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PRIVATE
TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TELECOMMUNICATIONS COMMISSION
TRANSCRIPTION DES AUDIENCES AVANT
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT:
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 26, 2005 Le 26 octobre 2005
Transcripts
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
Contents.
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.
Transcription
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
Telecommunications Commission
Conseil de la radiodiffusion et des
télécommunications canadiennes
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 26, 2005 Le 26 octobre 2005
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
PHASE III
INTERVENTION BY / INTERVENTION PAR:
Astral Television Network 575 / 3260
Corus Entertainment 699 / 4001
Muse Entertainment Enterprises Inc. 759 / 4244
True West Films 773 / 4319
ImagiNation Film & Television Productions Inc. 785 / 4378
Insight Production Company Ltd. 797 / 4452
ImX Communications Inc. 815 / 4561
CCTA 828 / 4632
Gatineau, Quebec / Gatineau (Québec)
‑‑‑ Upon commencing on Wednesday, October 26, 2005
at 0933 / L'audience débute le mercredi
26 octobre 2005 à 0933
seq level0 \h \r3251 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 3252 THE CHAIRPERSON: Order, please. À l'ordre, s'il vous plaît. Good morning, everyone.
3253 Madame la Secrétaire.
3254 LA SECRÉTAIRE : Merci, Monsieur le Président.
3255 As we have now reached Phase II, in which applicants can appear in the same order to intervene on competing applications if they wish, I have been advised that all applicants, Spotlight, The Canadian Film Channel, Allarco and Archambault, will not be appearing in Phase II.
3256 Therefore, we will go directly to Phase III, in terms of where the other parties can appear to present their intervention.
3257 I would like to inform the Panel and the public that two intervenors that were listed on the agenda to appear, Bell ExpressVu and Lowenbe Holdings, informed us that they will not be appearing at the public hearing.
3258 Therefore, I would now ask the first intervenor, Astral Television Network, to present their intervention at this time and I would ask Mr. Ian Greenberg to introduce his colleagues, after which you will have 20 minutes to present your interventions on all four applications.
3259 Mr. Greenberg.
INTERVENTION
3260 MR. GREENBERG: Thank you. Good morning, Madame la Secrétaire, Mr. Chairman, Mr. Vice‑Chairman, Members of the Commission and staff.
3261 I am Ian Greenberg, President of Astral Media and I am pleased to introduce our panel today.
3262 To my right is John Riley, President, Astral Television Networks;
3263 Next to John is Kevin Wright, Senior Vice‑President, Programming, Astral Television Networks;
3264 To his right is Domenic Vivolo, Senior Vice‑President, Marketing and Sales, Astral Television Networks;
3265 And next to him is Ken Goldstein, President of Communications Management Inc.;
3266 To my immediate left is Johanne Saint‑Laurent, Vice‑President and General Manager of Astral Télé Réseaux;
3267 Next to Johanne is Michel Houle, consultant;
3268 To his left is Steven Zolf, Partner at Heenan Blaikie and our legal counsel;
3269 Next to him is Sophie Émond, Vice‑President, Regulatory and Government Affairs, Astral Media;
3270 And finally, Alicia Barin, Vice‑President, Strategic Planning at Astral Television Networks.
3271 We will now begin our formal presentation.
3272 Mr. Chairman, Members of the Commission, in this hearing you have examined five proposals for pay TV services that are directly competitive with our pay TV networks: TMN, The Movie Network and Super Écran.
3273 Everything we have seen or heard has reinforced the position that we put forward in our intervention.
3274 The applicants have failed to show that there are benefits to either consumers or producers and hence to the system. The applications have not come close to justifying the grant of an exemption to the Commission's long‑standing and successful not directly competitive policy, let alone the extraordinary measures some seek.
3275 John.
3276 MR. RILEY: The Commission's policy has been a big factor in creating a strong and vibrant broadcasting system, one that offers Canadian consumers more diversity and programming than arguably any country in the world.
3277 Moreover, producers benefit directly from the financial health and growth of the licensed broadcasting services.
3278 In pay TV, the Canadian system provides better programming and more value to consumers than the U.S. system you have heard so much about in the last couple of days.
3279 Allowing an exemption for directly competitive pay TV services will result in negative consequences throughout the system.
3280 First, there will be no added program diversity. The applicants appear to be proposing services that will result in duplication or splitting of programming that is already here. Having said that, the applicants are still struggling to define their programming, to the point that we have not yet seen a basic programming grid from any of them.
3281 Second, consumers will not be better off. Simply put, they will have to pay more to buy two or more services to get the same core programming they currently receive from one pay service or they will have to choose between two duplicative services.
3282 Third, there will be a negative impact on our own services and others. Our contributions to Canadian programming will be negatively impacted and the potential impact on other players in the Canadian system cannot be ignored.
3283 Fourth, and just as important, there will be no net gain for Canadian producers.
3284 Kevin.
3285 MR. WRIGHT: All of the applicants acknowledge that it is the first‑run movies that drive pay TV and all have agreed that the core programming of The Movie Network and Super Écran consists of every first‑run Canadian theatrical‑released feature film and 90 per cent of first‑run movies listed in Variety's Top 200 grossing films.
3286 Our services offer, to use Allarco's description, the cream of the crop. Yet, the applicants would like you to believe that Canadians are missing programming that U.S. consumers or others have access to.
3287 So what are Canadian consumers presumably missing?
3288 If it is the second‑run movies that are on HBO, Showtime or Starz, as claimed by Spotlight, we point out that those movies are available on other licensed Canadian services, including our own MPix.
3289 Where U.S. pay TV services mix both first‑ and second‑run studio movies in their schedules, we have 100 per cent first‑run product on the premium services and 100 per cent second‑run product on the mini‑pay services. In a word, the two systems offer the same stuff, just organized differently.
3290 In addition, while the applicants would have you believe that there is a shortage of second‑run movies available to Canadian viewers, Nielsen data for the English market for the most recent broadcasting year shows that 2,530 different movies played a total of 6,744 times collectively on the 17 Canadian analog specialty and conventional services alone, and this number excludes the pay TV services and all of the digital services, including the movie‑based ones like Independent Film Channel, Silverscreen Classics, Showcase Action, Scream and Diva.
3291 Dominic.
3292 MR. VIVOLO: Where does this leave consumers?
3293 We have heard much this week about more choice and more channels but the real definition of choice is diversity, it is not more channels of more repeats. It is not in consumers' best interest to reallocate our core programming among two or more pay TV services to reduce or devalue the current programming offer that consumers have come to expect of pay TV in Canada and then to also expect them to pay more for diluted offer. This is not true choice.
3294 The applicants portray the current pay TV services as unmotivated and underperforming in a market supposedly absent of rivalry.
3295 This is ridiculous. We exist in a very competitive environment. We compete with other movie‑based applications such as VOD, pay‑per‑view, DVDs, PVRs and the internet. We also compete with conventional and specialty channels.
3296 To be clear, pay TV growth in this competitive environment is becoming very challenging. Consumers are increasingly attracted to on‑demand options.
3297 We also do not have a monopoly market power. We do not control our retail price, we do not dictate the wholesale fee, and we get our primary foreign product from the largest integrated media corporations in the world.
3298 Moreover, because we are a premium subscription service, we live or die by our ability to attract and retain subscribers. With subscriptions being our sole source of revenue, we need to convince consumers each and every month to subscribe or to stay subscribed. This is why we have strong and effective marketing campaigns and why we continually innovate.
3299 In fact, our pay services are the Canadian leaders in programming innovation. We were the first to introduce multiplexing in the early nineties, the first to offer 5.1 audio, the first to offer a full 24‑hour true high definition channel, and the first to offer SVOD, and despite all the discussions at this hearing around penetration levels, our digital penetration, at 52 per cent, is virtually the same as that of pay TV and digital in the U.S.
3300 So let me just repeat that ‑‑ and despite all the discussions at this hearing around the penetration levels, our digital penetration, at 52 per cent, is virtually the same as that of pay TV and digital in the U.S.
3301 Alicia.
3302 MS BARIN: In terms of impact, the applicants have acknowledged two fundamental facts that will result in negative financial consequences for pay TV under a directly competitive pay TV structure.
3303 One, they admit the cost of studio programming will rise. It naively assumes that these increases will settle at a level that is sustainable. Furthermore, the half‑baked measures proposed with respect to exclusivity for studio product are completely unworkable and the legality of such measures could be challenged.
3304 Two, the applicants acknowledge that our wholesale fee will be driven down. We can assure you based on our history and experience as a broadcaster unaffiliated with any BDU, BDUs will not pay the same wholesale fee for a service with half the studio product or for a service that is duplicated.
3305 We will end up with a negative impact as costs go up and our revenues go down. Our ability to contribute to Canadian programming will be impaired and we also risk disillusioning Canadian consumers and turning them away from pay TV, a likely scenario with the rapidly increasing number of competitive alternatives for watching movies.
3306 Kevin.
3307 MR. WRIGHT: As demonstrated by the CMI study, the overall result in a directly competitive pay TV model will be a net loss of revenue for pay TV in Canada and therefore a net cumulative reduction in Canadian programming spending.
3308 CMI also shows that our own contribution to Canadian programming would be higher over seven years under a scenario without directly competitive services.
3309 Last year, TMN and Super Écran spent over $40 million on the financing and acquisition of Canadian feature films.
3310 Contrary to BOOM's assertion in its oral presentation yesterday, the contributions of pay TV are significant.
3311 Attached to our presentation is a list from our written intervention with over 500 Canadian productions from across the country that we supported in the last three years, including over 430 Canadian features and 27 Canadian original series. In the same period, we have almost tripled our spending on Canadian programming.
3312 We are the largest private sector supporter of the Canadian feature film industry. By the end of this year, our pay services' aggregate contributions since launch will be half a billion dollars.
3313 We also take the lead on developing and broadcasting high quality Canadian feature films and dramatic productions and we promote them passionately.
3314 We give Canadian programming pride of place in our schedule and we provide it with a wide array of marketing support: broadcast TV, radio, print, the pay TV guides, direct mail, billboards, our Web sites and our own magazine show.
3315 As a testament to our efforts, pay TV delivers more viewers to Canadian films than any other television window.
3316 Now, we will speak specifically to BOOMTV's proposed French‑language service.
3317 Johanne.
3318 MME ÉMOND : Toutes les requérantes, y compris BOOMTV, ont pris pour modèle de marché compétitif réussi celui des États‑Unis, un pays de 296 millions d'habitants. On conviendra que c'est là une base de comparaison peu crédible pour tenter de justifier l'introduction d'un service directement concurrent dans un marché francophone de 7 millions d'habitants, soit 42 fois plus petit.
3319 Aucune des requérantes n'a évoqué l'effet de l'introduction de la concurrence dans des marchés de taille plus modeste, comme ceux des pays européens, par exemple. Pourtant, les données sont très révélatrices à cet égard.
3320 Dans les pays de l'Union européenne, l'introduction de services de télévision payante à prédominance films directement concurrents a eu un effet dévastateur sur les entreprises de ce secteur. Leurs résultats d'opérations sont passés en sept ans d'un bénéfice d'opérations collectif de plus de 300 millions d'euros à des pertes d'opérations collectives de plus de 85 millions d'euros.
3321 On ne parle pas ici de spéculation basée sur des intentions exprimées lors d'un sondage en réaction à un concept de programmation flou. Ce sont des données réelles des faits avérés qui démontrent que les pertes de revenus d'au moins 130 millions de dollars sur sept ans, qu'anticipe l'étude CMI dans l'éventualité où BOOMTV serait autorisé, sont raisonnables, voire même conservatrices.
3322 Comme les revenus gérés par BOOM ne suffiraient pas à compenser les pertes subies pour Super Écran, ce sont les revenus globaux, et conséquemment, les dépenses de programmation canadienne de la télévision payante qui seraient réduites.
3323 Pour le cinéma québécois et canadien de langue française, une telle perte nette de financement en provenance du secteur de la télévision payante serait significative et risquerait de freiner son élan.
3324 Sophie.
3325 MME SAINT‑LAURENT : La demande de BOOM devrait aussi être rejetée sur la base de son mérite, ou plutôt de son absence de mérite propre.
3326 Cette demande a été profondément modifiée en cours de route, tant ce qui a trait au concept de programmation qu'à la distribution et à la tarification du service.
3327 Ces modifications improvisées ont eu pour effet de rendre la demande incohérente et les projections financières dépourvues de crédibilité, sans parler de l'incohérence entre ses projections et les engagements proposés qui ont été mis en évidence lors de l'échange avec Madame la Conseillère Pennefather, hier.
3328 En outre, Quebecor Média bénéficie déjà d'une situation de forte dominance dans le marché d'exploitation des nouveaux longs métrages au Québec, et elle ne cache pas son intention, si BOOMTV voit le jour, de confier à sa filiale ayant le plus de pouvoir de marché le soin de négocier les droits d'exploitation des productions pour l'ensemble des fenêtres de diffusion qu'elle contrôle.
3329 Cela lui conférerait des avantages indus face aux producteurs indépendants, comme face aux distributeurs et aux diffuseurs traditionnels et payants concurrents de TVA Films, du réseau TVA ou de BOOMTV.
3330 Dans sa réplique, Quebecor ne conteste pas cette affirmation, mais elle soutient, et je cite, que :
* Astral Média est capable d'assurer que les mêmes longs métrages passent d'une fenêtre à une autre à l'intérieur de ses propres filiales et compagnies affiliées. +
3331 Cela est inexact. Jamais Astral ne négocie simultanément les droits de diffusion d'un long métrage à la télévision payante et sur ses services spécialisés six ans plus tard.
3332 Enfin, nous soumettons que Quebecor a failli à démontrer que son projet confus et imprécis offrirait des avantages qui puissent, de quelque façon que ce soit, justifier tous les privilèges et exceptions qu'elle revendique, en plus d'approfondir sa dominance de marché.
3333 John.
3334 MR. RILEY: Regarding the CFC application, we submit that their proposal is flawed from a business, legal and public policy perspective. Many of these concerns were outlined in our written intervention and have already been addressed in the course of this hearing.
3335 Mr. Chairman, Members of the Commission, in the call for applications that initiated this proceeding, the Commission requires applicants to provide clear indication of the contribution that their proposed services would make to meeting the objectives of the Broadcasting Act, including the manner in which the applicant intends to add to the diversity of the Canadian broadcasting system through its programming.
3336 We submit that the applicants have not met this test. They have failed at the most basic level to demonstrate that they will add programming diversity or that there will be any overall benefit to the system.
3337 As you know, our environment is evolving rapidly. DVD penetration has risen meteorically over the last several years. A variety of new technologies now enable consumers to select and pay for movies on a title‑by‑title basis, to the disadvantage of pay TV's fixed schedule offerings. Use of video on demand services and personal video recorders is increasing in Canadian households. Availability of movies streamed or downloaded over the internet is imminent.
3338 This month, as highlighted actually in this week's Time magazine, Apple unveiled its new video iPod, capable of downloading film and television programs. This is the way of the future and the key driver is naturally movies, all available to viewers before and during the pay television window.
3339 It is into this environment that the applicants are now seeking an exception to the Commission's not directly competitive policy even though their services do not meet the basic tests in the Commission's call.
3340 Contrary to what you have heard, we submit there is a huge downside risk in licensing any of the applications.
3341 At risk are the present and future contributions we make to Canadian programming, the continued growth of Canadian pay TV services among a myriad of other alternatives, and ultimately, the vast array of pay and specialty services in distinct niches that have successfully launched under the Commission's not directly competitive policy.
3342 If directly competitive pay TV services are introduced, the promises the applicants have made will not be realized, and as was the case in the aftermath of 1982, the U.S. studios will be the big winners and the Canadian producers and consumers will be the real losers.
3343 Further, we don't think that this time around we will get another chance to undo the damage. With all due respect, this is neither the time nor the circumstance to roll the dice with the Canadian broadcasting system.
3344 We appreciate the opportunity to raise our concerns and we welcome any questions that you have.
3345 THE CHAIRPERSON: Thank you very much, Mr. Greenberg, ladies and gentlemen.
3346 The questions on programming, I think, we are going to have to during the course of the morning establish a procedure. There is material still to come which you haven't yet seen, nor have we, and you will have to have an opportunity to consider that and reply.
3347 So questions on programming at this point, I think, are, from your perspective and ours, I think, probably worth deferring until we have established those procedures which will take place in the course of the morning.
3348 So what I am going to focus on in my questions to you is essentially the second, third and fourth points that you raise on page 3, of will consumers be better off, will there be a negative impact on your services and the question of the net gain to the Canadian system, the growth of the pie, which are all very pertinent questions to the matter that we are considering.
3349 So let me begin by asking you whether you have copies of the Spotlight presentation with its charts or you have otherwise access to those charts that were in their material throughout the proceeding. These are the percentage of TV households, comparing the U.S. and Canada, the pay TV market revenue comparisons with or without competition, and Cancon expenditure growth.
3350 MR. RILEY: Well, I would say we should be familiar with that and if you want to have a go with the questions ‑‑
3351 THE CHAIRPERSON: Okay.
3352 MR. RILEY: ‑‑ we will see how we do.
3353 THE CHAIRPERSON: Okay.
3354 MR. RILEY: We may have to ask for a cite or a reference but ‑‑
3355 THE CHAIRPERSON: Fair enough.
3356 So I guess the first question is the question regarding pay TV penetration. Now, I know that in your intervention you challenge the 50 per cent plus figure that Spotlight had presented. Spotlight responded to that in their reply and I have to say that at this point, unless you can provide more material, I think that the figure that I am comfortable with is that 50 per cent penetration figure from the U.S.
3357 I don't know whether you want to add anything further to that or discuss it further but if you do, now is your chance.
3358 MR. RILEY: Well, maybe what I would do is ask Ken Goldstein to address specifically ‑‑ you seem to be saying that your preference at this point is the number from Spotlight, and, Ken, maybe you can address the context of our comments on that number and other sources.
3359 MR. GOLDSTEIN: Sure.
3360 Good morning, Mr. Chair. I guess there are two issues here. One is what is the actual level, and two, whether it is comparable given different market structures, history, culture and so on.
3361 THE CHAIRPERSON: So if you could just address the first.
3362 MR. GOLDSTEIN: Okay, I will address the first one.
3363 I am as familiar with the Kagan data as the applicants are. I have also discussed this with a number of other sources in the United States, and in the CMI report, I put in as an example of a slightly different estimate the Yankee Group survey, which is a survey they do of in excess of 2,000 people.
3364 I think the simplest thing to say is that there are some different opinions on these levels in the United States, based on how you count what might be called dual or triple subscribers, based on how you rationalize households with services, and that at a level of about 32 per cent of all households or perhaps 37 per cent of multi‑channel households, the Yankee Group provides a different perspective.
3365 So there are differences of opinion and it is kind of difficult ‑‑ I included in the CMI report a quote from Kagan itself which said maybe these definitions don't work anymore because of all the discounting and packaging.
3366 MR. RILEY: Mr. Chairman, may I just add a comment in general to that?
3367 THE CHAIRPERSON: [Nods yes]
3368 MR. RILEY: Is that setting aside for a moment whether or not that 50 per cent number is the number, in our opinion, it is frankly irrelevant. The applicant states that the 50 per cent number is evidence that multiple services have driven that but there is no causal link between that 50 per cent and the fact that there are multiple services. They have not demonstrated that in any way other than their assumption.
3369 Secondly, that number of 50 per cent includes, as we pointed out in our intervention, what you would call, I guess, the history or analog hangover.
3370 I think anyone of a certain age in this room, and I include myself, would know what drove cable in this country. It was women trying to get their husbands off the roof from adjusting the aerials to get the Buffalo over the air stations or other similar stations on the border. We all know that. Mr. Rogers will, I am sure, verify that.
3371 The circumstances were different in the United States. The United States, of course, well, you get the over‑the‑air U.S. services because you live in the United States and, as a result, pay services and other cable services, they were the services that drove penetration.
3372 To give some evidence of that, in the Kagan material that was provided by the applicant, the total number of premium homes is some 39.4 million, I believe. Yet, the total number of digital homes is 24.3 million. So there are some 15.1 extra million premium households. Those would be analog households.
3373 I think those who have common experience in the United States know that pay services have been packaged in lower tiers and even on basic, something which pay services in Canada are precluded.
3374 So we could battle over whether or not the number is 50 or whether or not the number is 37 or some number in between. Frankly, I am sure the applicant would say no, no, no, what can it be other than multiple services. All I am saying is there is nothing in the application that demonstrates multiple services support that.
3375 Secondly, why don't we do ourselves a favour and just move history out of the way because people can battle over what was the cause.
3376 If you look in the digital environment, which is the future and represents the cleanest picture right now, as we said in our oral presentation, our penetration is about 50 per cent and in the U.S. the total of all those services, the premium services, is about the same. So frankly, in a world that is clean and probably the best control sample for all the factors, it is essentially equal and I think that is our main point.
3377 THE CHAIRPERSON: Let me get back to that last point that you mentioned, that I noted, in your presentation today.
3378 I guess Spotlight's position particularly is that whatever the number is, the gap between Canadian penetration and U.S. penetration presents an opportunity and that that opportunity is not being taken advantage of because of a lack of rivalry as between premium service providers, and that they see as the opportunity going forward.
3379 I guess it is hard to quarrel with the fact that when we look at markets in Canada over time that the addition of new players has generally increased the size of the pie.
3380 So I guess I am wondering, at that level of discourse, whatever your absolute numbers are, that ‑‑ I mean you don't deny that there is a gap in penetration between Canada and the U.S., I take it, even at the numbers Mr. Goldstein was presenting?
3381 MR. RILEY: I would say due to historical factors ‑‑
3382 THE CHAIRPERSON: Right.
3383 MR. RILEY: ‑‑ that at this period in time there is a total gap that is much narrower than as described by the applicant, but as I said before, we do not accept the fact that in the environment going forward there is any difference.
3384 With respect to the point about the introduction of additional services, the Commission has a long‑standing policy about not licensing directly competitive services. So we agree, the addition of additional services to add diversity is a good thing. It makes our system better. There is no doubt about that.
3385 What drives a service though is motivation of some factor. Vice‑Chair French spoke the other day that rivalry generally is positive and we accept that in that motivation is positive. Motivation is what makes people do things.
3386 There are different forms of motivation. Threat is a form of motivation, reward is a form of motivation and, of course, competition or rivalry is a form of motivation.
3387 The fact of the matter is that in Canada, due to the circumstances of our system and our country being beside the largest exporter of entertainment on the planet, we have chosen a way to introduce these services that has been extremely successful. No one can quarrel with that. I don't think the applicants will quarrel with that.
3388 The question we have now is if we are to make an exception to that rule, will that be the motivation that is necessary?
3389 Our point of view is no motivation is necessary for the reasons we talked about in our oral presentation. Pay services as premium price products, as the most discretionary of all services, surviving on one form of subscription revenue, are motivated enough.
3390 Those are the motivations that drive the services to do that. The introduction of another, for the reasons we have set out in the study, will have the opposite consequences. Remember, at the end of the day, the question is will it be a net benefit to the programming system?
3391 THE CHAIRPERSON: Precisely. That is precisely the point. So that motivation aside, if ‑‑ I mean the applicants, a number of them, their case essentially is that the effects of competition will increase the size of the pie, producing hundreds of millions of dollars more for Canadian production.
3392 That is obviously the pot of gold at the end of the rainbow, and if they are right in their logic, then the Commission can be persuaded. If they are wrong, which is what you are trying to show, then, of course, the logic falls.
3393 So the logic is there is a gap between Canada and U.S. penetration for whatever reason. It presents an opportunity cost. Rivalry or competition is known to increase the size of the pie. The pie will increase and with it, at a 32 per cent Canadian content expenditure level, this will result in hundreds of millions of dollars more. So that is the logical chain that they are following.
3394 MR. RILEY: Mm‑hmm.
3395 THE CHAIRPERSON: And I guess it doesn't have to do with motivation, it has to do with simple observed behaviour in competitive markets.
3396 MR. RILEY: Well, what I am going to do is I will pass it over to Ken for the moment but what I would say is that it does not represent an opportunity because that gap is as a result of historical reasons. So there is no gap ‑‑
3397 THE CHAIRPERSON: Let us examine that for a minute and I will be asking Mr. Goldstein questions. He will have an opportunity to comment.
3398 But I take your point about the origins of premium television in Canada versus the United States, and that is history and it, I think, is fairly factual and that may well account for the gap that we are looking at, in part or even in large part, but going forward, the gap still remains.
3399 So the question still is, if you introduce more competitors in the marketplace, will you have the phenomenon of the growing pie going forward?
3400 Notwithstanding that we have got here through one set of historical factors, we are now in a premium digital universe, and if the introduction of a new player will increase that pie, then how would you argue that going forward the historical reasoning would still affect the results in Canada?
3401 I mean why would there be an inherently lower willingness to respond to packaging, marketing, promotion and so forth in Canada than we have seen in the United States or other places or other Canadian markets where new broadcasters have entered?
3402 MR. RILEY: Well, I would say this. I would say that the estimations on the increase of the pie are exaggerated. In fact, other applicants don't even support those levels. You have seen a variety of estimations of what they will be.
3403 Secondly, there are always consequences to that route. We have seen that before in our own case and it is natural that certain consequences flow when one introduces that kind of model. To date in this country, we have found that those consequences are extremely negative and that is why we have the system that we do and the benefits that have been derived from the system.
3404 So I would say even if the pie gets marginally bigger, there are consequences such as wholesale rates and other items that will be affected.
3405 Ken ‑‑
3406 THE CHAIRPERSON: Right. Mr. Riley ‑‑ you will have an opportunity, don't worry ‑‑ the point you are making is though that the image you are asking us to accept is one of a static kind of market with essentially a fixed number of top hits that will be divided, not much other value added to the mix and therefore not much reason to have the kind of uptake that some of the applicants are suggesting will occur.
3407 I guess I am wondering ‑‑ and we will get into, with Mr. Goldstein, the actual numbers ‑‑ why you would see such low growth in a sector that would be heavily promoted and advertised and programmed and packaged, why you would see such a static result in the marketplace in terms of the pie growing, conceptually, and we will get into the numbers with Mr. Goldstein.
3408 MR. RILEY: Fair enough.
3409 Conceptually, remember, at the end of the day ‑‑ you can market the consumers as much as you want, you can spend as much money as you want, but at the end of the day, the consumer has to find value in the product that they are purchasing.
3410 The proposal is to take programming that already exists, not to add something new to the market. It is simply to divide the programming that already exists here effectively into two lesser products and then let's market them and that will presumably close some gap.
3411 As I said before, we don't believe that there is a gap between the services at all ‑‑ between the two situations.
3412 In our view, all we have done is arranged the programming in our country a little differently from what they do in the U.S. and it does not go to follow that if you have got a product and you take that product, divide it, essentially, let's say, for all intents and purposes here, into two and then market the daylights out of it that then that will suddenly result in people taking more product. It is not logical.
3413 THE CHAIRPERSON: But doesn't that just, again, assume a static image? I mean anybody who is granted a licence knows that they have to figure out ways of coming up with new material.
3414 One would argue that those who don't face competition are more likely to have that attitude of well, there is a fixed market, we will get our share of the blockbusters and we will build the Canadian around it and we will have a service and it will be a profitable service, whereas if we face the rivalry, the rival is going to try very hard because he is only going to get part of the blockbusters. It is going to be a more difficult chore both for him and for you to come up with the programming ideas and to promote and market them, and that seems to be consistent with behaviour in other markets.
3415 So I am wondering how we can be persuaded of the sort of static image that you are referring to, well, we will just divide up the blockbusters and market the heck out of it and that is not going to be enough. Surely, there is going to have to be a lot more that goes into it, and what we have heard over the past few days are some of the ideas, albeit we haven't got complete programming pictures, to be sure, and we will come back to that.
3416 But that conceptually is how one would imagine anybody starting a new television station in a market would have the same sort of challenge facing those who have acquired the best network programming. You have got to come up with something that is going to work and why wouldn't the creative and financial resources in this country produce that and produce the uptake that the applicants are saying would happen.
3417 MR. RILEY: Well, two things, I said.
3418 As I said, first of all, I think the notion that it is a static market and that somehow it is automatic for pay television is not the most accurate description of the circumstances.
3419 As we indicated in the oral ‑‑ in our intervention, we vie for the attention of consumers, whether it be specialty and conventional in terms of their watching and their access to movies. We vie with other forms of delivery of movies.
3420 The other thing I would like to add too is that, frankly speaking, not only do we vie for them in terms of attention and the movies they have, we vie for them for the rights. There have been instances in both Canada and the United States where other broadcasters have bought out the pay rights. There is no prohibition on any broadcaster from doing that.
3421 So you have a fully discretionary service, a premium product, with one source of revenue. As I have said before, that is motivation, that is energy. It is not automatic. Nobody sits at the office and says, well, that is good enough for today, let's go home. Every month, we have to encourage that subscriber to subscribe, and as you know and as you have heard, because the service is so discretionary, churn is just something that comes naturally. So we always have to be moving forward.
3422 We are in a dynamic marketplace. Someone talked about the cost of the box is now gone, so it is much easier for pay. Compare the number of pay and specialty services that now exist in the market thanks to the Commission's good work over the years. They have multiplied dramatically, and as I said, we compete with those services and not only in terms of attention but in terms of actual rights on occasion.
3423 THE CHAIRPERSON: Right. So your point is that you do compete against many other services, often for similar product, and that it is wrong to say you are not in a competitive market right now, even though you have the pay TV window in that market, and you add that in Canada, given the size of our country, that that probably is enough to make it work and that the head‑to‑head competition of another pay TV service is not only unnecessary but is in effect a bad thing for all the reasons you mentioned?
3424 MR. RILEY: Well, I would say yes, the negative consequences of introducing that model are not sustainable over the long run. We have seen it before. We will see it again. The cost of that cream of the crop programming will rise exponentially.
3425 So it is not a sustainable model in the long run in any way whatsoever, and that the notion that there is no motivation, if you will, no rivalry, no impulse to do it ‑‑
3426 THE CHAIRPERSON: Right.
3427 MR. RILEY: ‑‑ as I said ‑‑
3428 THE CHAIRPERSON: I hear that point and I hear the point of the value chains increasing the number of windows and the number of competitive services that you have to compete with for the viewers' attention.
3429 The applicants, of course, focus in on movies in particular, other major events as well, and some of them argue that, well, that may be fine, the argument that there is other competition, but in the motion picture production sector, because of a lack, as they would put it, of competition in that particular marketplace, we haven't had the results in Canada that we should have.
3430 So for example, in the BOOM presentation yesterday ‑‑ and I will ask you to comment on it ‑‑ they talk about the fact that the existing situation has not really been ‑‑ page 5:
"Canadian pay television services have not provided a significant stimulus for the Canadian production industry."
3431 And page 15:
"Over the last five years, 1999‑2000 to 2003‑2004, the annual contribution of all Canadian private sector broadcasters, including pay, specialty and off‑air, has varied between $3.5 million and $14.5 million and never amounted to more than 5 per cent of theatrical feature film financing."
3432 They are quoting the House of Commons Standing Committee on Canadian Heritage.
3433 Do you have a comment on that?
3434 MR. RILEY: Well, I think I would step back and rely on what we have said in our intervention and here today, that there is no private broadcaster in this country that supports Canadian feature film more than our company.
3435 Half a billion dollars will be the amount that is invested. Perhaps for Quebecor that is insignificant money, I am not sure, but half a billion dollars is what we have contributed, with $40 million last year.
3436 We have appended to our oral applications the number of projects we have supported in the last year. I am not sure if they made it but this is the list of the Canadian productions that Super Écran and The Movie Network have supported in the last three years alone. So I am not sure how they come to their conclusion but I would also like to point out that we license every theatrically Canadian released feature film.
3437 THE CHAIRPERSON: Right. Thank you. So that is your answer to not being enough of a stimulus to the motion picture industry in Canada?
3438 MR. RILEY: It is.
3439 THE CHAIRPERSON: Okay. Let me move on to the CMI ‑‑ oh, before we go, your point about digital penetration. I heard you this morning and I want to know that I have it right. This is page 6 of your statement and you refer to it again.
3440 You say that your digital penetration at 52 per cent is virtually the same as that of pay TV and digital in the U.S.
3441 Now, I thought I heard you say earlier that you thought that part of the U.S. figure of 52 or 53 per cent was analog or did I get you wrong?
3442 MR. RILEY: Yes, that is correct, but what we are doing to try to create an apples‑to‑apples comparison is rather than getting into a fight for the moment about what were the factors that stimulated the differences in the market, if one looks at ‑‑ for example, if one looks at DTH penetration in the U.S., it is about 54 per cent, and it is about the same in Canada.
3443 I would note that the other day, Gary Smith, the President of Bell ExpressVu, was on the Spotlight panel and made reference to the fact that movie packages were about 25 per cent penetration in Canada.
3444 We have a relationship, obviously, with Bell ExpressVu and I just assumed that Mr. Smith misspoke because the reporting we have from that company and the payments we have from that company show that the number is not 25 per cent but is in the range of the number we have just quoted.
3445 So setting aside the numbers that the applicants report saying 50 per cent overall, we thought, let's just look at digital. That is how all sales will be in the future, all the opportunity. Any opportunity will happen within the future.
3446 If you look at, for example, then Direct TV and Echo Star, the digital services, you are around 50 per cent. If you look at digital cable and ExpressVu and Star Choice combined, you are at about 50 per cent. So all opportunity in the future will come from digital boxes. So where is the gap?
3447 THE CHAIRPERSON: Just to understand you, you are saying that ‑‑ does this include cable in both countries as well?
3448 MR. RILEY: Yes, it includes cable definitely because, of course, these numbers ‑‑ you know, we are the service, we know what our subscriptions are.
3449 In the case of the Kagan research, the number on the cable side, it is a little difficult to strip out the digital cable in the U.S. We can make some assumptions and it would appear to be around 50 per cent but it is clearly stated that the digital in the ‑‑ I think it was Allarco that submitted with their application the Kagan numbers for 2004. You will see that the digital DTH is 54, and to the best of our knowledge, the digital cable penetration is at the same range.
3450 THE CHAIRPERSON: Well, I mean it is an interesting point. I am not sure how to understand now what you are saying because I hear you backing cable out here. I am not sure what your statement in bold in your opening statement is meant to cover.
3451 One could read it, I think, fairly as saying that of all the digital homes in both countries, in each country, the number is 52 per cent pay penetration, which would include cable and DTH digital in both countries?
3452 MR. RILEY: I would say that is a fair assessment.
3453 THE CHAIRPERSON: Yes.
3454 MR. RILEY: I gave you sort of the details of the ‑‑ with a calculation on the cable but I would say, based on the Kagan information filed with Allarco and to the best of our knowledge with respect to digital cable, in a digital environment in both countries, it is fair to say that the penetrations are very close ‑‑
3455 THE CHAIRPERSON: Okay.
3456 MR. RILEY: ‑‑ essentially the same.
3457 THE CHAIRPERSON: Well, could you provide us with the backup that you have for that?
3458 MR. RILEY: Certainly.
3459 THE CHAIRPERSON: It would be useful to see it, and the applicants clearly are hearing what you are saying and they can assess that.
3460 I guess your point is that in that digital universe, which is the universe in which pay TV is going to exist in the future, we are neck‑to‑neck with the U.S. and so the gap that they are talking about is a past history factor and not a future consideration?
3461 MR. RILEY: Yes.
3462 THE CHAIRPERSON: I mean that is what I am hearing you making the point about ‑‑
3463 MR. RILEY: I would say that ‑‑
3464 THE CHAIRPERSON: ‑‑ if that is correct.
3465 MR. RILEY: ‑‑ any future subscriptions in the future will by definition have to be in a digital environment, and therefore, as compared to the United States, Canadian pay services are doing our job.
3466 THE CHAIRPERSON: Okay. Let's look at that backup material ‑‑
3467 MR. RILEY: Sure.
3468 THE CHAIRPERSON: ‑‑ if you can come up with it.
3469 MR. RILEY: We would be happy to do that.
3470 MR. GREENBERG: Mr. Chairman, could I just ask Michel Houle to respond to the question regarding the amounts of dollars that BOOM stated in their application yesterday?
3471 THE CHAIRPERSON: Yes.
3472 MR. GREENBERG: Michel.
3473 M. HOULE : Oui. Merci. Je voudrais juste préciser que le tableau auquel réfère la citation de BOOM, et qui a été présenté par d'autres applicants ou intervenants, est un tableau qui réfère aux investissements des diffuseurs dans la production de longs métrages. Ce qu'on nous présente, c'est la structure financière de ces longs métrages.
3474 (a) Le travail essentiel d'un diffuseur comme à la télévision payante, c'est d'acquérir des droits de diffusion des films.
3475 LE PRÉSIDENT : Oui.
3476 M. HOULE : La télévision payante fait aussi des investissements directs, mais ce qui est reporté dans ce pourcentage et ce chiffre, c'est la partie d'investissement direct, qui est la petite partie. C'est pour ça qu'il y avait un écart aussi grand entre le 40 millions qu'on dépense et les quelques millions de l'ensemble des diffuseurs canadiens dans le secteur du long métrage.
3477 Contrairement à ce qui se passe en télévision, où souvent les productions... l'ensemble des revenus prévus des diffuseurs sont inclus dans la structure financière, dans le long métrage, les revenus à venir de la salle, de la vidéo, de la télévision payante, généraliste, et caetera, ne sont pas inclus. Le distributeur fait une avance au producteur et se rembourse de cette avance à partir des revenus qui viennent du marché.
3478 Donc, on ne peut pas prendre cette donnée‑là comme représentative des sommes que les diffuseurs mettent en droit de diffusion dans les films, mais simplement les sommes que, en supplément, ils mettent en investissements directs. Donc...
3479 LE PRÉSIDENT : Je ne suis pas certain si je comprends. Les chiffres sont très bas, 3,5 millions à 14,5 millions, et jamais plus que 5 pour cent du financement des films, ça me semble être très bas. Et vous dites que ça représente quoi?
3480 M. HOULE : C'est très bas parce que ça ne représente que les investissements, equity investment...
3481 LE PRÉSIDENT : Oui, oui.
3482 M. HOULE : ...dans la production, qui sont faites par les diffuseurs, mais les diffuseurs ne font pas, en priorité, des investissements à risque dans les émissions et dans les films.
3483 Dans le cas des films, ils versent des droits de diffusion, qui sont des revenus et qui ne sont pas intégrés dans la structure financière.
3484 Donc...
3485 LE PRÉSIDENT : Oui.
3486 M. HOULE : ...c'est pour ça que les nombres sont aussi précis.
3487 LE PRÉSIDENT : Ces chiffres ne représentent pas les fees des droits de diffusion?
3488 M. HOULE : Non, c'est ça, et qui est la dépense principale des services de télévision payante, comme des services généralistes ou autres, puisque la donnée porte sur l'ensemble.
3489 LE PRÉSIDENT : Je n'ai pas eu l'opportunité de relire le document, le rapport du comité, mais eux, ils disent la contribution, annual contribution, et c'est un chiffre assez global, mais vous dites que c'est seulement les investissements dans ces productions‑là?
3490 M. HOULE : C'est exact.
3491 LE PRÉSIDENT : O.K. Merci pour la clarification.
3492 Est‑ce que vous avez aussi des commentaires sur l'impact sur Super Écran, ce qui a été déposé hier par Archambault, BOOMTV, en anglais et en français, impact sur Super Écran? Est‑ce que vous avez eu l'opportunité de lire ce document‑là? Avez‑vous des commentaires là‑dessus?
3493 MME SAINT‑LAURENT : Oui. Je vais demander à Ken Goldstein de répondre à cette question.
3494 MR. GOLDSTEIN: Yes. I am just going to find the file here. We received something yesterday which appears to be only about the French service ‑‑
3495 THE CHAIRPERSON: Right.
3496 MR. GOLDSTEIN: ‑‑ if we are talking about the same thing.
3497 THE CHAIRPERSON: That is right.
3498 MR. GOLDSTEIN: Yes. BOOMTV impact on Super Écran from Archambault.
3499 THE CHAIRPERSON: Mm‑hmm.
3500 MR. GOLDSTEIN: Obviously, we just got this late yesterday. I haven't had a chance to go through it in detail but I would make this first initial reaction and then perhaps they might want to come back and revise it again.
3501 If you go to the material filed by BOOM, and I am looking at something called Appendix 1F ‑‑ this was filed previously ‑‑ where the Commission staff had asked them to break down their projections into the English side and the French side.
3502 In Appendix 1F, they show the average subscriptions to the French service, the average subscriptions to the English service and so on, and in year seven, they show for the French service 369,909 subscribers. So we have the same piece of paper.
3503 THE CHAIRPERSON: Mm‑hmm.
3504 MR. GOLDSTEIN: If I now go to Table 1 in what was filed yesterday, you will see that they say that in year seven they have 241,657 subscribers.
3505 So they appear to have used approximately 370,000 subscribers for estimating revenue but 130,000 subscribers less for estimating impact. So I would suggest they might want to go back and do their homework again.
3506 THE CHAIRPERSON: Well, they may or may not want to take you up on your suggestion.
‑‑‑ Laughter / Rires
3507 THE CHAIRPERSON: Is that your only comment on that?
3508 MR. GOLDSTEIN: Well, I don't know how one can assess an impact analysis that is based on a different number of subscribers than the revenue projections.
3509 M. HOULE : Si je pourrais ajouter un élément, Monsieur le Président?
3510 LE PRÉSIDENT : Oui.
3511 M. HOULE : Comme l'a dit Ken, les pourcentages ont été appliqués sur un nombre d'abonnés relativement réduit, mais aussi ce pourcentage de 15 pour cent de gens qui, dans un sondage, avaient indiqué leur intention d'éventuellement se désabonner de Super Écran, apparaît comme une base un peu sommaire, compte tenu qu'on nous a dit hier que le sondage ne précisait pas la part ou la portion que chaque axe de programmation allait représenter.
3512 On disait aux gens, voici, il y aura des longs métrages, du sport, des dramatiques et des événements, dans quelle proportion, on ne le sait pas. Avec un concept aussi flou, forcément, les réponses qu'on obtient quand on essaie de mesurer la différenciation entre ce service et le service existant sont aussi floues.
3513 Et donc, sur la foi d'un seul sondage où les gens ont indiqué qu'éventuellement... 15 pour cent d'entre eux ont indiqué qu'éventuellement ils se désabonneraient à Super Écran, me semble une base un peu ténue pour baser des projections d'impact sur Super Écran.
3514 THE CHAIRPERSON: Okay. Now, I note the same discrepancy in the figures that Mr. Goldstein mentioned and I guess we will have to leave it at that and see what the applicant wishes to do.
3515 Okay, if we could turn now to the assumption to the CMI study that has been filed with the intervention and I guess I would like to go through them. I am looking at page 32 of the report. Well actually, let's do it a little earlier here. Let's go back to the creating a baseline projection section, page 27.
3516 MR. GOLDSTEIN: Mm‑hmm.
3517 THE CHAIRPERSON: I think I follow the reasoning there but what you are assuming here is that without an additional player and the same market structure in 2013, you are projecting a baseline of subscribers and you project numbers of growth of 6 per cent in 2005‑07, 5 per cent in 2008‑09, 4 per cent for the following three years and 3 per cent for the two years after that, and your reasoning is that the low numbers of penetration, certainly compared with the historical growth, are due to largely the impact of competing technologies and you are comforted by the views of PWC in regard to take‑up of premium pay TV; is that fair?
3518 MR. GOLDSTEIN: That is correct. I think that ‑‑ you were discussing earlier, and I hope we get a chance, by the way, to go back to some of the other differences between Canada and the United States because, just for the record, a number of Spotlight's numbers are simply incorrect.
3519 THE CHAIRPERSON: You will have an opportunity to comment on those.
3520 MR. GOLDSTEIN: Good. But you can't ‑‑ I think John made this very clear. We can't treat pay TV as if it is somehow hermetically sealed and operates separately from the rest of the world.
3521 When I first read the applications, aside from doing the statistical analysis and discussing things like we just discussed about BOOM and subscriber levels and so on, the thing that struck me as most peculiar was the fact that they have essentially ignored the changes in technology that are occurring today and are going to occur with even greater speed going forward.
3522 By 2010, we are going to be swimming in a sea of downloadable video and that includes movies. It has happened already, of course, but it is going to happen even more, and while ‑‑ sure, you have the video iPod and it is a two‑and‑a‑half‑inch screen. I asked a 20‑something person about this a couple of weeks ago.
3523 I said, well, if you wanted to take the stuff, internet movies that you can get on your computer, what would you do if you wanted to watch it on a bigger screen? He said, oh, I just modify my PlayStation.
3524 All those video game console pieces of equipment out there let you do things with these things that come over the internet or come over the iPod.
3525 So the only question by 2010 is not whether or not we are going to have downloaded movies over the internet, the question is how much is going to be free and how much they will be able to protect the copyright, and in that context, I think that anybody, whether it is an applicant or an existing player, going forward, who says this can go on forever at high growth rates is letting themselves and the system in for a lot of trouble.
3526 So I took those growth rates based on, obviously, for the short term, what PWC was saying and what the companies themselves were saying, and for the longer term, my assessment of the market based on how new technologies will influence that market.
3527 THE CHAIRPERSON: Right. But I guess ‑‑ and I hear what you are saying but I guess for us to accept that, we would have to accept that notwithstanding the considerable growth over the past four or five years ‑‑ what, over 50 per cent combined over the period ‑‑ that that is going to dramatically taper off down into the low single digit number growth figures that you are projecting, and the reasoning is alternative technologies, still in an environment without a competitive player?
3528 MR. GOLDSTEIN: I think you will see the same thing happening in the United States as well but I would suggest to you that there are a couple of other factors going on here, even absent the technological issue, which I do think is very important.
3529 The first is that the period you have just described is the period of rapid growth of satellite services and that rapid growth was taking place in markets that had not been served by cable, with a small number of channels, or if they were served by cable, a small number of channels. In most cases, it was markets that had nothing and people were hungry for the whole offering of the satellite services, and if I remember correctly, one of the offerings from ExpressVu was all you can eat and I think they captured that pretty correctly in those areas that had been under‑served. They were starved for services.
3530 But if you take a look at the pattern ‑‑ and I think John can confirm this ‑‑ if you take a look at the pattern, the percentage of people taking pay on satellite was higher four years ago than it is today, which leads me to the second point, which is that after your initial early adopters or your early plus medium adopters have adopted, then it is much harder to sell and that is the pattern that we are in.
3531 THE CHAIRPERSON: Right. I take your point about the digital growth in that period but if you look at the cable digital growth, this year's figures for penetration for the major cable companies show that digital penetration is down around 30 per cent, plus or minus depending on the system.
3532 So there is a lot of growth and one can assume that there will be total digital migration there, and if you assume ‑‑ I don't know ‑‑ 50 per cent penetration that Mr. Riley was taking, then you will come up with a lot higher numbers than five, four and three?
3533 MR. GOLDSTEIN: No. No. You have to remember that the services, the pay services are only available on digital ‑‑
3534 THE CHAIRPERSON: Right.
3535 MR. GOLDSTEIN: ‑‑ and those who are really interested in those services probably have largely made that transition already.
3536 THE CHAIRPERSON: You are saying that even in an analog environment since pay is sold as a digital, they will have the box already ‑‑
3537 MR. GOLDSTEIN: Well, not everybody but certainly in proportions.
3538 THE CHAIRPERSON: Well, we have had a lot of debate with the applicants about that back and forth on the early adopter scenario. What else do you have to back that up other than it is a commonsense kind of point?
3539 MR. GOLDSTEIN: Well, common sense usually goes a long way but ‑‑
3540 THE CHAIRPERSON: There is a commonsense argument on the other side as well ‑‑
3541 MR. GOLDSTEIN: Yes.
3542 THE CHAIRPERSON: ‑‑ that says with competition and further marketing that you will get those penetration levels up there.
3543 MR. GOLDSTEIN: Well, I assume that we will deal a little more with the competition issue.
3544 THE CHAIRPERSON: Yes.
3545 MR. GOLDSTEIN: But I would suggest that our own findings ‑‑ I would suggest that the experience of the company is I suggest the PWC survey, but I would actually, if I may, like to refer to a finding by another research company if that is acceptable. It is publicly available on the internet. It is not some new survey we have commissioned.
3546 I would like to refer to a news release from Decima if that is acceptable.
3547 THE CHAIRPERSON: Well, I mean Decima is represented at this hearing ‑‑
3548 MR. GOLDSTEIN: Exactly.
3549 THE CHAIRPERSON: ‑‑ on the part of one of the ‑‑
3550 MR. GOLDSTEIN: So I don't think it is unfair then to mention their news release. Okay?
‑‑‑ Laughter / Rires
3551 MR. GOLDSTEIN: This is a news release issued on September 1st:
"Consumers confused about digital TV services but growth accelerating. New Decima Study."
3552 This is from their Digital Domain study and attached to it is a table and it says:
"The top five digital TV services benefits are features that convinced digital TV subscribers to subscribe:
1. Access to more channels, 31 per cent;
2. Better picture quality, 21 per cent;
3. Cost, unspecified,
11 per cent;
4. Better sound quality,
11 per cent;
5. Access to more movies,
9 per cent."
3553 So Decima is telling us in their Digital Domain Survey that as a reason for getting these new digital services, 9 per cent was movies, which I think supports the notion that the people who were really interested in movies have already done it.
3554 THE CHAIRPERSON: Well, I am not ‑‑ I mean the other factors are pertinent as well. I mean what would be your point? I am not sure I am taking your point here.
3555 MR. GOLDSTEIN: Well, my point is they asked a specific question about movies ‑‑
3556 THE CHAIRPERSON: Right.
3557 MR. GOLDSTEIN: ‑‑ are movies a motivation for you to get digital, and only 9 per cent said yes.
3558 THE CHAIRPERSON: Well, but more channels is a factor in there. I mean I am not sure how to interpret that data as a negative against the applicants.
3559 MR. GOLDSTEIN: Well, I ‑‑
3560 THE CHAIRPERSON: I can see what you are saying, that look how few people care about more movies ‑‑
3561 MR. GOLDSTEIN: Yes.
3562 THE CHAIRPERSON: ‑‑ is really what you are saying?
3563 MR. GOLDSTEIN: Exactly.
3564 THE CHAIRPERSON: But there are all kinds of other factors that will be offered as part of the competitive service that will fall into the other reasons for them taking it up?
3565 MR. GOLDSTEIN: Oh, I am sure people will take it up, I am just saying that to suggest that movies is the strong motivation that ‑‑
3566 THE CHAIRPERSON: Who is suggesting that?
3567 MR. GOLDSTEIN: The applicants. The applicants are specifically saying ‑‑
3568 THE CHAIRPERSON: No, I don't think that is fair. I mean a number of them are offering services other than ‑‑ programming other than movies, at least at the level that we know of the programming so far, and we know from experience in other countries that movies aren't the sole factor in the service.
3569 Nobody has confined themselves to movies of the applicants.
3570 MR. RILEY: Mr. Dalfen, I just might say that, you know, based on our own experience where we have the launch of our service into DTH ‑‑
3571 THE CHAIRPERSON: Right.
3572 MR. RILEY: When those services first launched, first of all, there were not the plethora of specialty services, new digital services, that were licenced.
3573 We were packaged in an all‑in package. That was the way that this particular group chose to sell the programming, as opposed to "let's get then on basic and then build them up."
3574 It was a very effective method of packaging, and let us be ‑‑ let us be reasonable too. Obviously DTH can go where cable can't.
3575 So it is going to have a market in the beginning that was "One starved for entertainment." And it was sold in one big package.
3576 As a result of that, our penetration started in DTH somewhere around 70 per cent. And those quite naturally, as you get further from the core of the tree, as you get away from the people that are most likely to adopt it, you are always going to have a harder sell.
3577 So I always liked to say around our office "Eventually, you will reach my dad." My dad will not take much more than basic and whatever the core services he wants. As much as he loves me, he will not subscribe to the Movie Network.
3578 So I think it is a natural ‑‑
3579 THE CHAIRPERSON: Do you have a family discount, Mr. Riley?
‑‑‑ Laughter / Rires
3580 MR. RILEY: No. You know, I have been speaking to this man about that, but unfortunately I don't have that. At least it doesn't extend to that element of my family.
3581 I guess the thing is, our own experience has demonstrated that it is natural that people who are most motivated and wish to have it, the early adopters, are the ones to take it first.
3582 And it is quite reasonable to understand and expect that, as you get further away, you are going to get to the people that ultimately will not buy anything else.
3583 You see in all kinds of businesses, and I don't think it is separate ‑‑ ours would be any different.
3584 I think the bigger question is, What about the assumption that that does not happen? That seems to me to be the more unlikely phenomena, that as a straight line continuing to whenever that there would be the same mark tape.
3585 That is just ‑‑ as I said, it is against our own experience and seems counter‑intuitive to the progress of any product. All products mature at some point because they reach the maximum density that they are going to achieve in the market.
3586 THE CHAIRPERSON: Well, perhaps, Mr. Goldstein, you do want to comment on in because what I think I am left with at this point is, I am seeing a very large gap of some 70 per cent plus or minus of subscribers who are not getting digital in the 6.5 million cable homes and I am thinking that the effects of competitive offering packaged and promoted make your numbers for subscriber projections, particularly ‑‑ well, I guess you are looking at it in a monopoly environment.
3587 Even in that environment I would have thought that the strength of TMN and Movie Central would such that they would do a lot better than tapering down to three per cent growth, notwithstanding the unknown impact of new technologies. I am just not sure why that isn't a very juicy fielding to clientele.
3588 Maybe you can help me on that. Then we can move into the competitive scenario, which is later on.
3589 But I am just not sure of the basis for your pessimism.
3590 MR. GOLDSTEIN: Well, I don't think I am pessimistic actually. I think it is actually a relatively conservative estimate. And it is precisely because there isn't a monopoly environment that I have made those projections.
3591 If there were a monopoly environment, this business would be hermetically sealed. It would be unaffected by Bravo's use of an HBO movie on Friday night. It would be unaffected by downloading. It would be unaffected by the video store. It would be unaffected by all of those other things.
3592 It is precisely because it isn't a monopoly in terms of what the consumer can do ‑‑
3593 THE CHAIRPERSON: I take that point. I take that point.
3594 MR. GOLDSTEIN: And that is why I came up with those projections.
3595 THE CHAIRPERSON: Okay. It think I have that.
3596 Also, your subscriber revenues, in that ‑‑ you are right. I shouldn't call it a monopoly environment. In the existing environment, the revenues are declining. You have them declining $8.50 down to $8.00 over the period.
3597 And again, I guess for the same reasons, is that what you are saying ‑‑
3598 MR. GOLDSTEIN: Precisely. One could have said "Let us keep the gross rate of subscribers different, but lower the price even more."
3599 I mean, the whole question here isn't only subscribers' levels as we will, I am sure, discuss a little. It is subscriber time price.
3600 THE CHAIRPERSON: Right.
3601 MR. RILEY: Mr. Dalfen, if I may just add.
3602 THE CHAIRPERSON: Sure.
3603 MR. RILEY: The wholesale rate for The Movie Network is at about the same point it was 20 years ago.
3604 So in exercising our monopoly power to increase our rates, we have never seen that. Every negotiation that we have undertaken our rates have gone down notwithstanding the supposed power we have to dictate those rates.
3605 So it is completely in keeping with the practice that we have seen historically and as we renew agreements that there is downward pressure on rates absent competition.
3606 THE CHAIRPERSON: So, you are saying that your rates have come down. Your wholesale rates have come down. Do you have a curve of that, to take you down to the $8.50?
3607 Is that what you were saying, that the ‑‑ I am looking at page 28, table 3 of the CMI study, showing the revenue percent per month line.
3608 And you are saying this continues a downward curve?
3609 MR. GREENBERG: The answer is yes.
3610 If you look at the original price when pay was introduced in this country, it was $9.60 on a wholesale basis.
3611 THE CHAIRPERSON: Right.
3612 MR. GREENBERG: And it has gone continuously ‑‑ it has decreased over the last 20 years.
3613 THE CHAIRPERSON: I guess in your table 2 you have a number that is $8.50 to $8.69 and $8.78 for Super Écran. So I guess we don't have that material as to the historical curve. But you are saying that when it started ‑‑ but that is 22 years ago, is it not?
3614 I don't know how long that $9.50 lasted. And then in '84, as you say, there was a re‑organization of the industry.
3615 I don't know what the numbers are going forward, but my recollection, I could be wrong, is that if you look back five‑ten years you are probably going to get very little decline in that wholesale rate. I could be wrong about that.
3616 MR. GREENBERG: You will see somewhere within a five to seven per cent decline in that period.
3617 THE CHAIRPERSON: From the beginning to the end of the period?
3618 MR. GREENBERG: No, from the period you are talking about, when it was $8.70.
3619 THE CHAIRPERSON: Yes. Down to $8.70. So sort of flat. But this period, I guess, tapers down even further over a shorter period.
3620 MR. GREENBERG: But I must say ‑‑
3621 THE CHAIRPERSON: Figures have shown unduly ‑‑
3622 MR. GREENBERG: I am saying, the pressure has not ceased.
3623 THE CHAIRPERSON: Yes.
3624 MR. GREENBERG: I mean, we are continuing at the pressure as we speak here today in negotiations with BDUs.
3625 THE CHAIRPERSON: Okay. I think I have those points. Thank you very much, Mr. Greenberg.
3626 Now, if we look at table 5, you present the comparisons of the various applicants and then argue that you don't think that they are correct for the reasons you set out.
3627 And then you go to your central question, which I think is fairly expressed and I think most people would agree is the issue here. And then you go to your key assumptions used in analysing the other applications. And I guess I would like to ask you other questions about those.
3628 You are saying that, if we go back to table 3 and 4 that we have just discussed, that effective competition or rivalry would be to increase those numbers by 5 per cent.
3629 Is that right, Mr. Goldstein?
3630 MR. GOLDSTEIN: That is correct.
3631 THE CHAIRPERSON: Right. And again, why would that by so low relative to what one would normally see in a market where a new competitor enters?
3632 MR. RILEY: Well, I believe it is consistent with the notion of the dual subscriber. I think that is absolutely key here.
3633 I mean, if you are going to ‑‑ again we haven't seen the programming grids, but we have heard a lot of discussion about dual subscribers.
3634 And it is also consistent with the fact that the people who are interested in movies, we expect, will largely be present in the marketplace.
3635 So to suggest that a vast number of new households is going to be added because of an offering that either splits or duplicates the most interesting part of a product I think is a bit of a stretch. So I put in a five per cent uplift.
3636 THE CHAIRPERSON: Right. I guess your are both putting an uplift in and you are taking down the revenue per subscriber per month figure. You are doing both, aren't you?
3637 MR. RILEY: Yes, I believe you have to, and I think that that ‑‑ with your permission, I will mention the U.S. market now because ‑‑ you know, we will get to the comparisons later.
3638 But just as a matter of basic, fundamental economics, when you are going to compare a market, you can't compare a level without comparing a price.
3639 And the prices in the U.S. market are lower. They are lower per se. The American GDP per capita is 29 per cent higher than it is in Canada when adjusted for exchange rates, which means the Americans have more purchasing power. And they are paying lower rates with more purchasing power for this product.
3640 You, you know, I jokingly said in one of our meetings "If you want to really drop the subscription rates to a very, very low level, sure you will get more subscriber, but you are going to get a whole lot less Canadian content."
3641 And that, to me, is were the issue is joined. It is joined at the level of price, of rates, of what the BDU actually passes on to the service.
3642 And I questioned and I compared those services of when we referred to previously. I questioned how anybody could argue that you are going to be getting revenues per subscriber in the seven to nine and a half dollar range in 2013 with either a duplicated product or half the product.
3643 That is fundamental to my set of assumptions.
3644 THE COMMISSIONER: Right. Perhaps this might be the time for you to indicate why you don't think that the activities associated with rivals trying to get customers in the market won't provide a greater lift than that.
3645 MR. RILEY: Well, rivalry has to be based on two things. I mean, if you want to have consumer choice, consumer choice is based either on differentiation of product, which so far we don't know about based on the previous comment you made, because we haven't seen their programming grids.
3646 But of what we have heard we haven't seen much differentiation of product. It is based on price.
3647 And what I have done, and my whole exercise here, is I said, "Look, I am going to accept their subscriber projections for each applicant, and then I am going to see what the consequence is for price."
3648 Now you have heard reference to the CSFB report about this, which agreed with my assessment that the applicants had misinterpreted the American market. But they came the other way. They said if they get their price they won't get their subscribers.
3649 So, you know, it is a continuum. As you have different price levels you have different subscriber levels.
3650 And all I am saying is that their proposed prices, and I mean wholesale prices here ‑‑ their proposed wholesale revenue per subscriber is inconsistent with their subscriber projections.
3651 And I am trying to make them more consistent based on the U.S. experience, based on the number of dual subscribers. And it is a slide. It slides for each applicant and each year based on what they have said.
3652 There is a different number of dual subscribers and everything sort of flows back and forth. If you increase one, something has to give somewhere else.
3653 MR. GREENBERG: Mr. Dalfen, if I just may add something, if one takes ‑‑ at the end of the day it is what the total return is to the Canadian broadcasting system.
3654 If we take half the product from an existing service away and then we go back for a renewal of an affiliation agreement, it is not reasonable to expect that that negotiation would end up in wholesale rates that are consistent with what historically has been given.
3655 You have a certain amount of product, let us say it is six studios worth of products, and suddenly you have half that.
3656 It is similar on the other side of the table. I would see it extremely reasonable that they would say ‑‑
3657 THE CHAIRPERSON: No, and I think the applicants have acknowledged that you are going have duals. In a dual subscribers scenario, you are going to have a lower blended rate.
3658 I guess though I am not quite sure how you are positioning your thinking on this, and I am trying to think it through myself.
3659 You keep saying "half the product." And again, I guess the applicants would say "No, that isn't what it is. It may be half the studio blockbuster product, but will be a lot of other things." And if you combine it, Mr. Goldstein just quoted a Decima report saying "People don't go there for movies anyway."
3660 Then you are going to be ‑‑ both services, both competitors are going to be trying to offer other kinds of programming that will attract and packaging ‑‑ and the BDUs will be packaging in away that attracts and promoting programming as well.
3661 So I guess we are in a bit of that circle, and it is hard to ‑‑ Mr. Goldstein comes up with persuasive arguments why he feels the numbers should be as low as they are in terms of the growth. Yet the applicants are also making arguments related to the impacts of competition.
3662 Since there are no facts in the future we have to rely on analogous kinds of exercises and experience in trying to come to and determine the numbers.
3663 MR. RILEY: Well, you know, I think probably the best ‑‑ I agree. There is nothing in the future.
3664 What the interesting situation in this case is, we do have experience in the past. The man to the left of me has lived that, and perhaps he might best be able to describe the circumstances that would happen in the future and have happened in the past.
3665 MR. GREENBERG: Mr. Chairman, the reason I am having trouble with my microphone is that this morning I was excited to appear before you that I spilled a glass of water and it went on the mic and it goes on and off by itself.
3666 So I apologize to that.
‑‑‑ Laughter / Rires
3667 THE CHAIRPERSON: Can we provide this man with another mic?
‑‑‑ Laughter / Rires
3668 MR. GREENBERG: If you will just bear with me for five minutes. And perhaps a little history is good for all of us.
3669 THE CHAIRPERSON: Yes. Go ahead.
3670 MR. GREENBERG: As my good friend Yogi Bear used to say, it sounds to me like déjà vu all over again.
3671 When we applied for a licence back in 1982, we submitted that there was not room for competition.
3672 The Commission in its wisdom in those days disagreed with us and gave out six licences. We did not get a licence. That was fair enough. That was our condition.
3673 In the end, within a year, the entire industry was bankrupt. The studio contracts that were in place at the time called within the first five‑year licence with the licence fees to go up by 50 per cent.
3674 The BDUs, realizing there was instability, sent out a letter that said, "I am going to chop your price by 30 per cent overnight, and the first applicant who says yes, that is the service I will promote."
3675 So the industry was left with huge debts. Astral and my brothers and I at the time frankly, looking back then, I don't know why we did it.
3676 It has worked out well obviously. But in fact we mortgaged everything, including our entire company.
3677 If we had not turned pay TV around, the Greenberg brothers and Astral were bankrupt. What even public shareholders don't know even though it was a public company is that in order to get the money from private sources to fund pay TV we actually signed personally all our shares away.
3678 So the public shareholders would have been protected. It is one of those reverse situations. Where it is usually the management or owners take advantage of public shareholders, in this case we were signing personally on behalf of the entire public shareholders to support the rejuvenation of pay television.
3679 We could have walked away. We could have asked for settlements. At the time the deficit within 12 months of the English pay TV service was 52 million. The deficit on the French side was 13 million.
3680 We were the only ones willing to support the deficit on the French side. Our colleagues in the West frankly didn't want to hear about supporting a French‑language pay TV operation. It took 13 years to recoup our investment in Super Écran.
3681 So this was not something that was quick overnight fix, and we saw in those days what happens when you have competition.
3682 The fact is, as far as I know, there is no market in the world, other than the United States, of the size of Canada, that has a competitive domestic pay TV situation.
3683 I mean, I heard Italy was mentioned. The fact is they had to merge in order to solve the situation. They were losing tons of money. You have heard the overall pay TV situation in the European Union.
3684 Pay TV is a unique product. It is the only one that has to be sold, we said, day in and day out.
3685 We are on the one hand under pressure from BDUs for rates. We are dealing with the largest media conglomerates in the world.
3686 If they don't like the price we offer ‑‑ if we were a monopoly, they would have to give in to that price. The fact is we have seen it happen to us where one major studio bypassed our window completely to teach us a lesson. And we didn't have that product for four years, until we made a sub‑agreement with the conventional broadcaster that bought it.
3687 So it is a very fragile industry. We have made it work. We have contributed over half a billion dollars since inception. Forty (40) million dollars last year. Obviously under the present scenario that will grow.
3688 We think we are adding something to our distinct Canadian broadcast system that is offering the best pay TV service in the world, bar none, including the United States.
3689 And so it is kind of difficult to sit here and listen to all, in my opinion, with all due respect, naive comments about what they will add.
3690 The fact is I don't know what they are adding. They haven't shown it. But the fact is they all want access to the American movies, which is a driver.
3691 So what is the consumer left with? In order to get the same product he is getting now, to pay more. Frankly, I don't see how you expand the market by doing that.
3692 In fact, when pay TV was first introduced in Canada, everyone thought we would have a terrific head start because our penetration of cable was so much higher than the U.S.
3693 But the fact is in the U.S. that is why pay TV grew much faster than in Canada. That didn't happen.
3694 The promises that were made by all the applicants were wild. The greediness of the American studios, and frankly some Canadian suppliers of movies, where they were getting hundreds and hundreds of thousands per movie that hadn't been seen in five years because of the competitor factor.
3695 So to me we have rationalized something that we should be proud of as Canadians, for the Canadian consumer, for the Canadian industry.
3696 And now, all of a sudden, to think in this day and age with all competing technology in a system where we don't control everything, particularly the supply from American studios, that will drive the cost of programming way over what it is today.
3697 Mind you, I don't think that is a service to either the consumer, the production community or the broadcast system.
3698 Thank you.
3699 THE CHAIRPERSON: Well, this is a good time for a break.
3700 Thank you.
3701 We will resume in 15 minutes. Nous reprendrons dans 15 minutes.
‑‑‑ Upon recessing at 1102 / Suspension à 1102
‑‑‑ Upon resuming at 1120 / Reprise à 1120
3702 THE CHAIRPERSON: I am going to continue the questioning now on the CMI report. I am at page 32, assumption 2.
3703 I noted in your opening statement ‑‑ I think it was you, Mr. Riley. I couldn't remember one of the other members of the panel who made reference to the exclusivity proposals.
3704 I wondered whether at this point you had any comment on how it would impact your services if one were to consider the proposals of the different applicants on exclusivity, in particular Spotlight on the one hand and Allarco on the other. One for partial exclusivity. The other for non exclusivity.
3705 Whether you had any comments on that, and I am only in a sense using this assumption as the basis for that question.
3706 MR. RILEY: Just for my benefit, is your question referring to the special measures that they have requested ‑‑
3707 THE CHAIRPERSON: Yes.
3708 MR. RILEY: ‑‑ or just the general impact of ‑‑
3709 THE CHAIRPERSON: The special measures that they have requested.
3710 MR. RILEY: Well, with respect to the special measures that have been proposed, I would say we have probably two conclusions.
3711 First of all, I don't think we fully understand, nor do I think the applicants actually have fully understood or have fully completed or have been fully able to fully express what those measures are.
3712 So we are in a bit of a liability, as we said in our oral presentation. I would suggest that maybe the best phrases out there are half baked. So we will start with that for the moment.
3713 As I said, in one of the situations it seems to be that we would designate three studios, and then with the other three, that the applicants would then have an opportunity to bid.
3714 So if we understand it correctly, we would have a bit of a beauty contest and then turn to one of the major media companies in the world and say "You get to go. Avail yourself to another bid." And to the other one you say, "You go back to your room and wait there." So I think that is completely implausible.
3715 In the other case, again, as I said, we are going on the information that we can understand, there seems to be the suggestion that it would be based on the titles and somehow one would share the top of the top so to speak.
3716 And while it is true, given that pay comes about a year after the theatrical window, yes, at the time you are scheduling the movie you have pretty good idea where the box office is going to end up.
3717 But the reality is you sign a deal with a studio for a number of years. So at the time you sign, let us say you sign a deal with studio X, then how do you later, two‑three years into it, say "Well, that, you are getting more than your full share of the top titles. So we should get it now."
3718 We have a studio. We have that deal. So do you tell the studio "Well, we can't take any more of your product because we have hit our quota. So it goes over to the other service."
3719 This is just ‑‑ it is absurd is what it is. It is completely unmanageable.
3720 The other aspect of it is let say Star Wars VII is released on December 31st, 2005. That is a 2005 movie. Now Star Wars VII would probably be a big hit on that day, but it would be a 2004 movie. Is it a blockbuster in that year? Because 99 per cent of its revenue is going to come in 2006. It is a 2005 movie.
3721 So the only way you could possibly do that is you have everybody ‑‑ we both have arrangements with all the studios. We would sit down with the biggest media companies in the world and say, "We are kind of a film marketing board here, a distribution board. Sign deals with all of us, and at the point where we get over our quota you will go over to the other guy." That is fantasy.
3722 I would say this about the agreements. And Vice Chair French, I know, would say, "Gee, we would love to solve some kind of regulatory problem." The fact of the matter is that all deals tend to be on a cyclical basis. And the deals are in some cases for a few years, and with others for a few more years.
3723 I would suggest that in effect what the applicants are requesting is in some way to protect the studios from somehow missing their own economic best interest, as if the studios for some reason might say "Just signed a ten‑year deal with Astral and now there is a competitor."
3724 Our experience is the studios are very good at maximizing their economic interest. They are all knowledgeable about the proceedings that are going on. There is a representative ‑‑ at least one representative of these studios in this room as we speak.
3725 So the notion, I think, that in some way we have to ensure that a studio doesn't by accident not maximize its economic interest by doing some arrangement with us again is absurd.
3726 And as I said, first of all, these are our comments based on what we know about what will seem to be made up on the spot. And secondly, I don't think that, even if the Commission were to do something that we don't think is a net positive gain, is that ‑‑ don't worry. The studios can take care of themselves.
3727 THE CHAIRPERSON: Okay. I will let the applicant concerned address that if they wish to. I am not sure that the concern about protecting the studios was paramount in their thinking.
3728 MR. RILEY: But that is in effect what ‑‑ as I said, if a party were sitting down having a discussion at this particular time or any other time with a studio, it is not as if it is happening in a vacuum. It is not as if the studio will be knowledgable about what's going on, and will not decide, "Well, gee, what is the best thing for me to do?"
3729 So in effect, what I am saying is, obviously the applicants are saying we need this to protect ourselves. But it doesn't realistically characterize the behaviour that happens in the market in this context.
3730 THE CHAIRPERSON: I hear you on that. And on non exclusivity, what is you view on that? On simply having a rule, as the Commission has had in other areas, of no program exclusivity?
3731 MR. RILEY: Here we had a discussion a little earlier about demand. For the life of me, I cannot understand what the benefit or how we would produce benefit for having two services that are virtually identical.
3732 How would the subscriber choose? Just based on I like their logo better than the other guys' logo, but essentially ‑‑ remember, in that proposal, although it was positive that it would only just be a few sprinkling of titles to get people inside the store, the reality is it could be all of them, the way it is proposed.
3733 You know, we had that experiment back in 1982, and it didn't work because there wasn't enough differentiation. To suggest that now the circumstances are going to be different doesn't make any sense at all.
3734 THE CHAIRPERSON: Thank you. I have your views on that.
3735 I would like to turn to the third key assumption. This is the table that CMI has prepared with regard to the dual subscriber level correlating with the average rate per subscriber.
3736 It is intriguing, but I am wondering on what you base those exact number, Mr. Goldstein.
3737 MR. GOLDSTEIN: We know, and I think there is general agreement, that the more dual subscribers you have, the more you are going to push down the rates.
3738 I mean, I think everybody agrees on that. I think we are arguing about the level of the rates, but not whether dual subscribers push down the rates.
3739 And I wanted to come up with a sliding scale. Obviously, if I would have said, "Well, if there are any dual subscribers at all, then we will put down the rates 25 per cent.", just picking some number.
3740 That doesn't make a lot of sense because if there is a small number of dual subscribers it is going to push the rates down less, and if there is a larger number of dual subscribers it is going to push the rates down more.
3741 And I came up with this sliding scale because I thought it was a reasonable representation of what would happen.~~
3742 Remember, on day one, and again going back to the previous assumption, we were assuming there is some product on these competing services. If there is no product on these competing services, they don't make any money. Nothing happens.
3743 So assuming there is some product on these competing services and assuming that some of that product has come from the incumbents, the incumbents no longer have the same offering that they had before, and therefore overall they can charge less.
3744 And for dual subscribers they can charge even less because somebody who is saying, "Well, I want everything I had before. It is now split." And let us remember it is the high‑profile titles that drive the service.
3745 You might fill in around the edges with some different stuff. We will find out when we see the programming grids. But it is the high‑profile titles that drive the services.
3746 So now I am looking at ‑‑ saying, "Well, I do really want all of those services. I want all of those titles. And so now I have to buy two."
3747 Well, if one used to cost me X, am I prepared to pay 2 times X? No, I am not prepared to pay 2 times X. I might be prepared to pay 1.4 times X or 1.2 times X, whatever it is.
3748 And that reflects itself back into this assumption. And of course, this is ‑‑ you know, there is economic theory here. There is looking at economic models. There is a lot of work with spreadsheets and calculators.
3749 But ultimately the simplest economic principle expressed in all of these assumptions is a couple sitting at the kitchen table looking at the cable bill. What are we getting for what we are paying?
3750 THE CHAIRPERSON: I take that point. I was wondering in all those spreadsheets and data how much empirical basis there was for these ranges and those outcomes. Or were they basically, you know, kind of a good feel, best guess ‑‑
3751 MR. GOLDSTEIN: Well, I looked at the American model, and you have to remember at least two of the applicants are saying they want to import the American model here. So I looked at the American model, and I was going to say this later, but I will say it now.
3752 When you are finished doing ‑‑
3753 THE CHAIRPERSON: I don't know if they would agree with that characterization that they are going to import the American model. But I mean, they are gearing the opportunity to the penetration in the American market, never mind it doesn't have much Canadian content.
3754 MR. GOLDSTEIN: That is absolutely correct.
3755 But to the extent they say you can change penetration according to what they say is a gap. And if you leave out the factors that are going on there and just pick one factor rather than others, then their whole case falls apart.
3756 So I am saying that if you do what they say they will do, you will get the American model. In essence, this whole thing is a ‑‑
3757 THE CHAIRPERSON: When you say that, you mean you will get the second service being priced at percentage below the first one?
3758 MR. GOLDSTEIN: That is correct.
3759 THE CHAIRPERSON: And a lower blended rate?
3760 MR. GOLDSTEIN: And lower rates overall.
3761 THE CHAIRPERSON: Right.
3762 MR. GOLDSTEIN: I mean, you know, Marketing 101, it is either the first lesson or the second lesson: it is not about promotion, it is about price.
3763 Anyway, the point is that after doing all of these tests, and we tested in a number of different ways, there is a moment of truth. There is the reality check.
3764 Does the result look like the American prices or not? And the result does.
3765 THE CHAIRPERSON: Right. I guess what my question is that you are using this, and this is a particularly important element in your calculations, to subsequently try to demonstrate that there will be a net shrinking of the pie at the end it for no matter what application your approving.
3766 I guess I am trying to probe the basis for the ranges, which are not even, and the actual numbers you are using. And I am wondering the extent to which there is any empirical basis for ‑‑ I appreciate in modelling you have to make assumptions and draw ranges, and I am just wondering ‑‑ I am trying to test what empirical basis there is for these particular ranges and those particular ‑‑
3767 MR. GOLDSTEIN: If I could ask you, what do you mean when you say they are not even?
3768 THE CHAIRPERSON: Well, I mean zero to ten, there is a ten per cent range that results in an 85 per cent, and then a further ten per cent down five per cent, then a 15 per cent range, and then a 30 plus per cent range. So ...
3769 Not that if you had said 20 to 30 in your third line, which would have made them the same size. I would have made much difference to the question.
3770 The question still is, what is the basis for the range?
3771 MR. GOLDSTEIN: Okay. Well, first of all, the not evenness is, the empirical basis is examining the consequences of the competitive within this segment in the United States. That is the empirical basis.
3772 But the reason they are not even ‑‑
3773 THE CHAIRPERSON: But elaborate on that. How would you link them?
3774 You provided earlier on the numbers that ‑‑ for example, on Figure 1 of your report where you show graphically based Kagan research the cascading effect of second and third service discounts.
3775 How would I try to corelate that with the precise ranges that you have here?
3776 MR. GOLDSTEIN: Well, I actually was a little more conservative than that. I mean, we ‑‑ if you accept my notion, and I think it is intuitively logical, that you can't charge as much as you did before if you have less product, that is fairly fundamental to this, then there has to be some reduction to the incumbent with a competitor on the scene.
3777 And then once you have accepted that notion, then you say, "Well, how much should the reduction be?"
3778 And I looked at the United States experience, the whole United States experience, and I came up with these percentages. They are estimates. There is no question about. But that is how I came to those estimates.
3779 THE CHAIRPERSON: Okay. Well, that, I expect, is the answer.
3780 I guess the only other question I wanted to ask you about your report ‑‑ and we had one of the applicants yesterday, I guess, in response to ‑‑ I think it was Spotlight in response to the question when I pointed them to, I think, it is table 13 in your analysis, in respect of their numbers, the numbers that you project for them and the net gain in the system, and their answer was to the effect, "Well, if that was the best you could come up with trying to show the net loss" then, you know, it is almost break even and really isn't that good news from their point of view.
3781 Where you here when he gave that answer?
3782 MR. GOLDSTEIN: Oh, yes. I heard that.
3783 THE CHAIRPERSON: What is your comment on that?
3784 MR. GOLDSTEIN: Well ‑‑
3785 MR. RILEY: Maybe I could comment on that for second, and Ken, if you have anything ‑‑
3786 MR. GOLDSTEIN: Sure.
3787 MR. RILEY: Yes, I guess, if you look at the economic model that one would say, "Well, gee, if we are wrong in the economic model, in pure dollar terms, it means seven million dollars. So, you know what? That is not much of a risk. So let's take a shot."
3788 I don't think it is reasonable to think that the harm that would be done to the system can be measured solely in, you know, we are off by a few dollars, whether it is seven million, eight million or two million.
3789 As I have said before, even if one wishes to argue that the world is different or the circumstances are different, we have seen failure before in this system.
3790 Set aside for a moment whether or not it is us. That failure was more ‑‑ first of all, in pure terms, the failure was a lot more than that.
3791 But the failure goes well beyond the actual dollars, whether we are a few off. Remember, this failure will take place at a time ‑‑ the Canadian broadcasting system, as the Commission would well know, is facing all sorts of challenges as a result of technology. Whether it is the internet or other factors, we are all grappling with how do we maintain what we have built under these kinds of pressures.
3792 So imagine if this failure takes place at a time where that is even more magnified. There won't be the opportunity to go back and put Humpty Dumpty together again.
3793 So, yes. On a piece of paper the mathematical, arithmetical calculation is seven million dollars. But that truly won't represent the total damage that it has done to the system.
3794 THE CHAIRPERSON: Hold on. There is ‑‑
3795 Un autre commentaire.
3796 MS SAINT‑LAURENT: And I would just like to add that in the Quebec market it is going to be even worse.
3797 Alors, entre autres, je pense que dans la présentation hier des gens de BOOM TV, il y a eu, évidemment, beaucoup de confusion par rapport aux chiffres qui ont été déposés hier, par rapport à ceux que nous avions précédemment.Dans l'étude de C.M.I. il y avait plus de 130 millions de revenus de moins qu'il y aurait pour Super Écran si BOOM avait cette licence‑là.
3798 Évidemment, c'est difficile de réconcilier les chiffres que nous avons eus hier avec ceux qui avaient été déposés au cours de l'été.
Cependant, j'aimerais souligner le fait qu'ils ont eux‑mêmes dit qu'il serait difficile d'avoir une licence juste en français. Si c'était le cas, ils souhaiteraient avoir un partenaire pour exploiter cette licence‑là.
3799 Alors, déjà cet élément‑là, à mon avis, j'aimerais souligner que sûrement est un élément de la difficulté du marché, de la petite taille du marché.
3800 THE CHAIRPERSON: Well, those are my questions.
3801 Ce sont mes questions.
3802 Mr. Goldstein, do you want to add something?
3803 MR. GOLDSTEIN: I still would like to answer about Table 13 very briefly.
3804 THE CHAIRPERSON: Okay, go ahead.
3805 MR. GOLDSTEIN: A couple of points.
3806 As I've said, there are, you know, a number of simply incorrect numbers in the Spotlight Response to interventions. I'm talking about factually incorrect.
3807 THE CHAIRPERSON: Do you want to draw my attention to those?
3808 MR. GOLDSTEIN: Yes. First of all, we heard repeatedly yesterday that there were no per capita differences between Canada and the United States in this area, except in the pay tv field. I believe that was the discussion.
3809 I would like to draw your attention to page 3 of Annex 3 to the Spotlight Response to interventions.
3810 THE CHAIRPERSON: Sorry; this is the Spotlight Reply?
3811 MR. GOLDSTEIN: Spotlight Reply where they are dealing with the C.M.I. Report.
3812 THE CHAIRPERSON: Oh! yes.
3813 MR. GOLDSTEIN: You had referred to it.
3814 THE CHAIRPERSON: Page 3, yes, okay.
3815 MR. GOLDSTEIN: Yes. Paragraph 10 and the little table there?
3816 THE CHAIRPERSON: Yes.
3817 MR. GOLDSTEIN: We repeatedly heard that there were no per capita differences.
3818 THE CHAIRPERSON: Right.
3819 MR. GOLDSTEIN: I believe they've said that fairly straightforwardly.
3820 I would like to draw your attention to the line "Cinema Admissions".
3821 THE CHAIRPERSON: Right.
3822 MR. GOLDSTEIN: A 104.4 million in Canada, 1.435 billion in the United States.
3823 I divided those numbers by the populations of the two countries. I divided 104.4 million by 31,974,363, the number of Canadians in 2004, and I got a per capita figure of 3.265. And then, I divided the American number by 293,655,404, the population of the United States in 2004, and I got a figure of 4.887.
3824 So, the fact is the contention of Spotlight that there is no per capita difference is simply completely wrong. The Americans are 50 per cent more likely to go to a movie theatre than Canadians.
3825 And there are some other minor mistakes, but we could file something in writing if you wanted.
3826 But I want to get back to Table 13 and say this. That the Spotlight contention that this somehow establishes a range, that somehow the range is between the C.M.I. projection of a seven million cumulative loss for Canadian content and their projection of so much gain, I reject the notion that there is a range here.
3827 You can't say there is a range when one end of the range actually replicates the model on which they say they have based their whole application, in other words, U.S. style rates and U.S. style structure.
3828 And the other is a model in which as the Chair I believe, you, yourself pointed out, basically says we can charge as much for half the product.
3829 So I don't accept their argument that this defines a range.
3830 THE CHAIRPERSON: But I wasn't taking it as a range. I was taking their point to say that, here you have recast their numbers based on your assumptions and have come up with a number that they said, if that's the worse that he can come up with, it's not about a range, then surely it may be worth the risk of the upside, thanks to the benefits of complication that their application would bring.
3831 That's how I was understanding and I wasn't suggesting ‑‑ I didn't take them as saying their number is the top of the range and yours is the bottom.
3832 MR. GOLDSTEIN: O.k.
3833 THE CHAIRPERSON: I want to say you've provided some very useful material here in this proceeding and I wanted to thank you, Mr. Greenberg and the team for the help you've provided us in trying to understand the business you're in and the issues at stake in this proceeding. So, thank you for that.
3834 Commissioner French.
3835 COMMISSIONER FRENCH: I just have a few small questions. First, I would like to make sure I understood Mr. Riley's comments on exclusivity and I'll attempt to summarize them.
3836 Your view is that there would be no need in the hypothesis that the Commission opted to license one of the competitive trio of QMI, Allarco or Spotlight, there would be no need for a Commission intervention into the relationship between production houses and Canadian pay television licensees because, in practice, the studios know how to look after themselves and it would become a question of the financial returns which would be occasioned by whatever structure the studios that would maximize their interests versus what was available from the different licensees.
3837 MR. RILEY: That is correct. The one thing I did neglect to say at the time too though was that that intervention or those mechanisms could pose complications too with respect to legality as well.
3838 COMMISSIONER FRENCH: Yes and the Commission is very much aware of that, Mr. Riley.
3839 MR. RILEY: Yes.
3840 COMMISSIONER FRENCH: I'm just concerned about your view of what would happen in the event we made this licensing decision.
3841 So, your view would be: were we to embrace their arguments with respect to the value to be brought to the Canadian Broadcasting System of the kind of additional supplier of pay television in Canada, were we to buy those arguments, we would not need to intervene because the studios would know very well which side their bread was buttered on and would know how to astutely exploit the resulting situation, which would be, I guess, unlikely to issue into an exclusive supply to either the incumbents of the best of U.S. product.
3842 MR. RILEY: I think that fairly represents. I think there is a fear on the applicants that somehow that would happen. Our own experience suggests that that wouldn't.
3843 COMMISSIONER FRENCH: Thank you.
3844 Mr. Goldstein, you were either listening of I don't think you were present, but when Spotlight appeared, Mr. Garry Smith, president of Bell ExpressVu appeared, and he shared with us his experience of the BSKYB market in the U.K.
3845 I had a little exchange with him in which I explored the question of whether this was a comparable market and if it was a comparable market, what did the experience suggest.
3846 And he said in a very definitive way that if we took a cohort of new ads with a sufficiently large sample size to be representative, in any year from one to seven, that the proportion of those new BSKYB satellite television customers in the United Kingdom who opted to take the premium drama service or the premium movie service, was roughly the same over the seven years.
3847 I don't want to put words in his mouth because I think he would ‑‑ might have admitted that at a certain point it might have been a slight decline, but fundamentally, there was very little tapering off and a position to which I think you are diametrically opposed, and I am just trying to wonder what do you do when the doctors disagree here?
3848 MR. RILEY: Well, Vice‑chair French, I happen to have that quote, I've written it down. I might be wrong, but it said :
"BSKYB take up of premium services including the payment of the team packs that were sold by BSKYB at the time, was consistent across the seven‑year life of the digital platform in the U.K. and it didn't show any adverse effects at the early adapter philosophy that you are perhaps alluding to there.
3849 However, in response to questioning from you, he acknowledged that that included the sports pack and I also point out that he did make an error with respect to our penetration in the existing business. So, hopefully there isn't a similar error here.
3850 I think our response to this would be the context of this is not known. There is no empirical evidence so to speak, of when this took place, what the period was, what the conditions of the market are, how many services are there in the United Kingdom compared to here, is the cable penetration the same.
3851 I would suggest that that is an observation taken in isolation on its own, may indeed represent the experience that they had, but it's not relevant to the circumstances here.
3852 I would also point out that Bell ExpressVu itself, from our understanding, its growth curve has started to flatten out in terms of its basic base. It launched, it got all the early adapter signed on and its growth rates are nowhere near what they were from when they launched in 1997 to where they are now.
3853 So I think the experience of the company for which he is now the president demonstrates that the early adapter effect does indeed exist.
3854 MR. GOLDSTEIN: I can add a couple of items on that, I think, that might be helpful.
3855 In this case, if you want to decide between which doctor is correct, you go to offcom. www.offcom.org.uk, which is, of course, your equivalent regulatory agency in the United Kingdom and there you find some very substantial differences between Canada and the United Kingdom in this regard.
3856 First of all, BSKYB had the lead on cable and BSKYB I think reaches about 30 per cent of the homes in the United Kingdom where cable is much much much smaller there, much much smaller than it is here.
3857 So, they, in effect, have gathered the early adapters all in one place. I think that's the first point.
3858 The second point is if you look at the latest Offcom Report on television, you will find that at the viewing level, the viewing of BSKYB movies, they have a specific movie offering has fallen by about half over the last four years and I think the final point and perhaps most relevant in all of this is you only talk of what will drive digital and how will digital be driven by something else and what effect does price have.
3859 The same Offcom Report will tell you that the fastest growing digital program platform in the United Kingdom, the fastest growing platform, is not BSKYB, it's something called "Freeview" and I think you can guess what the price of Freeview is.
3860 COMMISSIONER FRENCH: The Freeview is a packet stream, no? I mean it's not a ‑‑ it's an internet based.
3861 MR. GOLDSTEIN: No, no. Freeview is terrestrial digital.
3862 COMMISSIONER FRENCH: Terrestrial digital.
3863 MR. GOLDSTEIN: Yes, a terrestrial digital package and it's free and the terrestrial broadcasters are involved in it and it is growing much faster than BSKYB and will exceed BSKYB over the next few years.
3864 COMMISSIONER FRENCH: I'm tempted to ask a lot of questions about Freeview, but the Chairman will be unhappy with me.
‑‑‑ Laughter / Rires
3865 COMMISSIONER FRENCH: And Mr. Riley will be unhappy too because it will be irrelevant, so we'll leave that aside.
3866 MR. RILEY: I would just like to say that if there is such a thing as unlimited flat line growth, we would be happy to accept that from Bell ExpressVu.
3867 COMMISSIONER FRENCH: Well, there's some good news, Mr. Greenberg, because not everyone is quite as conservative as Mr. Goldstein and some other players believe that were we not to embrace their proposals with respect to licensing of an additional player in the pay market, your future would be very rosy.
3868 Not all of the people who believe that are necessarily self‑interested in that projection. That is to say they are not necessarily linked to one of the three players and I don't suppose you're going to include Mr. Goldstein's Report in the appendix to your Annual Report of 2005 either.
3869 So, my question therefore becomes: if the Commission were not to license one of the competitors, what would be your view of an appropriate posture on the part of the Commission with respect to your contribution to Canadian production?
3870 Wouldn't it be appropriate for the Commission then to ask itself whether there might not be another examination of your current obligations in that regard?
3871 MR. GREENBERG: Vice‑Chairman French, as you know, our licence renewal comes up for 2008 and it goes way before that probably in 2007 and to me, that would be appropriate time to have that very discussion.
3872 COMMISSIONER FRENCH: Thank you.
3873 THE CHAIRPERSON: Thank you. Commissioner Delval.
3874 COMMISSIONER DELVAL: Thank you. Mr. Riley, in your presentation today, I think it was on page 2, the last paragraph, you said that:
"In pay tv the Canadian system provides better programming and more value to consumers than the U.S. system you've heard so much about in the last couple of days."
3875 I'm wondering why you say that and instead of what ‑‑ yet the basis for that statement, please?
3876 MR. RILEY: Well, our own research and our own experience was subscribers and frankly the research of Spotlight indicates that the number 1 reason people subscribe to pay television is for recent main stream movies, which may be the wording they actually used. I'm not sure, but I think we understand first run main stream U.S. movies, it's the number one reason people subscribe to pay television.
3877 If that is the number 1 reason, then one might feel sorry for American citizens who need to subscribe to three different services and able to get the advantage that their neighbours to the north have in subscribing to one service for a lower cost.
3878 That's the source of our conclusion there.
3879 COMMISSIONER DELVAL: Thank you. I was just trying to understand better the differences between, say, the U.S. market and the Canadian market. So, I didn't know whether there were actually more research numbers to back that up.
3880 MR. RILEY: No. I think it's just the difference. I think we've said before, you know, the Canadian system is arguably the most diverse in the world. Not only do we get all the American programming coming in on American channels or through Canadian channels to the content allowable, we also have our Canadian services.
3881 In addition to that, we have them in two languages : french and english, and the Commission has embarked not long ago on an exercise that permits the licensing of countless new category 2 licences and has added a significant number of foreign language services to the list.
3882 In a sense, you don't have that same experience in the United States. I'll give you a perfect example. I happen to be a fan of the Olympics. I don't know why, I just love the Olympics. When they come on I watch them and one time I was down, and usually I'm here in Canada when I watch them.
3883 UNIDENTIFIED VOICE: How so?
3884 MR. RILEY: Well, at the time I wasn't ‑‑ I was down on business for the company so don't say that yet.
‑‑‑ Laughter / Rires
3885 MR. RILEY: So, I usually watch them here. So, I watched them on the Canadian English broadcasters, CBC or CTV to date. I also get the American feed for NBC or whoever happens to be carrying it and I also get the French language national broadcasters as well too. So, I have the Olympics almost multiplexed because I live in Canada.
3886 I happened to be down in New York on company business and I wanted to watch ‑‑ I didn't have much time because I was working so hard for the company ‑‑ but I wanted to watch the Olympics.
3887 THE CHAIRPERSON: They intend to even give you a further discount.
‑‑‑ Laughter / Rires
3888 MR. RILEY: Yes, exactly, exactly. I had my standard half hour dinner break and I wanted to watch the Olympics. I turned on and it was NBC at the time, I turned it on and, of course, all I had was that one sole option and, of course, they cover the Olympics in a way I don't like.
3889 It's more like a magazine show with the little sports thrown in. I like to see the sports the other way around and, of course, because their athletes tend to win everything, they naturally focus on the athletes. So, I wasn't actually aware of any other athletes that were, you know, it's just I learned a lot about these people. That's all I can say and their backgrounds and saw them finish the race.
3890 So, I saw the one channel, it's very frustrating. I said this is not as good as being back home and I can tell you, around the Olympics you'll always get a letter ‑‑ I see in the paper like USA Today ‑‑ where someone says, thank God, I live near the border because I picked up the CBC's feed, if it were apologies to CDV now I guess now, but ‑‑ and that's what I watch.
3891 So, we arguably we, we have that already. It's extremely diverse. We have all that programming. We arrange it a little bit differently in this window.
3892 We have chosen for historical reasons and for good reasons that recognize the relationship in our size to this country that we have a policy here that we say we don't license directly competitive services to allow those services to maximise the benefit that they contribute to the system.
3893 That is the standing policy and it's worked exceptionally well.
3894 As a result of that, our pay service in this country happens to group the one segment of programming that is the number 1 choice with consumers the main reason they do it. Virtually every studio is in that product, every first run movie.
3895 The other thing we do too is we add, of course, the Canadian components, a little bit like my example down the States. So, we also have our Canadian movies every theatrically released Canadian film is on that channel, virtually every U.S. studio film is on that channel and something we do that is not done at least on HBO, we also run independent films.
3896 HBO does not run any independent films. It runs its original programming, some first run and the rest is library studio product.
3897 So, we think our service not only compares favourably, but is actually better for what is the main desire of any consumer. And as I've said, I don't think it's a stretch to say I feel sorry for some Americans that they don't have the choice we have to get what they expressed that they want in one simple cost effective package.
3898 COMMISSIONER DELVAL: Thank you. I have another question on the comparison of the markets, but while you're on that topic of the Canadian programming, what if someone came to you and said, why not an all‑Canadian channel?
3899 And I recognize in your intervention you talked about the commoditization and there is also, I think, you actually use of the word "gettolization", but do you have anything more to add to that?
3900 MR. RILEY: Well, I would say this on the ‑‑ if an all‑Canadian channel, there is nothing wrong with that concept at all. I think it maybe cuts contrary to the way people watch product and in fact, I think when the applicant was here, they said, we want people not to say that it's a Canadian film, but that it's a movie that happens to be Canadian.
3901 Well, the reality is that's how people watch movies. They want to watch a good film. They don't really care too much where it comes from, though I never had the experience myself and I doubt other in this room have it, where they sit down at night and say, you know, honey, let's watch a Canadian film. They say, let's watch a film, and if it's Canadian that's a bonus, they would like that.
3902 So I find something a little contrary in the concept of the applicant in this particular case. I am not sure we would see it as the idea of an all‑Canadian film channel is that, is that the way you categorize the film? Not really, it's not ‑‑ what you do is you say, we want to have a film channel and we want them to be good.
3903 So, my personal belief is that that's not ‑‑ the applicant has contradicted itself by saying we just want movies to be good and where they come from we don't matter, but we feel it's important to have them all labelled as Canadian and put in one place.
3904 Listen; no one in this country, private sector, supports Canadian film more than we do and I did take some umbrage on behalf of my colleagues that and somehow, there was maybe a suggestion that we weren't passionate about it. That's what this group was bringing to the table.
3905 I'm glad that they're passionate, I think that's wonderful, I think we need more people like that, but so are we. I don't need to go through the contributions that we have made.
3906 So, I think the idea of just saying it's a Canadian channel is not the best way to promote a Canadian film and I would certainly say ‑‑ I don't know if the question is coming ‑‑ that the business model that they've proposed as a set aside from the legal issues that might abound, I can't imagine it would be an attractive proposition to the Commission whose goal is to raise Canadian content. In a way it's a very ineffective way to do it.
3907 What do we do if we do that right now? Do we turn around tomorrow and say, you know what? I've got a great idea for midget sports. I don't think, you know, enough young girls sports are being carried, let's do an application and get TSN to transfer over 22 per cent of ‑‑ 12.9 I guess I should use ‑‑ 12.9 per cent. Then, some other body could just say, well, I've got another area, you know, what? There are some music that's not being profiled, let's make an application at MuchMusic.
3908 This is what could be ‑‑ I mean, if it were possible, this is what could be opened up, it's the most incredibly inefficient way I can think of to reach the goals that the Commission has for itself.
3909 COMMISSIONER DELVAL: What about the ‑‑ I mean, it's not that there are so many new programs that you can fill the schedule with entirely new programs. It's just that, say, Canadian programming need more hours, need better exposure, in a more viewership on television.
3910 MR. RILEY: Well, maybe I'll turn to my colleagues to follow that. I'll say this as a general comment. I don't think exposure is necessarily ‑‑ is not an issue for programming whether it's Canadian films or other films on our channel.
3911 Because of the multiplex channels that we have, there are plenty of repeat opportunities. Opportunities for us to see any film and, in fact, Canadian films get a higher degree of exposure on our network than do other films.
3912 But the problem you have is you reach a point frankly where the number 1 point of dissatisfaction we have with our channel is too many repeats.
3913 Now they say they want first run films, so we've got them all the first run films, we got them all the Canadian and we have all the U.S. and the independent and the number 1 complaint is "too many repeats". So, and this actually disenfranchises viewers.
3914 So I think I understand as a simple matter the goal to say expose it more and maybe I'll get Kevin to give more detail about all the things that we do for exposure and Dominic maybe on the marketing side, but I think just a notion of repeat it more is actually ‑‑ as I've said I think it's in the research that the applicants have shown that repeats are a problem.
3915 They are a problem for anything and this is why we don't think the idea of just more channels repeating the same stuff equals diversity, but I'll stop talking and perhaps Kevin you could provide some detail to that.
3916 MR. WRIGHT: Yes, just to look at the movie network, we have five multiplexes, each of which has the record set amount of Canadian content and the average number of times that we might play each title is between 80 and 90 times over its windows.
3917 So, that's a lot of opportunities for the subscriber to find that movie and it's well‑promoted and it's well‑integrated into our programming mix with the Hollywood blockbuster.
3918 So, they're very difficult to miss, plus we have a on‑demand platform where subscribers have 30 per cent, more than 30 per cent of Canadian content that's available every single day that if they want to go and look at something it's available for them.
3919 And our Canadian content does every well. Just recently, "The Last Casino", which was nominated for six Geminis, was in the top 5 number of transactions on our on‑demand service.
3920 So, Canadians have the opportunity and they are opportunity to watch this.
3921 MR. RILEY: I just add one other little fact that is very common practice in programming to hammock or bridge programs. You will see when there is a big hit series, if someone wants the next series, the new series to be successful, they'll put that thereafter.
3922 So, remember Canadian films are in effect independent films. It's not like there is a problem about Canadian films. Independent films from other countries have the same problem, they just don't have the same notoriety, they don't have the same marketing budgets behind them. So, it's a common problem for independent or smaller films. The best think we can do with it, if we're showing a blockbuster, is to put that film behind it. To take the film and just sort of put it all in one spot is not necessarily the best thing for it actually.
3923 COMMISSIONER DELVAL: Thank you. And I think it's madam Saint‑Laurent. On page 9 of the presentation this morning, you referred to the European experience.
3924 So, aside from the size of the countries, I was wondering whether you can tell me what other similarities there are between the European market and the Canadian market that makes us think that competition in Canada will play out more like it's played out in the European market than, say, in the U.S.
3925 Mme SAINT‑LAURENT : Bien sûr, l'importance, la grandeur du pays, de la population est un impact majeur. Évidemment aussi, l'introduction de la câblodistribution ou de la... des services par satellite est aussi un autre facteur très important.
3926 Michel, peut‑être que tu pourrais rajouter des informations?
3927 M. HOULE: Oui. Évidemment, et toujours on a fait une longue discussion ce matin sur les mérites comparés... des comparaisons entre le marché américain et le marché canadien, une histoire différente, et tout ça et chaque marché spécifique a aussi ses particularités.
3928 Donc, c'est sur ça qu'on a pris une donnée qui présente l'ensemble des résultats, l'ensemble des pays de l'Union européenne des 15 et donc, d'avoir une moyenne.
3929 Chaque fois qu'on arrive pour prendre un exemple dans un pays spécifique, vous avez discuté plus tôt aussi le code BSKYB ou on aurait pu discuter de l'Italie ou de la Grèce ou de la Belgique, il y a des particularités.
3930 En France, par exemple, on a parlé hier beaucoup de Canal Plus. Mais Canal Plus est un exemple assez unique puisque Canal Plus, au moment où il s'est implanté, il s'est implanté dans un pays où il n'y avait pas de câblodistribution, où les gens n'avaient accès qu'à la télévision en clair, comme on dit en France, la télévision traditionnelle.
3931 En plus, ces diffuseurs traditionnels avaient des obligations de ne pas diffuser de cinéma au moins deux jours par semaine, et caetera, pour protéger le marché. Donc, il a connu un succès effectivement phénoménal. En plus, il avait comme particularité technique, c'était d'avoir une partie de sa programmation cryptée ou accessible seulement aux abonnés et une partie diffusée en clair.
3932 Donc, quand on regarde les résultats notamment en terme d'auditoire, Canal Plus a une part de marché de 3.7 pour cent, mais elle reflète le fait qu'il y a une partie de sa programmation qui est accessible à tous les citoyens.
3933 Je dois dire que c'est le seul exemple que j'ai trouvé dans les 29 pays où j'ai analysé la situation où la part de marché, par exemple, était supérieure à celle de Super Écran.
3934 On a beaucoup parlé de pénétration, c'est une chose la pénétration, mais encore faut‑il que les gens qui ont accès à ce service le regardent.
3935 Donc, la part de marché au cours des deux dernières semaines et régulièrement de Super Écran était de 3.5 pour cent. C'est généralement le service qui après les trois conventionnels est celui qui se classe en premier, donc avant Télé‑Québec, par exemple, qui est pourtant accessible à 98 pour cent de la population.
3936 Donc, les particularités de chaque marché font en sorte qu'il est difficile de prendre des exemples. J'ai essayé aussi de trouver un pays où la population était le plus proche possible de la population de langue française. Celui qui apparaissait dans l'exemple européen était la Grèce.
3937 En Grèce, il y a eu autorisation de concurrence de service de télévision payante et aujourd'hui la marge bénéficiaire des deux est de moins 50 pour cent parce que c'est un pays qui est très petit.
3938 Ceci dit, le parallèle n'est pas tout à fait exact puisque chaque groupe a un bouquet de services dans lequel il y a un service de télévision payante et d'autres services qui ne sont pas films, qui sont sports ou information.
3939 Donc, c'est effectivement difficile, madame la conseillère, de comparer avec des marchés spécifiques sans faire à chaque fois l'historique propre, l'analyse du contexte concurrentiel dans lequel la télévision en général évolue.
3940 Mais si on regarde pour l'ensemble des pays européens, c'est très clair que l'introduction de la concurrence a amené des problèmes très sérieux. Même pour Canal Plus, Boom TV a fait beaucoup de références aux contribution de Canal Plus au cinéma français qui, effectivement, à l'origine ont été très importants.
3941 Mais depuis qu'est apparu après dans l'univers les bouquets numériques, la compétition globale dans le système s'est accrue. La situation financière de Canal Plus s'est détériorée.
3942 Ils ont réduit considérablement leurs dépenses et donc, aujourd'hui, leur nombre d'abonnés est en décroissance constante et leur contribution dans le cinéma français est en décroissance constante. Elle est passée de 17.6 pour cent des devis à 13.6 pour cent des devis de 1995 à 2004, ce qui est une baisse de 35 pour cent.
3943 Donc, dans tous les pays où on a pu analyser l'effet du développement global de la concurrence dans l'ensemble du marché de la télédiffusion, c'est‑à‑dire ajouter de nouveaux services, de nouvelles fenêtres, là aussi le DVD, et caetera est apparu, a eu des effets négatifs.
3944 Et lorsqu'on introduit, en plus la concurrence directe entre deux services, là, ça a généralement eu des effets et à long terme. Quand je dis les données que nous avons invoquées, c'est quand même sur sept ans, sur une période complète de licence, on passe de 300 millions d'EURO de profits d'opérations à moins 85 millions, c'est une grande différence.
3945 COMMISSIONER DELVAL: Merci. And then, just to follow up, would you say then the U.S. market and how it is profitable for the competing services, in your study of when you were looking at all the data from across the world, is that an exception or how does that compare?
3946 M. HOULE: C'est effectivement une exception. Il faut rappeler que le marché américain est un marché de 296 millions d'habitants. Aucun pays européen industrialisé a cette taille‑là. Ils ont des tailles 60, 70, 80, 90 millions, d'autres plus petits. Donc, c'est une particularité.
3947 J'écoutais Spotlight l'autre jour lorsqu'on les a interrogés, à savoir s'ils accepteraient plus d'un compétiteur, à commencer par dire le marché américain ne peut pas supporter plus de trois services de télévision premium.
3948 Donc, un marché de 300 millions ne peut pas supporter plus de trois services premium, on nous dit ça comme base de départ et, ensuite, on nous dit qu'un marché de 30 millions peut en supporter deux et que, éventuellement, un marché de sept millions peut en supporter deux. J'ai beaucoup de difficulté à réconcilier ça.
3949 Tous les pays qui approchaient les 7, 10, 12 millions ou n'ont pas de service de télévision payante du tout ou n'en ont pas de compétitif ou lorsqu'ils en ont des compétitifs, comme la Grèce, c'est catastrophique et probablement va conduire à la même situation qu'en Italie où ils vont devoir se * merger +, si vous me permettez l'expression anglaise, ou faire faillite.
3950 COMMISSIONER DELVAL: Merci.
3951 My next question is what I've asked the other applicants.
3952 Every time I ask it I fell like I'm trying their patience, but I'm paid to be fixed skin so I have to ask this. So, I'm wondering whether you have run any numbers on if you were required to make that 12.9 per cent contribution, what would that do to your bottom line in terms of subscriber fees. Would it increase?
3953 MR. RILEY: You're not trying my patience with the applicants of course, because that's a different group.
3954 But just so I understand, when you say "subscriber fees", are you saying, but we would charge to the ‑‑ what the subscriber gets charged, would it get ‑‑
3955 COMMISSIONER DELVAL: Passed on. Basically, would the cost be passed on?
3956 MR. RILEY: Well, put it this way. That, obviously, would be ‑‑ as I've said, it's an incredibly inefficient way to create Canadian content. That said, that would be an extra expense, like any extra expense, we would have to figure out how to absorb that expense.
3957 We don't have the ability to just go phone up our affiliates and say, guess what, we have an extra 12.9 expense, we need to just pass that on to you and then you just pass it on to those guys.
3958 So, I think the reality would ‑‑ we would have to figure out a way it may come out of other expenses, may come out of promotion expenses. It may come out of other things that we do. Obviously, with any expenses, any business looks for a way to continue to operate and continue to make a reasonable profit.
3959 So, would we be able to pass it on? No, we don't have the right just to dictate and say on it goes. We would like to, like any business, determine a way to manage that extra expense.
3960 COMMISSIONER DELVAL: Thank you.
3961 MR. RILEY: You're welcome.
3962 COMMISSIONER DELVAL: Mr. Zolf, I was wondering whether you had a chance to hear Mr. Grant and Mr. Lewis' response when I asked for their view on that ‑‑ just imposing the condition of licence of requiring the licensees to contribute and that would be subject to legal challenge. I was wondering whether you had anything to add.
3963 MR. ZOLF : Thank you. Yes, Commissioner Delval.
3964 I heard the discussion over the last two days and our view, I think, is similar to what we heard earlier and that is that under the Commission's general jurisdiction under 91C of the Act, of the Broadcasting Act, the Commission obviously has broad jurisdiction to amend a condition of licence, but it clearly needs to be tempered, in our view, by reference to a public purpose that's somewhere in the Act.
3965 I mean, 91C states clearly that the authority under that section is both subject to this part of the Act as well as in furtherance of the Commission's objects.
3966 So, in terms of public policy objectives, it's not clear that you have, you, the Commission, would have the actual legal authority to allow what would be an effective subsidization of a private enterprise, distinct and that, I would agree with I think the comments of Mr. Grant, I think it was, who said that this is distinctive from the rationale that the Commission used I think in 1992 to establish the contributions to what is now called the "C.T.F.".
3967 So, we think ‑‑ and in addition, that the Courts would be unlikely to grant deference to a condition of licence that would be imposed all things held equal, on an existing licensee, which would effectively support another private sector entity.
3968 So, I think to that extent our comments are congruent with the previous comments.
3969 COMMISSIONER DELVAL: Thank you. Then, just some of the questions raised by the interveners.
3970 The writers GUILD had suggested that instead of a set amount being devoted to script and concept development, that a percentage be so devoted and the percentage that they had suggested is three and I was wondering whether you had any comment on that, please.
3971 MR. RILEY: Well, with respect to the applicants, I think they've answered that in respect to their own services.
3972 We're proud to say that under the terms of our licence, we also support a script and concept development and as Mr. Greenberg alluded when these are all the basket of goods, we would be talking about in a licence renewal.
3973 COMMISSIONER DELVAL: Currently, do you set a limit of a set amount?
3974 MR. RILEY: Currently, our licence conditions provide for a set amount. I think it's ‑‑
Well, could you just answer that?
3975 MR. WRIGHT: Yes. For the example, it's a set amount of 1.3 million each year, our total term is 9.1 million dollars plus Super Ecran's obligation.
3976 Mme SAINT‑LAURENT: And for Super Ecran, this fiscal year it's 550,000.00 $ et à chaque année il y a une augmentation.
3977 COMMISSIONER DELVAL: Thank you. What would you say if that set amount were changed to a percentage?
3978 MR. RILEY: I would say we would be happy to answer that at our licence renewal.
3979 COMMISSIONER DELVAL: O.k. I'll remember to ask it again then.
‑‑‑ Laughter / Rires
3980 MR. RILEY: Well, that will give us plenty of time to work on it, so ‑‑
3981 COMMISSIONER DELVAL: Thank you. O.k. And I believe it's C.F.P.T.A. who suggested that ‑‑ and this is on equity investments, that recoupment of the producers' equity position talks credits and producer deferrals should be allowed to, say, take precedent over the broadcasters' recoupment of equity investment.
3982 Could you please comment?
3983 MR. RILEY: Yes, I think in those circumstances ‑‑ I mean, any time we have done that, there have always been discussions with all the parties involved in financing as to where people are in recoupment and obviously it depends on the amount of money being invested, is not the similar in any case when your bank has a mortgage, it gets in first place and then, somebody ‑‑ a guy gets in second place.
3984 So, we found that all of these are just subject to the negotiation of the particular circumstances that we're involved in and it seems to have worked well for everybody.
3985 COMMISSIONER DELVAL: Thank you. Those are my questions, Mr. Chairman.
3986 THE CHAIRPERSON: Thank you. Counsel?
3987 MR. KEOGH: Yes, Mr. Riley, I just want to confirm when you will be able to provide us with some information.
3988 I think in an exchange with the Chairman, with respect to the high‑lighted sentence on page 6 of your presentation, the reference to the 52 per cent digital penetration Canada‑U.S., you had undertaken to provide the sort of support for how that comparison was drawn.
3989 Would you be able to provide it?
3990 MR. ZOLF: Counsel, I think we would suggest end of day Friday if that's acceptable, at the earliest?
3991 MR. KEOGH: O.k. At the earliest. So, I'll take it that's as soon as you think you could have it. I was going to ask for tomorrow morning, that would be off.
3992 MR. ZOLF: That would be off, yes.
3993 MR. RILEY: What would we get in exchange? I'm just kidding.
‑‑‑ Laughter / Rires
3994 MR. KEOGH: Would you know what? Appreciation, that would be about it.
3995 MR. RILEY: That counts for a lot, I think. We would be happy to file our program schedule though with you. We could do that. We could do that.
‑‑‑ Laughter / Rires
3996 MR. KEOGH: O.k. Friday will be fine. Thank you.
3997 THE CHAIRPERSON: Thank you very much. We'll break for lunch now and resume at 1345.
3998 Nous reprendrons à 1 h 45.
‑‑‑ Upon recessing at 1223 / Suspension à 1223
‑‑‑ Upon resuming at 1347 / Reprise à 1347
3999 THE CHAIRPERSON: Order, please. A l'ordre, s'il vous plait. Good afternoon, everyone. Madame le secrétaire.
4000 THE SECRETARY : Merci, Monsieur le président. We would now call the second intervener, Corus Entertainment, to present their intervention. I would ask Mr. Cassaday to introduce his colleagues, and then you will have 20 minutes for your presentation. Mr. Cassaday.
INTERVENTION
4001 MR. CASSADAY: Thank you, Mr. Chair, Members of the Commission. It is after lunch on Wednesday, so you are officially over the hump, congratulations. My name is John Cassaday, President and CEO of Corus Entertainment. With me today on my left is Andrew Eddy, Vice‑President ‑‑
4002 THE CHAIRPERSON: Excuse me, Mr. Cassaday, sorry.
4003 MR. CASSADAY: Yes?
4004 THE CHAIRPERSON: For some reason, I don't have a copy of your oral remarks and I would like to follow along with you.
4005 UNIDENTIFIED SPEAKER: I have it.
4006 THE CHAIRPERSON: You got it? Okay. Sorry, we are okay now, go ahead.
4007 MR. CASSADAY: Okay, on my left is Andrew Eddy, Vice‑President and General Manager of Movie Central and Encore. We wanted to let you see another side of Mr. Goldstein, so he is on the left side of our panel this morning, of Communications Management Inc. Beside Ken is Gary Maavara, who is General Counsel for Corus. Next is Chris Johnston of the firm Johnston & Buchan. Next to me on my right is Paul Robertson, President of the Television Division of Corus Entertainment. Next to Paul is Kaan Yigit, the President of Solutions Research Group who did our consumer research and who conducts the nationally syndicated Fast Forward report. Next to Kaan is Christine Nalborczyk, who is Vice‑President, Finance, for our television group.
4008 We are here today to intervene against the applications for new pay television services by Allarco, Archambault, Spotlight and the Canadian Film Channel. We will present five arguments as to why these applications should be denied. We will address each of these points in our presentation. Following that, we will briefly review the deficiencies in each of the four individual applications, deficiencies which we believe are sufficient grounds for denial of each of them.
4009 The applicants have presented, not surprisingly, a highly optimistic and, in our view, a highly inaccurate assessment of the likely impact of the approval of their applications. The applicants contend that the licensing of a new pay television service will offer the following benefits to the Canadian broadcasting system.
4010 First, that pay television subscriptions will increase and consumer wallets will be opened so that significant revenue increases will accrue for everyone. Second, the applicants want you to believe that they will have no impact on consumer prices. Third, they contend there will be no material negative impact on the existing pay services, either in subscriber levels or in terms of wholesale rate erosion. Fourth, they want the Commission to accept that they will advantage consumers in terms of increased choice and program diversity. And fifth, they want you to accept that their new services benefit the Canadian program production community as well.
4011 Meanwhile, the applicants acknowledge that the approval of their applications and the successful operation of their proposed new services will require fundamental change in the policy and regulatory framework and a significant increase in regulatory complexity. Needless to say, they believe that these unfortunate effects of increased regulatory intervention will be offset by the benefits.
4012 MR. GOLDSTEIN: It is highly speculative that a new pay television service will drive up pay penetration in Canada. As a result, the applicants will not be able to achieve their optimistic subscriber projections or they will only achieve them at the expense of the incumbents.
4013 The applicants comment on differences in pay penetration between Canada and the U.S. It is important to remember that pay television got a significant head start in the United States. U.S. pay television also benefited from analogue unencrypted carriage in the early going and continues to enjoy this legacy on many systems. In Canada, pay TV is offered almost exclusively on digital. An American consumer must subscribe to pay to get home box office content. Contrast this with the Canadian market, which provides much more access to the same programming. Pay programs are also exhibited on specialty and conventional networks. But when you set aside the analogue legacy in the United States, the penetration of pay and digital in Canada is comparable at 50 per cent. We also heard about BSkyB penetration at 50 per cent, so it seems that Canada, the United States and the UK are similar on a digital basis.
4014 Our marketing activities have been very effective. We acquired Super Channel in 1999, we immediately re‑branded the channel to Movie Central, created four thematic genres, settled a dispute to get HBO on the air and then we marketed the services aggressively. During these six years we have tripled the number of subscribers of Movie Central to now 52 per cent of digital households. We have moved rapidly to enhance our service with on‑demand access to programming, a fulltime true HDTV offering. We have also scheduled home box office and show‑time series premiers at the same times as in the U.S. to address Canadian subscribers' concerns that other North American audiences had preferential access.
4015 It is notable that this effort has resulted in a pace of growth for Movie Central of over 30 per cent in the last four years, when the U.S. pay system has grown only 8 per cent during the same period. However, it is now clear that the growth of pay television has begun to level off both in Canada and in the U.S. The number of premium cable units in U.S. is down in both 2003 and 2004, and the source of that is Kegan. In total, the forecast for U.S. premium growth stands at just 2 per cent a year. The slowing of growth reflects increasing competition in the video entertainment market as a whole, including rapid growth of VOD and internet downloading, some of it authorized and some of it unauthorized. So this is not the time to weaken the pay sector. We know we are going to have major challenges from video iPods, DVD players and the downloading of movies directly from computer servers located in Hollywood.
4016 Now, let us consider the impact any new pay service would have on wholesale rates. Our analysis shows that the new service would reduce rates due to the head to head competition as well as the bundling of the dual offer. This reduction in revenue would reduce spending for the production community and we will be forced to reduce our rates without the approval of one of these applications.
4017 We face ongoing pressure from cable and DTH distributors to reduce our wholesale rates and we are constantly upgrading our service to fight this. Evidence in the United States, as reviewed in the communications management study, clearly shows that the second and third services in the pay market compete by offering lower rates. We expect that any new service, if licensed in Canada, would do exactly the same thing. The impact analysis conducted by Mr. Goldstein shows our revenue will be much lower if a new pay television services were to be licensed and it also shows that the revenues for each of the applicants than they have projected.
4018 MR. EDDY: The licensing of a new pay television service will not benefit consumers. Prices for individual pay services may decrease, but the total cost to consumers will increase. Consumers will have to purchase two or more pay services to receive the choice and diversity of programming that they currently receive. The two genres of programming that drive consumer interest to premium pay television are theatrical movies and original series. Movie Central has about 90 per cent of all top movies, as reported by Variety Magazine. Movie Central carries all theatrically released Canadian movies, the best in Canadian series and all first windows on the original series of HBO As well as most of Showtime and those that we did not run ran on specialty channels such as Showcase.
4019 The applicants' proposals to have the CRTC allocate these rights among licensees is proof enough of that reality. There were no interventions from individual consumers supporting new licensing, but there were some against. Ms. Helen Scarlet sums‑up the consumer dilemma quite well:
4020 "If I have to pay twice for what I really want I would be willing to pay for it, but having to pay more for what I am already getting, that makes no sense. It is as if you took every second page out of a magazine. If you want the whole magazine that you bought last week, you have to buy Volumes I and II, paying twice the price. From a consumer's standpoint this is infuriating and more than a little shady."
4021 The applicants hold up the U.S. model as worthy of replication, but we know that the American consumers pay more to get the same content. The applicants, with the exception of the Canadian Film Channel, have been quite clear that they intend to compete for high profile foreign content. In fact, they have asked for new regulatory measures to ensure that they have access. Inevitably, this will drive up the cost for this high profile content.
4022 A substantial amount of public opinion research has been placed on the record of this proceeding. However, we have not seen any data which suggests that consumers would be willing to pay more to acquire services offering less than what they enjoy today. The licensing of a new pay television service will not result in benefits for Canadian program production either. In fact, the result will be irreparable harm to this sector. Quite simply, the licensing of new services will jeopardize the sector where Canadian theatrical movies and original programming are thriving in both quality and in consumer acceptance.
4023 We contend that pay TV has become the crown jewel of the Canadian broadcast system as it fosters the development, production and release of the best quality Canadian drama. The analysis prepared by Mr. Goldstein demonstrates that the licensing of a new pay television service would actually reduce revenues. As a result, the potential contribution of pay television to Canadian program production will be reduced from between $6 million to $70 million over the licence term.
4024 None of the applicants filed any analysis or empirical evidence to rebut this even in their replies. There were also considerable factual errors in both the original filings and the replies as we are prepared to illustrate during questioning. The current structure of the pay television industry has allowed us to develop excellent services that make a substantial ongoing contribution to Canadian program production. During the current licence term for Movie Central this support will result in $145 million in Canadian programming expenditures.
4025 We have also set in place a wide variety of mechanisms to support Canadian program production, including the Corus Family Feature Film Fund of $5 million, the Corus Team Drama Fund at $2.65 million, the Corus Export Initiative at $500,00 and the Corus Made‑with‑Pay Development Fund at $1.5 million annually and, finally, the Corus Young Filmmakers' Initiative at $1 million. We are proud of what these funds have accomplished. Each month we hit new heights.
4026 The pay sector has indeed made a significant contribution to the creation of excellent Canadian drama at a time when that contribution was most needed. Most recently, with the launch of the Vancouver‑produced 10‑part series Terminal City, which has instantly won critical acclaim, similarly pay series like Slings and Arrows, have made an major impact both here and in the international markets. Meanwhile our series, ReGenisis, recently received nine Gemini Award nominations, including the categories of best dramatic series, best actor, best director and best writing. Corus is one of this country's largest producers and exhibitors of Canadian drama.
4027 We are also a major exporter of Canadian drama with offices in London, Paris and Los Angeles. We know the markets, we also work will with Canada's best independent producers. All of our shows on Movie Central are done by independents.
4028 Even the applicants have said that we are doing a good job. The challenge for Canadian producers is not the pay sector, it is the size of the market, the limits on public production funding and the challenges producers are facing in international markets. The interventions by Telefilm Canada and some of Canada's best and most prolific producers told you that. Having another competitor at the Telefilm and CTF offices for their limited resources won't change that.
4029 The Commission also understands that Canadian producers must use all elements of the market to secure the needed financing for their projects. Canadian pay licensees understand that producers must secure other financing through other windows. There is no way that pay alone can support this absent the funding from other windows. We simply can't look to the U.S. market as guidance for how to structure or system. If we could, then the role of the CRTC, Telefilm, the CBC and other agencies would be very different.
4030 MR. MAAVARA: The approval of any of the pay television applications will require fundamental changes in established CRTC policies and will materially increase regulatory complexity and intervention in the market. The applicants have asked you to depart from the fundamental policy that has served the broadcasting system well by asking you to set aside the long‑established not directly competitive policy. The end of this established policy could well have significant negative implications.
4031 Applicants also have asked the Commission to intervene directly in the programming rights market. They would have you establish and enforce new rules with respect to programming non‑exclusivity or they would have you place regulatory limits on the amount and type of foreign programming that pay services would be allowed to purchase and exhibit. These proposed new rules will result in a significant increase in regulatory intervention in the programming market. They will be complex and difficult to establish and to administer. They may also be contrary to law.
4032 It is also not clear where your intrusion should end. Is it restricted to pay or would the Commission also be forced to step in and manage rights for specialty channels as well? Specialty channels are enthusiastic bidders for exclusive movie and series content. Should they also be restricted by this new policy? And what about conventional broadcasters, would the Commission be asked to regulate them in this manner as well? In short, the role of the Commission would be complex and probably not workable and, in our view, poor public policy.
4033 We should remember that the program rights secured by specialty, pay and conventional broadcasters are negotiated, not regulated. The exclusivity of content for pay TV has always been a matter of commercial negotiation. Other channels can bid for the content across windows and many often do just that.
4034 It might be worth considering fundamental changes in established policy and the requested significant increase in the scope and complexity of broadcasting regulation. But the applicants would first have to demonstrate and the Commission must accept that there is clear demand from Canadian consumers for this. The Commission must be satisfied that such a move would not threaten programming production and in fact provides some unequivocal benefits. The standard the applicants must meet is high and we contend that the record in the form of their applications, deficiency responses and their appearance here before you this week don't meet that standard.
4035 MS. NALBORCZYK: We have carefully reviewed each of the four applications. In our view, there is nothing in these to give the Commission confidence that the applicants understand the pay television market or that their approval would contribute to Canadian broadcasting policy objectives.
4036 Allarco has filed questionable public opinion research that overstates the demand for its proposed new service by offering an inaccurate service description. The public opinion research that was conducted by Solutions Research Group addressed these issues arising from the Allarco research and delivered what we believe is a more accurate picture of the consumer demand. When consumers understand what the licensing of a new pay television service could mean to them in terms of increased costs and reduced programming diversity they are, of course, much less interested.
4037 Like all of the applicants, Allarco has not yet provided even a rudimentary programming plan to demonstrate how its new service will increase choice and diversity in the pay television market. If you approve this application, our research demonstrates that there will be a $43 million reduction in expenditures on Canadian programming over the licence term compared to that which would have been spent under the current market structure.
4038 Contrary to the claims of Archambault, we can find no evidence in their research of demand for new pay television services. The piracy problem, which Archambault cites is another indicator of demand, exists both in Canada and in the United States. The availability of multiple services in the United States has clearly not eliminated their black market. The problem is not about absence of choice, but rather it is about theft. Clearly, it is not directly related to market structure. Archambault offers little insight into its programming plans with the exception of a significant reliance on sports programming and now, it seems, a preponderance of movies too.
4039 Should you approve this application, our research demonstrates that there will be a $70 million reduction on expenditures on Canadian programming over the licence term compared to what would have been spent under the current market structure.
4040 The Spotlight application is based on questionably relevant old research conducted two years ago, which may explain why Spotlight ignores the deployment of new technology platforms and non‑linear offerings. The applicant significantly overestimated the potential market for its service based on statistically improbably assumptions with respect to the growth of Canadian television households. This has obvious implications for the validity of conclusions reached in their business plan.
4041 However, the public opinion research filed with the Spotlight application does show significant price sensitivity on the part of consumers. Clearly, Spotlight agrees with us that the strategy for a new entrant will be to price below the existing services. They expect prices to move downward even further, beginning by the middle of the licence term. We expect that downward movement to begin in year one and to continue throughout the licence term. Spotlight has not yet provided a clear programming plan and on that basis it is impossible to conclude that the proposed service would increase programming choice and diversity for viewers. They could not explain how their multiplex would be themed or structured.
4042 There is also the challenge of adult content. Although given the opportunity to clarify their plans regarding the watershed hours of the regions they want to serve, Spotlight has not made adequate assurances that their schedule will respect the appropriate exhibition times as warranted by the rating of their content. They also seemed to have overlooked the cost associated with providing feeds to Western Canada. If you approve this application, the analysis we filed with the Commission shows that there will be a $6 million reduction in the expenditures on Canadian programming over the licence term compared to what would have been spent under the current market structure.
4043 The Canadian Film Channel application is based on a unique business model. If you approve this application you would set the unusual precedent of forcing the existing pay services to directly fund the operations and profitability of a competitor. Who would the Commission turn to if revenues do not materialize and the CFC is unable to meet its obligations?
4044 There is no evidence of demand for this proposed service and, to be clear, it would not be free to consumers. BDUs would be unlikely to give‑up a channel without being able to recoup their costs through some kind of mark‑up. During questioning the CFC did not seem to understand that the BDUs can recoup the cost of carriage.
4045 Make no mistake, the CFC idea is based on the very faulty premise that Canadian feature films are not getting shelf space. Movie Central schedules all such Canadian production and does so in ways designed to drive the largest audience returns. Half of the viewing of Canadian feature films in English language markets comes from pay TV. This is huge when one considers that we are not in every home. Creating what would effectively be a new repeat channel and will not help producers at all, and establishing rules that make it nonexclusive will greatly damage the value of Canadian movies.
4046 MR. CASSADAY: Mr. Chair, Members of the Commission, we are proud of the pay television services that we offer to consumers. As we demonstrated in our written submission, our services deliver an outstanding selection of the highest quality, most popular foreign and Canadian premium programming. We make a substantial contribution to Canadian program production through ongoing development investments and purchases and through an extensive array of funding mechanisms.
4047 The general interest pay television market is maturing with modest projected growth in subscribers and with decreasing wholesale rates even without additional entry. Even so, our services will continue to make a substantial and increasing contribution to Canadian program production in the future. Consumers will be asked to pay more to get essentially the same top quality content that they already get today. The applicants will offer no net benefits for Canadian program production. A new pay television service will shrink the pay television market, undermining our potential to contribute and making it impossible for the new services to achieve its projections.
4048 Anywhere from $6 million to $70 million will be lost to Canadian producers from pay television operations alone. And in return for no benefits for consumers or Canadian program production the Commission will have to abandon long‑established and effective policies and substantially increase the scope and complexity of its regulatory intervention. There is no overt public demand on the record for these specific services, only speculative research. The public interventions of the production community were marked by cautions about the potential impacts. As such, we can see no basis on which it is possible to conclude that the approval of these applications would contribute to the objectives of the Canadian broadcasting policy and serve the public interest.
4049 We submit that all four of the pay television applications are deficient on their own merits and therefore should not be approved. We appreciate this opportunity to appear before you and would be pleased to answer your questions.
4050 THE CHAIRPERSON: Thank you very much, Mr. Cassaday, and members of the panel. Your presentation is clear, as was your written intervention, and we have covered a lot of the ground. Mr. Goldstein's company did the study for both Astral and Corus jointly, so I will try not to cover the same ground again. So the questioning will be briefer and, because your oral presentation summarized it again very well, I am going to just use it as the basis for the three or four areas that I would like to question, if that is all right.
4051 My first question is you raise at page 8 of your presentation today the ‑‑ at the top you note that Movie Central's growth has been 30 per cent over the last four years, in the U.S. only 8 per cent. And then you say that there is a levelling off and that premium cable units in the U.S., the number is down and that predicted growth is 2 per cent. I guess I am trying to ‑‑ I mean, it seems to me that when you layer these over the different bases you get the higher percentages and so I am trying to understand. If we accept that the U.S. level is at 50 per cent or thereabouts and the Canadian is down in the teens, or certainly three or four years ago in the teens, then one would expect the percentages to reflect exactly what you are showing, namely a higher percentage growth in Canada because you are starting from a lower base. Is there anything more to it than that?
4052 At the end of the day you are saying that at the 50 per cent plus level growth in the U.S. is tapering off. I am not sure that we can conclude from that that the much lower level in Canada would lead to a similar tapering. If that is the point you are trying to make, I am not sure this makes it.
4053 MR. CASSADAY: I guess at the root of your deliberations is going to be coming to grips with the question are we dealing with a zero‑sum game here. If, in fact, it would not be reasonable to expect the markets to grow at any greater rate than they have in the past, perhaps this isn't worth the risks that are involved. So I guess just a couple of comments that I would make to that.
4054 First of all, we think we have done a very good job since we took over these services. Paul, in his comments, talked about the fact that we have brought the HBO program into Western Canada where they were previously not available due to a commercial dispute that existed between the previous owners and the HBO organization. We have also spent a significant amount of money marketing these properties. In fact, we spent as much money and are as effective marketing Movie Central as we are YTV and I think most people would acknowledge that YTV is perhaps the best marketed service in the country. So our view is that if you want to just take at face value that we have done a pretty good job and that we have grown quite nicely, the point that we would make is that these guys are going to be as effective doing that in the future as they have been in the past, so that growth is not bad, but offsetting that is the likely impact of some market erosion as a result of new technology.
4055 So net net our view is that we should not expect this market to be anymore dynamic in the future than it has been in the past and, as a result, we are not sure it would be safe to assume that it is anything but a zero‑sum game.
4056 THE CHAIRPERSON: I am not sure how those two points connect. I can understand the point about the slope or the curve in growth, but that seems to me to be a different point from the zero‑sum game. I mean, you would ‑‑ Mr. Goldstein built his model, his baseline, on a static model which was essentially Canadian growth without further competition and then factored in the competition as the second stage. Those are two, correctly in my view, two separate variables. And I guess even he is acknowledging that in the "zero‑sum game" that there will still be some uptake as a result of competition ‑‑
4057 MR. CASSADAY: Yes.
4058 THE CHAIRPERSON: ‑‑ it would be greater than what it would be without it.
4059 MR. CASSADAY: Yes, and that is what I was trying to say. I think that it would be reasonable to assume that we will be as effective as we have been in the past at growing this market and that there would be an expected increase in uptake as a result of new competition offset by the impact of new technology, so net net we end‑up in the same place.
4060 THE CHAIRPERSON: No ‑‑ I think I follow his analysis. I was struck by your comment on page 16 here where you say, "We simply can't look to the U.S. market as guidance for how to structure our system." I would, of course, agree with that, but I guess you take your evidence where you find it and we are trying to ‑‑ so that ‑‑ and the point I just covered with you you highlight on page 8 the number of premium cable units in the U.S. to make your point, which I think is a perfectly valid exercise. It is not that anybody is trying to look to the U.S. for guidance as to how to structure the system. It is about, you know, are they right, that the pie will grow when they draw from the U.S. and as you do, later on, from the UK and you are trying to make your points from the most analogous circumstances you can find. They are never perfect analogies, because the systems are quite different with quite different histories. So I think that that is really what we are trying ‑‑
4061 MR. CASSADAY: Yes.
4062 THE CHAIRPERSON: ‑‑ to do. You can't suck and blow on the U.S. point I guess is what I am referring to.
4063 MR. CASSADAY: The one thing that is analogous is that the penetration of digital in Canada, the UK and the United States seems to be quite comparable at around 50 per cent.
4064 THE CHAIRPERSON: Yes, and we have asked Astral to show us exactly what they mean by that. But I take it this is the same point that you are making here. Okay, so we will have a chance to ‑‑
4065 MR. ROBERTSON: If I might add. I think there is some additional evidence that we can add to the previous conversation relating to the growth rate and the addition of pay and how that paces with digital. First of all, I would just say that the growth rates that were projected in the base model started at about 6 per cent and went down I think to 3 or 2 over the licence time period, which is about seven years. That 6 per cent is exactly what, you know, there was a question earlier on about, you know, what do the analysts hear versus what the Commission hears. Six per cent is exactly the growth rate that we will have experienced in 2005. We announced that ‑‑ we announced it yesterday.
4066 So the starting point for the model is exactly the same growth rate that we are coming off of. And to see that, the deceleration trend on that, there is no question that we can file data to show how our own information has bee decelerating down from the double digits two or three years ago down to that 6 per cent level, so the trend line is pretty clear.
4067 I think, further to that, when you look at the comparison between gee, I see the digital market looks like it is going to be growing in double digits, why isn't pay growing at double digits too? And you had a couple of doctors, I think, talking about their views on this. At the risk of over doing it, we do have one more very experienced doctor in the room, Mr. Kaan Yigit, whose Fast Forward report has really taken ‑‑ is, you know, a wonderful source of information on the exact topics. We have asked Kaan to take a look at this and he has some more evidence he would like to table.
4068 MR. YIGIT: These are independent from Dr. Goldstein's information actually, just sort of ‑‑ a couple of things here. First of all, one is the global growth rate digital and when we look at our trending data, 2003 we had something like ‑‑ May of 2003 ‑‑ 34 per cent of households in Canada with digital, meaning digital cable or DTH. That went up to 40 per cent last year and it is now around 43, 44 ‑‑ May of this year it was about 43, now it is about 45. So, when you look at that growth you could already see that the rapid phase is passed. It is not only our research, but other companies also researching this market generating evidence to that effect, that the rapid transition has passed to the extent that DTH is flat, digital cable is growing, but not as fast. So, that is number one.
4069 Putting in also the context of what is happening in this space, in the two years digital grew by 26 points. The same time period, exact time span, high speed internet households grew by twice that basically. Now, let us look at the subset of digital, which is pay, just using the same numbers. In 2003 we had 20 per cent of households in Canada with one pay service, Movie Central, TMN or Super Écran, that went up to 21 per cent, the year after that went up to 22 per cent.
4070 So when you look at it as a percentage of total digital the growth isn't the same. Digital has grown 25 points, pay has grown 10 points roughly, you could always do the numbers with a slight different basis, but the fact will remain ‑‑ and I have done this on both actuals and our independent trend data, which is easy to file, and they both basically show the same thing.
4071 The second point I would like to make and add, the new technology ‑‑
4072 THE CHAIRPERSON: So, just to summarize that point, your point is that pay penetration has been a fraction of total digital penetration?
4073 MR. YIGIT: That its rate of growth isn't as ‑‑ the magnitude of growth ‑‑ rate of growth is smaller than that of digital itself.
4074 THE CHAIRPERSON: Right, and what are the rough figures?
4075 MR. YIGIT: Well, I will give you the rough figures. These are verifiable from a number of different sources, actuals. For example, June 2003 there was something like 2 million households with Movie Central, TMN and Super Écran. June 2005, that is 2.2 change. The digital base in the same period went from 3.8 to about 4.6. So you will look at that ratio, digital base itself has grown over 20 per cent, so I guess illustrating the point that the flat part of ‑‑ we are already reaching the flat part of the curve in terms of growth of pay TV services ‑‑
4076 THE CHAIRPERSON: Mr. Yigit, I don't mean to interrupt you, but do you happen to have or can somebody give you a copy of Allarco's page 14 of its supplementary brief with the Decima numbers in there, because they are close to what you are saying, but not quite and I wouldn't mind asking you about your comments on those specific figures.
4077 Does anyone happen to have that to give Mr. Yigit a copy of? Here, there is one here. You haven't seen this before? I don't want to take you by surprise.
4078 MR. YIGIT: I am familiar with most of the published material in the States, but I don't know that I have seen this before.
4079 THE CHAIRPERSON: So this has been on our file, filed by one of the applicants and, you see, there is a Decima actual number there which ‑‑
4080 MR. YIGIT: Right, that is ‑‑
4081 THE CHAIRPERSON: ‑‑ which is not quite the numbers you gave me for 2003 and 2004, maybe that you are looking at a different time period.
4082 MR. YIGIT: Well, actually I gave you ‑‑for June 2003 I gave you a base of 3.8 ‑‑
4083 THE CHAIRPERSON: Right. Okay, that is pretty close.
4084 MR. YIGIT: ‑‑ and it says 3.828, so we are pretty close. 2004 ‑‑ there is no 2005 ‑‑ oh, 2005, they have a forecast of 5 points there, they don't have actuals here.
4085 THE CHAIRPERSON: Right. Would you agree with the forecast for those next two years?
4086 MR. YIGIT: That would be end of year, maybe this year, if that. That would be my guess. If ‑‑ I don't know what they will forecast for. My comparable number is from May, June ‑‑ sorry, June of this year and our estimate at that time was 4.6.
4087 THE CHAIRPERSON: For June of 2005?
4088 MR. YIGIT: Correct.
4089 THE CHAIRPERSON: 4.6?
4090 MR. YIGIT: Right.
4091 THE CHAIRPERSON: And do you have a 2006 number that you have projected?
4092 MR. YIGIT: No, but if I actually look at the trend line from the other source I mentioned it should be ‑‑ the growth this year should be less than last year in total adds, because basically Express Vu and Star Choice is flat.
4093 THE CHAIRPERSON: Well, they are showing a slight decline as well ‑‑
4094 MR. YIGIT: Yes.
4095 THE CHAIRPERSON: ‑‑ from 15 per cent growth rate to 14. Do you have any comment on the 2007 to 2013 years? This is now not Decima, this is the applicant. I asked the Decima representative who said that he thought, if anything, they might be conservative, I think that was his answer but ‑‑
4096 MR. YIGIT: Well, you know, if this was ‑‑ this forecast was filed in 1996 I would say that is great, those numbers would hold. But let me give you a couple of items here. In 1998 there was 1 per cent of Canadian households with a DVD player, it is 82 per cent now. In 1998 I came to several hearings here and we were talking about internet at 20 per cent of households, it is 75 per cent of households. Three years ago there was no such thing as a movie download, there is now 2 million Canadians, roughly, downloading movies.
4097 So the point is we are in a ‑‑ from a change standpoint ‑‑ and I don't want to belabour the point, because I am sure other people have made it, we are ‑‑
4098 THE CHAIRPERSON: You mean, they may even have belaboured it?
4099 MR. YIGIT: But we are at a different part of the curve where some of the conventional spreadsheets ‑‑ I mean, there are a lot of companies in trouble as we speak ‑‑ not communications companies ‑‑ in trouble with the spreadsheets because of the rapid technological change. And things are maturing so fast that Steve Jobs has to, you know, basically announce three new products within a year period because his first project, the original iPod, is already obsolete.
4100 So the context for a lot of this and what will happen in the future has to be tempered with what is happening now, what has happened in the past six, seven years and that change has been far more rapid than anytime before.
4101 THE CHAIRPERSON: Right, and if I asked you for a view on the 10 per cent number going out from 2007 to 2013, as you see projected on that sheet, what would your specific comment ‑‑
4102 MR. YIGIT: You are putting me on the spot with ‑‑
4103 THE CHAIRPERSON: I don't want to take you by surprise and I know you haven't seen this before and ‑‑
4104 MR. YIGIT: So this is 10 per cent growth year over year?
4105 THE CHAIRPERSON: That is how I am understanding, well ‑‑
4106 MR. YIGIT: Are you asking my opinion?
4107 THE CHAIRPERSON: Do you ‑‑ yes, as I did with the Decima people ‑‑
4108 MR. YIGIT: Right, so this is digital households growth year over year. I can't believe it for a second. I mean, it is ‑‑ as I said, if the competitive context was different, fine, we could have double digits. But we are in a very different situation. I keep showing ‑‑ in our trend presentation chart showing book sales down, music sales ‑‑ I mean, a lot of shifts happening and part of it is new technology, part of it is just sheer number of entrants and competitive scenarios. So off the top, just if you are asking my opinion as if a journalist called up and said what do you think of these numbers, my ‑‑ you know, simple as that ‑‑
4109 THE CHAIRPERSON: Perish the thought that I am a journalist.
4110 MR. YIGIT: ‑‑ they look pretty rich to me. Can I have a licence too?
4111 MR. ROBERTSON: I think what we would put on the record though is that the percentage, the penetration of pay against the digital base is declining. And, in fact, the two‑year spread that Kaan just took it through, took us through, it goes from 52 to 48 and that is the trend we are seeing.
4112 THE CHAIRPERSON: Sorry, Mr. ‑‑ for what period is that, the 52 to 48?
4113 MR. ROBERTSON: June 2003 to June 2005.
4114 THE CHAIRPERSON: Yes, right. Mr. Yigit, again, I wonder ‑‑ and again, I don't want to put you on the spot if you haven't seen this, but in the Spotlight reply, we referred to it in discussion with Mr. Goldstein this morning from another perspective, but there is ‑‑ Schedule 3 to their reply contains, at paragraph 10, a table. The point they are trying to make, well at paragraph 10, what they do make is that Canadians are spending 4.49 per cent of what they spend in the United States on pay TV and that they would expect, they say in paragraph 10, that this would be higher based on ‑‑ and the two things I would appreciate your commenting on are DVD households and DVD sales where they show that the numbers are at 11 and 13 per cent relative to the U.S. I don't know whether you have any comment on that and whether that gives you any greater optimism or less conservatism regarding your future projections for digital uptake.
4115 MR. YIGIT: I haven't seen these before, I am just trying to come up to speed pretty quickly. But I don't want to bog down ‑‑
4116 THE CHAIRPERSON: That is because you bill by the hour, so ‑‑
4117 MR. YIGIT: Sorry. It was a fixed rate.
‑‑‑ Laughter / Rires
4118 THE CHAIRPERSON: No, there is no excuse.
4119 MR. ROBERTSON: Was it paragraph 10, the one we are referring to?
4120 MR. YIGIT: Right, entertainment spending, percentage relationship, DVD households, cinema admissions, right. I'm sorry ‑‑ I don't know what the question is though.
4121 THE CHAIRPERSON: It is only that ‑‑ you know, we are trying to grope our way, all of us, towards something in the future and there are no facts and so we are trying to use modelling ‑‑
4122 MR. YIGIT: Yes, yes.
4123 THE CHAIRPERSON: ‑‑ and you referred, Mr. Cassaday, to speculative ‑‑ I mean, we are trying not to be speculative, we are trying to be as empirically‑based as we can in our modelling and I had that discussion with Mr. Goldstein this morning and we all are trying to do the best we can.
4124 So the issue really is using this kind of analogy of DVD household penetration relative to the U.S. showing, I suppose at one level, that there is ‑‑ that there seems to be Canadian interest, would that not support a view of a higher digital market growth rate than you seem to be thinking will occur, namely double digit if 10 is considered double digit ‑‑
4125 MR. YIGIT: Oh, I see.
4126 THE CHAIRPERSON: ‑‑ that they are projecting?
4127 MR. CASSADAY: Sort of the thought process that we have is if you accept for a moment that the incumbents are competent in their job of promoting their product and securing programming and if you accept the fact that we have that the growth rate has slowed and you also accept the fact that there is technology that will have an impact do you not come to the conclusion that it would be difficult to project a significantly higher growth rate than 6 per cent, which has been the most recent level that we have seen? And, if you can't get beyond that, is there really an incremental benefit to the system and that is where I get back to my point about is this more than a zero‑sum game. So that is the logic.
4128 THE CHAIRPERSON: Well, unless we are not understanding each other, when I look at that same chart that I just referred Mr. Yigit to I am seeing numbers for digital market growth of 20 per cent, 12 per cent and 14 per cent over the 2002, 2003 and 2004 period. And they are projecting Decima is 15 and 14 for going forward. So maybe I am missing your point about the 6. What is your point about ‑‑ this is digital market growth and ‑‑
4129 MR. CASSADAY: The 6 per cent was referring to the growth rate in pay subscribers.
4130 THE CHAIRPERSON: Okay. So staying with digital market growth, of which was this discussion, I am wondering why, again ‑‑ and I discussed with Mr. Goldstein briefly ‑‑ given that cable digital penetration is only roughly at 30 per cent currently with ‑‑ although DTH is, of course, at 100 per cent digital ‑‑ why you wouldn't see much higher figures of digital market growth, why you wouldn't be comfortable with the 10 per cent number or, as the Decima representative said, he thought that was conservative. This is just digital ‑‑
4131 MR. YIGIT: Well, Decima could speak for itself but, I mean, last year they released something that talked about the digital market growth slowing down. So we are not the only people saying this and there are many reasons for it. I could get into it if you are interested, but there are barriers basically and I know that the BDUs aren't trying to address those barriers so that they could get more addressable subscribers and make more, but it is not a simple equation, unfortunately, and there are many substitutes out there obviously.
4132 Even in the Canadian context, we are different than the United States. One thing that you could look at is we are far more PC and internet centric here, where our broadband penetration is almost 50 per cent and in America it is about 35 per cent. So there are those kinds of factors. There could be waste increase ‑‑ I suppose ‑‑penetration, but at the current trajectory and based on what is happening in the market I can't imagine an analyst putting big dollars on, you know, double digit growth.
4133 MR. CASSADAY: Perhaps just a couple of comments on what I am hearing from BDUs about what their intentions are going forward. Starting with the satellite operators, clearly their business has slowed as a result of having essentially grabbed all of the rural or low‑hanging fruit. I don't think any of us anticipate we are going to see a return to the growth that they enjoyed in their early years.
4134 Now, looking at the two major BDUs across the country I think that there is quite a different attitude that exists between both of them in terms of their outlook for digital. But both of them are primarily preoccupied with Voice over IP and the rollout of a high speed broadband. Those two ‑‑ I believe you will have the cable association to confirm this later ‑‑ but I think both of them would take the view that those represent more significant competitive opportunities for them going forward than does putting the major focus on digital.
4135 Then, as it relates to digital, I think Rogers is of the view that digital is a real differentiator, that digital means new. So they are more intensely interested in pushing that than Shaw, which really believes that there is going to be, long into the future, a significant group of their customers that are interested only in analogue. They are not early adaptors, they are happy with the service they have and they are not going to be forcing digital boxes into tier three and tier two households if they don't have an expressed desire to have it.
4136 THE CHAIRPERSON: Right, so taking Rogers ‑‑ this is subject, I guess, to your checking ‑‑ but the information we have is that at the second quarter of 2005 Rogers was at 34 per cent or some 769,000 digital subs of a total of 2,238,000. So there is about a million and a half to go, so to speak, which is the sum total of Express Vu subscribers. So if you look at growth and if you look, as you say, at Rogers trying to advance the agenda on digital migration there is a lot of room to grow and I guess I am wondering, again, why we wouldn't assume that some number ‑‑ 10 per cent, being lower than the previous five years on the table that we have been looking at ‑‑ why that would be an unreasonable number to assume?
4137 MR. ROBERTSON: I think it goes to the question of the remaining analogue subscribers, how hotly interested are they in getting into movie services. We have a piece of data that we filed with our application that was a study that Kaan did, which says that if you ask analogue subscribers have they thought about getting digital, 31 per cent of them said yes, I have thought about it. And then you ask the same group, have you thought about getting a pay movie service, and 12 per cent said yes, I have thought about it.
4138 When you think about the ratio between the 12 and the 31 I think that is a pretty telling statistic and really goes to the point if you wanted movies and you are a movie buff why aren't you already getting digital? These are the ones that are slow to move. These are the ones that will be encouraged to move by inexpensive offers and that is the idea of the cable company, that is where they are at. Let us deploy digital, let us get to the point where we can save the bandwidth, but these customers don't necessarily want premium service.
4139 THE CHAIRPERSON: Perhaps. Mr. Cassaday, have you got a copy of the same table that we are looking at with Mr. Yigit? Again, I am trying to test your 6 per cent number here. If I look at ‑‑ these are based on CRTC actual, so they must be golden ‑‑ they show growth rates of 6.1, 9.1 and 8.9 for an average of 8, that is TMN plus MC for the Movie Network and Movie Central.
4140 MR. CASSADAY: Well, certainly we wouldn't argue that the digital market is going to grow faster than we think the pay market is going to grow.
4141 THE CHAIRPERSON: No this is just ‑‑ this is pay.
4142 MR. CASSADAY: Yes.
4143 THE CHAIRPERSON: You were mentioning a 6 per cent number between ‑‑ did you say 2003 and 2005 I think? But, I mean, these figures show a higher number, if they are correct.
4144 MR. ROBERTSON: Yes, well all I can really talk to is how we are doing, so I think this year we ended at about 750,000 subscribers, up from about 735,000 subscribers and I don't know what on earth we could have done differently to accelerate that. We certainly ‑‑ we distribute hundreds of thousands of direct mail pieces, we invested in every piece of programming that we could acquire. So I think my point would be that we are doing an extraordinary job in marketing our product and we are achieving what I think is a heck of a good growth rate, which is 6 per cent, but it is not 10.
4145 And to your point about what are we telling the analysts? We are not telling them we can grow this at 10 per cent, because we don't believe we can.
4146 THE CHAIRPERSON: This is the combined services of TMN and MC.
4147 MR. CASSADAY: Mr. Chairman, I think one other area where you might want to look for empirical evidence is through the migration proceeding. Through those discussions, as we were developing the submission that we made between the five broadcasting entities and Rogers we went through a lot of data as to consumer behaviour as a home goes from an analog environment into a digital one.
4148 Of course one of the big questions on that transition was: how big is the bundle going to be and what kind of bundling is there going to be and what is the most enticing way to get people to take as much as possible?
4149 The evidence is quite varied but a lot of the behaviour indicates that oddly enough when you give people à la carte they like it. The result is that the total universe may be growing but on a per channel basis the actual numbers shrink, which is one of the issues that we are all trying to deal with on a per channel issue. Of course that context is of great concern to us because of the size of the overall pie.
4150 Again, I don't want to compare too much with the American market, which we agree is not necessarily a good way to do it, but one thing that we all understand is that the smallest pay operator in the United States and all of the small ones that are struggling against bankruptcy all have more households in a raw sense than we would have if we had all of them. That of course is the challenge of the Canadian system.
4151 What we are facing as conventional networks, as specialty channels and as pay as we move into a digital environment is that we might not be able to count on as many of those small numbers of households as we might need in order to be viable. Of course we are waiting for your policy decision in that regard, but I think there is substantial evidence on the record that reflects that and would also suggest that in fact as a home converts from analog to digital it is not necessarily predictable that the growth is going to be to any particular service.
4152 THE CHAIRPERSON: We have discussed that. Vice‑Chair French discussed that with Mr. Smith of ExpressVu and so on. I'm not sure the evidence is clear on that. I'm not sure at this stage where the argument rests on early adopters. There is an obvious common sense point about low‑hanging fruit and early adopters, but how much that shows up in the statistics over time and how that continues or tapers is I think something that we may still want to think about and discuss with the applicants in terms of their experience. I don't know whether you have anything further to add on that point.
4153 It's true that you don't know that there isn't clearly any kind of absolute relationship. It's not clear exactly what that trend has been historically, is it?
4154 MR. CASSADAY: Mr. Chairman, if I might add, not to belabour anything but just to ‑‑
4155 THE CHAIRPERSON: It wasn't you I was referring to, Mr. Cassaday.
4156 MR. CASSADAY: Just to add very briefly on this is that ‑‑ first of all, to answer the question on the disconnect between the numbers of 8.9 per cent and 6 per cent and so on, I think the difference is simply that the company here is referring to its 2005 results. Of course the Commission hasn't yet received them nor published them so I think it's the difference between 2004 and 2005 which is the difference.
4157 The other point though is that I would caution us all, and I would particularly, if you will permit me, caution the Commission, against only looking at subscriber levels, because when we are all finished, it is subscribers times revenue equals what is left over for Canadian content. One can artificially get higher subscriber totals if you want to drive the price down to almost nothing. It is always an equation of subscribers at what price, and that is in the case of this particular table, this page 14.
4158 I agree with Mr. Huguette that some of this looks quite optimistic and bullish, but the other issue that goes with this is even if this were correct can you imagine this universe being real when everybody is getting $8 a month from everybody, that there would be no erosion in that whatsoever and all of this would happen wonderfully at these rates and everyone would still pay ‑‑ the BDUs would still pay for each subscriber $8? That to me joins the issue.
4159 THE CHAIRPERSON: The applicants would obviously argue, and I think a number of them have said, that they felt that the competitive pressures and dual subscribers would force the blended rate down but that the uptake in subscribers, it would be their point, would more than make up for it.
4160 Just before you mentioned that, confidentiality precludes us from discussing revenues and revenue growth in the thing, but I'm not sure if that would help your argument that much, that's all, on that point.
4161 Those are my questions. Thank you.
4162 I don't know whether my colleagues have any questions.
4163 Commissioner del Val.
4164 COMMISSIONER del VAL: Thank you.
4165 Back on the issue of analogous markets, I was wondering whether you heard what Madame St‑Laurent and M. Houle had to say about the European markets. I was just wondering whether you had anything to add.
4166 MR. EDDY: No, apparently not.
4167 I guess one of the notions that I thought might be worth just mentioning though is an experience that I had in the airline industry because one of the contentions here is: can anyone imagine or can anyone think of a category that hasn't benefitted from new competition?
4168 I served for a number of years on the Board of Directors of Canadian airlines and I certainly experienced firsthand what happens when you have undifferentiated competition. We both tried very hard to successfully market our services to Canadians. Because we really had no point of difference between us, all we really succeeded in doing was forcing down prices, landing on top of each other on various routes to the point where both companies faced bankruptcy.
4169 There is an example in the United States with Southwest where they in fact competed successfully against the established airlines but they did it on the basis of a completely differentiated strategy. They went after people that were previously taking buses and driving cars to get from one destination to another and it was a low cost, low service alternative.
4170 What we are talking about here is non undifferentiated competitor and as a result I think that the airline example is analogous and I can see the outcome being quite similar to the one that we experienced during that most difficult and trying period.
4171 COMMISSIONER del VAL: Thank you.
4172 What are your views about an all Canadian channel, let alone the Canadian film channels application, but just an all‑Canadian channel?
4173 MR. EDDY: Thank you. I would be pleased to talk about really our focus on Canadian programming.
4174 I think it was best summarized by one of the producers we met with who said: if you were a Canadian author would you want your book in the fiction section or in the Canadiana section? I think that's the flow advantage that comes from scheduling across all of our multiplexes the best in Canadian film and drama so that a series, like our series Regenesis follows right after an HBO series. The ability to bring an audience into a Canadian show is really important to building the awareness and ratings of the show.
4175 I think the ACTRA Intervention summarizes it as a ghettoization. You know, that is perhaps strong but I think in terms of positioning the content within a robust schedule of high demand, high interest content, that in our view is the most significant way to bring audience to Canadian programming.
4176 COMMISSIONER del VAL: Thank you.
4177 Here comes my annoying question. At this point I would feel I'm being unfair to the other applicants if I didn't ask the same of you. So if the Canadian Film Channel's proposal were approved, would your subscriber fees increase?
4178 MR. EDDY: Unless those fees were regulated up there is zero chance that we would be able to increase the fees that we are paid by our affiliates. Right now we are adding value to hold our rates. We are adding HD, we are adding subscription video on demand, all these value‑added and free components are really simply being done to support the current rate. We have had no success despite the impact of shows like the Sopranos and commitments to programs that we have made like Terminal City and Regenesis to increase our rates with any of our subscribers across the country.
4179 If I may just add that the pressure from that added expense that was talked about really would then diminish our ability to buy programming. As business people we need to find savings to offset those expenses and our most significant expense is really the expenditure on programming. Without the ability really to change our strategy on Canadian, it means not being able to afford American content.
4180 COMMISSIONER del VAL: Thank you.
4181 Would you have anything to add on the argument that it would be subject to legal challenge, Mr. Johnston?
4182 MR. JOHNSTON: We are talking about the Canadian Film Channel?
4183 COMMISSIONER del VAL: Yes. Sorry, yes.
4184 MR. JOHNSTON: I would hesitate to depart from the positions of my distinguished colleagues that you already heard from, but I share their view. As broad as the Commission's powers are, and they are indeed very broad, I think a court would have trouble accepting that those powers extended to requiring one private enterprise to basically fund another.
4185 COMMISSIONER del VAL: Thank you.
4186 I think you heard Mr. Chairman's questions on the exclusivity proposals of Allarco. I'm wondering whether you have anything to add, whether you have a different view.
4187 MR. EDDY: We just would agree that we think the idea of non‑exclusivity is very difficult to work with. It really suggests that there really will be no different programming between the two and if there is a case of two services with the same stuff on it, given that movies are really what people think of when they think of these services, that would be a major step in the wrong direction, so we think that would be a poor approach.
4188 COMMISSIONER del VAL: What about the limited exclusivity, prohibition on exclusivity on a set number of Hollywood blockbusters per year?
4189 MR. EDDY: We found that one to be pretty confusing. We spent a little time trying to think through how you might work with that and found it to be really unworkable. I think it goes to the point of the way in which we actually do our deals, which are output deals that are done on a multi‑year basis and then we pay based on how well they do at the box office. So after the fact trying to figure out which one ‑‑ how many we had, what proportion and then divvying them up in some way just seemed like an impossible task.
4190 Non‑exclusivity I think is really bad for the consumer. Divvying up the studio seemed like impossible from an operating standpoint.
4191 COMMISSIONER del VAL: Thank you.
4192 MR. JOHNSTON: Madam Commissioner, if I could add to that.
4193 Part of the difficulty that we have with the concept is that we don't quite know what the proposal is. There in fact is nothing before the Commission or the intervenors as to what the specific rules would be.
4194 Having said that, the other issue as we alluded to in our comments was simply: who does it apply to? The negotiation market for programming is an open one. The difficulty that we submit the Commission would have is actually determining who is going to be subject to this? Is it going to be just the pay licensee or is the Commission going to have to, in a sense, have a wider ambit in order to solve the alleged problem.
4195 COMMISSIONER del VAL: I think it is the Writers Guild who suggested that the amount devoted to script and concept development be a percentage and they suggested 3 per cent rather than a fixed amount. What would be your view on that?
4196 MR. EDDY: I will add a couple of comments about our current activity first and then answer that question directly.
4197 In the case of Corus our condition of licence really does specify a fixed amount of $1 million. We have, of our own decision, increased that to $1.5 million each year. That this year will represent roughly 2 per cent of our gross revenue.
4198 All that being said, I think it is important that we not create an industry of development but really an industry of production. The challenge is that we need to invest more energy in development and not just write cheques. So our participation with development goes beyond sending cash to pay the bills for writers.
4199 Film making is a very complicated business. It is not particularly an individual creative activity and there needs to be consideration of script and concept development within the entire continuum of production. We have made a significant investment in script and concept development but it is above and beyond just the cash that we devote to it. It is a creative energy. It is the connection of writers with producers and, in our case, the efforts to connect those producers with other broadcasters for second and third window rights.
4200 In that context, we are doing a terrific job on script and concept development and we want to be cautious to ensure that the scripts we are developing will deliver the quality of production that we ultimately want to see on the screen.
4201 COMMISSIONER del VAL: What would you say if the fixed amount were changed to a percentage just on that issue alone?
4202 MR. EDDY: Again, I think it represents change to a single condition of licence that as a company we feel is really best handled in the context of a review of the full licence, which won't be that far out.
4203 COMMISSIONER del VAL: I guess your investments or funding of the Canadian programming would include equity investments?
4204 MR. EDDY: Yes, we do have the ability to make equity investments.
4205 COMMISSIONER del VAL: Two questions flow from that.
4206 I think there is some suggestion that recoupment, and I believe this is from the CFTPA, of producer's equity position, tax credits and producer deferrals must be allowed to sort of take precedence over the broadcaster's recoupment. How do you feel about that?
4207 MR. EDDY: I begin by saying that although we do make equity investments we really are not required to make any equity investment. It is really just at our discretion. That being said, investment, equity investment in film, is incredibly risky.
4208 As a general principle we are not looking to get rich in terms of equity investment in film. We are very selective in terms of the projects that we investment. A project that comes to us where a producer has had to waive their fees or cover a deficit in the programming is one that really is already under quite a bit of pressure and it is typically not the kind of project that we are looking to invest in.
4209 That being said, we are putting our money at risk on exactly the same plain as Telefilm and other investors.
4210 COMMISSIONER del VAL: Thank you.
4211 Some of the intervenors have also suggested that some of the licence rights that the broadcasters are acquiring are over a range of outlets to show over different mediums. Do you have any comment on that?
4212 MR. EDDY: The distributors and producers themselves who exploit the rights to their content are very savvy with their dealings with Movie Central. We buy explicitly exhibition rights for films on the channel. It specifies in some cases the number of plays, the term, at what times of day those plays can come. They are very intelligent and very explicit in terms of negotiating the rights for exploitation of their content.
4213 As we have added high definition, as we have added subscription video on demand, those have become elements of the negotiation and they have all received separate and specific discussions in terms of the licence fees we pay. There is nothing within our agreement that gives us those kind of sweeping rights on platforms other than the linear service from Movie Central.
4214 COMMISSIONER del VAL: Do you have a terms of trade agreement with CFTPA?
4215 MR. EDDY: We have not signed a terms of trade agreement with the CFTPA.
4216 COMMISSIONER del VAL: Can I ask why?
4217 MR. EDDY: In my tenure at Movie Central, they have not approached me about signing a terms of trade agreement. All I can then infer from that is that the manner in which we are dealing with Canadian producers is consistent with how they expect us to deal with their members.
4218 COMMISSIONER del VAL: Great. Thank you.
4219 Those are my questions, Mr. Chairman.
4220 THE CHAIRPERSON: Thank you very much.
4221 MR. JOHNSTON: Mr. Chairman, just before we go on, I wonder if I could raise an issue with the Commission. I have spoken about this with your counsel Mr. Keogh. There has been a considerable amount of new material filed during this proceeding. The intervenors of course analyzed and made their comments on the basis of the material that was before them up to the time that we appeared here. I want to make a request on behalf of both Astro and Corus hat they have an opportunity to comment but comment only on the new material that has been filed.
4222 The proposal is that they would have a period of one week from Monday to do that and that the applicants would have a week thereafter to make their reply. As I say, one of the things that prompts this is that a major flaw the intervenors have argued in the applications is the lack of specific programming information. Vice‑Chairman French made the point on the opening day that this was a key element of the applications and extremely important. We agree.
4223 That is a matter that we would very much want to comment once we see it, as well as any other new material that has been filed.
4224 I stress again that the comments would be confined strictly to the material that has been filed. I know from past experience that there is a temptation to reargue the intervention or on the applicant's side to reargue the application, but that is out of bounds. But I do feel that we are entitled to comment on the new material that has been filed.
4225 THE CHAIRPERSON: Thank you.
4226 I don't know whether any of the applicants have any views, those that are ‑‑ I don't know how many present in the room would have views on that. It sounds frankly fair to me to do that. I see heads nodding so I am going to agree ‑‑ Mr. Keogh is nodding his head as well, so let's set it at that.
4227 You were looking for a filing a week from which Monday, last Monday or next Monday?
4228 MR. JOHNSTON: A week this Monday.
4229 THE CHAIRPERSON: What's the date?
4230 MR. KEOGH: It would be the 2nd of November that the intervenors will be filing their comments and the applicants would be filing Monday the 14th of November. Is that correct, Mr. Johnston?
4231 MR. JOHNSTON: That's correct.
4232 THE CHAIRPERSON: That's what you had in mind?
4233 Okay. Done. Bench ruling.
4234 MR. JOHNSTON: Thank you. Actually, it might be helpful to the Commission as well to get the comments of the intervenors on the new material.
4235 THE CHAIRPERSON: Absolutely.
4236 MR. JOHNSTON: Thank you.
4237 THE CHAIRPERSON: Okay. Thank you very much. I know you have put in a lot of preparation for this and you share co‑responsibility for Mr. Goldstein's work, so thank you for all the filings that you have put in.
4238 MR. CASSADAY: Thank you. We appreciate your time.
4239 LE PRÉSIDENT: Madame la secrétaire.
4240 THE SECRETARY: Mr. Chairman, we are now ready to call the next intervenors. I would call the next seven intervenors as a panel to come up to the table, namely: Muse Entertainment Enterprises; True West Films; ImagiNation Film & Television Productions Inc.; Insight Production Company Limited; ImX Communications Inc.; Big Motion Pictures; and Original Pictures Inc.
4241 THE CHAIRPERSON: There should be enough chairs.
4242 You will each be entitled to make your own presentations of course.
‑‑‑ Pause
4243 THE CHAIRPERSON: I am going to call you in the order of your being listed on the intervention list. I would ask Muse Entertainment to begin. Introduce yourself, please.
INTERVENTION
4244 MR. PRUPAS: Thank you very much, Mr. Chairman. My name is Michael Prupas. I am the President of Muse Entertainment.
4245 I am glad to have some colleagues up here with me. Unfortunately, some of them I have never met before but nevertheless it's nice to be not alone up at the panel. I thank you for taking the time to hear our case.
4246 Let me speak very briefly about my company and my personal background. I do not have a written set of notes so don't look for anything in the package other than the original intervention that I submitted on September the 6th. I will give you a couple of minutes to find it there.
4247 THE CHAIRPERSON: We have had it and read it so you can proceed.
4248 MR. PRUPAS: Very briefly, I think as a company that is involved actively in the production of Canadian television programming we feel quite strongly that the pay television programming system in this country is one of the pillars upon which our programming can and should be based. I think it is important to ‑‑ firstly, let me tell you about our company.
4249 We are producers of many different programs including the program This is Wonderland, which has recently been nominated for 12 Gemini nominations. We had another program that received two Gemini nominations this year. In the last five years our company has been amongst the top 10 producers of Canadian content programs.
4250 We expect to be producing somewhere in the range of $50 million worth of Canadian content programming this year. In addition to which, we are a company that participates as well in what's called the production service sector in this country and have been very actively involved in doing some of that work as well. Amongst the other productions that we have provided services to have been a couple produced by Steven Spielberg, partly in Canada, including Catch Me If You Can and The Terminal.
4251 We have, as a result of that exposure, a very distinct philosophy about what is involved in producing Canadian content programming and hence the importance to us of these hearings.
4252 Basically, the way Muse looks at the challenges that faces us as a production company, producing primarily in the adult drama area, which is the toughest area to provide financing I think in the country, is that we start off with a base of funding from Canada which can vary from the substantial amount of funding that we can get if our program were to qualify as does This is Wonderland, for Canadian Television Fund moneys, which is one category; in other words, programs that are heavily funded from Canada, 90 per cent or more coming from Canada, to programs where we have a significant international co‑production partner under one of Canada's international co‑production treaties.
4253 Thus, this year we have been producing a major miniseries that will be on the CBC next year in co‑production with the Australian Broadcasting Corporation. We have in the past produced several movies with British co‑producers which is again our second category. Just to give you some idea of the numbers, in that case 70 per cent of the funding for a program that will qualify as Canadian content actually came from Australia.
4254 The third category are programs that we produce with Canadian licensees and with some Canadian funding but which have major American customers and where a significant amount of that funding, sometimes as much as 70 per cent as well, comes from the American market.
4255 Our ability to grow our company, given what we all acknowledge to be a limited source of funding in the Canadian Television Fund, is dependent upon our ability to have substantial support from Canadian broadcasters for the portions that we are expecting to get from Canada.
4256 When the CRTC first licensed pay television services back in the early eighties, I personally was involved in writing one of those applications in 1982, the philosophy at that time was that the pay television services should be contributing a significant portion of the budgets for those productions. I recall that some of the licensees guaranteed on a per production basis to put in $500,000 Canadian per production in 1982. Today if one is looking at the licence fees that we are getting from the two pay television services that you have heard here today, we are lucky if we can get in 2005 dollars as much as $250,000.
4257 That statistic alone is particularly going to be in a context where the amount of money that's been generated by the pay television services has been increasing exponentially over the last seven years.
4258 I know that you have been concentrating today on the issue of whether the addition of new competitors will in fact provide benefits to companies like ours and we are certainly conscious of the conflicting debates that have gone on.
4259 The reason why we are supporting the notion of adding pay television services to the mix that we have know and particularly the Spotlight application which we have specifically agreed to support, is because that application involves a commitment of capital on the part of the applicant, which is substantial and which involves a commitment to the absolute dollars, fixed amounts of dollars, at least in the first couple of years.
4260 I certainly am not in a position to comment on what the percentage of gross income is that any pay TV applicant should be expected to contribute to the Canadian production sector, but I believe that those figures need to be re‑examined as well and that there may be in future or even in this application hearing the opportunity to consider a floating rate of financial contribution starting with the 32 per cent as a base and not as a cap. In any event, I will leave that to financial analysts to help you on that one.
4261 The other point that I think is important is the basic concept of competition. We believe that when two well‑funded organizations are competing head to head with each other they will make enormous efforts to try to increase the volume of consumers that use their particular service and as a result the two services as a whole will benefit enormously. It is basic economics to us. It has been proven in the past in almost every other industry. To allow an industry to remain in a monopolistic kind of environment in this day and age seems to us to be a throwback to the past.
4262 Those are my comments.
4263 THE CHAIRPERSON: Thank you very much, Mr. Prupas.
4264 Commissioner Pennefather.
4265 COMMISSIONER PENNEFATHER: Thank you, Mr. Chairman.
4266 Good afternoon and thank you for being here with your intervention.
4267 We have all read your written intervention and your comments add to your point so I don't have too many questions. It is quite clear.
4268 You have been here today and have you followed the debates so far yesterday as well.
4269 MR. PRUPAS: Just today I'm afraid.
4270 COMMISSIONER PENNEFATHER: One of the important points we have raised I think and others have raised is repeated today by Corus. I will quote:
"There is no way that pay alone can support this absent the funding from other windows."
4271 In other words, the questioning of bringing another player into the pay field would increase the pressure on Telefilm and public funds and put at risk in fact the Canadian production sector. That comment is made in other parts of today's presentation that the licensing of a new service would put at risk the Canadian production sector and add nothing new.
4272 Do you have any further comment particularly on this component of the increased pressure on public funds, which is based on an assumption that, I think you have said it yourself, producers will still require access to those funds to complete the funding of their projects? Do you want to comment on that?
4273 MR. PRUPAS: Firstly, I think what I did say was that in about a third of the productions that we do we rely on those public funds. In fact, the challenge for independent producers in this country today is increasingly to try to find funds from other countries. To rely on the public system alone is I think a recipe for disaster. I think that the availability of funds ‑‑
4274 Firstly, I think that Telefilm Canada, in administering the Canadian Television Fund and what used to be called the LFP portion of that program are very conscious of the fact that their financial contributions have to be sufficient to make any particular program get produced. I do not think that they would change their policy so as to reduce the amount that they contribute to an individual program in order to spread it over further programs. I think they will be conscious of the fact that when they are contributing to a program, that those contributions should be sufficient to allow that program to get made.
4275 COMMISSIONER PENNEFATHER: The other question I wanted to ask you about was the matter of rights. The comment was made by one intervenor in this process that in fact, and I think even the APFTQ itself indicated that, one applicant had not taken into consideration the increased costs of rights that will drive the production costs up as a result of an increased number of windows for the product.
4276 If you combine the potential for increased production costs with today's discussion on the potential for decreasing rates, are we not putting at risk the current incumbents who support pay television? I know you don't think that they supported it enough, but I think the numbers say and demonstrate that they certainly have been very strongly supportive of the future film industry.
4277 Is there validity to the point that going forward there will be increased pressure to raise production costs as a result of increased rights required for the several windows that the product can be seen on?
4278 MR. PRUPAS: In every production that I have ever been involved with we have acquired the rights to utilize our programs in virtually all media into the future. There is, for example, under the Writers' Guild of Canada collective agreement, provisions for the payment of a profit participation to writers when revenues reach a certain level. There are provisions in the ACTRA agreement for the payment of rights for additional windows. However, our experience has been that the existing budget structures allow us to cover those rights on a sufficient basis.
4279 I don't anticipate, at least under the current regime of collective agreements that exist in English Canada, that there will be any material increase as a result of this licensing process.
4280 COMMISSIONER PENNEFATHER: Those are my questions. Thank you.
4281 THE CHAIRPERSON: Thank you.
4282 Vice‑Chair French.
4283 COMMISSIONER FRENCH: Mr. Prupas, very nice to see that there is life after Heenan Blaikie and that you continue to work in the domain that you care about very much.
4284 I don't have a lot of questions, but I have one that is more in the nature of trying to educate the Commission and perhaps of direct relevance to this proceeding. You mentioned that in the early eighties the discussion, and I emphasize I guess that it was just discussion, you will correct me if I'm wrong, was that rights would be going for about a half a million a film, pay TV rights would be going for about a half a million dollars a film. Is that a fair characterization of what you said?
4285 MR. PRUPAS: I didn't say it was just a discussion; (a) I believe it was a requirement, but certainly I know from contracts that I negotiated that it was a fact.
4286 COMMISSIONER FRENCH: It was a fact. Okay. Fair enough.
4287 Now the number is $250,000, which is not just 50 per cent of what it used to be but 50 per cent plus inflation would have been a relative number.
4288 MR. PRUPAS: Right. Correct.
4289 COMMISSIONER FRENCH: I guess I'm struggling with trying to understand why that is.
4290 The first question I would ask you and I think you may know but I'm not sure, has there been a comparable erosion of rights, I'm talking a proportional erosion of rights, the value of rights, in the French market, the French‑speaking market?
4291 MR. PRUPAS: In terms of the amount, the licence fees that have been paid.
4292 COMMISSIONER FRENCH: I know the absolute amounts would be different because of the amounts of the market, the size of the market.
4293 MR. PRUPAS: Yes, there has been a comparable reduction in the licence fees that were paid, certainly in the very early days of the pay television service. I should emphasize by the way that the period that I'm talking about was very short lived.
4294 COMMISSIONER FRENCH: Let's agree about that. Then I would ask you about, with respect to the francophone market, let's say from 1985 on or 1986 on was there comparable erosion or not in your experience?
4295 MR. PRUPAS: Yes. Yes, there was.
4296 COMMISSIONER FRENCH: There was.
4297 What would you attribute that to generally. An economist would say, no doubt he would be wrong because economics never works in the world of Canadian audiovisual production, but an economist would say that the purchaser's perceived value was lower and therefore he was less willing to pay. Is that ‑‑
4298 MR. PRUPAS: I think it was driven largely by the absence of the anticipated installation base for the pay TV services. When the original applicants made their projections and raised their initial capital, they were expecting penetration levels to reach a certain level. They weren't able to reach those levels. There was a crisis in I believe 1985 in the economics of the pay TV services. There was a bankruptcy of one major service and a merger of two others. As a result of the law of supply and demand two things happened: (a) there was less money in the system, but (b) the rules were changed and the rules were changed to create a monopoly situation, establishing a system where there was one buyer and many suppliers.
4299 COMMISSIONER FRENCH: Your claim must be a little more than that because that hasn't ‑‑ I think the question was a little earlier, but let's take 1990 to 2005. Your claim it seems to me was, or what I understood you to be saying was, the pay television industry was now thriving but was not being any more generous on a per film basis or a per hour basis to the independent production milieu.
4300 MR. PRUPAS: That's correct. That's my point.
4301 COMMISSIONER FRENCH: What would your argument be about the resources of that? I mean is it simply that there is more supply than demand?
4302 MR. PRUPAS: Certainly part of my argument is that there is a monopoly on the buying side.
4303 COMMISSIONER FRENCH: A monopsony on the buying side.
4304 MR. PRUPAS: Yes, I guess so.
4305 COMMISSIONER FRENCH: Your view would be that in the Canadian production side the simple fact of having two potential buyers in a single market will raise the value of Canadian production in the hands of the producer.
4306 MR. PRUPAS: I believe that there would be at least some competition. I don't expect any of the new licensees to be particularly generous but I think that at least in the presence of competition the opportunity to increase sale prices will grow.
4307 COMMISSIONER FRENCH: Thanks.
4308 I would just mention the last time we found ourselves together in an official context, Mr. Chairman, I was involved in the Quebec National Assembly with Mr. Prupas in some heart‑rendering battles over subtitling rights and the requirements through circulation of English film in Quebec and the alleged damage it would do to the linguistic fabric of the country. That was only 20 years ago so both of us are a little bit different and in different places but I'm delighted to see him again in this situation.
4309 THE CHAIRPERSON: Thank you.
4310 Commissioner Pennefather.
4311 COMMISSIONER PENNEFATHER: I'm sorry. Me again. I forgot to ask you one question. You mentioned in your comments a sliding scale for Canadian content contribution. Did I hear that right? This afternoon when you were speaking.
4312 MR. PRUPAS: I think I was talking about the Canadian Television Fund's contributions to Canadian productions. I think their scales are established in light of, (a) the kind of programming that you are talking about, is it children's, is it drama?
4313 COMMISSIONER PENNEFATHER: I thought I heard you referring ‑‑ I must of misunderstood you ‑‑ to the percentage of contribution, Canadian programming expenditure contribution by pay services.
4314 MR. PRUPAS: No. I wasn't specifically referring to pay services. I was looking at it at a global level. I was referring to the different kinds of financial contributions to my productions, some of which are heavily funded by Canadian licensees and some of which are relatively lightly funded by them.
4315 COMMISSIONER PENNEFATHER: Thank you.
4316 THE CHAIRPERSON: Thank you very much, Mr. Prupas.
4317 MR. PRUPAS: Thank you.
4318 THE CHAIRPERSON: True West Films.
INTERVENTION
4319 MS GRAYSON: Good afternoon. My name is Rochelle Grayson and I'm representing True West Films.
4320 I have provided you with my statement as well as a company profile. You are free to follow along.
4321 I am here today representing True West Films, which is based in Vancouver, B.C. We develop and produce feature films, television series and long form documentaries. We released the feature film It's All Gone Pete Tong, which won best Canadian feature at the Toronto International Film Festival last year and was named one of Canada's top 10 films 3004.
4322 Currently, we are also finishing Everything's Gone Green, a film based on renowned Canadian author Douglas Coupland's first original screenplay and are in the early stages on Coupland's first television series.
4323 Trues West Films is committed to creating, captivating and entertaining in Canadian product with both national and global appeal. It is from this perspective that we support Spotlight's application.
4324 In reviewing Spotlight's application there are four major issues that stand out and make their proposal attractive and compelling. Their new capital resource, their commitment to marketing and promotion, the opportunity to increase viewer options and improved negotiating power for Canadian producers.
4325 Spotlight's commitment to spend $35 million on Canadian content in its first two years, regardless of subscriber or revenue levels, introduces a significant source of new investment for Canadian producers. This increase is quite substantial compared with the average $60 million spent by private conventional broadcasters over the last five reported years.
4326 Specifically, we believe that this increase will have a positive impact on feature film funding which generally has larger budgets and therefore it is often difficult to secure the necessary amounts, particularly the last 5 per cent to 10 per cent of financing.
4327 Furthermore, Spotlight's ongoing commitment to investing 32 per cent of the prior year's revenues back into Canadian productions highlights their long‑term financial support of Canadian programming.
4328 Spotlight's recommendation of disallowing expenditure credit for licence fee top‑ups provides further guarantees that these proposed investments will truly expand the current capital pie, a funding increase that will benefit all Canadian producers.
4329 Spotlight's assurance to spend $45 million in the first two years on marketing and promotion highlights the company's dedication to growing its subscriber base and to ensuring Canadian content is seen by a wide spectrum of Canadian viewers. While producing top quality, high value entertainment is the ultimate goal of every Canadian producer, equally important is a broadcaster's ability to draw an audience and convince viewers to tune in.
4330 With the significant marketing and promotional budgets often seen with U.S. programming, it is essential that Canadian broadcasters engage in persuasive marketing campaigns, to engage viewers to watch Canadian programming. Spotlight's explicit commitment to this end is encouraging and highlights their understanding and acceptance of the responsibilities required to become an eminent player in the Canadian pay TV sector.
4331 The success of Canadian programming relies not only on the quality of product delivered but also on close collaboration and partnering between the independent producer and the broadcaster, a role Spotlight has clearly agreed to accept.
4332 Another issue these hearings have highlighted is the opportunity to increase Canadian viewer options. The extensive market research presented by many of the proposals portrays a strong case for more and better programming choices for Canadian pay TV subscribers. By allowing competition to enter the pay TV market, this can easily be achieved.
4333 I have read the issue brought up by other applicants, largely the incumbents, stating that a new player in the pay TV market will fragment content offerings and ultimately cause subscribers to pay more for services they already receive. To this I respond I ask you to consider my personal telecommunications example. If we focus on the bottom line of my telecom spending, I am paying much more today than I did in the late 1980s. I pay $40 for a cell phone, $60 for a land line, $45 for DSL. In 1988, I paid on average $50 a month for local and long distance service.
4334 In real terms, my telecom spending has more than doubled but so has what I can do with what I get. In 1988, I didn't talk much to my friends, just occasional quick phone calls. Now I can keep in touch with friends, family and business colleagues. I pay more but I definitely get a lot more value, satisfaction and wellbeing out of my 2005 telecom consumption.
4335 Telecom companies have developed these new products and services because of my freedom to choose and their necessity to attract my business. Most of that value comes from products and services that were not available when there was less competition. This is the type of value proposition we need to articulate for pay TV.
4336 So might consumers pay more for pay television services? Perhaps. But the real question to ask is: will they receive more value? I would argue that the answer is a resounding yes.
4337 Spotlight's entrance into the pay TV sector will not only offer better value for subscribers but will also provide an option for Canadian subscribers seeking pay TV broadcast commitments.
4338 By introducing competition, Canadian producers will no longer be in a position of having only one pay TV network in the east and one in the west. Producers will have a choice. This more competitive market will hopefully drive prices up and improve our ability to negotiate. In the current system we have virtually no leverage if there is only one game in town. Because so much of our financing and distribution deals are triggered by broadcast commitments, it is a game we need to play.
4339 As an independent Canadian producer, we represent the largest stakeholders in pay TV in Canada. In our opinion, Spotlight's application offers the strongest overall proposal of those submitted to the CRTC. Their initial and ongoing financial commitments to the production and marketing of quality Canadian entertainment are substantial and will clearly benefit all Canadian producers as well as pay TV subscribers.
4340 Regarding the benefits of competition, I do have one last quote I would like to leave you with. This is from World Bank advisors R. Shyam Khemani and Chad Leechor from their paper entitled "Competition Boosts Corporate Governance":
"Without effective competition it is not possible to build a culture of good corporate governance. Incumbent firms under restricted competition generally lacked the incentives to use financial and operational resources efficiently. They also often possess considerable market power which enables them to earn excess profits and will political influence to tilt public policy in their favour. Sound competition policy helps firms focus on efficiency, reduces price distortions, lowers risk of misguided investments, promotes greater accountability and transparency in business decisions, and promotes better corporate governance." (As read)
4341 I look forward to taking part in this expanded pay TV market, one that provides improved funding opportunities for Canadian producers and greater pay TV value for all Canadian consumers.
4342 Thank you for your attention and for allowing me to share my thoughts with you today.
4343 THE CHAIRPERSON: Thank you very much.
4344 By the way, your land line, do you get long distance with that?
‑‑‑ Laughter / Rires
4345 THE CHAIRPERSON: It's kind of high if you don't.
4346 MS GRAYSON: Yes, I do. Indeed I do.
4347 THE CHAIRPERSON: Okay. Commissioner French.
4348 COMMISSIONER FRENCH: It's Ms Green, am I right?
4349 MS GRAYSON: Grayson.
4350 COMMISSIONER FRENCH: Grayson.
4351 Ms Grayson, thank you very much for that. Of course, the Chairman and I are always liable to pay most attention to your paragraph on telecom so we will try to avoid doing that, but you did appeal to our prejudices.
4352 I wonder if we could just explore a bit how this process works.
4353 You said that you have got to have broadcasting commitments to make your financial montage. Am I correct there?
4354 MS GRAYSON: Often various financial funding will require a broadcast commitment as a prerequisite to triggering other financial drawdowns or other financial ‑‑
4355 COMMISSIONER FRENCH: But pay wouldn't be the only place you could go for that or would it?
4356 MS GRAYSON: No. Pay would not be one of the only places you can go for it, but pay TV is a specific window. Spotlight has actually already suggested in their application that that window is an additional window that is available to us. In that window right now we only have on network in the east and one network in the west that we can actually approach in English‑speaking Canada.
4357 COMMISSIONER FRENCH: In developing the properties you have developed over the last two or three years, have you had commitments from pay from the incumbents, either of them?
4358 MS GRAYSON: We have not.
4359 COMMISSIONER FRENCH: You have not.
4360 MS GRAYSON: We have not.
4361 COMMISSIONER FRENCH: What would your hypothesis be about why not? You won the best Canadian feature with It's All Gone Pete Tong. Can you now sell it to them?
4362 MS GRAYSON: We can now sell it to them. Yes, that is definitely an option.
4363 Our funding has been complete so obviously we would have to negotiate that with our Canadian distributors and they often deal with sort of the local pay TV networks. But none of our films have been funded by the pay TV services here.
4364 COMMISSIONER FRENCH: Let's talk about that then. Let's forget It's All Gone Pete Tong. You have sold the property ‑‑
4365 MS GRAYSON: Right. Right.
4366 COMMISSIONER FRENCH: When you are developing a project, what would you ascribe your inability to attract the interest on the part of the pay television licensee?
4367 MS GRAYSON: I think that part of it is their programming needs, what they are looking for. I do agree with what Michael said in that there is more supply than demand. So they have a finite number of Canadian content programming that they are looking to fill and if you fit into that then you may get some funding from them. However, they have a lot more to choose from. From a producer's perspective, we are providing a lot of content and they are selecting what they feel best suits their audience. I think having competition will introduce other audiences and other people with other interests in terms of what kind of value they want to provide to their subscribers.
4368 COMMISSIONER FRENCH: It is your theory that if we build an audiovisual space people will come and you will fill that space. Is that your theory? You have to be in effect telling us that two pay television stations who are essentially competing for the same audience with roughly the same kind of locomotive programming will nevertheless generate twice as much demand or something like twice as much demand for Canadian programming.
4369 MS GRAYSON: I think there is one flaw in that logic in that I am not assuming it is the same audience. I think there is a greater audience that is not being fulfilled. I think there is an audience out there that is not getting the value that they need and so they are not getting the programming that they require that would encourage them to pay for a pay TV service. Because they have no choice or they have only a couple of choices, they may choose not to subscribe to the current offerings because it doesn't meet their needs. Someone else can enter the market, offer greater value or offer a different value proposition and that would be attractive.
4370 I am saying the market actually would grow. I am not saying that we are necessarily fragmenting the existing audience. I'm saying trying to provide additional Canadian content to grow the pay TV subscriber market.
4371 COMMISSIONER FRENCH: What is it about Spotlight's programming plans that leads you to conclude they are going to draw a new audience into the pay market?
4372 MS GRAYSON: I think the idea that they are bringing in additional feature films that are well beyond sort of the U.S. first run movies will make sure that they are looking at other audiences and people who are attracted to those alternative feature films would probably be interested in also alternative Canadian content programming.
4373 COMMISSIONER FRENCH: So in your mind, Ms Grayson, there is an unmet need in Canadian television today for films on television.
4374 MS GRAYSON: Yes.
4375 COMMISSIONER FRENCH: Thanks very much.
4376 THE CHAIRPERSON: Thank you, Ms Grayson.
4377 ImagiNation Film & Television.
INTERVENTION
4378 MS SAINA: Thank you, Mr. Chair and members of the Commission for allowing me to speak in support of Spotlight today.
4379 My name is Nicolette Saina. I'm an independent producer who has founded ImagiNation Film & Television Productions based in Edmonton. I have dedicated my career to creating Canadian cultural product as a writer, producer, director, first cutting my teeth on smaller one‑off nationally broadcast specials and now churning out high end multimillion dollar dramatic productions.
4380 We are proud of the fact that we creatively and financially maintain control of all of our productions including 100 per cent or the majority copyright and ownership in all cases.
4381 Our first TV movie one the 2003 Gemini for best TV movie in Canada and landed in the top five in two world competitions in fields of almost 100 movies, including fare from HBO, BBC and Showtime. That we were able to stand up against this competition was very exciting and affirming for us.
4382 It is also exciting that I have been able to bloom where I have been planted, and that is in Edmonton. I am very grateful for everyone in the Canadian industry who has helped me achieve that. What you are looking at today is I am not as evolved as Michael but we are heading in that direction. Our company is on the verge. You are looking at a snapshot of someone on the cusp to explode.
4383 Our company thinks that the Canadian broadcast landscape is perfectly poised for an exciting and successful shake‑up in the premium pay TV sector. We are very much in favour of a competitive environment for pay TV. We feel it is underperforming and could truly benefit from a fresh injection of new energy and verve. To that end, I am here enthusiastically supporting the Spotlight application.
4384 That the time is ripe for new pay TV players on the national scene is evidenced by the fact that Canada lags dramatically behind the U.S. numbers by almost 80 per cent per capita. This I feel is due to both the current regional monopoly, thus lack of competition, and most importantly I feel the failure to create energy and excitement around the platform. HBO, Showtime and Stars were positioned in the U.S. as vibrant top value entertainment options and the ensuing programming and subscriber results reflected those promises.
4385 We believe healthy competition creates a healthy marketplace and the competitive infusion to the sector we feel would really raise the bar for all pay TV players, new and existing, as they pace one another on the road to excellence, striving to develop the strongest programming and the most creative promotional strategies to lure and stimulate viewers.
4386 We feel that the potential exists to duplicate or better the U.S. success model on a per capita basis since we feel there is plenty of room to grow. I have studied Spotlight's proposal and am very impressed with the thoroughness and commonsense approach to their business plan. Three very clear benefits emerge.
4387 First, the consumer. The Canadian viewer will hugely benefit as this move would more than double the choices available in Canadian homes. Research supports that an appetite for this exists.
4388 Second, the existing pay TV services will benefit from competition, as previously stated.
4389 Finally, the production sector in Canada would hugely benefit. Before I go there I want to focus on benefit one and two, consumers and incumbents.
4390 The idea that this move would reinvigorate the industry is so clearly evidenced by the recent marketing effort by Corus to ship 20,000 DVDs of their marquis show Rome to homes that weren't subscribers to its premium movie channel Movie Central. This seemed to me to be a knee‑jerk response to the criticism launched with the new applications. I didn't think that the optics were very good. Although it was very innovative and creative, the optics weren't good that it happened a few weeks before a hearing to prove some sort of point
4391 Where were these creative initiatives over the past 20 years. We have proof in the pudding that competition has already changed the marketing behaviour before you even licensed this, as evidenced by this initiative. The consumer has benefitted because they have received free DVD freebies, so already we are seeing a rattling.
4392 The third benefit is to the independent production sector. That is a personal benefit obviously. Here is what we like about Spotlight's plan.
4393 One, we like that they are very well capitalized.
4394 Number two, they are paying particular attention to the marketing and promotion of their service and programming and backing it solidly financially. We are very big on that. We demand that from our broadcasters. We are happy that they have a very intelligent plan in place.
4395 Three, there is an experienced management team, a strong founding group in place to execute these plans.
4396 Four, there is a comprehensive and solid business model.
4397 Five, they are dedicating themselves to Canadian content.
4398 I must say, I must actually scream this, dramatic production in Canada is a very, very fragile sector. For producers of high end quality drama, this is a very important and very significant commitment that needs to be taken very, very seriously. Whether they succeed or not, we are left with a $32 million guaranteed injection into high end Canadian storytelling.
4399 Six, I am also very impressed with their proactive stance. I was impressed with my meeting with George Burger, who met with us in Edmonton and took an active interest in our company. I was impressed because I didn't know how he knows that we are on the verge of exploding. I haven't publicly let that information out, not even to my own industry locally. That he somehow found out this and came directly to us and took an interest in what we had was very, very impressive.
4400 My next point is: can the market support new pay TV services?
4401 We don't subscribe to the notion that less is more. Sometimes more is truly more. We can't compare what happened in the early eighties to now because we live in an entirely different digital world and the pie, we feel, grows with competition.
4402 We also don't agree with the idea that cheaper is better. Sometimes value trumps regardless of price.
4403 I would like to talk a little bit about value.
4404 HBO didn't capture my interest until it started churning up ground‑breaking fare such as Six Feet Under and the Sopranos. My very strong belief is that very strong content will drive the success of the new pay TV stations and for that you need the right people in the right places running the service, which we think we have, and you need the right talent and we feel very strongly that that does exist in Canada.
4405 It is a very exciting time for our industry right now. We are making huge inroads in the U.S. with programs such as Slings and Arrows, and Degrassi, and Da Vinci's Inquest.
4406 I have friends who work in Hollywood, they are Americans, who have told me about the rumblings of Canadian shows all of a sudden. In fact, there is a New York Times article that said exactly word for word: How do these Canadians do it? As if we somehow just emerged doing great things, yet we have been flexing our muscles and exercising our muscles for years but we are now making inroads there.
4407 More importantly, we are making huge inroads with our own audiences as evidenced by Corner Gas, that more people watch that in Canada than the Simpsons and that that springs from Regina says to me that anything is possible and it is very exciting. For someone from Edmonton, that's hugely exciting.
4408 Canadian TV we feel is truly poised to breakthrough the international marketplace. I feel that Spotlight has the potential to be Canada's HBO and could really revolutionize the entire industry, just like HBO did, where mainstream programmers struggle to keep pace with their ground‑breaking, edgy offerings.
4409 New players on the entertainment scene such as Spotlight create new and exciting opportunities for our company and industry to strengthen its creative muscle. It is time to close the curtain on the current pay TV monopoly, which truly stifles the potential of the sector, and shine a light on invigorating new forces.
4410 Thank you for your attention to my comments.
4411 THE CHAIRPERSON: Thank you.
4412 Commissioner del Val.
4413 COMMISSIONER del VAL: Thank you.
4414 Why did you choose Spotlight over the other applicants, well specifically Allarco and Boom TV?
4415 MS SAINA: I looked at all of the applications. I actually wrote a support letter for Allarco as well. I like what they are doing. I think this is stronger, but I like some of their ideas. I prefer this, but I support both. This is clearly better backed and it is more attractive to our company, but it is not to say I don't like that.
4416 COMMISSIONER del VAL: In your letter and today you also mentioned the time is right for a new pay TV on the national scene as evidenced by the fact that Canada lags dramatically behind the U.S. in numbers, almost 80 per cent per capital. I don't quite understand what that number is. What is the 80 per cent?
4417 MS SAINA: That is an area of expertise that is not my ‑‑
4418 COMMISSIONER del VAL: That's fine.
4419 MS SAINA: But I will get back to you on that once I look at ‑‑
4420 COMMISSIONER del VAL: That's okay.
4421 MS SAINA: It was just something when I looked through the document, that was information given to us which seemed impressive.
4422 COMMISSIONER del VAL: Okay.
4423 In what you talked about today, I am interested in finding out a bit more about your movies.
"Our first TV movie won a 2003 Gemini for best movie and landed in the top five in the two..."
4424 How much did it cost to produce that movie?
4425 MS SAINA: It was $4.8 million.
4426 COMMISSIONER del VAL: What do you think of the Canadian Film Channel's proposal and their budgets?
4427 MS SAINA: I wasn't that impressed with that application. You know, just at first blush I wasn't as impressed. I like the idea of the money being recycled. I don't know, it doesn't seem that strong to me. I wasn't that impressed with it.
4428 COMMISSIONER del VAL: The concepts that the Canadian Film Channel has of many more movies but a much lower budget, a smaller budget to produce say, what do you think you could produce for $500,000 on a feature film?
4429 MS SAINA: That's a very low budget. In my opinion, I don't think that is substantial. I mean it is possible. It just seems quite tight.
4430 COMMISSIONER del VAL: What about $1 million?
4431 MS SAINA: You can do anything for anything. I have done extremely low and I have done very high end. I have had the gamut. So your question is what?
4432 COMMISSIONER del VAL: What about say if the budget were $1 million for a feature film?
4433 MS SAINA: Do you think that is a good budget?
4434 COMMISSIONER del VAL: Yes.
4435 MS SAINA: I think it is low but it's not impossible to do.
4436 COMMISSIONER del VAL: Thank you.
4437 The research that you were mentioning both in your letter and today, citing that the research supports an appetite for this, for the competition to exist, is that Spotlight's research?
4438 MS SAINA: Yes.
4439 COMMISSIONER del VAL: As a producer, what are your views of an all Canadian channel? ACTRA I think used the word "ghettoization". What do you think of that? There is also the Rhombus Media letter that Commissioner French mentioned that we are actually producing too much. I guess those are two separate issues.
4440 But an all Canadian channel, what do you think of that?
4441 MS SAINA: That is one of the applicants you are asking me to respond to.
4442 COMMISSIONER del VAL: The Canadian Film Channel has proposed an all Canadian channel. Allarco also has a proudly Canadian channel and it is just all Canadian programming. What do you think of that?
4443 MS SAINA: I like the concept of it. I am interested in looking at the whole picture though, you know: what is the financial backing, what is the money spent on marketing? I need to assess and look at the entire picture before I could comment on it. I mean it is a good concept. It's a good idea in theory, but it would have to be very well mapped out.
4444 COMMISSIONER del VAL: ACTRA used the term "ghettoization" of Canadian programming, that it could be one of the results. Do you have any comments on that?
4445 MS SAINA: As a concern for...?
4446 COMMISSIONER del VAL: For putting all Canadian programs on one channel. Would that be a concern to you?
4447 MS SAINA: It doesn't concern me per se.
4448 COMMISSIONER del VAL: Those are my questions. Thank you for your time.
4449 MS SAINA: Thank you.
4450 THE CHAIRPERSON: Thank you very much.
4451 Insight.
INTERVENTION
4452 MR. BRUNTON: Mr. Chair, members of the Commission, hello. Thank you for the opportunity to speak today.
4453 I would like to try to make some comments that aren't repeating what some of my additional producers are saying today so I am going to adjust some of the statements that I was going to make.
4454 My name is John Brunton, as I said. I am the CEO and Executive Producer of Insight Productions.
4455 Insight Productions is known for producing big events. We have produced Canadian Idol. We have produced the Juno Awards each year. We produced the Canadian Walk of Fame. All of those for CTV. Falcon Beach, Global's big new drama series, we produced for Global. We are very excited about that.
4456 On the CBC right now we are producing a show called Hatching, Matching and Dispatching, Mary Walsh's new wicked comedy show from Newfoundland. We are also about to broadcast on the CBC a project by the name of Comedy Gold, which is the history of Canadian Comedy from Wayne and Schuster to Mike Myers and Jim Carrey. We are in a high ratings, high profile big event TV world. By and large that's what we try to do.
4457 We live in a very competitive world. We live by Canadian broadcasters competing for the shows that they think will benefit the time slot that they are putting that show in, that they think will attract advertising revenue for their network, that they think will help them with their business. We live in a very, very competitive world and quite often advertisers and broadcasters compete very aggressively to try to get our next show.
4458 So of course I believe very strongly in competition.
4459 I need to say to all of you that Insight Productions is a minority shareholder of Insight Sports and Insight Sports is a minority shareholder of Spotlight. That is why I'm here today. I'm here to support Spotlight. Our company has a very, very, very tiny share of that business, but I am here as a producer today. I would like to talk from the perspective.
4460 We had some discussions earlier about HBO. I have had the good fortune over the years of working for both HBO and Showtime in the United States. Both those pay services in America have competed for some of the shows that we have produced.
4461 In the beginning I remember HBO as being a pay service that almost exclusively concentrated on promoting big American movies. What has happened with HBO is they have just absolutely started to kick everybody's ass in the States.
4462 They have won so many Emmies year after year and we view the point of differentiation, not only HBO as a competitor with Showtime and other pay services but HBO as a competitor with NBC, ABC, CBS, Fox and everyone else. So Sex and the City, and the Sopranos, and Curb Your Enthusiasm, and Six Feet Under, and Deadwood, and the list goes on and on and on, have really caused that channel to really differentiate itself and to stand out and to be really seen as a premium service.
4463 What I have noticed at HBO is that they have wildly dynamic and passionate people that run that company, that are extremely demanding. They are wildly competitive. I think that has in many ways has been the answer to their success.
4464 You look at shows like what the Trailer Park Boys have done for Showcase or what Corner Gas and Canadian Idol have done for CTV, and I guess it just makes me feel very strongly that a competitive pay TV world in Canada will cause those two services to really try to distinguish themselves in the marketplace. To me that point of distinction between those services will be to the benefit of all of us sitting here at the table and all Canadian producers.
4465 As we heard from Corus and Astro, they feel this huge threat of the big American movie coming at them from all these different directions. So in one way they are saying, well, is that our future. My feeling is that we may very well be Canadian pay TV's future and we may be the answer to their ongoing success when they are looking at iPod distribution.
4466 The thing about HBO and those shows that I had mentioned is they have a degree of exclusivity on those shows. There is a point where the notion of a broadcaster paying only a portion of a budget for a program and one needing all of these different windows and that same show has to run on all these different platforms is an old fashioned idea in my opinion.
4467 Have exclusivity. Draw people to your service. Do something that is special and unique. That is why I am supporting Spotlight. I really believe that it is a really dynamic group of people. I really feel that in George Burger's case, he came from the production world. I feel he is really passionate about programming. I really feel that he is bubbling over with ideas.
4468 I feel that we have such limited time slots to find places for our programs in Canada. We have huge competition with the Americans, with American simulcast shows, with all the publicity spillover across our borders from the American media machinery that to have yet another place, another competitive place that we may be able to find a spot in prime time, that we may be able to be a touchstone for that broadcaster to attract Canadians to that service is something that I just can't see any reason why that wouldn't benefit both players in that world to be competing for those eyeballs, for those Canadian hearts and minds. I think that right now they don't have as much pressure to do so.
4469 Just in wrapping up, everybody has talked about the huge commitment. I think that Spotlight has a dream team of players. I think the foundation of the company is rock solid. I think it's financial base is solid. I think gentlemen like Mr. Tanenbaum and what he has done at Maple Leaf Sport & Entertainment and some of the other endeavours in his world makes for a really solid backbone to that company. Obviously, Bell ExpressVu is a huge company that also gives a really solid foundation.
4470 From my perspective, I think it could only mean good things for a company like mine and all of ours and everyone in the Canadian production business.
4471 Thank you.
4472 THE CHAIRPERSON: Thank you, Mr. Brunton.
4473 Commissioner Williams.
4474 COMMISSIONER WILLIAMS: Good afternoon, Mr. Brunton.
4475 Can you tell me a little bit about your experience working with the incumbent pay services? What has your experience been with them?
4476 MR. BRUNTON: I haven't got very much experience. We haven't had any real successful projects that we have contemplated or developed together. I have very little relationship with them and have had historically.
4477 COMMISSIONER WILLIAMS: Do you think this will be quite different should Spotlight ‑‑
4478 MR. BRUNTON: I believe in competition. I think that if there was competition maybe I would have heard from them more aggressively.
4479 COMMISSIONER WILLIAMS: Does your support for this competition extend to other applicants as well?
4480 MR. BRUNTON: Philosophically, the idea of an all Canadian channel offends me a little bit. I have worked for years and years on a program like the Juno Awards, for that show not to be ‑‑ to ghettoize Canadian musicians. We have world class Canadian musicians and we appear on the Brit awards and we appear on the Grammy awards. So should we then have a Canadian award show that is only for Canadians? When we are leaders around the world, it doesn't make sense to me.
4481 The American show that follows Canadian Idol are lucky because of the lead‑in audience we give those guys. I just don't like the idea of being a second class citizen. I think that in some way that might infer that.
4482 We are in the world of broadcasting. Communications is a worldwide thing, the worldwide net, worldwide everything. Canadians should be front row centre and participating in that world. We are certainly trying to.
4483 COMMISSIONER WILLIAMS: I'm not sure if I got the answer to what I was looking for.
4484 MR. BRUNTON: Okay.
4485 COMMISSIONER WILLIAMS: Does your support, your theme being that you support a competitive environment or more competition in the pay services business, does that support extend to the other applicants or is it clearly on Spotlight?
4486 MR. BRUNTON: I think it is an overall philosophical point of view. Underlying that, I think that the Spotlight application is the best financed. I think it is the most aggressive in terms of funding Canadian production. I think it has a dynamic team of people involved. I think that is really, really important.
4487 In my experience at the variety of different networks and over my career, there are all those people that I have met, whether it be at the CBC at different times or at CTV right now or at Global and various places, that are dynamic, exciting. They are risk takers and they are ready to create and produce the kinds of programs that are distinctive and that are going to stand out and not the status quo. Those are the people that I respect and I like to work with.
4488 That is my point about Spotlight. I just think it is a dynamic group. I think that their plan is the most appealing. I think that their financial foundation is the solidest.
4489 COMMISSIONER WILLIAMS: Okay. Thank you very much, Mr. Brunton.
4490 Those are my questions, Mr. Chairman.
4491 THE CHAIRPERSON: Mr. Brunton, just a few follow up questions.
4492 MR. BRUNTON: Yes, sir.
4493 THE CHAIRPERSON: The intervenors have argued that there is competition in that there are multiple windows, the windows are starting to overlap in a way that you find HBO productions on conventional or specialty TV in Canada, so that really there is competition now. I'm trying to link that.
4494 So I would appreciate your comments on that and if you could link that to your earlier comment ‑‑
4495 MR. BRUNTON: Sure.
4496 THE CHAIRPERSON: ‑‑ that whizzed by me and maybe you can take it more slowly ‑‑ where you said that you didn't think people should worry about windows, windows was an outmoded concept.
4497 Was that what you were saying?
4498 MR. BRUNTON: No.
4499 THE CHAIRPERSON: And that you should go for exclusivity?
4500 MR. BRUNTON: No. I'm just saying that in a world where you can get the same thing on a million different platforms you will see, in my opinion, people wanting exclusivity and ownership, so that they will be directed to a specific broadcaster or platform and producers will be producing things specifically for cell phones and specifically for variety.
4501 I'm not talking about every show. Certainly there are many shows that we produce and we try to expose them on as many platforms as is humanly possible.
4502 THE CHAIRPERSON: Right.
4503 MR. BRUNTON: Absolutely we do that. But, on the other hand, I think you will find that like HBO and the fact that "Sex And The City" was appointment viewing for them and they had exclusivity for that program, there was nowhere else you could see it, and it was the buzz of the town and the buzz of America for such a long time, I think you will start to see ‑‑ I know that in my discussions with a number of different broadcasters the issues of exclusivity are becoming much, much, much more important and who they share it with and how that defines their brand and what their brand is.
4504 So in the case of pay television in Canada, I think it may be a mistake not to have programming that you can only see on that channel that defines what the channel stands for. You get a sense about who HBO is by the kind of programmings they put on the air. You get a sense as to who CTV is by the kinds of shows that they are putting on the air right now. I just think that if there is a competitive environment the need to create a distinctive brand will cause us all to benefit by that.
4505 I think the exclusivity is a period, but the length of that period and the ease in which a variety of different kinds of programs can be seen on different platforms is a hot topic every day on every show that we are doing and at what point are people going to get access to the DVD of the season of the show that you have done, or will you hold that back for a much longer period. Will that person that owns that platform pay you a much, much higher licence fee for that degree of exclusivity?
4506 THE CHAIRPERSON: That is what it would come down to. For exclusivity to a given platform, if that is what you are suggesting, can you imagine the price you would have to charge in order to make it worth your while to forego all the other platforms?
4507 MR. BRUNTON: Absolutely.
4508 THE CHAIRPERSON: And is that conceivable in the foreseeable future in Canada?
4509 MR. BRUNTON: In my opinion it is necessary for people to be distinctive unless you have a monopoly and there is no point in being distinctive, you don't need to be.
4510 I think there are a lot of people out there in the world of digital television, everybody competing for eyeballs, and they want to have their hit that is on their channel, on their station and their destination and I think it is crucial and important.
4511 I think it has worked very effectively for home box office.
4512 THE CHAIRPERSON: From their point of view it would be.
4513 Of those productions you named of HBO, how many are their own productions and how many are independent productions?
4514 MR. BRUNTON: Of HBO's?
4515 THE CHAIRPERSON: Yes.
4516 MR. BRUNTON: I think in terms of who owns the copyright and the nature of their business, I think there is an element of independent production in every single one of those shows.
4517 Certainly Larry David owns the copyright to "Curb Your Enthusiasm" and when you think of "Curb Your Enthusiasm" you think of HBO.
4518 THE CHAIRPERSON: Is "Curb Your Enthusiasm" offered exclusively on HBO in this case?
4519 MR. BRUNTON: It had for a period of time and it negotiated, in a partnership with HBO, to then start releasing DVDs of their season, those kinds of things. It is in a broader syndication now, yes.
4520 THE CHAIRPERSON: Yes. Which is likely to be the development generally, isn't it? You are talking about a timeframe at best, aren't you, where exclusivity would hold?
4521 MR. BRUNTON: Yes.
4522 THE CHAIRPERSON: I don't know whether you had a chance to see the CMI Report that was filed by Astral and Corus, but in that they elaborate on the video value chain going back to the early days when there were just movie theatres and conventional TV and then home video added on, and so forth.
4523 MR. BRUNTON: Yes.
4524 THE CHAIRPERSON: So those are multiple windows. As you said, you would really seek to get as many of those platforms buying your product as ‑‑ sequencing it as best you can to maximize your dollar value. Right?
4525 MR. BRUNTON: Yes. I is the order of the process and it is the degree of exclusivity that defines a brand. When you think of certain Canadian series that have been on Canadian pay television, I don't feel necessarily that they are identified. They are part of a chain of a number of different windows that don't distinctly define the nature or the personality of that place.
4526 I guess that is part of the point I'm making.
4527 THE CHAIRPERSON: I understand that point, but I guess increasingly, as the windows increase and the media involved increase, you get more disorder in that marketplace and overlapping both in terms of timing and audience, do you not?
4528 MR. BRUNTON: Yes.
4529 THE CHAIRPERSON: Therefore, their point is that we are really facing competition coming around the corner at us right now. So while the pay‑tv application window, so to speak, in the orderly marketplace is one thing, the reality out there is that we have competition.
4530 That is their point.
4531 MR. BRUNTON: Yes.
4532 THE CHAIRPERSON: I will give Mr. Prupas a chance to ‑‑
4533 MR. BRUNTON: I think the idea of the orderly marketplace is a convenient way of everybody having to pay a little bit at times, and I think that the notion of the orderly marketplace is going to be turned upside down on its head.
4534 I think there are certainly ‑‑ tv came on ‑‑
4535 THE CHAIRPERSON: So if that is ‑‑
4536 MR. BRUNTON: TV came on and everybody said "Nobody is going to go to the movie theatres any more. They are all going to sit at home and watch television". Of course that has not been the truth.
4537 There is a lot of new technology and we are viewing things on a number of different platforms, but to what extent. Is a network going to say, "You know what, I don't want you to download desperate housewives on that gizmo. I want everybody to come to ABC tonight." Or is ABC in a position where they can make so much money distributing on that other? At a point, where do you give up the value of your brand?
4538 THE CHAIRPERSON: Or can they stop it?
4539 MR. BRUNTON: Pardon?
4540 THE CHAIRPERSON: Or can they stop it?
4541 MR. BRUNTON: Or can they stop, yes. Yes.
4542 THE CHAIRPERSON: I guess that is their point, that they are saying that the marketplace is becoming increasingly disorderly as the platforms multiply and therefore you have to see us as facing competition from other technologies and other windows, so it is over simplistic to say that we don't face competition in the marketplace.
4543 That is their position.
4544 MR. BRUNTON: I understand that part of their point and I agree with that part of their point. I agree with that part of their point.
4545 There is increased competition every day in any number of different media for every one of us, absolutely, in terms of the different options for all those audiences out there totally and completely. I don't disagree with that.
4546 But I don't think that by not having another pay television applicant is going to in any way solve that problem for any of us.
4547 THE CHAIRPERSON: Mr. Prupas, you are on the panel, so ‑‑
4548 MR. PRUPAS: Sorry. I just wanted to jump in.
4549 I agree with John, because I know it from personal experience, that many of the networks that we are dealing with are actually looking for more exclusivity, more distinctiveness in their programming. I think when you talk about the multiple windows that are available that are creating greater competition for a service, I think the solution to that competition is in fact going to be exclusivity.
4550 I think there is a disconnect in the thinking there.
4551 THE CHAIRPERSON: Run that by me again?
4552 MR. PRUPAS: If your problem is that you have many other windows that are going to be competing for the same product, the way to fight that problem is to create exclusivity and keep it as long as possible and create ‑‑ control the orderly marketplace in your favour, which probably means, as you suggest, that there is going to be more money that you are going to have to pay for that exclusivity.
4553 The other aspect of that is ‑‑ in terms of Canadian production not being able to be supported by Canadian financing, you need to make sure that you have a distinction within the Canadian marketplace, but you can afford to have other windows in other countries.
4554 THE CHAIRPERSON: Right. Either Mr. Brunton or Mr. Prupas, we had one of the applicants ‑‑ I can't remember now who it was ‑‑ who argued that the brand identification in the United States of the pay services was a lot higher than the brand identification of the pay services in Canada.
4555 Would you agree with that? If you do, why? If you don't, why?
4556 MR. BRUNTON: I completely agree with that. In fact, I would almost go so far as to say that I'm not sure that HBO's brand identification isn't stronger in Canada than our Canadian pay channels, for a variety of reasons. I'm not so sure ‑‑ there are certainly some great brands, but HBO is a monster brand and it has just been growing and growing and growing and growing in a number of different fields.
4557 THE CHAIRPERSON: What about the others? What about the Showtime and the Starz brand?
4558 MR. BRUNTON: I think that Showtime is a significant and a solid brand. I think that certainly it is a very, very, very well‑known brand in America. HBO would be a better known brand in Canada. HBO is certainly the brand leader in the pay‑tv universe. Showtime I would say would be number two.
4559 THE CHAIRPERSON: Thank you very much.
4560 We will now hear from ImX Communications.
INTERVENTION
4561 MR. ZIMMER: Mr. Chairman, Commission members and staff, my name is Christopher Zimmer and I am a feature film producer based in Halifax, Nova Scotia. I started my company, imX Communications, in 1985 and I believe it to be one of the longest existing film production companies in Canada, sort of a dinosaur as I have seen a lot of things come and go.
4562 We have done a steady flow of feature films in the last 20 years, 28 to date, and I'm proud to say that they include some notable ones that have arisen out of regional or local stories, "Margaret's Museum", "New Waterford Girl", Wayne Johnston's "Divine Ryans", to mention but three.
4563 We have supported and encouraged Canadian east coast writers, directors, actors, and we have done many first works by what we believe to be up and coming Canadian talent. I have produced films in many of Canada's provinces and indeed Nunavut as well.
4564 We have also chosen to do a strand of international films, co‑productions for the most part, that reflect my belief that the Canadian film industry and those who work in it cannot work in a cultural vacuum but must learn from and contribute to stories and ideas that have relevance to the world.
4565 Canada is very clearly a place of international cultural influences and people, so it seems natural to me, both as a film maker and a business man to do projects in partnership with countries such as Holland, the UK, Poland, Germany, France, Venezuela and Spain. We have produced these films not only in English, but in French, Spanish and Dutch.
4566 All of the productions provided work for our Canadian actors, technicians, production personnel and, not the least, Canadian lawyers.
4567 This is my first time at the CRTC hearings and I notice there are a lot of lawyers in the room.
4568 THE CHAIRPERSON: You noticed, did you?
‑‑‑ Laughter / Rires
4569 MR. ZIMMER: I'm impressed. I feel I am the minority.
4570 But all of these films found their way to the television screen and the Canadian TV audience. Given the state of our theatrical industry at this moment, and in the past, this seems very important to me. To a much lesser extent we have done films set in Canada for foreign companies acting as a Canadian line producing company. These projects not only help keep the ship afloat, but also provide valuable links to the U.S. and UK mainline companies and valuable jobs and experience for the Atlantic Canadian acting and film production community.
4571 All of this is by way of saying that I have had to do business with a great variety of different partners, financiers, government agencies, distributors, broadcasters, television companies, investors, banks, agents and their lawyers.
4572 With a bit of this as background, we are here to support the application before you today for a licence for a new national pay‑tv service by Spotlight Television.
4573 I was contacted by several of the current applicants and took it upon myself to learn something about all of the applications in order to see if there was anyone that was really more outstanding. I believe, in my opinion, Spotlight is.
4574 I have done many projects with the current holders of the pay‑tv licence, TMN and Movie Central, going back a long way, and will hasten to say that I have been pleased by the participation that these companies have made to the financing and support of feature films in Canada. Many of the projects would not have been possible without this support.
4575 I have never been made to feel as though my location on the east coast and our projects have been an issue and I don't think this is a concern of mine here. Even though I live on the east coast and am a dyed in the wool Maritimer, I am a very big regionalist.
4576 I also think that this is now time for the arena to open up somewhat and for there to be additional players who the producers can approach for their licence fees. Competition here will, I hope, lead to a more realistic level of financial participation given the realities of today's cost of production, just as I know that to survive I cannot depend on any one source of finance for a project. I must consider all options.
4577 I also know that new participants to the Canadian tv market will create more options for us, and this can only be good. I do not believe that additional services on the dial would do anything but put more Canadian films in front of our views, and this I believe to be a good thing.
4578 If we can offset the deluge of U.S. reality shows in any way and increase the Canadian drama programming here, I think it would be a good thing.
4579 Spotlight Television's plan seems to be my choice in that they have proposed to put more money on the table in the first year and a clear incremental value for the industry in the following years. This must be done on a national basis and be open to Canadian film makers regardless of where they live and work. This level of capitalization is needed if they are indeed to succeed to participate in a meaningful way in the Canadian film production industry.
4580 This is slightly aside. I think the ability to cash flow licence fees upfront so that film makers can actually use this money is very important. Extended terms of licences payment serves only to make the banks and interim financers happy. Oh yes, and again, the lawyers are very happy too.
4581 This has become a very real concern as the costs of cash flowing these licence fees is often equal to 20 percent of the value of the fee. If you add to this the 25 or 30 percent distribution commission, as we are commonly confronted with by Canadian distributors, the actual net value to the producer is 50 percent or less. I don't know if anybody here has really looked at this, but I believe this has to change.
4582 As you are no doubt aware, there has been a consolidation on a corporate level of the channels on the dial. Shows that are bought for one channel always now seem to have multiple use. This is counter to the idea of diversity of content and ownership and service only the owners of the corporations, not the Canadian viewing public and not the producing sector of the industry.
4583 If these companies were paying for a majority of the cost of the production it would be one thing, but the fees paid usually equal less than 1 percent of the cost of the film.
4584 I'm sure there are many sincerely good things about all the applications before you, but from my position I think some additional competition that is well financed and well set up is worth consideration.
4585 Thanks for your attention.
4586 THE CHAIRPERSON: Thank you very much, Mr. Zimmer. That is an interesting presentation.
4587 I wonder whether I could ask you to turn to the second page, second last paragraph, where you mentioned that you have had good relationships, as I take it, with the incumbents and yet you think it is time for the arena to open up.
4588 You say you hope that competition will lead to a more realistic level of financial participation.
4589 Why would you think that this would happen?
4590 MR. ZIMMER: For one thing, I think the pay television licence fees have remained static ever since I have been doing business with the companies. It hasn't gone up in relation as our production costs have gone up. This has partly been offset by both Astral and Corus investing in projects, putting equity in instead of licence fees. It is another way of moving the thimbles around on the table.
4591 But I think the licence fees should actually rise. If there is another choice, be it Spotlight or one of the other applicants, or Traces, then perhaps the productions that we do will find a better market right there.
4592 THE CHAIRPERSON: Simply because there will be more demand for product and therefore your products will be more sought after and therefore the price will rise.
4593 Is it as simple as that?
4594 MR. ZIMMER: I think it would create more demand for product. I know there was some concern here expressed over this would only diminish the value or the draw on the CTF and the Téléfilm funds. But it is my feeling that producers, if they are going to survive, are going to have to go international. They are going to have to find other ways of financing.
4595 So the pay television licence isn't necessarily just an absolute fit with Téléfilm and the other parts of our system. Sometimes it is and sometimes it isn't, but I think that there is definitely room for competition and for expansion, and competition will, I believe, make it possible for you to at least find out what the other company is going to pay for.
4596 THE CHAIRPERSON: You think that with two competitors rather than one, when you found out what they are going to pay for it, that amount is actually going to be higher than it is in the current market?
4597 MR. ZIMMER: That's right. I mean, move it out of our arena and take it anywhere else. We go from one distributor to another our Showtime and HBO. You take the same project, that project may very well fit what they are looking for at that time and they are willing to pay so much. You could go across the street and they are going to pay less or more and you can make your decision. At least you get your product done.
4598 For a producer, you have to realize that is where our focus is. Our job is to finance each film and bring it to the marketplace. So the more options we have, the happier we are.
4599 THE CHAIRPERSON: Thank you very much for that.
4600 MR. ZIMMER: You are welcome.
4601 THE CHAIRPERSON: We have Bit Motion Pictures and Original Pictures now, but I don't see that they are represented here.
4602 MR. PRUPAS: I know that Wayne Grigsby of Big Motion Pictures was sick and wasn't able to make the trip here today.
4603 THE CHAIRPERSON: I see. Okay, thank you.
4604 Then we will take a break now for 15 minutes and then resume with intervenor No. 10, the CCTA.
4605 MS SAINA: I'm sorry to interrupt, but can I make an additional comment or is it too late for that?
4606 THE CHAIRPERSON: Did she use up her time?
4607 Sure, go ahead.
4608 MS SAINA: I didn't know we could just jump in.
4609 THE CHAIRPERSON: Go ahead.
4610 MS SAINA: There are two points where previously questions were brought up by the Commission and one is the issue of the strain on the funds. The second is why our company hasn't gone to pay‑tv in terms of just going there, knocking on their door.
4611 First, regarding the strain on funds, our company has benefitted by the funds and we are grateful for them, but we have really learned to live without them. That they exist is great, but even so it is not guaranteed as it is competitive.
4612 So we think it is very wise to develop an arm of our business that doesn't rely on that. As evidence of the fact that we have been able to do that, in the mid‑1990s Alberta lost its tax credit or grant and there is a mass exodus of producers elsewhere because they just couldn't ‑‑
4613 I ended up producing, directing and writing a special for PBS that aired as a lead‑up show to the Bush‑Gore debates ‑‑ it aired on PBS in the United States ‑‑ while living in Edmonton and going to knock on doors like Kellogg's and stuff.
4614 Anyway, the point is, you have to think outside of the box and there is a big world out there and a lot of money.
4615 Also, currently our company has an investment, licence and equity investment from CTV of $2.5 million for an upcoming movie that we are shooting in Spain. That has enabled us to buy Pass Telephone.
4616 The reason I mention this is because in discussions with Spotlight ‑‑ CTV can do that because they have deep pockets. The fact that Spotlight is well capitalized and I know that they are open to possibly this kind of thing as well, which is very attractive, because there has always been a complaint about the strain on the funds. Since I have been in this business, there is never enough, period.
4617 So I don't think that is an argument that can really be used. There is some degree of truth there, but I don't think it is a serious issue.
4618 Second, just commenting on why we haven't gone to pay, and it is as simple as this: The profile of the movies, not to discount the quality of them in any way, but for me as a producer, if I am going to invest my time and energy ‑‑ and there is so much risk for all of us when we do these things, incredible, I want to go to the top and I want to go to the biggest, the companies that get behind them, that market them, promote them.
4619 And CTV, we have only done CTV movies because they really do that. We are big on that, huge on marketing. And we bring to the table ‑‑ we don't even have to do that for the networks, but we do it and they like the fact that we are into that, we like the fact that they are into that. We work as a team.
4620 So our movies have a higher profile. It is as simple as that. The profile of the movies in the industry, like if I were to look at a list of who is producing what, I know all the details about people who have produced movies on CBC and CTV. I know them, I could recite them, but when I dig around, "Oh, there is this movie." "Oh, okay. Well, I haven't heard about that." Not to say it is not good or fantastic or award winning, it is just the profile of the movies on pay‑tv in Canada is not great, period.
4621 That is why we haven't gone, because to us why go there if they are offering this to us, and we work in tandem.
4622 THE CHAIRPERSON: You think if Spotlight is licensed you will go there?
4623 MS SAINA: Oh, gosh. What attracts me, seriously ‑‑ and that is why when you are asking me questions about this other network it is like I can't just answer that question because I need to look at the whole ‑‑ yes, the theory of all Canadian movies. That's a nice idea, but what are they doing for this, this, this, this, this?
4624 Are they backing ‑‑ are they going to promote it? It is in all of our interests. It is a win for them, it is a win for us. We want Canadians to watch our shows. We don't just want to make them and grab our production fees. We take pride in what we do and want people to see them, especially in Canada.
4625 THE CHAIRPERSON: Thank you very much, ladies and gentlemen.
4626 We will take a short break and resume in 15 minutes. Nous reprendrons dans 15 minutes.
‑‑‑ Upon recessing at 1626 / Suspension à 1626
‑‑‑ Upon resuming at 1643 / Reprise à 1643
4627 THE CHAIRPERSON: Order, please. A l'ordre, s'il vous plaît.
4628 Madam Secretary, would you call the next intervenor, please?
4629 THE SECRETARY: Yes, Mr. Chairman. Thank you.
4630 I would now call upon the Canadian Cable Telecommunications Association to present their intervention.
4631 You have 10 minutes to do so. Thank you.
INTERVENTION
4632 MR. HENNESSY: Good afternoon, Mr. Chair, Commissioners.
4633 My name is Michael Hennessy, President of the Canadian Cable Telecommunications Association. With me today is Lori Assheton‑Smith, Senior Vice‑President and General Counsel at CCTA, and Mike Lee, Chief Strategy Officer, Rogers Communications Inc.
4634 In our remarks today we are going to focus on the carriage issues raised by the Commission in the context of this proceeding, but I would just like to emphasize that we do not oppose the licensing of any of the applications here on a discretionary digital basis. We are categorically in support of more competition.
4635 In fact, we are excited about the prospect of increased competition amongst all programming services, but at the same time we would suggest that it would be inappropriate and inconsistent with Broadcasting Act objectives to impose mandatory carriage requirements in respect of any new service that might be licensed. We take this position for three reasons.
4636 First, digital technology has changed the broadcasting environment fundamentally and irrevocably. On‑demand content distribution is challenging traditional business models that were predicated on carriage rules developed in the analog world.
4637 Second, the Commission has already established the licensing and carriage policy for digital pay services. That policy recognizes that "digital" means "discretionary" and that "must carry" does not mean "must take".
4638 Third, while the cable industry has invested close to $10 billion in cable infrastructure since 1998, the demands on BDU capacity continue to outpace supply. With capital rebuilds now essentially complete, the ability to be flexible and efficient in the management of capacity during the digital transition is critical to the long‑term viability of the Canadian broadcasting system.
4639 I would like to expand on each of these three points.
4640 First, digital technology has changed consumer behaviour and expectations. The shift by consumers to discretionary services and on‑demand content isn't somewhere off the in the future. It is here now.
4641 Comcast reported last month that its customers have downloaded over one billion ‑‑ one billion ‑‑ VOD titles. Canadian cable companies are also seeing tremendous take‑up on their VOD and PVR services. Viewers aren't just looking to television any more to find their favourite programs.
4642 Wired Magazine September issue reported that peer‑to‑peer program bit torrent now accounts for fully 30 percent of all internet data traffic, about a third of which is television programming and short clips. The internet is rapidly evolving into a video distribution system.
4643 Clearly the digital transition is well under way. As networks become increasingly faster and more robust, they will provide ample bandwidth for whatever consumers request, to watch a favourite television program, to download or stream a movie, to listen to a concert or receive the latest news from anywhere in the world.
4644 It is worth noting that more people watched a live AIDS concern online than watched it on television. On‑demand is a reality and it has already fundamentally changed the way the viewers experience television.
4645 Let me now turn to our second point, that the Commission has already established the carriage policy for digital pay services.
4646 In an environment where premium content is increasingly on demand and PVRs provide consumers with 90 hours preferred content at the push of a button, it makes little sense to licence linear multiplex channels for mandatory carriage.
4647 The Commission recognized the discretionary nature of digital technology when it introduced its new licensing framework for digital pay and specialty services in 2000. It created a transitional regime to, in its words:
"... provide a bridge between the traditional regulatory mechanisms which have been highly supportive of emerging new Canadian services, and a more open entry environment that allows for greater risk taking, provides for a greater number of services in the marketplace, and allows the success of services to be increasingly determined by customers." (As read)
4648 Under that new licensing framework, the Commission decided to licence two categories of new services, Category 1 and Category 2 services. These are the only categories of licence available under the digital and pay specialty framework.
4649 The Commission hasn't licensed a Category 1 service since the year 2000. This makes sense given that Category 1 services were licensed as transitional services at the outset of the digital transition, with access privileges and genre protection to assist them to launch vibrant services during the uncertain period of digital rollout.
4650 Five years have passed since PN 2000‑6 and there can be no doubt that we are passed the uncertain period of digital rollout. Almost half of all Canadian multichannel television subscribers are now digital subscribers and the group of digital services licensed in 2000 is well established and progressing to profitability.
4651 In this context there is no policy justification for licensing new services as Category 1 services.
4652 So while the applicants have gone to great length to explain that they do not want and have not asked for a Category 2 licence, we suggest that there is no other category available to them under the Commission's policy framework.
4653 PN 2000‑6 specifically contemplated the licensing of pay services on digital as Category 2 services. The Commission expected these new services to have Canadian content exhibition and expenditure commitments comparable to those of existing pay services, and it also said that BDUs would be able to select the services on the basis of perceived appeal to subscribers.
4654 Even if the Commission were to make an exception to its existing policy and grant access privilege to one or more of these services, in a digital discretionary environments the benefits of "must‑carry" status are unclear.
4655 "Must carry", simply put, does not mean "must take" and it certainly doesn't guarantee that viewers will watch. For example, of the digital services licensed since 2000 none of the services with mandatory carriage were in the top 10 in terms of audience last year. Not one.
4656 Clearly the access rights and genre protections afforded to Category 1 services haven't necessarily translated to more viewers.
4657 Conversely, many Category 2 services have thrived, relatively speaking, in the absence of any access rights or genre protection.
4658 In the digital environment all services, and particularly premium services, have to be attractive to subscribers. If a service is not appealing, "must‑carry" status will be meaningless since subscribers are not obliged to buy the service. If the service is appealing, BDUs will carry the service in the absence of a regulatory requirement because the competitive market will drive that outcome. Either way, the decision will ultimately rest where it should, with the subscriber.
4659 The third and final issue we want to address is that of capacity.
4660 A number of parties have questioned the ability of BDUs to carry additional pay services and to meet anticipated demand for HD content and other innovative services. We can tell you right now that capacity remains a critical issue during the digital transition. The ability of distributors to manage capacity is subject to a high degree of regulatory uncertainty.
4661 The Commission's decisions in ongoing proceedings, including the migration proceeding and the proceeding to determine the framework for HD, pay and specialty services may or may not help resolve these concerns.
4662 It is important to recognize, however, that the cable industry has largely competed its capital investment in upgraded plant. Additional capacity will have to be created through migration, advances in technology, compression technology and increased emphasis on broadband solutions.
4663 In the short term, then, the issue of capacity will be driven almost entirely by questions of efficiency and trade‑offs, particularly trade‑offs.
4664 We can't emphasize enough that the existing and potential carriage obligations are already substantial. Adding more "must‑carry" services during the digital transition will constrain the ability of BDUs to offer other diverse and innovative services such as HD, unlaunched Category 2 services, VOD and ITV. Those are the trade‑offs.
4665 If the Canadian broadcasting system is to remain relevant to consumer as the primary platform for the delivery of priority services, as it is today, the discretionary elements of the system must remain just that, discretionary.
4666 In our view, it makes no practical or regulatory sense to allocate what could amount to 40 or more digital channels to mandatory carriage of multiple pay services at a time when consumers are moving increasingly to on‑demand and online models of content distribution. Licensing linear, multiplex services on a "must‑carry" basis is highly inefficient and contrary to Broadcasting Act objectives.
4667 Just five years ago the Commission established a workable, balanced competitive framework for the licensing of digital pay and specialty services. It recognizes that ultimately the key drivers for increased penetration of digital will be consumer appeal, reasonable prices and packaging flexibility. This framework has allowed the successful entry of a number of Canadian programming services on digital and has enabled cable undertakings to manage their available capacity effectively during the transition while offering consumers a greater array of programming choices.
4668 We reiterate that we welcome increased competition amongst programming service. In fact, we hope this proceeding is the beginning of a trend that will expand to include competition amongst other genres of service.
4669 We ask, however, that you refrain from licensing any new services on a "must‑carry" model that is rooted in analog distribution legacy. Instead, we urge you to allow for a truly competitive environment that delivers on the promise of digital technology that was envisioned by the Commission five years ago.
4670 Thank you. With that we would be pleased to answer any questions you might have.
4671 THE CHAIRPERSON: Thank you.
4672 Commissioner Williams.
4673 COMMISSIONER WILLIAMS: Good afternoon, Mr. Hennessy and panel. Your oral presentation today was very thorough and covered a fair amount of ground, as did your written submissions, so I will probably only have about five or six questions for you.
4674 For the first four, if you could envisage we have licensed one and possibly two of the applicants and that they were licensed in a "must‑carry" manner, as a hypothetical exercise, could you talk to me about the opportunity costs of using the bandwidth in this manner, much like you were speaking of just a few moments earlier?
4675 MR. HENNESSY: Yes. I will touch quickly on the points I made and then hand it over to Mike Lee who has had a lot of experience in terms of trading off capacity requests during the transition.
4676 I don't think that any Class 1 provider could meet all the demands we expect on the system. So it is very hard to predict exactly how much capacity is going to be required because we don't know the outcome of the digital migration process, how effective that will be, how much that will actually help in short‑term transition.
4677 We know there are going to be increasing demands for high definition television. We know, particularly in some of the major urban markets, that there is a pressing need to add more third language services to offer a similar product to DISH Network because that is at the root of a lot of the black market problem.
4678 You can go across the country, every system is going to be different from very small Class 1s to larger systems like Mike's in Toronto, but all of them are going to face constraints on these kinds of trade‑offs.
4679 Mike, would you like to add anything to that?
4680 MR. LEE: Sure.
4681 We run probably systems with the most capacity in Canada from a cable perspective at 860 megahertz. It is always difficult to predict the amount of capacity that you need for future services and the attractiveness of those services, but I can tell you that the challenge that we have as an industry and as distributors and programmers at the end of the day, is we have to maintain relevance with our customers.
4682 That is our number one constituent. We have to satisfy their requirement for the way that they want to consumer programming and media. So that means probably on a go‑forward basis our primary concerns are essentially HD carriage as we make this transition from sort of the standard def quality to a higher definition quality that is coming through retail.
4683 The second issue is, we know the video‑on‑demand is picking up in traction, both in terms of the quality, the content and more innovative services like what we have launched with TMN on Demand. So as we continue to see more and more of these innovative on‑demand type opportunities we have to allocate more spectrum to be able to facilitate that demand.
4684 Then the third one, which is a little bit different, is that there is the shift going on from the broadcast environment for primary source for programming over to the broadband environment as another source for programming.
4685 As we project forward, we are going to probably be in a situation where we will be offering greater and greater amounts of bandwidth to our subscribers for them to be able to have media experiences and broadband experiences online as well. That also will be bandwidth we will be allocating, or spectrum we will be allocating.
4686 So when we take a look at possibly one or two services that are a "must‑carry" situation, both multiplexes and potentially going to a high definition environment, that is going to significantly impair our ability to offer new services to subscribers in each of our existing systems, because that is a fair amount of allocation and spectrum if you think about the high def combination with the multiplex on a "must‑ carry" basis.
4687 COMMISSIONER WILLIAMS: So that amount of spectrum being used up for these types of services, would that be a good return for the amount of spectrum that is invested?
4688 MR. LEE: That is always a tough question because it is largely dependent on how attractive those services are. So just because I allocate the spectrum to the service doesn't necessarily mean it immediately starts driving revenue and return.
4689 I can tell you this, that as we look forward on digital we are probably, as a distributor, more bullish about digital than probably everybody else in the Canadian marketplace.
4690 What digital is is not so much a technology for customers because they are still watching TV. What it has created, it has created a culture of choice. They have an expectation that they can have choice. That is true for internet, that is true for anything that is digitally distributed, music, movies, video, television.
4691 So when we project forward on the attractiveness of new services, not knowing what the service is, we know that it is going to be a smaller subset of the customers who will be attracted to those services than we have seen in, say, an analog world where 60 percent, 70 per cent penetration would not be abnormal for a tier offering.
4692 So when you are looking at distribution in smaller subsets of customers and you are allocating a significant amount of spectrum per programming service, the return looks pretty bad in terms of the opportunity costs relative to other services you could be delivering against that spectrum.
4693 COMMISSIONER WILLIAMS: What is your view on the rate of growth in digital cable?
4694 MR. LEE: I have a Rogers hat on here so I will speak as Rogers.
4695 COMMISSIONER WILLIAMS: Maybe a Rogers view and then if it is similar within the CCTA amongst your other members if there is a slightly different view.
4696 MR. LEE: Do you want to start with an industry view?
4697 MR. HENNESSY: I would much rather follow so I can decide whether to disagree with ‑‑
‑‑‑ Laughter / Rires
4698 MR. LEE: We started in digital late. We had access to the digital technology so we trailed the U.S. with regards to digital penetration for a long time. In fact, we actually waited until we were able to purchase sort of higher end two‑way boxes because we believe in the power of VOD, we believe in the power of interactivity and all the advanced services. So for the longest time we actually trailed the Canadian marketplace in penetration.
4699 We closed the third quarter, which we just announced yesterday, at 37 and a quarter percent penetration on basic. For digital, to put some context around our subscriber growth, we added 71,000 net subscribers in Q3 of this year. Last year in the same quarter we added 37,000 net subscribers. So the growth year‑over‑year in the quarter was very strong.
4700 If you look at our projections going forward, we haven't provided guidance to the street, the analysts, the investment community, but we have said that we fully expect that digital will be one of our growth platforms, that we are looking at a model where we will see cresting 50 percent penetration and more.
4701 So when I listen to other people talk about what our own projections are, I would say that they are probably in line or slightly conservative relative to where we think the business is going.
4702 The reason we think that is because we do believe that digital is a different product now than it was three years ago. Three years ago it was essentially a set‑top box that provided you access to more channels. Now it is high definition, now it is PVR for customers, now it is video‑on‑demand for customers, it is more programming services, more rich programming services, so the value in the minds of the consumers changed.
4703 Now it is not a situation where we are pushing digital, we are actually starting to see where customers are actually demanding and pulling digital. So we are actually quite bullish about the digital business and it is a primary focus for Rogers. If you listen to Ted Rogers' comments publicly, it comes up quite frequently as one of his issues because it makes us more competitive because we have a better product.
4704 COMMISSIONER WILLIAMS: The CCTA view?
4705 THE CHAIRPERSON: Just before you do that, if I could follow up on the Rogers.
4706 So at the end of the second quarter you were at 34 percent and now you are at 37‑plus at the end of the third quarter, which is a 10 percent in a quarter.
4707 MR. LEE: Yes.
4708 THE CHAIRPERSON: So you are basically saying that in your view as far as Rogers' systems are concerned numbers like 10 percent year‑over‑year increases would obviously sound very conservative, would they?
4709 MR. LEE: You never want to really commit to projections on a go‑forward basis, but I would say that it ‑‑
4710 When you say 10 percent, are you saying relative to our base or relative to the existing base of digital when you describe 10 percent growth?
4711 THE CHAIRPERSON: Just take your own company.
4712 MR. LEE: So if we are running on 2.3 million subs, a high single digit, low double‑digit number would not be, we think, an unreasonable number.
4713 Having said that, as you go forward it gets very difficult to predict because you get into different types of customers the deeper you go into the base.
4714 But right now, as we take a look at it, our growth has been quite strong in digital. I think we are at 675 now and we started the year at just over 500. So we are actually growing quite aggressively.
4715 THE CHAIRPERSON: Thank you.
4716 COMMISSIONER WILLIAMS: Go ahead, Michael.
4717 MR. HENNESSY: I would say complementary, there is nothing I really disagree with Mike there, but there are, I would say with many of our companies, very different approaches to the same direction.
4718 Everybody believes in digital, but the concept of digital for many of our companies has evolved much more into the concept of broadband. So let me explain.
4719 When we originally got into the need to be digital, the need to be digital was the need to be competitive with satellite, to be able to offer as many channels and to have the flexibility to package. So for many companies that meant creating space to add new services and, for some companies, trying to find a duplication path so you could actually get away from the analog trapped environment.
4720 That still is a key objective for everybody. We don't ignore satellite. It is still a significant competitor, particularly for smaller systems.
4721 That said, if you take a company like Shaw, they are clearly on the record that analog as a product is still strong. I think we would all agree as an industry that digital in terms of the services that we carry on digital are not as strong as you would like I guess would be a nice way to put it. Part of the reason for that is it is the first tier, I think, that was every launched without some very strong brands to help pull along the Canadian product. That is, to a large extent, water under the bridge but nevertheless true.
4722 But let's move to broadband for a second.
4723 So we have people who are looking to duplicate, we have smaller systems that will probably make a complete transition to get to digital, but everybody is now focused on the kind of things the Mike said. High definition is going to be very significant, telephony is going to be significant, trying to get to something, I don't know, in five years like a 50 megabit internet is going to be critical in terms of our competitiveness with broadcast distributors, with telephone companies, and generally that will be the demands of the Canadian economy cultural products.
4724 So I think in part because digital is not a huge driver of economic growth right now and has not been as attractive service‑by‑service to customers as we would have wished, we are looking at ways to create more demand.
4725 Customers are delighted with PVRs, they are delighted with VODs. Canadian numbers I don't think, relatively speaking, are much different in terms of tracking where Comcast is going. The things the pay channels have done with SVOD are huge hits.
4726 So the traditional kind of linear space, let's just keep adding more and more channels, is something we are quite happy to do to an extent, but it is not the future.
4727 COMMISSIONER WILLIAMS: It is not all of the future anyway.
4728 If we licence these one or two as I described earlier, can you describe what the effect would be on your packaging and the types of wholesale rates on the new services and certainly the effect on the incumbents and how your members and I guess your company would deal with that type of challenge?
4729 MR. HENNESSY: Let me work backgrounds. I guess our companies would deal with it with some degree of anguish.
4730 For us it would be incredibly frustrating given the amount of capacity we have already allocated to the Commission's requirements under the Broadcasting Act to find that the capacity that only in the very recent past was identified during the transition as the element that was flexible it was up to us to try to find the right consumer equation was taken on the assumption that the product that the new pay licensees have offered would be much better than anything else in the digital space might be if it is happy to carry.
4731 I think that is the equation.
4732 In terms of the wholesale arrangements, I couldn't imagine for an instant there would be any linkage. You wouldn't try to, say, "Buy one Canadian pay service, you have to buy another." That is not going to happen.
4733 I think as one of the applicants said, some people will take two, some people will substitute one, some people will stay with what they have and a significant number won't take any at all.
4734 I think as we have tried to emphasize, the end result of "must carry", because of the competitive nature of the market, is unlikely to create a much greater benefit to the applicants. They may think so and would like the comfort that the risk‑free licensing regime that used to exist in the analog world ‑‑ I think that is what they are really asking you to, is bring back the old days.
4735 But even if you offer "must carry", you can't offer any comfort of success unless the product is really great. And I think it has to be really great. I don't think "good" is good enough any more.
4736 Wholesale fees, not my issue.
4737 Mike, I don't know if you want to comment on some of the packaging wholesale issues.
4738 MR. LEE: I will start with packaging.
4739 It is very hard to imagine what the product definition would be where it would be to our advantage to package in such a way that the new service would get the benefit of penetration of another package or existing services.
4740 Our biggest challenge as a business, outside of making sure we stay relevant with customers and providing good value, is to make sure to manage our cost of sale because it is our single largest expense in the business, even above and beyond the people that we employ.
4741 So when you look at it that way, without knowing the characteristics of the service and being able to research the attractiveness of the service, it is hard to believe that there would be a situation where we would do anything but offer that product, particularly if it is a premium pay product with a relatively high subscription rate on an "à la carte" basis for those subscribers who are interested in it based on the strength and effort of the marketing that that service will do on their own behalf and maybe do in partnership with us to try to get some incremental sales.
4742 With regards to wholesale fees, it is always hard to talk about the subject without really just giving a sort of blanket "lower is better" so that we can basically drive profit for our own shareholders when we go to sell that product offering.
4743 I don't know whether or not I have a more specific comment other than that.
4744 COMMISSIONER WILLIAMS: So would more competition in the pay services area help that lowering of wholesale rates that you talked about leading to increased profit?
4745 MR. LEE: Not in a "must‑carry" environment, because in a "must‑carry" environment basically from a commercial negotiation perspective there really is little ‑‑
4746 COMMISSIONER WILLIAMS: Yes, there is no negotiation.
4747 MR. LEE: You argue back and forth, but there is really not a whole lot to argue about.
4748 I think what will happen is I think that programming service will become more innovative. Innovation is good because value proposition goes up for the customer.
4749 Arguing against competition sometimes is a little like arguing against gravity in terms of its benefit for customers. People do get stronger, you get stronger services as a result of the competition.
4750 So what we are not smart enough to do as a distributor, we are not smart enough to know exactly what is going to resonate with our customers. We will let our customers tell us what is important to them, what we must carry to be competitive.
4751 I think that is the basis of our position, which is that the "must‑carry" environment for linear services is not an approach we think is going to resonate with customers in a way that will make them successful in terms of the programming services and us successful.
4752 What we want is the ability to have many people come to us with lots of innovative ideas and then we can test that against customers and let the customer decide what it is that they want and what they want to pay for and what is valuable to them.
4753 MR. HENNESSY: Let me, if I could, when Mike mentioned that it is less likely under a "must‑carry" environment that there would be downward pressure on the wholesale fee, it is also likely that if there isn't any take ‑‑ because we are dealing with discretionary services ‑‑ that the wholesale fee doesn't necessarily produce any sort of significant revenue stream to either the licensee or the distributor.
4754 So it is not ‑‑ again, because the environment is discretionary and because there is competition both within that are, and very much so outside of it, there are no guarantees.
4755 A couple of examples. Let's assume that Bell plays a significant role in the Spotlight channel ‑‑ and they have, obviously, very deep pockets ‑‑ and decided that the only way to make a go of it was that as soon as the deals that the existing players have with HBO are up, they were going to put enough money on the table so that went Spotlight.
4756 If that was the case, we are not going to sit there obviously with a service up on Bell ExpressVu offering HBO to our customers and say, "Well, we are not going to carry it because it is affiliated with Bell." So the better the service, the more obvious it is for us to carry. We carry a lot of digital services today that are potentially a lot less attractive than some of the things people have been proposing.
4757 So to the extent we can put product out there were do, but it is just that it is a very different environment we are dealing with.
4758 Let me give you an example. When I go home I have a PVR. My PVR is always at least 75 percent full, so that means I usually have about 40 or 50 programs that I go to first. So that is my premium channel, if you will.
4759 I pay ‑‑ how much do I pay you, $10 a month?
4760 MR. LEE: Not enough.
4761 MR. HENNESSY: Not enough.
‑‑‑ Laughter / Rires
4762 MR. HENNESSY: But I can choose exactly the programming I want to watch when I want to watch it.
4763 I then go to TMN to the SVOD channel, the TMN on Demand, because I don't have to watch a lot of the movies in a scheduled period of time, I can watch them when I want.
4764 Increasingly I am going to go to the internet and, even more so my son and his friends, and download movies, the "Desperate Housewives" iPod is the same as "Desperate Housewives" to the computer is the same as "Desperate Housewives" crossover to a bigger screen. It is all the same. There are no such things as cell phones, iPods or anything that perform different functions, they all display content.
4765 So it is a much tougher world to be in. You have to have deep pockets. And if people are willing to get there, and recognizing it is discretionary offer something good, we will be there. We need more good stuff.
4766 COMMISSIONER WILLIAMS: Okay. Thank you very much, Mr. Hennessy and Mr. Lee.
4767 THE CHAIRPERSON: Mr. Lee, how is your pay penetration tracking your digital uptake?
4768 MR. LEE: We have had very good growth in premium pay. It is partially because we have been just more focused on marketing the offering and, as well, improving the product offering itself, both through I think good work on re‑branding and refocusing the service itself as well as contributing an on‑demand component to create better value for the customer.
4769 But we do see that as we look forward into the next base that the attractiveness of the premium pay offering in TMN that we have right now is not as attractive as it was to the customers beforehand. Now, it is always difficult to understand exactly why that is. You can attribute it to maybe premium pay is just not attractive to those customers or you could say, you know, maybe the definition of that offering is not the right definition or maybe we have to do a little bit more work collectively between ourselves and Astral to maybe make the on‑demand component more enriched so that it will actually be more attractive or maybe it is that you need more services in that category to create more awareness and better value for the customer so that you will get more people attracted to even a concept of premium pay.
4770 So we do see, as we continue to track on digital growth, that the percentage penetration of new subs, the incremental that take premium pay is declining and I think Astral and Corus talked about it today, that that is what they are seeing with their own results as well. But we have not by any stretch of the imagination decided that the premium pay category is something that we feel has no value left in it. We think there is actually good business still in that category and we would like to see more innovation just generally, not just in the premium pay category, but from all programmers in general so that we can continue to make sure that we are putting out the best product in front of the customers so that when they buy digital it is actually because they feel that they are getting great value for money and they want to stick with us.
4771 THE CHAIRPERSON: You have heard the early adopters debate the arguments pro and con over the last day or two, what is your view on that? Do you think that there is that phenomenon? Have you noted it in your own uptake?
4772 MR. LEE: With any product, unless it is air, water and basic food, as you get deeper into a base you get a different perception of value for the product. So I don't think that you can argue that there is going to be an early segment that, you know, that all segments of the market love movies equally and see value equally. I don't think that that would be crazy to argue for that. We do have an internal debate in our own shop on a continual basis, which is while you are not trying to replicate a U.S. system you do take data points from the U.S. as to what is going on and, okay, if there is a difference between that market and our market what is fundamentally different.
4773 THE CHAIRPERSON: You discern that difference?
4774 MR. LEE: We definitely see that difference. When we have conversations with ‑‑ you know, one of the reasons why we are actually quite interested ‑‑ we were quite bullish on digital is because when we look at our U.S. counterparts, their digital penetrations are much higher than ours and they actually plateaued for a little while around the 40 per cent level and then, with the introduction of PVR, VOD, HD all of sudden digital penetration picked up again. So that is why we believe that, you know, we don't have a natural ceiling at a 40 per cent level or a 45 per cent level.
4775 We also see the premium pay does have higher penetration in U.S. markets, so when we talk with our peers we talk to them about, okay, what is the marketing program, what are you doing, what is the difference and we don't see that big a difference other than there is a lot more choice for customers in the U.S. marketplace and that drives more awareness. And we have talked about it here ‑‑ I don't have empirical data ‑‑ that the HBO brand is a better brand for you today but, you know, the HBO brand is a very good brand. And so when you have, you know, value proposition for customers on a number of things they don't always vote just because, you know, all the features are there, they vote because they also love the brand, they vote for a number of different reasons with their wallet to buy something and the HBO brand definitely, in the U.S. marketplace, drive that category.
4776 I think that, you know, when we look forward I don't understand why Canadian consumers would be less disposed to buying a premium pay movie service than an American consumer would be. I am not really seeing ‑‑ I haven't heard an argument yet that is compelling to make me think well maybe there is a difference between a Canadian customer and a U.S. customer and that we should have lower expectations for penetration in the Canadian marketplace for premium pay movie service.
4777 THE CHAIRPERSON: Can you give me some metrics over the past say five years or so, when did you start going digital at Rogers? You said you were latecomers to the digital ‑‑
4778 MR. LEE: I think it was 1998, 1999.
4779 THE CHAIRPERSON: Right, so since that point, let us say the past five years, can you correlate a pay penetration with digital uptake and with some metrics?
4780 MR. LEE: I think it is actually unfair probably to ‑‑ I will tell you why ‑‑ unfair to use that as a measure and the reason is is that in the early days we were migrating premium pay analogue to premium pay digital. So there is this artificial ‑‑
4781 THE CHAIRPERSON: I see.
4782 MR. LEE: ‑‑ migration going on, which is not about pull, but about us managing spectrum and trying to convert old analogue boxes out to new digital boxes. So I am not sure that the tracking of the penetration relative to digital growth is a relative measure and so ‑‑
4783 THE CHAIRPERSON: When would you say a good starting point would be to start seeing a trend that would be useful to you?
4784 MR. LEE: To be frank, we don't really think of things that way. I think, outside of this year, we have had some uncharacteristic things happen this year in this category for us as a ‑‑ had nothing to do with anybody else, but it is an internal issue of focus. I think the last two years probably have been a good measure, the last three years probably have been a good measure of what is going on in that category. You know, when we added the on‑demand component churn has definitely gone down or when we go to do focus groups with this product, you know, the before and the after, which is the easiest way to do focus groups, it is hard to get someone to conceive imagining something but if you can say this is what you have now and then if we add this feature how do you feel about it, we definitely get a very very positive response and it is reflected both in the customer satisfaction research that we do as well as the churn rates, which ultimately is the biggest measure, because that is the measure of whether or not I feel comfortable spending that money month after month after month for their product.
4785 THE CHAIRPERSON: It is interesting that you mentioned the 40 per cent number and you mentioned the plateauing of Comcast until the HD and the VOD came along, because when you ‑‑ I don't know whether you have seen an Allarco document that has been filed in this presentation and what it indicates is that pay subs as a per cent of digital is roughly in the 40, 42 per cent range going back from 2001 through 2004. And then they project a downward trend of 35 and 33 in 2005 and 2006 and carrying on until, in their view, the effect of competition brings it back up to 40 and then it kind of plateaus at 40.
4786 Now, you are saying that you don't think it needs to plateau at 40 and that you, in your view, you are going to hit that ‑‑ what did you call it ‑‑ the 50 per cent corner or threshold or whatever it was?
4787 MR. LEE: So when I was talking about 40 per cent and 50 per cent and growth it was in reference to digital growth as opposed to premium pay growth and digital.
4788 THE CHAIRPERSON: Okay, it was digital growth separate.
4789 MR. LEE: That, I have probably a more accurate feel for those types, those numbers. With regards to premium pay offering within the digital base and what per cent that should make‑up on the incremental ‑‑
4790 THE CHAIRPERSON: You are quite right ‑‑
4791 MR. LEE: ‑‑ it s very difficult to predict those kinds of things, particularly with a potential phantom third or second product which has no definition it is almost impossible to predict what kind of take those kinds of services would be. Because a customer doesn't get up in the morning and say, you know what, I think I really have a missing premium pay product in my television package. They are attracted to the definition and the brand of the service so they want, you know, whether it be BBC Canada or HDTV, they focus on the brand. So I am not sure that saying there is a natural premium pay penetration, you just can't think of it that way.
4792 THE CHAIRPERSON: Well, what would your current number be for that?
4793 MR. LEE: Our current premium pay number is probably ‑‑
4794 THE CHAIRPERSON: As a percentage of digital.
4795 MR. LEE: ‑‑ as a percentage of digital is probably in the 40 per cent range.
4796 THE CHAIRPERSON: So we are back there.
4797 MR. LEE: Very coincidental.
4798 THE CHAIRPERSON: All right, thank you for those answers.
4799 Mr. French.
4800 COMMISSIONER FRENCH: Mr. Hennessy, I want to go back to the scenario under which the Commission, being attentive to the CCTA, decides to licence another pay player or an optional carrier or optional status or whatever the appropriate form of words is. Wouldn't that, in effect, also require us to remove the must‑carry status of the incumbents?
4801 MR. HENNESSY: I will let Lori Assheton‑Smith deal with the legality, you know, there are regulations in place and I guess you can remove them, but I don't think so. I would assume that when you were contemplating more competition in 2000‑6 that that didn't involve whenever there was going to be more competition or choice taking away all the rights that had accrued to people, whether they were pay channels or analogue channels or tiering and linkage or any of those other things. But Lori ‑‑
4802 MS ASSHETON‑SMITH: I think we can be, in the sense that on digital, we think everything should be discretionary and discretionary at the option of the distributor as well as at the option of the subscriber. Having said that, we recognize that these are entrenched services with a long history and a contribution to the system and they are popular with our customers. I don't think it is a question of do you have to remove the must‑carry requirement. I think you can have a proceeding to consider that. I think that is a separate proceeding than the one in front of you right now. But it is unlikely, even if that requirement were removed, that that service would be in jeopardy, either of those services would be in jeopardy. They are entrenched services and we know from experience, customers don't like having services taken away from them once they become accustomed to them.
4803 So whether you feel there is a need to consider removing that requirement for those services or not ‑‑ and as a general principle, as I said, we support a fully discretional environment in digital ‑‑ I think from a practical perspective you would see very little movement in the carriage of that service.
4804 COMMISSIONER FRENCH: So I confess, that was why I asked the question. I mean, they have already had their X number of years to endear themselves or not to a customer. How would we, in terms of equity, justify not exceeding to the demand for a must‑carry on the part of a licensee, tell the licensee that nevertheless he could enter the market and then say, but by the way, we are retaining this rather now asymmetric requirement, a must‑carry with the incumbent?
4805 MS ASSHETON‑SMITH: With all respect, that is the model that you already use for different types of services on analogue, whether it be a dual status or a modified dual status. The earlier ones that got licensed have better access privileges than the ones that came after. It is a model that the Commission has used previously. I am not saying that we are a big fan of it, but it doesn't seem to have troubled the Commission to have inequities or asymmetries in carriage requirements based on the year of licensing.
4806 COMMISSIONER FRENCH: Yes, first I have to understand them and then I will appreciate the asymmetries and historical legacy with which I have to grapple.
4807 Well, what if we were to exceed now to your suggestion that we licence under optional status, let us forget about what we would do with the existing incumbents as such, but tell me how we would respond to the claim that in the case of one of the incumbents there is an affiliate relationship with a major member of your association? How would we explain to ourselves and to the population that we were in fact creating something which might laughingly be called a level playing field?
4808 MR. HENNESSY: I guess there is lots of affiliate relations in the industry. I think, as somebody mentioned to me in the audience ‑‑ I was talking to Paul Armstrong from Bell Express Vu and he did mention that they do carry Rogers SportsNet. You carry what is good. You know, there is all kinds of examples where ‑‑ I can't think of an example where a good product has been foregone and a competitive advantage offered to somebody else in the market. I just don't think it works that way anymore.
4809 I think the benefit of not having must‑carry is that if you say any of you can have a Category 2 licence you are on your own. You will end‑up with very well‑financed, thought‑out business plans. They may be restructured, which is fine under the Category 2 environment, but people aren't sort of operating under the assumption that they can come in, make traditional analogue promises of performance that are almost impossible to hold anybody to in a discretionary environment and get must‑carry. How are you going to be sure you picked the right promise when there is no guarantee you can meet them?
4810 But if somebody knows they want to do pay, they believe in pay ‑‑ and we certainly, I mean, we believe that is an opportunity there ‑‑ but if they go in with real deep pockets and a serious plan and nobody to take the risk but themselves you are going to end‑up with something a lot better and more likely something that is going to seriously compete with the incumbents. You know, we have been looking for competition with the incumbents for a long time.
4811 COMMISSIONER FRENCH: How damaging would it be, how likely would it be and, if it were likely, how damaging would it be if we were to say licence Spotlight on an optional carry ‑‑ I am sure that is not the right word, I forgot what the right word is, the right expression ‑‑ and we found ourselves with a situation in which Express Vu was carrying Spotlight but decided to drop Movie Central, and Shaw was carrying Movie Central but didn't have Spotlight? I am not saying it would be ‑‑ I don't know, is it damaging to the Canadian consumer that it works out that way or do we mind? Is it economically ‑‑ I am just trying to search for a kind of a grasp here, because you are showing me an environment in which both of these products are presumed ‑‑ or you seem to be suggesting we are in an environment where both these products would be sufficiently attractive that all major BDUs would want to carry them. Maybe that is true, I don't know.
4812 MR. LEE: So let us take the example of Rogers Bell, though it is a little bit skewed because we don't own the or don't have an interest in the second premium pay offering. But if Bell decided to drop TMN I would sign‑up Spotlight in a heartbeat, offer both and then take all the TMN loyal subscribers with an offer and then Express Vu would be left with a very puric victory.
4813 I think that the competitive environment doesn't allow you to simply substitute and I think that the rights environment will not create duplicative services. These are not undifferentiated. I think Mr. Cassaday came up and talked about the airline industry. These are not undifferentiated services. Programming services are very much built on the quality of the programming, how good the programming is, how good they are at programming to content to their customers, customers that will be loyal to these services. I would like to think they are like 12 plain donuts in a donut shop, but they are clearly not in the minds of consumers.
4814 So I don't think that outcome is highly likely, because as soon as someone went to drop one of those services all those subscribers who are very very angry at you for dropping it are now up for grabs and that will stop that behaviour from happening.
4815 COMMISSIONER FRENCH: Yes, true in the centre of Toronto, you know, true in the centre of Montreal. There is a certain amount of market power in some of their distant regions, but let us say ‑‑ I mean, I think that is kind of sensible and appeals to the residual economics that may still exist in audio visual markets.
4816 So what I am puzzled about is why have these otherwise intelligent applicants who have spent, in some cases, some significant time and energy and money preparing their applications gone so far as to ask for must‑carry and also they have asked for us to reach into the production distribution arrangements? So these are two major interventions that are integral parts of the proposals of three of the applicants. Why have these people who presumably know the environment as well as the CCTA does, why have they done this when presumably their claim for competition would be, you know, augmented were they not asking for these additional supports on our part?
4817 And, you know, people like me who have a prejudice in favour of some of the nice values of competition that have been evoked but not heavily respected, in my view, in the applications might be tempted to support them on those grounds and instead they come in with all these help me here and help me there and, by the way, I want to be a competitor.
4818 MR. HENNESSY: I think they think there is a good chance you will say yes and, you know, the Commission has ‑‑
4819 COMMISSIONER FRENCH: They are trying ‑‑
4820 MR. HENNESSY: The Commission has a history of trying to balance interests and I am not trying to be overly critical here, because there are serious obligations the Commission or objectives the Commission has under the Broadcast Act that have to be achieved. But it has been, you know, certainly from our perspective the easiest way to ensure that you got space on the dial is you go to the Commission, you say well you have to make the cable guys do it or else, you know, it will be really bad, the sky is going to fall on us.
4821 The classic example is conventional high‑definition television where it was argued for a long time that unless you forced must‑carry there would be no HD on cable. As it turned out, the reverse happened and we have invested hundreds of millions of dollars probably in HD and there is not much programming, because they were also able to convince you that the market would work when it came to actually delivering on the product.
4822 But, you know, nobody is going to vote for I want to compete and be left alone if they think there is something the government can give them to give them an advantage, and that would be including us.
4823 COMMISSIONER FRENCH: Well, that is shocking. Now the last part is just ‑‑ (laughter) ‑‑ extremely disturbing, Michael.
4824 While you have added to my knowledge of the market and also to my cynicism about what I am told about it, I guess I just have one other thought or question. You have given us a picture of a cable market or a cable industry which has a huge amount of dead weight that it is carrying in its existing capacity. Is that a fair statement?
4825 MR. HENNESSY: It is ‑‑ I don't know, is Glenn O'Farrell still sitting behind me?
4826 COMMISSIONER FRENCH: Yes. (laughter)
4827 MR. HENNESSY: You know, the problem I think is that there are channels that are more productive in terms of generating revenues than others and some are not very productive at all. You can subtract from that those that are there for public policy reasons and there has to be in a 500 channel universe some dead weight.
4828 COMMISSIONER FRENCH: Yes I guess, in the medium term, one of the discussions we have to have ‑‑ and I am sure this is something you shouldn't say in a public environment, but I will say it anyway ‑‑ we just have to have a discussion so that when you evoke this broad picture of a great many requirements that don't, in your view, serve customers or generate revenue or serve a public policy purpose ‑‑ and I add the last one because I think they are, you know, we could all identify three or four or five commercial dead weights that exist for good public policy reasons that are not going anywhere soon and the Commission is not going to, in the short‑run at least, question.
4829 It is the middle group of allegedly competitive or allegedly contributing services which you claim you have to now carry, which are not gathering or generating audience, which are not bringing more people to your system, which are not generating revenues. That group I think, you know, we need to understand, at least I need to understand better. I think in the context of the migration processes that we are ‑‑ the Commission is currently considering, we need to look at in a deeper way ‑‑
4830 MR. HENNESSY: Could I ask Mike Lee to ‑‑ I had a conversation today with Mike Lee where we talked about the roll of broadcaster as packager and I think that for those kind of services time is up unless they are more competitive. But Mike had a pretty good feel on that and where we are going in a broadband world in terms of broadcasters that really aren't as good as other broadcasters.
4831 MR. LEE: So let me ‑‑ I just want to go back just a second before we talk about our conversation. The difference between, I think, our perspective and the applicants' perspective and other programmers is we actually have to be accountable to the customer, we actually have to go out and get $9.95, $3.95 and satisfy their requirements. When they are not satisfied with the service they talk to us very loudly and we have to be quite respectful of that feedback.
4832 So when we look at the services ‑‑ I think dead weight probably is ‑‑ I wouldn't characterize it as dead weight, but I think we are moving more and more towards a model of a meritocracy with regards to these programming services where those services that have the most merit with the most customers are more successful. And then, as you look down the list, those services which don't resonate or are not relevant with customers then start to decline and they will decline from an advertising perspective, from a subscriber perspective and it will happen over time.
4833 So the conversation we referred to earlier was we are starting to see a shift. I mean, I think you have heard it over and over today, probably ad nauseam at this point, around iPods and digital and distribution and all these things. But at a macro level the shift is there is a value shift going on from the broadcast environment to the broadband environment at a very high level. So what is happening is in a world where we had no broadband, no other access to content and programming but through a controlled distribution system, all the money was in that pot.
4834 Now, we are starting to see small little leaks in the system and it can be people going direct, it can be through theft, it can be through a number of different things. The customers are going that way because they are not getting what they want from the existing system. They would like to simplify their lives and get it all from one system, but they can't because there is rigidity, there is inflexibility, there is something in that system that doesn't appeal to them, so they will go outside.
4835 The split is actually quite dramatic when you look at it from an age perspective. You know, if you go above 30 you don't have these people going to the second system, not in mass. But if you look at people who are young and, particularly just now starting to come into the point and stage in life where they actually have money to buy things, they are actively using the second system as the way to satisfy their programming requirements, whether it is BitTorrent or iPods or whatever anybody wants to dream‑up.
4836 The challenge is is that the people who are in the system this pie is starting to shrink, just generally. You know, we are spending a lot of time, you know, we want to sell as many services as possible, we are a distributor. The role of the distributor is distribute as many things as possible for as much money as you can, like that is the role that we play. As we look, we are starting to see that if we don't get flexibility in the system that people are going to vote with their wallet to go to the alternate system.
4837 The problem is these are not equivalent bases. One is young and going into a buying phase and one is dying. And so you cannot continue to just simply focus on the fix system at the expense of and not create flexibility, which is why the must‑carry is, we believe, problematic. Because what it does is perpetuate an environment that has no flexibility and actually focuses on a product definition which doesn't work. As I think packagers, in general ‑‑ and I would describe broadcasters as packagers ‑‑ the challenge is how do you innovate with your brand and your product so that you stay relevant with that customer because the customer will walk, the customer will download Desperate Housewives or will download Survivor and not use the system the way we think and construct it and derive a lot of benefit from.
4838 So I think that, for us, as we look forward it is that challenge and we need to make sure that we are as flexible as possible as the distributor to make sure that, as the customer says, you know what, I would like to watch some TV on a PC. We could say, you know what, it doesn't work on our system, but they are going to walk, so we have to find a way to make sure that that works from a distributor perspective and a system perspective.
4839 MR. HENNESSY: And if I can just complete that thought. In terms of the meritocracy ladder, I think the solution for the broadcasters, because it is not just the cable companies obviously that have to look at solutions in this new world, is the direction the Commission is going in in this proceeding today, which is start to remove the genre exclusivity shackles. Because those are ultimately going to leave a lot of broadcasters in inflexible places that aren't going to give them the ability to respond as much as they need.
4840 The problem is today most like it, particularly in an analogue world, because it is generating a fair revenue stream. But down the road only the strongest broadcasters, I think, and those that have the ability to switch their product line according to the preference of the customer are going to be able to survive and if they don't survive then you don't have a Canadian broadcasting system. So there is, you know, benefit and balance at both ends but I think, you know, now is a good time to start that change, that is why we support removing the genre rules.
4841 COMMISSIONER FRENCH: My last question, promise, promise. Mr. Lee, do you think that this form of consumer behaviour, form of consumption of media products which you see and others see as marking what, teenagers and twenty‑somethings, do you think it is going to be sticky with that group? The only counter‑argument I have and I may be complete crazy is it is a much more labour‑intensive way of accessing content. So I am saying to myself, okay, that is great until you got the kids and the mortgage and you got to commute to work and you got to wash the car and that is ‑‑ so, I mean ‑‑ and I don't know the answer.
4842 I am just asking you is there any grounds for thinking that while undoubtedly great changes are underway that the sort of I think I will spend a half an hour or three‑quarters of an hour finding the content I want and downloading it and then putting it onto this and carrying it ‑‑ is that going to stick or not? I agree with you there is a big change. I am just trying to understand fully the implications.
4843 MR. LEE: I will give you two data points that we think are directional. Gaming would be a classic example. As a segment, you know, everybody thinks of games as being a 14‑year old boy in the basement, you know, no friends, but online, kind of gaming all day long. But if you look at the actual age segment is actually ‑‑ average age on console and PC games is probably north of 30 years of age and there is still a significant female segment in there.
4844 The data would suggest that if you game young you game old, if you didn't game young you don't game. And so, you carry that behaviour through your life even though, you know, it may not be as attractive to describe to your friends that you spend your time in your basement at the age of 44. So that is one data point.
4845 The second one is that what is difficult today does not remain difficult. It actually gets easier, because the market changes and adapts. So what is a sort of a home brew behaviour today becomes a product by Sony tomorrow or some entrepreneur out of the Silicon Valley. And so as soon as they see that there is a large enough base of customers who find that behaviour attractive, they will simplify it because they feel that they can make money through the simplification.
4846 So classic example, you will see this behaviour change and probably change over the next probably 18 to 24 month is if you looked at Windows Media Centre PC, watching TV on a PC and then be able to connect it to your TV so you could use it as a PVR and so on, first generation didn't really take, second generation is a little bit better and you see people in the U.S. like Discovery and MTV and ESPN climb on board, third generation it will be integrated right into the operating system. So now you don't have to buy the special PC, you don't have to do some weird connect, now every PC can do that and you will see Intel with their Vibe platform support that as well.
4847 So now you have gone from home brew, very difficult, you know, probably needs to be technically adept, to every PC now connects to my TV and supports PVR. That is a big shift and if you look at the replacement cycle it doesn't take too many years before ‑‑ now that is a mass accessible experience. So I think that to count on the fact that it is technically difficult and work‑intensive to get it to work I wouldn't count on that as being the refuge for the behaviour not persisting over time.
4848 MR. HENNESSY: And one point I am at, I guess, is also we think about that as downloading, that you have to go through the action of downloading to watch, where rapidly increasing the speed of the internet so you just start to move to a world of watch, you don't download anymore, you can stream right there or you can store. But it no longer becomes sit and wait for the program, it becomes again press the button.
4849 COMMISSIONER FRENCH: Thank you very much.
4850 THE CHAIRPERSON: I am going to preface the question by a few comments. This is not the proceeding where the issue of genre specificity is being addressed head on. This is a proceeding about whether to make an exception to the rule in the case of these particular applications. The debate over the past few days has centred around competition. It has been acknowledged by the applicants that they are directly competitive with the incumbents, so that issue has been raised. They are asking for an exception on the basis of competition bringing about benefits, particularly to Canadian programming that wouldn't otherwise be there. You say you support competition in your remarks and elsewhere.
4851 So I guess I am back to Ms Assheton‑Smith's response to Vice‑Chair French, because if that is the case and if must‑carry is a competitive advantage then why would it be appropriate in that environment of the exception to allow there to be a different rule for the new competitor than applies to the incumbent? I guess you could take it down and say strip out the incumbents right under the regs, but that isn't your answer and I am not suggesting it is, so the other answer would appear to be that you allow them the must‑carry so that they don't face a competitive advantage in that marketplace. Now, I would appreciate your comments on that.
4852 MS ASSHETON‑SMITH: I think I would like to address, first of all, the assumption that must‑carry in a digital environment is a competitive advantage. I think fundamentally what we are saying is it is not a competitive advantage in a digital environment. Their advantage of the incumbents is that they are incumbents, it is not because they have must‑carry. If you look at the Category 1s and the Category 2s launched since 2000 you look at the subscriber numbers and it is ‑‑ you can see there is no trend, it is not ‑‑
4853 THE CHAIRPERSON: Without wanting to interrupt you ‑‑ I mean, on that point Mr. Lee has stated that the price, the wholesale price, would be affected directly by whether or not they had must‑carry or not. If they have must‑carry they are in a stronger position to negotiate with you than if they don't. I am sure if you ask the incumbents whether it is an advantage in the digital environment they will tell you absolutely, so that they enjoy under the regulations. And so, given the logic of this proceeding, I can't understand why we could, if we decided to licence one of the applicants, how we could not grant them must‑carry and maintain competitive fairness in the context of that particular genre in which we are making an exception and permitting more than one per genre.
4854 MR. HENNESSY: I guess it gets back to the broader issue for us in terms of fairness. What was it that moved these particular applicants to the head of the line in terms of the proceedings that we already have underway in terms of migration HD specialty or issues with ethnic services or anything else consumers might have. There was nothing in 2000‑6 that suggested that in the discretionary world one element, and in this case movies, premiums, sports, etc., had greater entitlements than anybody else. So it is back to the issue of trade‑offs.
4855 THE CHAIRPERSON: I take ‑‑
4856 MR. HENNESSY: I understand your question. I don't have a simple answer for that.
4857 THE CHAIRPERSON: Okay, that is fair. I guess the other comment or the other question really is about this notion of meritocracy which you are defining as popularity with your audience, you are trying to maximize your audience. I guess we are all going to have to continue to fact the fact that, you know, we built a railroad across this country against all the economic flows and if it was left to the market, you know, the CBC wouldn't exist, this Commission wouldn't exist, a lot of institutions in Canada wouldn't exist that attempt to fight the economic trends over time, particularly our transportation and communication systems.
4858 So while I take your point about technological change and movement towards on‑demand and online selection and in effect that is almost a threat, if you like, to the larger notion of the identity of Canadians at first glace. It may not be ultimately, because it may be a true meritocracy where excellence prevails and Canadians can stand on their own. But that hasn't been a policy that the Government of Canada has ever really bought. In other words, they have always felt that whether it is CTF funding or funding of the CBC or having special rules to allow APTN to be carried have to be ‑‑ or as the Broadcasting Act says, services for the disabled and to reflect multicultural ‑‑ are going to be with us for the foreseeable future. So all of us have to figure out how.
4859 We can't just jettison those and say well that is the end of that, let the market decide, we have to continue to figure out ways of working with those to achieve those fundamental objectives. Whether it is in the Broadcasting Act today or not, it is part of the Canadian psyche, I think, and will continue to be with us.
4860 MR. LEE: I guess I wasn't suggesting that we should jettison everything in I guess the pursuit of this unfettered meritocracy. But the difference is is we built a railway and now someone has built a parallel railway which allows you to stop wherever you want, not just at the stops that we think are most convenient to where we built stations. And when that is the situation and customers have choice they will, over time, not in one fell swoop one day everything is moving, will start to swing more of the economic value from one system to another system, that is the threat.
4861 So what we have to do is we have to make the system strong. We have to do that by, you know, TMN and what Movie Channel has done with on‑demand and creating better value, being innovative and creating better value. Those are the things we have to do. We have to strengthen the system so that we can make it attractive to a very broad base of people so that we can have all those things. Because if we don't, then what happens is this one starts to shrink while people are shifting their behaviour.
4862 THE CHAIRPERSON: That is your challenge?
4863 MR. LEE: That is our challenge.
4864 MR. HENNESSY: Can I just speak on that, you know, in terms of the position on the industry on that exact question? That is that we have always taken the position that there are a number of priority Canadian services, whether that is the CBC local programming. There are objectives, we have to meet those objectives, that is how we benefit in the system by meeting the objectives and having certain status within the system that, you know, at one point derived out of licenses that had very significant value. But at some point there is a trade‑off, right. You have to maintain those and then the rest of our investment is left to manage things.
4865 So if the determination of the Commission is that the contribution of the pay television sector is something that must be not only enhanced, but ensure that it is in way undermined, then you are almost better than saying we are going to licence more than one party on a must‑carry basis. You are almost better just to say no, at this point we think that we are generating the optimal amount of drama or money from this sector for drama and film the way it is. I am not suggesting that that is the direction to go in, but there are significant costs in the digital transition in terms of trade‑offs if you do a must‑carry and if those parties can't then deliver on their promises and this is a high‑risk thing.
4866 THE CHAIRPERSON: No doubt, and others have proposed, it is on the record, that instead of licensing a new competitor, contrary to your position which is which favours a new competitor, they say simply ratchet up the CPE requirements on the incumbents and you will get the dollars you are looking for without having the competition. Now, that isn't of course the position of the applicants. I take it your are not saying that either?
4867 MR. HENNESSY: No. I think because ‑‑ I fundamentally believe that even in a managed system the more you can inject competition when the environment all around you is becoming more competitive, the more better it is going to be for everybody.
4868 MS ASSHETON‑SMITH: Can I just add one thing? The idea that must‑carry status is the leveller between competitors I think is lusory. It is ‑‑ as I said, there are a lot of other factors at play, it is not just about must‑carry and there are a whole lot of other factors at play and there is nothing, I think, under the Act that requires the Commission or directs the Commission to give these new applicants a status that may or may not lead them to be in a position to compete with incumbents.
4869 If it is a question of competitive disadvantage the Commission has the undue preference rule to apply where incumbents are in fact exercising an undue preference. Bearing in mind that not all preferences are undue in a competitive market, some preferences might make market sense and the Commission has all the tools it needs to look at a particular situation, decide whether in fact in that situation a competitive disadvantage or market power is being displayed. There is a tendency, I think, on the broadcasting side sometimes to try to pre‑level the playing field rather than letting it play out.
4870 I know we are having this whole discussion on the telecom side about expost and exante, but I think this is one area where in a digital environment, given the discretionary nature of the technology, maybe it is time to experiment a little bit with the market forces. The Commission has the tools it needs to wonder and solve a dispute if in fact one arises. I think for the reasons that Mike and Michael have already laid out, you may find that the market takes pretty good care of this situation all on its own, given the backing of the ‑‑ two of the applications have distributors backing them. I think you will find the market will play itself out in a very interesting way in this field.
4871 THE CHAIRPERSON: Well, as to the lusory nature of the advantage, I think all you have to do is ask the parties involved, they will give you a pretty clear answer.
4872 MS ASSHETON‑SMITH: I am sure they would disagree.
4873 MR. HENNESSY: Well, we are one of the parties involved.
4874 THE CHAIRPERSON: Well, I was referring to the incumbents and the new applicants, but thank you very much. I think those are our questions and I think that is it for this evening and so we will resume ‑‑
4875 MR. HENNESSY: Thank you, Mr. Chair and Commissioners.
4876 THE CHAIRPERSON: Thank you. We will resume tomorrow morning at 9:30 a.m. with the next intervener. Nous reprendrons à 9h30 demain matins.
‑‑‑ Whereupon the hearing adjourned at 1806, to resume
on Thursday, October 27, 2005 at 0930 / L'audience
est ajournée à 1806, pour reprendre le jeudi
27 octobre 2005 à 0930
REPORTERS
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