultimately going to win over your audiences. I think everybody has gone to a lot of first run movies and walked out less than satisfied. So that in and of itself is not a criterion of excellence.
167 We would like to expand what we show on premium pay television to things that are a bit older than the first run, within say five or six years after release. I think that allows for a much larger library of product available, which will also allow for very creative programming by both ourselves and the incumbents, to ensure that when a consumer flips to the pay television band and they have those hopefully ten or twelve channels to choose from, they will always find something they want to watch, whether it is first run or recent run.
168 COMMISSIONER FRENCH: The incumbents' interventions suggest that they carry 90 percent of the top 200 grossing U.S. films annually.
169 Do you deny that?
170 MR. BURGER: No, I don't deny it. I have no reason to dispute it. I didn't make a personal count of it. But as I said, there are some studios that are not carried across Canada.
171 COMMISSIONER FRENCH: Well, there are 10 percent on that account, of the top 200 grossing films in the U.S. market, that are not carried in Canada, unless they are carried by specialty.
172 What you are in effect saying to me once again, I think, is that your programmers have knowledge of substantial amount of product, to use the crass term, already exhibited in its domestic market, overwhelmingly the United States, which doesn't reach Canadian consumers.
173 With the greatest of respect for what you have just said, it suggests to us a philosophy of programming which is interesting; it is stimulating. And without in any way denying the pertinence, it leaves me still without anything very tangible to go on.
174 Could you, for example, not provide the Commission with say two weeks of September 2005 programming, which would specify the full schedule? There would be blanks in the place for the Canadian content ‑‑ we will discuss that in a minute ‑‑ because we will presume that you have plans in that regard.
175 There would be a certain proportion, it appears, on your account of material currently being carried by the incumbents because you want us to assist you in accessing that material, notwithstanding your optimism about the remaining material available.
176 Excluding those two categories, could you not provide us with a couple of weeks of programming which would give us an idea what production houses and what kinds of programming you are looking at, and would demonstrate that quality programming is indeed available and that is not reaching Canadian consumers at the moment?
177 MR. BURGER: I certainly don't have a problem undertaking something like that, but I think there might be a bit of a shorter cut to getting to that result.
178 I think all one needs to do is look at the listings for Direct TV satellite in the U.S. for the HBO and the Showtime services and put them up against the programming that is available from the incumbents currently, leaving aside the raw number of channels ‑‑ we are five on the one hand and approximately 17 on the other. You also have a difference of approximately, at the last count on a recent night, of about 13 titles in Canada and over 30 in the United States.
179 We can get into a discussion about the relative merits of the quality of the titles, but I point out that there are five premium pay television services in the United States which are able to fill their agendas with plenty of content. I would suggest that the addition of one more service in Canada would not deplete the available content that we could show.
180 I would also like to ask Charlotte, if you don't mind, to speak a little bit about the content that is available around the world, to give you some comfort certainly on the first run side.
181 COMMISSIONER FRENCH: Ms Mickie, just a moment, please.
182 That is not my job. That is your job, Mr. Burger. How would I know, given this plethora of supply, which part of it you would choose to present to Canadians?
183 It is your job, if I may say so, respectfully, to provide us with something that we can touch and feel and examine. At the moment there is nothing. I suggest to you, with the greatest of respect, that I am not going to run to look at Direct TV's programming and compare it with what you might bring us. I am asking you and giving you the opportunity to provide us with some specific and detailed information about what your programming plans would be.
184 Ms Mickie.
185 MR. BURGER: Before I ask Charlotte to respond, certainly I will undertake to do that.
186 MS MICKIE: Obviously it wouldn't be appropriate to give you specific titles at this point, but I can say that I am in the business of both acquiring and selling motion pictures around the world, including to the Canadian market.
187 I am very aware, obviously, of my film line‑up and of my competitors' film line‑ups and where they get sold to.
188 I would say that the company that I work for has many available films and my competitors have many available films for Canadian television and specifically for the pay window.
189 I think George talked about the Kagan statistics, but I can say as well that I spoke recently to one of my buyers, one of the acquisitions people for Fox Searchlight, and he told me that at Cannes he tracked around 400 movies, at Toronto around 200, at Sundance another 123, and at Tribeca, 135, for a total of about 900 films, all of which we felt could have been potentially viable for Searchlight to have picked up for domestic distribution.
190 Presumably they only chose maybe three or four of all of those.
191 COMMISSIONER FRENCH: They being...?
192 MS MICKIE: Fox Searchlight in the United States.
193 Presumably they only chose a few and their competitors only chose a few. That leaves a great many movies, many in the in English language, some foreign language, that would be pre‑curated by film festivals, that would be potentially accessible and entertaining and that could be of great interest to a pay service.
194 So to use the crass word, there is product out there, absolutely.
195 COMMISSIONER FRENCH: I agree there is product out there. I think it would be helpful to the Commission to ensure itself that it is not being asked to create the channel equivalent of an art house cinema.
196 I am all for it, but we have to consider whether the total package is going to be sufficiently compelling and sufficiently original to attract a major following and to ensure that the optimistic and aggressive forecast that Spotlight has provided us with can be backed up by something.
197 It would be very helpful to have the details.
198 I would like to explore with you for a moment the multiplex channel plan that you have.
199 Would you expect the Commission to require that the BDU carry all of the channels?
200 MR. BURGER: I think that certainly in order for us to be able to approach this on the basis of somewhat the opportunity to level the playing field, I think that we would have to be able to be in the position to at the least match the channel availability that is provided by the incumbents.
201 We do have a bit of an uphill climb to really be able to effectively deal with a 20‑year entrenched monopoly. I think anything that would differentiate us in a negative way would really not be helpful.
202 COMMISSIONER FRENCH: So in effect, since I am given to understand ‑‑ and I might be corrected ‑‑ that currently there is no such requirement to carry all of the multiplex channels of any given pay television on the BDU, we would get ourselves into the business of making a horizontal requirement applying to both pay television? How would it work?
203 MR. BURGER: I would ask my counsel, Peter Grant, to address that.
204 MR. GRANT: Thank you, Mr. Vice‑Chairman.
205 Actually, the provision in the Broadcasting Distribution Regulations states that the obligation there, under subsection 18(5), is to carry each English‑language pay television service, which could embrace more than one channel, of course. But it is preceded by language that says "the licensee shall distribute it to the extent of available channels".
206 The fact remains that if a particular BDU had a capacity problem and had already filled up with other services and could not make available the full multiplex channel, this section gives them an out.
207 Obviously from Mr. Burger's perspective, he would like to go in with the assumption that if they do have the available channels, and they are open and available to be used, then surely the obligation should be to have a bit of an even playing field.
208 As I understand it, the way this obligation is operated, the incumbents do not view this as an entitlement to the full multiplex thing. It is the question of what is available and what can be negotiated at the time.
209 I think this issue will turn in the end on BDU negotiations that will probably focus on what availability has potential. That will change over time as people will want to use HDTV or other technologies, and it will be a different conclusion for each BDU. So it is very difficult to speculate until one gets a licence and then starts to launch and gets plans and sees where HD is going, and so on.
210 The obligation is not inflexible. The obligation in the regulations does give that out to a BDU that has a problem with capacity.
211 COMMISSIONER FRENCH: My question wasn't really about capacity. Let me try to summarize, if I can, Spotlight's position, and you can correct me if I am wrong.
212 Spotlight's position really is that there should be horizontal equity as between the incumbent and the new entrant and that that horizontal equity should be ensured by the Commission.
213 Is that correct?
214 MR. GRANT: That is a fair point, yes.
215 COMMISSIONER FRENCH: Could you tell me a little bit about the design of these multiplex channels. Would you have a flagship channel? Would you have a guide channel?
216 How would it work?
217 MR. BURGER: I certainly think that we would have a core channel which would essentially be our signature channel with whatever premiers from time to time, and so on, that consumers could look to as being the consistent provider of the top quality programming.
218 Then the other ones could potentially be focused on other niche areas, as well as give the opportunity to show some of that content at different times. We would expect also to have at least one HD channel. We consider that to be a very important aspect of our strategy. We think that it will considerably help enhance the value of pay television.
219 Apart from that, in terms of the opportunity to perhaps focus different channels and different interests, I guess that would depend on the ultimate number of channels that we wind up launching.
220 COMMISSIONER FRENCH: Would they therefore be different genres or styles or sources of programming?
221 MR. BURGER: I can say that, but as far as I can discern, certainly in my experience, the one that is easiest to discern is the so‑called festival channel, that one that would typically be more geared toward art movies.
222 I very often see the same programming on different channels, even though they may be labelled family or extreme, or so on. So they move around a little bit.
223 COMMISSIONER FRENCH: Fair enough.
224 Would you have a guide channel, some kind of a channel which would indicate to the viewer what is available on your various offerings?
225 MR. BURGER: We would certainly hope to, if that was available to us.
226 I also understand that it is up to the BDU to provide that.
227 COMMISSIONER FRENCH: Well, I would never argue with the guy that wrote the book, let's put it that way.
228 How much would the different channels overlap one another? Would there be repeats? Or how would it work?
229 MR. BURGER: Do you mean within our selection of multiplex channels?
230 COMMISSIONER FRENCH: Yes.
231 MR. BURGER: I think inevitably there is a repeat, because I think there is a bit of a rule of thumb that you launch one or two new titles a day, if you can, and inevitably there is going to be repetition.
232 I think I am going to have to leave that to whoever our programming executive is going to be. We are going to search for the best programming executives available, not so much to concentrate on whether there are successive repeats or not, but really how to most effectively try to program the available time that is not first run studio content, that is not original programming, that great bulk of time where people are entitled to see something that they want to watch.
233 COMMISSIONER FRENCH: You say that you would like to acquire 30 to 40 hours of foreign original made‑for‑pay drama programming. Would these be feature films or would they be dramatic series and, if so, how much of each?
234 MR. BURGER: Well, I think it really depends on what is available and, to some extent, there is a bit of a trend aspect to that. Early on, certainly if one looks to HBO as an example, the focus tended to be on movies and miniseries. Then it shifted to slightly longer form, half‑hour comedy series and then it moved onto drama. I think at the end of the day it is going to be whatever is available, because we find that the pay TV audience is very accepting of different formats as long as the quality is there and as long as they are able to view something that they are content they can't really see anywhere else.
235 COMMISSIONER FRENCH: All right, thank you. What role would ExpressVu or Globemedia play with respect to your programming? I mean, would you imagine joint buys with other parts of the Bell family?
236 MR. BURGER: Well, I think I am going to let Gary speak to that in a second. But just one comment I do want to make is to differentiate between Bell ExpressVu and Bell Globemedia. Our dealings have been exclusively with Bell ExpressVu and we don't really see that necessarily changing in the future, so I just want to limit that part of the discourse to Bell ExpressVu.
237 COMMISSIONER FRENCH: So you would not be engaged in joint buys with Globemedia or its member programmers?
238 MR. BURGER: Well, let me clarify that. From the point of view of whether we are within the same corporate umbrella, only for that purpose not necessarily, we certainly look forward ‑‑ and we have addressed this elsewhere in our application ‑‑ we look forward to the opportunity of working with Bell Globemedia as well as other conventionally owned speciality broadcasters to try to put together effective financing mechanisms for Canadian productions. Certainly in that respect we would expect to be working closely with them if we have the opportunity.
239 COMMISSIONER FRENCH: But no more and no less than you would with any other potential partner is what you are saying?
240 MR. BURGER: That is right.
241 COMMISSIONER FRENCH: And so the fact that BCE has made an investment does not give them any kind of privileged status in your mind?
242 MR. BURGER: Frankly, it is a relatively minor investment and it does not give them any particular kind of leverage in terms of the decisions that are made by the company.
243 COMMISSIONER FRENCH: Well now we are going to hear from the minor investor?
244 MR. BURGER: I knew you would pick‑up on that.
245 MR. SMITH: Speaking as the minor investor, I can confirm that Bell's interest in this is driven exclusively from the point of view of Bell ExpressVu as a BDU. We at Bell ExpressVu believe strongly that the opportunity to increase the competitiveness of the pay TV movie market in Canada will bring benefits to consumers, because they will have more choice and it will bring more choice to BDUs because we will be carrying more content and our customers will be paying us more for that content and it will bring benefits to Canadian broadcasters and, particularly, to Canadian content producers who are providing the raw material that customers are going to get. That is why we are here.
246 The second chart in fact, the middle chart of the three on my left, illustrates it very well that we think that the gap between the blue line, which is where we are today, and the red line is significant and that represents consumer choice and it represents additional revenues for producers in Canada and for ourselves as a BDU. We are very supportive of the process.
247 COMMISSIONER FRENCH: Mr. Smith, as precisely as you can in one paragraph, why Spotlight and not Allarco or Archambeault?
248 MR. SMITH: Larry and George brought us this opportunity sometime ago. We were actively looking at different opportunities to participate in this and, quite frankly, we were very impressed by the work that George has put into this over several years now, I believe, and the team that he has put together to promote this application. We think it is the strongest and we wanted to show that support by participating, albeit as a minority shell as I noted earlier.
249 COMMISSIONER FRENCH: Mr. Smith, the lawyers are going to kill me, but when are the high‑definition set‑top boxes going to be available? I have no television and I am suffering terribly.
250 MR. SMITH: We can speak about this separately.
251 COMMISSIONER FRENCH: Well, I want to get you on record, that is why the lawyers will be unhappy.
252 MR. SMITH: We have high definition set‑top boxes in the market today. We have many tens of thousands of subscribers to our HD programming and we have recently launched our HD PVR, which I am sure that some people in the room have seen, it is a fantastic box and I can strongly recommend it to you.
253 COMMISSIONER FRENCH: When am I going to be able to buy one, Mr. Smith? That is my question. It is a simple question. I have given you all the opportunities you could ever ask. You did a paid political announcement for your partners, which was fair enough because I gave the opportunity, now you are giving me a paid political announcement for Bell ExpressVu. When can I buy the box?
254 MR. SMITH: I am sorry, to buy the box ‑‑ they are available today in the stores.
255 COMMISSIONER FRENCH: No, they are not available today, not anywhere I can find in Ottawa. And not only that, I have been told by Bell they are on backorder and not available. Now if I am wrong, that is great, that is all I want to know.
256 MR. SMITH: No, they definitely are available. If there is a short‑term supply shortage we can look into that.
257 COMMISSIONER FRENCH: Can you get me a box?
258 MR. SMITH: Could certainly get you a box if you need one.
259 COMMISSIONER FRENCH: No, no, no ‑‑ for full price, for full price.
260 MR. BURGER: That you are not allowed to do. That is ‑‑
‑‑‑ Laughter / Rires
261 ‑‑ the nervousness comes.
262 MR. SMITH: I think you coaxed the witness, sir.
263 COMMISSIONER FRENCH: All right. I want to talk a little bit about this idea that Spotlight has put forward, which I would characterize as follows and you are free to feel that I have mischaracterized it. But, as I understand it, Spotlight feels that it will not be diluting the content currently available to the Canadian consumer, it will be augmenting it in a dramatic and positive fashion. Indeed, it is unimpressed with the programming skills of the current two incumbents and it suggests that, with a little hand from the commission, it will be able to provide a sufficiently attractive set of foreign alternatives and this set of foreign alternatives, like the residual set of foreign alternatives for the incumbents, will separately provide motors which will drag along incremental new programming into the Canadian television universe. Is that a fair way of describing what you put forward?
264 MR. BURGER: I think it is partly fair. I think that the elements that are really missing from it are the ability to envision pay television in a competitive framework where the various providers have nothing better to do all day long than to figure out how to put on the best programming they possibly can on their five or seven channels 24 hours a day. I believe that that only happens in a competitive and that is precisely why the U.S. pay services flourish in that market. I think that what can be done with a service is, with the right programming approach, it would surprise the Commission and, in fact, at some point I would like ‑‑ at this point I would like to ask Lori Rosenberg to speak a little about her experience at Alliance when we acquired the licence for Showcase and launched it into what is arguably one of the most successful specialty brands in Canada.
265 I can certainly tell you that at the time of its launch we expected to have a somewhat fair to mid‑lane type of channel which would be an outlet for Alliance's extensive library of Canadian programming. But when an effective programming approach was taken to it it turned into a real gang‑busting channel. So I would like to ask Lori to speak to that for a second.
266 MS ROSENBERG: Thank you, George. Thank you. I have been asked to speak about my Showcase experience to show how new entrants to the market, Showcase in this case, managed within an already competitive environment to build a successful and viable service.
267 I was involved in the start‑up of Showcase from pre‑launch in 1994 until after the history television licence in 1998. During those early years or that early time one of the amusing stories about Showcase was the way it was referred to pre‑launch by the media almost across the board as the Canadian repeat channel. This was the early impression that the management group at Showcase sought to and needed to reshape.
268 In the six months prior to launch we had to be thorough in our search for feature films, acquiring well over 300 films in the first year. These included Canadian feature films as well as non‑Canadian movies from U.S. major and independent studios and UK and other international suppliers of feature films. Through creativity, well‑focused marketing and innovative acquiring we were able to build an international feature film slot that started to generate viewer ratings and media attention.
269 In terms of serious programming, we had to be meticulous in our selection and scheduling in keeping within the 5 per cent limit on U.S. programming. Our first made‑for‑cable legitimate hit was OZ, which took Showcase to a new echelon in consistent viewer ratings to series and started the branding of great series programming that continues today and upon which Showcase is currently building every night at 10:00 p.m. series slot.
270 So as George mentioned today, Showcase is one of the best performing services, largely by virtue of its clear focus on its offering, innovative thinking and adaptability to the marketplace. It is also evidence that imagination and creativity should not be underscored in their importance to the success of a new channel, notwithstanding any early pre‑launch impressions. It also illustrates how competition gives rise to a certain productive energy and that same focused innovative thinking. Thank you.
271 COMMISSIONER FRENCH: Thank you, Ms Rosenberg. Mr. Burger, you are seeking to "compete" with an existing or two existing incumbents, one in each territory. Who can deny that in some sense that is competition and yet it bears very little resemblance to anything like an open market, because you are asking for a very specific set of conditions into what is now a highly engineered market and will not be less so after you arrive. Yes, there will be rivalry and I grant you the important potential effect of rivalry. But if rivalry is so good, why wouldn't we just go ahead and licence all the applicants?
272 MR. BURGER: I think, first of all, the ‑‑ one answer to that is that we do in fact have a smaller market than the U.S., and take that into account, and the U.S. itself really can only sustain three premium pay television groups. I would assume others would probably like to enter it if they thought it was viable, but as the new entrants come on board it becomes less and less profitable. In this case, there is another very important factor. We think that there is a critical element in this that relates to Canadian content and being able to contribute to Canadian content, that is a fundamental underpinning of any pay TV licence, and I am not sure that that can be achieved in a more widespread licensing environment. I can say very specifically, from our point of view, we are looking forward to making a $35 million contribution in the first two years, but frankly that is premised on a certain set of economic circumstances. I think that if it is a wide open market then the business plan changes dramatically and the degree of commitment has to change.
273 In addition, I think that if you wind‑up introducing two or more additional entrants it will indirectly wind‑up effectively perpetuating the monopoly. I think that the degree of entrenchment that the incumbents have is sufficiently strong that with a variety of players coming in the access to capital is going to be relatively limited, the assurance of having adequate supply to be able to effectively compete with the incumbents is going to be uncertain and so the overall outcome of being able to mount a significant and competitive force in relation to the incumbents is definitely going to be at risk.
274 COMMISSIONER FRENCH: So one is too little and three is too many?
275 MR. BURGER: That is our point of view.
276 COMMISSIONER FRENCH: Fair enough. Now, you have talked a bit about the issue of programming and the performance of the incumbents. In your research, which was done a couple of years ago now I guess, we learn that 22 per cent of former subscribers stopped subscribing because they felt it was not worth the money and an additional 18 per cent stopped subscribing because of insufficient top quality recent movies and original programming.
277 Now, unless you are going to compete on price, I guess my question would be why would you want access to any of the existing programming that has failed so egregiously on your account?
278 MR. BURGER: Well, forgive me for harping on a particular theme, but I really think that it is programming, programming and programming. I think at the end of the day what a consumer wants when they have canvassed the various conventional offerings and speciality offerings they want to flip to the pay TV band and they want to just cruise there and see if they land on something that is starting, it is in the middle of, that they have seen, that they liked, that they missed, so that they can watch something that they can recognize and it is partly that factor that is really missing right now.
279 In fact, the whole issue about this focus on studio product and original programming in a way really undermines the argument in favour of maintaining the status quo. Because if indeed that was all that the consumer was looking for, then I don't think that the incumbents would be getting the level of satisfaction that they are. I think that, in fact, instead of having a grey market problem in Canada there would probably be a grey market problem in the United States. I think that if it is such a tremendous value proposition why not just get one pay TV service that has everything instead of having to pay for two or three or four in the States.
280 I think obviously there is still something lacking and I think it is difficult to really ignore the market research in that regard. I think, if you would like us to pursue it a little further, I would like to turn it over to Ted Doering and perhaps he can give you a little bit more detail in that respect. Ted.
281 MR. DOERING: Thanks. When we did the research we found that, you know, top box satisfaction with the incumbents is about 20 per cent, 25 per cent. So that suggests to us that there is room for improvement in the offering that the incumbents are delivering to consumers in the marketplace. When you dig a little deeper, when you look into the former subscribers as you have pointed out, rightfully 22 per cent feel they are not getting the value for the money ‑‑ weren't getting the value for the money, excuse me, from the incumbents and an additional 18 per cent said that programming was repeated too often for their taste. So you can see through these findings from our research that there is a bit of a gap in satisfaction and room for improvement from the consumers' minds.
282 MR. BURGER: If I could just expand it a little bit further. I think that, you know, sometimes there is a tendency to view marketing as a bit if a dirty word in like sort of a public consumer manipulation, but I think that the reality is that it is largely attributable to the way pay television is marketed in the United States, that it is so ubiquitous and so popular. There is a tremendous degree of excitement that is generated by the platform and part of it is attributable to the way that it is promoted. I think that it is very difficult to really ever miss when you are in New York City, for example, what HBO is going to be showing that week or that month or what they are featuring as their next big show or show time, because when you are in Times Square the very biggest billboards that you see are the HBO and Showtime billboards and at every bus stop you see the one‑sheets for their latest offering.
283 So the public awareness of what is there to create that kind of public appetite is really essential to creating a vibrant pay TV experience. I mean, there is nothing really dastardly or anything about the way the incumbents carryon business, I think that that is inevitable in the situation where there isn't competition. I just think that if there were, then both the programming skills that we have brought to bear on what is shown and the degree of marketing that we have brought to bear on the market would both dramatically elevate the public perception of the pay TV platform.
284 COMMISSIONER FRENCH: Yes, Mr. Burger, I am inclined to think, frankly, that that argument is the most powerful and least controvertible dimension of your total presentation.
285 MR. BURGER: Do I say thank you for that?
286 COMMISSIONER FRENCH: Not yet. But it is premised, all the same, on having something to market and the Commission has to wrestle with this question which has been evoked not only by the incumbents, but also by specialty licensees and by individuals who have no licence whatever but have a great deal of interest in the outcome of the hearing, to wit, are we simply dividing into a relatively finite supply of attractive programming ‑‑ and you are shaking your head and I will give you all the time you want to to controvert the proposition ‑‑ but combined with a requirement that the Commission intervene in the output contracts it tends to create a certain feeling of unease, if you will and we will talk about those contracts in a moment.
287 So could you talk again, perhaps less about the incumbents whom you have addressed, but the sense that there is going to be a downstream impact on some speciality channels, for example. I mean, at the end of the day you are telling us, I think, you are making a claim, and I don't say it is wrong, but you are making a claim which I have asked you to substantiate, you are going to try to do, that your programmers know, you know, have a better sense of what is available and have contacts and knowledge and taste and capacity to foresee consumer taste and response that is superior in someway to those presently being operated in the corporate structures of the different licensees. No doubt you are going to get your programmers from the existing licensees, but in any event you are making a claim that somehow, you know, you have got a better mouse trap. I think the concern is that your better mouse trap is going to consist of taking something from the incumbents and something from the speciality channels and I think that you need to address that question beyond simply denying that it will have the impact.
288 In other words explain to us why, for example, the kinds of things that you would be attracted to and you would be looking at would not be the kinds of things that specialty channels would be interested in programming.
289 MR. BURGER: I think that there were a couple of questions in there.
290 COMMISSIONER FRENCH: I am sure there were.
291 MR. BURGER: One that I sort of like when I was shaking my head had specifically do to with the continued assumption that there is a sort of finitude of product available and I would really just ask that Commission to scroll back I guess ‑‑ I am not sure about how many years but ‑‑ maybe seven, eight, nine, 10 years when TSN was fighting the prospect of the introduction of Sports Net. I mean, I think that there is a direct analogy to be drawn there. We had this terrific channel, TSN, had all the major sports that were available, we also had CBC, we had this, we had that and who wants more sports? Well, it turned out that a lot of people wanted more sports. Where are we going to find anymore sports? Well, it turned out that we found a lot more sports. So I think that that assumption somewhere has to figure in the Commission's considerations.
292 I think in terms of the way the speciality channels and, to perhaps a lesser degree, the conventional channels view our application, I want to point one thing out, it is not a universal view among the existing broadcasters that this is a bad thing. I would like to point out that, yes, on the one hand CanWest did file a negative intervention, although I will point out that the National Post had a glowing editorial in our favour recommending the opening up of the home box office as they put it, be that as it may.
293 COMMISSIONER FRENCH: Proof that the Aspers don't interfere editorially.
294 MR. BURGER: That is right, or they change their mind. And, of course, CHUM also intervened negatively, but Alliance Atlantis didn't and CTV, with respect to drama, didn't. I think that those are very substantial players who do have a vested interest and, by the way, arguably CBC could as well because CBC also shows foreign films from time to time. So the jury is not just not out from a pure voting point of view, I think that the good guys are on our side. But having said that, I think that the ‑‑ I respect the letters from CHUM and CanWest, but I think that there has to be some small degree of scepticism, particularly on the CanWest one, where the implication is that if they don't have access to shows like The Shield it will essentially undermine the foundations of their business. I am not sure that that is necessarily the case.
295 The prospect of having one more buyer out there it the market to buy occasional original programming, which is not really destined for conventional television anyway, is not going to bring the downfall of the broadcasting system in Canada.
296 Now, in terms of specific numbers ‑‑ if you will just forgive me ‑‑ I did a survey of what is shown on a month in the conventional speciality channels and initially I wanted to sort of narrow it down to really just studio releases within the last five years, for example. And there were so few that I had to broaden it to include international films and B movies and everything else. So in a month on all the conventional specialty channels there were a total of 43 titles that were shows in that kind of expanded window that we would consider getting into, the kind of five or six‑year window. So I think that perhaps a bit much is being made of that.
297 That is right and, as Peter is pointing out, in that same timeframe, that, you know, 1998 to 2003 or 2004, in that period the studios put out over 750, close to 900 movies. So again, that just allows for just a broader and broader library and palate available to consumers without impacting the existing broadcasters at all.
298 COMMISSIONER FRENCH: Okay, so fundamentally the argument is less that you would be in a different market and more that the supply into that market is sufficiently large that irreparable harm will not be done to any given player?
299 MR. BURGER: I am absolutely certain of that and Alliance Atlantis agrees with me and CTV agrees with me.
300 COMMISSIONER FRENCH: Let us talk a bit about Canadian programming because it is an important dimension of your proposal and it is important to the Commission and to Canadians. Your application contemplates 120 to 150 hours a year of original Canadian programming. Could you tell us how much of that would be feature films, how much would be dramatic series and are there any other genres that you are interested in?
301 MR. BURGER: Well, I think that we really want to break the Canadian content part of our business into a variety of categories, if you will bear with me. On the feature film side, as a general rule, we are approaching this from the point of view that we will cover all the downside risk of the existing producers of feature film going forward, in that we will buy all of the movies that they make that are suitable for pay and we will pay at least the going rate that they are obtaining for the licence fees and, in addition, we will make judicious equity investments in them. These are essentially what I would call third party productions, fully independent of ourselves. Then, in addition, we would also look to establish over the next several years some structure that is somewhat akin to BBC films in the U.S., which would represent a much more proactive approach to becoming involved in the development and financing of Canadian feature films. We would be looking to a target of perhaps three to six films a year.
302 We expect that we would probably be up and running in that by about year three because there is obviously a lengthy gestation period in the business. But I think that that provides an opportunity. And I can't overstate this, the fact of the matter is that since the demise of Alliance as a feature film entity, as a kind of a cluster for making feature films, for financing them for that kind of a motivating force there really has been no one who has stepped into the breach in Canada into providing that kind of support and assistance to feature film producers and I think that that has contributed to the problem that the feature film industry has in Canada.
303 Now, I do not purport to position ourselves in the same way as Alliance. They had a very lengthy development and they became a great company and certainly established itself as a frontrunner almost internationally in the independent feature film business. But I do think that this market could certainly use someone who is I guess closer to the broadcasting side, definitely on the capitally well‑financed side that can be there effectively as a champion for the feature film producers in this country.
304 This is not a grandiose suggestion because I can assure you that it fits well within our expectations in terms of what we spend on Canadian content. A relatively little amount can go an awfully long way in this market. If I could just pause there for a second and ask Charlotte perhaps to amplify that a little bit I think you will get a better flavour of what I mean.
305 MS MICKIE: Did you want to speak to what kind of investment on a per film basis we would be able to put in and what that would ‑‑
306 COMMISSIONER FRENCH: You know, Ms Mickie, I think we could get there, but I just want to make sure I am following. Spotlight, first of all, seems to have said it is not going to be in the production business. Is that clear?
307 MR. BURGER: That is absolutely correct.
308 COMMISSIONER FRENCH: That would be ‑‑ you will do no ‑‑ well, you made some interstitials or whatever, but you will do no long‑form or half hour or hour production?
309 MR. BURGER: We will ‑‑ well, it depends on what you mean by "do" ‑‑
310 COMMISSIONER FRENCH: Yes, well you or your affiliates will not ‑‑
311 MR. BURGER: Well, it depends on is, is I mean ‑‑
312 COMMISSIONER FRENCH: Well, that one is a tough one. Sorry, please.
313 MR. BURGER: I think that what we are definitive about is we re not going to develop an in‑house infrastructure for production. I think that my lawyers will kill me for saying this, but we are not going to own copyright, we are certainly going to be independently developing ideas that we are going to want to share with producers, whether they be feature film producers or television producers, we are certainly going to try to become a major locomotive for organizing the financing that is required and, needless to say, very often it requires a certain amount of money toward development and then a further amount toward the seed capital that is essentially needed to leverage the whole production. We will provide all of that. And, of course, we will have our fair share of interest as a partner, but certainly we will be at risk with every other investor in the project.
314 So I think that that is really the approach that we are going to be taking to production. We are certainly not going to be a production company perse.
315 COMMISSIONER FRENCH: Okay. So, I am trying to understand a bit about the relative proportions in this 120 to 150 hours. Three to six ‑‑ let us talk about your three. There will be three to six films in which you will have played a major role, there will be I guess a significant number, another 10, 12 films that you would expect to acquire, Canadian productions, in a year?
316 MR. BURGER: No, well actually, as I said, we are content to acquire all the films that are made in Canada that are suitable for pay but ‑‑
317 COMMISSIONER FRENCH: In the English language?
318 MR. BURGER: We sort of work back ‑‑ no, not necessarily just in the English language. I don't see any reason to differentiate. But I think that the ‑‑ the fact is we sort of worked backwards to that number because we are fundamentally a film and drama outlet, so that immediately defines what we are going to be showing and then the drama that we are going to want to show is going to be drama that is not shown elsewhere on television. The feature films that are available historically are roughly 45 to 50 titles a year. So that gives you a 100 hour block, and the rest of it will be the rest of it, which somehow will be filled through a combination of original drama, whether produced by ourselves or by others, and other programming is available.
319 COMMISSIONER FRENCH: Okay. Are you also looking at commissioning dramatic series?
320 MR. BURGER: A short answer is yes. Yes, we would be commissioning dramatic series.
321 COMMISSIONER FRENCH: And of course all your investment, by the way, is going to be at risk, you said that?
322 MR. BURGER: Absolutely.
323 COMMISSIONER FRENCH: I just have to find ‑‑
324 MR. BURGER: You can underline it.
325 COMMISSIONER FRENCH: Pardon me?
326 MR. BURGER: You can underline it.
327 COMMISSIONER FRENCH: Yes, you are on the side of the angels in that one.
328 Could we talk a bit about how dependant the plans you have just outlined would be on public funding from Telefilm and CTF? We know that these funds are oversubscribed and there has been a concern in the production community that adding another player will fragment the demand even further and leave these sources of funding heavily dependant on the public treasury even more oversubscribed. I think you have said that you would be prepared to go ahead without Telefilm in some cases, I don't know. But would you help us, please, to understand how you see this problem and your relationship to it, because the producers assure us it is a problem?
329 MR. BURGER: Well, I certainly agree with the producers that it is a problem. But I think a far greater problem is the assertion that when $35 million of new private equity is injected into an industry that can actually be a bad thing. I think that, you know, I can't really wrap my mind around that, but I will certainly try to address it.
330 The fact that of the matter is that, given the scale of, you know, the size of films that are made in Canada, they can be made anywhere from, generally speaking, anywhere from between $1.5 million to about $7 million with certain deviations either way. Certainly, as you get on the lower end of the scale, it is absolutely not inconceivable for Spotlight to be in the position three or four years down the road to close to fully financed from the equity side in addition to tax credits and whatever else might be available, excluding Telefilm and CTF, to be able to produce those films. I think that that kind of entity is needed so that the pressure does come off of Telefilm.
331 In addition, the opportunity is there for us to use our money to augment the Telefilm money that is available. So if a producer would need $1 million from Telefilm to complete a production and all they have to do is call us with a pitch and perhaps we are in the position to give them a half a million, then Telefilm suddenly has to put up less. So it changes the entire financing model across the country and most producers, frankly, agree with us when we have a detailed discussion about this.
332 So when you take that into account ‑‑ and then on top of that there is another big problem in Canada when it comes to feature films. Inevitably, producers are unable to be able to achieve their vision for their product and at the end of the day that is what the feature film business is. It doesn't exist unless somebody has a passionate vision that they want to put up to the screen and inevitably the creation of that vision costs a certain amount of money. Well unfortunately, that certain amount of money is not always available to producers and they have to make do and they have to make their rent and they have to do everything and they have to go into production and they go into production with something that perhaps is a little less compelling than they would like to finish, that happens everyday.
333 So what we are offering is the opportunity to be able to augment. If Telefilm does put in $1 million or $1.5 million, if they do get the tax credits for a further amount and if they do get the broadcasting licences we can be there and be able to put up perhaps another $500,000 or $1 million or $1.5 million, depending on how prosperous we are to be able to allow the producer to make the film that the producer wants to make.
334 So there are just far too many opportunities for us to really be a major positive contributing factor to the feature film industry here. I am sorry, but please feel free to tell me the other side of the case.
335 COMMISSIONER FRENCH: Well, let me try to do that, not that I am not un‑pressed by the positive points you have made. The other side of the coin is roughly this. The independent production community has frequently been offered miraculous visions of the future which have on occasion, but not inevitably, foundered on a certain amount of rocks of commercial reality, if you will. That is to say, that licensees have not been able to meet their obligations, because they have failed in the market or haven't succeeded in the market as much as they could wish.
336 The concern on the part of producers is, I think, that that may be the case here. I am not saying that they are arguing firmly that it is the case, but they have suggested to us that it is not inconceivable and I confess to you that, speaking only for myself, I don't think it is inconceivable either. One of the interventions which I found, particularly which was suggested to me by colleague, Commissioner Pennefather, from a Rombus film says it is not that we don't make enough films in this country, we make too damn many and they aren't good enough.
337 So I am not saying this to counter you intervention, Mr. Burger, at all. I am trying to explain the perspective from which an independent producer might reasonably uncomfortable at the possibility that the two players would be weaker jointly than the single player is now and/or rather that the allegedly competitive and what I would call a monopolistic structure that you are proposing would be inferior from the point of view of Canadian production than the monopoly structure which you are criticizing. And I don't ask you to respond, because I am absolutely not claiming that what I have just said, in someway, counters what you said. I think it is a judgment call. If you want to, please do. But the perspective that I am trying to articulate to you is a perspective that I perceive in the interventions of a number of producers.
338 MR. BURGER: Well, I think it is probably in keeping with what this is all about, to just make a reference to a screenwriter and writer from south of the border named William Goldman who is very well‑known for his statement that when it comes to Hollywood and entertainment nobody knows anything. I have to confess, I don't have the answer. I can't give you any assurance whatsoever that this is not going to founder on the rocks. But it is precisely to be able to address that risk that we front end loaded a very significant capital commitment to the Canadian producers to make sure that, at the very least, that amount of money will be a win right off the bat. And, at the end of the day, if we do fail two or three or four years from now presumably that means that the incumbents will have won. So in the very worst instance, you are pretty much back to where you are now. I don't see the downside risk.
339 Risk is definitely there and there is no way that I could assure you that it is not going to happen. But I think, just from a balance of probabilities and having the benefit of exceeding well‑capitalized partners, I think we will be able to deliver on our promises.
340 COMMISSIONER FRENCH: Fair enough. Do you imagine that your Canadian programming will come from sources other than original production, including original production which you didn't originally commission? I mean, that is to say are there other sources of Canadian programming than the ones we have evoked so far which might find their way into your program, into your schedule?
341 MR. BURGER: I guess it is really just a question of who initiates. I think that the general category is finite, you know, it is going to be feature films and it is going to be original made‑for‑pay drama or comedy or long‑form documentaries. But I think that it is a question of who initiates it. It is either going to be us or it is going to be the producers and much more likely the producers, because there is far more of them than there are of us. And we are going to be looking very aggressively for original dramatic programming. We are certainly going to be content to buy original drama that would be produced by the incumbents, we don't have a problem with that, it is programming.
342 But in terms of what we would proactively produce, I think that you can rest assure that is not an area where anybody can take a tremendous amount of comfort. We are not promising that we are going to produce 10, 20, 30, 40 hours of drama. What we do want to do is produce as much drama that we can afford, which is going to drive our brand. We want to make very high end drama, which is essentially Monday morning cooler conversation and that is our goal. If we don't do it, then we can pass and spend our money some other way than put it into the drama system.
343 COMMISSIONER FRENCH: Thank you.
344 THE CHAIRPERSON: Thank you. We will break now for 15 minutes. Nous reprendrons dans 15 minutes.
‑‑‑ Upon recessing at 1058 / Suspension à 1058
‑‑‑ Upon resuming at 1116 / Reprise à 1116
345 THE CHAIRPERSON: Order, please. À l'ordre, s'il vous plaît.
346 Vice‑Chair French.
347 COMMISSIONER FRENCH: Just to finish up on Canadian programming, would all of your Canadian programming be first exhibition on television?
348 MR. BURGER: We would definitely strive for that. Definitely we would strive for that.
349 COMMISSIONER FRENCH: There might be exceptions, but basically the principle is first exhibition?
350 MR. BURGER: Absolutely. I think it is part of our approach. I think that it is really critical for the pay‑tv platform to become a platform of exposure for Canadian feature films and for programs. So absolutely.
351 COMMISSIONER FRENCH: How much repeat would there be in that Canadian dimension of your programming?
352 MR. BURGER: I'm afraid it depends on what is available. I am not trying to be evasive, but I think at the end of the day that is all we can do.
353 COMMISSIONER FRENCH: No, no. So there will be repeat and the amount will depend on the amount of attractive product that is available?
354 MR. BURGER: That's correct.
355 COMMISSIONER FRENCH: I want to talk again about exclusivity
356 There is the question of why you are seeking the Commission's intervention and then there is the question of what that intervention would really consist of. Let's start, though, with the why.
357 On your account there is:
"... enough inventory for two or three competitor's schedules instead of one."
358 How is that you require the Commission to become involved in these output agreements which the incumbents may or may not have with the major studios?
359 MR. BURGER: The overall approach that we took to this whole initiative from the start was that it was going to be basically a go‑big‑or‑go‑home type of proposition. We were not looking for the opportunity, nor did we think that the Commission, frankly, or the public or the film community, would be interested in an opportunity where we basically had the ability to hang up a pay‑tv shingle and then see who was going to walk in our door.
360 I think that the only thing that gives our proposal integrity and viability is if we are able to position ourselves immediately as an alternative to the existing services.
361 It is for this reason that we chose to put together a business plan that contemplates $130 million of capital expenditure. We think that is what is needed to be able to make an impact.
362 Now, the flip side of that is, you are absolutely right, we sound like we may be saying two things at once, but I think it is perfectly legitimate to want to be able to have access to sufficient studio product, sufficient original programming, so that we can use them as a locomotive that essentially drives the marketing of our brand.
363 I can assure you that it is a lot easier to sell a pay‑tv service if you are able to put up, for argument's sake, a billboard that says, you know, "Season 7 of the Sopranos" than something that is something a bit more esoteric, to say the least. I think that it becomes a major driver. The content that you show is an important factor, obviously, in the selection of your service by the consumer.
364 So we are not taking the slow‑build approach. We don't think the slow‑build approach would be useful, we don't think it will be productive to the community, and it is certainly not going to give the kind of immediate alternative to consumers, and certainly funding to the film community that really is needed at this time.
365 COMMISSIONER FRENCH: So, in effect, you are an infant industry and the Commission is affording you protection while you grow up to the robustness necessary to compete on your own?
366 MR. BURGER: No.
367 COMMISSIONER FRENCH: No?
368 MR. BURGER: No. I think I will ask Peter to speak to this in a little more detail, but what we are asking for is very much a short‑term measure, the opportunity for us, if we are fortunate enough to get a licence, to be able to do all the little things that have to be done to get us into an operating position and to be in the position to making the kind of deals, or at least compete with the incumbents in making the kind of deals that are necessary to obtain that locomotive product.
369 Beyond that, we are not asking for any help whatsoever. I think it is awkward enough to suggest this because we are coming in here as a champion of competition, but I think that if we want to make this competition effective this relatively small modicum of support, especially since there is precedent for it, is not unreasonable to request.
370 I would like to ask Peter to speak in a little bit more detail about that.
371 MR. GRANT: The issue is a transitional question, Mr. Vice‑Chair, in that we are currently in a situation where we have the two players who have a dominant position ‑‑ in fact it is effectively a monopoly ‑‑ and they have contracts in place with Hollywood studios. Now, some of them will be coming up in the next little while. Timings for all of them change over time, but here is sort of a dramatic way to pose the question.
372 We will be, after this hearing, in a period where we don't have a licence, but there is a potential likelihood we will have a licence, but clearly we cannot go and bid for a title with a studio until we actually have a licence. They know that and we know that.
373 So if the two incumbents, over the next three or four months ‑‑ and that is not a long time but it is an important time ‑‑ entered into long‑term exclusive arrangements with all the Hollywood studios or the suppliers of made for pay programming like HBO and Showtime ‑‑ which they could do in the next few months, because remember, the studios, when they are comparing apples and oranges, they don't have a counter bid from us at that point. We can't make one without a licence.
374 It would be possible for them to do that based on their monopoly position. That would effectively preclude a new pay service from competing directly with them since some exclusive studio product ‑‑ not a lot, maybe the output of two or three studios ‑‑ but some exclusive product would be needed as a locomotive to launch the new service.
375 In looking around the world at examples like this we found that competition regulators around the world have basically recognized exactly the same point.
376 For instance, a couple of years ago the Italians had two of their pay services merge and the competition regulator in Europe required, as a condition of the merger, that all of the studios, the Hollywood studio contracts with those pay‑tv services and the merged service, be able to be terminated on six months notice without penalty by any studio.
377 What was the reason for that? The reason was to allow a new player, if they were to emerge, to break out a studio from that and make an offer.
378 We have indicated that we think there is a very simple way to handle this under the Broadcasting Act because there already is an existing regulation that precludes the pay television players from granting themselves an undue preference. We think it really just requires a statement by the Commission that they recognize that this is a problem, albeit a transitional problem, and the Commission would be concerned if the existing licensees abused their dominant position.
379 Let me underline, this would not mean that any program supplier would be forced to deal with Spotlight, or they would have to licence their content to Spotlight. That is a matter for negotiation. The Commission can't get into that aspect, and clearly Spotlight would need to step up to the plate to offer terms that would make sense to the supplier, and the terms can't be small. That's why they have the budgets they have planned, particularly for the opening year or two when they have very few subs but they still need to step up to the plate to get this kind of product.
380 So that is the theory behind it and basically where we are coming from.
381 Thank you.
382 COMMISSIONER FRENCH: So you would, I say again notwithstanding this enormous amount of untapped programming, regard any sort of exclusive agreement in black and white as an abuse of dominant position.
383 MR. GRANT: No, that wouldn't be accurate.
384 COMMISSIONER FRENCH: No?
385 MR. GRANT: They can have exclusive agreements in fact with all six studios, but the condition that we are asking is that a number of the studios sufficient to provide a reasonable amount of first run content, so that some of those, three or four of those studios could stay exactly as they are, but two or three should be subject to the ability for a studio to terminate it and move it elsewhere without penalty. That sort of approach would certainly make sense.
386 Now, the studio may not terminate the deal. The studio may decide to keep with the incumbents because we don't offer them enough money. That, we realize, is the marketplace. But what would be injurious is if you have long‑term exclusive agreements with all six studios ‑‑ and we are talking just six, Universal, Paramount, Sony, Warner, Fox and Disney, those are them ‑‑ and it would be unacceptable if Spotlight could not even make an offer to any one of the six because the incumbent monopoly service has already tied all of them up under long‑term contracts.
387 That is the problem the Italian regulators faced and this is the problem I think you face, but it is strictly a transitional problem until we get launched and get organized with some locomotive material to help market the service to get off the ground and then it disappears as an issue.
388 COMMISSIONER FRENCH: I think you are going to have to help me, Mr. Grant, because it is not too clear in my mind.
389 It would be an abuse of dominant position for any sort of long‑term ‑‑ and presumably the Commission would have to specify the term ‑‑ exclusive agreement to exist between the incumbents and all six of the studios?
390 MR. BURGER: Yes.
391 MR. GRANT: Yes. To be entered into.
392 COMMISSIONER FRENCH: So how would the Commission police such a provision?
393 MR. GRANT: It would be handled essentially as a complaint and dealt with under dispute resolution. The same way you handle all undue preference cases, you basically would have a complaint, presumably from us, we would lay out some facts, the incumbents would come back with other facts, you would adjudicate it in the normal way and make a ruling.
394 COMMISSIONER FRENCH: And our ruling would be based on whether or not there is a clause in a contract that is presented towards us or tabled in the proceeding which had this exclusivity feature?
395 MR. GRANT: Well, you would have to take a look at the whole circumstance.
396 As I say, obviously a number of the studios, they will pick the ones they really want and they will be able to keep them. That is not an issue obviously.
397 COMMISSIONER FRENCH: So we are putting a limit on the number of studios with which they can have an exclusive agreement?
398 MR. GRANT: Yes.
399 COMMISSIONER FRENCH: Is that it?
400 MR. GRANT: Yes.
401 COMMISSIONER FRENCH: All right.
402 When would this end?
403 MR. GRANT: Again, this is a transitional issue to basically relate to the period up to the launch to get to effectively, I suppose, a mature service. So we are probably talking the period from the date of licensing of a competing service to perhaps two or three years into the operation of the service.
404 It might be shorter, if things work out, because then there wouldn't be an issue.
405 COMMISSIONER FRENCH: So the Commission would adopt a policy that it would state would be "transitional" or "for a short period" but would not specify what that transition or short period would be?
406 MR. GRANT: Well, the issue here is abuse of dominant position technically, from a competition regulator's perspective, can persist as long as there is dominance.
407 COMMISSIONER FRENCH: Well, since on your account it is difficult to believe there is dominance in the first place since there is a huge amount of additional programming ‑‑
408 MR. GRANT: No.
409 COMMISSIONER FRENCH: ‑‑ I find it difficult to follow.
410 MR. GRANT: No, there is dominance in respect of the six studios. There is dominance. The American and European regulators have all considered and made orders that (a) define the premium movie‑based pay‑tv sector as a distinct market; and they have also specifically stipulated in a couple of cases that access to major Hollywood first‑run studio product is essential for success in the market.
411 So we are just focusing on the six Hollywood studios and we are saying those are essentials to be in this market. Some of that product should be available.
412 COMMISSIONER FRENCH: So we are going to have to have a forbearance hearing.
413 Is that right?
‑‑‑ Laughter / Rires
414 MR. GRANT: No.
415 COMMISSIONER FRENCH: Well, then how are we going to decide, Mr. Grant?
416 MR. GRANT: This is just decided effectively. Once you have decided to issue an order upon the licensing of a new pay‑tv entrant which says: We recognize that there is a problem here in the transition and we will adjudicate those as complaints about undue preference in the normal way. That is all you have to say in your decision basically.
417 You would express the notion that we have been expressing here as to what the problem is, and then basically you will be providing your supervisory regulatory role over the next two or three years in case the complaint comes up. It may not.
418 It may be that, frankly, they will not make long‑term agreements. A few studios will come up, Spotlight will make an appropriate bid for one or two of them and life will go on.
419 That is the perfect world but, as I say, we have to recognize that there is here a dominant position in respect to this product and there could be an abuse of it.
420 COMMISSIONER FRENCH: So there will be no future point at which we will permit any pay television licensee to have an exclusive agreement with more than three studios. It will never happen. There will never be forbearance. We will continue to regulate this market for an indefinite period?
421 MR. GRANT: I think the position would be that once Spotlight is up on its feet it will be every man for himself.
422 COMMISSIONER FRENCH: That is what I'm asking you and have been asking you for the last three or four questions, if I may.
423 When is that going to happen and how will we know?
424 MR. GRANT: No more than two years after launch.
425 COMMISSIONER FRENCH: No more than two years after launch. Thank you.
426 What would happen to this business case if we were to decide not to provide this form of competition policy protection against abuse of dominant position?
427 MR. BURGER: We have considered that, Mr. Vice‑Chair, and I think the position is that we would still accept the licence but the one element that we have promised would have to come off the table, and that is the $35 million to be spent in years one and two.
428 You will recognize the two are directly related, because absent the kind of role that we are hoping the Commission will take, it means that to launch may take longer and it may be a slower rollout before we finally manage to convince a studio to come aboard. Given all of that higher risk, and probably lower penetration rate, the business plan would not be able to sustain a $35 million risk‑free guarantee for the production sector.
429 All the other conditions would continue, but that would have to come off the table if you decline to help us in this area.
430 COMMISSIONER FRENCH: Thank you.
431 THE CHAIRPERSON: Just one follow‑up, Mr. Grant, on that area.
432 In your response you list the examples from Europe and the United States in respect of the point you are making, I think at paragraph 168, and I'm wondering why you aren't proposing no exclusivity for all six studios, for example the way example (e), the European Commissioner, seemed to order in 2004 based on your example.
433 I assume your model would allow the incumbents to select the three studios they want and then the remainder would have ‑‑
434 MR. BURGER: Right.
435 THE CHAIRPERSON: Why are you adopting that approach rather than saying for the period in question no exclusivity, which I thought you were saying in your application?
436 (a) is this a change from the application or did I miss it somewhere that you had used this three and three model?
437 MR. BURGER: If I can just speak to that for a second.
438 If I understand your point, we have always maintained that we want to have exclusive relations with studios respectively, between ourselves and the incumbents. I think it is going to be an important point of differentiation and I think it is going to avoid the pitfalls that the system suffered back in 1984 precisely because of that.
439 So if that is your question, then we would not be looking for any kind of long‑term non‑exclusivity, or even on the short term.
440 THE CHAIRPERSON: No, no. I followed that. Just in reading your material I had understood that it could result in each player having access to three studios exclusively, but I hadn't read it as formalized as Mr. Grant was just presenting it now, to let them select the three, enter into exclusive agreements and leave the other three open to offers.
441 MR. BURGER: I think it is really more a question of opportunity. I think we want to have the opportunity to make our bids and to make our deals with the studios and be able to operate in that respect on a level playing field.
442 It may very well be that over time, and certainly beyond that two‑year period that we are discussing, for whatever reason it turns out that one service gets five studies, the other gets one, or six and none, or whatever combination. But at that point we are basically ‑‑
443 THE CHAIRPERSON: No, it's not about that point. My question is about the transition period.
444 MR. BURGER: Yes.
445 THE CHAIRPERSON: I follow the beyond period.
446 Perhaps you would like to comment, Mr. Grant.
447 MR. GRANT: I think, yes, to clarify, it certainly has been the general thesis that the model of non‑exclusivity, which was the original kind of model the Commission had in 1982, is one of the reasons why there were very few multi‑pay subscribers. So the whole new notion is the whole system would benefit from having some degree of exclusivity, because that then will clearly differentiate the two services in the consumers' mind and lead to a large number of people deciding to buy both, which is certainly ‑‑
448 THE CHAIRPERSON: I follow that. That again is the beyond transition. I was focusing just in on the transition.
449 MR. GRANT: During the transition period, though, the concept would be that when we launch we would launch with entirely distinct programming that is exclusive to us.
450 THE CHAIRPERSON: Right, but you would have three studios locked up under your model, even in the transition period, if I'm understanding you correctly.
451 MR. GRANT: I'm sorry?
452 THE CHAIRPERSON: Would you not have three studios locked up even in the transition period?
453 MR. GRANT: By Spotlight?
454 THE CHAIRPERSON: By the incumbents.
455 MR. GRANT: Yes, but then that would mean the other three could be purchased exclusively by Spotlight.
456 THE CHAIRPERSON: Could be, right.
457 MR. GRANT: Yes.
458 THE CHAIRPERSON: I'm wondering why you are not selecting all six to be the recipients of offers by Spotlight based on the examples you have put in here. You may just feel that 50 percent is where it is going to end up and that is what you want to put in.
459 Is there anything more than ‑‑
460 MR. GRANT: Yes. To be honest, the fortunes of the studios rise and fall and so to be able to speculate at this moment which are the most important, which are the least important, it is very difficult to put the Commission in that role. So it seemed to me to make this as simple as possible the approach we have suggested is what is proposed.
461 MR. BURGER: If I may add, probably putting in one word too many, in fact what we really want is the opportunity over the next year and a half or so, to the best of my knowledge, there are potentially several studios and sources of original programming which may become available.
462 I think until we get to the point where we can effectively bid for those that are becoming available, it is at least for those that we would like to ensure that we have the chance to bid at some certain point in time where we are capable of doing so.
463 So that is the ones that are essentially moving into play, if that is accurate to say. Beyond that ‑‑
464 THE CHAIRPERSON: Presumably if you were the incumbent you would select what you regard as the three top studios from the point of view of the programming you wanted to carry and you leave the opponent, your competitor with the remaining three.
465 You are prepared to accept that?
466 MR. GRANT: I'm totally prepared.
467 THE CHAIRPERSON: That is your proposition?
468 MR. GRANT: I am totally prepared to accept that, because things change every day. One day Sony is up and Warner is down and vice versa. They operate on three‑year cycles.
469 THE CHAIRPERSON: Thank you.
470 Commissioner French.
471 COMMISSIONER FRENCH: I have been trying to get a grip on precisely what these studios are looking for besides money. I know you give good lunch, but I suspect the incumbents to too.
472 If it is a money thing, then the question becomes: Does the Commission do a service to the Canadian tele‑spectator by opening the market in such a way that content owners, rightsholders in the United States, are in a position to command higher prices for product which is already arriving in the market?
473 Perhaps I have misunderstood how this would work, but I want to understand and I would like to invite you to help me to understand how it is that you will be able to control the bargaining power of American rightsholders, production houses, in this situation?
474 MR. BURGER: First of all, I am finding that there is less and less that you actually do misunderstand. I think that you are dead on. Inevitably there is going to be pricing conflicts.
475 I think the question really is the level of acceptability from our point of view, from the point of view of the incumbents, and the level of acceptability to a degree from the studios.
476 Because one thing is absolutely certain, in my lunches that I have given from time to time it has been made eminently clear to me that the studios are very happy with the prospect of competition, not just for the prospect of a quick kill, they want to have a long‑term competitive environment because at the end of the day they are supportive of our premise that we are going to be building the subscribe base in Canada dramatically.
477 We think that the combination of factors that I have alluded to earlier between promotion and programming, and so on, are all going to wind up driving pay‑tv into more homes.
478 Fundamentally, the pay television platform to the studios is a subscription‑driven business. If the subscribers flourish, so do they, so do we and, needless to say, so do our partners in Cancon.
479 So it's in their interest in the longer term to be able to not help develop this, because they are not in the charity business, but at least not punish us to the point where one of us is going to lie dead and bleeding on the road. So our expectation is that we are going to have to pay up.
480 We have built that into our model, but I think beyond that it is going to be a relatively regulated business, just like it is in the United States. Because I can assure you that either HBO, on the one hand, or Showtime, or even Starz, they have the pockets to lock up whatever content they want to if they wanted to go head‑to‑head with each other, but at the end of the day they wouldn't have a viable business.
481 So there is a regulated level to which the cost of programming rises in the market and we expect it to hit roughly that level here as well.
482 COMMISSIONER FRENCH: Mr. Burger, you must be careful using the word "regulated" in our presence because "regulated" means we take the responsibility and I don't think you are proposing that.
483 MR. BURGER: No, not at all.
484 COMMISSIONER FRENCH: So this is a form of self‑regulation. No?
485 MR. BURGER: No, I think it is a form of de facto market regulation, with the market regulating itself, because few people are in the business of putting themselves out of business.
486 COMMISSIONER FRENCH: So you don't sit down with your pay competitors and decide which production houses you are going to allocate to one another?
487 MR. BURGER: I have the feeling that I am not going to be sitting down with them for quite some time.
‑‑‑ Laughter / Rires
488 COMMISSIONER FRENCH: But on the other hand, by some process ‑‑
489 MR. BURGER: By the way, I don't mean to be flip about that. Absolutely not.
490 COMMISSIONER FRENCH: No, I hear you and I understand what you are saying.
491 But by some method which is not a purchasing cartel you collectively restrain yourselves.
492 MR. BURGER: If we want to maintain our business we will restrain ourselves like everybody else does when they make a purchase decision for their supply.
493 COMMISSIONER FRENCH: It would be irrational to behave otherwise?
494 MR. BURGER: It would not if one had such deep pockets that one was willing to take that kind of pain. As well as I know my partners, I don't think either of them are in the position, I am certainly not, and the way I perceive Corus and Astral running their businesses I'm not sure they are either.
495 COMMISSIONER FRENCH: So with respect to the widely expressed concern that prices will spiral out of control the answer is: Yes, they will go up, but no, they will not spiral out of control?
496 MR. BURGER: That is our position.
497 COMMISSIONER FRENCH: I would like to talk to you a bit about your subscriber forecasts. The Chairman will also do so,perhaps in a different way. So let me begin and he will follow.
498 You have taken a very positive view of the subscriber response to the arrival of a second player and I want to just examine some of the assumptions.
499 One interesting assumption is that you do not accept the notion that early digital adopters are also liable to subscribe to pay television in a larger proportion than later digital adopters.
500 Am I correct?
501 MR. BURGER: Yes. Well, there is a question of degree certainly, but I don't think that anyone who is ever going to want to have pay‑tv has already ordered it.
502 COMMISSIONER FRENCH: No, but everybody who is ever going to want digital is not digital yet either.
503 MR. BURGER: No. I don't think that ‑‑ first of all, where I did read that assertion was in a CSFB report ‑‑ I'm not sure where else it has appeared ‑‑ but the fact of it is that is quite a leap. It is quite a guess.
504 Because in fact there is a technological obstacle for people in analog to have pay television. I think right now as it stands I'm not even sure if pay is available in most markets on analogue. But once a digital service is available ‑‑ and I think that probably Gary can speak to this a lot better than I can ‑‑ what ultimately winds up happening is that the pallet of services available to the consumer go up and inevitably, because they don't have a technological barrier the only barrier they have to deal with at that point is financial, and the financial decision is mitigated simply by what is on offer by the various services.
505 So I really don't think that is necessarily going to be a problem.
506 By the way, our market research, which I can get to again in a second, also bears that out.
507 So if I could turn it over to Gary for a second on the impact of the technology on take ‑up.
508 MR. SMITH: Thank you, George.
509 If I can just refer briefly to my past experience over in the UK at BSkyB. BSkyB's customer take‑up of premium services, including the pay movies theme packs that were sold by BSkyB at the time, was consistent across the seven‑year life of the digital platform in the UK and it didn't show any adverse effects of the early adopter philosophy that you were perhaps alluding to these.
510 It does seem to be the driver of the transition from analog television to digital television. That is the customer's decision point and the availability of the movie packs and the availability of the premium services is a bonus to those customers and many of them choose to take it and it does result in a growth of the market for content. There is more content being distributed to more customers.
511 So from my experience in the UK I would certainly expect that to be replicated in Canada.
512 The other point I would like to make is that at the moment, speaking in my role as the President of Bell ExpressVu, our customer mix doesn't consume anywhere near as much premium movie theme packs as my competing platforms in the U.S. or my platforms in Europe. Those platforms customers buy more movies, typically substantially more movies than they do in Canada.
513 At the moment we are probably looking at something like 25 percent of our customers buy some sort of theme packs in this area in Canada, whereas in the UK for example it was well in excess of 50 percent. So I think that again indicates that there is a market opportunity here that is not being tapped by the current availability of content in this market.
514 COMMISSIONER FRENCH: Thank you, Mr. Smith. Let me just confirm what you have just said.
515 If I take any given cohort of new ads in any given year of seven years of BSkyB customer acquisition, and given a sufficiently large in, the proportion of adopters of premium services is the same?
516 MR. SMITH: I think it did vary over time, but not significantly. The take‑up of movie packs and sports packs, which were the two main drivers of pay‑tv in the UK market, as they are here I believe, those two drivers existed for the seven years that I was working at BSkyB.
517 COMMISSIONER FRENCH: I would just like to explore with you for a moment the significance in the British context of the sports pack.
518 Is it or is it not the case that BSkyB, as you then were, acquired some exclusive rights to premiership soccer and people really didn't have a choice?
519 I may be completely wrong. I'm asking you a question because I don't know the answer, but I thought this would have been a tremendous driver and I would prefer, if that is true, that you take that out and just talk about premium movies because I think it is much more comparable in the situation. But I may be wrong about my assumption.
520 MR. SMITH: No, I think it is a totally fair suggestion that a lot of the growth in the UK market was driven by premium sports, but it is also a fact that more than 50 percent of the UK subscribers subscribed to the premium movie services which were purchasable distinctly from the sports services. It wasn't just the sports services that were driving the consumption of premium content. Definitely movies as well.
521 COMMISSIONER FRENCH: Let's talk a bit about the movie situation. Is it possible that Canadians ‑‑ and I don't know the answer to this ‑‑ simply are not as motivated by premium movies as Americans or Britain. Or would you rather assume that they are equally motivated but for some reason they don't want to subscribe to services which provide 90 percent of the 200 highest grossing films every year?
522 MR. BURGER: Well, first of all, I'm not sure that I would go along with the assertion that we are any different. For better or for worst, on the various levels of entertainment, cross‑border, North American entertainment, the Canadian market largely tracks the U.S. market per capita, whether it be in theatrical attendance or sales or DVD or video rentals or purchases or pay‑per‑view or VOD purchases.
523 However, there is a dramatic drop off at the pay‑tv level. So I think that is one factor.
524 In addition, consistently the CCTA does their surveys ever year, their annual report, and it is a constantly growing number of respondents who say: What do they want to see more of? They want to see more movies. Seventy‑three percent of the most recent ones said that the top thing that they wanted to see on TV was more movies.
525 So I happen to think Canadians like movies at least as much as Americans do. I don't think it is a public taste issue.
526 I can just circle back a little bit ‑‑
527 COMMISSIONER FRENCH: I'm sorry, if I may. Then in effect, Mr. Burger, you are saying, as you have already said, that the incumbents are marketing ‑‑ they are programming and marketing their services in ways that are ineffective?
528 MR. BURGER: I'm hesitant to say that. I am saying that they are marketing it and promoting it in a way that is effective in a monopoly context. I think it works for them or else they wouldn't be doing it.
529 But I think that by definition if you introduce competition into it inevitably what is going to happen is that there is going to be a whole new dynamic which is going to drive subscriptions.
530 I should point out for example, there was a debate about satellite, DTH. Once before competition there was a view that it was only going to be a certain number. I don't remember the number, a million, a million and a half or something, a million two, and then when competition was introduced then the demand for DTH just went through the roof.
531 So I think there was some reason. We could have gone through the same Q&A with respect to satellite needs before the introduction of competition and you would quite legitimately have asked the same questions and I'm sure somebody in my position would have said what I did, but the result is that the market wound up doubling.
532 COMMISSIONER FRENCH: Yes, I do understand that. I don't doubt for a minute that rivalry ‑‑ because something economic in me refuses to call this competition, even once you get into it ‑‑ rivalry is very positive and will drive awareness. When I was in the mobile phone business there is no question, every time someone else comes into the market the total pie grows. Somehow we didn't want them any way, but at least the pie grew.
533 I don't doubt that rivalry is important. My problem here is rather that I keep coming back to the fact that the existing programming covers 90 percent of the U.S. box office and it is still not drawing, and you have to be making some kind of an argument about how that package split in two somehow looks better than that package in one place. I'm searching for that.
534 I know I'm putting a monkey on your back, but I'm trying to draw from you what exactly it is about this new configuration of an existing supply of material to the marketplace that is going to stimulate the way you claim.
535 MR. BURGER: I have to go back to my earlier comments.
536 I think the incumbents are to be congratulated on their ability to frame the agenda. We keep going back to the issue of a finite number of films released by the studios that are first run films and we object to that as being the sole content of pay television.
537 We think that certainly that is there, but there is a whole lot of other content there that people are paying for right now in the United States. They are loving pay‑tv in the U.S.
538 In Canada, notwithstanding the assertion that they are getting everything that they need ‑‑ for example, you mentioned earlier about analogs going to digital, will they take‑up pay‑tv? You know what, I don't even care about them so much at the moment, I am more concerned of repatriating and harvesting the 40 percent of digital cable and DTH subscribers who used to have pay‑tv and don't have it any more, who may very well have been the early adopters that you were suggesting and that they just lost interest.
539 That is a market of 1.3 million people. if we can repatriate that into this business, everybody winds up winning.
540 COMMISSIONER FRENCH: Mr. Burger, that argument is very powerful, but it would be a hell of a lot more powerful if you weren't asking for the exclusivity arrangements and the policy from the Commission with respect to the majors who are currently supplying the incumbents, that's all.
541 R. BURGER: I have to leave that really to your own policy considerations, because the fact is: Do we want to step up into this and turn this into a competitive market now or do we want to push it out and wait and see people perhaps entrench themselves further and maybe kill the baby in the cradle.
542 That is a policy issue. That is why we are here.
543 COMMISSIONER FRENCH: What is your view of the impact of a second licensee on subscriber rates for pay services?
544 My understanding is that in the American market the second and third services are achieving about 60 percent of the price that the lead service has achieved. I don't know if that is correct, but that is the information that the Commission is in possession of.
545 I am just wondering what your view would be of how that would play out in Canada.
546 MR. BURGER: First of all, the comparison between the three in a way is the natural result if you trifurcate the market. So in that case you have three competitors there. In fact, if you took the second and third, layered them on top of each other, the price point for that combined service is not a lot far off from the price point of the leading service, which, incidentally, is not terribly far off from our own projections.
547 If I go by memory, HBO is getting, on average, about $5.50 or some‑off for their service and I think that in our model on a dual scenario we are looking at $6.25. So it is not ‑‑
548 COMMISSIONER FRENCH: Sorry. Your wholesale rate is $6.25 or your retail rate is $6.25?
549 MR. BURGER: Wholesale.
550 COMMISSIONER FRENCH: Yes, okay.
551 MR. BURGER: So we are not that far off. We arrived at those numbers well before these numbers were brought to our attention, so that is just the way it worked out.
552 COMMISSIONER FRENCH: I guess I'm understanding that in practice a duopoly will provide a smaller gap between the first and second providers.
553 Is that fair?
554 MR. BURGER: There may not be a gap. Because, as I said, if you combine the second and third service providers, they are very close to the first one.
555 COMMISSIONER FRENCH: Fair enough.
556 MR. BURGER: I'm just going by memory. I think it is pretty close.
557 COMMISSIONER FRENCH: Six twenty‑five is some distance off the current wholesale rate.
558 MR. BURGER: Yes, that is correct.
559 COMMISSIONER FRENCH: Like about 25 percent, 20 percent? It's not public, but you can calculate it.
560 MR. BURGER: We actually have it at about 13 percent. Obviously we are going by 2003 numbers because the incumbents have not filed their financials for the most recent year, but that is the best numbers we have to go on.
561 MR. GRANT: I think that I can just add there.
562 If you go to paragraph 12 of Schedule 3 of the Spotlight reply there is a table there comparing the wholesale rates that Spotlight has proposed for the seven years, and then the wholesale rates that CMI gave us for the first time as to the projections of the incumbents averaged. You will see the Spotlight pricing as a percentage of the incumbents ranges from 79 percent to 87 percent.
563 COMMISSIONER FRENCH: Thank you for pointing that out, Mr. Grant. I'm sorry that I hadn't that in front of me.
564 Could we talk a bit about the U.S. and Canada just a little bit more and appreciate your contribution to this ‑‑
565 Sorry, a question from the Chairman.
566 THE CHAIRPERSON: Just on that point, the range goes from 675 in that reference through to 2013 at 699.
567 You mentioned a 625 number, Mr. Burger. What were you referring to there?
568 MR. BURGER: This is a blended version between dual and single, with the expectation that if it was a single price point then there might be a slightly higher wholesale rate if somebody was only taking one service. Just like in the U.S. currently, you pay $12 for your first one, $11 ‑‑
569 THE CHAIRPERSON: So the reference in that paragraph 12, that is a blended rate?
570 MR. BURGER: Correct.
571 THE CHAIRPERSON: Thank you.
572 COMMISSIONER FRENCH: So fundamentally your view of the entrant's position in a U.S./Canadian comparison would be something along the lines of combining the positions of those two providers.
573 What difference does it make that the price per service in the United States across the board appears to be ‑‑ appears to be I say and I stand to be corrected ‑‑ the retail rate, about 25 percent lower than it is in Canada.
574 Is that difference reflected in your forecast? Does it make a difference? Is it relevant?
575 MR. BURGER: Craig would like to answer that.
576 MR. GIBSON: No, no.
577 MR. BURGER: Would you? No, okay.
578 I think there are a variety of differences that are involved which I don't think I am really knowledgeable enough to get into that have to do with margins and the decisions on what is chosen in terms of a price point in the sales by the BDUs, but I think that one reason for the lower U.S. rate, for example for HBO, is obviously partly because they are not showing all the studios. That is to be acknowledged.
579 No one here really begrudges the wholesale rate that the incumbents are obtaining now because in fact they are paying for all of the studios, or most of them.
580 I think inevitably, since they are the largest chunk of programming expenditures, if those numbers are split and there is some kind of a factor added to them as a competition premium, if you will, then inevitably you are still going to wind up with some kind of a number less than you are currently paying for your programming.
581 COMMISSIONER FRENCH: Okay. Retail rates will go down. There will be more rivalry in the market, uptake will increase, the pie will, in terms of the number of people, the number of tele‑spectators for pay, will grow.
582 If you then could explain a little bit, help us to understand, why you have made a fairly ‑‑ I would characterize it as more aggressive than the other analysts with respect to dual subscription.
583 Could you tell us what your thinking is there, because I think you are looking at 80:20, which is fairly substantial.
584 MR. BURGER: It was just whispered to me that it is 70:30, but whatever.
585 COMMISSIONER FRENCH: Sorry.
586 MR. BURGER: I will certainly tell you the basis of our assumptions and perhaps Craig can elaborate on them a little bit.
587 I will confess to you, when we first started this thing our expectation was that we were going to try to get into a kind of a cannibalization scenario which really would probably, especially given the views expressed by the Commission, not have won a lot of favour.
588 What happened was that we conducted our market research and the information that we obtained from the research totally turned our entire strategy on its head. What we found was that among existing pay‑tv subscribers 50 percent of them ‑‑ well, much more than 50 percent, 75 or 80 percent of them would take a second service, and over 50 percent of them ‑‑ sorry, to be accurate, 46 percent of them would pay between $10 to $12 more, incremental to what they are paying now, for a second service.
589 Now, that is not terribly surprising because the demographic of pay‑tv subscribers tends toward the higher income, and it also, I agree with your views about early adopters in this area, they are probably movie lovers and they care about the content they are watching. So it's an easy spend.
590 But having said that, that number translated into a very substantial figure and we thought, "You know, we are not going to go that far. Let's really discount it."
591 What we built into the model was an 8 percent factor, so we took that 50 down to 8 and assumed that as a conversion, and then we just assumed a build over time over the seven years. That is where we came to the whole dual scenario.
592 On almost every level it fits with the experience in the United States. It is no accident that in the U.S. half of pay‑tv houses have two services. In Canada, well, it looks like that is the case here as well.
593 It also wound up generating a lot of excitement by people who aren't pay‑tv subscribers currently.
594 So that is where we expect this kind of competition and this kind of model will generate not just duals but also incremental subscribers. So it really becomes winning on a couple of levels.
595 Craig, if I haven't covered too much territory, if you want to add to that.
596 MR. GIBSON: I think George has covered it well.
597 I think the only other thing that I would add is that when looking at the market research and doing our discussions with some of the U.S. players that are in the market today, one of the things that we kept coming back to was the fact that this is a subscription‑based service that people pay a certain amount a month for and they want a certain amount of return during that month during the schedule timeframe, either through the prime 20 percent time or in the other 80 percent slots that we find there is more room for improvement, that they can, at the end of the day, look at it and say "I have seen something I like, I am going to continue to support this service."
598 In looking at the duals, they are going to have 10, 11, 12 channels to create that subscription feeling for, and that is certainly the evidence that came out of the United States and other places in the world, is that the ability to flip onto that pay service and scroll through and find something that satisfied that customer need.
599 So the research and then the discussions drove us to that conclusion, quite frankly.
600 COMMISSIONER FRENCH: Mr. Burger, all of my colleagues want me to immediately tell you that anything you have heard from me is not representative necessarily of what the Commission thinks. It might not even be representative of what I think.
601 But it certainly is not representative of what my colleagues think, so please don't draw any conclusions about what the Commission thinks.The staff does the thinking.
‑‑‑ Laughter / Rires
602 COMMISSIONER FRENCH: I want to talk just a bit ‑‑ unless, Mr. Chairman, you want to pursue the ‑‑
603 THE CHAIRPERSON: Go ahead.
604 COMMISSIONER FRENCH: ‑‑ distribution issues.
605 Could you help me to understand a bit how are you going to differentiate your service? How do you imagine differentiating it in terms of packaging and the kind of presentation that the customer is going to get from the BDU?
606 How do you see that working?
607 MR. BURGER: I think first of all, we have told our competitors quite a bit about our business plan already so I don't want to get into too much detail.
608 I think that it is not unreasonable to assume that ultimately the market will largely look a little bit like HBO/Showtime in the States. I think that generally speaking you will have an emphasis on future films and original programming, but within that there may be nuances and directions that might be taken differently by one service or the other. I think a lot of that is going to shake out of the very dynamics of what happens.
609 But I can't tell you that it is going to be radically different. It is not in the U.S. and I don't think it is going to be radically different here either, but there are going to be different directions taken, different programming approaches and different marketing strategies.
610 From the BDU's point of view, I think you mentioned that as well, I don't think that again one can say too much about how enthusiastically the BDUs really are, notwithstanding their comments about "must carry" and so on.
611 I think the fact of the matter is, one needs only look again to the U.S. When you are watching on television and you see an ad promoting Comcast, to pick that up as your service, oddly enough the Comcast brand is almost invisible. What you see is HBO and Showtime as these massive drivers of that platform.
612 Here if you do something similar and you take a look at the offerings on hand, whether it be from Bell ExpressVu or from Rogers, you see that the pay‑tv package is a relatively unprepossessing opportunity in that package, simply because it doesn't have the critical mass.
613 It has nothing to do with the quality of TMN or MovieCentral, but it has to do with a certain cluster effect, a certain density, a certain knowledge that if you are going to wind up taking this package chances are you are going to find something to watch any time you can't find something somewhere else. In addition to that, you are going to wind up finding terrific original programming and recent studio movie releases.
614 COMMISSIONER FRENCH: You wouldn't expect to be packaged with another pay service, or you wouldn't demand of the BDU's any particular package, would you?
615 MR. GRANT: No.
616 MR. BURGER: I would have to leave it to them.
617 COMMISSIONER FRENCH: We referred in passing ‑‑ because you thought I was asking a question about distribution capacity earlier on, but now I want to ask the question about distribution capacity just to be completely clear.
618 You are not seeking distribution on analog‑only BDUs?
619 MR. BURGER: It is digital only. I'm sorry, that just took me by surprise. That's all it is, yes.
620 COMMISSIONER FRENCH: It was probably not a very intelligent question, but the staff told me to ask it.
‑‑‑ Laughter / Rires
621 COMMISSIONER FRENCH: Assuming that the requirements, though, were the same for both pay services, is there a BDU carriage capacity below which you don't feel that the Commission should require access for pay services?
622 MR. BURGER: I'm going to have to throw that to either to Peter or Gary. Maybe Peter first and then possibly Gary.
623 MR. GRANT: I think the general sense from the BDUs is that there is in fact sufficient capacity for at least one additional English pay service. The issue is not so much capacity, they have an issue with the "must carry" issue.
624 I guess, Gary, you can speak to the question for ExpressVu.
625 COMMISSIONER FRENCH: I understand the satellite situation. That is a separate situation, if you will.
626 I don't think there is an issue, Mr. Smith. Unless there is, I find it most unlikely you are going to tell us you don't have the capacity to carry this service or any other service we choose to licence?
627 MR. SMITH: We would be able to carry this service.
628 COMMISSIONER FRENCH: Thank you.
629 Mr. Grant, with the greatest of respect, the Commission has a kind of fiduciary responsibility for a large range of players with whom you don't normally dialogue and who don't have necessarily a lot of capacity.
630 MR. GRANT: That's true.
631 COMMISSIONER FRENCH: I'm just searching for some kind of scent on your part that you will not come to us in great disappointment if 500 or 600 capacity BDU says "No, I'm sorry, we can't do it." You are going to be sympathetic and understand.
632 We are talking about a small proportion of the audience, but a big proportion of licensees.
633 MR. GRANT: No, we understand the practical problems for the smaller cable systems and that is not part of the business plan.
634 COMMISSIONER FRENCH: Great. That is what we were looking to try to get on the record, if you don't mind.
635 Now we want to talk about "must carry", what you have requested.
636 What if the Commission were to consider licensing and removed "must carry" for both pay services, that is remove ‑‑ I'm not sure we could in the short run do it, but in the medium term remove the must carry requirement. Would that be something that would be compatible with your business plan?
637 MR. GRANT: My immediate thought is that effectively levels the playing field and I think that would be sort of fair and fair, except for the fact that the incumbents have a hell of a head start on us.
638 So I think that is the real immediate issue that I would face on that. On appearances it would be fair, but in substance I don't think it would be.
639 To be honest, that was not a question that I had anticipated and so I think if Peter would like to add something to that I would really invite him to do that.
640 COMMISSIONER FRENCH: Yes. He will go into that book and confuse me.
‑‑‑ Laughter / Rires
641 MR. GRANT: Well, the question of "must carry" is addressed, of course, in the Commission's regulations and the existing requirement does require BDUs, subject to available capacity, to carry an additional English‑language pay service were it to be licensed.
642 There is of course also, one has to realize, in the real world of the larger BDUs there is one BDU that has a ownership relationship to a competing regional incumbent. So even without this particular regulation in place on would worry about being ever able to be carried or marketed by that particular BDU.
643 So there is more happening here than just the general obligation to carry. So I wanted to make that point as well.
644 COMMISSIONER FRENCH: Yes, fair enough. I mean for sure such a provision would have to deal with affiliate situations.
645 All right. I think I can conclude that without the "must carry" you don't feel the business plan is viable?
646 MR. GRANT: I think without "must carry" the same conclusion would be reached that I mentioned before in regard to the application of section 6.1 of the pay regulations, which is to say the licence would still be accepted, but given the question mark as to whether one was going to be able to be launched by every one in the right timeframe, then the $35 million guarantee for the first two years would come off the table.
647 COMMISSIONER FRENCH: Just a bit about HD.
648 We know that the cable industry is rather critical of its programming brethren for the lack of HD.
649 Just tell us what your plans are.
650 MR. BURGER: We see HD as actually as a real boon to the pay‑tv platform. I think what it is going to do is make pay‑tv even more of a tremendous destination for people to watch original programming and feature films.
651 it is very easy for us. Whatever HD we have available that we can acquire in the market we will put on our service. I think the limitation is going to be the technological capacity.
652 It is easy for us to say for some extent because we are ultimately buying the HD product instead of having to create it, for the most part ‑‑ certainly with the Cancon there is that element to it ‑‑ but, nonetheless, we see it as a major important element in pay‑tv growth in any event in the future.
653 Gary, you can speak to that.
654 MR. SMITH: Yes, if I can add.
655 Certainly from the point of view of a BDU in Canada we are faced with a wash of HD growth south of the border in the U.S. We feel that it is crucial that we encourage our affiliate partners, our content partners to bring HD content to the table and we welcome the opportunity to do so.
656 There are lots of technical constraints involved in that development of the HD market, both from the producing side and from the BDU side, but it is a challenge that both parties have to overcome if we are going to stay as a successful market in Canada.
657 From out point of view, we welcome it. It gives us significant challenges in satellite bandwidth, but we are already taking measures to address that in our business. As long as the Commission doesn't licence 16 different providers of a new pay‑tv movie service and we restrict it to the one that this application has proposed, then we can still accommodate that with the expected growth in HD.
658 COMMISSIONER FRENCH: Mr. Burger and your colleagues, thank you very much for the very interesting and stimulating and valuable information you have provided us.
659 I'm just saying that on my behalf. We are not finished with you, alas, but thank you very much.
‑‑‑ Laughter / Rires
660 MR. BURGER: Thank you.
661 THE CHAIRPERSON: Commissioner Pennefather.
662 COMMISSIONER PENNEFATHER: Thank you, Mr. Chairman.
663 Good afternoon. I just wanted to follow up briefly on the Canadian program expenditures presentation. I just wondered what the rationale was for script and development remaining at 1.5 year‑over‑year as opposed to increasing as do the other elements of your support for Canadian programming. What is the rationale?
664 I think you reference in your application the importance of this component of the development of Canadian programming.
665 Why does it remain constant?
666 MR. BURGER: We are just dumb. I mean it really. We didn't put enough thought to that particular element of it. I think our principal focus was that we were certainly going to at least try to match what was out there available in the development area. That has been, to the best of my knowledge, a relatively static level. But we didn't pay much attention to it.
667 I think if our views about how we want to approach Canadian content, both feature films and original drama, has any integrity then inevitably that number is going to grow.
668 We can certainly move numbers back and forth within the other categories, because we are trying to fit this into a larger policy framework.
669 I think most recently Heritage Canada had the Nordicity Report which contained certain suggestions and recommendations and analysis, and certainly one of the clearest ones, which was echoed by Wayne Clarkson at Téléfilm, was that the projects to production ratio in Canada is far below that of other markets. Essentially there are four projects to the one that goes ahead in Canada versus eight‑to‑one in Europe and nine‑to‑one in the U.S.
670 I think it is very important for all of us to try to ‑‑ this goes back to the issue of how are we going to help Téléfilm who is already strained, and so on and so forth. The fact of the matter is, the market is crying out for a greater selection of scripts, better developed scripts, better financed scripts, and we think that you could expect that line is going to be substantially higher than what we put there.
671 COMMISSIONER PENNEFATHER: So your comment on, I think one of the intervenors proposed, a 3 percent level, that would be appropriate to your business plan?
672 MR. BURGER: I can't think that through, only because it means that I would just have to spend money whether there was something there or not.
673 I think on this level I would have to ask the Commission to trust us that we are going to go ahead with the overall Cancon objectives and that that money inevitably has to flow into that pool.
674 To do it the other way and to stipulate an amount ‑‑ and I haven't even thought through what the number is, to be honest with you, but to stipulate an amount really means that all you are going to be doing is spending it unnecessarily.
675 COMMISSIONER PENNEFATHER: Thank you, Mr. Burger.
676 Thank you, Mr. Chairman.
677 THE CHAIRPERSON: Thank you.
678 Commissioner del Val.
679 COMMISSIONER del VAL: Thank you. I would like to refer to The Canadian Film Channel application.
680 If the Commission were to approve their proposal that you contribute 12.9 percent of your gross revenues to that channel, would you increase your subscription fees?
681 MR. BURGER: Well, I guess my first impulse is to say that is a classy problem to have, but in fact I think inevitably it becomes a cost of doing business and I think that you have obligations to maintain certain margins in order for your business to continue to be viable.
682 I think the short answer is that we would have to consider, but then of course there is competition and there is a question of what the market will bear, so it may be that people's margins will have to shrink.
683 This leaves aside our general view about the viability of The Canadian Film Channel as a viable option for the Commission.
684 But just to address your question directly, I guess that is our answer.
685 COMMISSIONER del VAL: Have you done any analysis of the impact on your business case if The Canadian Film Channel were approved?
686 MR. BURGER: We would be probably making less money if we would have to be hiving off 12.9 percent to them. That certainly is the immediate impact that comes to mind.
687 From a competitive point of view, I think it is implicit in The Canadian Film Channel's application that they are effectively not competing, because if they were competing then they would be able to charge a rate and have people pay for their service.
688 COMMISSIONER del VAL: I know you would be making less money, but I was just wondering whether you had done any analysis in terms of, say, the decrease in your CPE contribution, the revenues that would be decreased.
689 I was just wondering whether you have any specific numbers?
690 MR. BURGER: No. I really don't see that would change. I think our business would operate essentially the same way. If we didn't have to attach it to our margins and therefore cut down the extent to which we can penetrate the market, we would see really any change. It would just be our profitability that would be affected. "Just".
691 COMMISSIONER del VAL: Would you rather see a significant but lesser increase in your, say, CEP contribution requirement than to contribute 12.9 percent to another service?
692 MR. BURGER: This inevitably goes into a discussion of the merits of the CFC application and I'm perfectly content to do that.
693 I think that regardless of the other comments that I may have about the incumbents, one thing that I'm absolutely certain of is that they know how to spend money on Canadian content. They have a great depth of expertise in that area and overall I think that they have really done a tremendous job. So they have the expertise.
694 If you are asking me: Would the Canadian film industry and drama industry be better served by taking the 32 percent that the incumbents and us would be spending on Canadian content ‑‑ let's leave it with the incumbents because we are talking about experience ‑‑ and moved it over to the CFC and effectively cut it in half so that they would take that 12.9, there are two immediate issues.
695 One is the expertise of the people who are now spending a very substantial amount of money. I frankly don't know them well enough one way or the other, but I certainly do know the incumbents.
696 The other aspect of it is, will that money all be spent on Canadian film? Because I know that the 32 percent that Astral and Corus currently spend on Cancon largely goes to Cancon. The 12.9 percent that would be hived off to The Canadian Film Channel, a good chunk of that would go to overhead and other elements. I think their undertaking is that 50‑or‑some‑odd percent of their revenues would go to Cancon, so it is immediately you are taking 6.5 percent out of the system.
697 But that is just my take.
698 COMMISSIONER del VAL: Thank you.
699 Mr. Grant, can you please comment on The Canadian Film Channel's proposal that the pay‑tv licensees be required by condition of licence to contribute the 12.9 percent?
700 I think Astral and Corus in particular raised the issue that this may be subject to legal challenge.
701 Can you please comment on that?
702 MR. GRANT: Well, I would agree it would be subject to legal challenge. The difference is that the Commission does have a pretty wide jurisdiction to impose obligations, as part of its franchising if you will, to earmark funding for specific public purposes. The question would be: Within that framework does this private sector channel qualify as a public purpose. Is it a public interest?
703 Requiring, for example, BDUs to support The Canadian Television Fund is clearly a public purpose because there you have a history where the agency has been blessed by Heritage and receives funds from the government.
704 To me, the question I would want to look at as a lawyer examining it is whether this channel could fit itself within that category. I think they may have a hard time, given the structure they propose.
705 I wouldn't want to go further than that because, to be fair, I haven't examined the Astral opinion or seen it to see exactly where they are coming from, but I want to start with the general premise that I think the Commission does have a pretty wide jurisdiction to require its licensees to contribute money to various things, but to avoid it being qualified or categorized as a tax requires a certain number of hurdles to be passed and they aren't easy hurdles.
706 COMMISSIONER del VAL: Thank you.
707 Going back to your contribution, I need to clarify your position on exclusivity. I think I got it. When you were talking about exclusivity on foreign programming, the question on foreign programming, your answer I believe to Mr. French was that your commitment for $35 million would have to change if exclusivity were not permitted for foreign programming acquisition.
708 Is that correct?
709 MR. BURGER: I think that it would be impacted by that, but even more so it would be impacted by our ability to access foreign studio programming.
710 COMMISSIONER del VAL: Do you have an idea now on what the $15 million and $20 million in years one and two would be substituted by? Would the second year be 32 percent of the previous year?
711 MR. BURGER: That is basically correct. If we proceeded, that's right.
712 COMMISSIONER del VAL: Then what would be the first year contribution?
713 MR. BURGER: I think that we would go ‑‑ and I would have to ask Peter, because again we really didn't think of that. I don't know what is typically done in the first year when you don't have a previous year against which to measure a number.
714 I will certainly let Peter deal with that. In terms of quantifying it obviously it would be very difficult because we would have a totally different expectation of take‑up.
715 MR. GRANT: I think what we could do is look at that scenario and get back to you in the next day or two with a hard number.
716 COMMISSIONER del VAL: Great.
717 MR. GRANT: What the problem really is, we have said is, absent the ability to break out a few of the studios it does change the risk attached to the business plan and therefore the projected revenue.
718 COMMISSIONER del VAL: Great. Thank you.
719 Then on exclusivity for Canadian programming, I'm not too clear on what your proposal is there.
720 MR. BURGER: Actually, I would be very happy to discuss that, subject obviously to Competition Bureau issues.
721 When I'm talking about the Canadian size of our business ‑‑ on the U.S. side it is unequivocal or the foreign side it is unequivocal.
722 The reason I say that caveat is based on what I am going to say next.
723 We would look forward to the opportunity to collaborate with the incumbents going forward in terms of the financing development and exposure of Canadian films.
724 I think that probably would better serve the policy objectives overall than if we were to get into some kind of an exclusive arrangement with Canadian producers.
725 I think our preference would be that we could work as a team, again to be able to not necessarily make more movies, but certainly to make better funded movies so that we could be sure that you have the script elements that you need for a successful film and that you have the production elements that you need for a successful film, to get to that level where we can with comfort make films like that.
726 I think a collaboration aspect would be very important. So that is our take on it.
727 We are certainly content to pay for a Canadian film and licence fee that they are currently getting on an exclusive basis. We would match that, we don't have a problem with that, and take it from there. But as a base that is our commitment and our preference.
728 COMMISSIONER del VAL: Thank you.
729 I will come back to that, but in the meantime I would like to hear your comments on Allarco's revised proposal on exclusivity. I believe it is in their September 19th response to the interventions whereby they were proposing limiting the prohibition against exclusivity to a set number of Hollywood blockbusters per year.
730 Could you comment on that, please?
731 MR. BURGER: Well, again it is something I guess diametrically opposed to our approach. The reason it is is because we don't really believe that is going to work.
732 I think to mandate that, first of all, is a far greater request of the Commission than the relatively modest assistance that we are suggesting.
733 So that is the first issue.
734 The second issue is, regardless of the complexity of implementing it, I think you are also facing in fact a precedent. I don't think that it is a good idea to go back to the future by going back to 1982 and trying to adopt that kind of a model and working with that.
735 I guess that is just our first impression. We didn't come here really prepared ‑‑ not today but at all ‑‑ to be doing a lot of interventions against the other applicants so I am just caught a little off guard, but that is my response.
736 COMMISSIONER del VAL: On the Canadian programming, on the contributions, some of the producers raised the issue that ‑‑ I'm sorry.
737 I go back and I understand that one of the ways that you would help fund is by taking an equity position in some of the productions.
738 Some of the producers have suggested that recruitment of the producers' equity position, that should be allowed before the broadcaster can recoup.
739 What do you think of that?
740 MR. BURGER: I think that the production of a film like anything else, like building a building, is a business. I think that people are entitled to get the rewards based on the risk that they have taken for the most part.
741 I think the real controversial issue, as I understand it, in the issue of recoupments is where effectively the contribution that one would make would not really be fully at risk. That turns it into a different form of financing. It becomes almost a substitutional financing rather than incremental.
742 I think that if we put money up for a film fully at risk along with other partners, then I think subject to the entitlement that a producer would have as a producer, whatever would be negotiated as their share of that equity pie, I think would probably be the reasonable approach.
743 But certainly I don't see any priority for the pay broadcaster as an inventory.
744 COMMISSIONER del VAL: This question is just following up on Mr. French's. I think we were talking about the potential exhibition on a broad number of broadcast outlets.
745 Do you intend to enter that type of an arrangement, for example with BEV's investment? Would you intend to negotiate licensing rights for more than just, say, the Spotlight channel?
746 MR. BURGER: No.
747 COMMISSIONER del VAL: Great. I mean "great" in that it is simple.
‑‑‑ Laughter / Rires
748 COMMISSIONER del VAL: I see that your script and concept contribution is a set $1.5 million per year. The Director's Guild, I believe, suggested that it be a percentage. They suggested 3 percent.
749 What do you think of that?
750 MR. BURGER: I don't think that is really practical. It is akin to the Field of Dreams, you know, the assumption that if you build it they will come. If you have that money, that doesn't necessarily mean you are going to get better scripts for it.
751 I really much prefer kind of a demand side to the equation and just make sure that there are scripts out there that need the money that can potentially turn into viable production projects.
752 If it turns into something that is compulsory, I don't think anybody is going to be happy with that. Yes, you may find that a lot of people are going to be able to make somewhat of a living from being a writer, but that doesn't necessarily mean that it is going to help the system with more viable scripts.
753 I would like to believe that ultimately, certainly in any kind of a re‑energized platform, whether actually it is in pay or drama ‑‑ certainly it is open to conventional specialties to be investing in that area as well ‑‑ I think there is going to be a growing demand for quality scripts in any event and I think that the market should probably determine that for the most part, subject to clearly having, you know, some certain clear expectations.
754 COMMISSIONER del VAL: But to the extent that you seem prepared to commit to an amount here for script and concept development, what do you think of committing to a percentage rather than a fixed amount?
755 MR. BURGER: Part of it has to do with the fact that the more successful we are, that would generate more money to be spent on scripts. That doesn't mean there are going to be more scripts to spent it on.
756 So there is a disconnect between those two sides of the equation.
757 MR. GRANT: If I may add, Commissioner, I think there is also a very difficult problem in the opening two years because there would be very little revenue and actually it is the opening two years where you would want the $1.5 million to be your base, because that is the time when you want to be pouring money into new scripts and so on, although on a percentage of revenue basis the number, even a 3 percent number, would not be enough to generate that kind of support.
758 COMMISSIONER del VAL: Thank you.
759 Just on the question of whether exclusive arrangements will drive up the acquisition costs of foreign program acquisition and thus leave less revenue available for contribution to Canadian programming ‑‑ I think that was raised by the Writer's Guild ‑‑ can you comment on that, please?
760 MR. BURGER: I think that is not an invalid suggestion to make. I do think, though, that it only has an impact truly in a scorched earth scenario. I think if there is a normal competition that ultimately winds up potentially squeezing margins, I don't think that is a good enough excuse to come back to the Commission and ask the Commission to change the rate.
761 I think if you are looking at some kind of thermonuclear winter or something like that then that might require it, but I certainly don't think that in the kind of future we envisage we would have the face to come back and ask for a reduction.
762 At the end of the day, if you maintain that level, then as long as the pie stays at the same level nobody gets hurt, certainly not on the future film side.
763 COMMISSIONER del VAL: Thank you.
764 Mr. Chair, those are my questions.
765 THE CHAIRPERSON: Thank you very much.
766 I wonder if I could just ask you a few higher altitude questions. We may get into the lower altitudes depending on the answers.
767 I guess it was the CFTPA in their intervention that basically said that:
"The entry of additional players must result in a significant amount of new money available to fund original Canadian independent production. We will not have accomplished anything if we merely fragment the contribution that pay television makes to the funding of the same amount of programming. In licensing additional general interest pay‑tv services, the CRTC must be convinced that the revenue pie will grow."
768 Would you agree with that?
769 MR. BURGER: I absolutely agree with it. As I understand that statement I wholeheartedly endorse it because clearly it makes us the favourite candidate for the CFTPA.
770 THE CHAIRPERSON: Perhaps.
‑‑‑ Laughter / Rires
771 THE CHAIRPERSON: I guess when I stand back and look at it, your charts very graphically make your case, which is essentially that there are much higher penetration levels of premium services in the United States. That is an opportunity that, as you said in your reply, there is a lot lower spending per unit on premium than there is the United States. It is somewhere around 4.5 percent. You show a 50 percent to 20 percent comparison there.
772 Therefore that is an opportunity available to us. We are going to essentially realize that opportunity by introducing what my colleague, Mr. French, calls rivalry, or you call competition, into the market and that the marketing and promoting that is entailed in that activity will result in two things happening, an increase in the number of subscribers overall and a sufficiently high revenue per subscriber figure so that your Chart B red arrow will be achieved.
773 Is that a fair way to put it?
774 MR. BURGER: That is dead on, yes.
775 THE CHAIRPERSON: I guess the challenge that you have had from Astral and Corus, among others, is that those are flawed assumptions ‑‑ that even leaving aside the dispute about the level in the United States for a moment, because I don't think we have to get into that ‑‑ that on the two items of subscriber growth and revenue per subscriber you are ignoring a number of factors.
776 First of all, on subscriber growth your are ignoring the early adopter phenomenon that you discussed with Mr. French, you are ignoring the impact of other technologies, other media windows and value chains, you are ignoring the comments of PricewaterhouseCoopers that have been quoted in one of the interventions about the slowdown in premium take‑up and so on. So those are essentially inflated figures.
777 On your revenue per subscriber assumptions you are ignoring the U.S. comparisons, the step down, if you like, from the first to the second or the second to third service where the numbers become a lot smaller.
778 Your customer will, in effect, be getting what he gets now over two channels and he won't, in effect, be willing to pay double for that. He may be willing to pay 100 plus something, but probably not double and maybe not significantly above what he pays now and that competition is simply going to drive all that down.
779 On top of it, the studios are going to make a lot of money because of the bidding that is going to ensue that they don't currently make. Some money is going to flow south of the border. You are going to have higher marketing costs, both of you, and the end result is that we are going to crash and burn into the situation that we were in 1984 where this current model was adopted.
780 Would you think that is a fair summary of the case against you at this point?
781 MR. BURGER: I would say so, yes.
782 THE CHAIRPERSON: That's why I say I don't want to necessarily get into your reply to interventions at this point except to the extent that you may wish to challenge any of those assumptions that I have just summarized, perhaps not doing full justice to them, any of the ones that you think are the most important considerations in that analysis.
783 MR. BURGER: Could you read me the list again? No, no, I'm ‑‑
784 THE CHAIRPERSON: I can repeat the list ‑‑
785 MR. BURGER: No, no, that's fine.
786 THE CHAIRPERSON: ‑‑ or I can refer you to the CMI study that was performed for ‑‑
787 MR. BURGER: We are very familiar with it, yes.
788 In fact, as you well know, I know you know, we filed a very lengthy, very extensive rebuttal to that intervention which goes on in far greater detail than certainly you would like me to or any one in this room would like me to go on with.
789 I think just trying to deal with a couple of them without trying to get to high C, because we really do have responses to virtually every suggesting that has been made.
790 The early adopter issue or the issue about whether or not anybody who already has pay‑tv with digital ‑‑ anyone who is going to get digital from now on is not really going to be interested in pay‑tv, apart from anything else it completely flies in the face of the position taken by the incumbents in terms of the prospects for the growth of their own businesses.
791 We should take the CMI report on the one hand and some of the statements contained in the Astral Annual Report in the other and we will see that there is very clearly a disconnect.
792 I think that it is a vibrant business, it has continued to be a vibrant business, it continues to do well, and I congratulate the incumbents for keeping that report out of the hands of the research analysts on Bay Street. I think the fact is that it is a vibrant business and it is only going to do better.
793 I think Gary certainly addressed the issue regarding the early adopter factor as it was experienced in BSkyB.
794 So yes, you are right, theoretically it is a problem, but theoretically anything is a problem. We just don't think that from a practical point of view it is a real issue.
795 In terms of you mentioned the PWC Report, which sort of has a soft spot in my heart because I read that report actually before it was cited in the CMI Report and I'm not sure I still understand what it says.
796 But I can tell you that historically, for whatever reason PWC has been extremely bearish on the prospects of various industry acceptance, and so on. I can refer you back to a 1999 report that they did with respect to the digital uptake, which I think that their levels were even probably two or three years ahead of ‑‑ I may be exaggerating a little bit, but they were well off in terms of that.
797 So I think experts have a lot of points of view and that is why they are experts, but I think there is some caution that should be read into that.
798 In addition, the issue about the studio matter, I would like to think that we did deal with that in some detail earlier and I'm pretty confident that at the end of the day it is not going to turn into that kind of negative scenario that is being painted.
799 Obviously the CMI Report was a case that was made for the incumbents. That goes without saying. I think it is perfectly legitimate to make the assertions that are in there, but in our most strongest and emphatic view, I think that we were successful in rebutting virtually every one of the assertions that were made in our submission.
800 THE CHAIRPERSON: Okay. Let me drill down just on two or three of the items. I have your general answer.
801 If I look at paragraph 10 of your reply where you cite entertainment spending comparing Canada and the U.S. on box office, cinema, DVDs, and so on.
802 If you were to add radio and television ‑‑ I appreciate that isn't the same as subscriber spending ‑‑ but has it not been your experience that in radio, and I believe in television as well, that the revenue per capita figures that are achieved in Canada are, for whatever reason, a lot lower than equivalent rates in the United States even in markets where there are more licensees?
803 MR. BURGER: If I can ask Peter to address that because he has far more experience certainly in the radio area.
804 MR. GRANT: That is well‑known that in advertising‑driven media such as television and radio the per capita spend by advertising agencies is not a 10 to 1 ratio, it is far less. But that is largely accounted for by spillover. Spillover doesn't apply in the subscription market.
805 The spillover factor has always been a great difficulty in the advertising markets and advertisers give probably greater credence to spillover than they should. We have never gotten the right kind of support from the advertising industry.
806 Also, to be honest about it, it is possible to get effective national coverage in this country with the use of our traditional media in a much more economic way because we are more consolidated than the U.S. market. That also accounts for the fact that less money is spent on advertising per capita.
807 That table that is listed ‑‑
808 THE CHAIRPERSON: Excuse me, Mr. Grant.
809 When you mentioned spillover you are referring to television?
810 MR. GRANT: Yes. There is a degree of radio spillover, but it is really television.
811 THE CHAIRPERSON: But in radio the phenomenon is fairly dramatic was well, is it not, the differential? I don't have the figures with me and we have had discussions with the radio industry.
812 MR. GRANT: Yes. I think in radio you would also have to examine, of course, the number of stations per capita in the States, which has to be double what it is in Canada for a market of comparable size. That gap is starting to diminish as the Commission licenses more stations, so we will have to see how the revenue develops in response to that. But, that's right.
813 The table in paragraph 10 of Schedule 3 of the Spotlight reply does focus on the markets that it seems to us are relevant for this exercise and that is theatrical admissions and DVD rentals. That, let's face it, is the market for people who like movies. It is also purely subscription revenue‑driven, if you will. In other words, people have to pay a price per title for those things and it gets you a sense that Canadians are stepping up to the plate and paying the same amount really comparably as the Americans are for movies.
814 THE CHAIRPERSON: Do you have the number for movie rentals as between the two countries? It isn't on here.
815 MR. GRANT: We will look into that and see if we can get you a number.
816 THE CHAIRPERSON: The secondary is paragraph 12 on that comparison that you reviewed previously and I guess I'm wondering about the apples to apples nature of this comparison, given that the MC and TMN line was developed in a status quo scenario and yours is based on a competitive scenario, is it not, so that your calculation of the percentage would raise questions of apple to apple comparisons, if I'm reading it correctly.
817 MR. GRANT: Actually, you raise a good point, Mr. Chairman, because you are right, the second line is effectively furnished by the incumbent and I'm assuming that it is their view of what would happen in a continuance of the monopoly model.
818 THE CHAIRPERSON: Correct.
819 MR. GRANT: Our assumption has not been disclosed, but in general I think we have indicated that we expect the wholesale rate of the incumbents will drop and that has been built into our business plan and accounts in part for the decline in their revenues from a pure growth strategy, if you take a look at the chart 2.
820 THE CHAIRPERSON: Right. Putting into question the validity of the percentage that you draw.
821 MR. GRANT: The difference will of course evaporate because the second line will drop a bit, our line will stay the same.
822 THE CHAIRPERSON: Right. Okay.
823 MR. GRANT: So in fact the difference.
824 Remember, the Spotlight number does not, however, represent the wholesale rate for multi‑pay subscribers. I think, as Mr. Gibson has indicated, there is a lower rate that was built into the plan for people who are taking both.
825 THE CHAIRPERSON: Your previous answer was this is the blended rate.
826 MR. GIBSON: That's correct.
827 MR. GRANT: That's right.
828 THE CHAIRPERSON: If you are now saying that the MC and TMN line is getting smaller, then the ratio will get higher and the effect that we see in the United States, you would be even farther from replicating that effect in Canada.
829 MR. GRANT: Let me take a first crack at that and then I will give it over to Craig.
830 I think the fact is that our assumption for our blended rate ‑‑ actually, I do believe these are blended rates going forward based on a CMI comparison with ours.
831 We expect to probably be having a lot fewer single subscribers than the incumbents will. I think that their advantage will probably mean that they are going to have a lot of single subscribers who may be paying more because they are only getting one service and that results, to some extent, to the higher blended rate that they have.
832 The vast number of our subscribers are going to be blended and we think that a good proportion ‑‑ and Craig can back me up on this ‑‑ of the incumbents will be singles.
833 THE CHAIRPERSON: I'm wondering why you are making that assumption?
834 MR. BURGER: Principally because of their head start. Because we are just breaking into the market. In fact, that experience is somewhat replicated in the HBO/Showtime relationship, although the head start wasn't as pronounced, but there is a difference.
835 The tendency is for people to have HBO kind of as the default and then Showtime as the second.
836 THE CHAIRPERSON: All right. I'm looking at the answer to your deficiency, page 3 of 5 November 2004, and I noticed that doesn't appear to be reflected in that table. I could be misreading your table here.
837 How is what you have just said reflected in there?
838 I see an 80:20 split consistently through the seven years.
839 MR. GIBSON: I'm sorry, I'm having trouble understanding what the question is.
840 THE CHAIRPERSON: I guess in going to the comparisons of the revenue per subscriber charts that appeared in paragraph 12 of your reply, the answer was that you are going to have more dual subscribers, 80 percent. The answer to why that would be the case is because the incumbent has 100 percent of the market now and you will be coming in.
841 But again, I'm trying to link that to the split between dual and single and Mr. Burger's answer which was that should change over time. At least that is how I was interpreting it.
842 Perhaps you can interpret the table for me in a way that explains how starting off from zero ‑‑ and you will be moving up.
843 MR. BURGER: I'm sorry, let me just take a crack at that.
844 THE CHAIRPERSON: Go ahead.
845 MR. BURGER: This is speaking, I think, to a bit of a different point.
846 The column the 80:20 is really the expectation of how the growth in the market is going to be split just generically. So that if there is a new entrant into the market then that is how it is going to break down.
847 THE CHAIRPERSON: Right.
848 MR. BURGER: The next one is the impact solely on us. This is not a comparison with the impact on the incumbents.
849 THE CHAIRPERSON: So you will start, you think, with 75 percent roughly ‑‑
850 MR. BURGER: That is correct, of duals.
851 THE CHAIRPERSON: ‑‑ of duals, and that will move down over the seven years to the 63, that 11 percent.
852 MR. BURGER: That's correct. That's right.
853 THE CHAIRPERSON: I think I have that point.
854 MR. GIBSON: Yes.
855 THE CHAIRPERSON: I'm not sure how you have reflected it in your reply, but perhaps you can address that when you do come to reply.
856 The only other area that I would like to drill down on, do you have the CMI Report there by any chance?
857 THE CHAIRPERSON: You will have an opportunity to address that following their presentation, but in your reply I believe you said that you didn't use the TV household number as your basis for your calculations, you used cable and satellite homes. So that the error that they pointed out was irrelevant to your calculations.
858 I take it that is ‑‑
859 MR. GIBSON: That is correct. We started with digital subscribers, and that is both in the cable world and in the DTH world.
860 THE CHAIRPERSON: Right. Would you have a look at Table 12 of their report where they adjust your subscriber numbers downward.
861 MR. GIBSON: Yes, I have it.
862 THE CHAIRPERSON: Do you agree or disagree with that revision, and why, whatever your answer?
863 MR. GIBSON: As I say, it wasn't relevant to my projections because that wasn't a starting figure for our projections.
864 What he was arguing was that the growth rate in homes, and therefore the growth rate in TV homes, would average about 1.5, 1.6 percent a year. We went straight to a projection of digital increases, both in subscriber take‑up and whatnot.
865 Although I agree with his 1.5 to 1.6 percent, it wasn't relevant in my numbers. It didn't drive any of my underlying assumptions.
866 THE CHAIRPERSON: Therefore are you saying that the Table 12 revisions then don't follow, given that you weren't using TV households?
867 MR. GIBSON: That's correct.
868 THE CHAIRPERSON: All right.
869 Do you have any overall comments on Table 13 at this point, because that is the one where CMI purports to show that there will be a negative or net loss to the systems?
870 The starting point of the questions, which you agreed with, is there should be a net gain which you put up at hundreds of millions of dollars and if there is a loss obviously this exercise should have a different result from the one you want.
871 MR. BURGER: I think I am not really able ‑‑ I would like to, but I'm not able to go into analyzing this line‑by‑line or even close to it.
872 I would like to make a general comment and I appreciate the opportunity for doing that. In many respects it goes back to what Mr. French and I discussed regarding risk and so on.
873 I think the fact of the matter is, I have to assume that this is the very best case that CMI could come up with in terms of the deficiencies in our respective applications.
874 Without being self‑serving, the fact is that this analysis has far more applicability to the other applications than it does to ours. I say this because we make certain proposals and certain assumptions and a business case that presents a very significant upside.
875 This is the downside risk for our application that CMI articulated. If I read it correctly, the whole down side risk over the seven years to the Canadian feature film industry is $6 or $7 million. In comparison to the other applications it is virtually nothing.
876 In the grant scheme of things, it is obviously money, but I think from our point of view that it is a risk well worth taking if that is the true downside coming from perhaps the strongest critic of our approach. We could live with that as the downside.
877 It's easy for us to say, but the fact is that the upside far outweighs the downside, and on that basis it is a risk well worth taking.
878 THE CHAIRPERSON: Right. Nice levering on that one.
879 The last question on that table.
880 The revenue per sub per month figures for Spotlight, as you can see, are dramatically lower than the ones that we have just been discussing that you have put forward.
881 Do you have any comments on those or do you want to leave that to a later stage?
882 MR. GIBSON: We don't like those ones as much obviously, but that is going to take the negotiations to BDUs and the discussion on the margin splits and everything else that we think are critical obviously.
883 But these are lower than we anticipate.
884 THE CHAIRPERSON: Okay. I would appreciate it if in your reply you could address the assumptions particularly in the CMI Report and respond to them at that stage. There are a number of assumptions through the piece, particularly ones for market structure of 2013 on pages 27 and 28, and the key assumptions on pages 32 and 33, if you could?
885 Thank you very much. Normally what we do, and we will not deny you the same opportunities, at the end of our questioning ‑‑ unless counsel has questions.
886 Usually I forget this. Now I have gotten it in and ignored counsel.
887 At the end of counsel's questioning, if I forget, you can make a final statement summarizing your position.
889 MR. KEOGH: Thank you, Mr. Chair.
890 I won't have many questions, I'm conscious of the hour, but I just wanted to clarify a few points if I could, Mr. Burger.
891 First of all, with respect to the services that you will see yourselves competitive with, I understood from you that you would, in addition to having current feature films you would see yourselves broadcasting films of five or six years' vintage I understand.
892 As you know, the incumbents have services that provide product of five years or more. Would you see yourselves being competitive with them for that product?
893 MR. BURGER: No, not at all. Certainly not in the way that those services are currently being marketed. I think the typical age of films that are shown, certainly at least in our market in the east, is considerably older than just five or six years out, although I notice that there has been a bit of a gravitation toward more current movies, possibly coincident with this process.
894 But I think the fact is that our focus really will be on, first of all, first run films, original programming, as well as selectively chosen films from that particular area. I don't think that it is going to be the main driver, but there is going to be some content from that.
895 But it is going to be, for the most part, what we consider to be higher end, extremely appealing and very popular films.
896 MR. KEOGH: Thank you.
897 Have you done a similar analysis in terms of the financial impact on them as you have done for the other services?
898 You say you don't see yourselves being particularly competitive, thought you acknowledge that you may be somewhat competitive with them.
899 MR. BURGER: No, we didn't do that analysis. We are completely at a different price point. No.
900 MR. KEOGH: Okay. Thank you.
901 The second question I have is just to clarify something and you may wish to pass this to Mr. Grant because I believe he was the one who responded for you.
902 With respect to multi‑part channels Mr. Grant indicated that under section 18 of the Regulations there would be an obligation to carry and he cited two available channel capacity, so in terms of its impact on the BDUs it would be a function of their ability to find channels for you.
903 Would I be correct in assuming, though, if you were not receiving what you felt were comparable numbers of channels with the existing services that you would be invoking the undue preference provision?
904 MR. GRANT: Maybe I will tackle that issue.
905 It is to a certain degree hypothetical and there are some issues about you could imagine a BDU that already has a full line‑up with the existing incumbents and only can break free three channels let's say.
906 Although, as we understand it, the technology continues to involve compression techniques. Eventually that too may free up. But I think if that was the situation it would be unlikely that we would enlist the Commission to come back, because to cut the current incumbents back by a channel or two to match us, in light of their existing position in terms of channels would be difficult.
907 So I think if it was an egregious, obvious discrimination where we could point to other channels that seemed to be available, then that would be a situation where we would enlist the Commission's aid, but if it is a situation where they literally are down to the last three and that's all they can give us, we would have to understand that situation.
908 MR. KEOGH: Thank you.
909 My next question is perhaps Mr. Grant as well. It relates to this issue of exclusivity.
910 In the exchange with the Vice‑Chairman I understood at the end of the discussion that what you were suggesting is that you would be looking for the Commission to indicate that for the first two years of operation of the new entrant that it would be considered an undue preference if an exclusive arrangement were to exist between the incumbent and more than three studios.
911 Is that correct?
912 MR. GRANT: No. I think the appropriate wording for that is presented in the Supplementary Brief and it doesn't go that far.
913 If I can just refer to it here.
914 MR. KEOGH: Yes, if you could, because that was the source of my question. I was trying to understand sort of where you ended up. It was an issue that you addressed as well in your reply.
915 MR. GRANT: Yes.
916 MR. KEOGH: Just so you know what I'm trying to understand is, the basis of it of course, from a legal point of view, is the undue preference provision.
917 MR. GRANT: Yes.
918 MR. KEOGH: You are assuming that the wording of that provision would not change.
919 MR. GRANT: No.
920 MR. KEOGH: And that the Commission would be indicating how it would be interpreting or applying that section.
921 MR. GRANT: Yes.
922 MR. KEOGH: It is the sort of correlation, independent of circumstance, simply with time that I was struggling with.
923 MR. GRANT: Yes. Well, the correct wording for what we are looking for is at page 20 of the supplementary brief. I won't read it into the record because it is an obvious point, but I guess what we were looking to is that we would be prepared to accept that the circular would indicate that this interpretation would apply until two years after launch.
924 MR. KEOGH: I guess I still am wondering
925 You are familiar with the wording of the section and we would not be amending the section to indicate a timeframe. I thought during part of the discussion with the Vice‑Chairman you were indicating that the period may be two or three years and you were explaining the reasons why it was important that you have such an interpretation from the Commission in the initial years.
926 I guess I'm still sort of puzzled by the sort of magic of the two years. Is the two years because you are assuming certain circumstances will have occurred in the market at that point and so the timing is really just an estimate as to how the market may change, it is really a function of how the market will be functioning?
927 MR. GRANT: That is correct. It assumes that if the Commission were to issue this,in effect it is like an interpretation bulletin in a sense, or it is similar to what the Commission has done before in interpreting section 9 of the BDU regulations for the benefit of BDUs. They have listed a set of illustrative circumstances that they think may give rise to an appropriate complaint.
928 So that is the context in which this would he put in.
929 You are quite right that it is conceivable at the end of two years there may still be a problem, but I think we are prepared to say that if the rule was to be applied in the opening period up to launch and getting us started, it should be possible then for Spotlight to launch in the appropriate way.
930 At that point, if that all works out, everybody will be up and running in two years and the issue goes away.
931 MR. KEOGH: Thank you.
932 The last point was really just with respect to one of the undertakings you gave. I just wanted to clarify what you would be providing and when you would be able to provide it by.
933 There are some others which I won't mention and I would ask that you speak to the Hearing Secretary once we have adjourned to indicate when they would be available.
934 In discussion with the Vice‑Chairman, he had asked Mr. Burger if he could provide two weeks of programming so we would have a better sense of what you would actually potentially be running, recognizing you wouldn't have any agreements for these programs.
935 I wondered with respect to that, in addition to titles to be of assistance to the Commission, if you could indicate where that is coming from in terms of studio and also the nature of it in case the title wasn't recognized as to whether it is a feature film, long‑form series, or whatever, its source in terms of country and whether it is currently available in Canada or not.
936 I wondered if you would be able to provide that by the end of day tomorrow?
937 MR. GRANT: I think that there is a lot of work involved in this, Mr. Keogh. I wonder if it would be possible to file it by end of Wednesday?
938 MR. KEOGH: Okay. That would be fine. Thank you.
939 MR. GRANT: Than you.
940 MR. KEOGH: Those are all my questions.
941 THE CHAIRPERSON: Thank you.
942 Last word.
943 MR. BURGER: Thank you. I will keep it brief.
944 First of all, I want to thank the Commission for an extremely stimulating hearing.
945 I want to thank my team because they have been a tremendous support and I think they have done a great job.
946 But I also especially want to make a reference to staff. When I have made reference to the fact that I have been at this for three years, that is really a description of a personal journey. It doesn't have very much to do with how the staff has handled our application. In fact, since we submitted it to staff it has been handled very expeditiously and fairly, so I just wanted to make that clear.
947 I think overall, very briefly, what we really want to do, apart from the general and very detailed and economic and relatively, to some extent, dry analyses that we have tried to put forward, is to try to create some kind of a new approach to the way certainly feature films and drama is carried out here. It is not really a new approach, it is maybe a moving back a little bit to the way it was.
948 In our years at Alliance, when Charlotte and I were there ‑‑ mostly because of her efforts, not much to do with mine ‑‑ arguably that was really the golden age of Canadian cinema. I think that the Canadian feature films were a regular fixture in the international art circuit, they were sought after products all over the world, and I think that there was a tremendous drive and dynamism. It is not accidental that it was because there was a core entity that was dedicated to the development and financing of feature films.
949 Again, as I said before, it was not a huge amount of money. Going back to those days, I want to remind everybody, that Alliance's top line revenues in about 1995 were like about $150 or $130 million, which is just no comparison to the capabilities of media broadcasting today.
950 The difference was the approach. As Alliance grew and as it became a more substantial player it truly was able to become a more effective champion of the production community, being a producer itself, but also becoming a broadcaster and being an extremely well capitalized entity.
951 I think that is the opportunity that we are seeking to create for ourselves and for the creative community in Canada. We want to be a new player, to introduce a new diversity in the face of the very substantial consolidation in the media and entertainment business in Canada since around 1998 so that we can be a partner to the future film community and for the production community that has the substance and the sensitivity and the creativity to work best with them and help them do the best they can.
952 That is really what it's all about. Thank you very much.
953 THE CHAIRPERSON: Thank you very much, Mr. Burger, ladies and gentlemen.
954 This item concludes at this phase and we will break for lunch.
955 We will resume at 2:30. Nous reprendrons à 2 h 30.
‑‑‑ Upon recessing at 1312 / Suspension à 1312
‑‑‑ Upon resuming at 1434 / Reprise à 1434
956 THE CHAIRPERSON: Order, please. À l'ordre, s'il vous plaît.
957 Madame le secrétaire.
958 THE SECRETARY: Thank you, Mr. Chairman.
959 We will now proceed with item 2 on the agenda, which is an application by Romen Podzyhun and C.J. Cal Millar on behalf of a corporation to be incorporated for a licence to operate a national English language general interest pay‑television programming undertaking to be known as the Canadian Film Channel.
960 Appearing for the applicant is Mr. Cal Millar and Mr. Millar will introduce his colleagues.
961 But, before we continue, I would just like to indicate for the record that the applicant has filed additional material with respect to their application. The information will be made available on the public record shortly. If you wish to have a look at the documents, you can see me at break.
962 Thank you.
963 Mr. Millar.
PRESENTATION / PRÉSENTATION
964 MR. MILLAR: Thank you very much.
965 Good afternoon, Mr. Chairman, Commissioners and staff.
966 Prior to beginning our formal remarks, allow me to introduce our panel this afternoon. To my immediate right is Romen Podzyhun, Chairman of Channel Zero and, most importantly to us, the visionary on our team.
967 To Romen's right is Doug Barrett, partner, McMillan, Binch, Mendelsohn, LLP. To Doug's right is Cathy Mewett, Director of Finance and Administration for Channel Zero.
968 To my immediate left is Shane Smith, the Director of Programming for the Canadian Film Channel, and some of you may remember Shane from his time at the Canadian Film Centre and as Director of the World Wide Short Film Festival.
969 To Shane's left is Carla Nolan. Carla's a 20‑year veteran of film and television and she has joined us as the Project Manager for the Canadian Film Channel.
970 And on Carla's left is David Miller, our Director of Communications. David is also an independent filmmaker, which will come up later on.
971 My name is Cal Millar and I am President and COO of Channel Zero.
972 So, to begin. Our application for us is all about a dream, a dream that we've had for many years, to establish a home for Canadian story tellers on the small screen.
973 So, I want to begin today by telling you a little bit about ourselves.
974 My business partner, Romen and I, together with our team at Channel Zero responded to the Commission's public notice 2000‑06, the digital licensing framework with applications for two Category 2 services five years ago.
975 Those services are now known as Moviola, the Short Film Channel, and Silver Screen Classics.
976 These services were launched by our company in 2001 and 2003. Today they are carried into more than a million Canadian homes.
977 Channel Zero is an enterprise that creates, launches ‑‑ sorry, creates and launches new broadcast brands into poorly served niches. We own and operate a state‑of‑the‑art digital broadcast facility in downtown Toronto.
978 We also provide broadcast and origination services to other independent Canadian broadcasters.
979 We are innovators and problem solvers. An example of this is that when we first launched Moviola, the only way that we could manage the very large volume of individual titles that Moviola, the Short Film Channel showed each day was to design our own traffic software. We did and we now supply this product to other independent broadcasters.
980 We have been digital from the beginning, born in the digital age and we built our origination centre ‑‑ origination services plant on an extremely economical basis. Our plant has the flexibility to expand as the number of digital channels that call it home expands as well.
981 While the nature of the Category 2 licensing process means that this is actually the first time that we have ever appeared before you in person, Romen and I have been successful in launching and building digital services that respond to all of the objectives set out in the digital licensing framework.
982 We saw the Commission's call for this hearing as an opportunity to achieve our dream and to solve a problem that has long bedeviled the Canadian broadcasting system. That problem was discussed most recently in the Standing Committee on Canadian Heritages Interim Report on the Canadian Feature Film Industry which stated, and I quote:
"Creating and producing Canadian feature films is one thing, getting those films viewed by Canadians is quite another."
983 We believe that Canadians have, frankly, had relatively little opportunity to view on any adequate, ongoing basis the vast catalogue of feature film and short material that has already been produced.
984 To address this problem, we see the Canadian Film Channel as actually unlocking the vault of Canada's cinematic and story telling heritage.
985 It almost goes without saying that this heritage is one that has, over the years, been the subject of tremendous accumulated investment in public resources, an investment that is hardly recouped if Canadians have limited access to its results.
986 We see the Canadian Film Channel as an instrument for effectively recovering that cultural investment.
987 To quote again from the Interim Report on the Canadian Feature Film Industry, and I quote:
"The larger portion of the audience for most Canadian films is probably television viewing and through the sale or rental of DVDs and videos. Certainly the television audience for a film is likely to be much higher than the few thousand that might have seen the film in its theatrical release."
988 So, a principal point is not that Canadian feature films are never seen on Canadian television, it is that compared to the vast wealth of available material in the vault, the overall degree of exposure is extremely limited.
989 In preparation for filing our application, we identified some 3,000 individual Canadian feature film titles. The distributors who responded to our written inquiries confirmed that roughly 70 per cent of their existing film catalogues were immediately available and that most of the balance would become available during the licence term.
990 Based on this information and using the repeat factor we propose in the application, we could run Canadian features for the full seven‑year term of a licence without duplicating any title.
991 While we acknowledge the contribution of the incumbent pay‑television licensees to the exhibition of Canadian films, no one should doubt the vast quantity of additional material that is readily available, nor the importance of the opportunity of presenting it throughout prime time, indeed, all the day, every day, all year.
992 As our application states, 100 per cent of our schedule will be dedicated to airing Canadian feature length and short motion pictures, 100 per cent, all the time.
993 An important part of our acquired schedule, a minimum of 20 per cent will be French language Canadian films.
994 While the major box office hits from Quebec are already seen in English Canada, there are literally hundreds of titles that have been well received in Quebec but rarely promoted or seen outside the province. The Canadian Film Channel provides an answer to that challenge as well.
995 Based on our carriage model, the Canadian Film Channel will be immediately available to over 2‑million Canadian homes at the time of its launch, at no additional cost to the pay subscriber. The Channel will become an instant value add to the pay package and, we believe, drive increased consumer value and, hence, increase penetration.
996 No other application before you delivers this much Canadian programming to this many Canadians at this degree of efficiency.
997 MR. PODZYHUN: The Canadian Film Channel not only unlocks the vault of Canada's cinematic heritage, it delivers the resources to continue and build that heritage.
998 Our application commits to spend a full 50 per cent of the channel's gross revenues on the production of new, original, short and long format feature productions and a further 16 per cent of gross revenues on the acquisition of Canadian films.
999 For original production, we commit to back no fewer than 12 feature films per year with a $500,000 pay window broadcast licence fee.
1000 None of these moneys will be in the form of equity investments, we will take no distribution rights other than the appropriate pay window in Canada. We will step back for an unlimited theatrical release period and festival premiers, if the producer is able to arrange for those, and we will produce none of these films in‑house.
1001 Our original approach to the licensing of these films was to suggest that they should all be produced for less than $500,000 and that we would pay 100 per cent of these costs.
1002 In that way we felt we could, with one decision, eliminate all the legendary financing and business clutter that producer after producer reports as the single biggest impediment to the achievement of the filmmaker's creative vision.
1003 When we spoke about this model to our production colleagues across the country we learned several things. They loved our simple approach to production financing, they loved the no equity/no strings attached approach to deal making. They also told us they wanted more flexibility in our budgeting requirements. Not everything fits neatly into a $500,000 package, and producers wanted some opportunity to make more costly films and, to do so, are prepared to arrange additional financing on their own.
1004 In response to that advice, we have revised our thinking somewhat. For productions with budgets of $500,000 or less we will advance 100 per cent of those costs and provide all the cash necessary for the production. For films with budgets over $500,000, we will pay our licence fee on the delivery of the film to us.
1005 We remain committed to 12 feature films per year and to pay $500,000 in pay window licence fees for each of them. We leave it to the producer to determine the appropriate budget level.
1006 Since our principal pre‑occupation is to support emerging filmmaking talent, we expect the majority of the films we commission to be in the $500,000 range and we do not see ourselves supporting anything costing more than $1.5‑million.
1007 In addition to our features, we are committing to fully finance the production of 52 mini‑features of less than an hour in length and 100 short films of approximately 10 minutes in length.
1008 We have spoken to over 20 Canadian film festivals this past summer that have specifically identified this commitment as meeting a pressing need for nurturing emerging filmmakers.
1009 The process of supporting short films will allow us to identify the best new talent and develop solid working relationships for the production of our features.
1010 In preparing to file our application, we were struck by the strong and experienced filmmaking traditions found in centres outside Toronto, Montreal and Vancouver. Winnipeg and Halifax in particular have real depth and there are others.
1011 For this reason, we have committed to spending fully 60 per cent of our original production dollars outside Ontario and half of that 60 per cent outside Montreal and Vancouver. This measure, in addition to our commitment to four regional development offices, will ensure that the dollars get to the talent in every region of Canada.
1012 To help the Canadian Film Channel vision stay fresh and alive, we will also have an advisory board of senior creators from across Canada that will advise us on choosing the best material available in that vault, advise on our ongoing relationship with the production community, how to make it effective, efficient and simple, keep us abreast of new technologies in the filmmaking arena, and also critique the look and the feel of the channel.
1013 We are thrilled to announce that Guy Madden has agreed to chair this group for us. As you may know, Guy is a Winnipeg‑based, world renowned filmmaking genius.
1014 Talent of enormous international stature, Isabella Rossalini, for instance, have come to Winnipeg to work with him, and his films have earned him the well‑deserved reputation as one of Canada's greatest living filmmakers.
1015 Tickets for his recent film, Saddest Music in the World, were actually being sold by scalpers at its New York premier. His filmography includes the international Emmy‑winning Dracula, Pages from a Virgin's Diary.
1016 We think Guy and the other members of our advisory board will make a huge difference. We literally can't wait to begin working with Guy.
1017 MR. MILLAR: Thanks, Romen.
1018 The Canadian Film Channel will launch with both high‑definition and standard definition feeds of our service. One feed will be 100 per cent high‑definition from day one.
1019 But who cares about high‑definition? Well, Canadian consumers who are buying high‑definition ready TVs in record numbers seem to. By July of 2004, more than 50 per cent of all televisions sold in this country were high‑definition capable.
1020 The Canadian Film Channel will require that all original production be delivered to us in high‑definition format and up‑convert every film we air that is delivered to us in standard definition.
1021 This isn't nearly as complicated, nor as expensive as others seem to think. On the up‑conversion side, the equipment has now dramatically come down in price and the necessary bits and pieces have been fully budgeted for in our plan.
1022 On the production side, we recognize the cost implications for producers and plan to have high‑definition cameras and post‑production equipment on hand as loaners. Again, it is in our budget.
1023 On the consumer side, high‑definition will give viewers another compelling reason to watch Canadian stories on our channel.
1024 Let's show you what the Canadian Film Channel will look like.
‑‑‑ Video Presentation / Présentation vidéo
1025 MR. MILLAR: So, that's our dream. We know others share it because we have spent the last few months criss‑crossing the country and talking to dozens of groups and organizations.
1026 We have received in excess of 250 positive interventions, including overwhelming support from government organizations like the Nova Scotia Film Development Corporation, OMDC, SaskFilm, it includes the Independent Aboriginal Screen Producers Association, and film festivals such as Real World Film Festival and numerous others.
1027 It's a unique proposal, it's a unique channel. We believe we have found a solution for financing this vision that's good for viewers and ensures that it can deliver fully on every commitment to create, promote and exhibit Canadian film.
1028 Mr. Chairman, Commissioners and staff, thank you for your time. We are now ready to answer your questions.
1029 THE CHAIRPERSON: Thank you very much.
1030 Commissioner del Val.
1031 COMMISSIONER del VAL: Thank you for your presentation.
1032 I am going to ask you some questions on programming, that will include the funding, and then your business case or the economics, then some distribution issues and then on the issue of exclusivity and some of the producers' ‑‑ issues that the producers raised.
1033 And I think one of the key questions that are asked, one of them, is that what is it that the Canadian Film Channel will contribute to the Canadian broadcasting system that cannot be accomplished by us simply increasing the Canadian program contribution requirement of pay licensees?
1034 And you can think about that generally and that is where I am trying to go with the questions, and particularly with the questions on programming now.
1035 Can you turn to your programming guide which is Part 2, Schedule B I believe with the program titles.
1036 I am looking at the slots that show movies and I think you have also identified the strands where you are going to show street film movies, digital cineworks.
1037 So, aside from those and for the movie slots that show ‑‑ that are basically marked as "A", can you tell me which ones have not yet been aired? Can you identify the ones that have not yet been aired?
1038 MR. MILLAR: Thank you, Commissioner.
1039 I'm going to have both Romen and Shane Smith answer the questions on programming as they are the programming whizzes.
1040 And, Romen, do you want to start with that?
1041 MR. PODZYHUN: Sure.
1042 MR. MILLAR: Okay.
1043 MR. PODZYHUN: Yes. We spent the better part of the last year actually accumulating a database for Canadian films, not knowing that the call was coming through, but we were doing that for short films, and we created a list of just over 3,300 Canadian feature films and there's a database of about 21,000 films, other than feature films, available in the Canadian vaults, 11,000 in the National Film Board and a few other Canadian distributors.
1044 Part of the mailings, we went out to the distributors to find out, and I'll just pass on to Shane because Shane has the list of which films are available and how many.
1045 MR. SMITH: Based on our contact with distributors so far, initial contact, we have accumulated a list of 700 titles and are available for acquisition right now.
1046 That doesn't include drilling down into the vaults of independent distributors and the National Film Board, you know, the National Film Board has 11,000 titles, the Canadian Filmmakers Distribution Centre in Toronto has 2,600 titles in their vaults, Videograph, a distributor in Montreal, has a thousand titles, and Vtape, a video distributor in Toronto, has 3,500 titles.
1047 We have identified a massive amount of Canadian content that is available and then, of course, we will program that content accordingly.
1048 There are a lot of fantastic independent film and video makers in this country that have been well supported by the Arts Council and by the public funding over the years but that have never had their work seen on Canadian television, and we intend to address that with some of the several programming strands that we've come up with for the channel.
1049 COMMISSIONER del VAL: So, first of all, would you be able to provide us with the list that you have?
1050 MR. SMITH: Yes. We can offer you the database and we can offer you our counts of other distributors' titles available.
1051 COMMISSIONER del VAL: Okay, that would be good. Thank you.
1052 And the lists that you have, how many titles did you say there were in total?
1053 MR. SMITH: We've identified on the feature film database approximately 3,000 feature films, there are some documentaries on that list, and then additionally another 20,000 titles available through independent distributors across the country.
1054 So, in total, we're looking at around 25,000 titles.
1055 COMMISSIONER del VAL: Okay. Would you be able to organize the titles on that list into whether they are feature films, long form, documentaries or drama series, exactly together with their source, you know, and their length, those particulars, and how long do you think you would need to provide us with this?
1056 MR. SMITH: The count database is arranged simply by features and documentaries. It would take not very long at all to rearrange that and to fill in any missing distributor information that we don't have at this time.
1057 COMMISSIONER del VAL: Okay.
1058 MR. SMITH: So, we could do that by the end of day tomorrow.
1059 COMMISSIONER del VAL: Okay, great. Thank you.
1060 Then, going back to your program schedule ‑‑ the program schedule titles where you have got ‑‑ say, I am just looking at the one that says Monday, say at one o'clock, I believe, Who Has Seen The Wind.
1061 Now, I know that has been aired, I believe, but I am wondering, the titles that you have listed here, why you chose those titles and then, which of these ‑‑ make it easier: which of these have not yet been aired on TV?
1062 MR. MILLAR: Actually, if I could just add, Commissioner, one of the things that we want to try and make clear today is there's two sources of program ‑‑ well, I guess I should include the original production that we would trigger ‑‑ the three sources of programming, two of them come from what we call the vault of Canadian cinematic heritage.
1063 A great many of those films have never been seen on television, and that is what we will show to you.
1064 But there are also films that have not been on air four or five years, 10 years, 15 years ‑‑ you saw a reference to one of those at least in our presentation, which was Going Down The Road.
1065 So, some of them that we do intend on showing have been seen before, there's no intention to say that all the films we would show have never been.
1066 And the third source of films is, of course, the original production that we would licence.
1067 I hope that clarifies it.
1068 MR. SMITH: If I could just add, I think it's important that we note that the Canadian Film Channel will be providing context and background and theme programming strands for the work that it airs. It will not simply be movie after movie on the channel.
1069 For example, our Canadian essentials programming strand is a program dedicated to unlocking the vault of the cinematic history and showcasing the jewels of Canadian cinema, but contextualizing those jewels, why they were made, where they were made, the time they were made and the importance that they have in Canadian cinema.
1070 So, titles like: Mon Oncle Antoine, The Rowdyman, The Grey Fox, Nobody Waved Goodbye, Leola, The Best Damn Fiddler from Calabogie to Kaladar, Between Friends, those titles would be broadcast on the channel but would be contextualized in terms of their importance to Canadian cinema.
1071 COMMISSIONER del VAL: Okay. Thank you.
1072 Just going back on the program titles, can you identify five of the movies that have not been aired?
1073 MR. SMITH: Five of the movies that have not been aired?
1074 COMMISSIONER del VAL: Just five. Let's start with five.
1075 MR. SMITH: Five feature films?
1076 COMMISSIONER del VAL: Yes.
1077 MR. SMITH: We have the new feature films, many ‑‑ some of which are tied up with or have been promised to conventional broadcasters for their independent feature films, like Stryker, for example, directed by Noam Gonick.
1078 COMMISSIONER del VAL: What day? What day are you on?
1079 MR. SMITH: Oh, I'm sorry, it's not listed on our schedule.
1080 Graveyard Alive, Zombie Nurses in Love, one of our late night fun strands. Graveyard Alive has not been aired on television, to our knowledge.
1081 Ham and Cheese, we are unaware if that has been aired at this stage.
1082 And there are other additional titles that are not on our schedule that we've compiled and added to our list over the summer as we've prepared for this hearing.
1083 COMMISSIONER del VAL: I think earlier you said that ‑‑ have these been acquired by conventional TV; was that...
1084 MR. SMITH: Some of them have, yes.
1085 COMMISSIONER del VAL: Okay. Do you think you can maybe provide ‑‑ maybe this is not the time ‑‑ but could you provide to us just on your program schedule, can you check off the ones that have not been aired already on TV?
1086 MR. SMITH: Yes.
1087 COMMISSIONER del VAL: And that have not been acquired by conventional TV.
1088 MR. SMITH: Yes.
1089 COMMISSIONER del VAL: Okay. See, where I am going is I want to see how much of it is new, whether it is ‑‑ or how much of it is repeat scheduling.
1090 MR. PODZYHUN: We could also provide you with a list of the 196 films that Astral has shown this year ‑‑ in the past nine months.
1091 COMMISSIONER del VAL: Sure. Yes, please.
1092 MR. PODZYHUN: That way you can see.
1093 COMMISSIONER del VAL: Thank you.
1094 I think you have indicated the categories that your programs will be drawn from, and in your June 8th reply to the CRTC request you have also indicated that 20 per cent will be from 2A and 2B ‑‑ 2A being analysis and interpretation, 2B being long form documentary ‑‑ and also from Category 3, which is reporting and actualities, and 80 per cent will be from drama and comedy, which is Category 7, from 11 which is general entertainment and human interest, 12 which is interstitials and 13 which is public service announcements.
1095 Within the 80 per cent, can you give, please, a breakdown of what will be, say, drama and which ones will be Category 7 programs?
1096 MR. SMITH: A preliminary breakdown of our schedule has 75 per cent on our schedule being feature films. The mini‑features that we fully fund will make up 5.5 per cent of our schedule.
1097 Documentaries, we're anticipating, around 11 to 12 per cent of our schedule, and short films and animated works around 8.5 per cent of our schedule.
1098 COMMISSIONER del VAL: I'm sorry, so can you just add it up in terms of feature films and drama, what percentage do those two add up to?
1099 MR. SMITH: Feature films and drama, I'll include our min‑features in that, and that adds up to 80 per cent.
1100 COMMISSIONER del VAL: Then where does, say, Category 12, the interstitials fit in there?
1101 MR. MILLAR: Sorry, if I can just clarify.
1102 What Shane is working from and provided to you are very specific numbers, which is our intent. I think to be fair we need to say that there's a range in that programming.
1103 In our response to deficiencies in June, we were clear and said these will be the maximum amounts that will be in any particular category, but we do, as programmers, usually get and would expect to be able to use some flexibility in the breakdown within the area of where we've said feature film and drama.
1104 So, when Shane's giving you a number ‑‑ I'm looking at the page he is and if it says, you know, 11.25 per cent, that's what we've calculated as being the first round schedule, but, you know, that could easily be accommodated in 10 to 15 per cent.
1105 So, the numbers may not in fact round, other than the commitments we've made to deficiency.
1106 COMMISSIONER del VAL: Would you be willing to commit to a minimum number, say, for drama and feature films?
1107 MR. MILLAR: Yes.
1108 COMMISSIONER del VAL: What would that number be?
1109 MR. MILLAR: We were going to say that. Hold on one second.
‑‑‑ Laughter / Rires
1110 MR. MILLAR: Actually, can I just give that to you in a minute, if you want to continue on?
1111 COMMISSIONER del VAL: Sure, okay.
1112 The next question was Category 3 being reporting and actualities being included in the nature of this service.
1113 Now, can you give me an example of what programs would be ‑‑ you would think fall into this category?
1114 MR. MILLAR: Actually, yes, I can answer that. Reporting and actualities for us would be our live‑to‑airs from Canadian film festivals across the country.
1115 COMMISSIONER del VAL: Okay. And how would they relate to the Canadian films, just by way of introduction, or...
1116 MR. MILLAR: Sure. Actually it would relate in the format of, in some ways, of promotion as well.
1117 If we go to a film festival and are talking about the films that are in competition, the films that are showing and the responses to them, from our standpoint it's an attempt to begin to build a Canadian star system.
1118 If Canadians recognize titles, they're more likely to watch them; if Canadians recognize the people in the films and those who have made them, they're more likely to watch the film as well.
1119 Shane, did you want to expand on that a bit?
1120 MR. SMITH: We've established partnerships with several film festivals across the country so that we're able to maximize the promotion for the channel and work with them to identify the emerging talent that we can support with our production envelopes.
1121 COMMISSIONER del VAL: Maybe you can just provide that number in terms of the minimum that you would be willing to commit to as an undertaking, if it is not available now.
1122 MR. MILLAR: I would appreciate that opportunity.
1123 COMMISSIONER del VAL: Okay, thank you.
1124 Yes, and then going back to the list that you were going to provide on the program titles and then identify the titles that are available but unaired that you have, can you tell me which ones you would also have programming rights to air on Moviola and Silver Screen?
1125 MR. SMITH: Licences will be requested simply for the Canadian Film Channel. If we do wish to broadcast any of the films on any of the other services, we would do a separate agreement for that.
1126 COMMISSIONER del VAL: So, do you intend to enter into arrangements whereby you would get the programming or licence rights for more than just the Canadian Film Channel?
1127 MR. SMITH: No.
1128 COMMISSIONER del VAL: Going back to the question of original programming, I think Astral and Corus have calculated the hours of your original programming to be 78 hours per year.
1129 And I read your reply, but your reply is simply that it is more than what some of the current programmers are providing.
1130 So, I guess the first question is: do you agree with that calculation of 78 hours of original programming and, if not, how would you recalculate that?
1131 MR. MILLAR: No, just for the record, it wasn't Astral and Corus that calculated it, we calculated it and presented it in our deficiencies, June 8th.
1132 COMMISSIONER del VAL: I'm sorry.
1133 MR. MILLAR: It's okay. And, so, I think the answer is yes, we do agree with it. It's based on the three production envelopes that we would have ‑‑ that we are offering to create.
1134 And, Romen, why don't you just take them through the numbers on them specifically.
1135 MR. PODZYHUN: Sure. Thank you.
1136 We have created two production envelopes that sort of meet different budget needs and experience levels of the filmmakers, the first one being Digital Cineworks New Filmmaker Fund, and that's a $5,000 licence fee to produce a short up to 10 minutes, it will be providing a hundred of those across Canada every year.
1137 The second envelope is called the Digital Cineworks Mini Features, and that's for the filmmakers with a little bit more experience, have had their films ‑‑ some of their shorts played at film festivals and are now looking to sort of build their track record, and they are mini‑features from about 40 to 50 minutes. It's based on a program that's been operated by the Australian Film Commission to a great success, and we're offering $100,000 licence fees plus some loaner H ‑‑ high‑def cameras as well.
1138 And our third program is called Street Films, and that's going back to the old days of the French New Wave where they sort of ran around the streets and made some great films like "Breathless" and "Jules and Jim" and "Shoot the Piano Player", the Truffault films.
1139 We're providing $500,000 of cash licence fee, we're providing Super 16 cameras, they'll be able to ‑‑ if they're theatrical, they'll be able to take it for film or we can go into high‑definition for television.
1140 Again, it's based on something that's been operated in the United States with the IFC Program called InDigEnt Films. They've been very successful with their program, has drawn lots of American talent to it, actors like Ethan Hawke. Courtney Cox appeared in a film just about a couple of months ago called November that was playing in the theatres, a film that was made for $350,000 U.S., and also major directors like Richard Linklater and Wim Wenders have made those films and we're going to be replicating those programs here in Canada.
1141 COMMISSIONER del VAL: Thank you. Now, what about your programming of "Radio Vidz" and the "Screening Room ‑ The Directors" and "Screening Room ‑ The Actors", those are ‑‑ I'll use the term loosely ‑‑ in‑house productions. Will those add any more to your original programming?
1142 MR. MILLAR: They will, but it's not part of what we've counted in our original production from licence fees.
1143 We don't see them as in‑house productions. We're not getting into the business of producing the films. As Shane alluded to, they're intended ‑‑ more than alluded to ‑‑ they're intended to contextualize the Canadian directors, Canadian actors and so forth, and to introduce the films, very much as Elwy Yost used to do on TVO for those of us from Ontario.
1144 MR. PODZYHUN: Actually, I'll give an example of the Radio Vidz. It's based on a program we tried with Moviola where we work with the Marshall McLuhan School in Toronto, it's a high school or visual arts school and the kids actually run a national film contest for high school students across Canada and we helped them to actually produce their shows.
1145 So, we're their mentors and the kids get the films, do all the clearances and program it and then they come down to our studio to shoot it and then we broadcast it on Moviola. It's a great experience.
1146 And that's what we want to do, with all the new technology coming, there's a lot of cameras out there, technologies make it very easy for kids to make films, and with the new I‑pod, video I‑pod that's coming out into the Canadian stores this week, it's just going to open up the short film market, and we want to make sure our Canadian kids, our Canadian youth are out there in the forefront.
1147 COMMISSIONER del VAL: So, if you were to accept a condition of licence today of the minimum hours of programming, that would be original Canadian programming, 78 hours is what you would accept today?
1148 MR. MILLAR: Yes, 78 from independent producers, not produced by the licensee, yes. It would all be produced by independent producers.
1149 COMMISSIONER del VAL: But of original Canadian programming?
1150 MR. MILLAR: Yes.
1151 COMMISSIONER del VAL: Okay. That still leaves a large part of the 24‑hour broadcast day with non‑original Canadian programming, and I know you have pointed to the list of films that have not been shown.
1152 Can you give me an idea of, say, what percentage of the day could be occupied by the, you know, programming that hasn't been shown and what percentage would be repeats then?
1153 MR. SMITH: Given the variety of programming shorts, documentaries and features, I would anticipate that around 10 per cent or more of the broadcasting day would be new content that hasn't been broadcast on television before.
1154 COMMISSIONER del VAL: Then on the broadcasting of programming, I believe it is the Writer's Guild who estimated that the average cost of a one‑hour 10‑point Canadian drama to be about 1.16‑million. Would you agree with that estimate?
1155 MR. PODZYHUN: That is actually the industry average, yes. If you look in ‑‑ with Telefilm, that is the average.
1156 Where our strength is and what we're trying to create, our dream, is for the emerging filmmakers. With all the consolidation that's gone on with the broadcasters and how over‑subscribed the funds are, we're trying to bring in some new money and some huge opportunities for the emerging filmmaker because it's the one group that's left out.
1157 And when you look at our great filmmakers like Atom Egoyan, David Cronenberg, they've all started making films like street films and digital cineworks.
1158 So, we're now just giving a new opportunity for the new group to come up.
1159 COMMISSIONER del VAL: Then what would you say to their comment that your budget seems to be a bit low for high‑quality Canadian film and, you know, I note your budgets and they are all in H‑D.
1160 MR. PODZYHUN: Yes. The films that the Writers Guild are talking about are almost something that ‑‑ replicating what you see on American television, they're looking for a Sopranos type of show, and those aren't the stories that we want to do. We want to do ‑‑ we want to focus on content and good stories.
1161 But even using minimum amount of actors, you know, smaller crews and the way the digital equipment is set up now and all the new software out there, it's very easy, it's very cost effective. The cost of equipment has come down dramatically, but somehow it hasn't filtered down to the production community, but it can be done.
1162 I mean, I've watched probably 10,000 shorts since we've created Moviola and the quality in the stories I see are just mind boggling.
1163 And in Canada there's about 1,500 shorts a year that are made. There's a huge army of filmmakers ready to move to the next level, and that's what we want to provide.
1164 So, making features for half a million dollars is not a quality issue at all.
1165 COMMISSIONER del VAL: Okay. But, you know, you mentioned shorts, and that is one ‑‑ for the pay‑TV window, you know, how would that contribute to feature films and Canadian drama?
1166 MR. PODZYHUN: Well, the shorts program that we have is more just, again, as a development process. We like to sort of create nice ‑‑ what I like to call, a little farm system for filmmakers, give them an opportunity to practice.
1167 Because what happens is we have great development funds where we spend a long time developing, but we don't shoot, and the one thing we found out talking to filmmakers across Canada is they need production dollars to start making some of these films that have already been developed. And that's what we want to provide.
1168 COMMISSIONER del VAL: Were you aware of ‑‑ Commissioner French mentioned the intervention of Rombus Media, that there are too many ‑‑ that there is actually too many Canadian films that are not high quality being produced.
1169 If you were in a debate, how would you answer that?
1170 MR. PODZYHUN: Actually, I disagree with that. I think that's very subjective. There is a lot of filmmakers out there, but I think the reason it seems like there's a lot of filmmakers out there is there's not an avenue for them to exhibit their work.
1171 So, Hollywood has a good control of our theatrical, so there's very limited space. The incumbents have done a great job showing Canadian films, but they're starting to show more Canadian TV series like ReGenesis and Slings & Arrows, so it's starting to minimize the windows for feature films on the pay networks, and...
1172 MR. MILLAR: I'm just going to change or add to that a little bit, because he has a list here of some of what the industry call low‑budget feature films, but what we call simply made by other filmmakers other than the very select group that Rombus is one of.
1173 MR. PODZYHUN: We've prepared a list of Canadian feature films that have been made for under $1‑million that have played around the world, such films as FUBAR, Rude, directed by Clement Virgo that screened at the Cannes Film Festival, CuBe by Vincenzo Natale that was a hit in Japan and France.
1174 Films like those by Bruce Sweeney, Live Bait and Dirty. Phil the Alien, which was the hit of the Toronto Film Festival last year and went on to screen at the Sundance Film Festival.
1175 We believe that budget is no limitation in terms of quality and good story telling.
1176 COMMISSIONER del VAL: Thank you.
1177 So, those would be examples of feature films that would be funded by your street films fund?
1178 MR. MILLAR: Yes. And if I might just add, one of the things I touched on in our opening comments was the advice we got from the CFTPA and a number of producers across the country was that, as we originally envisioned, the Canadian Film Channel, the very tight budgetary limitation of $500,000, we heard that they wanted some more flexibility. So, without changing the essence or adding anything new to our application, we've just loosened some of the restrictions.
1179 So, I think in the opening comments we referred to the fact that we would be able to pay a licence fee, a very healthy, above industry average licence fee for a pay window towards a film that might have a budget in excess of $500,000 and we picked a number, approximately $1.5‑million, as it still represents very much the emerging filmmakers.
1180 COMMISSIONER del VAL: Thank you. I think one of the ‑‑ part of your proposal was that the funding of ‑‑ I don't want to put words in your mouth ‑‑ would one of the criteria of obtaining funding from your channel be that they not apply for public funding, say, from Telefilm?
1181 Like, based on what you have just said today, I take it that it is still open for the producers to apply for public funding; is that correct?
1182 MR. MILLAR: Well, yeah. Let me be clear and let me ask Doug to step in if I'm anything but clear, because we kept our original model very simple because we don't come from the funding side of the film.
1183 For films up to $500,000 we would still ‑‑ it's fully our intention to write a cheque for the licence fee and fund the entire budget of that film.
1184 For projects that exceed that, where the producer would like to bring in their own financing, what we're clear on is that we, as the Canadian Film Channel, would never have a CTF envelope, we would not access directly any public funds whatsoever.
1185 What the producer does ‑‑ because it's their film, they own the copyright ‑‑ is really up to them, but we're not looking in any meaningful way to add stress to a system that we recognize and built this for is already over‑subscribed.
1186 Doug, is that clear enough?
1187 MR. BARRETT: Clear enough.
1188 COMMISSIONER del VAL: Okay. You know, you have pointed out that one of the issues is the stress on the current public funding for films already.
1189 So, if the projects require, say, more than 1‑million, then would that not ‑‑ then the producer will go to other sources of funding, and you are saying that that other source of funding could still be public funding?
1190 MR. MILLAR: In essence, yes. It's the producers' business as to how they raise funds, but how we would structure it is that the Canadian Film Channel would pay a licence fee which perhaps is the last part of the funding that's needed.
1191 For instance, if they apply to Telefilm, Telefilm has their own selection process and chooses projects on merits they believe are appropriate. If a project is green lighted by everybody and is still looking for the $500,000 to complete their budget, it may well fit well within what the Canadian Film Channel would do to pay a licence fee of $500,000 to ensure that that film gets made and an appropriate budget.
1192 COMMISSIONER del VAL: The budgets for each of the production of the films being so small, would that not lead to a chronic problem of producers coming partly to you for the first part of the fund and then to the public system for the remainder?
1193 MR. PODZYHUN: No, I don't think so. If you look at the way our terms of trade and our application forms are all set up, we're looking for those films that have completed their scripts or are sort of in an advance stage of completion, and those are the ones that we're going to be sort of working with.
1194 The regional reps that we'll have across Canada, they're going to be working with their talent pool and they'll know which filmmakers and they'll know which stories are coming up in scripts.
1195 I mean, it was interesting when we travelled and talked to all the provincial film agencies across Canada this past summer. They were giving us lists of filmmakers' names that were ready, from their eyes, to move up to the feature film ranks and they just wanted to make sure that these people ‑‑ you know, how they can get in contact with us.
1196 I mean, since ‑‑ I think within the last couple of weeks we've received about a dozen feature film scripts of projects on our desk already, so...
1197 COMMISSIONER del VAL: But why not fewer films or fewer productions and larger budgets for each?
1198 MR. PODZYHUN: Well, we just sort of felt what Cal was saying, that if we do go over the million and a half dollar threshold, then we will be going into, you know, government funds, and that's not the intent.
1199 We really want to concentrate on the emerging filmmaker that's coming up.
1200 Films can be made for half a million dollars, we've got lots of films that played in the TIFF Program this year, and actually one of the films, Richie that you saw in the videotape, he won the Toronto Film Festival pitch contest for a feature film and his film fits right into our sort of program.
1201 COMMISSIONER del VAL: But why not from your own fund sort of why $500,000 ‑‑ say, rather than $500,000 per film, why not $1‑million per film but fewer over the year?
1202 MR. MILLER: And I don't want this to sound flippant because every time we talked about this internally it sounded that way, but I don't think large budgets guarantee good movies, and that would be our position overall.
1203 There are other methods to get large‑budget films made and that's not what we're about.
1204 MR. PODZYHUN: Sorry, if I can also add, when we did go across the country and some of the allegiances we've made and discussions we've had with, say, the Canadian feature film project and the NSI Institute, we have looked to possible partnerships down the road, and that would be for that window of $.5‑million films.
1205 So, I think using their fantastic programs that they've already started and built would be a good venue for us as well.
1206 COMMISSIONER del VAL: Now, on the programs, to what extent would you be competing for the same Canadian programming that the incumbent pay‑TV licensees have already, that they can offer, I'm sorry?
1207 MR. SMITH: We do not intend to acquire content on any exclusive basis, so we don't want to close the doors or opportunities for any Canadian filmmakers to sell their films to multiple services for multiple windows.
1208 The incumbents have Canadian commitments of between 25 and 30 per cent, we're 100 per cent Canadian. So, while there will be some overlapping in content, we'll be accessing a lot of new material not seen on television before.
1209 COMMISSIONER del VAL: I thought ‑‑ but maybe this is a good time for you to clarify your position on exclusivity of the Canadian programming.
1210 I thought that there was a part in your application where you indicated that there would be a short window for the film to be shown exclusively on the Canadian Channel.
1211 Maybe you can clarify what your proposal is.
1212 MR. MILLAR: Sure. Our first window is always going to be theatrical and after theatrical it will be coming over to the pay window and we want to take a three‑month exclusive run with it and then, after three months, the secondary rights will go to, at no charge, to the incumbents, which in this case will be Astral and Movie Central.
1213 COMMISSIONER del VAL: Thank you.
1214 MR. BARRETT: Just for clarity, this would be with respect to original programming, not acquisitions.
1215 COMMISSIONER del VAL: Okay, thank you.
1216 Now, I understand that you also have your interest in Moviola and Silver Screen Classics.
1217 Can you talk about the synergies between Moviola, the Silver Screen Classics and the Canadian Film Channel, the synergies that can be achieved?
1218 MR. MILLAR: Certainly. Actually, I'll ask Cathy Mewett to take some of those questions.
1220 MS MEWETT: Thank you, Cal.
1221 The Canadian Film Channel will be an independent channel with dedicated staff on the phone and a unique identity, but we will be contracting out to Channel Zero for the master control and origination services and we'll take advantage of synergies in the area of executive offices and back office administration.
1222 COMMISSIONER del VAL: So, what proportion of the Canadian films shown on Moviola and Silver Screen will also be offered on the Canadian Film Channel?
1223 MR. MILLAR: None without a separate licensee contract.
1224 COMMISSIONER del VAL: Okay. But aside from the licensing contract, there is no prohibition on how many you would show again; right?
1225 MR. MILLAR: No, there's not, but we also aren't trying to create two services that look the same. Silver Screen Classics focuses on the really the Hollywood and Canadian films of 30s, 40s and 50s; so the Canadian films made through that era.
1226 Silver Screen Classics ‑‑ sorry, Moviola, the short film channel, is exclusively dedicated to short film from around the world.
1227 So, there's very little duplication.
1228 COMMISSIONER del VAL: What would you say to counter the argument that the creation of your two proposed fund would just serve as a funding mechanism for your Category 2 specialty services?
1229 MR. MILLAR: I would say that it's not. No, it's not, because it's certainly not the same programming, they're not the same services and they would have separate licensees in any case.
1230 COMMISSIONER del VAL: Thank you.
1231 I want to better understand your group of seven for regional representation.
1232 MR. SMITH: The group ‑‑
1233 COMMISSIONER del VAL: Sorry.
1234 MR. SMITH: Pardon me. The group of seven is a group of senior industry players, filmmakers, producers, writers who will advise the Canadian Film Channel on the four aspects of its operations that Romen discussed in his proposal.
1235 I'll hand it over to Romen to talk a little bit more about that and also about our regional representatives and how they differ from the group of seven.
1236 MR. PODZYHUN: The intent of the group of seven, it may not actually be seven people, altogether, we're going to leave it up to Guy to decide how many people will work.
1237 And the whole intent was just to sort of keep the whole vision, the whole idea of the channel just fresh and alive, because in the case of Guy, he's really tied into the independent film community in Canada, he's well renowned around the world and he'll be able to really make sure that we get the resources and everything needed to make really good Canadian stories, because our whole mandate is to create, promote and exhibit Canadian films and that's what the group of seven does.
1238 We just need that sort of external group that's not tied in with us to let us know.
1239 COMMISSIONER del VAL: Thank you. Then on the regional, I know you have provided a breakdown that 60 per cent of the production fund to be spent outside of Ontario and of that 60 per cent, half will be outside of Montreal and Vancouver.
1240 I am wondering if that ties in at all with the proportion of your schedule that you would anticipate would come from producers in the various regions?
1241 Maybe ‑‑ I'm sorry. What portion of your schedule do you anticipate would come from producers in the various regions that you plan to have acquisition and production community liaisons?
1242 MR. MILLAR: That's a particularly difficult thing to do, to tie that ‑‑ the regional representatives or regional officers are intended to ensure we're in touch with those areas.
1243 They will have a very significant impact on the way the moneys are spent in that region, but I can envision a situation where a particular region ‑‑ I won't say which one because I don't want to prejudice anything going forward ‑‑ but a particular region has very good stories presented them, ideas, projects that are all applicable to street films, and another one that has several more projects related to mini‑features.
1244 So, that the actual proportion of on‑air isn't something that we're specifically trying to specify, what we're trying to ensure is that there is regional voices and regional diversity from across the country ‑‑ it's a big country ‑‑ and they have actual spending commitments that they know will have to come from those regions.
1245 COMMISSIONER del VAL: Okay. It ‑‑ sorry.
1246 MR. SMITH: Sorry, if I could just add. Acquisitions also, the regional reps will be out, our eyes and ears on the ground in those regions too in terms of completed works that we can acquire from those regions for the channel.
1247 COMMISSIONER del VAL: It is just that what you have stated about funding, the 60 per cent and then half of the 60 per cent sounds a little bit like a quota system to me, and so I didn't know whether that would also translate into some sort of a quota system for productions that you would air from the regions.
1248 French programming, is my next question. I note that you have on Sundays, I think it is an hour and a half from 7:00 to 8:30 the French Canadian essentials shown on your program strand.
1249 So, besides the one and a half hours on Sundays, do you have any other French language programming that you are planning for now?
1250 MR. SMITH: We wanted to make sure French language content is included in all of our programming strands.
1251 There will also be a specialized programming strand called French Kiss, highlighting the newest and best work from French Canadians, and we anticipate that no less than 20 per cent of our schedule will be French language films.
1252 COMMISSIONER del VAL: Do you have an estimate right now of what percentage that would be?
1253 MR. SMITH: Sorry, 20 per cent of our schedule.
1254 COMMISSIONER del VAL: Sorry. I am going to move on to your business case now.
1255 So, what is your estimate of the annual growth rate of digital cable subscribers in Canada over the next seven years?
1256 MR. MILLAR: I don't have that actual number in front of me, but because we are strictly in the digital world, I'll do this in sort of rough numbers if I could.
1257 Digital cable is growing fairly well, it is ‑‑ well, DTH has seemed to kind of plateaued a little bit right now, digital cable is growing.
1258 Our expectations, our projections of that marketplace is that there will be approximately 4‑million digital cable subscribers by the time we get out seven years from the current number. There are approximately 4.5 digital subscribers across Canada right now in aggregate, including DTH.
1259 COMMISSIONER del VAL: What would be the basis of that number?
1260 MR. MILLAR: The source?
1261 COMMISSIONER del VAL: Studies you have conducted, or...
1262 MR. MILLAR: We didn't do any primary research specifically for that, however, we did refer to the CCTA's annual reports in each of the last three years.
1263 Because we are a current licensee we have access to and a need to understand the growth patterns over the last five years, and we've extrapolated those forward.
1264 We also have compared it to ‑‑ Mario is I think going to be appearing before you ‑‑ digital ‑‑ I can't remember the name of the report, but it's consistent, that number is consistent. It is kind of a rule of thumb in the industry, the broadcast industry's programmers were using right now.
1265 COMMISSIONER del VAL: Okay. A general question. Do you think that the take rate for pay‑TV, do you think it will reflect the current level among the digital cable ‑‑ sorry, do you think that it will be lower due to the fact that most of the early adapters have already subscribed, like, over the next seven years?
1266 MR. MILLAR: In all honesty, I think that question is outside of my snack bracket.
1267 I do think there's an element of truth to that, okay, and the reason for that is that many of the BDUs that we're familiar with, who we've talked to, because they're our customers, told us that they did a lot of ‑‑ where they chose to put in digital boxes directly, they put them in where there was pay‑television. So, I think that there's an element of truth to that.
1268 However, I wouldn't go so far as to say that there will be no growth in the pay sector as a result of that.
1269 COMMISSIONER del VAL: Thank you. Now, your application also didn't have any evidence of consumer demand for the proposed pay‑TV service, but then in your June 8th letter you did say:
"Our experience with operating Moviola and Silver Screen Classics would indicate that most of the viewing to Canadian Film Channel will be new and incremental."
1270 I was just wondering, what is the basis for that statement, or what is your experience with Moviola and Silver Classics that will enable you to make that statement?
1271 MR. MILLAR: Sure. Let me address that first. We very clearly heard five years ago that nobody would watch a channel dedicated strictly to short film and we took the position very early on that short films were just great movies that happened to be short and there is an analogy to that to the Canadian Film Channel. Some people have actually said that nobody would watch a channel dedicated to Canadian film. Our position is it is not about Canadian film, it is about great movies that happen to be made in Canada. Let me stop there.
1272 I am sorry, I actually forgot the first part of the question, even though I was supposed to write that down.
1273 COMMISSIONER del VAL: You were ‑‑ that is okay, I do that all the time. Now, I am just looking for some evidence of consumer demand and you were talking about your experience with Movieola and Silver Screen Classics that showed that the viewers will be new and incremental. So I was just wondering whether ‑‑ like, you know, the basis of that statement.
1274 MR. MILLAR: Sure. Thank you, thank you for reminding me. Actually, at the far end of the table are a series of reports, because report after report has told us that Canadians, number one, watch Canadian drama in direct proportion to the amount that is made available to them. Report after report says there aren't enough exhibition venues in the Canadian broadcasting system. And I would add on a persona level that we are entering a new era, we are in a high‑def world today and if Canadian stories are not available in high‑definition we are only going to send Canadian viewers to other countries of origin for their programming that is in high‑definition.
1275 If I can add to that, just for some tactile research, we kind of took what we knew in here kind of on the road over the summer. What we found by talking to various audiences, viewers, filmmakers at film festivals ‑‑obviously Canadian filmmakers are excited about this ‑‑ but going across the country, talking to the provincial film corporations, talking to just various groups and communities we found that there is a great desire for Canadian content and there is a Canadian appetite. If I may, one other anecdote that we have all discussed before ‑‑ I came from the National Film Board and last year I ran the Oscar campaign for the film Hardwood and Ryan. What I saw happen and see the country basically rally around two short films really told me and spoke to me that there is an appetite out there. When a short filmmaker is one of the most recognizable people in the film industry after a great year of exposure I think there is a hunger for feature film, especially if it is promoted and exhibited in prime time.
1276 COMMISSIONER del VAL: Thank you. Just pointing to the sack of the studies you have there, I take it that those are the studies that you referred to that show that Canadians watch Canadian dramatic programming in direct proportion to the extent that it is made applicable to them or available to them, I am sorry.?
1277 MR. MILLAR: Yes.
1278 COMMISSIONER del VAL: Would you be able to just provide the list of ‑‑ like with the names of those studies and then, if need be, if you could provide us with copies ‑‑ we cannot get copies, we can ask you for them. Will that be okay?
1279 MR. MILLAR: Yes, we can.
1280 COMMISSIONER del VAL: Thank you. So, could you provide that list say by the end of tomorrow as well?
1281 MR. MILLAR: Yes, we will provide it at the same time.
1282 COMMISSIONER del VAL: Thank you. In your business case you are proposing that 12.9 per cent of the gross revenues of the current licensees be provided to the Canadian film channel each month. I take it and I believe that in your answers you would say that that would apply to every pay TV licensee, not just the incumbent too, is that correct?
1283 MR. MILLAR: Yes, it is.
1284 COMMISSIONER del VAL: Now, I was wondering how you reached that 12.9 figure other than the fact that that would equate to $1 million a month.
1285 MR. MILLAR: We actually had the luxury of ‑‑ when the call came out in January ‑‑ we had the luxury of looking at it. Our dream for the Canadian Film Channel is something that we have been working on and trying to find a way to bring it to realty for three years prior. We saw the call and said what ‑‑ we had the luxury of looking at it then and saying what would we build and then we will figure out how we will make it work from an economic standpoint.
1286 So what we actually had the ability to do was to sit down and make sure that all the costs were covered, that there was a high‑definition fee. I mean, others will tell you they no doubt have ‑‑ that the cost of transponder space segments is fairly expensive and so we were able to add that to our cost. It was a fairly straightforward process of building the cost side of it and then establishing the revenue required to make that.
1287 Perhaps Cathy would actually talk a little bit more in terms of the components of that.
1288 MS MEWETT: Thanks, Cal. Yes, Just as Cal was saying, we used our experience and our extensive knowledge of the digital television industry and we built a sound and reliable budget. We then determined ‑‑ well, of course, taking into the fact that we have considerable synergies and that we will continue to seek opportunities with partnerships in the industry ‑‑ once we had that cost we determined that the revenue that we would require to fulfill our mandate and create a great all‑Canadian film channel. And then, lastly, it was a matter of projecting out the revenues of the existing pay television services and determining that 12.9 per cent was the appropriate number.
1289 COMMISSIONER del VAL: So, in doing that, did you analyze the impact this would have on the pay TV licensees on their business?
1290 MS MEWETT: Yes, we did. After paying the programming rights fee to the Canadian Film Channel, the Astral and Corus networks would have sufficient contribution available to meet their Canadian commitments, their overhead and profit. And using the 2003 numbers as an example, they would be retaining an aggregate profit before interest and taxes of 15.9 per cent of revenues, which was over $28 million.
1291 COMMISSIONER del VAL: So it sounds like you have done quite an analysis and you have projected the lower revenue for the incumbents. Would you be able to provide those projections to us?
1292 MS MEWETT: Yes, we could.
1293 COMMISSIONER del VAL: Now, why do you feel that this will be at no additional cost? Do you not think that the pay TV licensees would increase the subscriber fees?
1294 MR. MILLAR: Well, I think the current subscriber fees ‑‑ the current subscriber fees are actually set by the BDUs directly, not by any pay licensee or any specialty licensee for that matter, so they are set by the BDUs. The existing contracts ‑‑ there are existing contracts in place that specify what the wholesale fee is and so the wholesale fee also is not necessarily subject to change at a whim.
1295 COMMISSIONER del VAL: Okay. So, in a nutshell, you don't agree that it will be ultimately the subscriber who will be paying ‑‑ however it is passed through ‑‑ it will be the subscriber who will be paying to make‑up for the revenue that the pay TV licensees have lost?
1296 MR. MILLAR: No, I mean, obviously we don't have control of that. But no, I don't. I think that either there are sort of industry norms and standards for whether it is pay or specialty broadcasters can expect to earn, given their privileged position in our industry and society. But it is strictly a function of whether the BDU ‑‑ the question that is really being asked is would the BDU pass on some sort of cost increase to the subscribers? Our service is being offered with no wholesale fee whatsoever. It would be a value add to the existing pay package. We see it ‑‑ clearly, there is an appetite out there for Canadian film.
1297 There will be some people who will want to subscribe more than they did before. They may be the ones that Mr. Burger referred to as people who have fallen off the pay ‑‑ sorry, fallen out of the pay market and they may return to that increasing penetration, which will somewhat increase overall revenues.
1298 COMMISSIONER del VAL: I think you also suggested that the 12.9 per cent be imposed by, you know, a condition of licence, imposed on the pay TV licensees. Now, I am not too clear whether when this condition of licence, you know, would be imposed if it could be. Is this at renewal time or?
1299 MR. BARRETT: Perhaps I could address that Commissioner. Section 9(1)(c) of the Broadcasting Act provides that no amendments can be made to a condition of licence in the first five years of the term other than on the motion of the licensee. But it also provides that following the expiry of the first five years the Commission is able on its own motion to change the conditions of licence ‑‑ of licensees. And I note that this approach has been used before, particularly with the introduction of the policy, that new television policy in 1999.
1300 Now, it is our understanding that the incumbent licences expire around about August 31, 2006, that would be the end of the seventh year and therefore ‑‑ 2008, my apologies ‑‑ and therefore the expiry of the fifth anniversary would be on August 31, 2006. And, in fact, I think it is our sense that an appropriate launch date would be right about then. Now, we would hope that if the Commission chose to licence this application that the incumbents would make application on their own motion to amend their conditions of licence given that obviously it would be seen as the Commission's purpose to see that this service is made available to Canadians. But I just wanted to note that in the absence of that, the Commission has the authority to make the change.
1301 COMMISSIONER del VAL: Then what do you say to the position that this, you know, for the Commission to impose the condition of licence on one licensee in order to contribute to another licensee's operations would be subject to legal challenge? Can you help me out there?
1302 MR. BARRETT: Well, first of all, I think it is fair to say that anybody can challenge a Commission's decision and there have been a number of times over the years where people have challenged the Commission's decision. But I think the courts have said repeatedly that the Commission ‑‑ and Peter Grant pointed this out this morning ‑‑ the Commission has a wide latitude to take the steps that is necessary to do things to fulfill the objectives in the act and, in particular, to achieve, as Peter put it, a public purpose. I think it is fair to say that this application is proposing what is essentially a public purpose.
1303 Now, so I guess the question then is is it necessary that a public purpose has to be achieved by a public sector entity? And I suppose one could argue that that is a necessary condition, but as a practical matter there are many many examples around or private sector organizations which are in fact dedicated to achieving public purposes.
1304 Now, interestingly enough to me, the Commission has a longstanding tradition of having Canadian programming expenditures and some of them are tailored very specifically and involve the requirement to pay very specific amounts of money calculated as a percentage of gross revenues to private sector enterprises, namely independent producers. I am having a little difficulty understanding why in the aggregate or the essence of the public policy purpose achieved by having licensees pay money to independent producers differs in nature from the suggestion here that the money should be payable to another licensee. I would also point out that the independent producers, upon receipt of these monies, are private sector enterprises and have overhead and administration costs and receive fees for producing their films, as well they should.
1305 So I think that the type of tying we are talking about here is not unprecedented in its essence, although it is fair to say it has never been expressed before as an obligation by one licensee to pay another. And in the case, obviously, of the early days of what was the Cable Production Fund, while the fund was a private sector organization and established clearly for what was then a public purpose, designed in fact expressly by the Commission at the time ‑‑ well, at no time has the Cable Production Fund been a licensee. Nonetheless, it was a creation and instrument of the Commission in its first instance.
1306 COMMISSIONER del VAL: Thank you. Just going back then ‑‑ prior to the imposition of the condition of licence, if that is the way that this will unfold, you have preoperational expenses and I believe also your first three years of operation, as in all cases, show losses. And I also see that in your financial statement there seems to be a draw down in the first year of $5.5 million. Is that ‑‑ is your pre‑operation expenses and the losses going to be funded by the $6 million commitment you have from First Canadian American Holding Corporation?
1307 MR. MILLAR: Yes. Cathy, do you want to expand on that a little bit? Okay, the actual financials in the application show it as a draw down at the very beginning ‑‑ actually, without it in front of me I should look ‑‑ but it is either right at the very beginning or at the period of pre‑operation. What we have actually done is established it as a line of credit that would be drawn down as needed so, in fact, the interest costs that are shown in the financials are slightly overstated. We wouldn't, in fact, draw it down immediately, we would use it to fund those operations as you correctly point out and it is more than sufficient to cover both the pre‑operations period and the deficits in the first three years.
1308 COMMISSIONER del VAL: So the April 11 letter from the First Canadian American Corporation confirmed that it has made available to the Canadian film channel a $6 million line of credit, so that is still in place and that will be in place?
1309 MR. MILLAR: Yes, it is.
1310 COMMISSIONER del VAL: Okay. Then I see that in clause 5 it refers to on the basis ‑‑ I am just clarifying the terms of financing ‑‑ on terms of the funding model as applied for and then it talks about an attached schedule. Is that funding model the funding model we are talking about here, which is you will get a 12.9 per cent, sorry contribution, from the licensees of 12.9 per cent of their gross revenues? Is that the funding model?
1311 MR. MILLAR: Yes, it is.
1312 COMMISSIONER del VAL: Then it also goes onto paragraph 7 to say that they ‑‑ to negotiate, it refers to negotiating the definitive terms of this agreement. So have the definitive terms of the financing agreement been negotiated? Have they been finalized?
1313 MR. MILLAR: No, no further than what is in the commitment letter, but there is nothing that would be in definitive terms that would change the basic deal points that were issued on the attached schedule.
1314 COMMISSIONER del VAL: So do you know now what those definitive terms would be or have the parties agreed?
1315 MR. MILLAR: We have. I mean, for us, that clause was to cover‑off ‑‑ really, sometimes the wording is used, a long‑form agreement will be signed pursuant to moving forward on the terms, and that is really what the ‑‑
1316 COMMISSIONER del VAL: So even though the definitive terms are still to be negotiated, your understanding is that the First Canadian Holding Corporation has committed to funding the project, is that correct?
1317 MR. MILLAR: Yes, unequivocally.
1318 COMMISSIONER del VAL: Okay. Now, if you do have the say long‑form of agreement that is to be entered into or definitive terms that you know of now that parties have agreed to, can you please provide those? You can provide those in confidence if you want.
1319 MR. MILLAR: Okay, so for clarity, there are no additional terms at this time. The intention is, and maybe I should look, but I believe clause 6, that you didn't refer to, actually refers to a break clause and that would allow us to ‑‑ the unequivocal availability of the financing is a one‑way road. In other words, they are obligated to provide it to us. We are not obligated to take it from them and it is for that reason that there is a reference to definitive terms as in start date and that we would in fact proceed.
1320 COMMISSIONER del VAL: Okay.
1321 MR. MILLAR: We were just trying to meet the Commission's obligations in the application.
1322 COMMISSIONER del VAL: Okay, great. Thank you. If the Commission were to not approve your proposal, the part that obligates pay licensees to contribute their revenues to you, how would you finance your proposed service?
1323 MR. MILLAR: For clarity sake, finance, for us, is the ability to meet pre‑operation and finance deficit losses. The revenue model that we have proposed, which includes the 12.9 per cent statutory contribution or condition of licence to be imposed on other pay services. To answer your question, I think ‑‑ actually, Mr. Burger made it clear this morning in his presentation ‑‑ that it is very difficult if not impossible to create a pay television service in this country without ‑‑ on a strictly competitive basis ‑‑ without the drivers of Hollywood programming. And that isn't the application that we have applied for.
1324 I think that it is fairly obvious, people have been talking about this basic concept of a Canadian film channel for a number of years. We are not the first ones to propose it, but we do believe we are the first ones to put in a complete realistic and stable business plan that can actually exist and can grow and be around for a full seven‑year licence term and can keep the very large commitments that we have made in exchange for the very big privilege that we are asking for. We believe that it is genuinely good public policy for there to be a Canadian film channel, that it meets with the objectives of the act and it is for that reason that we have requested the 12.9 per cent of revenues.
1325 COMMISSIONER del VAL: So then the answer to my question would also be that if the 12.9 per cent were not approved, then you would not be able to offer the service, is that correct?
1326 MR. MILLAR: That is correct.
1327 COMMISSIONER del VAL: What would be the impact if the Commission were to approve your service, but without the linkage that you propose? That mean, you know, it will be aired together ‑‑ not aired together ‑‑ sort of linked to the incumbents' service?
1328 MR. MILLAR: If your question is whether it was not packaged with the incumbents' services ‑‑ first of all, we think that packaging it makes a lot of good business sense. The existing pay services provide good services today, but when you add value to a package ‑‑ and this is how all our television services are sold, with packages and incremental value ‑‑ if you add incremental value to that package it is good for the package, package partners, it is good for the BDU who is ultimately retailing that package. And so while it is not necessary to actually package it with the service, I think that it misses the point, which is to ensure that two million Canadian households are able to receive this service at no charge at the day of launch. We have tied it to the existing ‑‑ the subscribers of the existing pay services.
1329 COMMISSIONER del VAL: Okay, I guess this then takes me ‑‑ would it not be easier for the Commission to just encourage or require the existing players to make a higher percentage of contribution to Canadian programming which is, you know, what is it that you bring to the table that is different. And I also note that say Allarco also offers a Canadian channel. So what is it that you contribute that will be in addition?
1330 MR. MILLAR: What the Canadian Film Channel brings is a complete and utter focus on Canadian film and that focus is played out in the fact that obviously everything we create or any licensee creates as Canadian. But what we promote is Canadian and no other licensee, whether it be the incumbents or any other applicant at this hearing, none of them can commit to promoting 100 per cent Canadian film because their business models are made‑up of foreign programming sprinkled with Canadian content. And so the Canadian Film Channel uniquely can promote Canadian film 100 per cent of the time.
1331 The other thing that we do is that we absolutely ensure that the Canadian films are shown in prime time all the time with a focus to getting the best films. Do you want to add anything?
1332 MR. PODZYHUN: The other one is too on the ‑‑ we are also buying 66 per cent of CanCon, Canadian content, 50 per cent of new production and 16 per cent acquisition, which is far better than all the other incumbents and, you know, the fact that it is that singular focus. Also, I think the other intangible, the one that is hard to measure, is I think is the passion. I think a lot of broadcasters look at Canadian content sometimes as, you know, it is their obligation, you know, to sort of appease their licences. We look at it as a passion. That one is hard to translate into numbers, but I think we can do a really good job. And as you can see a part of the team here, there is some great talent here.
1333 COMMISSIONER del VAL: What do you say to the suggestion ‑‑ I believe it is ACTRA which used the term ghettoizing Canadian programs? How would you respond to that?
1334 MR. MILLAR: Well, a focus, an uncluttered dedicated focus on Canadian film is a celebration of the filmmakers, of great films that have been made over three and four decades. We don't perceive it that way. David, did you want to touch on?
1335 MR. MILLER: Sure, I think what we are looking to do with the Canadian Film Channel, as Cal was saying, was to promote Canadian content and Canadian filmmakers and Canadian films 100 per cent of the time. This is new money, new films, new voices and new opportunities and if they believe that that would ghettoize Canada and that would have Canadians ignore it, I think it will be the opposite and I think they won't be able to ignore us.