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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
Review of the regulatory frameworks for broadcasting distribution undertakings and discretionary programming services /
Révision des cadres de réglementation des entreprises de
distribution de radiodiffusion et des services de
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
April 8, 2008 Le 8 avril 2008
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès‑verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio‑television and
Conseil de la radiodiffusion et des
Transcript / Transcription
Review of the regulatory frameworks for broadcasting distribution undertakings and discretionary programming services /
Révision des cadres de réglementation des entreprises de
distribution de radiodiffusion et des services de
BEFORE / DEVANT:
Konrad von Finckenstein Chairperson / Président
Michel Arpin Commissioner / Conseiller
Leonard Katz Commissioner / Conseiller
Rita Cugini Commissioner / Conseillère
Michel Morin Commissioner / Conseiller
Ronald Williams Commissioner / Conseiller
ALSO PRESENT / AUSSI PRÉSENTS:
Chantal Boulet Secretary / Secretaire
Cynthia Stockley Hearing Manager /
Gérante de l'audience
Martine Valle Director, English-Language
Pay, Specialty TV and
Social Policy / Directrice,
TV payante et spécialisée
de langue française
Annie Laflamme Director, French Language
TV Policy and Applications/
Directrice, Politiques et
demandes télévision langue
Shari Fisher Legal Counsel /
Raj Shoan Conseillers juridiques
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
April 8, 2008 Le 8 avril 2008
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
PRESENTATION BY / PRÉSENTATION PAR:
Rogers Communications Inc. 6 / 33
CBC/Radio-Canada 178 / 1104
Canadian Conference of the Arts 282 / 1663
Friends of Canadian Broadcasting 295 / 1723
Gatineau, Quebec / Gatineau (Québec)
‑‑‑ Upon commencing on Tuesday, April 8, 2008 at 0900 /
L'audience débute le mardi 8 avril 2008 à 0900
1 THE SECRETARY: We are about ready to start, if you can take a seat. Anyone that does not have a seat, there is extra seating in the examination room, in the Papineau Room, just outside the hearing room.
2 Thank you, Mr. Chairman.
3 THE CHAIRPERSON: Good morning, ladies and gentlemen and welcome to this public hearing to review the Commissions regulatory framework for broadcasting distribution undertakings and its discretionary programming services.
4 Le comité d'audition est formé de mes collègues Michel Arpin, Vice‑Président de la Radiodiffusion; Len Katz, Vice‑Président des Télécommunications; Rita Cugini, Conseillère régionale de l'Ontario; Michel Morin, Conseiller; Ronald Williams, Conseiller, Régions de l'Alberta et des Territoires du Nord‑Ouest; et moi‑même, Konrad von Finckenstein, Président du CRTC.
5 The Commission team assisting us includes the Hearing Manager Cynthia Stockley, Director of Distribution Regulatory Policy; and Martine Vallée, Director of English Language Pay and Specialty Television, and of Social Policy; Annie Laflamme, Director French Language Television Policy Application; Shari Fisher and Raj Shoan, Legal Counsel; and Chantal Boulet, Hearing Secretary.
6 The purpose and scope of this hearing is very important. This is the first broad review of BDUs and its discretionary programming service since 1993. A great number of issues are at stake, however everything revolves around five key questions.
7 I just came back from a week of holidays in Mexico and reflected on it and it seems to me this is what it's all about.
8 Number one, what should be the size of basic package?
9 Number two, should there be guaranteed access for certain Canadian specialty and pay services? Which ones and on what terms?
10 Three, should there be any type of genre protection for guaranteed services? If so, should they be protected from other Canadian services or only from foreign services?
11 Four, should there be a fee for carriage for over the air broadcasters? If so, how much and on what terms?
12 Lastly, should BDUs have access to advertising revenues from on‑demand services and from local avails?
13 There are of course a host of secondary and tertiary questions, such as this implication of BDU licences, cable direct to home synchronization, dispute resolution in terms of entry for foreign services.
14 However, in my view, all of these very important issues can only be addressed once the five primary questions that I mentioned have been resolved. Consequently, while we have received written submissions on all issues raised in the Public Notice and expect all submissions from you on them as well, we will concentrate our question on these five key issues.
15 There will be an opportunity to file final written comments following this phase of the proceedings. The Panel will give instructions with respect to comment at the conclusion of the hearing.
16 Following the public process, the Commission will announce the fundamental policy principles guiding its approach to these major issues. There will then be an opportunity for further public comment regarding how these new approaches should be implemented.
17 I will now invite the Hearing Secretary, Madame Chantal Boulet, to explain the procedures which we will be following.
18 Madame Boulet...?
19 LA SÉCRETAIRE : Merci, Monsieur le Président, et bonjour à tous.
20 I would ask as a reminder that you please turn off your blackberries and cell phones while you are in the hearing room and we would appreciate that you do this throughout the hearing.
21 Please note that Commission Members may ask questions in either English or French. You can obtain an interpretation receiver from the Commissionaire sitting at the entrance of the conference centre.
22 Le service d'interprétation simultanée est disponible pour la durée de cette audience. L'interprétation anglaise se trouve au canal 7, et l'interprétation française au canal 8.
23 We expect the hearing to take three weeks, approximately. We will begin each morning at 9 o'clock and adjourn approximately at 4:30 in the afternoon. We will take one hour for lunch, a break in the morning and in the afternoon.
24 We will advise you of any changes as they may occur.
25 We also would like to remind participants to monitor the progress of the hearing in order to be ready to make their presentation on the day scheduled or, if necessary, the day before or after their scheduled date of appearance, depending on the progress of the hearing.
26 Pendant toute la durée de l'audience, vous pourrez consulter les documents qui font partie du dossier public pour cette audience dans la salle d'examen qui se trouve à la salle Papineau, à l'extérieur de la salle d'audience, à votre droite.
27 There is a verbatim transcript of this hearing being taken by the court reporter sitting behind the staff table, which will be posted daily on the Commission's website. If you have any questions on how to obtain all or part of this transcript, please approach the court reporter during a break.
28 Please note that the document that was distributed to all appearing participants on March 14th on the assumed distribution model is available on the Commission website, as well as copies in the examination room.
29 Two participants have been added to the agenda. They are Metro Vancouver on April 17 and l'Union des artistes et SARTEC on April 18th. Please note that GV Productions, scheduled originally on April 28th, will now be panelled with Metro Vancouver on April 17th.
30 We will now proceed with the presentations in the order of appearance set out in the agenda. Each participant will have 15 minutes for their presentation, followed by questions by the hearing Panel.
31 I would now invite Rogers Communications to make its presentation. Mr. Phil Lind will introduce his colleagues, after which you will have 15 minutes for your presentation.
32 Mr. Lind...?
PRESENTATION / PRÉSENTATION
33 MR. LIND: Mr. Chairman, Members of the Commission, good morning. I am Phil Lind of Rogers. Let me introduce the panel to you.
34 To my immediate left is Ted Rogers and then Mike Lee, Chief Strategy Officer; Rael Merson, who is the President of Rogers Broadcasting. On my right is Ken Engelhart, who will steer the questions afterwards; Pam Dinsmore, Vice‑President Regulatory, Rogers Cable; David Purdy, Vice‑President and General Manager of Rogers cable.
35 Sitting behind are Colette Watson, Vice‑President Rogers Television; Dave Watt, Vice‑President Economics, Rogers Communications; Suzanne Blackwell, President of Giganomics; Dustin Chodorowicz, Director of Nordicity Group; and our external counsel, Lori Assheton‑Smith.
36 Now I will begin our presentation.
37 This hearing is about the future of the Canadian television industry. Everyone in this room would probably agree that we need a strong, healthy, viable Canadian broadcasting system, and to ensure that we have one it is important to understand the changes that are affecting the television industry today everywhere in the world.
38 The most important trend is the consumer is in charge. This notion was at the heart of the Public Notice that launched this proceeding. It is at the heart of what we do as a company.
39 Today more and more viewers, especially younger ones, are watching TV on the Internet. They are doing this instead of using a cable or satellite provider or even watching a local station using rabbit ears. In addition, many Canadians continue to watch TV through illegal black and grey market satellite services. If this trend continues and a sizable group of viewers abandons the regulated broadcasting system, the impact could be profound.
40 Rogers believes that the most important task in this proceeding is to make sure that this does not happen. We need to improve the Canadian broadcasting system so that viewers prefer it to any of the available alternatives.
41 In shaping the new television marketplace, we have to pay attention to the changes that are taking place on the Internet. If the regulated television system can emulate many of the benefits of the Internet, it will be more successful.
42 For consumers the Internet puts them in charge. They can watch what they want to watch when they want to watch and where they want to watch. Because of the success of the Internet, access to this type of functionality is becoming part of what viewers expect on television. They don't just desire choice, convenience and control, they demand it.
43 For content providers the Internet is creating new ways for them to monetize their content. Companies like Google have made advertising targeted and measurable. This makes the advertising much more valuable. As a result, even with the audience fragmentation that all media are experiencing, content can continue to be ad supported. We believe these trends should shape the way that the Commission approaches this hearing.
44 So how can we preserve and strengthen the broadcast system in the light of these trends? We propose a three‑step solution.
45 Number one, give viewers a reason to stay in the system.
46 Number two, maximize new revenue opportunities.
47 Number three, reinvest new revenues in the system.
48 The challenges faced by the system all stem from one simply stated fact of modern day broadcasting life: the consumer is the cornerstone. If the Canadian broadcasting system is to stay viable, it must become more responsive and accountable to the people who ultimately pay for it.
49 Consumers have choices. We have to give them a reason to choose the Canadian system.
50 So what does this mean in practical terms? More importantly it means bringing the benefits of the online experience to the TV platform. We can do this through video‑on‑demand, which allows us to show all of the television shows people want to watch when they want to watch them. And if they can watch their favourite movie or TV show any time they want, consumers will have less incentive to go online.
51 But to maximize the value of the on demand platform for consumers, we need to continue to add more content, especially prime time episodic programming. We also need regulatory changes so that VOD content can be ad supported.
52 Giving viewers a reason to stay in the system also means encouraging value‑added features such as high definition television. If customers have big, beautiful high def pictures on their TV sets, they will be less likely to watch TV on their computers.
53 Timeshifting is another value‑added feature that provides consumers with a reason to stay in the system.
54 Being more responsive to customers also means giving them greater access to choice of services, including Canadian or foreign service. The current rule which keeps out foreign services that compete in any way with Canadian services is too restrictive and too hard to interpret.
55 Our proposal, which looks at viability rather than programming overlap, will ensure that viewers will have a broader choice of diverse Canadian and foreign signals.
56 Relaxing the genre protection rules will also improve television. In an unregulated TV market, TV channels are free to change in response to shifting consumer demands and popularity of different formats. In Canada services cannot make these changes easily because they are confined by regulation to a particular genre.
57 We think the Commission should eliminate the genre protection rule as between Canadian services. It would allow them to compete for customers like other businesses do. In short, we think the best way to keep consumers on the system is to give them an enhanced viewing experience and more control over their programming choices.
58 Our balanced and streamlined distribution model would therefore eliminate most carriage and packaging restrictions.
59 At the same time it would contain the following core elements:
60 ‑ a basic service that includes, at a minimum, a group of mandated Canadian services;
61 ‑ a requirement that all distributors provide a simple majority of Canadian signals;
62 ‑ the elimination of access rules for specialty services; and
63 ‑ a strengthened undue preference for seeding.
64 Mike Lee...?
65 MR. LEE: Thank you.
66 The second step in our proposed solution is to maximize new revenue opportunities. Last year advertisers invested about $3.3 billion in Canadian television. We know that fragmenting audiences and increasing competition from online platforms are putting pressure on this vital source of revenue. To keep that money in the system and to grow the advertising pie for all, we need to be able to bring more value to advertisers.
67 We believe that the best way to do that is to give advertisers the ability to deliver targeted, measurable television ads comparable to what they can do online.
68 Currently the rules prevent us from changing the ads that appear in television shows that are viewed on demand. If the rules were changed so that we could dynamically insert ads into this programming, the broadcasters and the cable operators could earn additional revenues. Broadcasters could increase their ad rates substantially since advertisers are willing to pay a premium to reach a relevant on demand audience.
69 At Rogers we have the capability to do this today. We simply need the agreement of the broadcaster and changes to the regulations to permit dynamic ad insertion.
70 We understand that programmers are reluctant to cede control over advertising sales. No one is asking them to. We think the process for ad insertion should be subject to commercial negotiation. Ultimately, this will add value for everyone in the system, including broadcasters, distributors and producers.
71 Beyond dynamic ad insertion on VOD, all the Canadian channels on the dial could benefit from targeted advertising. Customers in some postal codes will get ads for trucks, while in other postal codes the ads will be for minivans. This would allow broadcasters to greatly increase their ad revenues.
72 U.S. cable operators are creating platforms to do this today. We need changes to the regulatory system to give Canadian cable operators the incentives to create the same platforms.
73 Another source of untapped advertising revenue is the two or three minutes of local avails in U.S. specialty services. We have the contractual right under our agreements with these services to insert ads in these avails. However, we are prevented from doing so under current conditions of licence.
74 As many parties to this proceeding have recognized, this represents a wasted opportunity. Allowing distributors to sell ads on avails will repatriate up to $60 million a year in advertising revenue currently lost to the Canadian system. It would also create an incentive for distributors to make the necessary investments in dynamic ad insertion technology.
75 Finally, it would generate new funds for Canadian programming, as we explained in step three of our solution.
77 MS DINSMORE: The third and final step of the Rogers solution is to take the revenues generated in steps one and two and put them back to work for the benefit of the system.
78 One way we would do this is by creating new funds for Canadian program production through the sale of ads on the local avails. Five per cent of every new dollar of revenue would go to Canadian programming through our mandated contribution. More significantly we propose that 50 per cent of the net revenues from ad sales on the avails be directed to the CTF or another independent fund such as the Rogers Cable Network Fund.
79 In other words, our avails proposal would grow the advertising pie in Canada while contributing up to $175 million to Canadian programming over seven years. And as confirmed by the Association of Canadian Advertisers in this proceeding, all this can be achieved without creating any new fragmentation of audience or negatively impacting broadcaster revenues.
80 New revenues resulting from dynamic ad insertion and targeted advertising would also be reinvested in the system. BDUs, for example, would contribute 5 per cent of these revenues to Canadian programming. Programmers would also contribute a portion of their new revenues to Canadian programming as a result of CPE requirements.
81 Finally, we would reinvest the majority of new revenues earned from our proposals in the infrastructure and services that keep the system relevant and attractive to viewers.
82 Distributors have spent more than $13 billion over the last decade on rolling out digital, introducing HD and video‑on‑demand and increasing the capacity of our systems so that we can carry more Canadian programming services. We believe that this is the most important contribution we can make to the long‑term success and sustainability of the Canadian broadcasting system.
84 MR. ROGERS: Mr. Chairman, I had assumed that this was really a hearing on digital because of course analog in both countries, the United States and Canada, is being removed from analog and it will just be available on digital, in the United States in 2009 and we believe in Canada in 2011.
85 It's hard to imagine how there would be analog rules after 2011 when the broadcasters are not on analog. That to us is an important point.
86 The spectrum that the government frees up is used to sell to the wireless operators and that will be used for 4G, which is the very highest of speed Internet. So if there are rules to be on analog, I would think that they would be in the short term and they would fade to black as the over the air stations fade to black on analog.
87 Mr. Chairman, fee for carriage will not give viewers more value. Consumers will pay significantly more for what they are receiving today, so less value. And it is value that really matters to our customers.
88 If broadcasters are not as profitable as they used to be, it is primarily because they have spent a fortune on U.S. programming, much higher than before, and they have spent billions on acquisitions. Fee for carriage will not solve those problems, nor will it boost spending on Canadian programming. It will just make more money available for bidding the rights to U.S. hit shows.
89 The solution for broadcasters cannot rest with subsidies and regulatory protection. This only forestalls the necessary changes that all players in the system must undertake to become more innovative and more efficient.
90 Fee for carriage will have a powerful negative effect that will raise consumer rates, cause viewers to leave the system or downgrade their services, and this will hurt distributors and broadcasters and weaken the Canadian broadcasting system.
91 Let no one be of any doubt that the American recession that we are seeing undertaking there is coming into Canada. We are already seeing that in terms of bad debts, in terms of downgrading of services, and so on, and the next few years will not be easy.
92 The Commission should bear in mind that conventional broadcasters are not losing money. They are profitable.
93 We at Rogers recently spent half a billion dollars on Citytv. We wouldn't have done it if we didn't think we could generate a profit without fee for carriage.
94 In fact, despite the assertions to the contrary, the broadcasting sector as a whole is no less profitable than the distribution sector. Consolidation has provided broadcasters with the tools they need to grow.
95 The two largest players just spent more than $3 billion to become more diversified. Recent financial results suggest that their strategy is already starting to pay off. They don't need a handout. They don't deserve a handout. The regulatory bargain already gives them free use of public spectrum, access to 100 per cent of BDU subscribers, with priority channel placement, crisp, clear signal, exclusive access to local advertising, restricted competition in their local market and simultaneous substitution, one of the most important benefits, which of course the specialties don't have, which contributes up to half a billion dollars every year to the bottom line of the broadcasters.
96 So fee for carriage is not about fair compensation. It is a consumer tax grab, plain and simple.
97 So, Mr. Chairman, in summary, the consumer is truly in charge and that changes everything. It means we can't rely on old solutions and familiar fixes. It means new approaches and new partnerships.
98 For example, we think a good response to distant signal concerns is to create and enhance VOD offering. If consumers can access individual programming on an on‑demand basis, there might not be any market for just‑in‑time shifted signals. In that case we could stop offering them.
99 That is just one example of a consumer friendly solution that works for everybody.
100 In other words, instead of fighting over things like fee for carriage that would be bad for consumers and bad for the system, we should work together to make the system better. And we at Rogers are committed to that. We have had meetings with the broadcasters, luncheons, dinners, we have done everything we can to bring them together with at least Rogers Cable to try to find solutions to these problems without going up to the regulator to have the regulator have to solve every single thing.
101 So let's get started and thank you. We look forward to answering your questions.
102 THE CHAIRPERSON: Thank you very much. I am delighted by your presentation and the constructive way in which you structured it.
103 Judging by your recent press conference, I expected a much more negative tone from you. So I am delighted that we are going to do this in a cooperative way.
‑‑‑ Laughter / Rires
104 THE CHAIRPERSON: As I said, there are five points that concern us and let me go through them one by one.
105 Basic package. You agree with the basic package. You agree with the buy, so how big should the basic package be?
106 You are one of the largest basic packages in the industry. Do you think there should be a minimum amount that we should specify or should we leave it up to BDUs to determine what the basic package is? Give me in concrete what's your view of an optimum basic package.
107 MR. ROGERS: We are going to divide up the answer, sir.
108 We feel that on analog after 2011 there should be no requirement to carry any analog. If the market, in consultation with our customers, finds that it is not a viable solution because the spectrum space is immensely valuable, then there should be no requirements to carry any analog service.
109 If they do carry an analog service, then they should put on whatever the public consultation with our subscribers comes up with.
110 Now, on the digital, our basic principle is it should be one rule for all of the BDUs, not two rules. We don't want the satellites having more rights than the cable companies obviously. We think it is unfair and outrageous and Phil will elaborate.
‑‑‑ Laughter / Rires
111 THE CHAIRPERSON: Phil or Ken.
112 MR. ENGELHART: Thank you, Mr. Chairman.
113 As Ted said, we think that the cable and satellite rules for the mandatory requirements for basic should be fairly similar. So in our case we think that means the mandatory requirement should be the local and regional stations and the 91H services. Nothing else should be mandatory for basic.
114 We believe that the BDU should then decide whether they want to sell that minimal basic or whether they want to add services to it in response to customer demand.
115 You raised the issue in this proceeding about making a small basic mandatory. For cable networks that are hybrid analog digital networks, that would be very awkward today. The way that we would make a basic service smaller can only be done with trapping technology. Literally someone has to go on a truck to the house and they have to install a new trap, a device that blocks certain signals. That is the only way to do it.
116 It really is yesterday's technology, but we still have it in a big part of our network. We have it for basic and it will stay there for basic for a while.
117 So it would be an operational nightmare to trap our existing basic service into a small basic that we offer to all of our customers. Other people can explain more about it to you, but we already have, with our basic and three tiers, ten different traps because there are all sorts of combinations and permutations. If you add in effect a fifth layer in there, because you have now got a small basic and an extended basic, it then becomes exponentially more complicated.
118 So right now we could not really offer just that small basic without incurring a fair bit of cost and we don't think that is the right approach anyway. We think the right approach is for the BDU to determine, by doing customer surveys and investigations, what the size of the basic service should be and the composition of the basic service.
119 Now, as Ted said, we can envisage a world where we have migrated everything except ‑‑ we have in effect migrated everything to digital, and we think we might still have a skinny analog basic that we would offer for people who can only afford that skinny analog basic. So that every TV set in the house that didn't have a digital box would have a basic level of service.
120 But again, that is something that is very attractive to us as a BDU, but we don't think it should be mandated.
121 THE CHAIRPERSON: All right. Let's clarify things here.
122 Let's do pre‑2011 and post‑2011, okay? Pre‑2011 where we still have analog
123 What we said is a minimal basic package. You are telling me technologically that is not doable for you?
124 MR. ENGELHART: That's correct.
125 THE CHAIRPERSON: All right.
126 Post‑2011, if I understood Mr. Rogers correctly, he basically says fine, local, regional and 91H, everything else, every carrier of analog will do it because the customer wants it not because they are being obliged to?
127 MR. ENGELHART: Right.
128 THE CHAIRPERSON: Is that basically what you ‑‑ I just came back from Washington and I was told by the national, whatever they call it, cable association, that they have actually chosen to do it, carry it for three more years past 2009, because they think customers will demand it. But that is optional. That is a business decision.
129 You say basically the same thing here.
130 MR. ENGELHART: Correct.
131 THE CHAIRPERSON: But before 2011, I'm not quite sure I'm understanding this transition period between now and 2011. What is it you suggest for basic packages?
132 MR. ENGELHART: The same thing. The mandatory requirements would be as we outlined, the local, the regional, the 91H, but then, even though that is mandatory requirements, we are not required to sell only that package. We could sell a bigger basic or add to it as we saw customer demand.
133 THE CHAIRPERSON: But you don't think we as a Commission should mandate that you carry analog until 2011?
134 MR. ENGELHART: I think that is correct, but I think that we will.
135 MR. ROGERS: I think that is correct. 2011 is to turn‑off date, sir, where both governments in both countries have determined that analog is gone.
136 THE CHAIRPERSON: Right. I am just trying to figure out what your proposal is for between now and 2011. If I understand it, you are saying that there shouldn't be mandatory carriage for analog?
137 MR. ENGELHART: It should really be the same as it is today, except that ‑‑
138 THE CHAIRPERSON: Right now we have mandatory analog carriage, that's why I am trying to figure out what you are saying.
139 Are you saying that you want to change the rules between now and 2011, or are you saying that we should leave them as they are until 2011?
140 MR. ENGELHART: I am not sure that you have mandatory analog carriage today. I think, if we had a small system in ‑‑
141 THE CHAIRPERSON: I am talking about you, I am not talking about a small system, Mr. Engelhart. Please, let's get on with this. I want to know what the proposal from Rogers is.
142 MR. ROGERS: I think you have stated it well, sir, that between now and 2011, hopefully, the requirement for cable companies would be the same as satellite companies, but it would continue on analog.
143 And after 2011 there would be no more analog rules because there is no more analog.
144 Analog is old‑fashioned technology. You have heard about the traps.
145 THE CHAIRPERSON: Yes.
146 MR. ROGERS: It's just terrible.
147 MR. PURDY: Any wholesale changes to the basic package would require truck rolls to, virtually, our entire customer base. So any radical changes pre‑2011 would be unviable from an operational standpoint.
148 THE CHAIRPERSON: I thought I understood that, but then Mr. Engelhart went on and elaborated further and seemed to confuse me.
149 That part I understand.
150 Secondly, you suggested preponderance for post‑2011. In effect, get rid of any rules beyond the basic package, a preponderance of Canadian channels, and, I understand, preponderance in terms of subscriber buying.
151 In effect, each subscriber has to buy the basic package and a preponderance of Canadian channels, if I understand you correctly.
152 For that preponderance, does basic count as part of the preponderance?
153 MR. ENGELHART: Yes.
154 THE CHAIRPERSON: And preponderance is 50 plus 1?
155 MR. ENGELHART: Yes.
156 Our proposal is that preponderance would be measured in terms of what is offered, but we would commit that if you buy our packages, you will always ‑‑ our customers will always get a preponderance of Canadian services.
157 So we will arrange our packages, and, as you say, that will include basic, to make sure that if you buy our packages, you will get a preponderance of Canadian.
158 If someone orders à la carte, we don't want to have to say to them: You can't get there from here. But if you order our packages, you will always have more Canadian.
159 THE CHAIRPERSON: I don't understand that.
160 If it's not mandatory ‑‑ I'm a Rogers customer. I buy basic, and I want 15 other U.S. channels. You are telling me that you are going to ensure that there is always going to be a preponderance.
161 If I only want to buy U.S. channels, how do you get the preponderance?
162 MR. ENGELHART: We are saying that the preponderance rule that the Commission promulgates should be in terms of what is offered, not what is received.
163 If a customer ordered basic, and then ordered, à la carte, only American services, yes, you are right, they would receive more American than Canadian. But if they don't order à la carte, if they order our packages, we will make sure that doesn't happen. We will arrange our packages so that there is no combination of our packages that would leave them with more foreign than Canadian.
164 THE CHAIRPERSON: Why can't you go one step further and say that you will ‑‑
165 I'm sorry, let me get this straight.
166 The net effect would be that each subscriber would receive a preponderance of Canadian channels. You will ensure that.
167 MR. ENGELHART: As long as they are buying our packages.
168 If someone just bought à la carte services, they could end up in a different place, but that's not very common and it's not very likely.
169 MR. PURDY: Just to build on Mr. Engelhart's point, the vast majority of our customers take the VIP package.
170 Of our digital customer base, the vast majority take the VIP package. We would ensure that the VIP package had a preponderance of Canadian services.
171 If somebody chose to take basic plus digital, and à la carte channels on top of that, it is possible that they could end up with a channel mix that wouldn't have a preponderance of Canadian ‑‑
172 THE CHAIRPERSON: So, in effect, financial incentives to get them to buy a preponderance of Canadian channels, but no obligation.
173 MR. PURDY: Absolutely. Our marketing, our packaging, and our promotion would drive it.
174 THE CHAIRPERSON: And you suggest that we, in effect, mandate that for you; that you should adopt a strategy of financially encouraging people to buy a preponderance of ‑‑
175 There is no absolute guarantee, consumers will do what they want. There are contrarian consumers that don't care what it costs: That's what I want, I'll get it.
176 But persons who make rational economic decisions will, by your offering, be driven to preponderance.
177 MR. ENGELHART: Correct.
178 And you could put that in the rules, say that BDUs have to arrange their packages so that the sum of those packages is a preponderance of Canadian.
179 MR. PURDY: Mr. Chairman, I would just add that most of our à la carte channels, or channels that are available on an à la carte basis, are in fact Canadian. There are very few U.S. channels that are available à la carte.
180 THE CHAIRPERSON: Yes, I know, but I just want to understand the scheme and what it may mean.
181 In effect, you want to have maximum flexibility for you to offer ‑‑ you promise that a rational economic player will wind up with a preponderance of Canadian channels.
182 MR. ENGELHART: Correct.
183 THE CHAIRPERSON: Okay. The second subject that we asked you to talk about is guaranteed carriage.
184 Who would get guaranteed carriage in your world, Mr. Lind, Mr. Engelhart ‑‑ whoever is answering it.
185 MR. ENGELHART: We don't think there should be guaranteed carriage, other than for the 91H services.
186 THE CHAIRPERSON: Let me clarify that. When you say guaranteed package ‑‑ I mean carriage, I mean carriage.
187 91H is a mandatory package, part of basic.
188 Just so that we get the terminology straight.
189 MR. ENGELHART: Right.
190 THE CHAIRPERSON: I want to know, who will get guaranteed package ‑‑ carriage, sorry.
191 MR. ENGELHART: No one else will get guaranteed carriage.
192 The Category 1's and the analog services today have an access right, but they have had several years to build up their brand name, build up their audiences, their popular services. BDUs are going to be in trouble if they don't have them. They don't need guaranteed access.
193 The trouble with guaranteed access is that it leads, inevitably, to Commission‑mandated rates. There is no other way to do it. So you, in effect, have a completely regulated world. If we can step outside of that regulated world, the programming services now have an opportunity to get higher rates. The popular services will get higher rates. The less popular services will get lower rates.
194 As rational business people, they all want the higher rates. They are all going to want to improve their services as much as they can, so it becomes like every other market for goods and services in this country. The rational behaviour of self‑interested business people will drive them to improve their products and services.
195 So we will end up with a better Canadian broadcasting system.
196 I have read a lot of the submissions about how gloom and doom will result if we don't have the access rules. We already don't have them for the Category 2's. Rogers carries almost all of them, and we do that, again, in our rational self‑interest. It is an opportunity for us to say to our customers: Whatever you want, you've got it on Rogers. We offer you a full range of services.
197 We think that all of the other BDUs are going to have to adopt a similar strategy. We think it's the only sustainable long‑term strategy.
198 So, for those reasons, we don't think we need guaranteed access.
199 THE CHAIRPERSON: You mentioned that they have had lots of time to establish themselves. They either have made their brand and they have their customers, or they will never make it, essentially. Doesn't that lead you, naturally, to the idea of a headstart?
200 Let's not forget that we live in the shadow of the greatest broadcast creation engine in the world.
201 Some folks have suggested that maybe you should have guaranteed carriage for your first licence term. After that, you have either made it or not, and then you are free to negotiate with Rogers, and Rogers will carry you if you have built up a clientele and you have become popular. If you haven't, too bad. We gave you seven years. If you couldn't make it in seven years, you are not likely to make it in fourteen.
202 That way we give Canadian companies and broadcasters a headstart, so to speak.
203 On the other hand, they are not forever infants. They grow up and they have to face the world at one point in time.
204 MR. ENGELHART: The analog services and the Category 1's, and most of the Category 2's, are already through that first licence term, so you would be talking about new Category 2's that, in many cases, would have extraordinarily niche content, unless we change the genre protection rules, which will be your next area of inquiry.
205 I am not sure how sensible that is.
206 If a brand new service ‑‑ and I will ask Mr. Purdy if he wants to jump in, but if you have a brand new service like The Fight Network, they didn't need any protection, their programming was very compelling. Everyone thought: Let's get it, because it's a good channel.
207 I don't think we need the protection that you have identified, and given where we are in the evolution of the services, we would be talking about very few new services.
208 THE CHAIRPERSON: Mr. Engelhart, you can't just cut people off today. I mean, they have access, they have grown up in a certain regime, et cetera.
209 Even taking the existing categories ‑‑ take whatever time period you want. I just took the logical one, the licence period. Even if we took today, you are coming up for renewal and, let's face it, this is your last renewal. After that you are on your own, or we will make it a shorter period, or something like that, depending on when you were first created.
210 It strikes me that, if you want me to follow your idea of no guaranteed access, there has to be, also, a phase‑out.
211 MR. ENGELHART: This mythology that we are going to cut people off has been promulgated by a lot of the services in their submissions. It just doesn't make any sense. We have spent billions and billions of dollars to have a system with a huge amount of capacity. We need that programming to offer to our customers so that we can pay off those investments.
212 We are not talking about cutting people off. Customers are incredibly loyal to programming.
213 Again, I will ask David to jump in, but we recently took a very obscure, niche, American service called "Golf" and moved it from one of the tiers to digital, and the phones lit up. People don't like that many changes to their television service.
214 The marketplace will give these people the transition you are looking for, I don't think you need to regulate it.
215 MR. PURDY: I would just add, Mr. Chairman, that I learned two valuable lessons that day. One, that our entire Board of Directors and all of the senior management at Rogers are avid golfers and ‑‑
‑‑‑ Laughter / Rires
216 THE CHAIRPERSON: So those are the consumers you are talking about?
‑‑‑ Laughter / Rires
217 MR. PURDY: They were certainly the first ones that phoned.
218 Secondly, any channel changes, or any fundamental change to our packaging generally results in more pain than gain, and we are very, very careful not to alter the channel packaging or the channel make‑up for that very reason.
219 THE CHAIRPERSON: If I understand you correctly, Mr. Engelhart, after 2011, basically, it will be the basic package, and everything else the market will decide.
220 Is that your approach?
221 MR. ENGELHART: Correct, sir.
222 THE CHAIRPERSON: What about genre protection?
223 As you correctly predicted, that is my next topic.
224 MR. ENGELHART: For similar reasons, we think that a free market will work better than giving individual services a monopoly over a certain genre.
225 If you look at a market like the United States, services morph all the time. The Learning Channel started off with educational programming. Today it seems to have reality programming on home renovating.
226 This is what services do. They do it in response to customer demand, they do it in response to what is hot, and in the Canadian system we can't do that because they are regulated into a certain genre ‑‑ a certain format that they can't leave.
227 If we get rid of genre protection, we are going to improve the Canadian system. If someone is not doing a good job in their format, someone else will try and sneak into that format and take over their spot.
228 That sort of competition will be beneficial to the system.
229 Now, I should say that, in thinking about this, we anticipate sort of a regulatory problem, because if you have an analog service with a high CPE and a Category 2 service with no CPE, the Category 1 service might well say ‑‑ or the analog service might well say: This is not really fair competition. They are coming after my format; they don't have the CPE.
230 We think that if you get rid of genre protection ‑‑ and you should ‑‑ you should create broad categories, such as drama or sports, and say that everyone in that broad category has a CPE of 40 percent, or 35, or whatever you think is appropriate.
231 That doesn't mean that people couldn't move from category to category, and it doesn't mean that people couldn't be hybrid categories, but it means that everyone would have the same CPE, so that the competition would be fair.
232 MR. ROGERS: Could I just add one thing, sir, because it gets confusing.
233 There are two genre protections. There are two. As far as foreign services are concerned, we are not in favour of removing those rules. We are not in favour of a U.S.A. network coming in and things of that nature.
234 I have been a broadcaster all my life and, in my opinion, that would be very harmful to the system.
235 Some of my cable colleagues disagree, but maybe they didn't start as I did, as a broadcaster.
236 What Ken is talking about are rules within Canadian services, and he is suggesting some modifications, sir.
237 THE CHAIRPERSON: Thank you for that intervention.
238 Let's deal with these one‑by‑one. First of all, genre protection between Canadian services.
239 You are saying: Let's move to broad genre categories.
240 The various submissions ‑‑ and, honestly, I don't know whether it was you or someone else, because I read so many of them ‑‑ suggest that there should be one for lifestyle, there should be one for sports, and there should be ‑‑ et cetera.
241 What does that mean? How does it work? Put some flesh on the bones for me.
242 If you have a category for lifestyle, we have some Cat 1's in there and we have some Cat 2's, and we have some analogs. You say that they all get a common CPE, presumably, common exhibition requirements, or whatever.
243 But does that mean that any other new person who wants to come forward with a Category 2 can go in there too, as long as they meet that requirement?
244 MR. ENGELHART: Absolutely, sir. Any new Category 2 could decide to take over Sportsnet, or compete with Outdoor Life if they wanted to. They could compete with each other.
245 And an existing Category 2, or Category 1, could change their format to do the same thing.
246 THE CHAIRPERSON: And the delineation ‑‑ where is the boundary of the genre?
247 As you know, that is fraught with difficulties, and whatever decision we make, we get attacked from one side or the other.
248 Do you think it will be any easier with broad definitions?
249 MR. ENGELHART: You would be completely out of that business, because no one could come to you and complain any more that: This person has crept into that genre, and they are not allowed to.
250 The only complaint you would ever hear is: This person says they are sports and they are paying 40 percent CPE, but, really, they are mostly drama and they should be at 45 percent CPE.
251 That is the only dispute resolution you would be required to do.
252 THE CHAIRPERSON: Wouldn't I still be in the same business?
253 MR. ENGELHART: No.
254 THE CHAIRPERSON: Before you shake your head, answer my question.
‑‑‑ Laughter / Rires
255 THE CHAIRPERSON: You have lifestyle here. We all agree that ‑‑ whatever ‑‑ home and garden is lifestyle. But, then, the Outdoor Network, which also has some sports broadcasting, is it sports or is it lifestyle?
256 Don't I have to make exactly the same kind of decisions?
257 MR. ENGELHART: I am going to ask Rael to add a bit, but if you had a service that was part lifestyle and part sports, and one of them had a CPE of 40 and one of them had a CPE of 35, one rule could simply be that the CPE of the higher one trumps the lower one.
258 So if you combine 45 and 30, your CPE is 40, have a nice day.
259 That would be one simple rule.
261 MR. MERSON: Mr. Chair, there is no question that in a perfect world we would have one set of rules that would apply to every one of the specialties.
262 We were simply trying to reflect the fact that you might want to impose different sets of rules on different genres.
263 What we wanted to ensure was that there is a dynamism in the business, that people have the ability to morph.
264 The concept, for us, really is: You wake up one morning and you are in the sports business. You decide that you want to be in the news business. Not a problem.
265 What you are required to do is, you would move, as you would. You are required to go back in, send a letter to the Commission and say: Look, I am moving from the sports genre to the news genre, and my CPE and my exhibition quotas will change to be appropriate to that genre.
266 You might want to grant a little bit of leeway, to the extent that somebody decided to do a little bit of this and a little bit of that, but I think you have to pick a predominance of a particular genre.
267 The fewer the better. There is no question about it.
268 THE CHAIRPERSON: Do you have a list of broad categories that you think would be appropriate?
269 MR. MERSON: We came up with five, if that helps. We said: news, sports, general interest, music, and drama.
270 MR. ROGERS: We have tried to come up with ‑‑ if you want to make a change, we have tried to come up with some solutions.
271 But the question is: Do you want to make a change.
272 As I have outlined, no for the Americans. We don't want them in here.
273 And as for the Canadians, I don't know who is pressing for a change in the existing rules. The existing rules mean that our existing players, in the different areas, have enough funds to do a good job and to produce a good service for Canadians.
274 If you have a free‑for‑all in the market, that always leads to a lower standard of programming, and less money spent on programming.
275 That's just my background.
276 THE CHAIRPERSON: I'm sorry, I don't ‑‑
277 We asked for proposals, and one of the issues we raised was genre protection. We wanted comments on it.
278 Am I to take it, Mr. Rogers, that you think we should retain the existing genre protection, or should I go with Mr. Engelhart, who says "Move to five broad categories"?
279 MR. ROGERS: I have trouble, because I started as a broadcaster and I have it in my bones. My friends here are representing the BDU, and so am I.
‑‑‑ Laughter / Rires
280 MR. ROGERS: As a broadcaster, I would say: What's the problem?
281 THE CHAIRPERSON: And as a BDU, you say that there is a problem.
‑‑‑ Laughter / Rires
282 MR. PURDY: Perhaps I could offer the contrarian view.
283 Mr. Chairman, I think our concern ‑‑ and I think we all articulated it ‑‑ is that, in some cases, we see a lack of innovation within certain programming genres, and we don't want complacency in the system, we want people to be constantly fighting and trying to improve their service, and this would allow for more competition within genres.
284 THE CHAIRPERSON: The reason I am asking the question is because I just want to understand the concept. Obviously, we will have to decide what to do.
285 And I think that Mr. Merson has explained to me how it would work. Basically, there would be the rule that, if you change, what you pay changes, and depending on the categories you pick, you take on the higher obligation, whatever it is.
286 COMMISSIONER ARPIN: Mr. Chairman, for the benefit of at least two Commissioners, could you reiterate your list of five categories?
287 MR. MERSON: With pleasure, Mr. Vice‑Chair. We had suggested that news would be a category, that sports would be a category, that there would be a general interest category, which would be a catch‑all for anything else, that music would be a category, and that dramatic programming would be a category, or a scripted series.
288 COMMISSIONER ARPIN: Thank you.
289 MR. MERSON: We tried to mirror the existing ones.
290 THE CHAIRPERSON: And a musical would be music or drama?
291 MR. MERSON: Music, I hope.
‑‑‑ Laughter / Rires
292 THE CHAIRPERSON: Okay. Advertising for BDUs. This is a subject dear to your heart, as I gather from your submission.
293 You also made a very interesting statement, which I wasn't aware of:
"At Rogers, we have the capability to do this today. We simply need the agreement of the broadcasters and changes to the regulations to permit dynamic ad insertion." (As read)
294 Dynamic ad insertion is obviously something that is extremely important to the entire industry. It is one way to keep viewers from migrating to the internet, and also for you to attract advertisers ‑‑ I'm sorry ‑‑ viewers, but also advertisers. You know, they can reach the audience that they want, and you, as the BDU, are in a unique position to actually know who watches what, et cetera.
295 And we have had presentations from people showing us how it can be done, et cetera.
296 I am interested to see that you actually have the capability to do this. Does this mean that if we said tomorrow, "Okay, go ahead, do a dynamic ad insertion," you could go to General Motors and say, "I can make sure that your ads are seen by all young males between 24 and 35, which is your key target audience," or something like that?
297 MR. ENGELHART: I am going to ask Mike to comment, and then David Purdy, but there are two different things that we are talking about, and perhaps we haven't been as clear as we could be. There is putting ads on VOD. That we can do today. There is dynamic ad insertion on linear channels. That is close, but not here today. That requires us to build a system that our American friends are working on right now.
298 I will let Mike put a little more flesh on that.
299 MR. LEE: Sure. Thanks, Ken.
300 As Ken was saying, there are two separate categories of capabilities here. One is for the on‑demand infrastructure. With respect to the on‑demand infrastructure, the dynamic ad insertion capability is essentially a software upgrade capability within the network.
301 That would allow people to be able to insert ads from a specific company. It wouldn't act like a broadcast ad, you would be able to target specific types of content and refresh on a dynamic basis, on an ongoing basis, different creative forms to support that specific content.
302 In the absence of that capability today, it is very difficult to be able to offer more innovative content from the broadcasters to our subscribers.
303 We think the benefit there is that, first and foremost, as you stated, we get top‑quality popular content to our customers, so that when they do migrate from a linear viewing behaviour to an on‑demand behaviour, we immediately are able to capture that usage and actually sell that image.
304 THE CHAIRPERSON: Let me stop you there. With respect to VOD, my household subscribes to VOD, et cetera, and if there is a request, you know it is my household, but how do you know who in my household is watching it, whether it is me or my young daughter?
305 MR. LEE: We don't know who ‑‑ in the dynamic ad insertion ‑‑
306 THE CHAIRPERSON: No, I am talking about VOD right now.
307 MR. LEE: Yes, dynamic ad insertion for VOD.
308 There is no knowledge of who in the household is actually watching it, because there is no concept of logging in or anything.
309 So what you have to do is, the advertiser has to take a look at the data that we provide them with respect to where the house location is, do some inference, and then, basically, sell them advertising tied to the type of content they are actually watching.
310 THE CHAIRPERSON: Right. So you would look at my household and you would say that most of the requests have been for action movies, so from that, and from other factors, you make some inference that it must be a young male, and that way you put ads for young males on.
311 That's the idea?
312 MR. LEE: Yes. In the first stages it is a more crude approach to it, and then, as you move to the targeted technology in the linear broadcast, it is a much more refined approach, because you have a lot more data available to you.
313 THE CHAIRPERSON: Okay. And that technology you have today.
314 Now, if you go into linear broadcasting, let's say, for argument's sake, that we said, "Yes, you can do that," do you think that in the future you would be able, on linear broadcasting ‑‑ let's take a popular show ‑‑ whatever it is ‑‑ CSI ‑‑ you could put in for one household an ad on travel, and for another household an ad on cars, because you know that those folks are interested in travel, while these folks are interested in cars.
315 That is how I understand it. Crudely speaking, that is the idea; right?
316 MR. LEE: There is a big initiative in the U.S., across U.S. cable companies now, to standardize this, because you can't have non‑standard approaches to advertising. You can't do one thing in Philadelphia and a different thing in Los Angeles.
317 But that project, called "Project Canoe", which has budgeted, roughly, about $150 million this year, is designed to specifically enable the capability to be able to do digital ad insertion of specific ads to specific households.
318 And there will be different approaches, depending on which technology ultimately succeeds.
319 THE CHAIRPERSON: And how would the business arrangement behind it go?
320 Would the proceeds from this linear ad insertion ‑‑ assuming the technology is there and you can do it, presumably it would be shared in some way between the BDU and the broadcaster.
321 Right now the broadcaster has a right to broadcast and sell the ads.
322 So, rather than those ads, there would be dynamic ad insertion. Who would market it, and how ‑‑
323 Explain to me the business arrangement behind it.
324 MR. LEE: It would be very similar to the way it works today, in the sense that the broadcaster or the specialty service would sell the inventory itself.
325 There are a number of different proposals. This is technology and a business model that is still yet to be deployed, so there is no precedent for how exactly the revenue model or the economic sharing would work in the model.
326 But one of the proposals that has been offered in the industry is some form of revenue split between the BDU, the broadcaster or specialty service, and the technology provider, where they split the incremental upside that is created as a result of the technology.
327 Generally, when we take a look at new technologies like this, whether it is the internet or in the band services space for television, they generally have that kind of characteristic.
328 MR. ROGERS: Mr. Chairman, if I may add, we can run different ads in Mississauga than we do in Scarborough, or something of that nature, but the suggestion that we are going to have an ad going into Mike's house and a different ad going into my house, and Phil's house is, in my opinion, today, utterly, utterly, utterly impractical.
329 The privacy considerations that we would be faced with ‑‑ and we are faced with them every day. The house next door has two young kids and in my house we don't have any kids, so we run special ads for kids in his house. But they grow up. I mean, the complications of this are enormous to the point where I think it is just totally impractical to sell the ads house by house.
330 THE CHAIRPERSON: You raise it in your submission. I am just trying to understand what you are talking about.
331 I understand this as a VOD aside. I just try to figure out how it would happen on linear broadcasting.
332 If I understood Mr. Lee, he said basically the broadcaster will sell it on whatever basis he can sell it in a dynamic fashion and instruct you as a BDU to insert it along those lines because that is how he sold it ‑‑ I mean, to a great extent ‑‑ and then there will be a split of the proceeds or a fee to the broadcaster for doing this dynamic advertising.
333 If I have it wrong, please correct me.
334 MR. LEE: So let me just clarify a bit, because I do agree with Ted.
‑‑‑ Laughter / Rires
335 MR. LEE: The concept of specifically going to Ted's house, for an advertiser to say I would like to reach Ted's house, is not a viable concept for a number of different reasons.
336 One, there is just no practical reality to be able to create creative to target such a small subset.
337 Right now we have a system where you basically target, you know, an 18‑to‑54 segment for one show and there is a significant amount of waste in that technology. The opportunity for optimization is to be able to segment that into slightly smaller subsets of target audiences and then create different creative. That could mean anything from, as we said in our opening remarks, going and saying, you know, here is an ad for a minivan and here is an ad for a truck in a different household that has been targeted demographically, or it can mean hey, here is a GM ad and here is a different text overlay for an offer based on where the dealership is.
338 That is very, very viable within the bounds of the technology that is available today from a number of different start‑ups.
339 THE CHAIRPERSON: The smaller segments that you are talking about, you are creating that on the basis of the viewing habits that you are uniquely aware of of your customers?
340 MR. LEE: That's right.
341 THE CHAIRPERSON: All right.
342 MR. PURDY: Mr. Chairman, in the U.S. the rudimentary or the crude form of dynamic ad insertion that Mike referenced earlier that is available on video‑on‑demand where they are targeting specific ads to specific content genres and trying to become more specific that way, we are seeing premiums in the 50 to 100 per cent range.
343 So if you take music choice as an example, which provides music videos‑on‑demand, because of the targeted nature of the music videos they are able to command premiums. We have heard cost per thousand in the $30, range which would be a fantastic rate compared to most television 30‑second spots.
344 MR. ROGERS: We can tell the number of homes maybe that tune in. But the idea that we are going to keep records of what people are watching and things of that nature is just totally impractical and privacy rules would just, in my view, not allow it at all.
345 MR. MERSON: Perhaps, Mr. Chair, if I could add quickly just on broadcasters, we are very conscious of trying not to make the same mistakes the recording industry made where, you know, there consumers decided to go to different platforms to access the material that they wanted to hear.
346 We know our viewers are moving to different platforms. Video‑on‑demand is one of them; mobytv is going to be another; direct access through the Internet is going to be another. The key for us is to be able to monetize each one of those platforms.
347 So we are going to have to incent every one of our intermediaries to ensure that we can sell the content through each one of those intermediaries. This is an important part of that plank for us.
348 THE CHAIRPERSON: Let's go back.
349 You advocate an ability to advertise by BDUs and you suggest it is not going ‑‑ you are going to grow the pie. That's the key that I thought I picked out of news presentation. You're not talking about redistributing the existing. You know, it is going to go forward. Why? Because you can offer a kind of advertising that right now only the Internet can do very targeted. So you want to be as close to the Internet as possible.
350 You call this dynamic ad insertion and there is one form on VOD which is obviously much easier for you to do.
351 Another one you think you can do on dynamic ‑‑ on linear programming, if you get the consent from us and the technology is worked out, if I understood that.
352 What I'm hearing Mr. Rogers' basically somewhat discordant voice saying no, that is not where we want to go because there are all sorts of privacy and other problems. Undoubtedly there will be privacy problems unless you do it on a very aggregated anonymous basis or something like this.
353 But the central thrust of your submission, if I understand it correctly ‑‑ I just want to make sure that it is ‑‑ you will grow the pie. You are not talking about grabbing advertising from existing broadcasters but finding new ad market ‑‑ keeping advertising that would normally go to the Internet because it can be targeted there, keep it on television because you can target it on television.
354 If I didn't get it right, please correct me.
355 We are all looking in the future here. You were showing me a vision of the future and I want to understand and make sure I understand your ideas.
356 MR. LEE: That is exactly right. And there are significant privacy issues associated with all of these types of technologies.
357 THE CHAIRPERSON: Yes.
358 MR. LEE: But what we are describing is very analogous to what happens on the Internet today. So it may be very new to the television distribution system, but it is not particularly groundbreaking with regards to the way advertising works today in other interactive platforms.
359 THE CHAIRPERSON: Yes. If I understood Mr. Rogers, he was saying the first step might be those banner ads. You see a specific ad and then you have an address for the local GM dealer in the example, et cetera. So that not only do I see the truck, the GM, but I have also been told where to go, and that would be one way of doing it.
360 Or you might even ‑‑ is there a sort of hooking this up with your ISP provision that in effect click here on the screen and you can land on the dealer's website or something like that?
361 MR. LEE: You can do it a number of different ways. There have been lots of examples, and we have even done it in the past where you actually have call to action on screen.
362 THE CHAIRPERSON: I'm sorry, call what?
363 MR. LEE: A call to action. There is some form of ability to press a button, so the blue button on the remote ‑‑ they have done it quite successfully in the U.K. through B Sky B. You click on the button to ask for either a follow‑up or direct you to some form of a call response, and then that way there is actually some translation between the effectiveness of the ad inventory and the response from the individual.
364 Advertisers clearly are willing to pay a significant premium if they can understand that not only did they get there ad seen, but their ad translated into an action that led to some form of a sale or request for more information, because that is ultimately what they are looking for.
365 THE CHAIRPERSON: But that requires you to provide everybody with a new remote with that extra button on it, I presume.
366 MR. LEE: No. All of this, whenever in the cable industry ‑‑ and the U.S. cable operators are spending a lot of time on this. We always try to create solutions that are backwards compatible. So this will in effect be enabled by software that is downloaded to the set‑top box.
367 THE CHAIRPERSON: I see.
368 MR. LEE: But the remote controls do not change.
369 THE CHAIRPERSON: All right. All of this dynamic ad interaction, you see that both on VOD, SVOD and pay‑per‑view?
370 MR. LEE: I see no reason that it would be only for one specific type of on‑demand behaviour. Now, there may be certain types of content.
371 A great example is we have done a deal with Astral for the TMN service where we provide TMN on‑demand.
372 THE CHAIRPERSON: Yes.
373 MR. LEE: And in that particular case their brand and that sub‑service has no ads, so I would expect that we would not put ads into that inventory. But any inventory where we want to have some form of subsidy support for the costs associated with delivering that service we would probably want to introduce advertising into it.
374 THE CHAIRPERSON: All right. What about avails? You want to have the right to use the avails. Your rights right now are restricted to promotion and even then in promotion it has a certain per cent for yourself and a certain per cent for others.
375 What is it exactly that you think should be the rules for the avails?
376 MR. ENGELHART: Well, it actually links a little bit to what Mike has been talking about with the dynamic ad insertion, because one of the reasons that the Americans are moving more aggressively to implement dynamic ad insertion technology is because they are doing that so that their own avails sales will be more valuable.
377 The avails is a big business in the U.S. because obviously they have far more channels with the avails then we do, and they are putting in dynamic ad insertion for themselves and then it will be available for the other broadcasters.
378 So our proposal is that yes, we should be able to monetize those avails by selling advertising and we are prepared to put some of that money into a fund for Canadian programming.
379 THE CHAIRPERSON: I heard you, but your argument so far was you are growing the pie. You are doing dynamic ad insertion that nobody else is doing.
380 What are you going to do on avails?
381 Aren't you here ‑‑ because the avails are the extra two minutes. Are they also going to be dynamic ads or are these going to be ordinary advertising and therefore competing with existing broadcasters advertising?
382 MR. ENGELHART: I will let David jump in.
383 But initially they will be ordinary ads, and we will move to dynamic when we have it. But we think there is an element of growing the pie there as well because there isn't that much local inventory available where you can buy a television spot for a local shop or retailer in a local community. Most of the broadcasters that are selling national ads ‑‑ we think actually this type of local avails, particularly as it has rolled out in the U.S., will compete more against newspapers and radio stations than it will against TV stations.
384 But I will let David jump in.
385 MR. PURDY: Thank you, Mr. Chairman.
386 In the U.S. the cable companies are incented to build out the infrastructure and the technology that Michael was referencing because they have that two minutes of commercial advertising inventory that they sell on the specialty channels. It is going to help offset the ‑‑ build the costs associated with this more targeted and advanced advertising platform.
387 So we feel that our right to participate in the avails would be helpful in helping us offset the costs associated with building this infrastructure.
388 THE CHAIRPERSON: Offset the costs, please?
389 MR. PURDY: Well, if you look at ‑‑
390 THE CHAIRPERSON: No, I just didn't hear you. You mumbled the last few words.
391 MR. PURDY: Oh, I'm sorry.
392 THE CHAIRPERSON: Offsets the costs with what?
393 MR. PURDY: The costs associated with building up the targeted advertising or advanced advertising platform.
394 MR. ROGERS: But, you know, any thought of comparing it with America, there all of the services have these two minutes an hour. So the cable companies down there have a tremendous inventory of advertising, and they really have no restrictions on selling it and it is a source of perhaps 10 per cent of their profits.
395 Here we have no such thing from the Canadian specialty services.
396 And when we are talking this subject, you sort of wonder whether that would change. And the American services we do have. But then many of those are going over on digital where they are part of a 500 channel universe and perhaps the popularity or value of the inserts on those will not be quite the same as they were on analog.
397 THE CHAIRPERSON: Okay. The proceeds from the avails you have suggested you put 50 per cent into CTF or the Rogers Cable. What about the proceeds from targeted advertising ‑‑ you know, the dynamic ad insertion?
398 I presume since you separated those two, I presume the proceeds from those are going into the general Rogers fund; they are not designated in any way.
399 MR. ENGELHART: Yes. There is no plan to create a new fund as a result of incremental revenues from targeted advertising. Of course, it leads to more revenues and our revenues pay 5 per cent into a fund so in that sense it will lead to more fund money.
400 But no, we're not creating a special fund for that.
401 THE CHAIRPERSON: Why the differentiation?
402 I mean, you are asking for new sources of revenue, but you suggest to split one and not the other.
403 MR. ENGELHART: Right. Well, it is because of the enormous cost of building this infrastructure to do the dynamic ad insertion. Our split of the revenue, as Mike described, is our return for that investment.
404 MR. PURDY: Mr. Chairman, to be candid, we felt that the real beneficiary from the targeted advertising would be the broadcasters themselves and that is the primary reason we are doing this, is to try to provide some added benefit to the broadcasters.
405 THE CHAIRPERSON: Well, that depends on the fee splitting arrangement you work out with broadcasters, whether that is to their benefit or not.
406 MR. PURDY: Yes. But in this case we are not forced to do it and we are doing it partly of an enlightened self‑interest. Obviously Rael Merson and the Citytv guys are keen to do this, but we also felt it would be a logical help to ‑‑ it would be helpful for CTV and Global, et cetera.
407 THE CHAIRPERSON: Obviously, there is self‑interest to keep advertising on TV rather than going to the Internet. I can see that.
408 MR. PURDY: Absolutely right.
409 THE CHAIRPERSON: I am not quite sure I understand the logic for the split, but okay.
410 MR. ENGELHART: Mr. Chairman, I hate to go backwards, but I wonder if I could just clarify an issue that I don't think we have fully got to on genre protection.
411 As Mr. Rogers pointed out, we have a very different model or genre ‑‑
412 THE CHAIRPERSON: Okay. You are right. So let me finish with advertising and we will go back to it.
413 MR. ENGELHART: Sure. Sorry, yes.
414 THE CHAIRPERSON: You are absolutely right. Thank you for reminding me.
415 Where does the figure of $60 million come from of repatriated advertising revenue currently lost to the Canadian system?
416 Is there some study? Is there some evidence about the $60 million?
417 MR. PURDY: The $60 million, Mr. Chairman, is the money that we feel the ad avails will be worth on the open market.
418 THE CHAIRPERSON: Oh, I see. So what is the figure that you put on the increase of the pie thanks to dynamic ad insertion?
419 MR. PURDY: I will ask Mike Lee to speak to that.
420 MR. LEE: There are two factors I think we have to take into consideration.
421 One is that the actual dynamic ad insertion or targeted advertising in linear broadcast is a technology that has not been deployed yet, so assigning a premium to it is a little bit of a black art.
422 But what it does do is we know that there is existing inventory with existing audiences and the ability to be able to parse that inventory more tightly will create incremental sales opportunities.
423 THE CHAIRPERSON: We are talking about three different categories here. We are talking about dynamic advertising on VOD and pay‑per‑view. We are talking dynamic advertising in linear broadcasting and we are talking about advertising on avail.
424 You gave me a figure for the avails of $60 million. You told me you can do VOD today. So if you can do VOD today, you must have a figure in mind of what you are going to earn.
425 And then I gather the one that's still out in the future, because you have to develop the technology and the market, is the linear programming.
426 MR. LEE: So on the VOD, on the dynamic ad insertion on VOD, you know, over a three‑year period, assuming that the content is there ‑‑ because there is a significant factor which is the quantity and quality of content available ‑‑ we estimate that it's roughly about $50 million over the three years.
427 THE CHAIRPERSON: And for the linear one, if I understood your earlier answer, you cannot quantify at this point in time. The technology is not there?
428 MR. LEE: There are a lot of estimates in the industry, but particularly the U.S. operators because they have already committed down this path of doing this, they have a rationalization for their own business. But I think it's still early days yet to be able to assign a target number on it.
429 THE CHAIRPERSON: Do you have a figure on the cost side; to develop the dynamic advertising per linear, how much you can expect to spend?
430 MR. LEE: Yes. I think on the cost side, you know, over a multi‑year period, because there are scaling implications to a lot of this technology, so early days, it's relatively small. I think it's probably about $150 million capital over five years.
431 THE CHAIRPERSON: Over five. $150 million you said?
432 MR. LEE: Yes, $150 million. And that is leveraging the infrastructure that we are already building for switched and VOD.
433 THE CHAIRPERSON: Okay. Thanks.
434 To make Mr. Engelhart happy, let's go back to genre protection and foreign programming.
435 I understood Mr. Rogers to say he wanted to retain the present system when it comes to foreign services. If that was wrong, please elaborate.
436 MR. ROGERS: That was the position. Our brief merely said if somebody could show that it was economically viable for a foreign service to come in and persuade the Commission, that you should leave the door open so that you would have the flexibility to do that.
437 But by and large our position is we want to leave it as it is, subject to you having the authority to let people in as you see fit.
438 Is that fair, Ken?
439 THE CHAIRPERSON: But in your written submission you talk about a viability test.
440 MR. ENGELHART: Right.
441 THE CHAIRPERSON: How do I apply that? Explain to me exactly what you think on that.
442 MR. ENGELHART: As you know, the current test works on the basis of overlap, so you look at how many channels overlap and you ask yourself whether they are competitive.
443 We think it is better to move to a viability test. So with a viability test you would say: Is there any Canadian service that could go under, that could become insolvent as a result of the entry of this American. You would look at that service's profitability currently. You would look at programming overlap. That would be one of your inputs. You would look at advertiser response. You would look at the programming and whether the American service was taking away all the good programming.
444 It is not that dissimilar to what you do in the radio market today where when a new radio station is asking for a licence, you do a viability test and you say: Would the entire radio market in that community become non‑viable as a result of the entry of the station?
445 So it is the kind of regulatory test that you can do.
446 But as Ted says, it's a conservative test, and I suppose we are parting company with our BDU colleagues somewhat because we are saying that the objective is to maximize the diversity for Canadians. So if adding an American would lead to the elimination of a Canadian, you don't want to do it. You want to add an American service when the Canadian services would stay viable. Then we have more choice.
447 THE CHAIRPERSON: You are taking me into an area where I'm very loathe to go. You are asking me to make concrete business judgments on a possible success or not rather than ‑‑ you know, overlap I can look at, whether the program is going to be offered or not. But to actually judge this foreign service coming in will compete against this Canadian and will succeed or won't succeed. On what basis?
448 MR. ROGERS: We thought you would like the flexibility to make a decision from time to time. I would argue personally that I would hope it wouldn't be very many times because we can't stand it. We are a fragile industry here in this country.
449 But the thought we had was that you might want to retain the flexibility.
450 In principle, the idea of bringing in movie networks and the sports networks and all of these foreign services to weaken the Canadian broadcasting system is not something that I favour.
451 THE CHAIRPERSON: So as a fallback you can live with the existing system for foreign channels, a genre protection against foreign ‑‑
452 MR. ROGERS: Yes, as long as you have the flexibility where you see fit to make an exception.
453 THE CHAIRPERSON: All right.
454 Then let's move to your favourite subject, fee for carriage.
455 I have heard you now explain to me long and hard how you think there should be new revenues for BDUs; so advertising rules, we just went through them and you explain them to me, et cetera.
456 But you seem to be opposed to any new source of fees for over the air broadcasters, any new source of revenue.
457 On the other hand, this is the first ‑‑ I mean things have changed. We all know advertising audiences have fragmented. The old social bargain of simultaneous substitution and advertising to support local content work brilliantly, but you have heard what the broadcasters say; that it doesn't.
458 And one of their solutions is a suggestion of a fee for carriage.
459 Now, I have heard you, Mr. Lind, vociferously arguing against it unquestionably, so maybe you can explain to me why you think it is such an unacceptable idea.
460 MR. ROGERS: I'm going to start.
461 Mr. Chairman, we have had three of the broadcasters, CTV, Global and Rogers spend billions of dollars buying other over the air stations. So it is sort of talking out of both sides of your mouth to say we are going to our bankers and we are putting up $3 billion and we believe that will produce a profit in the future and then coming to this hall and saying we need to have more support, more regulatory support.
462 We put out half a billion dollars for Citytv and all the improvements we are making, and we had no thought of asking for anybody else to pay for it. So that is the first point.
463 How on earth can they argue ‑‑
464 THE CHAIRPERSON: Hang on. Hang on. That doesn't work in your case because you are a BDU as well as a broadcaster. For you it is just a transfer from one pocket to another. You are not in the same boat as CTV or Global or Canwest.
465 MR. ROGERS: I wish we were in the same boat in some respects with their services they have.
466 I mean, CTV has its network in Toronto, it has its national news network on basic, it has now a local news on basic. Listen, they are swimming. They are doing well and they are well run and we respect them very much.
467 The same can be said for Global.
468 There is no problem in the broadcasting system or otherwise they couldn't borrow the money to buy each other. I mean, that's a fact.
469 Second, they are spending wads of dough buying U.S. programming. Look at the numbers.
470 Now they come here and say give us some money so that we can continue to buy more and more high‑priced American programming and more and more specialty channels and over the air broadcasters.
471 It just doesn't make sense. It doesn't hang together.
472 THE CHAIRPERSON: Well, let's go back to my original question.
473 We have chosen to use the OTA as a vehicle to ensure that Canadians have local content. That is a requirement that is imposed upon us by the Broadcasting Act. I think we can all take that as a given. There should be local content. Canadians should see their local community reflected on TV.
474 One way we have done it is we have said local broadcasters, you are the primary vehicle. You are also the primary vehicle for Canadian drama, et cetera. And we will give you two sources of large income: one is advertising; the other one is simultaneous substitution.
475 The problem is the advertising one has been fragmented and is fragmenting at a tremendous rate. You are trying to recapture some of the ‑‑ stop that fragmentation through the dynamic advertising you just went through.
476 One of the reasons why I questioned you so intently about it is because I find that a fascinating one, and I wish you all the success in developing this because it seems to me that is something that is needed and that will maintain the Canadian broadcasting system as we have it today.
477 But I don't quite understand how you expect the broadcasters to continue to live up to the obligations under the Broadcasting Act as imposed on them by us while one of their key sources of revenue is fragmenting and walking away.
478 MR. ROGERS: well, because it's ‑‑ we don't think it's fragmenting and walking away. We just spent a lot of money thinking that over the air broadcasting is a good business. So I mean that's a fact. And they have just spent a lot of money arguing it's a good business. They have gone to their bankers saying it is a good business.
479 And to come here and argue it's not a good business is very difficult to understand.
480 Look, it's like a man and a woman ‑‑
‑‑‑ Laughter / Rires
481 MR. ROGERS: The specialty channels are not allowed to advertise locally. And certain stations, like in Toronto, CFTO and Global, are. But Hamilton can't come in and sell locally and neither can Barrie. So they have all of these benefits that the specialties don't have.
482 They have the right to be low down on the dial. They have the right to program substitution that the specialties don't have.
483 So if you gave them fee for carriage, the next thing you'll have is all the specialties coming in and saying okay, if we are all going to be the same, if that is the game, we want to have the same rules of access on the dial and we want to have the same opportunity for local advertising, and so on.
484 So it makes no sense for them wanting to grab off. They are doing very well.
485 THE CHAIRPERSON: You keep using these expressions "grab off" and you assume that there are no countervailing obligations. Surely you don't expect us to say yes, you can have a fee for carriage and no strings attached.
486 I mean, what is driving all of this is what I keep telling you, it's local content. Make sure that the local stations reflect the community in which they live, et cetera, and also that they use that money for Canadian drama, et cetera.
487 So rather than assuming this is a gift, it clearly will be earmarked to help those broadcasters meet their obligations specifically. To the extent that it is earmarked and specifically designated, would that make the fee for carriage more acceptable to you?
488 MR. ROGERS: No.
489 THE CHAIRPERSON: Can you be more explicit?
‑‑‑ Laughter / Rires
490 MR. ENGELHART: I will jump in and I'm sure Ted will as well, and David might want to say something.
491 At the risk of slightly disturbing your flow, in your preamble to this section you said something that I just wanted to come back to before I answered that last question. You said you are going to get more revenue for VOD insertion and yet you don't want the over the air broadcasters to get more revenue.
492 We may have been unclear about that.
493 For VOD ad insertion most of the new revenue is going to the broadcasters. We want something for our costs of doing the VOD. But the proposition that we have for the VOD ads is you give us the content, you get a new way to monetize that content. We need something for our costs, but it's good for us because it keeps people subscribing to our service and they become sort of ‑‑ the VOD's ads allow us to create companion channels.
494 So there is CTV over the air; there is a CTV ad supported VOD channel. It is a way for people to watch what they want when they want, but it is a new source of revenue for the broadcasters.
495 THE CHAIRPERSON: Okay. You want to go back to advertising, let's go back to clarify this point because this is ‑‑ I thought I went through in elaborate detail. I said three categories. Okay? They were VOD, which I understood you were going ‑‑ and you were going to talk about ‑‑
496 MR. ENGELHART: Avails.
497 THE CHAIRPERSON: ‑‑ avails and then linear advertising, dynamic.
498 MR. ENGELHART: Right.
499 THE CHAIRPERSON: You are now telling me ‑‑ let's go through them one by one.
500 VOD. The proceeds of that advertising is going to the broadcasters?
501 MR. ENGELHART: Right, except we want something for cost recovery, but it's small. They get most of the money.
502 MR. PURDY: And I think that's ‑‑
503 MR. ENGELHART: They sell the ads.
504 MR. PURDY: Mr. Chairman, I think that is a key point and I think that was in the newspaper I read; that Mr. Sparks from CTV was confused on the point as well.
505 We believe strongly that there should be an on‑demand extension of CTV's over the air broadcasting network and that that revenue, the advertising revenue associated with that on‑demand extension of CTV's broadcasting network, should be the property and domain and in control of CTV.
506 THE CHAIRPERSON: Okay. I'm glad for the clarification.
507 Number two, linear advertising ‑‑ linear programming with dynamic advertising. Who gets the proceeds?
508 MR. ENGELHART: It's a split. But, as Mike described, in a typical split they would get all of the money they would have got for a regular ad and then the dynamic ad insertion would lead to some sort of increased value of the ad and we would split that with them.
509 THE CHAIRPERSON: But surely the value they get for their regular advertising goes down if you do dynamic ad insertion, because you are diluting the number of people who will be reached.
510 MR. ENGELHART: Not at all. You now get a more valuable ad per eyeball. Right?
511 So they would still be running that car ad across our entire system but some people get the minivan ad, some people get the truck ad, some people get the sports car ad. So overall GM pays more for that because ‑‑
512 THE CHAIRPERSON: Oh, okay. So your model is I have CSI, I sell the advertising to GM. Then, thanks to Mike's magic, you do dynamic advertising. But it is dynamic GM advertising to all GM ‑‑ so GM basically gets a bigger bang for the buck.
513 MR. ENGELHART: Right.
514 THE CHAIRPERSON: Okay. Now, avails.
515 MR. ENGELHART: There is nothing directly in it for the local broadcasters except the money that we put into the funds very directly subsidizes their programming. So that is their benefit there.
516 THE CHAIRPERSON: Okay, thank you for the clarification.
517 Now let's go back to fee for carriage.
518 What were you going to say on fee for carriage?
519 MR. ENGELHART: Well, I agree with Mr. Rogers that it's kind of crazy to ‑‑
520 THE CHAIRPERSON: Surprise!
‑‑‑ Laughter / Rires
521 MR. ENGELHART: ‑‑ kind of crazy to subsidize someone that is making a profit on a service.
522 But even beyond that, even if there was a disease that needed to be cured, the cure that is proposed here is worse than the disease because, first of all, they're taking ‑‑
523 THE CHAIRPERSON: Hang on. My question was: If fee for carriage is tied to, you know, whatever you want to tie it onto so that they can live up to their obligation under the Broadcasting Act, Mr. Rogers said no and then turned it over to you to elaborate why.
524 I'm trying to figure out why a fee for carriage with strings is unacceptable.
525 MR. ENGELHART: Well, first of all, there is certainly no strings in their application. They are saying this is what we ‑‑ this money goes into our pocket. This is money that we need for our bottom line.
526 So as we described in our brief, if you do attach strings to it, it's an incredibly inefficient way of subsidizing whatever you are going to subsidize because you raise rates. You now have drop‑off from the system, drop‑off not just from basic but people will downgrade their packages.
527 So when you end up figuring out the incremental benefit to whatever you are subsidizing, drama or if your strings attached to local, there just couldn't be a more inefficient way of doing it. It couldn't be a way that is more disastrous to the system.
528 If you are worried about people doing local or people doing drama, you are going to have to put in some mechanism to do that. Right now that's the deal. You do local to get a local station. I think that deal is good enough.
529 But if fee for carriage is the way to enhance that, I don't think you could find a more inefficient way of doing it.
530 THE CHAIRPERSON: I find it interesting that you immediately talk about drop‑off, et cetera.
531 I mean, as a broadcaster still you raise your fees annually and you haven't had a decrease in subscribers. So I don't know what the price elasticity is. I saw this ‑‑
532 MR. LIND: Yes, but they get something for it. They get something for it.
533 THE CHAIRPERSON: Well, they would get something here for it too.
534 MR. LIND: No. No, they don't.
535 THE CHAIRPERSON: As I say, the strings attached ‑‑
536 MR. LIND: Last year and this year it is the same thing.
537 MR. ENGELHART: There is an awful lot of mistakes that are made in this area that a first‑year economics student wouldn't make.
538 I mean, when you look at a rate increase, for starters you have to look at the real increase versus the nominal increase. You have to take into account inflation. If a product sells for $25 a month and there is 3 per cent inflation, then a 75‑cent rate increase is the rate of inflation. That is, costs are going up, wages are going up, salaries are going up, prices are generally going up.
539 So to look at an increase like that and say "well, I didn't see any drop‑off, therefore you could go up another two or three dollars and not see any drop‑off" is erroneous thinking.
540 The other thing is, as Phil said, if you look at a rate increase you have to look at the same product or service before you can say anything about elasticity. If the product or service is changing ‑‑ more channels, and we are adding channels; better pictures, we are giving better pictures; new functionality, we are giving new functionality; better service, we are giving better service ‑‑ you end up ‑‑ I'm not saying very much about elasticity.
541 So they are basically arguing that cable service is perfectly inelastic. It is an observed proposition.
542 We have rate increases that are commensurate either with inflation or the additional value we are giving, or both, and you add two or three or five dollars to that with no benefit to the customer, like every other product or service in the economy you are going to see drop‑off.
543 THE CHAIRPERSON: Well, I am not a first‑year economics student so I am not going to get into that argument with you.
544 Mr. Lind says you get nothing more. You are absolutely right when you are talking about a fee for service as a grab. When I talk with strings attached, let's take just one simple example. If it was tied to an increase of CPA on local content, you would get more.
545 I mean, you are positing the thing deliberately in a way to make it true as a possibility.
546 MR. ENGELHART: The consumer doesn't get more. The consumer is paying two or three or five dollars more a month and they are not seeing anything different. They are going to drop off the system.
547 Every demand curve is downward sloping. There is no way to avoid it.
548 MR. PURDY: Mr. Chairman, if I could add, the perception is that we flow through an annual rate increase without any thought and nothing could be further from the truth.
549 We agonize over every one of our rate increases. We look at our capital expenditures, the improvements ‑‑
‑‑‑ Laughter / Rires
550 MR. PURDY: Obviously they don't manage a customer billing relationship.
551 But we spend a great deal of time worrying about our rate increases. We make sure that we have added value. And if you look at our customer satisfaction data over the last three years, we have actually risen in customer satisfaction dramatically, and that is because whenever we have put through a rate increase we have added value in for those customers.
552 THE CHAIRPERSON: You make it sound as carrying OTA is a burden to you. Surely you need the OTAs because Canadians want to watch it. That is the only way they are going to have a local content.
553 The attractiveness of Rogers' service is the vast array of things that it serves, but one of those happens to be local TV.
554 MR. PURDY: But there is an opportunity to have a discussion about fee for value that we are not having.
555 I think the problem with the current fee for carriage discussion that has gone on for the last year or so is that there is no incremental value in terms of how customers perceive it. Our customers have told us they want more choice, more convenience, more control.
556 They tell us that in our CSAT surveys, our Customer Satisfaction Surveys.
557 There is an opportunity for the over the air broadcasters to help themselves. If they were embracing the on‑demand platform, if they had a CTV on‑demand or a Global on‑demand, then we could have a very serious discussion about incremental value for the customer and compensation for that. But we are not having those discussions because we seem to have infantilized the broadcasters and they instead are coming here looking for, you know, a tax or a handout, and I don't understand that.
558 MR. ROGERS: Could I just add that there is one thing that we should remember.
559 I remember when we started at Rogers Cable in 1967 all we had was over the air stations. And the competition was the antenna, and people were used to having the antenna and getting the service for nothing. So we had to persuade them that it was the quality, the pictures being better, and so on and so forth, and it was worth the fee.
560 What people don't appreciate now is that with digital, the signal quality over the air of digital is far superior to analog. It goes unimpaired farther than analog and then it drops right off.
561 The competition to cable and satellite from over the air will increase when they are dependent totally on digital reception. So many people will say, "Why am I paying all this money. I just want sort of the local station." And they will put up a small inside antenna and they will get crisp, clear pictures, depending on the market, from half a dozen or a dozen signals, many including the U.S.
562 That's what we are up against.
563 THE CHAIRPERSON: I understand that.
564 Now, we are not in '67, we are in 2008 and we have to deal with the reality that we have today here. You have made a very plausible argument about keeping advertising in TV. But moving to the other side, you disagree ‑‑ let's agree to disagree.
565 You don't think the fee for carriage as positioned by the ‑‑ and I have an open mind. I'm just giving you a hard time. Don't worry, I will give CTV and Global the same hard time.
‑‑‑ Laughter / Rires
566 THE CHAIRPERSON: I'm just trying to get on top of this issue.
567 But even if I accept your argument, Mr. Lind and Mr. Engelhart, I have a real problem following it when we are talking about distant signals, which is closely related.
568 There you are offering something extra. I can't get it over the air. I love it, frankly. I love the distant signal because I'm late; fine, I can still get the news at the hour I want it, et cetera. It is great.
569 But that you are giving for free ‑‑ you are getting for free, according to the broadcasters. Now why if ‑‑ just let me finish, please.
570 Even if I accede to your argument, which I haven't, I have just heard it, I don't understand how it applies to distant signal. How by giving me Global from Winnipeg or Global from Vancouver two hours later or three hours later, you are not putting an extra offering for which you haven't paid.
571 That is basically the argument.
572 MR. ROGERS: Let me try and help. What we would prefer is some arrangement with our friends at CTV whereby it is available repeated on video‑on‑demand. We don't really want to bring in Winnipeg and Vancouver, those places. The other system is much more practical.
573 So if they demand payment for carriage, distant carriage, then I can understand the logic of that. I'm not sure we would continue the service.
574 THE CHAIRPERSON: But let me follow up your argument.
575 If indeed they could do that and you show or you repeat CTV on video‑on‑demand, you would pay for the privilege?
576 MR. ROGERS: Well, it's their benefit too, because they are getting their ‑‑ if they have their ads included, they are getting their ads run and it increases the size of their audience. So it is in our mutual self‑interest to have lunch together and get the show on the road.
577 THE CHAIRPERSON: Yes. I still didn't hear an answer. Would you pay for it or not?
578 MR. ENGELHART: No. The model as we described to you before is we don't pay for it. They give us the content, they sell the ads again and they get ad revenue. That's the VOD advertising model. It's that same model we talked to you about before.
579 MR. ROGERS: Or they run the existing ads.
580 MR. ENGELHART: And as Ted said, you might be able to do away with distant signals altogether because you can give people what they want when they want without running the distant signals.
581 Mr. Chairman, I realize that you have moved to the distant signal portion of your questioning now and I have a great deal I want to say, but I don't think we have fully answered your questions about fee for carriage.
582 With your leave, I would like to make another point and then ask my colleague, Mr. Merson, to make another point.
583 THE CHAIRPERSON: I am finished with fee for carriage, you're right. But I suggest we take a 10‑minute break. I think we all need a nature break.
584 MR. ENGELHART: Thank you, sir.
585 THE CHAIRPERSON: Thank you.
‑‑‑ Upon recessing at 1044 / Suspension à 1044
‑‑‑ Upon resuming at 1059 / Reprise à 1059
586 THE CHAIRPERSON: Let's resume.
587 Mr. Engelhart, you said that I had left fee‑for‑carriage. I hadn't, but you have, obviously, something to say on fee‑for‑carriage, so please do so.
588 MR. ENGELHART: Thank you, sir.
589 I wanted to respond more fully to a few of the questions that you posed, and I am going to ask Rael to comment, as well.
590 You talked about the value of the local signals, and you said: Look, the cable companies benefit from carrying these local signals.
591 We have sort of a real world experiment, in that if we look at the regulatory regime in the United States, the American over‑the‑air services are either entitled to must carry or to a fee, but not both.
592 So there are free market negotiations between over‑the‑air broadcasters and cable operators, and in 99 percent of those cases the cable operators don't pay.
593 They are saying: Look, we will take your local signals. We are happy to do it. We are happy to give you carriage, happy to add it to our lineup. But if you want payment for those signals, we are not going to make it.
594 The notion that these signals are worth 50 cents or 75 cents, or some other number like that, is not borne out by that American experiment, and we don't think that they drive that type of value to our customers for the reason that Ted gave, you can pick them up free over the air. It's very hard to sell people a cable service when that service has things that they can take advantage of free over the air.
595 The second point I wanted to talk about was your ‑‑
596 THE CHAIRPERSON: Hang on. Before you leave the U.S. experience, if you are right and they have the option of negotiating, is there not a standard fee, or a minimum fee, or something that has to be paid when you have carriage?
597 MR. ENGELHART: No. It is all negotiated and, in most cases, it ends up being zero.
598 THE CHAIRPERSON: Okay. My briefing was different, but that can be verified, obviously.
599 I'm sorry, go on.
600 MR. ENGELHART: You also talked about attaching strings to make it work. You would have to attach a lot of strings, and they would have to be wound very tightly. Even so, I don't think, as I said before, that it is an efficient way of doing things.
601 Say that you wanted to tie fee‑for‑carriage to local spending. You would have to get some sort of benchmark for how much spending they are doing now locally, and then you would have to say that 50, or 75, or 100 percent of the fee‑for‑carriage would have to go into local spending, but you would have to make some estimate of how much local spending would have increased anyway.
602 You would probably need to put on a CPE for local broadcasters.
603 So the strings that you are proposing to attach would be very complicated, and, as I said before, the efficiency of a regulatory subsidy like that is very poor, because you do have drop‑off from the system, so you end up with very little incremental benefit going into the thing that you are trying to stimulate.
604 The third point that I want to make ‑‑
605 THE CHAIRPERSON: I'm sorry, I want to interrupt you before I forget the point.
606 MR. ENGELHART: Sure.
607 THE CHAIRPERSON: Why would it be so complicated? Why wouldn't we say: Global, how much are you spending on local content?
608 We know the figure.
609 Okay. That's your base. You are getting a fee for carriage.
610 I will take your example, 50 percent goes on local content. So it's today plus 50 percent of fee for carriage.
611 It seems to me that it would be a very simple way of administering it, if you wanted to go that way, just to follow your example.
612 MR. ENGELHART: Is that 50 percent just for incremental spending, or can they allocate some of that to overhead, fixed costs, salaries, wages?
613 Once you get into these costing games ‑‑ I mean, this is how I started off in the telecom business, doing costing. It is a mugs game. You need a team of cost accountants to monitor these things, and, even so, you end up with arbitrary results.
614 THE CHAIRPERSON: Yes, I have been there, too. I know that cost accounting is a mugs game, but I don't think it is insurmountable. You do have separate cost centres and separate ways of allocating costs, et cetera.
615 But, anyway, I understand your point. Let's go on.
616 MR. ENGELHART: The third point is, how much sense does it make for one industry to subsidize another industry when they are making, roughly, the same profits?
617 You can't look at EBITDA and compare cable and broadcasters, because EBITDA compensates you for capital. We spend $700 million a year on capital in our cable business; the broadcaster spends $10 million a year.
618 A more relevant figure is PBIT. If you look at PBIT, according to the Armstrong study, which was done for the CAB, broadcasters, overall, have a PBIT of 15 and cable operators have a PBIT of 18.
619 Mr. Armstrong stopped at 2006. If you go to 2007, it is actually 17 for the cable operators and 16 for the broadcasters.
620 So the PBIT is almost exactly the same. But even PBIT, I would argue, is not a fair comparator, because the "I" in PBIT is for "interest", and when you spend hundreds of millions on capital, you have a lot of interest, so a profitability measure before interest is unfair.
621 If we had fee‑for‑carriage, you would drive the broadcasters up into the low twenties, you would drive the cable operators down into the low teens or the single digits, and now you have created a new problem. Now, okay, they are really rich, but we aren't, and we can't afford to build the platforms we are building, and we can't afford to do the things we are doing.
622 This whole notion that cable has a huge pot of money that we can subsidize people with isn't borne out by your own figures at the Commission on profitability.
623 THE CHAIRPERSON: Let's stay out of the rhetoric. You haven't heard me say that cable had a whole pot of money that should be redistributed or anything like that.
624 I am dealing here with the facts presented before us.
625 What we have seen in the last year is very interesting. The broadcasters have bought specialty channels. You, a BDU who has specialty channels, has bought an over‑the‑air broadcaster. Both of you are trying to cover your bets both ways, you are trying to have specialty channels and over‑the‑air channels.
626 The fact that they bought specialties and you bought City, as far as I'm concerned, cancels out to say that they have money to spend ‑‑ "Look they have bought" ‑‑ but, you know, you forget what you have done.
627 What I am concerned with are the objectives of the Broadcasting Act, making sure they are met and that everybody has sufficient means to do it.
628 I think we were very successful in setting up a system which, while it may be overly complicated, very dirigiste ‑‑ we managed to create a very diverse system, satisfying the various needs of Canadians.
629 That is how I see it, and I keep using the expression, "It is built on the cornerstone of the OTA," and funding for the OTA I see as being jeopardized.
630 Now, you suggest that it's not, and I guess that is one thing we have to examine in this hearing, to see whether that is true or not true.
631 Secondly, if it is in jeopardy ‑‑ and what I am concerned about is local content. It strikes me that I haven't heard anything from you which suggests that local content can be funded out of the existing revenue base, given the fragmentation of advertising, unless Mike pulls a rabbit out of the hat and his dynamic advertising actually works for linear programming, and then everybody is happy.
632 MR. LIND: OTA may be the cornerstone, but also, as we pointed out, the customer is the cornerstone, too. The customer has some say in this whole thing, and if you are just going to sock the customer with $5 or $10 extra a month for nothing extra, we are going to have a revolt on our hands, and we are going to have a problem with that. We are going to have a big problem with that.
633 THE CHAIRPERSON: Again, that depends on the size of the fee‑for‑carriage, the way it is being phased in, et cetera, and to what extent you pass it on, to what extent you don't.
634 Those are all business decisions that have to be made.
635 MR. MERSON: Mr. Chair, could I see if I can give a broadcaster's perspective, when I am tied to a BDU?
636 The question you ask yourself, really, is: How should a broadcaster feel about this, and what are the logical reasons that one might not be in favour of fee‑for‑carriage?
637 The facts that I look at are as follows. When you look at revenues in the over‑the‑air market over the last few years, they have been growing ‑‑ not strongly, but they have been growing at the rate of 1 or 2 percent per annum.
638 If you look at Canadian programming expenditures, they have been largely flat, also growing at 1 or 2 percent per annum over the last few years.
639 If you look at U.S. program acquisitions over the last four or five years, you see a massive increase in spending in the U.S.
640 So, to me, it is a little disingenuous to argue that the funds aren't necessarily available to fund Canadian programming, and local programming, when the bulk of the money, or the increase in spending, really has gone to U.S. program acquisition.
641 If you were the NHL and you were faced with a situation like this, and you had a massive increase in one of your costs, your inputs into your system, the natural solutions to them are salary caps.
642 There are salary caps, or there is tied spending of some sort.
643 The NHL went down the salary cap route. You could impose a tied spending regime if you thought this was the issue.
644 The problem with introducing more money into a system like this, and the reason that none of the businesses in this situation do that, is because it simply adds fuel to the fire. All that happens ‑‑ and I understand that you will go back in and impose some obligations, probably related to local spending, but it will, fundamentally, add fuel to the fire.
645 And if the system works as it has worked in the past, it will be very difficult to identify the money that is spent on local programming.
646 We have been at it with Citytv for six months, and I still don't know how much they spend on local programming.
647 I ask myself, as a broadcaster, which is more in my interest, to sort of build a system where I believe that money might be imposed on my audience, and I might drive them from the system itself ‑‑ as opposed to a system where I get guaranteed carriage.
648 I have a BDU in place that will allow me to be advertising agnostic. Wherever my viewers go, I want them to have a platform to allow me to monetize those viewers in a way ‑‑ wherever the viewers choose to watch what it is that we have on offer.
649 I would choose the latter system rather than the former system. The former system, to me, results in more program inflation. It doesn't necessarily, even with obligations, result in the meeting of those obligations. It, instead, results in sort of a program inflation fuel, as opposed to building the infrastructure of our system that allows me to be fundamentally medium agnostic. I want advertising, I want to acquire the rights, and I want to acquire the rights to exploit that advertising in every medium that is available to me.
650 And I want a BDU in the Canadian system that has the capabilities to allow me to do that.
651 For me, that is a fundamental broadcasting position. I don't think ‑‑ it is a choice.
652 THE CHAIRPERSON: I don't follow you, Mr. Merson. Explain this to me.
653 You are a broadcaster. Presumably you have separate costs in the Rogers empire, and you have to justify your expenditures, et cetera. You are not going to be subsidized by Rogers. So how do you meet the problem that CTV and Global point out, that U.S. programming is, to a large degree, what Canadians want to watch?
654 The price of it is going up. Yes, there is competition from simultaneous substitution, but that's not enough.
655 You, as Citytv, must be meeting exactly the same cost pressure, and yet your advertising dollar is going down. It is being fragmented.
656 Why would you not have the same "problematique", so to speak, as CTV or Global?
657 MR. MERSON: We have exactly the same issues, the question is what the solutions are. Whether the solution is to introduce more fuel to the fire and drive programming costs a little bit further, or whether the solution is in ‑‑ I don't want to say a more orderly marketplace, because markets work in the ways in which they work.
658 But to the extent that there is a recognition, for example, that there is no advantage to be gained by one party over another party, you tend to end up in a marketplace that becomes more rational about the acquisition of programming.
659 If you look at program inflation from the acquisition of U.S. programming, it has been tremendous. Why has it been tremendous in the last few years when it wasn't tremendous in the decade before? That probably relates more to inequities in the marketplace, the marketplace realities. We know it hasn't been driven by massive increases in revenue. It has been driven by one of the parties believing they can acquire a superior position over the other, and therefore driving an acquisition strategy that has worked very well for them.
660 THE CHAIRPERSON: So it is rational bidding by the networks that is the cause you are saying.
661 MR. MERSON: Certainly the evidence suggests it. The evidence suggests that that is where the issue is.
662 If you believe, for example ‑‑ if you go back to the evidence and you look at it and you conclude that that is what the problem is, there are lots of solutions to it.
663 I am not advocating them, because I think the market will sort itself out, but there are lots of solutions that will target just that issue, rather than throwing fuel on the fire.
664 THE CHAIRPERSON: What solutions are you talking about? You have to be a bit more specific for me.
665 MR. MERSON: You could have a salary cap, in the sense that the NHL has a salary cap that says: As a player, depending on what your audience is, the maximum amount you can spend on the acquisition of foreign programming would be X.
666 I am not advocating that. That is the NHL's solution, but I am not advocating it.
667 Tied spending might be more akin to the environment that we are in, which says: This is a luxury tax, effectively. To the extent that you want to spend that much more money on the acquisition of U.S. programming, there has to be a luxury tax that funds the Canadian system, as well, and sort of reinvests that money into the Canadian system.
668 It is another model. There are hundreds of economic models you could adopt that really target what I think is the heart of the issue.
669 I am not advocating them, because I do believe that the market will right itself.
670 As I say, for us, if we were given a choice between one system or the other, I want the ability to take my programming and monetize it wherever my viewers want to see it.
671 THE CHAIRPERSON: You just gave me two solutions, which are clearly regulation and not a free market, and in the next sentence you say that you believe in a free market. I have trouble reconciling these ‑‑
672 MR. MERSON: No, I want to be ‑‑
673 THE CHAIRPERSON: Whether it is a luxury tax or the NHL solution, either one of them is highly interventionist.
674 MR. MERSON: I am not arguing for them, I am arguing that the market will, in fact, sort itself out, and it doesn't require intervention.
675 The bigger issue is keeping Canadian viewers on a Canadian system.
676 I am simply giving an example of what the solutions might be that might be more targeted to the problem at hand.
677 THE CHAIRPERSON: Mr. Engelhart, back to you. You mentioned the U.S. model, and before the break you sort of indirectly hinted at negotiated fees.
678 What exactly is your position on the negotiation of fees?
679 MR. ENGELHART: It is not something that we are advocating in this proceeding. If you brought in a system like the U.S. system, where the local broadcasters could have either must carry or a fee, but not both, which I believe Videotron is advocating, we could live with that.
680 The problem is, sometimes in the U.S. the cable operator says: We will drop your channel then.
681 They say to NBC: We are not going to carry you any more.
682 The problem with that is, it is disruptive for customers.
683 I think you are going to end up, more or less, in the same place we are now. So there is a question of whether we want to go through that disruption to end up in the same place.
684 The other concern that we have, quite frankly, is, I am not sure the Commission would stand by and just watch those free market negotiations take place. There would be pressure on the BDUs to pay a little money to get along. Can't we all just get along here?
685 In the U.S., the regulator steps back and lets those negotiations take place. Our history has shown that that is not entirely the Canadian way.
686 We could work with that system, but we are not advocating it.
687 THE CHAIRPERSON: I asked Mr. Merson this because it seems to me, really, that our business model for producing local content is broken, and one way to fix it is through fee‑for‑carriage.
688 If you have a better way of doing it ‑‑ I mean, I heard you saying that the market will sort it out.
689 I hate to dismantle something, or see something go down the drain without having some assurance that, at the end of the day, there will be an outcome that will be compatible with the Broadcasting Act and the clear obligation that it sets upon this Commission. It strikes me that, without fee‑for‑carriage, local content will be in serious danger.
690 You testified before me for City, and I remember that we pushed you quite a bit about news in Vancouver, and you were very reluctant to do it, because you say that the market is ‑‑ there is no business in it.
691 On the other hand, I think that Vancourites are entitled to local news.
692 Help me out here. How are we going to solve this?
693 MR. MERSON: Again, it goes to the vision of what over‑the‑air is, and we went through the discussion in Citytv ‑‑ not very successfully, I might add.
694 The point we tried to make was that local television has two avenues open to it. What it can't do is duplicate what it is the specialties can do. The two avenues open to local television are local reflection and high‑quality prime time content.
695 There is nothing in anything we have learned in the last six or eight months that has changed our opinion on where the over‑the‑air business is, so you need to be ‑‑
696 It is confusing, and it is a dichotomy. You have to be as local as you possibly can be in local content, and you have to be as appealing as you possibly can be on the first‑run content, whether it be Canadian or non‑Canadian, that appears in prime time.
697 As we have gone back into City, we have expanded the news on City in Toronto. We have some plans for City in Vancouver, as well, but we will be ‑‑
698 I think what we said at the hearing was: Give us a chance. We haven't been there yet. We will try to figure it out. We are coming back for licence renewal in less than a year's time. You are going to hold us accountable, and we know you are going to hold us accountable.
699 The issue is, do you need a subsidy if the core function of your business is to provide local service? I don't know so much. I think ‑‑ that's where you business is.
700 THE CHAIRPERSON: Okay. Let's go back to the distant signal ‑‑
701 MR. ENGELHART: Could I just add a point, Mr. Chairman?
702 THE CHAIRPERSON: Sure.
703 MR. ENGELHART: I think we disagree with the assumptions in your question, or the parts of your question.
704 We don't think the model is broken. Don't forget, the over‑the‑air segment is profitable. This has to be the only country in the world where profitable companies can come in and demand a subsidy. The model is not broken.
705 THE CHAIRPERSON: You should talk to the steel industry ‑‑
‑‑‑ Laughter / Rires
706 THE CHAIRPERSON: ‑‑ if you think this is the only country where profitable industries ask for subsidies.
707 MR. ENGELHART: Ad revenue is not going down. Ad revenue is increasing each year for the over‑the‑air stations. It has increased since 2000 at about 3 percent. I am sure they would like a bigger increase in revenue. We have talked about some ways we can do that.
708 With respect, I would argue that you have taken the wrong conclusion from that hearing in Vancouver. The conclusion that I would draw is that a company that had lots of other uses for its capital decided to spend $400 million to buy some local broadcasting stations that had very onerous local spending commitments ‑‑ 30 hours, I think, for our Vancouver station.
709 The debate that I believe we were having in that proceeding was: How much of that 30 hours should be spent on news, and how much on other local reflection?
710 The argument that I believe we were making in Vancouver was that Global had kind of a lock on that local news. They were doing a great job on the local news. They were spending tons of money, and people were happy with their local news.
711 This isn't a story where the model is broken, this is a story where two or three local broadcasters were spending a ton of money on news, and one was saying: I would rather put my money into the morning show and some other things.
712 So I don't think that I would take your conclusion that our acquisition of City and our answers in the hearing associated were evidence that we can't fund local. We can still fund local. The market is still profitable.
713 The solution to it, which is the fee‑for‑carriage, I think, will have all sorts of unintended consequences, and I certainly don't think you can go down that path unless the model really is broken, and there is no evidence of that today.
714 What you are saying is, companies are saying: One of my divisions is less profitable than another division, so I want a subsidy from some other industry, which, overall, is no more profitable than we are.
715 Again, I can't think of any other country in the world where a proposition like that would be taken seriously.
716 THE CHAIRPERSON: Listen, just because I pose questions, don't think I have reached any conclusions. I am pushing all of the points that you are making to their logical conclusions, to test their validity. Don't read anything more into my questions than what they are, questions to try to get my head around the issues.
717 MR. PURDY: Mr. Chairman, I would like to make one additional comment. You had referenced the fact that we would link back the local content to the fee‑for‑carriage. Just from a marketing perspective, I can't see how that would be relayed to the customer. I can't see a marketing piece, or a promo, or a 30‑second spot saying: The additional $5 that is currently on your cable or satellite bill is helping to fund one or two hours a day on CTV or Global.
718 I don't understand how we could pass that value message on to customers in a way that they would understand. I think they would really struggle with it.
719 MR. LIND: And we are going to pass it on.
720 THE CHAIRPERSON: No doubt, you will try to pass it on.
721 MR. WATT: If I could, I would like to explain the economics behind that decision.
722 The simple way we look at it is, say that it is a $3 per month cost increase. If we were to decide not to pass that on, we would then incur a cost of $7 million per month.
723 Our alternative is to pass it on and then see how many customers drop off.
724 And we lose money at about $22 per month per customer that drops off. Our average revenue per user is about $56. An EBITDA margin of 40 percent leaves about $22.
725 So we see where the cross‑over point is, where we lose so many customers that we actually cross past the point of losing $7 million in the month.
726 And there are around 305,000 customers.
727 We would pass it on. The economics are that we don't think we could lose 305,000 customers, so we would pass on the $3 and see ‑‑
728 MR. LIND: And, Mr. Chairman, the proposition that we would have to go to the public with ‑‑ to our subscribers and say, "Guess what? The CRTC has imposed a $5 or $10 tax per month, and you are getting nothing extra for it, except, maybe, half an hour a week, or a day, of Canadian from Global," I don't think that's a very good proposition, and I don't think that people will stand for it.
729 THE CHAIRPERSON: I have no doubt that you are going to do exactly the same as the gas companies do, put their little sticker on every meter that says, "Forty‑two percent is tax, and profit is only 2 percent," et cetera, and you are going to blame us for any increases.
730 That being said, it doesn't take away from the fact that we have a responsibility to discharge, and we will discharge it.
731 Now, hopefully we can find a way out of this conundrum that is acceptable to everybody, but the mere fact that you may want, at the end of the day, to pass it on and blame us for it is not a reason not to do it if it otherwise makes sense and otherwise meets the objectives of the Broadcasting Act.
732 We are not there by a long shot. We are at the opening day of a three‑week hearing and we are trying to ‑‑
733 MR. LIND: We are trying to cooperate, too. We are trying to find new ways to monetize content within the system. We will work with the broadcasters and do everything that we have to do in that regard.
734 It is just that, if this thing happens, we don't work with them any more, and we have an all‑out war, and it's a real problem for our customers, because our customers then say: We'll leave you. We'll go somewhere else.
735 Because they now have the option of going elsewhere. They didn't before.
736 When we were in the sixties and the seventies and the eighties, okay, a big regulated system, no problem. You can't go anywhere else. Now they can go elsewhere, and that's what I am worried about.
737 If they go out of the system, it is really a problem for all of us.
738 THE CHAIRPERSON: I understand that. As you very well know, we are looking at new media, and we are going to have a hearing in the fall, et cetera, because, like you, I am exactly worried about what the impact of new media will be on the existing system, and the last thing I want to do is drive people from the present system into an unregulated new media system.
739 So we are on the same wavelength there.
740 Let me go back to Mr. Engelhart. You sort of made this a binary choice, either a negotiated fee or guaranteed access, but not both.
741 Isn't there a halfway house? Isn't there a minimum ‑‑ guaranteed access with a minimum fee, or no guaranteed access but a negotiated fee?
742 MR. ENGELHART: I'm sorry, you said access and a minimum fee?
743 THE CHAIRPERSON: Yes, for carriage that they would pay, or else ‑‑
744 If they think their service is so valuable, they would say, "Fine. No, no, I am going to sit down with Rogers and negotiate. They can't live without me," and negotiate whatever the appropriate fee is.
745 MR. ENGELHART: I don't think of that as a halfway house, I think of that as a fee‑for‑carriage. You are getting fee‑for‑carriage and mandatory access.
746 To me, there is no relationship, necessarily, to the value of that service, it is just whatever number you happen to pick, and it becomes that minimum payment.
747 THE CHAIRPERSON: Okay. If you want to put it that way ‑‑ I just meant ‑‑
748 You are all assuming that you are paying around 75 cents per signal, and that translates into, roughly, $8 ‑‑ or between $5 and $8, depending on how many ‑‑
749 I mean, if you start off with a much more modest amount, that makes the thing more accessible; especially if you couple it with negotiated, that means, you know, that you can actually pick which over‑the‑airs you pick. The ones that didn't opt for the minimum fee, you know, put themselves ‑‑
750 So the market, to some extent, would decide what the value of those signals really is.
751 MR. ENGELHART: If it is a much more modest fee, then it doesn't solve the problems that broadcasters claim they have, it's ‑‑
752 THE CHAIRPERSON: Let them make that point.
753 MR. ENGELHART: It is small change compared to the things we are talking about here, which solve the problem of audience fragmentation by doing VOD advertising, by doing target advertising.
754 Again, when you are dealing with small amounts of money, then the cost accounting problems that I talked about before become magnified. You can sort of lose 20 cents if you are trying to subsidize something by $1. But if you are trying to subsidize something by a nickel, you lose the whole thing in the paper shuffle.
755 So I don't think a smaller number solves any of those problems.
756 THE CHAIRPERSON: Now, on the distant signal, I heard you and Mr. Lind saying that in effect the solution to it is let us rerun the signal on VoD but you are not willing to pay it, just basically saying the increased excess that, let's take CTV as an example, would get through that rerun, they can charge more for their advertising, but to the extent that their advertising is local, it is of absolutely no use.
757 Why do you find the idea of paying for the distant signal so distasteful, to use your words, Mr. Lind? I mean it seems to me it is pretty close to a specialty channel. You are showing in Winnipeg a signal that comes out of Toronto that in no way you can receive over the air. So for the privilege of receiving that signal in Winnipeg, you, customer, should pay.
758 MR. ENGELHART: We do pay. We pay ‑‑ right now we pay 50 cents per month to the CAB for the right to carry those distant signals and we pay 25 cents for the right to carry a second set of four‑plus‑one signals.
759 The satellite guys don't pay and our issue with you is this is totally inequitable.
760 If we look at the study that the CAB did on this topic, or sorry, that Bell did on this topic, the Bell study shows that 95 percent of the distant signal viewing is on satellite.
761 So to the extent that there's a problem on distant signal viewing it's not a cable problem and the reason for that is just the way that our channel guide is organized.
762 People start at Channel 2 and then they go to Channel 3 and then they go to Channel 4. If you want to find our distant signals, they are up somewhere in Channel 368. So people will go there if they really want to watch a certain show that was on in Vancouver when they get home from work.
763 But in satellite it just happens that the channel guide is organized differently. So when I am up at my cottage and I go to my Star Choice system there's a whole bunch of Globals just sitting there one after another and they are all showing the same thing. I click on one and it might be Winnipeg and it might be Vancouver and I don't particularly care because it is the same show but now I am seeing different ads than the ones that Global wanted me to see.
764 So the distant signal problem is largely caused by satellite. For some reason the Commission says, well, satellite doesn't have to pay, they pay .4 percent of the 5 percent they would otherwise pay into a fund for local broadcasters.
765 But solving the local broadcaster problem doesn't solve the problem that you just identified. So they are paying zero for that and we are paying 50 cents. So we are overpaying. So if you work out the math, we should be paying less.
766 So I guess what we are saying is let's have a payment system which is symmetrical, which is equitable, where everyone pays the same amount, and the solution to that might well be have the satellite guys pay at the level that we are paying. That is one solution.
767 I think when you work out the math it works out to ‑‑ if we were all paying the same amount, it would actually work out to be less than 50 cents. So we might go down to 30 and they might go up to 30 but it would leave the broadcasters whole.
768 There are arguments about whether the number is 10 or 20 or 30 or 40 and it all comes down to the economic models but bear in mind that this is fundamentally a good thing. It is fundamentally a good thing to keep people on the system.
769 People are going to watch what they want when they want. Distant signals are one way of doing that. Oops, I missed my favourite show at 8:00. Darn it! Oh, I can catch the Vancouver feed at 11:00. That's great! Now I am watching it at 11:00 but I am still seeing the ads.
770 Now, I will grant you only 80 percent of them are the national ads, 20 percent of them are the local ads. I know the advertising guys always tell me that somehow Global can't monetize that national ad in Toronto as well as they do in Vancouver. I don't understand it. To me there is a free luncheon in that story somewhere and I don't think there should be. But fine.
771 The point is still I am watching part of the Canadian system, I am watching Canadian channels and I am watching the ads. If we don't give consumers that choice, we force them all to buy PBRs, now they fast‑forward through the ads, or we force them to download things from the internet, now they are off the system.
772 So let's try and find some way to make this time‑shifting thing work and let's bear in mind that it is inherently a good Canadian solution to the problem.
773 THE CHAIRPERSON: What would be the number if we imposed the same obligations on satellite as we have imposed on cable?
774 MR. ENGELHART: About 25 cents.
775 THE CHAIRPERSON: Okay. Now several times during your submission on these five key points, we broached the subject of dispute settlement and it seems to me very clear, as we try to make the system more deregulated, more simpler, more strategic, there will be a greater role for dispute settlement by our Commission.
776 Do you have any specific ideas what you would like to see us do?
777 MR. ENGELHART: Well, as you know, we have proposed a model where there wouldn't be any access rules and there would be more free market negotiations. So the area for dispute resolution that we have identified is undue preference or undue discrimination.
778 So to take the BDUs' side of it first, I suppose if a service, a certain channel, a Canadian channel said, I am going to sell my signal to Star Choice for 25 cents and to ExpressVu for 25 cents and I want $1.00 from Rogers, I think we should be able to come to you and say, well, that is not right.
779 That doesn't mean that there couldn't be volume discounts or other cost‑based elements to the rate card that would give different rates to different people or different conditions but within those sort of exceptions which we have seen for years in telecom, we think there should be a role for the Commission on dispute resolution for undue preference.
780 A similar story if I have got one service that is in a similar situation to another service and I am paying one of them a lot more than another one, they could complain and I would be called upon to justify my differential payments and show why that preference wasn't undue.
781 So that is the role that we see for dispute resolution even in a fairly deregulated world.
782 THE CHAIRPERSON: Mr. Merson, as a broadcaster, what is your view?
783 MR. MERSON: You know, we are not ‑‑ it is a specialty issue more than it is an over‑the‑air issue and as we look at our specialties we are not that heavily involved in it. So it is a question of how the world unfolds.
784 There is an undue preference provision that I think we have all proposed. To be frank, the idea that the undue preference provision might place the onus on the BDU to disprove the existence of an undue preference is a powerful tool. A lot of the undue preference situations right now you tend to self‑police a little bit more because the onus is on you to prove the undue preference.
785 I do think, to be frank, and I have said to Ken and to Phil, I think they are exposing themselves to a lot more undue preference complaints than they had in the past and I think it is a powerful provision. I think it will be made extensive use of.
786 THE CHAIRPERSON: If, contrary to your wishes there is a fee‑for‑carriage, do you see any cross‑work between fee‑for‑carriage and an enhanced dispute settlement provision?
787 MR. ENGELHART: Not really, I don't think so. I mean if there is a 20‑cent tax, we pay the 20‑cent tax. I don't know where the dispute resolution ‑‑
788 THE CHAIRPERSON: After you have gone to the Supreme Court, I gather.
789 MR. ENGELHART: And anywhere else.
790 THE CHAIRPERSON: Right. Okay, listen, the way we set ourselves up we have one ‑‑
791 MR. LIND: I made that comment just as a throwaway but ‑‑
‑‑‑ Laughter / Rires
792 MR. LIND: ‑‑ but respectfully, I want everybody to understand that we are very, very much against fee‑for‑carriage and that we will ‑‑
‑‑‑ Laughter / Rires
793 MR. LIND: We will go to all the lengths that are available to us to have this thing killed.
794 THE CHAIRPERSON: I think I got that message.
‑‑‑ Laughter / Rires
795 THE CHAIRPERSON: The way we set ourselves up for each intervener we have one lead question. I have monopolized the questioning but that doesn't mean my colleagues don't have questions for you. So let's turn to my colleagues.
796 We will start with you, Michel Arpin.
797 COMMISSIONER ARPIN: Thank you, Mr. Chairman.
798 Well, I will bring you back right to the beginning of the hearing and my first question will deal with basic service.
799 You said you got to be small made up of local broadcasters and the 9(1)(h). Do I understand that you will be removing the U.S. stations and put them somewhere in a tier or are you thinking that they are local stations in your model?
800 MR. ENGELHART: I was unclear, Vice‑Chairman Arpin. What I was talking about was the minimum requirements for basic. So those things have to go in basic. That doesn't mean that BDUs can't add other services to their basic in response to customer demand. So I expect, yes, the four‑plus‑ones would be in there.
801 There might even be some ‑‑ well, under our current basic today, we have some specialty services as well and for the reasons I talked about our current service is going to be around for a little while. But even when we move to a more flexible digital platform, we might add some specialty services to that basic.
802 So it is always a question of, you know, consumer demand. You have got a specialty service. If you put it on basic, you could have it for 20 cents. If you put it up in a tier, you could have it for 50 cents or 60 cents. And how many customers would prefer to get it at that cheaper price built into their package and how many would rather buy it à la carte?
803 We do customer surveys. We do polling. So we will still design a basic. Every BDU will design a basic that works and I think most BDUs will put the four‑plus‑ones in a basic but the list I talked about would be the regulatory requirements for what has to be in basic.
804 COMMISSIONER ARPIN: Now, I read somewhere ‑‑ there are so many things that I have read ‑‑ that currently in Toronto your basic service is made up of 63 different services and what you are saying here is that, if I am hearing you well, you could even consider expanding it much further.
805 MR. ENGELHART: No. Our basic is around ‑‑ it is a little less than 40 services, 38 or 39, and no, it is not getting any bigger right now.
806 COMMISSIONER ARPIN: And with what you said as an answer, that you may consider expanding it, that is your answer for the time being, not necessarily a given plan?
807 MR. ENGELHART: Yes. Again, I was unclear. What I should have expressed was that when we move to a more digital flexible environment, we will have a smaller basic than we do today but it won't be the minimum basic, it will be somewhere in between.
808 COMMISSIONER ARPIN: Okay, fine.
809 Now moving to when you dealt with access, you said that the BDUs shall be free to take whatever signal that they deem will work for them. You surely have read the Peter Grant opinion to the CBC regarding the CBC specialty services and the right to access.
810 Do you have any comments to make on that very topic?
811 MR. ENGELHART: Well, one doesn't like to contradict someone with the reputation and eminence of Peter Grant but the Broadcasting Act, to me, is not nearly as prescriptive as people make out and I don't think that any of the specialty services, CBC or otherwise, need to get access.
812 MS DINSMORE: Commissioner Arpin, I think in our view, as we said before, the test that should be followed is the 9(1)(h) test.
813 A year ago there was a decision that came out of this Commission which determined that a number of services that were dual status that had had guaranteed carriage on basic under their regime didn't qualify for the 9(1)(h) test.
814 They were not seen to be services that contributed in any exceptional way to the broadcasting system and that included services like Vision TV and weather, and not to sort of point to them but there is a very clear decision that those services don't pass that test and that decision was rendered only a year ago.
815 COMMISSIONER ARPIN: Well, that is clear but the opinion that Peter Grant gave to the CBC was not to the effect that they all their services shall be given a preference status like a 9(1)(h).
816 What he is saying is whenever the CBC makes the decision to go into a given specialty service, it shall be carried by all the BDUs. It could be not only on basic, it could be on a tier, it could be whatever but they shall have access to the BDU system.
817 MR. ENGELHART: I will ask Laurie Ashton‑Smith if she has something to add.
818 MS ASHTON‑SMITH: I don't have much to add to Ken's point.
819 The Broadcasting Act is not as prescriptive, with all due respect to Mr. Grant, as they suggest in that opinion. I don't think anyone has ever previously suggested that all BDU specialty services have a guaranteed right of access and I don't think that the Broadcasting Act necessarily was designed to be interpreted in that fashion. So I agree with Ken.
820 COMMISSIONER ARPIN: Okay. Obviously, this matter will come back throughout the week.
821 You discussed with the Chairman on the matter of fee‑for‑carriage and particularly Mr. Merson raised the fact that one of the issues is the acquisition of foreign programming and the increase in the cost of foreign programming.
822 One question that goes to my own mind is that through Geo‑fencing, Canadians cannot access most of the American programming, at least access the U.S. sites that are carrying some U.S. programming. I am thinking about some that you pay like "Desperate Housewives" and some that you can access free but because the address is in Canada, the signal is blocked.
823 Isn't it because the broadcasters are paying an incremental fee for their foreign programming that they are able to convince the producers not to allow Canadians to access foreign programming from other sources because I read somewhere that Geo‑fencing disenfranchised Canadians to get U.S. programming but in some European countries you could access those programs?
824 MR. LEE: I don't know if I can comment on the relationship between the producers and the programs themselves but there is a ‑‑
825 COMMISSIONER ARPIN: My question was directed to Mr. Merson.
826 MR. LEE: Okay.
827 COMMISSIONER ARPIN: He can come back with it because he is buying foreign programming.
828 Mr. Lee, I am not saying that you should not reply.
829 MR. LEE: I will follow up.
830 MR. MERSON: Vice‑Chair, there are so many elements to program buy nowadays, I mean it is difficult to sort of put them all into one sort of brief question.
831 As you know, there is a continuum of rights that you acquire and the more you go to the far side of the continuum, the more solid your rights tend to be. Where you end up on that continuum is always an economic decision in the sense that the studios evaluate their own ability to monetize their content relative to our ability to monetize our content.
832 I for one don't see any change in the notion that first‑run high‑quality content from overseas will ever end up anywhere else other than over‑the‑air television because over‑the‑air television fundamentally has the ability to monetize it best.
833 We know that from a lot of American experience in terms of how much money ABC are bringing from "Desperate Housewives." I read in one of the papers somebody submitted an analysis of how much money was coming in from the broadcasts of "Desperate Housewives" relative to the downloads of "Desperate Housewives" or the streaming that was occurring.
834 So we know there is that continuum. The question is sort of where the studios and the developers of content will end up on that continuum going forward. To the extent that we can monetize the content better than they can, they are always going to protect our rights in some fashion and I believe they will seek to protect our rights.
835 I mean ultimately, developing high‑quality programming has become a business of laying of risk. You know, it costs so much to develop a high‑quality content, you have got to believe you have other sources to monetize that content over.
836 And as the world unfolds, it will be the person who has the highest ability to monetize that content, which I believe is going to be over‑the‑air television, who will be in the driver's seat in determining where you fall on that continuum of the rights that you end up acquiring.
837 Does it make sense?
838 COMMISSIONER ARPIN: Yes.
839 MR. LEE: The only thing I would add to Raul's comments are that if you look at what is going on today, I mean the Geo‑fencing has become sort of a panacea in the industry in terms of it protects our territory.
840 But the reality of today and the reason why we are so focused on enabling VoD platform with the right revenue tools to allow it to provide comparable functionality and features for our customers is that if you walk down to the University of Ottawa this afternoon and walk through the dorm, there are no basic subscribers and they are not worried about Geo‑fencing. They don't contemplate Geo‑fencing. They just go onto DC++ and they download everything they want to watch.
841 That is our customer or was our customer and we need to find ways to create an all‑encompassing system that keeps all of this behaviour, all of this revenue in the system, not just for the customer who is the individual subscriber but also the customer of the system, which is the advertiser, which we need to make sure that they have tools to be able to continue to invest in the system as well.
842 COMMISSIONER ARPIN: And how do you think you are going to be able to recuperate them to the broadcasting system?
843 MR. LEE: Well, right now ‑‑
844 COMMISSIONER ARPIN: Through VoD or HD?
845 MR. LEE: I think that is a combination, as we discussed in our in‑chief, investment in High Definition, we think, is an incredible defensive tool because it raises the expectation for our customers about what minimum quality is and it forces an onus on the network to be able to try to compete against that, which on the internet side of the business it can't today. So it just pushes it out further.
846 The second one is VoD. I mean you have to go back to the underlying behaviour, what is the customer looking for. The customer is looking for flexibility, is looking for convenience, control, choice, and so what technologies do we have in the system today that facilitate that.
847 And so when you look at what we are doing today in the system as a collective, you are seeing more and more content actually go onto the internet. It goes onto the internet not because it is the only choice, it goes onto the internet because it has flexibility to drive revenue creation on that platform while VoD does not have that same flexibility. So we need to even that up to make sure that we can compete as the Canadian broadcast system.
848 COMMISSIONER ARPIN: One of the issues this Commission hears all the time when we are dealing with the unions is the issue of terms of trade.
849 Are the issues of terms of trade in place between the BDUs and the other stakeholders for VoD or is it still something to be sorted out and we are years before being able to put it in place?
850 MR. ENGELHART: I think in the case of VoD we are mostly talking about repurposed content, so I am not sure those terms of trade issues would come up. I think they would be between the rights‑holders and the people that we acquire the programming from, which would be the broadcasters.
851 COMMISSIONER ARPIN: But in some instances the broadcasters don't own the VoD right, those VoD rights belong to the producers. I am sure Mr. Merson is well versed also in that matter after some six months with over‑the‑air but with many years of background with specialty services.
852 MR. PURDY: Mr. Vice Chairman, this is exactly the key matter, which is we have been discussing with CTV, Global and our own Citytv the fact that during the May screenings this year it is so critical that the over‑the‑air broadcasters secure the digital rights at the same time they secure the linear rights because that ultimately is what is going to keep people within the system.
853 As Mike Lee referenced, if we don't offer that time‑shifting, the ability to watch what you want when you want, we are going to lose people off the system. Those rights are available. The broadcasters will tell you they are expensive, they are hard to get but they are available and we have to be, I think, united in terms of obtaining those ancillary rights for the U.S. content.
854 COMMISSIONER ARPIN: And once again, it will increase the cost of foreign programming.
855 MR. PURDY: If we don't behave rationally, yes.
856 COMMISSIONER ARPIN: So it may have an impact on their bottom line and ‑‑
857 MR. PURDY: But the U.S. studios recognize the fact that there is a number of websites now that offer peer‑to‑peer file‑sharing. There are websites now that you can go to where you can get a fake IP address that would disguise the fact that you are a Canadian.
858 So the geo‑filtering is no longer working as a comprehensive solution and the only thing ‑‑ we have to recognize what happened to the music industry and avoid that in the Canadian marketplace. We have to get these digital rights and act on them so we keep people within the legitimate system.
859 COMMISSIONER ARPIN: Thank you very much, Mr. Chair.
860 COMMISSIONER KATZ: Thank you, Mr. Chair.
861 You know, when I was on the other side I always thought that being first gives you the opportunity to ask questions because when you are second, third or fourth, those questions have been asked already and it becomes a burden to have the same questions asked. I thought coming on this side, it would be a bit different but my colleagues here have asked many of the questions I was going to ask. That being said, I still have a few.
862 That being said, I want to come back. Mr. Engelhart, I think it was you who mentioned the issue of the Golf Channel and for those of you who don't know, I will come out of the closet, I am an avid golfer and I love golf an awful lot.
863 When Rogers did move the Golf Channel from one of the tiers onto a specialty line on its own, you said the networks were lit up, your call centres were lit up. What did you do about it?
864 MR. PURDY: Mr. Vice‑Chairman, the original plan called for the Golf Channel to be moved from tier 3 to the Sports Theme Pack. I guess the response from the customers was overwhelming enough that we actually made a decision to put it into what we call tier 4, which is an extension of tier 3 that is available to our digital customer base. And so roughly 800,000 of our customers take the VIP package that includes tier 4.
865 So we actually sort of backed down from the original concept of moving it to an even more niche package and that was in response to the customer comments we had. We also had a number of programs in place whereby customers who used to get the Golf Channel could subscribe to the VIP package at an introductory rate.
866 So that seemed to manage the situation well. It didn't necessarily manage my career well, the board of directors is still upset but it did manage the customer.
867 COMMISSIONER KATZ: The reason I ask the question is not because of the Golf Channel but because of all the small programmers that are out there who are at, I guess, the BDUs', not just Rogers' beck and call. Whenever you decide you want to make a change, you make a change, and then suddenly there is the other side of this change and yes, some BDUs have offered graciously to pay for some of the marketing costs and whatever else as well but it is a major impact on them and in some cases it is a negative impact as well.
868 MR. PURDY: Yes, I think the key thing to remember is that we don't want to be arbitrary. We do a lot of customer research before we make any of these changes.
869 So in the case of Golf, the ratings were very low, amongst the lowest in that tier. It is a very niche service and that is why we chose to move that channel.
870 For other services if we were contemplating a program package move, we would go through a lot of research and, quite frankly, in most cases we choose to leave things just as they are because the customer disruption isn't beneficial to us and the overwhelming consensus within our building is that we want to add value into the existing package structure, we are not looking to strip value away.
871 So all but a very few services have we ever contemplated stripping them out or moving them. I think we have only turned off a couple of channels in the last ‑‑ in my memory and I have been at Rogers for eight years and these were channels that had little or no subscribers. So I don't think the risk is real. It is very hard to take channels away.
872 COMMISSIONER KATZ: Is there anything that you can offer programmers to reduce their anxiety that they are at a disadvantage when it comes to bargaining? I can understand the bigger players certainly have some weight and have some leverage. When you get down to the smaller independents, is there anything at all you can offer?
873 MR. PURDY: This is a standard line for Rogers but we do believe that market pressures force us to carry certain channels.
874 So let's take the high‑fidelity services. There are four HD services that we don't carry. Chris Frank is in the room today and he will tell you that Bell makes great hay with the fact that they carry these HD signals and we don't, so much so that competitive pressure is going to drive us to launch these services as soon as we have spectrum and we will have spectrum when we roll out switch digital.
875 So competitive pressures force you to carry a comprehensive channel line‑up and even the niche services have strong appeal to a certain hard‑core subscriber base. So things like the multicultural channels, we have stolen subscribers away from satellite because we have a more comprehensive multicultural offering, both domestic and foreign.
876 I am sure once Chris Frank solves his spectrum problem, they will launch the multicultural channels that we have launched in order to combat our competitive pressure.
877 MR. ENGELHART: If I could also add, Mr. Katz, I don't think it is who you are as much as how attractive your programming is. So one of the problems that the small independents have is not that they are small and independent; it is that the big broadcasters have bought up all the desirable formats and there are only very niche formats left for the small independents.
878 What we have proposed in our submission is that the genre protection rules should disappear as between Canadians. This will give the small independents a chance to morph some of their formats, make your programming more attractive and have a bigger stake in the industry.
879 So I think that that is the real thing you want to do to help the small independents.
880 COMMISSIONER KATZ: Okay. I want to come back to time shifting. You talked about it with the Chairman and you actually alluded to it as well in your submission this morning.
881 I think someone also said ‑‑ and I'm not sure who on the panel ‑‑ that if necessary or if compelled you will cancel time shifting as well.
882 How popular is time shifting today amongst your customers? How successful is it? How profitable is it?
883 MR. PURDY: Thank you, Vice‑Chairman. Some contextual background.
884 We only launched time shifting in its current package because the satellite guys were using it as a competitive advantage and viewers seem to value it. So when satellite customers were asked what they valued, time shifting was amongst the top three or four answers every time. So we responded by putting it into our digital service and making it base level with the box.
885 We believe strongly, though, that time shifting, to Mike Lee's point, only addresses a fundamental customer need which is the ability to be flexible in terms of when you watch your programming. So once we had of robust VOD offering that mimicked or, quite frankly, was better than what time shifting offered, we would be keen to turn off the distant market signals because they would no longer be necessary.
886 People don't necessarily want to watch time shifting, they don't necessarily want to watch the CTV Vancouver signal, but rather they want to watch Oprah at the time of their choosing. So having Oprah on demand addresses it and I think not only would we be willing to, we would be keen to turn off those distant market signals.
887 COMMISSIONER KATZ: And do you think that if you were able to transfer those customers from a time shifting environment to a VOD environment you would be able to grow that penetration as well, or would you just transfer all those people or would there be any melt or any loss?
888 MR. PURDY: We actually think a robust VOD offering, particularly prime time main network episodic programming, will bring people back to the system.
889 So when Mike Lee referenced, you know, those students in Ottawa who are currently downloading content, when they get their first apartment when they graduate, something like a robust VOD offering that includes most of your favourite prime time episodic shows would bring you within the system, especially if they are in high definition.
890 Rogers is uniquely positioned in Canada, following the leadership of other cable companies like Comcast, in terms of offering HD and in particular HD VOD.
891 COMMISSIONER KATZ: I asked how successful and how profitable, how many customers. I don't know if it's confidential and not.
892 Do we have that information?
893 MR. PURDY: Time shifting for us is not profitable in the sense that it was an incremental cost that we had not anticipated or budgeted for. It was something that we added into our overall package in order to keep customers within the cable fold, in particular to prevent defection to satellite at the time.
894 So it is an incremental cost that we have borne in order to protect our customer base and add value for our customers.
895 COMMISSIONER KATZ: I want to come back to broadcasting and I guess something, Mr. Merson, you mentioned earlier about one scenario to solve a problem might be tied spending. I am interested in that model.
896 Perhaps you can sort of elaborate a bit more as to how you think this type of model, should the Commission decide to go down that route as an alternative, would work?
897 MR. MERSON: I am partially sorry I mentioned it.
898 There are lots of models for how you do it. There is a luxury tax model which essentially says what you do is you establish a ‑‑ look, what you don't want to do necessarily is limit people's ability to react to the marketplace and build the businesses, but what you want to do is recognize, you know, the externalities, the other impacts that it has on the marketplace.
899 So you could for example tie spending, foreign spending as a proportion of Canadians spending, not necessarily limiting people's ability to spend above that mark. But in the instance that you do spend above that mark, you might want to make a contribution to the system.
900 So you might sort of want to take the overage and apply it to the CTF or a fund of some sort or local programming, something to drive local programming if that was the issue you were trying to deal with.
901 But to me again, as I said, the issue to me isn't the collapse of the system; it is the extraordinary spending that occurred in a portion of the system. So as opposed to a buckshot, which you want is to target right against that issue.
902 I know I'm repeating myself, but I fundamentally believe that it will right itself; that it doesn't actually need righting. But if you did, at least you would pick a targeted approach rather than a buckshot approach at it. That would be a luxury tax.
903 COMMISSIONER KATZ: I guess there are some representations that have been made to us with regard to the fact that foreign programming costs have been going up much faster and proportionately have gone from the 50/50 per cent Canadian/U.S. to 60/40 or thereabouts as well.
904 I'm just wondering if sort of tying them together whereby the market is free to bid up the price of U.S. programming or foreign programming, if you do that, the quid pro quo is your cost of Canadian is going to go up as well.
905 Would that be seen as an intended consequence to strengthen the system as well, given there is now more money being flowed back into the Canadian system as well?
906 MR. MERSON: Absolutely. I'm not sure you need to go there because I do think time might sort this out fairly easily. But it clearly is an alternative that would do exactly as you suggest.
907 COMMISSIONER KATZ: All right. Thank you. Those are my questions.
908 THE CHAIRPERSON: Thank you.
909 COMMISSIONER CUGINI: Thank you, Mr. Chairman.
910 I want to start with some follow‑up questions on the issue of genre protection and I'm going to start with a much more general question and then go into a little bit more detail as to your proposal for the genre silos I guess is a good way to explain it.
911 Others who are participating in these proceedings are saying that if we eliminate genre protection, all that is going to do is allow specialty services to morph, which has become a key word in these hearings, into something that will look like just everything else because they are all going to go after the same mass audience. And what we risk losing, therefore, is programming diversity in the Canadian broadcasting system.
912 How do you respond to those allegations?
913 MR. ENGELHART: Well, of course in most countries there is no genre protection. So when we look south of the border all of those services are free to morph and they are free to go after each other's base. But we see very distinct services. We don't see any regression to the mean. We don't see people programming to the lowest common denominator. We do see morphing.
914 So The Learning Channel was an educational channel and now it has reality shows, but we don't see everybody trying to be A&E or everybody trying to be CNN. We see the marketplace providing a lot of diversity and I think the same thing would happen in Canada.
915 COMMISSIONER CUGINI: So again it will be Canadians who will decide how much morphing is going to occur or not?
916 MR. ENGELHART: Yes. I mean, it's a bit like that in radio today, so there is no genre protection in radio. There used to be. Say one broadcaster decides I'm not going to do country and western any more, someone else thinks oh, that's good, country and western is vacant. I'll try and move in.
917 Generally speaking, the result is that the markets are well served.
918 COMMISSIONER CUGINI: Because you brought up radio, one of the elements of that is of course Canadian content is universal across all genres, across all radio stations, and that's why we could dismiss with the licensing of formats. But in television of course the circumstances are completely different and we have three elements that every specialty service has to comply with, for the most part.
919 They of course are Cancon, both overall and in prime time, and CPE requirements.
920 So in your model, let's take the sports silo as an example, in which you are a major player. So if I look at Sportsnet's obligations right now, it is 60 per cent Cancon overall, 50 per cent in prime time, 54 per cent CPE.
921 Then I look at TSN and it is 55 per cent Cancon overall.
922 So in your model are you suggesting that TSN should move up to 60 per cent Cancon overall to be able to be in that silo?
923 MR. ENGELHART: Either we would move up or they would move down, but I think you would probably want to have the same CPE for everybody and the same exhibition requirements for everybody.
924 I suppose there could be exceptions. You might say well, you know, Sportsnet has been around for a while so they have to do a little bit more then some Category 2 that is just getting started. But for the most part I think you would want to have the same obligations for everyone in that broad category.
925 COMMISSIONER CUGINI: Because you raised the issue of Category 2, that was going to be my next question.
926 If I look at something like LeafsTV of course it is at 35 per cent. So how does it qualify to be in that silo?
927 MR. ENGELHART: The simplest answer is they would have to increase their CPE and you would ‑‑
928 COMMISSIONER CUGINI: Well, they don't have a CPE.
929 MR. ENGELHART: Sorry. You would have to give them a new CPE and a new exhibition requirement and that would presumably have to happen at the next licence term. You probably wouldn't want to do it in the middle of their licence.
930 COMMISSIONER CUGINI: And if that blows up their business plan and they leave the Canadian broadcasting system, that's okay?
931 MR. ENGELHART: I think you could give people an option to opt out of this brave new world of genre morphing. So if someone said "look, I bought into a certain nature of service, it's in my licence; I just won to stick there, I don't want to morph, just leave me alone", I think you might want to accommodate people who want to do that.
932 COMMISSIONER CUGINI: Okay. So your model does allow for that?
933 MR. ENGELHART: You could.
934 COMMISSIONER CUGINI: One of the things you say in your written submission is that:
"Rogers suggests that the Commission consider giving increased flexibility to services that can demonstrate to audience success for Canadian programs." (As read)
935 Demonstrating audience success, is that a pure numbers game in terms of how much of an audience they reach or how much of an audience they can attract?
936 MR. ENGELHART: Sorry, could you give me that reference again?
937 COMMISSIONER CUGINI: Yes. It's paragraph 159 of your October submission.
938 MR. ENGELHART: Right.
939 COMMISSIONER CUGINI: Page 69.
940 You also go on to say:
"This would increase the incentive for programming services to invest in higher quality Canadian programming."
941 MR. ENGELHART: Sorry, page 60 and what was the ‑‑
942 COMMISSIONER CUGINI: It's page 69, paragraph 159 of your October submission.
943 MR. ENGELHART: Right.
944 MR. ENGELHART: I will ask Lori to respond to that.
945 MS ASSHETON‑SMITH: Thank you, Mr. Engelhart.
946 If I remember correctly ‑‑ I don't have the submission in front of me ‑‑ that discussion was in the context of creating incentives for specialty services to increase the appeal of their programming to consumers and creating a model in which the appeal of the service would be as important as the pure number of hours of exhibition.
947 I think that was where that discussion came from: that in the absence of any program spending requirement, there is maybe a disincentive to focus on quality and more of an incentive to focus on quantity of hours expended.
948 COMMISSIONER CUGINI: So in no way ‑‑
949 MS ASSHETON‑SMITH: I think that was the only intent of that.
950 COMMISSIONER CUGINI: Okay. So in no way it is related to access?
951 MS ASSHETON‑SMITH: I don't think it was related to access at all.
952 COMMISSIONER CUGINI: Okay.
953 And on the issue of access, I did hear you, Mr. Purdy, when you gave the example of the Golf Channel. You've only turned off a couple of services and it is way too difficult to take away services from Canadian subscribers.
954 So your suggestion of essentially doing away with the access rules, am I to assume that this is a going forward proposition?
955 Your cable business has been built thanks to the access rules in terms of the number of programming services that you offer and the type of programming services that you offer. So because of your statements, you have only turned off a couple, very difficult to take away, safe to assume that if we eliminate the access rules, it doesn't mean a reduction in the number of services that will be available to Canadians.
956 MR. PURDY: Yes, thank you, Commissioner. Absolutely right.
957 I think in fact what it does do is provide a little more impetus for people to drive excellence into the model. You know, our concern that if somebody has the right to just camp on a genre and not invest and not have to work for both the viewers and the ratings and the overall customer satisfaction benefit, that they may just do that.
958 So by having, I think, a little more impetus to provide excellent programming and the ability to move and improve their position within the lineup, I think is good for the system and good for viewers and good for our customers.
959 COMMISSIONER CUGINI: Okay.
960 Advertising on specialty services. First I will ask the question about U.S. avails.
961 Will this be limited to local advertising only, because correct me if I'm wrong, but that is essentially what the U.S. model is based on. They are called local avails because they are available to the local cable company and local advertisers.
962 Would you adopt the same model?
963 MR. ENGELHART: Yes.
964 COMMISSIONER CUGINI: So it is local advertising only?
965 MR. ENGELHART: Yes.
966 COMMISSIONER CUGINI: Now again in your written submission ‑‑ you didn't talk about it today ‑‑ you also mentioned the ability to sell unsold advertising on Canadian specialty services. What's that about?
967 I mean, is there all this inventory available on specialty services that they are not able to sell that you think you can, or are you setting us up for local avails on Canadian specialty services?
968 MR. ENGELHART: Well, there certainly is some unsold inventory on the Cat 2s. A lot of them do have it. So we are just saying as one of the elements that we would have in the negotiation, we might say, "Look, we will pay you X cents per month and we would like two minutes of your unsold inventory."
969 So it would be kind of voluntary avails service on Canadian, yes.
970 COMMISSIONER CUGINI: Specialty services however may argue that this could be something else that would favour BDUs in terms of negotiation for carriage.
971 What if the specialty service says "I don't want to give you local avails" and you make it a condition of carriage in the absence of access rules?
972 MR. ENGELHART: I will let Dave add to this.
973 Once the access rules are gone there is no more must carry, but there is also no more must offer. So the notion that this is going to give us more power and them less power is mistaken. In fact, we will see rates go up for some services where they have a commanding market presence and very loyal audience. We will probably see rates go down for other services.
974 So there is going to be a free‑market negotiation. All we are saying is why shouldn't the ad avails be an element of value that they could bring to that negotiation? If they don't want to offer it up, they don't have to.
975 COMMISSIONER CUGINI: Would you limit the advertising on Canadian specialty services to local advertising as well?
976 MR. ENGELHART: I think so, yes.
977 COMMISSIONER CUGINI: Just so I'm absolutely clear, on your issue of basic when you say local and regional, you are including public broadcasters in that equation?
978 MR. ENGELHART: Yes.
979 COMMISSIONER CUGINI: Okay. Thank you.
980 VOD advertising. If we allow your model to go forward ‑‑ and that is you and the broadcasters negotiate and somehow you come to an agreement to allow VOD advertising and for the most part the source of revenue will go to the broadcasters ‑‑ will this be the only source of revenue for VOD programming?
981 In other words, will you continue to charge cable subscribers to watch a program, whether it is 99 cents or $1.99, whatever it is, if there is advertising included?
982 MR. ENGELHART: I will let David jump in too.
983 There will be sort of two different things on VOD. There will be the movie business like there is now. People will watch their movie; they will play their three dollars, four dollars, five dollars. And then there will be companion channels, so Discovery ‑‑ we will maybe have Discovery on demand. Global will have Global on demand. Those will be ad supported so people will ‑‑
984 UNIDENTIFIED SPEAKER: Be charged.
985 MR. ENGELHART: Yes. They will give us the programming. We will get the channel. They will get the ad revenue. That is the basic model.
986 But people generally won't pay for those channels. It is something they will get for free.
987 COMMISSIONER CUGINI: All right.
988 MR. PURDY: By "free", I think you have to be clear that in the case of Discovery Channel it will be an extension of Tier 2 were Discovery Channel is currently offered.
989 So what we really believe strongly is that we need value add on demand extensions of all our linear offerings because it helps keep people within the system. It adds value and it prevents that disruption and cannibalization that the Internet proposes.
990 COMMISSIONER CUGINI: Yes, I understand that. I mean, my question was if I am now going to watch "Corner Gas" on demand and it's going to have advertising, am I as a Rogers cable subscriber going to pay anything to watch that show on demand with advertising?
991 And the answer is no, from all the head shaking.
992 MR. ENGELHART: No. And I should also add that the technology exists and would presumably be part of the negotiation that we could offer the broadcasters that people couldn't fast‑forward through those ads either. So that is something that we have the capability of doing.
993 COMMISSIONER CUGINI: Just one last question, Mr. Engelhart, just because it was your response to the Chairman's question regarding the symmetry between DTH and cable and what you currently pay for the carriage of distant signals.
994 In response to his question of symmetry, you said 25 cents.
995 Does that mean you are advocating that both cable and DTH pay 25 cents per subscriber per month for the carriage of distant signals?
996 MR. ENGELHART: Yes.
997 COMMISSIONER CUGINI: In lieu of fee for carriage?
998 MR. ENGELHART: Well, I think we should pay for the distant signals if you make a finding that they cause revenue loss to the broadcasters. I believe you have made that finding. So you tally up the amount of the revenue loss, you assign some to satellite, you assign some to cable, you divide it up.
999 I'm told that if you do all that, you end up at about a quarter. So yes, we think payment for distant signals is part of the system for us, should continue to be part of the system for everyone; but no, we are not in favour of fee for carriage.
1000 THE CHAIRPERSON: Hang on. Your 25 cents, that wasn't the question I posed to you. I said how much are you paying? I said it DTH had to pay the same amount, it will be 25. So in effect the broadcaster would get your current fee plus 25 cents from DTH.
1001 That's how I understood your answer to be.
1002 MR. ENGELHART: A current fee is 50 cents. So we would pay less, they would pay more.
1003 THE CHAIRPERSON: Okay. I'm glad for the clarification.
1004 You pay 50 cents now. So if we wanted to treat them equally, we would have to say you have to pay 50 cents, rather than splitting yours.
1005 MR. ENGELHART: And then according to the models that I have seen, the broadcasters would be over‑compensated.
1006 THE CHAIRPERSON: Well, that is a different issue. Okay. Thank you. I'm sorry.
1007 COMMISSIONER CUGINI: And should DTH continue to be obligated to contribute to the small‑market programming fund, if we were to accept your proposal?
1008 MR. ENGELHART: Yes. I think there are two separate problems that are alleged by the broadcasters to be caused by the distant signals. The one is the small‑market problem. So the small‑market broadcasters say I am up in this fairly remote community and as if I didn't have enough problems, all the people that live around here with satellite dishes can't even see my signal. That's really terrible.
1009 So that's a separate problem and that is dealt with by the small‑market fund.
1010 In addition to that, we have this broader problem where if the broadcasters argue, "Well, look, I can't monetize these ads so well when they are viewed distantly and I sure can't monetize the local ads that are viewed distantly. I am losing X dollars.
1011 That is what we are paying the 50 cents for and that's what the satellite providers are not paying for currently.
1013 MR. PURDY: And I think the one challenge we have is the fact that we made a conscious effort in our digital lineup to not replicate that satellite model where there is five Globals side by each but rather to keep the existing first one through 63 channels in tact. I think that is why the damage caused by cable's distant market signals is much less than that of DTH.
1014 COMMISSIONER CUGINI: Okay. Thank you very much. Thank you, Mr. Chairman.
1015 THE CHAIRPERSON: Okay, thank you. I hope we can finish with you by 12:45.
1016 We have two more questioners, Ron and then Michel.
1018 COMMISSIONER WILLIAMS: I will have no problem finishing by 12:45.
‑‑‑ Laughter / Rires
1019 COMMISSIONER WILLIAMS: Good morning, Mr. Lind, Mr. Engelhart and Rogers panellists.
1020 In your October 19, 2007 submission you proposed a new regulatory regime, one that is simplified and flexible, one that is reliant on the forces within the marketplace. You also have stated many times that the customer is the cornerstone of your business, as well they should be.
1021 Please help me better understand your proposed forward‑looking regulatory framework using specific examples and ideas for the Commission to consider. Please explain why these changes are needed to regulation now and on a going forward basis and, finally, how will these proposed changes be beneficial to your customers?
1022 So your view to regulation on a going forward basis, why it is needed now and with some specific examples of the benefits to your customers, please.
1023 MR. ENGELHART: I might ask David if he wants to add, or Pam.
1024 But just to take an example of the kind of anomalies that the current rules create, say you had 10 services on basic and 10 services on Tier 1 and on basic you had 10 Canadian services and on Tier 1 you had five Canadians and five Americans. Now you wanted to take one of those Canadians from Tier 1 and put it on basic and you wanted to take an American service and add it to Tier 1.
1025 You are still overwhelmingly Canadian and now more people are seeing that Canadian service that used to be on Tier 1 that weren't seeing it before, but you have run afoul of the rules because Tier 1 now has six Americans and four Canadians, even though everybody who buys Tier 1 has to buy basic.
1026 So we have these inordinately complicated rules right now. We have rules where Family Channel, because it is classified as pay, can be linked with five American services and other Canadian services can be linked with one. It's all very complicated. It all makes it very difficult for us to put packages together.
1027 And the satellite people don't have any of that. They have a simple preponderance rule. They have had it for 10 years. The broadcasting system hasn't crumbled as a result. So we think a simple preponderance rule is easier for us, allows us to be more flexible to consumers and it gets away from some of these strange results that flow out of the existing rules.
1028 MR. PURDY: I think the only thing I would add, Ken, is that it is incredibly important right now that we be able to be a little more nimble and that there be more market forces driving for excellence in the marketplace, given the threats that we are facing from the Internet and in particular the peer‑to‑peer and over‑the‑top sites that allow for people to access content for free.
1029 So I think all we want is the right to be able to protect ourselves and add value for our customers so that they are comfortable within the Canadian broadcasting system.
1030 COMMISSIONER WILLIAMS: In your submission of October, on pages 16 and 17, you list many of these changes that you are interested in. If you had to rank them in terms of importance, which areas should we consider more important than others?
1031 MR. ENGELHART: Well, if you are talking about the simplified model, I think that getting rid of the access rules will be the most sort of game changing event in terms of driving people to improve their programming.
1032 I think a close second will be the genre protection elimination.
1033 Simplifying all the rules in terms of tiering and linkage and substituting them all for predominance are very helpful, but for the reasons that Mr. Purdy has described, you sort of somewhat get locked in by historical accident to the way you have already set those packages up. So I don't think they will have as game changing an effect as the other two.
1034 COMMISSIONER WILLIAMS: Any final word on how this would benefit your customers?
1035 MR. PURDY: I think if there was more market forces being realized in the Canadian broadcasting system, you would see a faster adoption of the new technologies.
1036 So the example we always use is that VOD is a golden retriever at your feet and the wolves at the door are the PDR, Internet or IP websites, peer‑to‑peer file sharing and illegal satellite. And what we can't understand as a BDU is why the networks and the over‑the‑air broadcasters have not done more to embrace the on‑demand platform. We think it is very broadcaster friendly and we think it is enormously customer friendly and it is going to help keep people within the Canadian broadcasting system.
1037 So we just think it is critical that people not be up here asking for handouts, but rather be embracing the new technologies and adding value to the customers. That ultimately will be the salvation of the system.
1038 MR. LIND: This is what we are after. We want a strong Canadian broadcasting system, but one that allows diversity of both Canadian and non‑Canadian services. We want people, we want Canadian's to stay with us, stay on the system rather than going somewhere else. It's as simple as that.
1039 We think that with these rule changes, it will make it easier for us and you to work together to maintain a strong Canadian system.
1040 So for the most part this morning we have discussed, in very positive terms, the things that we think will enable us to do that. We have one negative, which is the fee for carriage, and we think that will totally disrupt everything.
1041 So if you want to work with us, and we want to work with you, this is the way we outlined this morning, various ways that we can make viewing more easy, more attractive to Canadians.
1042 COMMISSIONER WILLIAMS: Thank you, Mr. Lind.
1043 Mr. Chairman, that concludes my line of questioning.
1044 THE CHAIRPERSON: Michel...?
1045 COMMISSIONER MORIN: Good morning.
1046 I am looking for a simple model, too, and I'm looking for a compromise between nothing and something for the small and the biggest players in the world of the specialized channels.
1047 Now I would like to ask you a question about the access to your basic service.
1048 Would it make sense to you to give the specialized channels to your basic service if they meet certain Cancon and CP criteria, the same criteria which have been used in the CRTC hearings and documentation? But would it make sense to have a very simple model which takes into account not only these two variables, Cancon and CP, but three variables where the price to the consumer is deducted from the sum of the other two numbers?
1049 I'm not factoring it, but just mention these three variables.
1050 I just want to make sure ‑‑ and I'm sure that you will agree. I just want to make sure that the Canadian consumer pays a fair price for Canadian specialized channels.
1051 So I just want your reaction to these three important variables if the price to the consumer is deducted from the sum of the two other variables. This is my question.
1052 For me it's a matter of principle. I don't want to enter into the math of this model, but for me it's a simple equation: A plus B minus C equals a number of points.
1053 MR. ENGELHART: I guess our preference ‑‑ thank you for that question, Commissioner.
1054 I guess our preference would be not to link carriage on basic or in any other particular package with the CPE and the exhibition requirements. In our model we would rather see the Cancon and exhibition requirements be more or less the same for everyone and then have them compete on the basis of trying to maximize the viewing experience for audiences.
1055 So under our perception, everyone would have roughly the same regulatory requirements and then what went on what channel or what package really becomes a matter of the value that they are delivering to the audience, and of course the price is part of that, too.
1056 So I think that the model that you have proposed would require us to put things in certain packages based on how much Cancon they had or how much exhibition requirements they had rather than necessarily the value that customers were perceiving. So I'm not sure that model would be consistent with the framework that we have proposed.
1057 COMMISSIONER MORIN: Yes, but we will leave the players, the broadcaster players, the small and the biggest, to play by the rules. They have to think about Cancon, CP and the price to the consumer, which is deducted from the first two numbers. This is the way you want a simple model. I think all of us we want a simple model, not only for the BDUs, but for the broadcaster and play the market, the rules of the market.
1058 MR. ENGELHART: I know you said you didn't want to get into the math of it. I suspect that as we worked out the math, we would find some strange aberrant results were some services that were maybe very, very ad supported ‑‑ maybe I'm thinking of like a music video service might have a lot of Cancon and a low price because they are largely ad supported. They would score a lot of points in your model.
1059 That is not necessarily going to make it the most compelling programming for viewers. So I think it is an interesting idea, but I suspect that when we worked out the math, there might be some unusual results.
1060 COMMISSIONER MORIN: But perhaps the objective, the purpose of this model, is to stimulate the broadcasting system, you know, and every player ‑‑ look at TSN. Perhaps they won't qualify because they are charging a high price, over one dollar per customer. But now I am talking about the rate of the CRTC, for an example.
1061 So the point is, look at the market and every player ‑‑ and we can add another variable if you want to make sure that these guys, the specialized channels, will be serious. We can add a rule that they must have at least 30 per cent of their revenues from commercial ads. So the commercial test will be passed with this kind of model.
1062 I mean, we can add other variables, but I'm just talking here and asking your reaction about will it make sense as far as these three variables are concerned, Cancon, CP and the price to the consumer to make sure that this channel will have an advantage to propose a price which will be the lowest as they can offer, you know.
1063 MR. ENGELHART: I understand that your model is trying to create an objective test so that small broadcasters would be treated equally with large broadcasters, and I understand that the price factors in there so that it keeps the price of programming low. But I'm still not convinced ‑‑ and I would have to think about it a bit more ‑‑ that that model is really going to drive customer value.
1064 We think that even though it is messier and it is not as objective as your test, the way we do it now, which is to look at customer reactions to our surveys and through our polling and through our analysis of the market, is a better way.
1065 The other thing is, outside of basic, which is where you posed your question, in a digital world we are going to link a lot of these channels thematically, so they are going to be in packages based on theme, which again doesn't lend itself that well to your algorithm.
1066 COMMISSIONER MORIN: Thank you.
1067 THE CHAIRPERSON: Well, maybe you can reflect on it in your written response.
1068 I just have two quick clean‑up questions from the answers you gave to my colleagues.
1069 One, Mr. Engelhart, on genre protection.
1070 You talked about an optioning out provision for somebody who doesn't want to morph genres, so that means he or she would retain the present genre protection. Is that the opting out you're talking about?
1071 So I have a genre for whatever, fashion. I don't want to have any ability to morph so I say yes. So that also means you will keep out anybody who has fashion and protect my genre?
1072 MR. ENGELHART: Well, I was thinking about that for the Cat 2s really. They don't have any genre protection today. But what you would be saying to those Cat 2s is, "Look, if you don't want to take on a CPE and if you don't want an exhibition requirement greater than 35 per cent, if you want to just stay in the niche you are in, you can."
1073 So that would be an option available for the Cat 2s, but I don't think it would be available to the Cat 1s or the analog services.
1074 THE CHAIRPERSON: But then it is meaningless.
1075 MR. ENGELHART: I beg your pardon?
1076 THE CHAIRPERSON: Then it is meaningless. I mean, they don't get anything for staying there.
1077 If you don't give them any protection then ‑‑
1078 MR. ENGELHART: They don't have any protection now.
1079 THE CHAIRPERSON: I know, but you said you don't have to opt into the morphing. But staying out of the morphing, what benefit do you get?
1080 MR. ENGELHART: You don't have to have a CPE. So right now the Cat 2s have no CPE; they have a very modest exhibition requirement of 35 per cent. If they want to stay in that world and don't acquire a CPE, then they can.
1081 THE CHAIRPERSON: Okay. Thank you for that clarification.
1082 Last question on preponderance.
1083 You include the basic in the preponderance. Why? I mean basic is sort of basically the same criteria as 91H. It's something that we think is good for the system; it has to be there.
1084 Why not have the basic and then have preponderance for everything on top of the basic, regardless of whether you edit optionally two‑year basic or not? But if you start off with our proposition of the minimum basic and then everything else, the preponderance rules apply, why would that not be acceptable to you?
1085 MR. ENGELHART: Well, I will let David take a stab at it and then I might come back.
1086 MR. PURDY: Well, one particular instance where we feel basic should be included in the preponderance rule would be in the case of multicultural packages. So if you were to look at a Mandarin or a South Asian package of channels, there may not be enough Canadian services within that package to create that preponderance. So you would have to include basic.
1087 We felt it was important that overall that household have a preponderance of Canadian services.
1088 THE CHAIRPERSON: Okay, let's stick with English.
1089 MR. PURDY: So with English, again we just felt that overall it was necessary that there be more Canadian services in the home and we thought that basic should be included in that.
1090 MR. ENGELHART: I mean, the Broadcasting Act tells you the system should be predominantly Canadian. I don't see a reason to exclude basic from it. For the vast majority of customers, most of the stuff that we have is Canadian. Most of our affiliation payments are Canadian. So it just gets complicated to have predominance for each and every customer when we don't include basic.
1091 So I don't see a reason for excluding basic, but I think either in or out most people will be getting most Canadian.
1092 THE CHAIRPERSON: Okay. Well, thank you very much. I think we have had a full morning and we deserve a break.
1093 We will resume in an hour from now. Thank you.
1094 Madam Secretary, when do we resume, at 2 o'clock? What time had you planned?
1095 THE SECRETARY: An hour would make it quarter to 2:00.
1096 THE CHAIRPERSON: Yes. Is that what you had scheduled?
1097 THE SECRETARY: We are a little behind, but that is fine.
1098 THE CHAIRPERSON: All right.
‑‑‑ Upon recessing at 1243 / Suspension à 1243
‑‑‑ Upon resuming at 1349 / Reprise à 1349
1099 THE SECRETARY: Thank you, Mr. Chairman.
1100 Please be seated. We are ready to start.
1101 We will now proceed with the next presentation of CBC/Radio‑Canada.
1102 Monsieur Michel Tremblay va introduire ses collègues, après quoi vous aurez 15 minutes pour votre présentation.
1103 Monsieur Tremblay.
PRESENTATION / PRÉSENTATION
1104 MR. TREMBLAY: Thank you.
1105 Good afternoon, Mr. Chairman, Commissioners and CRTC staff.
1106 My name is Michel Tremblay, Vice‑President, Strategy and Business Development.
1107 With me today are Sylvain Lafrance, Executive Vice‑President French Services, and Richard Stursberg, Executive Vice President English Services.
1108 Also with us are Steven Guiton, Executive Director Strategy and Government Relations; Bev Kirshenblatt, Senior Director, Regulatory Affairs; Stant Staple, Director, Research and Strategic Analysis.
1109 And we are also pleased to have with us Peter Grant, senior counsel at McCarthy Tétrault.
1110 As you know from our written submission, CBC/Radio‑Canada has developed a comprehensive regulatory proposal aimed at creating a consumer friendly regime which relies on market forces whenever possible, while at the same time ensuring that the objectives of the Broadcasting Act are fulfilled. When developing our proposal, we have kept in mind the two overarching objectives of the Broadcasting Act identified by the Chairman last June in Banff: Canadian content and access to the system.
1111 Our regulatory proposal is structured to ensure that Canadians have access to the system in a flexible, consumer friendly and economical manner. If we hope to keep Canadians engaged with the Canadian broadcasting system, we must ensure that they can choose what they want to watch and gain access to that programming in a convenient and affordable manner. At the same time, it is critical that the regulatory framework enables strong Canadian programming services to create diverse, high‑quality programming that reflects Canadian cultural, social and linguistic realities.
1112 In this regard our proposal is intended to ensure a level playing field for all services in a framework that will provide a sound financial basis into the future.
1113 Our proposed framework relies on market forces to the greatest extent possible within the constraint established under the Act, while eliminating outdated regulatory rules. Ultimately, it should be consumers who will choose what they want to watch and which services are the most popular.
1114 Notre proposition comprend quatre éléments clés.
1115 Un volet de base à prix modique composé d'un noyau de services canadiens qui permettrait à tous les Canadiens riches ou pauvres, en zone rurale ou urbaine, d'avoir accès à un éventail de chaînes canadiennes significatives.
1116 Deux, le libre choix des services facultatifs canadiens et étrangers, lequel choix serait uniquement assujetti à la règle de la prédominance canadienne.
1117 Trois, une égalité de traitement en vertu de laquelle les radiodiffuseurs conventionnels pourraient recevoir les revenus d'abonnement, comme c'est déjà le cas pour les EDR et les chaînes spécialisées, et ainsi demeurer la pierre angulaire du système, et pourraient également continuer d'offrir à la population une programmation canadienne égale ou supérieure en quantité et en qualité par rapport à celle qu'ils présentent aujourd'hui.
1118 Quatrièmement, de nouvelles occasions de revenus pour les EDR afin de contrebalancer les droits que celle‑ci verseront aux radiodiffuseurs conventionnels, de manière à assurer que le prix du nouveau service de base simplifié demeure à la portée de tous les Canadiens.
1119 Nous reconnaissons que le Conseil a invité le secteur de la radiodiffusion à commenter son propre modèle de distribution, à savoir un petit bloc de services canadiens de base obligatoires, un droit d'accès garantit à un nombre limité de services canadiens essentiels, et aucun droit d'accès garantit dans le cas des autres services.
1120 Ce modèle diffère sensiblement du nôtre par le droit d'accès garantit dont bénéficierait un nombre limité de services canadiens essentiels exclus du service de base.
1121 Nous sommes à votre disposition pour répondre aux questions que vous pourriez avoir sur l'une ou l'autre approche.
1122 À la suite de nos observations préliminaires, nous nous attarderons à deux éléments : l'importance d'un volet de base de taille réduite et la nécessité d'établir des règles de jeu équitables pour toues les composantes de l'industrie.
1123 Sylvain vous entretiendra du premier élément et Richard du second.
1124 M. LAFRANCE : Merci, Michel, et bonjour.
1125 Donc, l'objet de la Loi sur la radiodiffusion est simple : Offrir aux Canadiens une programmation canadienne variée et de qualité.
1126 Nous sommes d'avis que l'intégration d'une palette de nouveaux services dans le système canadien de radiodiffusion a été une extraordinaire source d'enrichissement de la diversité de la programmation, mais cet enrichissement a eu son prix. Les radiodiffuseurs hertziens conventionnels, qui sont la pierre angulaire du système, ont fait les frais de la fragmentation de l'auditoire et du déplacement des revenus publicitaires.
1127 Nous croyons que le moment est venu d'instaurer un nouvel équilibre dans le cadre de réglementation afin d'offrir un soutien adéquat aux radiodiffuseurs conventionnels.
1128 Voilà pourquoi notre proposition s'articule essentiellement autour d'un petit service de base entièrement canadien, assorti d'une distribution prioritaire des services de radiodiffuseurs conventionnels.
1129 Et voilà également pourquoi nous préconisons que les radiodiffuseurs conventionnels aient également accès aux revenus d'abonnement, comme vous l'expliquera Richard.
1130 Le service de base est le seul élément obligatoire du système actuel et de notre proposition. Les abonnés doivent acheter le volet de base pour avoir accès aux services facultatifs.
1131 Vu son caractère obligatoire, nous sommes d'avis que ce volet devrait être, d'une part, composé uniquement de chaînes canadiennes, et d'autre part, offert à un prix abordable.
1132 Considérons le premier point. Si le volet de base compte exclusivement les services canadiens, il s'ensuit que les abonnés ne sont pas contraints d'acheter les services étrangers. Arrêtez‑vous un seul instant, ça du sens. Le Conseil ne pourrait invoquer aucune règle pour contraindre les Canadiens à acheter des chaînes étrangères. Il semble l'avoir bien compris en concevant son modèle de distribution.
1133 Au second point maintenant, le volet de base étant obligatoire, il devrait être le plus abordable possible, et donc, le plus petit possible. En réduisant la taille du volet de base, on élargira au maximum le choix offert aux consommateurs. Ceux‑ci paieront pour les services qu'ils apprécient le plus et non pour un volumineux bouquet de services de base dont ils ne regardent jamais, bon nombre d'entre eux, sans compter qu'un volet de base plus petit attirera probablement des nouveaux clients, des gens qui n'étaient pas abonnés aux services des EDR pour des raisons financières.
1134 Donc, maintenant, quels services devraient appartenir au volet de base?
1135 D'après nous, le volet de base devrait être composé d'un noyau de services canadiens qui, collectivement, favorise l'atteinte des objectifs culturels, sociaux et linguistiques de la Loi sur la radiodiffusion.
1136 Ainsi, les radiodiffuseurs hertziens conventionnels, la pierre angulaire du système, doivent être l'assise du service de base, à laquelle devraient aussi se greffer d'autres services en nombre limité.
1137 À notre avis, le volet de base devrait intégrer les services suivants, d'abord, les hertziens locaux, puis les services éducatifs provinciaux, puis les services qui ont une ordonnance de distribution en vertu de l'article 9(1)(h), et finalement, d'autres services dont la contribution est unique et significative dans une perspective nationale.
1138 Nous proposons que le volet de base soit le même pour toutes les EDR terrestres desservant un marché local. Quant aux distributeurs satellites, ils devraient distribuer au moins un signal hertzien de chaque grand réseau de télévision dans une province donnée.
1139 Dans le cas particulier du Québec, nous demandons que les distributeurs satellites soient tenus de distribuer au service de base d'une région donnée la station régionale de Radio‑Canada, c'est‑à‑dire la même que celle qui doit être distribuée par les EDR terrestres.
1140 Par exemple, ExpressVu devrait, dorénavant, distribuer la station Gatineau‑Ottawa de Radio‑Canada à la population de cette région, et Star Choice devrait ajouter notre station de la ville de Québec.
1141 Il est aberrant que la programmation régionale de notre station de Québec ne soit pas accessible aux abonnés de cette région, alors que Star Choice distribue les stations régionales de TVA et TQS à Québec. Ici même, dans la capitale du Canada, dans cette grande région, ExpressVu ne distribue pas le signal local de Radio‑Canada. En fait, au Québec, ExpressVu distribue 13 des signaux de TVA et de TQS ou de ses affiliées, et seulement trois signaux de Radio‑Canada.
1142 Enfin, en ce qui a trait aux services qui se distinguent par leur contribution unique et significative au système, nous estimons que ces services devraient englober ceux qui jouent un rôle significatif sur le plan culturel, civique ou démocratique. Nous suggérons fortement au Conseil que c'est le cas de CBC Newsworld, RDI et de TV5.
1143 En ayant accès à un bouquet regroupant les services à contribution unique et significative, les services hertziens locaux et les services éducatifs provinciaux, tous les abonnés auraient le choix parmi un éventail d'émissions canadiennes dans les deux langues officielles, le choix de suivre l'actualité régionale, nationale et internationale, de s'informer des événements sur la scène politique ou de s'instruire et de se divertir.
1144 En plus de ce bloc de services essentiels, les abonnés seraient libres de payer pour des chaînes qui couvrent leur centre d'intérêt, que ce soit le sport, les arts, le cinéma, la comédie et d'autres.
1145 Nous considérons que cette approche permet de réaliser les objectifs culturels, sociaux et linguistiques de la Loi sur la radiodiffusion, tout en étant très conviviale pour le consommateur, que cette approche a du sens.
1146 Je cède maintenant la parole à Richard qui parle de la dimension financière de notre proposition.
1147 MR. STURSBERG: Thank you, Sylvain.
1148 The broadcasting world is changing dramatically. Some of these changes are very recent. Other changes, like the advent of subscription platforms, have been under way for some time. In fact, the Commission itself commented in its Public Notice on the maturity of the specialty services industry.
1149 That maturity is best evidenced by the fact that TV subscription revenues are now nearly twice as large as all TV advertising revenues. People are accustomed to paying for TV. Equally important, they believe that when they pay a monthly subscription fee to a BDU, they are paying for all of the channels they receive, including conventional television stations, and the fact is they are. If they don't pay the basic rate, they don't get the conventional channels.
1150 However, the background fact that subscribers don't know is that BDUs are not paying anything to conventional broadcasters and this has created a fundamentally inequitable situation.
1151 BDUs and specialty services have access to both subscription revenues and advertising revenues to fund their businesses and they are enjoying tremendous financial success. BDUs have a gross operating profit of 21 per cent, while specialty and pay services have a gross operating profit of 26 per cent.
1152 Conventional broadcasters, on the other hand, are handicapped since they are denied access to subscription revenues. Given the changing financial model for the industry, it should come as no surprise that in contrast to BDU and specialty services, the financial position of conventional broadcasters has been in decline. Gross operating profit for these broadcasters is 9 per cent and their revenues are not growing.
1153 There is no policy justification for this unequal treatment of conventional broadcasters. This inequity has been a problem in principle for many years and now it has become a major problem in practice as well. Conventional broadcasters are no longer able to properly finance their operations on the basis of advertising alone. The fragmentation of audience and a shift of advertising dollars to new platforms like the Internet have slowed the annual growth and advertising revenues for conventional television in Canada to minus .4 per cent. It is predicted that this decline in growth will continue and should become completely negative.
1154 At the same time, costs are going up, not down, and the result is an unsustainable situation. If changes are not made, something will have to give.
1155 You will see this little chart here. One of the points that people have been wanting to make is that in 2007 at the level of profit before interest and taxes, margins seem to improve for the conventional broadcasters but that was as a result of the fact that there was a one‑time effect, which was that they no longer had to pay the Part 2 licence fees.
1156 So we have marked that in a sort of a little light blue box here, but you can see if they had had to continue to pay, then the downward trend would have continued for conventionals.
1157 Meanwhile, we have to remember that conventional broadcasters are the cornerstone of the Canadian broadcasting system. They produce a more original Canadian programming than any other segment of the industry.
1158 This is true, and I think this little chart ‑‑ this is a chart we filed with you and in fact was part of a large study we filed with you some time back ‑‑ is not just about local; it is also about drama, it is about comedy. Overwhelmingly in both, in the French and English‑language markets, it is the conventional broadcasters who do the heavy lifting with respect to those categories of Canadian programming that are the most difficult to finance.
1159 Given that Canadian content is one of the two overarching objectives of the Broadcasting Act, in our view it is inconceivable that the Commission would not take steps to fix the current situation. We believe the Commission must create a level playing field for all players by granting conventional broadcasters access to the subscription revenues.
1160 Our proposal is quite simple and is based on the approach the Commission has used for decades with respect to specialty services. At the time of its licence renewal, a conventional broadcaster would submit a proposal for the per subscriber fee to be paid by the BDU to the broadcaster. This proposal would set out the financial basis for the fee and would be subject to scrutiny by the Commission and to comment by other parties.
1161 Under our approach the subscription revenues would be tied to specific Canadian programming activities of the broadcaster. This could involve either the maintenance of existing levels of Canadian programming that are at risk from declining advertising or the enhancement of programming levels to meet even higher Cancon requirements, especially in areas such as drama. We have included a detailed example of such a calculation in our February reply and we would be happy to answer any questions you may have about our proposed approach.
1162 We would like to emphasize, however, that our proposal is aimed at levelling the playing field, and that means for CBC/Radio‑Canada as well as private conventional broadcasters. The government and the CRTC have in the past required and encouraged the Corporation to implement a mixed financial model which involves heavy reliance on advertising revenues. Indeed, in our 1987 licence renewal the Commission encouraged the Corporation to pursue advertising revenues with, and I quote, "all reasonable vigour".
1163 The Commission again endorsed this approach at the Corporation's last licence renewal in 2000. Consequently, CBC/Radio‑Canada needs access to subscription revenues for exactly the same reason as private conventional broadcasters. There is no basis for handicapping the Corporation by excluding it from this revenue source.
1164 Finally, we also recognize that the principle of a level playing field should be applied consistently. If conventional broadcasters are granted access to subscription revenues, then we believe it would be reasonable to grant BDUs access to new advertising opportunities on VOD and the Community Channel.
1165 In the case of the VOD, this will of course require the consent and cooperation of the programming supplier. We are confident, however, that with these additional revenues in hand, there should be no need whatsoever for BDUs to raise subscriber rates.
1166 Our proposal then achieves two things.
1167 First, it remedies a long‑standing inequity and establishes a level playing field by granting conventional broadcasters access to subscription revenues.
1168 Second, it creates an opportunity to both support and enhance the cornerstone role played by the conventional broadcasters in the Canadian broadcasting system. We believe our proposal is both principled and practical and will benefit the system and prevent serious erosion in the quantity and quality of Canadian programming available to Canadians.
1170 MR. TREMBLAY: Merci, Richard.
1171 As Richard says, we believe our proposal is simple, practical and principled. Under our proposed approach, consumers would have greater choice at lower costs than ever before and, at the same time, the central objective of the Broadcasting Act would be achieved. We believe this simple framework sets out the best way forward in the evolving and exciting broadcasting environment.
1172 Thank you for giving us the opportunity to participate in this proceeding and to present those comments today.
1173 We would be happy to answer any questions you might have.
1174 THE CHAIRPERSON: Thank you very much.
1175 My colleague, Michel Arpin, will be asking you most of the questions but there were just a couple that you maybe could clarify for me.
1176 For guaranteed access, you are talking about something that is significant and unique and those channels that have a significant and unique contribution would also get access.
1177 How do I apply that test? How is that test different from 9(1)(h)? What is it exactly that you are driving at with this test?
1178 M. TREMBLAY : Nous, notre position, finalement, a été élaborée sur la base que bien que ce sont des services qui ne bénéficient pas de la section 9(1)(h), nous estimons, à l'échelle nationale, les fonds de contribution assez spéciaux et uniques, et ils doivent être protégés parce qu'ils ont, historiquement, été distribués à la base et sont des services... une brochette limitée de services qui amènent une contribution et une diversité assez remarquable.
1179 M. LAFRANCE : Je peux peut‑être tout simplement ajouter, dans les exemples qu'on a donnés, par exemple, le RDI, le Réseau de l'information, est la seule chaîne d'information continue au pays à posséder des journalistes dans toutes les régions du pays et capables d'informer sur l'ensemble du pays.
1180 Si on veut que les francophones du pays aient un lien en matière d'information continue, le RDI est le seul réseau à pouvoir le faire. Ça me semble être une contribution unique à la démocratie canadienne.
1181 La même chose avec TV5 pour d'autres raisons, parce que TV5 est, à mon avis, un lien pour les francophones à travers le monde, et ce lien‑là existe pour les francophones.
1182 Nous faisons partie d'une communauté régionale, d'une communauté provinciale, d'une communauté nationale, mais comme francophones, nous faisons partie d'une communauté internationale importante, et TV5 constitue un lien unique pour rassembler tous ces francophones‑là dans l'idée de la francophonie, et le Canada étant le deuxième plus grand francophone au monde, il me semblerait étrange que TV5 ne soit pas distribuée à la base pour les francophones.
1183 THE CHAIRPERSON: Yes, but if I understand it correctly, then it's really the same test as 9(1)(h) except the result is different. In the 9(1)(h) you go on basic, here you get guaranteed access. But essentially it is the same test that you would be applying.
1184 MR. LAFRANCE: It is the same type of test.
1185 THE CHAIRPERSON: Okay. My second question is: You were here this morning and you heard Rogers talk about fee for carriage, and they basically described it as a money grab by OTAs and said if you give them fee for carriage, they are not going to add anything to it. All it means is they have more means while we, each year when we increase our fees, et cetera, we do that in order to give a better, wider, more richer offering to our customers of technological innovation, et cetera.
1186 I would be interested in your view of that. I doubt that you agree with Rogers.
1187 So if indeed you would get a fee for carriage, how would that increase or better your offering over what you have today?
1188 MR. STURSBERG: Maybe I will start with the second half of the question and then come back to the first half.
1189 The Rogers argument, as I understand it, goes something like this: that if you add extra cost to the basic service and you charge a higher price and you don't add any new services, then what will happen is the subscribers will flee and you will have kind of a revolt on your hands.
1190 Well, it turns out that is not true.
1191 What has happened over the course of the last little while ‑‑ I actually brought along the examples. If you were to go back and look at where Rogers was in 1998, they were at about $20 for the basic service and where they are in 2007 was about $33 for the basic service.
1192 What they had added was, they had added for specialty channels.
1193 In the case of Shaw, they went from $17, roughly $16.79, to almost $30, $29.99. They added one specialty channel.
1194 In fact, if you were to go back and look at where they have been over the course between 2002 and 2007, the Rogers basic rate has gone up almost 50 per cent, slightly over 50 per cent in fact, if memory serves, and they have added nothing.
1195 So clearly what is going on here is that their claims that there will be a revolt if somehow or another they raise price and don't add value is untrue on the basis of their own experience.
1196 But we don't think that is what is the case here. What we have proposed is something completely different. Obviously we proposed a basic service that will be substantially less expensive than the basic service they currently have, because the basic service would be a much more limited service.
1197 So that in fact from the point of view of the consumer, where do you end up? You end up with a basic service that costs substantially less than the $35 that Rogers is currently charging, plus you then have as much choice as you want. Our view is very strongly that you should maximize choice and you should say to consumers: Subject to a predominance test, pick whatever you want.
1198 Our predominance test is a little bit bigger. It is two out of three; it is not 50 plus one. Pick whatever you want.
1199 Now, the way we see it working is kind of straightforward actually. It is that, you know, when it came licence renewal time for us, we would come down to you and we would say to you here is the circumstance. Here is what is going on with respect to our advertising revenue. Here is what it looks like for the last few years. Here is what it is projected to be. This is the kind of pressure it creates on us.
1200 For us to maintain our existing levels of Canadian content, then we are going to have to find a fee that is going to make up for the loss in conventional advertising revenue.
1201 So we would have that conversation.
1202 For our part, we might go further than that ‑‑ in fact I think we would ‑‑ and we would say to you: You know, we would like to actually do more Canadian content than what we are currently doing. So over and above just making up the loss, we might propose to you that we would do more, and that itself would be subject to an increment to the fee.
1203 But the notion here would be that whatever is going on is completely tied to Canadian programming undertakings on our part, and that you would make as a condition of licence.
1204 THE CHAIRPERSON: But then you are agreeing with Rogers that there would be no value‑added. You are getting fee‑for‑service, you are getting ‑‑ what you just said, if there is incremental programming, incremental content, there would be an incremental fee.
1205 So the fee‑for‑service as such would be just to maintain the current service?
1206 MR. STURSBERG: Well, we're talking about two different things. You are certainly right that in terms of the latter, there would be incremental programming that would be associated with that part of the fee. And on the former, we would be saying yes, for us to maintain our existing commitment to Canadian content, we are going to have to find a way to make up the loss in advertising revenue that we anticipate.
1207 THE CHAIRPERSON: You do not see the fee‑for‑service being earmarked or tied to anything specific. It is just in effect to ‑‑
1208 MR. STURSBERG: Sure. No, no. We absolutely would say tie it to Canadian programming undertakings, whether that is ‑‑
1209 THE CHAIRPERSON: Yes, but to the existing one. To the existing one.
1210 MR. STURSBERG: To existing ones or to incremental ones. If you say fine, we are happy to give you a fee over and above just making up the lost advertising revenue. No, we should be thinking ‑‑
1211 THE CHAIRPERSON: So it is licence renewal. You come and say we need a fee‑for‑service of 50 cents. That will allow us to keep our current service. Now if you want us to increase our Canadian content by X, or our drama or whatever, then it should be 60 cents?
1212 MR. STURSBERG: Yes.
1213 THE CHAIRPERSON: Okay. Thank you.
1215 COMMISSIONER ARPIN: I think we will keep on that discussion first and then we will move back to basic service.
1216 Mes premières questions, je vais les poser en français parce que j'ai regardé... mes premières questions touchent le service français. Puis après ça, j'en aurai aussi pour le service anglais.
1217 Cependant, si, monsieur Stursberg, vous voulez compléter les réponses que monsieur Lafrance nous donnerait, vous êtes, évidemment, le bienvenu.
1218 Mes premières questions, c'est un peu sur votre modèle financier. Si j'ai bien compris, vous dites... vous avez fait une hypothèse que basé sur les fonds actuellement dépensés à la dramatique canadienne, ces montants‑là totalisaient $ 191 millions, et si j'ai bien compris, vous avez ramené ça sur une base d'abonnés, et ça vous a donné un prix de $1.53, et ce $1.53 serait, si je vous comprends bien, à l'occasion des renouvellements de licence, distribué à l'ensemble des différents télédiffuseurs hertziens.
1219 Cependant, quand j'ai lu vos mémoires, régulièrement, vous parlez de CBC, CTV et Global, à l'occasion, vous y ajoutez TVA et des fois TQS, mais jamais, vous mentionnez A Channel ou Citytv ou OMNI ou les services ethniques.
1220 Est‑ce que le $1.53 se distribue à l'ensemble de tous les joueurs ou bien si c'est uniquement pour les grands réseaux qu'on pourrait qualifier de nationaux parce qu'ils se retrouvent sur tout le territoire, dans toutes les régions?
1221 MR. STURSBERG: I'm just going to let Steve Guiton answer the question.
1222 But you are exactly right. The $1.53 would essentially double the amount of spending on Canadian drama in both French and English across all of the different conventional broadcasters. I don't know whether the A Channel actually does any original ‑‑ I don't know whether it is in or not.
1223 COMMISSIONER ARPIN: It's never mentioned in your brief.
1224 MR. STURSBERG: Yes. I think maybe just because they don't do very much. The ones who do all of it are TVA, Radio‑Canada, ourselves, Global to a lesser extent and CTV a little bit.
1225 MR. GUITON: We would have to check, but we have taken this as the total drama spending for the industry. We would have to go back and verify whether A Channel is in there.
1226 MR. STURSBERG: But I think the point of the exercise is to show you that actually with a very modest ‑‑ you know, people at the cable company will say it's $8.00, it's $10. Well actually, if it is only $1.50, it doubles the amount of spending on drama across the system as a whole, both French and English.
1227 M. LAFRANCE : Je voudrais ajouter simplement qu'au‑delà de tous ces calculs‑là, au Québec, on voit déjà l'impact, en passant, de la fragmentation et de la diminution.
1228 Tout le problème des séries lourdes au Québec, qui a été largement mentionné, la difficulté maintenant pour nous est de déclencher des séries lourdes, que ce soit... qu'on pense, par exemple, à « Vice caché » à TVA, il y a quelques années, ou « Lavigueur » à Radio‑Canada ou à d'autres séries lourdes comme ça, qui sont des productions assez coûteuses, il y en a de moins en moins de déclencher.
1229 En fait, ce qui fait les frais actuellement de la fragmentation, c'est la qualité des émissions. Ça fait que, de moins en moins, on a la possibilité de déclencher des séries lourdes ou même des séries mi‑lourdes au Québec, et là‑dessus, le Québec est un peu un poste avancé de ce que va être le débat au Canada quand ça va frapper.
1230 Le Québec étant un marché plus fragile, ces choses‑là frappent plus rapidement, mais on peut déjà dire que dans le domaine de la dramatique, il y a une crise au Québec là‑dedans qui est déjà importante. Les difficultés de TQS montrent bien aussi les difficultés de la télévision conventionnelle, mais dans le cas de la dramatique, on voit définitivement déjà l'impact de tout ça.
1231 CONSEILLER ARPIN : Donc, prenons comme hypothèse que les données que vous avez utilisées sont des données définitives, et ce montant de $1.53 serait... à l'occasion des renouvellements.
1232 Chacune des entreprises, à l'occasion de son renouvellement, viendrait dire au Conseil : J'ai besoin de 25 cents. J'ai besoin de 50 cents. Et là, le Conseil, lui, il faudrait qu'il arrive dans sa décision, finalement, à ce que ça ne dépasse pas $1.53. C'est ça votre modèle?
1233 MR. STURSBERG: No. It's not to create a limit. It is just to provide you an example of what the benefit would be for a certain amount of subscriber fee. That is the only purpose of the example, is just to provide a kind of financial context to give you an idea of the benefit.
1234 But the way it would work I think is what we were saying earlier on, each broadcaster would come in at the time of its licence renewal and it would say this is what it is that we would like to do by way of making undertakings with respect to Canadian programming and therefore this is the kind of fee we think we need given the economic environment. And then you would say yes or no.
1235 COMMISSIONER ARPIN: But at the end of the day the fear that Rogers is expressing, that we are not talking here a small amount of money but major costs for the subscribers, could be true because if everybody comes up and says I need $1.50 ‑‑
1236 MR. STURSBERG: Vice‑Chairman, that $1.50 is for all of the broadcasters to move up to that level. It is not $1.50 each.
1237 COMMISSIONER ARPIN: No, that I understand.
1238 MR. STURSBERG: Okay.
1239 COMMISSIONER ARPIN: What I was understanding when I framed my question. But the answer that you gave me led me to believe that it could be another number than $1.50.
1240 I said you are going to hear all the applicants, all the renewals and then at the end of the day the Commission will make a determination. Everybody will say, I think I am worth this, I'm worth that, but at the end of the day, even if the total was to be $3.00, there is only $1.53 to split.
1241 MR. STURSBERG: No, that's not our intention. I think, though, where it does take you in the $1.53 example ‑‑ do what have we said it would do? It would double the amount of Canadian drama.
1242 COMMISSIONER ARPIN: Yes.
1243 MR. STURSBERG: Now, is CTV seriously going to ask that you double the amount of Canadian drama that they put on? I don't think so. I think that is ‑‑
1244 COMMISSIONER ARPIN: But let's make ‑‑
1245 MR. STURSBERG: No, but I'm just trying to ‑‑
1246 COMMISSIONER ARPIN: Let's make the assumption that everybody says yes.
1247 MR. STURSBERG: But they can't say yes because they don't have any room on their schedule to do it. It would drive out their U.S. shows. So CTV is not going to do that; Global is not going to do that. We might actually ask to lift our Canadian content levels.
1248 The purpose of the exercise is to show you that even if you were to say something as dramatic as double drama, which of course nobody is actually going to ask you to do, but if you were to do that, then the total amount of money to the system as a whole is not $10 ‑‑ sorry, excuse me. I'm getting a little overexcited here ‑‑ but is $1.50.
1249 In other words, you can get quite big benefits for relatively modest subscriber fees.
1250 COMMISSIONER ARPIN: I see. Okay. I got you. So at the end of the day it could be only 75 cents because the other players may not wish, as you said, to invest more in drama than what they are currently doing, and that will take care of it.
1251 You are tying it directly to drama, not to any other ‑‑
1252 MR. STURSBERG: It could be tied to other under‑represented categories of Canadian programming. I think the key thing is, though, that whatever people ask you for by way of a fee for the conventional broadcasters has to be tied to Canadian programming commitments.
1253 They can't just say oh, I feel badly, my revenues are not good, give me some arbitrary amount of money. We say it has to be tied to real performance.
1254 THE CHAIRPERSON: Excuse me for interrupting, but is that not something different than what you just told me a moment ago?
1255 You told me the fee would be to sustain the present level and any increase would have an incremental fee.
1256 MR. STURSBERG: Yes. What I was trying to do is say I think there are two different issues, but they both relate to Canadian programming. One is to maintain the level that we are currently at, and of course if the revenues continue to slide, then the fee provides in fact, you know, the make‑up or the difference from where the revenues are sliding. And then over and above that, if people wanted to step up further, then that was fine and they would raise the fee accordingly.
1257 THE CHAIRPERSON: Okay. But for the first part, just maintaining the present level, never mind increasing anything, for that you say 75 cents?
1258 MR. STURSBERG: No, I don't say any price. We have no price in mind. I'm just saying that conceptually ‑‑
1259 THE CHAIRPERSON: Well, you need some calculation as to how much that would involve.
1260 MR. STURSBERG: That's right. So we said if everything was the same, i.e. there was no change to revenue and you wanted to double the amount of Canadian ‑‑
1261 THE CHAIRPERSON: No, forget doubling. I said stay the same. You are telling me you are supposed to ‑‑ you need it in order to keep your present level.
1262 MR. STURSBERG: No, no. Let me try to do this again.
1263 If the revenue situation was not to deteriorate, i.e. that didn't happen, then we wouldn't ask for anything. Right?
1264 We wouldn't ask for anything. We would you say were fine. But if the revenue situation does continue to go in the direction that it's going right now, then we would say for us to maintain our commitments we need a fee to make up the difference. That's all.
1265 So the only reason I make these two conceptual distinctions is one is to maintain and the other is to step up. But in both cases the fee is actually tied to programming commitments.
1266 COMMISSIONER ARPIN: So at the end of the day, say all the broadcasters are saying that they don't want to do more Canadian content than they are currently doing, then there is no fee for carriage ‑‑
1267 MR. STURSBERG: No.
1268 COMMISSIONER ARPIN: ‑‑ until next renewal.
1269 MR. STURSBERG: I think what would happen is they would say ‑‑ if they say I'm fine with my Canadian content levels now and my commitments ‑‑ excuse me just one second. He is going to give me the right answer.
1270 Okay. What would happen is they would say okay, you know, if we look out in terms of our licence renewal across the next seven years, here is the trends that we see with respect to revenue. This is what it is that is going to happen for us to maintain our existing commitments. It is going to require a fee of whatever amount of money to make up the shortfall.
1271 That's all they are going to say at that point and then they would never go to the second part, which is to say I would like to go beyond that.
1272 M. TREMBLAY : En bout de piste, ce qui est important, c'est que le Conseil aura les pleins pouvoirs discrétionnaires au moment opportun de juger des demandes.
1273 Effectivement, nous, c'est toujours le concept de something for something. Il n'y aura aucune proposition pour maintenir la rentabilité seule, orientée vers le maintien du programme ou l'amélioration. Il est possible que certains diffuseurs ne présentent pas de demande à ce moment‑là.
1274 Il faut que le Conseil juge à propos que le raisonnement proposé ne tient pas la route. Donc, effectivement, il n'y a aucune garantie pour aucun des joueurs, que ce soit nous ou les autres.
1275 THE CHAIRPERSON: Can I just summarize to make sure I have it right.
1276 What you are saying is we are fine right now, but there is an erosion going on. In order to compensate for that erosion, we need a fee‑for‑service and the fee‑for‑service will cover the erosion.
1277 If you want us to do anything more than we do right now, then you have to have a fee covering the erosion plus whatever more you impose on us.
1278 MR. STURSBERG: Exactly.
1279 THE CHAIRPERSON: Okay. Thank you.
1280 COMMISSIONER ARPIN: And obviously the money will only go to those who are a producer. So you have affiliates to your networks, but they are not producing ‑‑ let's say drama has been chosen as the category. The money goes to the network, not to the affiliate?
1281 MR. STURSBERG: That's correct. Yes.
1282 COMMISSIONER ARPIN: According to your approach.
1283 COMMISSAIRE ARPIN: Comment le Conseil pourrait effectivement mesurer, selon votre méthode, l'accroissement de production, parce que cet accroissement‑là se mesurerait par des dépenses, mais est‑ce qu'il se mesurerait aussi en temps?
1284 MR. STURSBERG: You could do it both ways. You know where we are right now, so if we made an undertaking to step up, it could be done on the basis of hours or dollars invested, or both. And then you would see whether we had met our ‑‑ and you could put it in as a condition of licence.
1285 COMMISSIONER ARPIN: That method will apply to all the broadcasters?
1286 MR. STURSBERG: Yes.
1287 M. LAFRANCE : Il faut comprendre que dans le cas spécifique du service public, il n'y a pas de profit.
1288 CONSEILLER ARPIN : Non, non, je comprends.
1289 M. LAFRANCE : Six millions de moins de programmes...
1290 CONSEILLER ARPIN : Oui, c'est ça. Non, non, je comprends très bien que dans le cas de la société, tout l'argent va s'en aller, effectivement, dans du contenu, alors que dans l'entreprise privée, on s'arrange toujours pour qu'il en reste un peu pour mon oncle.
1291 CONSEILLER ARPIN : Comment le système procéderait à l'occasion des renouvellements? Ça ferait partie de la demande de renouvellement et comme modèle financier, et évidemment, ça ferait l'objet de tout le processus, des commentaires publics. Donc, les syndicats, tous les groupes intéressés pourraient venir dire au Conseil, ce n'est pas assez, c'est trop ou quoi que ce soit.
1292 M. LAFRANCE : Oui, tout à fait, et c'est pour ça que le processus de renouvellement nous semble le meilleur endroit pour le faire, parce qu'il y a là tous les partenaires, tous ceux qui pourraient pour ou contre. Je pense que c'est le processus de renouvellement des licences qui est vraiment le bon endroit pour avoir ce débat‑là.
1293 CONSEILLER ARPIN : Maintenant, quand je regarde la marché francophone, évidemment, je peux faire des constats. La société Radio‑Canada, vous l'avez dit vous‑même est une société publique qui a ses engagements, qui reçoit ses fonds soit de revenus publicitaires, soit des appropriations, le service TVA par les revenus publicitaires et la vente de produits, et, grosso modo, TVA, pour les fins de la discussion, se tire mieux d'affaires que TQS.
1294 Mais est‑ce que le Conseil devrait prendre en compte des situations particulières dans votre modèle, comme l'état des finances de TQS?
1295 M. LAFRANCE : C'est‑à‑dire que l'état des finances de TQS est un des indicateurs, en tout cas, de la difficulté de l'industrie actuellement, c'est assez clair. TQS a eu des problèmes depuis le début, mais ça s'est vraiment aggravé dans les dernières années, ce n'est pas pour rien.
1296 Dans le simple cas de Radio‑Canada, on a vu cette année une diminution des revenus de Radio‑Canada.
1297 Donc, il y a plusieurs... je le disais tantôt, il y a plusieurs symptômes actuellement très clairs qui démontrent que le problème de télévision conventionnelle est un problème réel et que ce n'est pas un problème futur, c'est un problème réel actuellement.
1298 Il y a moins de grandes séries déclenchées, il y a moins de séries lourdes déclenchées, et éventuellement, l'écart de financement, qui va le payer? C'est la qualité des émissions, c'est la programmation régionale, c'est la qualité de l'information qu'on fait.
1299 Et c'est ce qui va toucher les télévisions conventionnelles, parce que je pense que l'objectif qu'avait le CRTC au départ avec les chaînes spécialisées, qui était de créer une plus grande diversité, a été atteint, et dans le cas du Québec, si vous me permettez, il a peut‑être été dépassé.
1300 Et aujourd'hui, il y a une crise au niveau des télévisions conventionnelles, et les télévisions conventionnelles, on le dit plusieurs fois, sont celles qui déclenchent les grandes séries, sont celles qui ont des grandes salles de nouvelles, sont celles qui ont des stations régionales, et actuellement, sont celles qui ont des problèmes financiers.
1301 Et ce que ça risque de provoquer, c'est une baisse évidente de la qualité, une baisse évidente des présences régionales, une baisse évidente des ressources en information, parce que ce sont les conventionnelles qui font ça.
1302 Alors, c'est un problème qui est majeur et qui est réel au Québec. Déjà, on l'a vu, parce que, je le mentionnais, la question des séries lourdes, tout ça. Donc, on voit toute sorte de symptômes au Québec depuis deux ans que le problème est arrivé, ce n'est pas un problème du futur.
1303 CONSEILLER ARPIN : Et Radio‑Canada souffre du même malaise que l'entreprise privée?
1304 M. LAFRANCE : Tout à fait! À partir du moment où, politiquement, on a fait le choix que Radio‑Canada doit posséder des revenus publicitaires pour près de 40 pour cent de sa télévision, on a choisi que Radio‑Canada jouait dans le modèle publicitaire.
1305 Il faut comprendre que, au Québec, l'industrie télévisuelle, particulièrement au Québec, est un succès énorme, en passant. Il y a un équilibre là, au Québec, qui fait que les Québécois sont immensément attachés à leur télévision. Il y a une situation d'équilibre entre les joueurs actuellement qui est bonne.
1306 Je ne vois pas pourquoi, subitement, quand on fait tous face au problème de la fragmentation des revenus, on ne ferait pas tous face à la même solution. On continue d'être des joueurs dans l'industrie commerciale. C'est la décision politique que nous avons prise dans le système canadien de radiodiffusion.
1307 Alors, quand le problème frappe, je pense qu'il faut trouver une solution pour tout le monde, d'autant plus que si, un jour, on accordait seulement aux conventionnelles privées des redevances, ça permettrait peut‑être de baisser encore le coût de la publicité, et ça atteindrait doublement Radio‑Canada. Ça serait un double hit parce que le prix de la publicité baisserait au Québec, et, à ce moment‑là, on aurait encore moins de revenus. Alors, ça serait assez dramatique.
1308 Je pense qu'on est dans la même situation que nos autres joueurs. Le Québec est actuellement en situation d'équilibre là‑dessus. Il faut avoir accès aux mêmes solutions.
1309 CONSEILLER ARPIN : Et vous croyez sincèrement que le prix de la publicité au Québec pourrait diminuer, parce que, effectivement, les diffuseurs se plaignent déjà que les coûts par mille sont les plus bas au pays?
1310 M. LAFRANCE : Bien justement, parce que l'arrivée de ce grand nombre de chaînes spécialisées a créé des surplus d'inventaire énormes qui a fait chuter énormément le prix de la publicité. Alors, si, aujourd'hui, d'autres faisaient baisser le prix de la publicité, ça serait vraiment inquiétant dans le marché. Mais oui, c'est toujours possible, et c'est extrêmement inquiétant.
1311 CONSEILLER ARPIN : Et votre inquiétude viendrait du fait que les privées pourraient bénéficier d'un frais de distribution et que le public n'en aurait pas? Donc, par des baisses de tarif, vous...
1312 M. LAFRANCE : Bien, on l'a vu dans le cas des chaînes spécialisées, en tout cas. C'est ce qui est arrivé dans le cas des chaînes spécialisées.
1313 CONSEILLER ARPIN : Oui. On a là un cas où, effectivement, il y a eu davantage d'inventaire commercial rendu disponible, tandis que dans le modèle qu'on discute présentement, il n'y a pas d'inventaire commercial.
1314 M. LAFRANCE : Oui, mais puisqu'on est dans une vraie position concurrentielle en matière de publicité, effectivement, l'un des avantages concurrentiels pourrait être de réduire les coûts de la publicité. Ça peut encore se produire au Québec, et ça pourrait, pour Radio‑Canada, un double hit, et ça serait extrêmement dangereux.
1315 CONSEILLER ARPIN : Évidemment, c'est un point de vue peut‑être un peu pessimiste, mais ça fait partie de la gamme des préoccupations qu'un bon diffuseur doit avoir.
1316 M. LAFRANCE : Ma connaissance du marché québécois me fait penser que c'est un point de vue assez réaliste.
1317 CONSEILLER ARPIN : C'est un marché très compétitif, il n'y a pas de doute.
1318 On va revenir... For the purpose of ‑‑ we are going to get back to your description of basic service and as you said in your submission, you see it as being a very small basic service made up of the local stations.
1319 Would you say that the border TV stations that are covering some part of the market, say, Buffalo covers Toronto, Plattsburgh‑Burlington covers Montreal, will be part of that basic service in your ‑‑
1320 M. TREMBLAY : Non, elles ne font pas partie du service de base. Le service de base est exclusivement canadien, donc, aucune station hertzienne américaine sur notre vision du service de base.
1321 CONSEILLER ARPIN : Donc, votre service de base, idéalement, comprendrait quoi, on parle d'une dizaine, une douzaine de stations et services?
1322 M. TREMBLAY : Dépendamment des marchés au pays, 12, 15 services, dépendamment des marchés, la disponibilité de stations de troisième ou quatrième réseau.
1323 CONSEILLER ARPIN : On a entendu ce matin Rogers nous dire qu'ils avaient actuellement 40 services sur leur base. Dans les documents que j'ai lus, il y en a un qui en avait 63.
1324 Could you expect an outcry from the subscribers that are only taking basic services saying that they are losing their choices?
1325 MR. STURSBERG: No, to the contrary. Actually, I think the Rogers people said that they had 38 channels on basic service. But this is from ‑‑ I think this is from their own website. This is now. They have 63 channels on their basic service for $35 and our general view is, of course, the more channels you stuff into the basic service that everybody has to take, the more you eliminate consumer choice.
1326 So we take exactly the opposite view, that what will be nice is if you offer ‑‑ if you say there is a very small basic tier, a substantially reduced price, over and above that just take the ones you want.
1327 I mean right now on this thing on their basic tier they have got YTV, W Network, Vision, The Weather Network, Treehouse. Maybe you don't have any children at home and you don't want Treehouse and YTV. Maybe you are just a man living alone, you don't want W, I don't know.
1328 But I mean like all these things here, these 63 services, I think if you say to the average Canadian consumer: Here it is, it's 12 channels, it's all Canadian, it's whatever the price is, $15, over and above that just pick the services you want, subject to a predominance test, everybody will be thrilled.
1329 COMMISSIONER ARPIN: And you pick them on a one‑by‑one basis or are they sold in tiers or in bundles, in packages?
1330 MR. STURSBERG: Our view is it could work either way. Either the cable company could say, here are our bundles or tiers that we are offering you; or alternatively, and we think this is a really important point, you have to ensure that the individual customer can create their own tiers and their own bundles.
1331 So they would say: I only want to have six channels, subject to a predominance test, they couldn't take six all‑American channels but they could take a group of channels that could be, and we have said two‑third predominant, four Canadians and two Americans. But that way they would take only the channels that they wanted and we think that would be exceptionally consumer‑friendly.
1332 COMMISSIONER ARPIN: Except that there are some services that might not be able to make it because there will not be enough subscribers to take it.
1333 MR. STURSBERG: That is true and then what will happen is that as you enter these kinds of models, to the extent that you increase consumer choice, of course, what will happen is some will get chosen more than others and those that get chosen more will do better in the market and those that get chosen less will do less well and that is, you know, an inevitable consequence of choice.
1334 COMMISSIONER ARPIN: And could that happen to your own services like Country Canada or Bold ‑‑
1335 MR. STURSBERG: Well, Bold, now ‑‑
1336 COMMISSIONER ARPIN: ‑‑ or the Documentary Channel?
1337 MR. STURSBERG: Well, you have seen what a terrific pair of channels they are. We just recently relaunched them but I am sure you don't want me to do an ad for them right here.
1338 COMMISSIONER ARPIN: No, but say there were no marginal takers for one of your own services ‑‑
1339 MR. STURSBERG: Well, if there were no takers for our service, then we would find ourselves in that kind of a difficulty, that is absolutely right.
1340 COMMISSIONER ARPIN: That allows me to move into Mr. Grant's opinion where he says that all CBC services by the nature that they are CPC‑owned seem to have a special protection based on the Broadcasting Act.
1341 MR. STURSBERG: Yes.
1342 COMMISSIONER ARPIN: However, those specialty services, to my knowledge, are not mandated either by the Act or by Parliament and they are pure commercial activities of the corporation. They are totally financed by subscription fees and advertising. There is no appropriation to support the operation of those services.
1343 Why are they benefiting of a mandatory access as Mr. Grant says in his opinion?
1344 MR. STURSBERG: Maybe I can pass it to Peter in one second. We just need to be clear that they are not mandatory in the sense that they must form part of the basic package. People don't have to take them.
1345 COMMISSIONER ARPIN: No, but they say mandatory access.
1346 MR. STURSBERG: That is right, they only have to get carriage.
1347 Maybe I will pass the legal issue to Peter.
1348 MR. GRANT: Thank you, Mr. Vice‑Chair.
1349 Well, I think you have read the opinion and I don't have to re‑read it.
1350 My argument is really based on the wording of section 3(1)(m) which talks about the premise that CBC programming has to be made available throughout Canada by the most appropriate and efficient means.
1351 I have heard Mr. Engelhart and Ms Ashton‑Smith argue that maybe the Act isn't as prescriptive as I have suggested but if you read 3(1)(m) I think you have to reach the conclusion that at least access is required in order to comply with that.
1352 Now, I should mention just in passing because I know Bell Canada will be up in front of you and they alone have also made some arguments in their written submission about my opinion.
1353 Their argument was essentially a simple one, namely, that 3(1)(m) only applies to the CBC and it doesn't apply to other licensees, including BDUs, and so the section says Bell cannot create a collateral legal obligation on other elements of the broadcasting system.
1354 My answer to that argument is very simple. While Bell is right that 3(1)(m) doesn't itself create a legal obligation on BDUs, what Bell doesn't note is that that obligation arises not under section 3 but under section 5 and section 5 states that:
"The CRTC shall regulate all aspects of the Canadian broadcasting system with a view to implementing the Broadcasting Policy set out in section 3." (As read)
1355 Now, the Bell reply makes no reference whatever to section 5. But to recap, if you have section 3 saying that the CBC programming is to be made available by the most appropriate and efficient means and for these services BDU carriage is essential, and section 5 says that the CRTC is required to regulate all aspects of the system in order to implement this, it is not just the CBC, it is all aspects, it includes the BDUs. My view is no other reading of the Act makes sense.
1356 So I take issue with the Bell argument. Of course, my views are not the same as Mr. Engelhart's.
1357 COMMISSIONER ARPIN: But obviously, as Mr. Stursberg just said earlier, they are subject to ‑‑ they could be available but if they have no success, then the corporation may have to make a determination if they keep operating.
1358 MR. GRANT: That is absolutely right, and in fairness, it seems to me that given the wording of this section, it behooves the Commission when they license the CBC to operate services of this kind will need to take into account the fact that once they have licensed it, it follows from this section that somehow they should be accessible to all Canadians and if it was licensed on the basis of being offered through BDUs, then that follows.
1359 So it would be one of the considerations before you would, in fact, license the CBC to take on a service. You would want to ensure yourself that it is the kind of service that would be appropriate.
1360 COMMISSIONER ARPIN: And it does apply to all classes of BDU? Class 1, there is no doubt. Class 2 and 3?
1361 MR. GRANT: Yes. Well, I guess you might be able to read it by saying it is made available throughout Canada, so pretty well all the classes are covered.
1362 COMMISSIONER ARPIN: So wherever there is a system, even if it is only 150 subscribers, if there is a CBC service, then they shall be granted access?
1363 MR. GRANT: Yes. I would think there would be some discretion here by the Commission.
1364 COMMISSIONER ARPIN: Based on the Act?
1365 MR. GRANT: Well, based on the premise that you are basically trying to make it available by the most appropriate and efficient means and if you have a very small community with a small system with limited analog penetration but it turns out that both Star Choice and Bell ExpressVu are already offering the service to everyone in that community with a dish, then the Commission has some flexibility there.
1366 But the bottom line in my views is that the section must mandate that you must make sure that the CBC services are available to all Canadians in one form or another, to make it appropriate and efficient.
1367 THE CHAIRPERSON: But this is your view. I mean there is no judicial interpretation of it until this is tested. It is an interesting proposition but you must admit, given the wording of the various sections you cited, there are different conclusions one could reasonably reach. You may not agree with them but it is capable of more than one interpretation.
1368 MR. GRANT: Well, looking at the way the section is worded, Mr. Chairman, I find it difficult to take a different view. I looked at it closely because it is unusual to see the CBC given this kind of status, it is a bit different from the rest but it runs on just those sections that relate to the CBC, which don't apply to these other services.
1369 COMMISSIONER ARPIN: I note that you didn't make any comment on the issue of genre. However, we heard this morning Rogers saying that ‑‑ and since you are operating yourself some specialty services and Rogers introduced the notion that genre protection shall be removed and that ‑‑ they have called it categories. They gave us five categories while they were talking that could be expanded somehow because we could surely have religious being another category.
1370 I don't know if based on your own experience of operating specialty services you have any comment to share with us regarding the proposal made by Rogers earlier this morning.
1371 M. TREMBLAY : Nous, a priori, on est d'opinion que si on va dans le sens d'optimiser les choix pour le consommateur et qu'on veut vraiment délester en terme de réglementation, il faut assumer les conséquences, finalement, d'enlever la protection des genres, avec les conséquences que ça va avoir sur le système.
1372 Premièrement, beaucoup de joueurs sont arrivés à maturité, et il est nécessaire, effectivement, de leur donner une marge de manouvre pour correspondre aux goûts des consommateurs, qu'on n'avait pas, finalement, envisager de délester, finalement, la protection des genres pour entrer dans un autre modèle qui va commencer à compartimenter les systèmes.
1373 Nous, on préconise ce régime à travers tout le système pour tous les joueurs, avec les conséquences que ça pose, même pour nos services à nous.
1374 CONSEILLER ARPIN : C'est sûr que si je regarde votre propre situation avec vos canaux...
1375 I am just thinking over what Michel just said and I am keeping in mind that you just relaunched Country Canada under a new heading but I think the makeup of the new service is much more different than what Country Canada used to be.
1376 It is not only a new name, it is also a new programming fare, a new approach and it seems to me that you probably put the cart before the horse and you have already moved in the category system and started to move around. Am I right in making that statement?
1377 MR. STURSBERG: Well no, actually, in the sense that the change from Country Canada to Bold Television continues to respect all the conditions of licence that were attached to Country Canada.
1378 COMMISSIONER ARPIN: That is something we will hear about in due course but what I have seen so far, and I am living in an area where Bold is not offered, so I have had to go on your website to have a better understanding of what Bold was, so I can't really make any conclusion by myself in that regard.
1379 Let's talk about advertising now and the model that you have proposed first. As you stated in your oral presentation and in your submission, you are open to the idea that the BDUs have access to advertising and particularly through local avails and through their community channel.
1380 MR. STURSBERG: No, that is not quite right. What we said is that we are completely open to the notion that the BDUs should have access ‑‑ should be in a position where they can negotiate advertising arrangements surrounding a VoD offer with the rights‑holder, and secondly, we are open to the question of them having advertising on a community channel but we have not said that we were keen on them getting the local avails.
1381 We have also said that what we believe is fair as a matter of equity is that if we are going to open up new revenue sources for them that that should only be done in the context of providing a new revenue source to the conventional broadcasters, which is, of course, the fee.
1382 I would just say one thing about the different ‑‑ when Rogers goes through what the three revenue sources they want are, none of those will help in a large way any of the conventional broadcasters.
1383 The local avails, as I understand their proposal, they would keep 50 percent of the net revenue and the rest would go to some programming fund, would not go to the broadcasters.
1384 Secondly, with respect to ad insertions for linear channels, they have said, yes, we think we could do that at some point in the future, but they have no idea as to what the relative value of that is and how much, if any of it, would go to the broadcasters.
1385 And finally, I would say with respect to VoD two things.
1386 First of all, that negotiating with the cable companies for any kind of VoD offer to date is a challenging matter because they are exceptionally dominant and the negotiating table is stacked heavily in their favour. So even when we do deals right now, we see splits that are less advantageous to the broadcaster than splits that we would get in other places, e.g., from iTunes, which is a measure of their dominance.
1387 But as far as ads are concerned, I think even if there is going to be no split but simply an ad base to offer, again, it is not altogether clear to me how much of that money is going to flow back to the broadcasters.
1388 Presumably the programming that is going to be most attractive is going to be the programming that is currently most attractive, which is American programming, and how much of the split with respect to the VoD rights for "Desperate Housewives" is going to go back to the "Desperate Housewives" licence‑holder for broadcast rights in Canada compared to the studio in the United States, it seems to me we don't know the answer to that question.
1389 The danger for them is, of course, they will be disintermediated and if that happens, that will actually cause a further erosion of their advertising revenue.
1390 THE CHAIRPERSON: I think in light of the time, Michel, let's take a 10‑minute break and then we will resume.
1391 COMMISSIONER ARPIN: I am almost through.
1392 THE CHAIRPERSON: Yes, I have a request from some of our colleagues to take a break.
1393 COMMISSIONER ARPIN: Okay.
1394 THE CHAIRPERSON: Okay, let's take a 10‑minute break.
‑‑‑ Upon recessing at 1456 / Suspension à 1456
‑‑‑ Upon resuming at 1506 / Reprise à 1506
1395 THE CHAIRPERSON: Can we go on in the absence of Mr. Stursberg? We are under a tight schedule.
1396 Michel, allons‑y.
1397 Mr. Stursberg, I thank you for taking your coat off because it really is hot in here, so I am following your example.
1398 MR. STURSBERG: I apologize for being late.
1399 COMMISSIONER ARPIN: Let's stay on the issue of advertising and then I will have a couple of clean‑up questions.
1400 What you were saying is that the ‑‑ you were talking about VoD and the difficulty that you have in already negotiating distribution through their VoD system.
1401 Even if they solicit for product, they want to ‑‑ what you are suggesting to us is that they want to have your programming but on their own terms, not on terms that have been negotiated or I will say they have been accepted, otherwise, you would not have given them the product but on terms typically acceptable.
1402 MR. STURSBERG: Well, that is right. Obviously, our view is that the cable companies and the satellite companies enjoy significant market power, that they are very dominant and that negotiating with them is a kind of unequal activity in the sense that certainly for people who do not have a lot of channels like ourselves, we find ourselves at a significant negotiating disadvantage.
1403 It is interesting, you know, I think when the Rogers panel was up earlier on, you could hear the extent to which they were interested in extracting further rents from the channels, whether that was extra minutes of avails or whether it was reductions to the price and so on and so forth.
1404 We obviously think this is a serious potential problem, and again, that is why we think that dispute resolution mechanisms and reverse onus tests are going to be fundamental to being able to guarantee fairness here.
1405 M. LAFRANCE : Dans le cas du Québec, à la limite, c'est naturellement aggravé par le fait que le principal distributeur est aussi un concurrent sur plusieurs canaux et dans les mêmes genres. Donc, naturellement, c'est plus complexe.
1406 CONSEILLER ARPIN : Monsieur Stursberg nous a rappelé, il y a quelques instants, que vous vous étiez prononcé sur la question des disponibilités commerciales sur les canaux spécialisés.
1407 Mais si le Conseil accédait à cette demande des entreprises de distribution et consentait à ce qu'elles puissent utiliser ces minutes commerciales sur des canaux spécialisés étrangers, et si le Conseil consentait à ce qu'elles puissent solliciter des minutes commerciales sur des canaux spécialisés canadiens sur le même modèle que le modèle américain, est‑ce que vous avez une opinion sur cette question‑là?
1408 MR. STURSBERG: Well, that would be a net loss of advertising revenue from the broadcasters to the cable companies. That is all it would amount to.
1409 And then over and above, I mean basically where their proposition leads is they get all the money from the foreign avails, they are going to get whatever they are going to get and as I was saying earlier on, I don't think it is very much for the broadcasters from VoD, and then over and above that they are going to take extra minutes of avails in the Canadian specialty services.
1410 Well again, that is just more money pouring into their pockets but it is not clear where any of the money is actually ‑‑ what money is going to arrive to support the broadcasters and their Canadian content obligations.
1411 COMMISSIONER ARPIN: Except to say that they have volunteered to send 50 percent of that money to CTF or their own managed fund.
1412 MR. STURSBERG: Yes, but it doesn't come to the broadcasters, number one, and the broadcasters, the conventionals are the ones who are facing the revenue challenge.
1413 And number two, I certainly didn't hear them saying anything to that effect with respect to extracting further concessions by way of avails in the Canadian specialty services when they are negotiating. Their suggestion was very clearly, as I heard it, that will be the price of getting access.
1414 M. LAFRANCE : Si je peux me permettre aussi de... Il faut bien comprendre toute la fragilité de ce système‑là, notamment, pour le déclenchement de grandes séries ou d'émissions particulières, particulièrement d'émissions spécialisées dans une chaîne comme Radio‑Canada.
1415 On fait face à une fragmentation sans précédent. On paie actuellement des coûts énormes pour déclencher des séries. Devant une fragmentation, là, il faut, après ça, discuter des droits de VoD, de DVD, de toute sorte de distribution de chaînes spécialisées.
1416 À chaque fois qu'on ajoute à cette fragmentation‑là, ce qu'on fait, c'est qu'on diminue la capacité du diffuseur conventionnel à déclencher une grande série, et à chaque fois qu'on diminue la capacité de déclencher des grandes séries, on diminue le nombre de grandes séries qu'on va déclencher, effectivement, et c'est extrêmement grave ce qui est en train de se produire sur la qualité de la production télévisuelle.
1417 Donc, il faut freiner la fragmentation. Il ne faut pas l'accentuer chez ceux qui sont les déclencheurs de ces grandes séries‑là et des grands produits.
1418 CONSEILLER ARPIN : Et c'est vrai même avec les entreprises intégrées qui ont des canaux spécialisés de la télévision hertzienne?
1419 M. LAFRANCE : Bien, d'abord, on est une entreprise beaucoup moins intégrée que d'autres dans le cas du marché québécois. Exemple, il y a des entreprises vraiment plus intégrées, qui ont aussi des journaux, des livres, des réseaux de distribution des DVD et des livres et tout ça. Donc, c'est énorme le pouvoir qu'ils ont sur les producteurs.
1420 Nous, nous avons de la radio, de la télé et du web, essentiellement. Mais c'est un pouvoir énorme sur les producteurs. Donc, il faut cesser la fragmentation si on veut laisser aux généralistes la capacité de déclencher des grandes choses.
1421 CONSEILLER ARPIN : Je veux revenir à la question... the first issue that we discussed, well, the basic service, when we had our discussion.
1422 What are your views regarding the analog portion of the BDU, the cable? Does your own vision of the smaller basic service apply also in the analog world?
1423 MR. STURSBERG: I think you heard two different accounts from Rogers as to what to do about analog. I think somebody said at one point it was impossible to put the small basic service on analog before the 2011 conversion date and then somebody else said, well, it wasn't actually impossible, it was just very expensive. I think the latter opinion is the correct opinions.
1424 Our view is that with respect to analog, if the cable company was going to go out and retrap the houses anyhow, say, they wanted to retrap them because they wanted to take some of the analog channels back to convert into digital or whatever it is that they wanted to do because they were under pressure with respect to the delivery of a high‑definition television, for whatever business reason that they might have if they wanted to go out and retrap the households, then we would say that's fine, then retrap a smaller analog basic tier along the lines that we have been talking about. But if they didn't, then I don't disagree with them. I don't know why we would want to impose upon them a whole bunch of other costs when we know that by 2011 we can get to the very small basic tier on digital without imposing those kinds of costs.
1425 M. TREMBLAY : Mais je pense que ça n'empêche pas de procéder de façon, aussi, graduelle, parce qu'on reconnaît les bénéfices de réduire la taille du service de base. Alors, c'est déjà un environnement purement numérique, c'est possible de le faire maintenant. Allons‑y de façon progressive, et au fil du temps, en fonction des contraintes économiques des distributeurs, qu'on le mette en oeuvre.
1426 Je pense qu'on ne veut pas bouleverser le système, mais on ne veut pas tarder, aussi, au niveau de l'introduction du bénéfice.
1427 CONSEILLER ARPIN : Mais votre modèle bouleverse le système. Avez‑vous estimé comment les consommateurs vont réagir? Ils vont peut‑être réagir positivement au fait que le service de base est plus économique, mais...
1428 MR. STURSBERG: I think there is no reason why anybody should find themselves in a circumstance where they are bouleversé at any level.
1429 What will happen is that if a customer wants to continue taking the basic service that they have right now, all 65 channels at $35 just the way Rogers has it, then Rogers can leave that offer in the marketplace and people can say, "You know what, that's good. I will continue to take the offer."
1430 Or alternatively they can have the option of simply selecting the smaller, you know whatever it would be, 12 channel, all Canadian basic service at a lower price and then, as we were saying earlier, make up their own tiers.
1431 So from the point of view of a customer, they can go either way: keep what they have right now or move to the very small basic service.
1432 COMMISSIONER ARPIN: So what you are saying is it could be done over time, because if ‑‑
1433 MR. STURSBERG: I would say you wouldn't force ‑‑ from the point of view of the customers, you wouldn't force them. You would say if you want to stay with the basic service that you have and you like that, that's okay. But if you want the very small, very inexpensive basic service, that is available to you too. You can take that and then choose what other services you want over and above it.
1434 COMMISSIONER ARPIN: Now, you have been yourself, in a previous life, involved in BDU operation and/or leading the trade association. I'm asking you for a minute to put your former hat on ‑‑
1435 MR. STURSBERG: Can you pass me the hat, please?
‑‑‑ Laughter / Rires
1436 COMMISSIONER ARPIN: Would you be excited about that possibility?
1437 MR. STURSBERG: Yes. I not only ran the Cable Association, I was also the President of Star Choice.
1438 So yes, I would actually, because I think that if you ‑‑ the general premise of the Rogers presentation this morning I completely agree with, which is that we have to find ways of ensuring greater choice for the customers and we want to try to keep as many Canadians as possible on the kinds of broadcast distribution systems that we already have.
1439 So in my previous life I would have absolutely agreed with both of those and I agree with those in my current life.
1440 That's why I think what we would want to get to, if we can get to a circumstance where there is a very small basic and then over and above that ‑‑ so you are not being ‑‑ nobody is forcing you to take anything you don't want. But over and above that you just take the service that you do want. I think that is exceptionally consumer friendly.
1441 COMMISSIONER ARPIN: I know that in your submission when you are talking about preponderance, you have your own definition of the word "preponderance", which seems to be different to what we heard this morning from Rogers.
1442 MR. STURSBERG: Yes. Our preponderance test is two‑thirds and theirs is 50 per cent plus one.
1443 We think that obviously the preponderance test remains one of the great protections in this completely freed up environment for the specialty services themselves. So the stricter the preponderance test with respect to how many American services you can take for a given number of Canadian services, then the greater the protection for the Canadian specialty channels.