ARCHIVED - Transcript of Proceeding
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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO-TELEVISION AND
Policy proceeding on a group-based approach to the licensing of television services and on certain issues relating to conventional television
140 Promenade du Portage
November 16, 2009
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.
Canadian Radio-television and
Policy proceeding on a group-based approach to the licensing of television services and on certain issues relating to conventional television
Konrad von Finckenstein Chairperson
Michel Arpin Commissioner
Len Katz Commissioner
Rita Cugini Commissioner
Elizabeth Duncan Commissioner
Suzanne Lamarre Commissioner
Timothy Denton Commissioner
Candice Molnar Commissioner
Stephen Simpson Commissioner
Jade Roy Secretary
Stephen Millington Legal Counsel
Jeff Conrad Hearing Manager /
140 Promenade du Portage
November 16, 2009
- iv -
TABLE OF CONTENTS
PAGE / PARA
CTVglobemedia Inc. 10 / 61
Rogers Communications Inc. 172 / 1126
--- Upon commencing on Monday, November 16, 2009 at 0930
1 THE CHAIRPERSON: Good morning. Bonjour, tout le monde, et bienvenue à cette audience publique.
2 Je vais vous présenter les membres du Comité d'audition :
3 - premièrement, à ma gauche, Michel Arpin, vice-président, Radiodiffusion;
4 - à ma droite, Len Katz, vice-président, Télécommunications;
5 - à ma gauche, Rita Cugini, conseillère régionale de l'Ontario;
6 - et Elizabeth Duncan, conseillère régionale de Nunavut;
7 - et Suzanne Lamarre, à ma droite, conseillère régionale de Québec;
8 - à ma gauche aussi est Tim Denton, conseiller national. Il remplace mon collègue Peter Menzies, conseiller de l'Alberta, qui a un décès dans sa famille, et pour cette raison, il ne peut être ici;
9 - à ma droite aussi est Candice Molnar, conseillère régionale du Manitoba;
10 - Stephen Simpson, conseiller régional de la Colombie-Britannique;
11 - et moi-même, Konrad von Finckenstein, président. Je présiderai cette audience.
12 L'équipe du Conseil qui nous assiste se compose notamment de :
13 - Jeff Conrad, coordonnateur de l'audience et ingénieur principal, Politique sur la convergence;
14 - Stephen Millington et Valérie Dionne, conseillers juridiques; et
15 - Jade Roy, notre secrétaire d'audience.
16 This hearing is about the future, a future where the old distinctions between over-the-air and discretionary television services will be irrelevant to most Canadians. It is about ensuring that Canadians continue to receive high-quality Canadian programming regardless of where they live or how they receive their television programming.
17 It is also about ensuring that Canadian broadcasters and distributors have the flexibility to respond to changing audience demands, revenue opportunities and new paradigm-changing technologies, while using the most effective platforms.
18 This hearing is not about the past. It is not about enshrining or protecting old business models. And it is not about taxing consumers.
19 Depuis deux ans, le Conseil a adopté différentes politiques visant à aider l'industrie de la radiodiffusion à se tracer une voie dans cet avenir incertain.
20 En 2007, la politique sur la diversité des voix a établi clairement les règles sur la propriété afin de permettre au marché de réagir rapidement dans un contexte en évolution.
21 En 2008, la révision de nos politiques sur les entreprises de distribution de radiodiffusion a permis d'assurer :
22 - que les abonnés canadiens aient accès à une diversité de services canadiens au sein d'un environnement numérique;
23 - que les services de nouvelles et de sports puissent se développer dans un environnement concurrentiel;
24 - que les petits câblodistributeurs soient exemptés de l'essentiel des règlements;
25 - et que la programmation locale dans les marchés plus petits et non rentables soit soutenue.
26 In 2009, our broadcasting in new media policy determined that this important sector was meeting the needs of Canadians and should evolve without direct regulation.
27 Finally, in decisions issued last spring, we set uniform rules for local content, established precise terms for the Local Programming Improvement Fund, and announced our commitment to a group-based approach for establishing regulatory obligations.
28 Really today before us there are four big issues:
29 Number 1 is establishing a framework for a group approach to television licence renewals.
30 Number 2 is ensuring that broadcasters spend an appropriate amount on Canadian programming.
31 Number 3 is reviewing revenue support mechanisms for conventional broadcasters.
32 And number 4 is setting the path for the digital transition for over-the-air broadcasters.
33 Each one of these four main topics obviously has lots of sub-topics. They are actually set out in my remarks but I am not going to waste time reading them out to you. You know them all so well.
34 This proceeding should not be regarded in isolation. That is why I have outlined to you what we have done over the last two years.
35 Parties should recall that the Commission has initiated several other proceedings to sustain and improve the health of the broadcasting system.
36 Among other things, we are also considering whether to allow the sale of advertising in video-on-demand programming and the local advertising availabilities of foreign services. Next year in April, we will review our policies for community television channels.
37 Furthermore, the most controversial issue that we are discussing today is not new. The value of conventional signals was discussed by the Commission in 1971 already. We said at that point in time:
"Stated simply the fundamental relationship is: television stations are the suppliers, cable television systems are the users. Thus the basic principle involved is: one should pay for what he uses to operate his business."
38 The Commission went on to observe presently that:
"The task of the Commission must be to relate the fundamental philosophical idea of payment for services rendered and for use made, with the pragmatic realization that, without this payment, in the long run the very stations on which the cable systems depend may no longer be able to provide them those many services."
39 This hearing today will allow us to revisit this issue and hopefully find a solution acceptable to all sides.
40 I would now invite the Hearing Secretary, Madame Jade Roy, to explain the procedures that we will be following this morning.
41 Madame la Secrétaire.
42 LA SECRÉTAIRE : Merci, Monsieur le Président, et bonjour à tous.
43 Please note that there is extra seating in the Papineau and Pontiac rooms, both located to your right outside the hearing room, where you can listen and view the hearing. The Pontiac room will only be available today.
44 Veuillez noter qu'il y a des places additionnelles dans les salles Papineau et Pontiac, qui sont situées à votre droite en sortant de la salle d'audience, où vous pourrez écouter et visionner l'audience. La salle Pontiac ne sera disponible qu'aujourd'hui seulement.
45 I would now like to go over a few housekeeping matters to ensure the proper conduct of the hearing.
46 Please note that the Commission Members may ask questions in either English or French. Simultaneous interpretation is available during the hearing. The English interpretation is on channel 7. You can obtain an interpretation receiver from the commissionaire at the entrance of the Conference Centre.
47 We would like to remind participants that during their oral presentation they should provide a reasonable delay for the interpretation, while respecting their allocated presentation time.
48 Veuillez noter que les membres du Conseil peuvent poser des questions en français et en anglais. Le service d'interprétation simultanée est disponible durant l'audience. L'interprétation française se trouve au canal 8. Vous pouvez vous procurer les récepteurs d'interprétation auprès du commissionnaire à l'entrée du centre.
49 Nous désirons rappeler aux participants d'allouer un délai raisonnable pour la traduction lors de leur présentation à vive voix, tout en respectant le temps alloué pour leur présentation.
50 When you are in the hearing room we would ask that you please turn off, and not only put on vibration mode, your cell phones and BlackBerrys as they cause interference in the internal communication systems used by our translators and interpreters. We would appreciate your cooperation in this regard throughout the hearing.
51 The hearing is expected to last approximately 10 days. We will begin each morning at 9:00 a.m. and take a break for lunch and a break in the morning and in the afternoon. We will advise you of any changes as they occur.
52 We invite 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 the scheduled date of appearance depending on the progress of the hearing.
53 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 dans la Salle Papineau, située à l'extérieur de la salle d'audience, à votre droite.
54 Le numéro de téléphone de la salle d'examen est le 819-953-3168.
55 There is a verbatim transcript of this hearing being taken by the court reporter sitting at the table to my right, 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.
56 We will now proceed with the presentations in the order of appearance set out in the agenda.
57 Each participant will make their presentation followed by questions by the hearing panel.
58 Now, Mr. Chairman, we will proceed with item 1 on the agenda.
59 I would now invite CTVglobemedia Inc. to make its presentation.
60 Appearing for CTV is Mr. Ivan Fecan. Please introduce your colleague and you will then have 20 minutes to make your presentation.
61 MR. FECAN: Thank you, Madam Secretary.
62 Good morning, Mr. Chair, Vice-Chairs and Members of the Commission.
63 My name is Ivan Fecan and I am President and CEO of CTVglobemedia and President of CTV Inc.
64 I would now like to introduce my colleagues on the panel.
65 To my far left, your right, is John Gossling, our Chief Financial Officer.
66 Next to John is Dawn Fell, Executive Vice President, Human Resources and Operations.
67 Immediately to my left is Paul Sparkes, Executive Vice President, Corporate Affairs.
68 To my immediate right is David Goldstein, Senior Vice-President, Regulatory Affairs.
69 And to my far right is Kevin Goldstein, Vice President, Regulatory Affairs.
70 On the back panel, starting from your right is Allan Morris, Senior Vice President, Engineering, Operations and IT.
71 Next are our outside experts, starting with Steve Armstrong of Armstrong Consulting and Jeffrey Eisenach of Empiris Consulting in Washington, D.C. Dr. Eisenach's biography was included as part of our submission. He is a former economist at the U.S. Federal Trade Commission and currently does economic analysis in the U.S. for producers, broadcasters and distributors. Together, Mr. Armstrong and Dr. Eisenach collaborated on our economic research.
72 Next to Dr. Eisenach is Dick Wiley, former Chairman of the Federal Communications Commission and currently a partner with the law firm Wiley Rein LLP in Washington, D.C.
73 Next to Mr. Wiley is his law partner, Todd Stansbury, who is one of the leading experts on the mechanics of retransmission consent and has negotiated over 200 retransmission consent agreements and coauthored the paper on the mechanics of retransmission appended to our submission.
74 Finally, on the end is Rob Malcolmson of Goodmans LLP who provided the series of legal opinions appended to our submission.
75 We would now like to begin our formal presentation.
76 Mr. Chair, Vice-Chairs, Members of the Commission, we appreciate the opportunity to appear here today at this extremely important proceeding, which will set the course for the future of conventional television in our country. Thank you for the honour of being the first presenter.
77 As Canada's number 1 broadcaster, we have given a great deal of thought to the issues to be considered at this hearing. All of our employees in our stations and at the network centre care passionately about the service we are performing for our communities and the country as a whole.
78 Over many hearings in the past few years, you have witnessed our fervour. Hopefully, you have also seen, day in and day out, our commitment demonstrated in the quality and quantity of local and national Canadian programming that we are proud to be associated with.
79 Whether it's groundbreaking hits like "Flashpoint," iconic comedy series like "Corner Gas," national talent competitions like "So You Think You Can Dance Canada," our country's longest-running public affairs program, "W5," our number 1 national and local newscasts or even just supporting community charitable events everywhere from our big cities to our smallest communities and all points in between, we love what we do.
80 Conventional television has been a source of national unity and has furthered an understanding of the many regions of our great country and thus has been a credit to the system.
81 We believe what we do has value. Our audiences seem to agree. The ratings demonstrate enormous usage of our services. According to the Bureau of Broadcast Measurement, this fall at suppertime almost 6 million Canadians are watching Canadian local programs on Canadian conventional stations, while less than 7,000 are watching all community cable channels combined nationwide.
82 It should therefore come as no surprise that tens of thousands of our viewers have signed petitions and found time from their busy lives to attend rallies in support of their local stations.
83 In addition, a whopping 114,900 Canadians filed interventions recently with the Commission in support of local TV. That is 81 percent of the submissions filed and this outpouring of support has got to be some sort of a record.
84 Canadian viewers clearly see value in what we do. Mountains of evidence have been filed in all of the hearings leading up to this one, demonstrating that the conventional business model is permanently compromised, that this is a long-term structural trend exacerbated by the recession, but that the damage is not caused solely by the recession and therefore temporary, as some claim.
85 Just a few months ago, anyone who believed that there was nothing wrong with the conventional business model had a golden opportunity to buy two TV stations in the largest markets in Canada, Hamilton/Toronto and Victoria/Vancouver. Together, these stations have a reach through rebroadcasters of over 52 percent of English Canada.
86 Any cable company or any producer could have stepped forward and bought them for the cost of two double-doubles and a box of Timbits. But they didn't and their actions speak louder than all the briefs they have filed.
87 There are many private capital funds that specialize in turnaround situations, where they take distressed assets and bring them back to life. They generally know no fear, but they too stayed away.
88 Instead, a couple of different groups are making a valiant effort to eke out a survival with a purely local service without priority programs, without their own national news service and without independent production requirements. And in the interim, other stations like CHCA-TV Red Deer and CKX-TV Brandon have gone dark.
89 We asked the citizens of Brandon, shortly after they lost their only local TV station, would they have paid one dollar more per month on the cable bill if that meant their hometown station would survive?
90 Understand that we are not advocating a pass through or a one dollar fee, but we wanted to know whether the citizens of Brandon value their local TV station. An overwhelming 82 percent said, yes, a resounding positive vote, which crossed every socioeconomic group from the richest to the poorest.
91 But we are not here to go over all of this old ground. We fought the fight in hearing rooms and newspapers, on the air and on Parliament Hill. There is nothing more we can say or do to demonstrate value. What we are saying is let the market decide.
92 Private broadcasters exist to create value for our audience, our customers and our shareholders. We are not looking for handouts. We are simply saying that if we are creating value we need to get paid for it, and advertising alone cannot support conventional television as we know it today.
93 Cable companies have had a free ride for a long time. In effect, broadcasters invested in them by allowing them to carry our signals for free and allowing them to damage our property rights by importing foreign programs to which we own exclusive rights. In this way, we subsidized the construction of their nation-wide delivery systems that have enabled digital services, telephony and internet businesses.
94 They have grown rich off the 40-year investment we have made in them and now it's time for us to benefit from our investment. It's fair and it's right.
95 We need to collect what is ours or we need to walk away, all or in part. Our investors deserve nothing less.
96 From a shareholder perspective, it's not logical to stay or even reinvest in a business that cannot earn back its cost of capital plus a competitive profit margin. That's the situation we are in now.
97 But, frankly, this isn't about us. Whether we stay in conventional television or not, is not the point. The structural issues need to be solved for any private broadcaster to make a go of it, whether it is us or whoever follows us.
98 Last spring we came here to Gatineau, opened our books and our plain truth was self-evident. Informed by that and by the previous policy reviews, we believe the Commission understood the severity of the situation and the need to act on an expedited basis.
99 The Commission presented several possible regulatory approaches and challenged parties to come forward with a holistic series of solutions within three major areas:
100 One, a market-based solution for the negotiation of value for local television stations;
101 Two, a conceptual group licensing model that would require corporate groups to make transparent and measured Canadian programming commitments, while recognizing the need for flexibility to respond to an increasingly competitive media landscape and;
102 Three; a firm commitment to digital transition.
103 We believe we have responded to the Commission's challenge with an approach that would begin to restore investor confidence, create a sustainable future for local television, including local reflection and programming of national importance, as we continue to move into a digital world.
104 Our made-in-Canada plan is reasonable, practical and provides a future for local Canadian television stations.
105 MR. SPARKES: It is clear that the first step in solving the issue and implementing a solution is recognizing, as most Canadians do, that what we do has value.
106 Our solution of negotiating for value is simple and fair. It can be implemented in short order and, most importantly, it is consumer friendly.
107 This is not about government taxes or industry bailouts. TV tax fear mongering is misleading to say the least and unfair to consumers.
108 Our proposed negotiation for value regime is a commercial negotiation between two parties. Informed consumers and stakeholders understand this. The time has come to let fairness and reasonable market principles prevail.
109 Our way forward is a made-in-Canada solution, based on our country's unique broadcasting history and reality. It's a market-based negotiation and it's informed by the long-standing success of the American retransmission consent regime.
110 Our proposed framework includes the following elements:
111 One, limiting negotiation for value eligibility to those stations that offer a tangible amount of local programming;
112 Two, for those stations that are eligible, requiring an election every three years whether they want guaranteed priority carriage or the right to negotiate the terms on which they are distributed;
113 Three, should the parties not agree to the terms of carriage, then the television station has the right to withhold its signal or the BDU can decide not to carry the station's signal;
114 Four, under either of these scenarios, the BDU must respect the program rights the station has acquired and delete any programming on any other station that would infringe those rights. Without this protection negotiation for value will not work.
115 And, five, under our proposal, the Commission would not set rates, but should offer support to ensure "good faith" bargaining and orderly negotiations.
116 We believe this new system will help ensure a viable broadcasting business in Canada, benefiting viewers and consumers alike by offering more choice at affordable rates.
117 From our perspective, the new negotiation for value regime can be implemented and fully operational within 2010 as we move forward towards our group licence renewals.
118 In the event that the BDUs employ more stall tactics, which we expect, the Commission has several options available; including raising the quantum of the Local Program Improvement Fund until such a time as a negotiation for value regime can be put in place.
119 As for consumers, we see no reason why TV distributors should be allowed to double bill their customers. Consumers already pay for local TV service today as part of the basic package.
120 Since rate deregulation, consumers have been subject to fee hike after fee hike. The privilege to reset the rate at whim has been completely abused.
121 It's clear consumers don't want their rates to increase, and we agree. And the Commission has several tools and mechanisms available to ensure that this doesn't happen. For example, the Commission could simply regulate the basic cable and satellite package and provide Canadian households with a low cost "Basic TV Service" with rate increases tied to terms set by the Commission.
122 Our proposal isn't radical or untested. It's based on a model that has worked well for local broadcasters and consumers in the United States for the last 18 years.
123 From a comparative perspective, you don't see a debate in the U.S. about station closures or stations that were unwilling and unable to make the digital transition. Nor has retransmission consent caused material increases on customers' bills. And the U.S. cable and satellite industries were not injured in the process either.
124 While their local television stations face the same issues of advertising fragmentation as we do, their framework of signal integrity and rights protection has provided a diversity of local service, even in some very small markets.
125 Back in 1992, U.S. Congress stood up to the threats and bullying by the cable companies industry and made a conscious decision that Americans deserved a local television offering that was diverse, sustainable and affordable.
126 We respectfully submit that Canadians deserve nothing less.
127 MR. D. GOLDSTEIN: We were pleased by the forward-looking nature of the conceptual model the Commission put forward for comment and we have advanced a variation on that model that we believe will result in tangible commitments to the system and increase programming diversity for Canadian viewers.
128 Our model provides increased programming flexibility that takes into account changing consumer habits in an increasingly competitive media landscape, while at the same time providing a harmonized and streamlined regulatory approach based on the test-driven model in place for specialty services.
129 By creating a formula that provides for base exhibition requirements, coupled with Canadian Programming Expenditure obligations, our proposal will ensure corporate groups provide transparent and measurable commitments to Canadian programming with programming flexibility that will provide a more constructive mechanism for Canadian programming to find Canadian audiences.
130 This model will, without a doubt, increase programming diversity to viewers by allowing different broadcasters to create more distinct Canadian programming strategies.
131 Once again, if we can implement a negotiation for value regime that will provide a sustainable model for conventional television, CTV will continue to commit to a set level of priority programming under an expanded definition.
132 That is why we have largely endorsed the ideas behind the conceptual framework and we believe that if approved it will provide all broadcasters the ability to come back at group licence renewals with innovative and distinct programming strategies.
133 MS. FELL: We are all looking for a solution for conventional television that provides digital service to as many Canadians as is economically feasible in a timely way.
134 We have been making significant investments in HD programming and infrastructure, and an orderly transition to digital service is our goal.
135 To that end, we are already operating digital transmitters in transitional mode for CTV Toronto, Calgary and Vancouver, and we will have CTV Ottawa, Montreal, and Edmonton completed by August 31st, 2011.
136 With these six transmitters, 65 percent of CTV's over-the-air coverage area will be served by a high-definition over-the-air signal. Provided that we can establish a sustainable framework that includes negotiation for value and DTH carriage, CTV is prepared to convert to digital the CTV and A-Channel transmitters in all of the mandatory markets by December 31, 2013.
137 Since we have transmitters in more mandatory markets than any other private broadcaster, this is a significant investment, worth over $30 million.
138 This investment covers the transmitters only. Converting the studio and news gathering infrastructure will require more than $200 millions more over time.
139 In addition, for the mandatory markets that we serve, we are prepared to make an HD signal available to the BDUs that we currently direct feed and this can be accomplished by December 31, 2010. And we urge the Commission to ensure that they are provided the same regulatory considerations as those stations operating over-the-air.
140 Outside the mandatory markets, we intend to rely on direct feed to BDUs and on existing analogue OTA transmitters.
141 CTV and CBC have significantly more transmitters serving non-urban markets than other broadcasters, and we believe that the transition policy should not penalize those who continue to operate outside the top major metropolitan areas.
142 Our challenges have been compounded by delays in the finalization of the digital allotment plan, a bifurcated regulatory approval regime between the CRTC and Industry Canada and the lack of a coordinated effort with the Federal Government.
143 American industry and consumers benefited from a coupon program worth hundreds of millions of dollars. In the U.K., they created Digital UK with a budget of roughly $350 million over seven years to facilitate an orderly industry roll-out and a comprehensive public communications campaign.
144 In summary, we are prepared to make a significant commitment to digital transition, provided that we can find ways to support financially the conventional television business.
145 MR. FECAN: In conclusion, this all about value. If we are not providing value, we shouldn't be paid for it. Frankly, we shouldn't be doing things that aren't wanted. Nobody is entitled to a free lunch.
146 Our viewers have clearly indicated that what we do has value to them but is that true for everything we do, or are some things more appreciated than others?
147 The BDUs have, in a backhanded way, acknowledged our importance to their business. That's why they are fighting so hard to prevent a negotiation. What we need from you are the tools to surface that value so that there can be a fair negotiation. It is impossible to find a solution if the other party refuses to come to the table.
148 On behalf of our 4,700 employees who work in Canadian television, the countless freelance creative people who we have the pleasure of collaborating with, our independent production partners and most importantly our viewers. We think this is an honourable debate and we feel privileged to have it.
149 Thank you for the opportunity to appear. We look forward to your questions.
150 THE CHAIRPERSON: Okay. Thank you for your presentation.
151 I am glad you mentioned the consumer because that's really what it's all about. I mean we want to make sure that in the discussions between BDUs and broadcasters we don't lose sight of the consumers. After all, that's why we are here and what we are trying to do is find a way that Canadians get the programming that they want and deserve.
152 Now, my colleague, Rita Cugini, and I have decided what will be the principal questions of you. I will be dealing with questions three and four which is what you call the negotiated value for signal and digital conditions, and she will deal with the group licensing and the spending on Canadian programming.
153 Since the value for signal is clearly the most controversial point, I will start with that.
154 Let's first of all get the terminology straight. You call it an NFP, negotiated fair value, I believe. The BDUS call it fee for carriage. We call it VFS, value for signal. So I will use that expression.
155 So just that we understand, I will ask -- would appreciate if both you and the BDUs could talk about this -- use the same expression so we know what you are talking about.
156 Now you basically are suggesting the U.S. model. But before we get into that, I would like to see what you understand by local TV, because having spent the last week reading all of the submissions, there are some people who think community TV is a replacement for local TV or can become that.
157 So share with me and my colleagues your vision of what you consider conventional TV.
158 MR. FECAN: Conventional or local TV?
159 THE CHAIRPERSON: Both.
160 MR. FECAN: Okay. Look, I think there is a place for both community cable channel in the system, we don't deny that. I just think we need to understand that one is largely done by volunteers, gets the benefit of I think it is 2 per cent of the cable fees, which is I believe $132 million of direct spending, and doesn't get much of an audience according to BBM, as I pointed out in the presentation.
161 The other, the kind we are representing, has employees that are professional journalists, we do local reflection, we work with freelance creative people; writers, producers, directors, actors, musicians to collaborate and do national programming, whether it's Flashpoint or Corner Gas or the Juno Awards.
162 We have a fairly large national news infrastructure that provides coverage of stories across Canada and around the world to all of our stations. It is an entirely beast and it is that part of the system that we represent. But I understand that there is place in the system for community cable as well.
163 THE CHAIRPERSON: If I understand you correctly, in effect you see community TV as a means of access for community groups, while you see local TV as a reflection of the local community?
164 MR. FECAN: It would be a good summary.
165 THE CHAIRPERSON: And conventional TV? I asked you that before in April and I would like you to repeat that just so we understand what you see as conventional TV and what you see the value of conventional TV.
166 MR. FECAN: The value of conventional TV is access to as many Canadians as possible, it is the national stage, in its best form it provides programming that is both nation building and reflects different parts of the regions back to the country. It is storytelling, whether it is in dramatic form or in musical form or in dance form or in documentaries or in news programming. I think it really is our national communication system in a very real way.
167 THE CHAIRPERSON: Okay. Now you suggested we basically evolve from the U.S. retransmission regime. Before we go there, tell me if this regime that we have right now has been in place for many years, as you so outlined in your submission, you complain you finance the BDU when obviously you didn't do that out of charity but because it was to your advantage as well. And you got lots of benefits; like a much clearer signal, probably a wider area of distribution, you got the simsub, you got the mandatory transmission.
168 Why does that deal not suffice anymore? The BDUs make a strong case that it doesn't suffice because you are effectively not running your business efficiently, you haven't adapted to the times and that this regime is perfectly fine with efficient operators, and you are not an efficient operator.
169 So you clearly make a different suggestion, you suggest no, that we have a structural change here, we have a paradigm change and because of that paradigm change we have to put in the rule that we suggested, the 71 should be there, but was never implemented.
170 I would like you to comment why the existing regime is no long sufficient for you.
171 MR. FECAN: Well, the existing regime was not a deal we made, it was a deal made for the system by the regulator. So it wasn't like we had a big vote in that deal.
172 THE CHAIRPERSON: No, but you lived with it, right, and you lived with it for years.
173 MR. FECAN: You live with lots of stuff and you try to make things work. And sure I mean, you know, generally distributing our signals has a value. Although, I am a Rogers customer and I have to say I get so much degradation of my basic service -- I know Nadir's in the room, maybe he can help me out. So I am not sure that the value is there as much as they would say it is.
174 Simultaneous substitution, I note in this morning's cart it was pointed out that cable invented that, Bill Jarmain invented simultaneous substitution and I think it is a benefit for the cable companies, it's not a benefit for us.
175 The benefit for us would be to have our own market and the integrity of our market so that we could run our programs and the programs that we own exclusive rights to when we want and now when it is scheduled in Los Angeles.
176 But you did say at the outset, Mr. Chairman, that this is not about the past. We are where we are. We believe we have value, consumers seem to feel we have value, we would merely like to now let the market decide whether we have value or not.
177 It is not exactly the American system either, because in the American system there is no CPE, there is no Canadian program expenditure requirement, there is no minimum content, domestic content, there is no obligation to use independent producers, there is no obligation to do a minute of drama or anything else. So it is quite a different system that we are proposing that ensures that the Canadian content will have a place of pride.
178 THE CHAIRPERSON: Okay, let me now instead move into what you are suggesting. You are suggesting that every three years you make a selection; either whether you want to negotiate your signal or whether you want to live with, as I understand it, the status quo. Basically, if you say you want mandatory carriage you get no compensation for it, other than what is there right now indirectly, which I just went through the list.
179 MR. FECAN: Yeah, on a station by station basis. And we are suggesting three years, it could be four years. But the concept is that it is a fixed term and that the safety valve for everybody in the system is at the end of every term you make another election of the broadcast.
180 THE CHAIRPERSON: You just smacked something in there, you said on a station by station basis. So you are not going to do it on a network basis?
181 MR. FECAN: No, this is station by station.
182 THE CHAIRPERSON: So you may very well decide in the same market that you want to negotiate for one station, not for another? Let's say in a market that is covered both by one of your main stations and one of your A stations?
183 MR. FECAN: It would always be on a station by station basis, and that is correct. I mean, you know, if we may -- we may, this is all hypothetical.
184 THE CHAIRPERSON: Yes, of course, I am just trying to understand your concept.
185 MR. FECAN: We may in Ottawa-Gatineau want a negotiation for value for CJOH but we may elect for CHRO a mandatory carriage of no fee, it is possible.
186 THE CHAIRPERSON: And it would be with BDU on a market by market basis, so how may negotiations will there be?
187 MR. FECAN: Every market. Every market, you know, there is often -- there is common BDUs in a lot of markets, but not in every market, so we would look at it market by market.
188 THE CHAIRPERSON: And would you stagger those negotiations or will it be all at the same time or..? I mean, you are putting this model forward. I am trying to visualize how it actually would work. Would you say Rogers, I want to negotiate, here is the stations I want negotiate, the other ones will stay on the status quo and let's now sit down and negotiate these 54 stations or whatever it happens to be?
189 MR. SPARKES: Mr. Chairman, the reason -- we are putting this model forward because it is one that is currently working, has been in place in the U.S. since 18 years and it is tested and it seems to be working fine. We have some gentlemen who have been involved in those negotiations, and maybe we could hear from them as to how that has been working.
190 But it is a tested regime that works well for consumers, works well for the BDUs and works well for the local television service.
191 THE CHAIRPERSON: Mr. Sparkes, I will gladly hear from your witnesses, but you are taking this model and trying to adapt it to Canada and to the Canadian market, which is quite different than the U.S. markets. Therefore, I am asking you how it would apply in the Canadian context and I gave you a specific example. I said, are you going to say to Rogers these are stations I want to negotiate and these stations I want to stay in the status quo, is that how you see it or not?
192 MR. FECAN: We would do it market by market, but in fact you would end up with something like that because essentially there is three big BDUs in Canada.
193 THE CHAIRPERSON: And what do you do with the DTH?
194 MR. FECAN: I consider them a BDU.
195 THE CHAIRPERSON: Yes, but when do you negotiate with them?
196 MR. FECAN: Same time.
197 THE CHAIRPERSON: So at the same time. And you see yourself negotiating by yourself, you are not seeing that the broadcasters will collectively negotiate?
198 MR. FECAN: I see each broadcaster negotiating by him or herself, yes.
199 THE CHAIRPERSON: Now, the Americans have something called "carry one, carry all" concept, would you introduce that here too?
200 MR. K. GOLDSTEIN: The American carry one, carry all relates to -- that is their DTH carriage model. What we are actually advocating is a harmonization of the carriage rules between cable and DTH in Canada such that in a phased-in approach over a couple of years DTH would ramp-up to local into local distribution just like on cable.
201 THE CHAIRPERSON: And at the end of the ramp-up you would have carry one, carry all?
202 MR. K. GOLDSTEIN: No, we would have an NFV choice between must carry or NFV local into local distribution. And perhaps again --
203 MR. CHAIRPERSON: And you -- all sorts of new concepts, local into local. We don't have that and our DTH providers tell us they don't have the technical capacity to do that.
204 MR. K. GOLDSTEIN: I think what we have seen is that he DTH providers can be very innovative in terms of the approaches they take to capacity when there is something in it for them. I think you saw the freesat model advance where all of a sudden there was room for 40 to 45 new stations that previously were unavailable.
205 We also understand from the capacity reports that the DTH providers filed that new capacity will be coming on board in the next few years and that is why we have advocated a phased-in approach.
206 THE CHAIRPERSON: Basically, you are saying it is a smokescreen, they can provide it?
207 MR. K. GOLDSTEIN: Pardon?
208 THE CHAIRPERSON: You say that is a smokescreen, the DTH providers can do local into local?
209 MR. K. GOLDSTEIN: That would be a good way of putting it, yes.
210 THE CHAIRPERSON: Okay. Now, what is this business about virtual contour that you mentioned:
"NFV will be specifically linked to providing tangible amounts of local programming services. Stations will only be allowed to elect NFV in BBN extended markets in which they provide local programming." (As Read)
211 So if I understand, if a station operates a transmitter or provides a signal to a BDU via direct feed only pursuant to virtual contour, but does not provide local programming, it will continue to enjoy mass carry rights?
212 Translate that to me.
213 MR. K. GOLDSTEIN: I will try and perhaps my colleagues may want to add.
214 With respect to the concept of a virtual contour, that was what we are advancing within the context of a hybrid model where at some point you move into the future to BDU-only distribution with no transmitter.
215 I am sorry, the second part of your question..?
216 THE CHAIRPERSON: But these retransmitters have no local programming?
217 MR. K. GOLDSTEIN: That is right.
218 THE CHAIRPERSON: So bottom line, is retransmitter would say as mandatory and would not be compensated for --
219 MR. K. GOLDSTEIN: That is right, that is correct.
220 THE CHAIRPERSON: Now, the U.S. system, and I am glad you brought Mr. Riley and others here, but if I understand it, and reading carefully your submission, if there is a breakdown there is not really something arbitration -- not arbitration, but there is a complaint mechanism to the FCC.
221 And basically, the FCC tries to make sure that they negotiate in good faith and they have established al sorts of rules, all sorts of or amounts in negotiating in good faith, but they do not get involved in the substantive dispute in what is a reasonable number of something like that, no baseball arbitration or anything like that if I understand it correctly?
222 MR. FECAN: Yes --
223 THE CHAIRPERSON: And you advocate the same model here?
224 MR. FECAN: Yes, we do.
225 THE CHAIRPERSON: Which also means that if there is a breakdown, in effect we are going to have either withdrawal of signal or refusal to carry?
226 MR. FECAN: Yes, and the consumer will have the option at all times of continuing to watch over-the-air or go --
227 THE CHAIRPERSON: If he is lucky enough -- in an area where you have over-the-air.
228 MR. FECAN: Which we are going to have rolled out pretty well everywhere. And --
229 THE CHAIRPERSON: Well, we will come to over-the-air in a second.
230 MR. FECAN: -- and they also may well have another option of another BDU who does choose to carry. What we believe --
231 THE CHAIRPERSON: Mr. Fecan, let's be honest here, the only other BDU that they could go to is DTH. And changing from a terrestrial to DTH is not an easy thing, and a considerable conversion cost.
232 MR. FECAN: I agree. But I think this kind of thing might incent some of the BDUs to compete a little more.
233 THE CHAIRPERSON: And you are prepared to face the consumer backlash and wrath when you destroy your signal?
234 MR. FECAN: Well, the signal would be available over-the-air so the consumer isn't harmed. It is the BDU that doesn't make the deal that's harmed. And mostly, I guess, maybe it's a comfort to you or -- but it's not to us, the law of who loses most would have us losing most because commercial inventory is the most perishable. An advertiser can call up this morning and cancel for tonight. It takes, as you've pointed out, a lot more to change BDU provider or to go to an over-the-air signal.
235 THE CHAIRPERSON: Yes, but 90 per cent of Canadians, roughly, receive their signal from BDUs, so to say the over the air transmission is available is somewhat cold comfort.
236 MR. FECAN: But, Mr. Chairman, surely you don't want us to spend all this money putting up transmitters, you don't think at this point --
237 THE CHAIRPERSON: We'll come to that on the second day.
238 MR. FECAN: Mr. Chair --
239 THE CHAIRPERSON: Now, just so I understand it now. Assume we have this situation and assume there is no bargaining in good faith. Then, you withdraw your signal and you insist that in effect they reverse themselves and all the programs to which you have the right have to be deleted from the 4+1s that the BDU carries.
240 MR. FECAN: Yes, yes.
241 THE CHAIRPERSON: Why only the first set of 4+1s? Why not the second?
242 MR. FECAN: It would be all of them. All of them.
243 THE CHAIRPERSON: All of them.
244 MR. FECAN: The concept is whatever -- you know, if we own a program, national rights to a particular program, and the BDU doesn't feel that our service provides value, we can agree on a price, we withdraw or they pull our signal, it would be either way.
245 THE CHAIRPERSON: What about the formats?
246 MR. FECAN: Pardon me?
247 THE CHAIRPERSON: What about the formats? You own the rights, you have an analog station here. It's being carried by Rogers. You get into a dispute, you withdraw it. Does Rogers have to delete digital and HD versions of that same program too?
248 MR. FECAN: Yes. They have to. You can't bring in a program that we own through the back door.
249 THE CHAIRPERSON: Well, I am asking you.
250 MR. FEDAN: Yes.
251 THE CHAIRPERSON: I want to make sure I understand your submission.
252 MR. FECAN: Yes. All of it, all of it, everything.
253 MR. GOLDSTEIN: Can I just -- it's an important issue, Mr. Chair, but it's a short term issue to get through the transition. After the transition is over, that's it. It's an outage.
254 THE CHAIRPERSON: Well, we'll see. I just want to understand. You basically say: I own the rights to Desperate Housewives, I don't know if you do or not, since I withdraw my signals, you cannot show Desperate Housewives on any other channels that you bring in BDU, right?
255 MR. SPARKES: The chances are, Mr. Chairman, that we'll all come to a deal on this. This won't happen. In the United States -- maybe I could get Mr. Wiley to explain what has been happening there in terms of program interruptions. There have been far and few between over the last 18 years.
256 MR. GOLDSTEIN: Because actually, I mean, just to put it to a point of magnitude, out of 1,400 commercial broadcasters in the U.S., there have been eight or nine interruptions over six election cycles.
257 Mr. Eisenach can explain to you both that from an economic standard what that has represented and the reason why they have been so few and far between. And I think Mr. Stansbury can explain to you the mechanics of why it seems like an issue, but it has actually been an insignificant issue.
258 THE CHAIRPERSON: Isn't basically the same as a strike? Whenever there is a strike both sides lose, but it doesn't mean that you don't have strikes, you know. And here, you know, really it's not only both sides, but the consumer also loses.
259 MR. GOLDSTEIN: Well, actually, I think Dr. Eisenach can explain to you why it's not -- the strike analogy may not be a hundred per cent analogous.
260 THE CHAIRPERSON: Okay. Dr. Eisenach.
261 MR. EISENACH: Thank you very much for having me here. In the paper that Mr. Armstrong and I submitted together, at Table III we present some results of research that I did in the United States and just to reach to the bottom line of that and then I'll come back to the economics of it.
262 Over the course of two years, 2006 to 2008, which was a period in which we moved from an in-kind regime in which broadcasters were compensated by BDUs through various kinds of in-kind compensation during the previous 14 or so years to a cash compensation. During that period, there were eight examples of negotiating impasses where there were temporary withdrawals of the signals.
263 Those eight -- what I did in that study was look at the impact of that on TV viewers and recognizing that each time there is a withdrawal of signal, many viewers would not have been watching that programming anyway, so the fact the signal was off-the-air had no effect on them. Or would have been receiving the signal through a different vehicle, through a different BDU or over-the-air, so have no effect on those consumers either.
264 So, taking into account those factors and looking at the percentage of viewing hours that were affected over the course of that two-year period, the percentage or the likelihood of any consumer at any particular time not being able to watch their number one programming choice.
265 So, even assuming that there is no second best local weather report that you can tune to, no other reasonably substitutable program that you can turn to and be equally satisfied, the likelihood of a consumer being deprived of their number one programming choice was .0089 percent and it's less than one one-hundreth of a percent of all viewing hours.
266 So, really, almost unmeasurable, an infinitesmal amount. That's about one tenth of the likelihood of a consumer not being able to watch any cable channel as a result of a cable outage through the entire system and about one twenty-fourth of the probability of being without electricity at any given time which, of course, means you're not watching television either.
267 So, the actual incidence of outages or withdrawals was extremely low.
268 Now, the economics of that. Both parties in a negotiation, and I think a strike is a good analogy, but really kind of in an extreme sense, right. We have a perishable product here with extremely high fixed costs. So, if a deal is not done, both parties to the negotiation are essentially losing everything during the entire period.
269 Now, as was mentioned, the broadcasters tend to lose more faster and the reason is that subscribers -- that advertisers can withdraw their advertising almost instantaneously while BDU subscribers shift only very slowly.
270 So, to the extent that there is an advantage, bargaining advantage between the two and this reflects some analyst reports that I cite in my work, to the extent that there is an advantage, that advantage tends to go to the BDUs, not to the broadcasters.
271 But at the end of the day, there is a very strong incentive for both parties to negotiate.
272 You mentioned consumers. You know, I liken this -- we think of this as two parties sitting across the table, but I really think of it as there is a third party here and the third party holds the hammer.
273 The hammer is -- the party holding the hammer is the consumer at the end of the day because the consumer is going to deprive both of these parties of the returns on their substantial investments; in the case of BDUs, their investment in infrastructure, in the case of broadcasters, their investment in programming.
274 The consumer will punish both parties who are not able to come to a deal and as a result they almost always do.
275 THE CHAIRPERSON: But the consumer will also suffer. I mean it's like in a postal strike, I mean, and maybe between the government and the postal union. But, you know, you as a consumer don't get your mail and then you suffer it too.
276 MR. EISENACH: Well, you know, I think that's true. Consumers exercise discipline in any market and so, it is in the nature of consumers that if a firm tries to raise a price above the market level, consumers will stop purchasing and do they suffer?
277 Yes, maybe in a temporary sense they suffer, but they also exercise discipline on the marketplace. That's the nature of market disciplining, consumers exercising discipline over producers in the market.
278 THE CHAIRPERSON: Thank you for that. Mr. Fecan, coming back to you. You say your negotiations would be tied to providing tangible amount of local programming. Is that local programming you're talking about the seven on 14 or is it hours that you're obliged by our regulations or is that over and above that?
279 Mr. FECAN: It's as it stands now, but as we approached this hearing we looked at it as a framework hearing and the most specific proposals would be made in the group licensing proceeding next. But as it stands now, that would be a good proxy.
280 THE CHAIRPERSON: You know this, we stumble over this issue every time you are in front of me and I am saying, I am asking you: Can you tell me concretely what you're prepared to do and you keep telling me: We'll do that at the licensing hearing and we have good intentions, but you don't spell it out.
281 Is there any way that you can spell this out for me a bit more than good intentions?
282 MR. GOLDSTEIN: The Commission has currently set a policy on local programming for seven hours and then define markets in 14 hours in large markets. And, yes, we are prepared to give into that. As the eligibility criteria to enter into negotiation value, that station would have to have those minimum requirements.
283 THE CHAIRPERSON: Mr. Goldstein, you want us to authorize the system. The idea of it is to give you extra resources and you are not -- and you are telling me with those extra resources you're going to do the minimum that you do right now?
284 MR. GOLDSTEIN: No.
285 THE CHAIRPERSON: I don't quite see what again -- what the consumer gets, what the Canadian gets if we have -- I thought the idea of this system was obviously to help you with the structural issue that you see, but also to improve the system, not to maintain the status quo.
286 MR. GOLDSTEIN: Well, we have -- this is not the status quo. What we've done is --
287 THE CHAIRPERSON: What do you mean "not the status quo"? You are under a legal obligation right now to put seven and 14.
288 MR. GOLDSTEIN: If that station exists. So, that's the first criteria. The first criteria is: how do we rebuild or heal conventional television and that's the starting point. And we've also put forward as part of the comprehensive plan, the conceptual model which includes CPE.
289 So, if you're going to continue in the conventional television business, you have a minimum threshold of local programming, as put forward by the Commission and again, can be amended at group licence renewal if it's deemed appropriate and we have the belt and suspenders with the conceptual model of other commitments that were in the system.
290 THE CHAIRPERSON: Well, okay. My colleagues will talk about that. But that is sort of the heart of your proposal, the quid pro quo for valuation for signal is the CPE on conventional?
291 MR. GOLDSTEIN: The opening eligibility is that the stations have local reflection.
292 THE CHAIRPERSON: One moment. I'm looking at it globally. As a regulator, what is the quid pro quo that I see for the health of the system and you're telling me it will be the CPE for conventional, which is not there right now?
293 MR. GOLDSTEIN: The CPE, yes.
294 THE CHAIRPERSON: Thank you. But, now --
295 MR. SPARKES: Mr. Chairman, I mean you guys hold all the cards here. You can determine the rules as we move forward. Right now, the rules that exist today doesn't -- there is no future for us. So, you know, what we are looking for is to be able to have a future and at the end of the day you are the ones that are going to be making the decisions as to what we are going to be doing, hopefully.
296 THE CHAIRPERSON: No, but we don't hold all the cards. I want you to survive, it's my job to make sure you survive and when there is Canadians, but what I wanted to know is you're putting forward a proposal and what is the big trade-off and I understand Mr. Goldstein saying, number one, you have a healthy system, you will have the local programming that you want and, number two, are you going to have a Canadian program expenditure on conventional, which isn't there right now.
297 Okay. Now, talking about the LPIF and you mentioned it in your presentation this morning and also in your book and you'll see the LPIF being totally interpreted from the evaluation for signal and you suggest that, in effect, it should -- I am a bit confused here.
298 You say in your written presentation it should stay in place at its present level at one and a half and not tighten incrementally for three years.
299 This morning you say it should stay in place until such time as negotiations are successfully completed. Which one is it, first of all?
300 MR. SPARKES: Well, first of all, LPIF is working. It has been able to keep a number of stations open that would have probably closed, so it is working.
301 THE CHAIRPERSON: I am delighted to hear that. That's why we have instituted it.
302 MR. SPARKES: What our message is, is that, you know, this battle that we're in right now I think is going to go on for a long time and whether you decide in our favour or not at the end of the day, the cable and satellite companies are going to do everything in their power to knock this off the table.
303 And what we are saying is the local programming fund is important. It needs to stay in place until there is a proper negotiation value regime put in place. And if the regime is implemented in 2010, excellent, great, we can all move on, but I expect, as you'll probably hear later today, that they'll throw everything into the kitchen to try and sell this thing.
304 THE CHAIRPERSON: And you think, it is your hope and what I understand that we (a) adopt your system and (b) that it will be in place for 2010, you mean for April 2010?
305 MR. SPARKES: Well, fiscal 2011, but we're hoping that, you know, you're going to make a quick decision and a clear decision so we can make our own decisions and, hopefully, the negotiations for value regime -- I think, I mean it's a very simple solution. It's not complicated. It's been working in the U.S., it's a Canadian-style model that we could have work in here in 2010. I don't see any complication to that.
306 MR. FECAN: The logic, Mr. Chairman, would be that this regime, the VFS regime should start with the new group license term and all the new commitments that might come with it.
307 THE CHAIRPERSON: And knowing that there will be such a regime will allow you to make a planning decision even if the implementation takes some time, but yes --
308 MR. FECAN: It would and the only other proviso, sir, is that there is a reasonable expectation that the BDUs will comply with us.
309 THE CHAIRPERSON: Now, you said it wouldn't necessarily be all stations, it would be only the ones that you select, and the other ones, you would -- you would do it on a station-by-station basis.
310 What would be the criteria you employ for saying, on this one I want to negotiate, on this one I'm content with mandatory carriage.
311 MR. D. GOLDSTEIN: I think there are various circumstances. Mr. Fecan has outlined two of them hypothetically here in Ottawa but I think in fairness I'm not sure we want to get into the negotiating process here.
312 THE CHAIRPERSON: This is not a negotiating process. I'm trying to understand the conceptual underpinnings of a proposal you put on the table. You want to have the option of doing one or another. I just don't understand why you wouldn't do it across the board, why you want to segregate it.
313 MR. D. GOLDSTEIN: In some cases, Mr. Chair, the mandatory carriage may be -- given the relationship between the BDU and the broadcaster, may be one thing.
314 What we found in the U.S. is that it actually can spur on a little bit of competition between the DTH provider and the cable company. So it may be a mechanism in order to fire up that competition. Again, Dr. Eisenach can talk about the experience in the U.S.
315 But there's a whole bunch of combinations and permutations to this.
316 MR. FECAN: You know, Mr. Chairman, it is not a big deal. We just want a little bit of flexibility so that in each case we can have a negotiation based on received value by the two parties. It is likely that if we choose one path for CTV that most of our stations would be on that path and it is likely that most of the A's would be on one path or another as well.
317 But I see no harm in allowing flexibility on a market-by-market, station-by-station basis.
318 THE CHAIRPERSON: Doesn't it undermine your argument when you say there is a structural problem here, it needs to be fixed, we need this system, but then you turn around and say, for some stations I'm willing to live with the status quo?
319 MR. FECAN: I don't see it that way, sir, but like I said, it is not a big deal.
320 THE CHAIRPERSON: Now, let's talk about simsub a bit. You are suggesting that in order to do this you have to have integrity of your signal and you are asking for two things. You want, first of all, simsub for specialties and, secondly, you want non-simultaneous simsub as well. Can you explain to me both of those positions?
321 MR. K. GOLDSTEIN: Specifically what we are proposing is a harmonization between the program rights integrity rules that apply to specialty services and over-the-air television.
322 What we are specifically asking for is the extension of the simultaneous substitution regime that currently applies to conventional to specialty, and the flip side, which is deletion requirements that apply to specialty apply to conventional, such that the non-simultaneous deletion rules that are in place with DTH and digital services become reinstated.
323 So that is the specific plan.
324 THE CHAIRPERSON: Why, Mr. Goldstein? I can understand if you are in negotiation and you withdraw your signal, you insist on a leash and you would say, put a leash on the specialty as well, otherwise my negotiating position is undermined, et cetera.
325 But why do you have to start also insisting on a simsub on specialty to begin with? I mean doesn't it really only come into play when you have these negotiations and one of you pulls the trigger?
326 MR. K. GOLDSTEIN: I think the simsub on specialty issue is different from the program rights integrity issue on conventional.
327 THE CHAIRPERSON: Explain that to me.
328 MR. K. GOLDSTEIN: There are situations now that arise with specialty services, obviously more limited than in conventional, where they acquire rights and that programming comes into the country whether through an over-the-air broadcaster from the U.S. -- actually generally an over-the-air broadcaster from the U.S. and in that situation the value of those rights in specialty service is diminished. It's no different than conventional.
329 So if we are going to go acquire exclusive rights, whether it be for specialty or conventional, we need to ensure those rights are protected. Otherwise, it diminishes their value to us.
330 THE CHAIRPERSON: How would it actually work? I mean doesn't specialty -- when they have those programs, usually it is not the first window and they are scheduled very different than you conventional schedule so that you are at different hours, et cetera. How do you this?
331 MR. K. GOLDSTEIN: Let me give you actually a very practical example from last night. I was sitting in my room as I was prepping for this, watching the New England/Indianapolis Sunday Night Football Game on TSN, which we have the privilege of owning. I also was watching it on NBC, which is an over-the-air station from the U.S.
332 The current way it applies in the regulations is that I can ask Rogers in Ottawa or Bell or whoever for those simultaneous substitution rights. They have no -- they are not required to provide them to me and in all instance essentially don't, as opposed to where if I was airing that program on CTV, I could enforce substitution.
333 MR. FECAN: I want you to look at this for a second in terms of value, sir. Given that we are proposing CPE, the more rights integrity we can restore to this market, the more value these programs have, the more we spend on Canadian programming. That is the --
334 THE CHAIRPERSON: That is the underlying -- I understand that. But the example Mr. Goldstein gave is a better one because it was shown at the same time, the same product. I mean that is not always the case. But if I understand, you want the same stuff anyway?
335 MR. K. GOLDSTEIN: For the most part, where a program is done on specialty, where it is aired at a different time, if it is a U.S. specialty and we have exclusive rights, we can get deletion for that right now. That occurs that way. It really benefits us specifically in this situation where the programs are aired at the same time.
336 THE CHAIRPERSON: You get it right now, simsub?
337 MR. K. GOLDSTEIN: If there is a situation in which -- not simsub. If the situation occurs where a Canadian specialty service owns exclusive rights to a program and a U.S. specialty service brings that -- it is brought into the country on cable, we can request deletion under the Regulations.
338 THE CHAIRPERSON: Even if it is not at the same time?
339 MR. K. GOLDSTEIN: That is correct.
340 THE CHAIRPERSON: And now the non-simultaneous substitution which is to air, we commissioned a study, which you see on the record, which basically said there are all sorts of both commercial and technical problems with non-simultaneous and the bottom line was that it is not doable at this point in time and would require major investment. At least that was my reading.
341 What is your position? Is that study right? Is it wrong? I mean it strikes me that even if we ordered it, it wouldn't be doable immediately.
342 MR. K. GOLDSTEIN: Conceptually, we believe in the concept but I think the report is right in terms of -- that there are a variety of impediments to its implementation. That is why we have advocated for non-simultaneous deletion. And I don't think we should diminish what those impediments are.
343 Perhaps I will try to deal with it from a legal perspective, then I will ask my colleague Allan Morris to touch on it from a technical perspective.
344 From a legal perspective, one of the huge impediments relates to the underlying rights deals that the studios in the U.S. have entered into with guilds that would prevent us potentially from offering that and that is not something we really control in any way or have any ability to change. Those rules have been around for a long time and we are not sure that they are going to change at any point in the future.
345 From a technical perspective maybe Allan wants to add.
346 MR. MORRIS: For non-simultaneous substitution, technically it is a massive infrastructure overbuild for us. Potentially we have to double the number of master controls we have because we have to feed programming at the normal time and date and then we have to feed it at a different time.
347 Our distribution to BDUs would also have to double and in most cases they are paying for the distribution, so they would have to double that. For BDUs that are accepting the signal over-the-air, they have no way of getting the signal at a different time. So it is a huge challenge.
348 THE CHAIRPERSON: So I take it from this that even if we order an implementation of a non-simultaneous substitution, it would take some time for it to be feasible?
349 MR. D. GOLDSTEIN: Yes. To take a step back, Mr. Chair, you offered or the Commission offered us a proposal to look at our businesses in a more realistic way. We were just trying to find a mechanism where we would find a streamlined sense between the current rules for conventional and specialty.
350 THE CHAIRPERSON: And as is my job, I probe your submission to try to understand what you have in mind.
351 Now, you also want to reintroduce regulation of BDU rates in order to prevent pass-through. You actually tabled something that prohibits the pass-through of the LPIF, et cetera.
352 Isn't that a somewhat regressive step, going back to cable regulation?
353 MR. SPARKES: Well, just to go back to the LPIF for a moment, you the Commission told the BDUs not to pass that on and what we saw, they completely ignored your wishes and dinged the consumer, which caused an outrage, unfair to the consumer because they are already paying for local television.
354 So our message has been from the beginning that consumers are already paying for it in their cable bill. It is just a fact, they are paying for local television. None of the money comes back to local television.
355 So if you were to implement a negotiation-for-value regime, we believe that the consumer shouldn't have to pay any more. They are already paying for it in their cable bill. There are ways for the consumer to pay less than they are already paying.
356 We are proposing as well that the Commission could introduce a skinny basic and in that instance, the consumer would pay less, and if the cable companies wanted to increase the bill, then they would have to come to you for permission.
357 THE CHAIRPERSON: You were here when we did the BDU review. Skinny basic was on the table. We discussed it. There wasn't a single person who advocated it, including CTV, and the BDUs. Quebecor told us they had one and there was no uptake on it.
358 What changed your mind?
359 MR. SPARKES: We are here today -- you know, people who are watching this are probably having a hard time understanding all the technical stuff but at the end of the day, as you said, it is about the consumer and these are the people, all of us who pay bills every month, who are going to be affected and we feel that they should be protected.
360 THE CHAIRPERSON: Now --
361 MR. FECAN: Sorry. The uptake is not the issue, it is whether they have the choice. You know, Comcast in the U.S. has in many markets a small basic service for under $16. They may not choose that package but, in fact, it gives in this case the Canadian household an affordable choice that they currently don't have.
362 THE CHAIRPERSON: Now, if we buy your proposal and you say there should be no arbitration, no baseball arbitration, how would you settle this, what do you think the negotiation would entail?
363 If I understand from the U.S. experience, actually very little of it is in money, most of it is in kind in terms of privileges, giving you extra channels or giving you placement or whatever it happens to be.
364 How would you see those negotiations taking place and what would you see would be the benefit that you get out of them?
365 MR. SPARKES: Well, the currency, we would want as money -- and in the U.S. it is now money as well -- and it would be an old-fashioned negotiation between two business people.
366 THE CHAIRPERSON: Mr. Wiley, did I misunderstand you? I read through the report that you filed and I saw just the opposite. The bottom line was that the U.S. result, most of it was not monetary compensation but compensation in kind, of various kinds.
367 MR. WILEY: Mr. Chairman, that really has changed in the last few years and it has moved to a cash-type transaction and negotiation.
368 THE CHAIRPERSON: Okay.
369 MR. D. GOLDSTEIN: Perhaps Mr. Stansbury --
370 THE CHAIRPERSON: I have to read your report again.
371 MR. D. GOLDSTEIN: Because there has been a change in the last few years and perhaps Dr. Eisenach can walk you through exactly what changes in market conditions have taken place to get there. And Mr. Stansbury, who actually negotiates these agreements, can probably give you a view as to the mechanics of what has changed in the marketplace.
372 MR. STANSBURY: Good morning. It is a privilege to be here.
373 The retransmission consent negotiations that are currently occurring in the U.S. between broadcasters and the cable operators generally are providing for cash consideration today and that does mark a sea change in the nature of the negotiations from when retransmission consent or negotiation for value was first instituted in the U.S. in the early 1990s.
374 At that point, cable had essentially 100 percent of the BDU marketplace and, as history tells us, essentially unilaterally dictated to the broadcasters an objection to the payment of cash consideration and, as a result of that, provided, in exchange for retransmission consent, in kind consideration.
375 That model has now evolved as competition in the BDU marketplace has increased, so that cable now has approximately 60 percent of the BDU marketplace. DTH now has a substantial percentage of the marketplace as well. And over the past two to three years, in my experience in negotiating hundreds of these transaction, the principal form of consideration now between the broadcaster and the cable operator is cash.
376 THE CHAIRPERSON: Okay. We will see if we adopt such a scheme what the development is in Canada. But why the change? Why the change from in kind to cash in the U.S.?
377 MR. STANSBURY: I think the difference in the United States -- and perhaps Dr. Eisenach can expand on this -- is that there have been some structural changes in the marketplace.
378 One, I think, is the increase in competition between the DTH operators and the cable operators.
379 I think another change is that broadcasters as an industry have determined that in kind consideration does not provide full value for retransmission consent, and, in effect, they took the chance over the past few years of accepting the risk of a potential withdrawal of service to negotiate for cash consideration.
380 THE CHAIRPERSON: Now, back to you, Mr. Fecan. The U.S. exchange is illustrative but who knows how it is going to play out here and you are one of the persons who is going to decide how it plays out here if you adopt such a scheme.
381 What would be your view? You wanted cash. What is on the table? Do you see us fencing in what can be negotiated or do you see basically you sit down with Shaw or with Rogers, et cetera, say these are the channels, let's sit down and let's decide what the value is?
382 MR. FECAN: I see this as a negotiation between two parties over the cash value of conventional television and I would ring-fence it that way.
383 THE CHAIRPERSON: How do you do that? I mean there are other things at the table.
384 MR. FECAN: We are not putting on the table other things. We need to see some cash value for our signal. That is what we need to see in order to maintain the commitments that you are going to require of us through operating conventional television stations.
385 THE CHAIRPERSON: But you say ring-fence conventional TV?
386 MR. FECAN: Yes.
387 THE CHAIRPERSON: That is the same party with whom you negotiate your specialty?
388 MR. FECAN: Correct. What prevents the BDU saying, well, Mr. Fecan, I have got to pay you for that, I will take it out of your hide the next time we do specialty negotiations?
389 MR. FECAN: I am sure they will try to do that but those are not the terms that I want to talk to them about.
390 THE CHAIRPERSON: Now, if you are successful and if (a) you convince us to adopt such regime, (b) it is fair (c) you negotiate and there will be extra money payable by the BDUs to you, it has got to come from some source. Where do you think it would come from?
391 They say it will come from the subscriber. They will bill it directly to the subscriber, saying conventional TV imposed by the CRTC via negotiations with CTV.
392 MR. FECAN: So far, the subscribers don't seem to be believing them.
393 MR. SPARKES: Maybe they can take --
394 THE CHAIRPERSON: That is not an answer to what my question was, where is the source of the cash.
395 MR. SPARKES: Well, you know, the numbers that they spend on U.S. foreign channels is upward of $300 million. Maybe they could take it out of that.
396 THE CHAIRPERSON: I am very frustrated with this confrontational view between you and the BDUs. You are in a symbiotic relationship. You need each other. They need your programming, you need their distribution. Yet, here we have seen for the last five months a public battle as never before about this and the only solution that I can see is at the end of the day, the consumer has to pay more. Surely there should be other ways of doing it.
397 Could we not -- and let me just pose you the question and I will pose it later on to the BDUs the same way. If the BDUs have to pay for the conventional, they have to find a source for that. Is there any way we can grow the pie for all of you other than to let the consumer suffer?
398 For instance, there are three things that are unresolved. One is advertising from local avails. One is advertising for VOD, which I think and certainly the BDUs see as a great future and a great alternative to the internet in allowing you to sort of give consumers what they want when they want it, and, okay, you can give it to them for free. And the third one is community television, which we are going to revisit in April.
399 Could you not throw all of that in the mix and start here, conventionals and BDUs sit down, work out for you what the relationship is, your regulatory regime, and then come to me for sanctioning?
400 Why should I wrack my mind over these four different issues: the value for signal, the local avails, the VOD and the conventional?
401 All of it is a pie. You guys split it up, tell me which part it is and then bring it to me and we will say yes or no, whether it is in the interest of the consumer or not. Rather than the consumer becomes the victim, you grow the pie and divide the spoils between yourselves.
402 MR. FECAN: Well, it is a very interesting approach, Mr. Chairman, and for it to be real, they would have come to the table but so far they have not been willing to even talk. It is very hard to have a conversation if one party isn't there.
403 You do have a bunch of different policy proceedings to cover all of those things and it is certainly an approach we could consider but I would just -- we need to reframe something. We are not going to be here, this company -- maybe somebody else will -- operating conventional television unless we can make a business out of it.
404 So the pie is going to get a lot smaller unless we figure out a fix to this thing and that has to be recognized by all parties, especially the BDUs.
405 THE CHAIRPERSON: I understand what you are saying and obviously we are holding this hearing and we are holding it as quickly as possible. I realize your position but I am also trying to find a way not to increase the consumer's bill, and as I say, all I see so far are antagonistic propositions which in the end result will mean I take something out of somebody's pocket and put it in the other.
406 I wanted to see whether we can't -- I don't expect an answer but I would like you to reflect on it and I will ask the BDUs too because I think we have to get out of this antagonistic way. You are, as I say, in a symbiotic relationship and there has to be a symbiotic solution, not a welfare solution to this thing.
407 MR. FECAN: The BDUs are our biggest customers. They write among the biggest cheques to us every month on behalf of the subscribers that are their customers. It gives us no joy to be in this kind of situation with them.
408 We are partners with some of them on other ventures. We have a multidimensional relationship with them and in no way are we happy to be at this place. This is an issue of survival for this part of our business and my partner doesn't want to talk to me. So here I am.
409 THE CHAIRPERSON: I understand. I want to thank you for putting this proposal forward and we will obviously reflect and hear from others on it. But as I say, that proposal, unless I go down the road, what Mr. Sparkes says, and regulate cable rates, will be passed on to the consumer. We know that.
410 MR. FECAN: The only thing --
411 THE CHAIRPERSON: So therefore, I am trying to find a way -- is there a way of accepting your proposal without it being a direct charge to the consumer? That is it in a nutshell.
412 And also, if I understand, the BDUs have been working on this business model for the last 30 years and they say, why do you suddenly change my underlying business model and take away -- or impose a new charge on me which was never there before?
413 And like everyone, we are struggling to find a solution which is sort of win-win-win, win for you, win for the BDUs, win for the consumer.
414 MR. SPARKES: We think the skinny basic idea is a win for the consumer, a win for the broadcaster and a win for the BDUs in a respect. You know, bring in a skinny basic, regulate a skinny basic. It they want to charge more money for it, they come to you, they ask permission. Give the consumer the choice of whether they want all the other channels that are associated with the current basic channel line-up that they offer.
415 MR. FECAN: Yes. We are not saying that you should regulate all of those rates, just the skinny basic. Let the others -- I think, 11 -- all of them become --
416 THE CHAIRPERSON: Sorry, that is different from what you said in your submission.
417 MR. FECAN: That is what we meant to say.
418 THE CHAIRPERSON: You now mean only the skinny basic?
419 MR. FECAN: Right.
420 THE CHAIRPERSON: Control the skinny basic?
421 MR. FECAN: Yes.
422 MR. SPARKES: Control the skinny basic.
423 THE CHAIRPERSON: But leave the others alone. I understood you wanted to re-regulate --
424 MR. FECAN: No, no.
425 MR. SPARKES: No, no. Let the consumer choose whether they want them or not.
426 MR. FECAN: Let the consumer choose.
427 THE CHAIRPERSON: Okay.
428 It is 11:00. I think we all need a washroom break. We will stop here and then my colleague will ask you about group licensing.
429 Let's take a 10-minute break.
--- Upon recessing at 1055
--- Upon resuming at 1114
430 THE SECRETARY: Please take your seats.
431 THE CHAIRPERSON: Okay. Let's continue.
433 COMMISSIONER CUGINI: Thank you, Mr. Chairman.
434 Before we begin with the group licensing framework, I have a couple of follow-up questions with regards to your conversation with the Chair.
435 And let's start with the Ottawa examples, CHRO and CJOH, where you say that perhaps for one you might give up mandatory carriage in exchange for value for signal and the other you would continue with mandatory carriage.
436 Do I take that to mean that you would be willing to have one of those services available on a pick and pay basis with BDUs?
437 The one for which you would negotiate a value for signal would that be available on a pick and pay basis for BDU subscribers?
438 MR. K. GOLDSTEIN: We believe that over-the-air television local service is long and basic.
439 COMMISSIONER CUGINI: But you said you would give up mandatory carriage for those OTA signals for which you would receive a value for signal. So why -- that's the question, is what does that mean?
440 MR. K. GOLDSTEIN: What that means is that we would negotiate the terms of carriage for the BDU as it pertains to whether or not they would continue to be carried on basic or not carried at all.
441 MR. SPARKES: So CHRO if we don't come to an agreement if it's not carried; fine, it's not carried. They can't bring in our programming for that station.
442 MR. FECAN: I think -- just sorry, Paul.
443 I think the one we said we would have a negotiation on is OH and RO we would perhaps -- this is all hypothetical -- perhaps elect for mandatory carriage. So negotiations with OH would be on a rate per basis.
444 COMMISSIONER CUGINI: Okay, which of course leads me to ask, because in your oral presentation this morning, you said that this model that you are proposing will lead to consumer choice and I'm wondering where consumer choice fits in your model.
445 MR. FECAN: On the skinny basic.
446 COMMISSIONER CUGINI: On the skinny basic?
447 MR. FECAN: On the skinny basic plus every other channel, specialty channel, I believe in all the evidence --
448 COMMISSIONER CUGINI: Which exists today?
449 MR. FECAN: -- can go a la carte.
450 COMMISSIONER CUGINI: Will exist in 2011?
451 MR. FECAN: Right.
452 COMMISSIONER CUGINI: Okay.
453 MR. SPARKES: Just for clarification, though, on the basic cable bill you get a whole bunch of specialty channels when you order basic cable.
454 So what we are saying is consumers should have the choice of taking those or not, but that we would have a skinny basic with conventional.
455 COMMISSIONER CUGINI: I understand.
456 When we talked about -- when you talked about the issue of withholding your signal and that if that is the case, or that BDUs don't carry you during a negotiation, that substitution of the U.S. shows to which you own the rights would occur. And I appreciate the American expertise where that is minimal in terms of the experience in the U.S., but it can happen and I venture to say it would be a major irritant for Canadian viewers.
457 Are you not pushing Canadians out of the Canadian broadcasting system by doing that where they can search elsewhere for that programming? We all know everybody gets around geo-gating and geo-blocking on the internet.
458 What's stopping everyone -- not everyone, but what is stopping a lot of Canadians from looking for those shows online?
459 MR. FECAN: Well, I don't think everyone gets around geo-gating. It seems to work a lot of the time for most people.
460 So look, we are not -- if we can't get our market rights integrity then I don't see how we are going to be around. So I really don't understand how to answer your question.
461 The Canadian broadcasting system is not going to have a whole bunch of people in it unless we find a structured solution to this thing.
462 COMMISSIONER CUGINI: In the event that that should happen, would you continue to make your programming available on ctv.ca and, by the same token, continue to make the programming available on VOD platforms?
463 MR. FECAN: We may choose to do so. Probably -- you know it's going to be on the air. It's going to be over the air, so why wouldn't we put it on .ca?
464 And the VOD on ctv.ca we stream them. On the VOD platforms that's yet again another conversation with the cable companies. It's not something that satellite is able to do easily.
465 So we would have those conversations or not, depending on the state of relationship with that particular cable company.
466 COMMISSIONER CUGINI: Well, I will have a couple of other questions on VOD, in particular a bit later on, but I just wanted to get it in that context.
467 MR. FECAN: Yeah.
468 COMMISSIONER CUGINI: The issue of simultaneous substitution for specialty services, you spoke about harmonization. We have all heard and seen the example, especially of sports networks, so in particular TSN.
469 But is this also an attempt on your part to move U.S. -- that's the only way I can describe it, is U.S. network first run programming, onto specialty services? You own all three CSIs. You own all three Law and Orders.
470 Is that your intention as well, to be able to take advantage of that opportunity?
471 MR. FECAN: I hadn't thought of it because the CSIs, to your example, are on the Alliance Atlantis/CanWest Global specialty services on --
472 COMMISSIONER CUGINI: But not the first run?
473 MR. FECAN: Not the first run but all the subsequent runs.
474 I don't really know how you could take advantage of that with the various time zone releases conventional television has and with specialty being a single time zone release largely. It's certainly not our intention.
475 COMMISSIONER CUGINI: But the simultaneous substitution would allow you to do that, though. If we were to extend the must substitute rule to specialty services you could put CSI on Bravo at nine o'clock on Thursday night. Is that --
476 MR. FECAN: I suppose you could do anything but that's really not our intention. Our intention is to try and find a way going forward for conventional television.
477 COMMISSIONER CUGINI: Okay.
478 And it is a follow up to your conversation with the Chair, but it also will lead well into the group-based model, and that is the issue of CPE where you said that the quid pro quo for value for signal is CPE on OTA.
479 And, again, going back to the example that you say that for some there will be mandatory carriage, for other OTA services there will be a fee, now I understand but to be carried on basic; for those OTA stations for which you choose mandatory carriage does that mean there will be not be a CPE associated with that?
480 MR. D. GOLDSTEIN: What we have actually proposed is a group CPE along the line of the conceptual model that was proposed, so that it's of less consequence which particular service has the CPE. All of them will be licensed but that overall there is a transparent commitment from us as a corporate group as we imagined or understood the Commission wanted us to do, that we would -- we would come back in group licence renewal with all the facts in front of us and create an expected CPE level right across the board.
481 So yes, it would apply to all of the services in entirety.
482 COMMISSIONER CUGINI: And I understand that, you know both from your submission and from what you just said, that the level of CPE will be proposed at group licence renewal.
483 What I didn't see in your submission, and if it's there and I missed it I apologize, but how do you intend to create a baseline CPE?
484 Rogers in their submission put in a model based on historical expenditures. I believe that it was CanWest who said -- they suggested a zero base modelling.
485 What is your intention?
486 MR. K. GOLDSTEIN: I think it is a variety of factors that go into establishing a particular CPE just like historically the Commission has looked at a variety of factors to establish the CPE for specialty services.
487 So those could include the genre of the service in question, the types of programming the service offers, the relative cost of that programming, the current CPE if one exists or historical spend and the services' cost structure.
488 And the last one, cost structure, is particularly important if the Commission intends to implements CPE for conventional television because conventional television in terms of its infrastructure costs is very different than specialty television. Conventional television is a bricks-and-mortar operation with locations across the country that need to be staffed, whereas specialty television tends to be operated on a national network basis so the cost structure is very, very different.
489 COMMISSIONER CUGINI: And what elements of the cost structure would you include in the list that would make up the CPE?
490 MR. K. GOLDSTEIN: I don't know if it's necessarily elements of the cost structure. It's more taking into account the rate.
491 COMMISSIONER CUGINI: The rate for?
492 MR. K. GOLDSTEIN: The rate of the CPE.
493 COMMISSIONER CUGINI: Yeah, but my question is how are you going to get to the CPE?
494 What are you going -- is it going to be -- like I said, Rogers presented a very simplified sample. You just take what OTA spent, you take what speciality spent as an average over the last three years and you create a percentage based on the revenues of those two sectors of the group.
495 MR. D. GOLDSTEIN: Well, and that's -- those are among the two things that Mr. Fecan stated and each of those elements may weigh heavier than the other.
496 But what I think we should take a step back and look at, is that the CPE in and of itself for conventional is a way for the Commission to actually incent more local service.
497 When you get -- when you look at a station configuration like ours versus, let's say CanWest or the current CanWest, they only have one station in Ontario. We have currently 11 stations in Ontario. CPE and the way you weight that CPE could incent the ability for those stations either through a discounted model or not, but incent those stations to stay open.
498 COMMISSIONER CUGINI: Are you suggesting that each corporate group at licence renewal time could come forward with a different level of CPE?
499 MR. FECAN: That's exactly what we are suggesting.
500 COMMISSIONER CUGINI: So the CPE is horizontal across your group?
501 MR. FECAN: Yes.
502 COMMISSIONER CUGINI: And it would be different for Rogers and it would be different for CanWest and every other OTA?
503 MR. FECAN: Because their infrastructure costs are different.
504 And I guess the example that David had is probably the clearest one, where I think the CBC operates three English-language television stations in Ontario, Rogers operates two; City and OMNI; CanWest now operates one; we operate 11.
505 You need to find a way of capturing the bricks and mortars' cost of doing that or you end up reverse incenting us to go to one station.
506 COMMISSIONER CUGINI: And do you see a scenario whereby each OTA operator, if all other obligations are the same, let's say it's seven and 14 hours in terms of local programming. It's the 55/35 model that we have put forward in our broadcasting notice of consultation.
507 All other factors being the same, do you see a scenario whereby each OTA operator would have the same CPE? Let's pick -- let's not pick a number.
508 MR. D. GOLDSTEIN: Sorry, but we wouldn't have the same configuration of stations.
509 Under your scenario, if all things were equal and we only had one station in Ontario and there was only -- like if we went to a regional station model just like some of the other broadcasters, then all things would be equal. But if you are going to incent market activity to create local stations in the smaller communities, then a specific CPE for a corporate group based on that configuration is the only way.
510 CHAIRPERSON: But that's not what my colleague asked. She asked just for the conventional portion should that be the same?
511 MR. D. GOLDSTEIN: But again --
512 THE CHAIRPERSON: The overall may be different for each group.
513 But since we are talking about conventional, which right now doesn't have a Canadian programming expenditure, should we not say, okay, make it a percentage? So obviously the amounts will be different but it has to be 30 percent everywhere or whatever number you want to pay. And then you advocate it with the specialties in order to get your overall group.
514 MR. D. GOLDSTEIN: But if I understand the question, should there be a set number for everyone, the answer is no, because what you are going to do is you are going to drive a corporate group to make the same bricks and mortar determinations as another corporate group. If you want to create an incentive so that small market stations open, then you can play with or adjust that CPE at a level to create that incentive.
515 THE CHAIRPERSON: You want to avoid rewarding the inefficient which your model will do.
516 MR. FECAN: But what we want to avoid is being faced with a situation where our competitors have a lower cost structure in Ontario for instance because they have one television station. And therefore we have to match that cost structure rather than have all of the local stations we have in Ontario, and that's 11.
517 So that's why I think the CPE has to be per group and not necessarily the same number for each conventional station -- for each conventional group because not each conventional group has the same makeup.
518 THE CHAIRPERSON: Surely you can address it by putting rates in. You know that's not beyond -- to be fair, put different rates depending on how many stations you have.
519 MR. FECAN: You could -- you know if you are saying it's a number but it's plus or minus depending on a bunch of factors, I think we are saying the same thing.
520 THE CHAIRPERSON: Okay.
521 COMMISSIONER CUGINI: Thank you.
522 You also say in your submission that each specialty service should maintain -- within a corporate group should maintain its permanent CPE?
523 MR. K. GOLDSTEIN: Yes. The way the model would work would be that you would establish a CPE on each specialty service based on the criteria we outline. It could be the current one; it could be greater; it could be less.
524 You would also have a CPE, you know, as the marker for the conventional group as well. And then what would happen is that would yield an overall number.
525 So effectively, if that yields $100 million, $200 million, $300 -- whatever the number is, our group would have to spend that amount overall across the group and that number would be adjusted based on how the revenue grows year to year because it's a percentage of the previous year's gross revenue.
526 COMMISSIONER CUGINI: And that leads to your position that -- the sharing of expenditures across the group. And it doesn't matter if a show airs for the first time on over-the-air or airs for the first time on specialty; it all comes from this pool of money?
527 MR. K. GOLDSTEIN: That's correct.
528 COMMISSIONER CUGINI: Now, with this approach some parties in these proceedings have expressed a concern that this could lead to less programming diversity in the system that it could create big budgets for some shows but this would result in fewer shows being produced.
529 MR. D. GOLDSTEIN: That may be, but I think what you are more likely to see is greater diversity amongst the services because we will be able to make more strategic investment scenarios where we think the audience is going to be.
530 I think -- you know, the Commission determined many years ago that we were moving from sort of a tonnage model to a quality model and this would give a company like ours the ability to make strategic investments in the types of shows that we have actually had a great deal of success with, with Canadian audiences over the last few years.
531 COMMISSIONER CUGINI: And because you said the tonnage model, obviously the other side of the argument is that there will be tonnage and there won't be any quality, big budget programs like drama and documentaries or they will be fewer and farther between than they are now.
532 MR. D. GOLDSTEIN: I suspect in this day and age a broadcaster who is taking those decisions in effectively contempt of their audiences and doing that at their own peril.
533 COMMISSIONER CUGINI: Some parties have recommended that the expenditure obligations should be extended to include spending on content shown on new media platforms.
534 What is your position on this?
535 MR. K. GOLDSTEIN: New media is currently unregulated. We are not certain how you can allocate expenditure costs over an unregulated medium.
536 COMMISSIONER CUGINI: So you would not include those expenditures in your CPE calculation?
537 MR. K. GOLDSTEIN: No.
538 COMMISSIONER CUGINI: And since we are talking about newer platforms, let's get into a little bit of a conversation about VOD.
539 Currently, you do provide programming to the VOD platform. Do you see any advantage in the Commission, as some parties have suggested, that there should be a floor as to how much Canadian programming is available on VOD platforms?
540 MR. D. GOLDSTEIN: I think we are going to have to take that under advisement. I don't think we -- I don't think we have a determination.
541 MR. K. GOLDSTEIN: And just to clarify what Mr. Goldstein was saying, in the context of VOD we are a supplier.
542 COMMISSIONER CUGINI: Exactly.
543 MR. K. GOLDSTEIN: We are not the -- we are not the licensee.
544 COMMISSIONER CUGINI: No, I understand that.
545 MR. K. GOLDSTEIN: So yes.
546 COMMISSIONER CUGINI: But should -- okay, should there be an obligation on you to provide a minimum amount of Canadian content to VOD platforms?
547 MR. FECAN: I think if there is an obligation it should be on the BDU making it available to its viewers, its customers a minimum number of Canadian programs.
548 COMMISSIONER CUGINI: Are your negotiations with BDUs currently? Are they on any commercial terms at all for the provision of programming on the VOD platform?
549 MR. FECAN: Commercial would be a stretch. We get some costs paid back so I don't think anyone is making money on it right now. We look at it as catch up viewing for our audience that if they miss a particular program.
550 This particularly works on a show that has got sequential plot lines and you miss it. So you want to give the audience, whether it's on your own site on a streaming basis or on a VOD site owned by a cable company, you want to give them the opportunity to catch up within a certain number of days so that they are encouraged to watch the next fresh episode which continues the plot line along.
551 COMMISSIONER CUGINI: You say that Category B services should be excluded from the model, and I would like to give you the opportunity to elaborate a little bit on why you think that should be the case.
552 MR. K. GOLDSTEIN: Category B services when they were first created back in 2000 and 2001 the Commission set down the policy of licensing those services, introduced certain tradeoffs, the key tradeoffs being on the one side that there was no genre protection but also carriage rights; on the other side no expenditure requirements.
553 All the services that we have included in that realm have expenditure requirements, and conventional that we're seeking to extend it to. Category B services would not.
554 COMMISSIONER CUGINI: We can all rhyme off examples of Category B services that have become -- that are very popular with Canadians.
555 So my question to you is should they be included when, for example, they reach a certain threshold, say one million subscribers? You get to a million subscribers and they become part of your group-based framework.
556 MR. D. GOLDSTEIN: That would be something to look at.
557 COMMISSIONER CUGINI: You would look at that? That would --
558 MR. D. GOLDSTEIN: I think that the genus of our proposal was because we saw the conceptual framework in its totality and we understood that there would effectively be a notion of portability if you will between the services, what we didn't want to create was a scenario particularly for BDU-affiliated companies where you could have a bunch of easily licensed Category B services that could then just weight all your Canadian content programming.
559 And so what we thought -- we thought -- to Mr. Goldstein's point -- was that what you are doing is you are trading off. It's a carriage for commitment trade-off and that would help the average.
560 We didn't consider it the way you have, but it's something to consider.
561 COMMISSIONER CUGINI: And because you spoke about ramping up both commitments and exhibition requirements, as you know that criticism has been made, or we have been cautioned that one of the unintended consequences is that certainly that could happen, in particular with news and sports services.
562 I take it from your submission that you will include or would want to include news and sports services in your group-based framework?
563 MR. D. GOLDSTEIN: Yes, that was our submission.
564 COMMISSIONER CUGINI: And what would be the perils if we excluded them?
565 MR. D. GOLDSTEIN: I guess if you take it to the extreme which, again, I go back to my earlier -- my earlier statement that if you were to be devoid of quality programming on your other services you would be doing so at your own peril. And if you put all your eggs in one or two baskets I don't think you would achieve the result across the system.
566 That said, under the conceptual model you as the Commission are capturing our whole system. So where the successes lie, the Canadian broadcasting system reaps in that success if you set a CPE, and as you move forward revenues go up and in fact it's a return of the system.
567 COMMISSIONER CUGINI: Because we are talking about inclusions and exclusions, as you know, especially the creative community has said that CMF top up fees should not be included in the revenue streams upon which the CPE would be calculated.
568 So I want your opinion on that. I want your opinion on whether or not LPIF monies should be included and of course if their value for signal is successful would that revenue be included or should it be advertising only -- is the question.
569 MR. K. GOLDSTEIN: Sure. There is three areas. I will try to deal with them.
570 With respect to CMF top up, CMF top up has always been included in specialty CPE. When conventional did have a CPE in the nineties our understanding is it was included as well. It factors into the whole mechanism for funding.
571 Canadian programming --
572 COMMISSIONER CUGINI: Right, but the criticism is to exclude it from specialty as well.
573 MR. FECAN: Yeah, and I think that's a possibility but then you would be reducing the CPE percentage for specialty as well.
574 So our approach was harmonize. It seems to be working well on the specialty side. We are not reinventing the wheel here. Let's do what works well there on the conventional side and let's put -- let's put a pin in a number and when we come to the renewal point that gives you the comfort that it's equitable all around.
575 If you know, as a model you say, well, you know, it shouldn't have been on the specialty side, let's take it out there, then in my opinion that will drive a lower CPE number.
576 So I'm not sure you gain one way more than the other.
577 MR. K. GOLDSTEIN: With respect to LPIF, our view is that LPIF dollars should not be included in the base for the CPE. Those dollars are meant as a subsidy effectively and to then require additional spending based on that money coming in essentially reduces the overall subsidy.
578 With respect to value for signal dollars, absolutely we would expect just as specialty services are included in the CPE, but those would factor into our basic CPE calculations.
579 COMMISSIONER CUGINI: Okay. I'm going to move on to your expanded definition and scheduling window for priority programming.
580 And you know when I go down your list, I think wouldn't it have been faster to tell me what you don't want included in there? It would have been a much shorter list.
581 I mean essentially you are saying all of Canadian content should count, are you not?
582 MR. FECAN: Not professional sports.
583 COMMISSIONER CUGINI: Right, okay, which CTV doesn't do a lot of anyway.
584 And you don't propose a minimum. You don't propose a percentage not only of just priority programming according to your definition or primetime. I know we didn't in our conceptual model.
585 So I'm asking this on the basis of what others have submitted, that we perhaps should have proposed a minimum amount of Canadian content in primetime on conventional.
586 MR. D. GOLDSTEIN: Actually, if I could refer you to page 35 of our submission, we did actually -- we did set out an extended scheduling window of seven p.m. to 11:00 p.m. -- sorry, from seven to 11:00 to six p.m. to midnight.
587 So we did propose. And I think to take a step back, we are in fact the only broadcaster, conventional broadcaster who continues to prepare to commit to priority programming in whatever definition, but in fact it's still part of our proposal.
588 So we have, yes, extended the definition and I think that relates to flexibility towards audiences that the Chair mentioned in his opening statement and we have committed to hours of exhibition.
589 COMMISSIONER CUGINI: I'm looking at page 35. I don't see a percentage committed to Canadian content in primetime.
590 MR. D. GOLDSTEIN: No, but exhibition hours, I believe, was the --
591 COMMISSIONER CUGINI: It would also be appropriate to expand the scheduling window for priority programming from the current seven p.m. to 11 p.m. to six p.m. to midnight.
592 MR. D. GOLDSTEIN: And so where none of the other broadcasters have made any commitment to priority programming we have actually made a commitment to priority programming.
593 COMMISSIONER CUGINI: But how many hours between six p.m. and midnight will be priority programming according to your new definition?
594 MR. D. GOLDSTEIN: We would have to come back in group licence renewal with the totality of the mechanisms available to us and make commitments at that point.
595 COMMISSIONER CUGINI: And just because I went through the exercise so I am going to talk about it, I looked at your current CTV primetime schedule and, based on your revised definition, 19 hours of what you currently have on the air would qualify as priority programming based on your definition, and that is just a little over 45 percent of primetime.
596 Is that a number you could work with? I know you won't commit to it now, I suspect.
597 MR. FECAN: I think we -- no, I think we would have to see how you arrived at the 19 and let us get back to you on that.
598 COMMISSIONER CUGINI: Okay.
599 As you know, again, parties are saying that there has to be a commitment to drama, documentaries and children's programming by the over-the-air broadcasters. I know that you have said that there should not be.
600 Is there any level that should we disagree with you, that would be acceptable to you?
601 MR. FECAN: We kind of look at priority programming a little differently perhaps than some of those intervenors. We look at it from the point of view of the audience, not from the point of view of whether this provides an employment opportunity for a person.
602 The audience likes -- it's pretty overwhelming that they like their local news. That's a priority for them.
603 We all serve the audience. Various other things are a priority for them and that's why we are asking for that kind of flexibility because we look at everything from the point of view of what -- we are serving an audience. What does that audience value from what we do?
604 Because the more we have to do checkbox programming; one from this box, check that box, one from that column, check that box, and if the audience doesn't find value in that then we are kind of undermining the case for conventional television.
605 So philosophically that's how we approach it. We like doing Flashpoint. We like doing --
606 COMMISSIONER CUGINI: And congratulations on the Gemini.
607 MR. FECAN: You are welcome.
608 We like doing Corner Gas. Brent Butt is busy as work on the next one, a show called Hiccups which I hope will be as successful as Corner Gas.
609 We like doing all these shows. They are an important part of our mix. They are an important part of how we try and connect with our audience.
610 Not everything should just be factual programming. There should be programming that -- I prefer to use the term "scripted" as opposed to drama because drama means Corner Gas doesn't qualify. So I think everybody means scripted.
611 This will always be part of our mix, and I think that's who we are. I could see the potential that some other broadcaster may say, well, that's not who they are. They do different kinds of things for their audiences and for their communities.
612 And I think, you know, the best place for you to kind of test that is as the broadcaster comes in front of you with what their vision is and what they are prepared to do and you then can evaluate whether you think that is the right thing for the system and their audiences.
613 So that's why we built in the flexibility for the model, because it's not just for us, it's for everybody else.
614 COMMISSIONER CUGINI: So do you believe that each over-the-air broadcaster should have the same definition of priority programming?
615 MR. FECAN: I think we need to find a definition that's common to everyone, yes. But how they apply it, what commitments they make within that may well vary from broadcaster to broadcaster.
616 COMMISSIONER CUGINI: As you know, and just like the licence fee top up fees are brought up on a repeated basis so too is the fact that the Commission allows repeats to be counted towards priority programming or programs of national interest.
617 Has the time come where we should only focus on the number of original first run hours and let that be the threshold?
618 MR. FECAN: You know, Commissioner, it's a -- look, I mean it's a different form of measurement and just as long as one understands that the numbers change as well because the form of measurement changes when you go, you know, from it to a different system. I mean, you could look at that.
619 Certainly I have to say from the point of view of a conventional broadcaster, there is a different value to something that's first run to our advertisers and our viewers than something that's, you know, had the oxide stripped off the tape. I guess we don't use tape any more, but --
620 COMMISSIONER CUGINI: Because you continue to include entertainment magazine shows in your definition, as you know, people have maintained that they have done absolutely nothing to create a Canadian star system, that their intended reason for existing just simply is not being fulfilled and, therefore, should be excluded.
621 MR. FECAN: You know what --
622 COMMISSIONER CUGINI: I know it's a big part of your schedule.
623 MR. FECAN: Yes. I think that comes again from people who are quite understandably looking for a specific kind of employment for their members.
624 And I think the rationale for including star system programming came out of many studies and many perceptions over the decades that Québec has this great star system. People know who their stars are, they worship them, they follow them, they write about them, they do all this kind of stuff and why can't we have the same in English Canada.
625 Certainly if you are going to be interested in Hugh Dillon, the star of Flashpoint, or one of the stars I should say, you know, might you be interested in other stuff he does. Might you be interested in his music career, might you be interested in, you know, what kind of place he lives in and just build the cult of celebrity?
626 I think that's worked for us and I think that's been a big part of why we have had programs of a scripted nature that has leads that people are following?
627 You know, we had the Giller Awards in Toronto a week ago, Hugh Dillon was one of the presenters, and I'm told it was fascinating to see how so many of the cultural glitterati were mobbing Hugh, you know, because he was a star.
628 It's not just the show that made him that -- a Large part of it is -- but it's also these programs and I think they have a legitimate purpose and I think they have served an important need in English Canada, maybe less so in French Canada.
629 COMMISSIONER CUGINI: We will move on to independent production.
630 I know what your proposal is, obviously, I know what Canwest has proposed, we know what Rogers has proposed, and I think I'm anticipating your answer when I'm going to ask you: Should the independent production commitment be uniform across all over-the-air providers?
631 MR. GOLDSTEIN: I think different.
632 The answer is "no" and I think that one of the reasons is that -- and I will use our example. We are far more interested in being in the content business and being part of that value chain than some other broadcasters may be.
633 And so I think those who want to make the investment in programming and share in the risk and rewards should be able to do so. Others just may not choose to do that and there may be offset regulatory instances in their group licence renewals that would be a product of that.
634 We have made a substantial commitment to independent production as part of the conceptual model which aligns itself with the specialty model and we like doing work with independent producers. We just want to be able to, in certain areas, make those strategic investments and be part of the risk and reward system ourselves.
635 MR. FECAN: Yes. Let me give you some perspective, if you don't mind, please, Commissioner, because there might be some confusion here.
636 Independent production shouldn't always be synonymous with scripted programming and vice versa. I think the Commission actually caught that because in your Notice of Consultation you talked about ensuring a place for the Canadian independent creative talent and production.
637 That's a really important distinction, because the vast majority of the Canadian independent creative talent are freelance people. Whether they be writers or actors or directors or choreographers or musicians, they work for many different production companies, occasionally they work for us, occasionally they might work for production company A, B or C, and that's what provides a diversity to the system, it is those different voices.
638 Who actually finances the show does not necessarily provide any diversity. That's more of a commercial transaction. There are exceptions to everything. There are some producers that are also great business people that do both. But in many cases I mean we have programs that have come out of writer-only development and then, you know, you have to find a producer to finance it, where we could have just as easily written a cheque.
639 So I just want to make sure that we are all conscious that we are not opposed to scripted programs, quite the contrary, we just want to be able to write the cheque and participate in the success of that program outside of Canada, and that's different from just ensuring the place of Canadian independent creative talent because I think that absolutely needs to be ensured.
640 COMMISSIONER CUGINI: We know that of course broadcasters have made use of independent producers across a number of genres of programming. So I thank you for that clarification, but I think, you know, you can rest assured that we don't just need scripted -- we don't just mean we recognize that independent producers are used across, like I said, a number of genres.
641 So the sum total of your group licensing framework is: Yes to streamlining and you, Commission, look at streamlining across each group, forget about, you know, the OTA sector and the specialty sector, and if that means different rules -- perhaps not all obligations, but if that means different rules for each of us, that is going to create a competitive environment in the Canadian broadcasting system?
642 MR. FECAN: That's essentially it. And I know one other preoccupation -- I haven't heard it yet at this hearing, but maybe I will -- is there value transfer between specialty and conventional and all of that. CPE across the top covers it. It captures all of it.
643 THE CHAIRPERSON: I really am troubled by your answer because as a regulator we set the environment, we allow you to move in it, to use your creative and entrepreneurial spirit to maximize it. If there are different rules how is there a level playing field? How is there a competitive neutrality?
644 I don't understand this at all. I mean, I would have thought it has to be the same rules for everybody. You then decide, given your product mix, given your audience, et cetera, how you maximize your return within those rules?
645 But if we have different rules for different groups, then by definition right from the beginning it has no neutrality. I don't know how you have a competitive landscape.
646 MR. GOLDSTEIN: Well, I think it is based on the asset make-up.
647 First of all, it starts with four principles, three or four principles. So presumably they would all subscribe to the three or four principles of conceptual make-up.
648 One is the CPE. One is exhibition requirements, one is CPE, one is priority programming and one is independent production commitments. So there is a framework in the conceptual model.
649 Each of those broadcasters has a different asset make-up and makes different contributions to the system. So you may have an expectation of one corporate group that has X and another corporate group that has Y.
650 Again, I go back to the -- it's not competitive neutrality because we have a different operational mix.
651 THE CHAIRPERSON: No, but let's start with what we are talking about which was independent production.
652 It seems to me we set the rate, whatever it is, you then decide how you meet it and what product mix you do, how much is scripted, non-scripted. That I buy perfectly, no problem.
653 But to say that you have a different independent production rate than Canwest, I just do not understand how we as regulator could justify that.
654 MR. D. GOLDSTEIN: And we are not. We have proposed a different level than they have, but we are not saying that.
655 What we are saying is that, you know, with regard to exhibition requirements you will likely need to standardize things.
656 The CPE is the component. It is the sort of lever, the economic lever, if you will, that is the one variable between one corporate group and another and based on the asset configuration.
657 THE CHAIRPERSON: Did you not say to the Commissioner Cugini just now there would be a different independent production rate there for you than for others because --
658 MR. GOLDSTEIN: No. What I said was that they have offered up a different proposal.
659 ME. FECAN: I heard the same thing you heard and I think he misspoke.
660 THE CHAIRPERSON: Okay, fine. Thank you. Thank you.
661 THE CHAIRPERSON: Issue cleared.
662 Go on, Rita.
663 COMMISSIONER CUGINI: So those are the four pillars is what you are saying? All right.
664 LPIF. I know it is in its infancy, but have you been able to take advantage of the fund?
665 MR. SPARKES: Absolutely. It's kept stations --
666 COMMISSIONER CUGINI: And what differences have those monies made? I'm sorry?
667 MR. SPARKES: It has kept stations open. It's been a great program.
668 COMMISSIONER CUGINI: Has there been an increase in the number of hours of local programming?
669 MR. SPARKES: No. It has kept stations open and people employed.
670 COMMISSIONER CUGINI: In your submission where you say that unless -- no.
671 If value for signal is delayed the LPIF should stay in place until 2013 and accessible by both large and small markets?
672 MR. SPARKES: Well, as I said before, you know, I expect that there is going to be all kinds of delays if negotiation for value is implemented or tried, I guess basically, if you agree to that.
673 ME. FECAN: Certainly if history is any precedent.
674 MR. SPARKES: Yes. I think they are going to try to do whatever they can to stall it, so LPIF needs to stay until the system is in place.
675 COMMISSIONER CUGINI: Now, obviously from your submission you don't want it to revert back to the 1 percent, but if at the point at which if value for signal is implemented and the negotiations are successful, are you saying that the local programming improvement fund could be eliminated altogether?
676 MR. FECAN: It could.
677 Mr. GOLDSTEIN What we have said is to take a look at it.
678 MR. FECAN: But it could.
679 COMMISSIONER CUGINI: I was going to ask you for --
680 MR. FECAN: It's working right now and so, I think in summation of what both of these gentlemen said, it could, but let's keep its success, let's keep it going until we know something else is in place. Let's not, you know, throw it under the bus until we know something else.
681 COMMISSIONER CUGINI: And keep it at one and a half percent?
682 MR. FECAN: Keep it at least at one and a half percent. It may well be that if you will decide that VFS is a good thing and then it bounces through various courts or it goes across the river to the political level and it's just delayed, delayed, delayed, it may need to be more to keep the thing going.
683 THE CHAIRPERSON: Just to keep the BDUs from having a fit, that is not part of the agenda. It's not part of the framework for this hearing to raise the LPIF above 1.5 percent.
684 COMMISSIONER CUGINI: That's why he's got the big gun.
685 In all of your asks in terms of the framework, is there a way for you to prioritize that list?
686 MR. SPARKES: I think we need a business model first. We need to be able to have a new regime in place that allows us to be able to continue to do the things we are doing.
687 COMMISSIONER CUGINI: Which I suppose answers my next question, which was going to be: If the negotiated value for signal is not implemented, the framework that you have presented, does that represent a successful business model for you going forward?
688 MR. SPARKES: No.
689 COMMISSIONER CUGINI: Absolutely not?
690 MR. SPARKES: No, not at all.
691 COMMISSIONER CUGINI: What changes will the Canadian viewers see on conventional television today versus tomorrow if we implement your regulatory framework?
692 MR. SPARKES: The changes they will see is if you don't implement what we suggest or something like it, because we will not be able to serve the Canadian viewers in the way that we have been serving them up to now.
693 COMMISSIONER CUGINI: Thank you for your responses.
694 Mr. Chair, those are all my questions.
695 THE CHAIRPERSON: Thank you.
696 I mentioned earlier that I want to speak to you about digital transition and then I want to give my other colleague a chance.
697 If it's okay with you I would like to see if we can finish by 1 o'clock and have a late lunch.
698 First of all, I would ask the Secretary to just give you a copy of the list of the analog transmitters that are in play, just to make sure we have them. A copy of those lists are also available in our distribution room.
699 Just let me set the scene so you understand.
700 List 1 are all the transmitters there are in the 360 kilometre U.S. coordination zone. Since the U.S. has gone to digital we will have to convert to those.
701 List 2 are all the ones in the priority markets that we identified to you, basically the market over 300,000.
702 Then List 3 is a combination of those so that you have all of them.
703 Now, quite a few of List 1, half of them are also already on List 2 and basically List 3 has all of them in there.
704 This is, in effect, if I understand your presentation this morning -- I have it different from what you put in your paper -- is that you have six transmitters now converted, which will be 65 percent of CTV's OTA coverage. You expect to convert the remaining CTV and A-channel transmitters by December 2013?
705 MS FEEL: That's correct.
706 THE CHAIRPERSON: So you are two years late.
707 And by doing that, you will have covered, if I understand this, too, you will not have covered everybody. So there are markets outside which you don't intend to cover which are, you know -- when you look at List 1 which takes you out there, I think you have about exactly half of them. Half of them you will cover and half of them you won't cover.
708 MS FEEL: Outside of the mandatory markets, we would continue to operate the analog, the existing analog transmitters.
709 THE CHAIRPERSON: Yes, but if it's outside the mandatory, it could still be within this 360 kilometres conversion it seems. That's the point I'm getting at.
710 If you look at List 1, those are the ones which at some point in time we have to abandon analog and there are some in there which are clearly yours?
711 MS FEEL: Yes. I mean looking at the list very quickly, I think one of the only channels on List 1 -- one of the only stations on List 1 that wouldn't be converted by December 2013 would probably be Bobcaygeon, which is a rebroad of CFTO.
712 THE CHAIRPERSON: I expect you to come back to me in detail, I gave you the list.
713 All I am trying to figure out is what do we do for those stations, you know, which are not in mandatory market and which you don't intend to convert? The Canadians who live there, and especially to the extent that there are on the 360, at some point in time there will be no analog system for them.
714 Now, partially your terrestrial BDUs have offered to provide a sort of service to them and I will ask them exactly what they mean by sort of terrestrial free service, and then of course there is Bell proposal of the free sat.
715 But where do you stand? I mean, those are customers of yours, you truly don't want to lose them. How do you ensure -- it seems to me you are silent on this point of what happens to those people?
716 MR. FECAN: Well, just to make sure I understand this -- please, Alan and Don fact check me if I'm wrong.
717 As I look at your list there is only one transmitter, a rebroadcasting transmitter, that is outside of the mandatory market, but within the 360 kilometre U.S. coordination zone and that is, as Don pointed out, Bobcaygeon. So it's fairly de minimis frankly, but we could look at that.
718 What I'm trying to say is I don't think this is a big issue based on these metrics.
719 THE CHAIRPERSON: Okay. So for you having a pre-set model, so it's really not -- it's only one station that would concern you, everybody else you will convert, but with a two-year delay?
720 MS FEEL: Correct. And it's not an originating station, it's the rebroad of the CFTO signal.
721 THE CHAIRPERSON: Oh,it doesn't have local programming?
722 MS FEEL: No. Bobcaygeon has no local programming.
723 THE CHAIRPERSON: Okay.
724 And why the two-year delay? This has been announced first by us I think it's two years ago, was it, yes. In 2007 we announced it. I spoke to you especially at the Broadcasting Summit and pointed out this is coming at us, we have to do anything, et cetera, and you are now telling me it's (a) a two-year delay and, secondly, if I understand you correctly, it's contingent on there being VFS.
725 Did I understand you correctly, Mr. Fecan?
726 MR. FECAN: Just to deal with your last point first. It's contingent on us being in business in conventional television, which I'm using VFS as a proxy.
727 THE CHAIRPERSON: Okay. But I mean, there is no other mousetrap on the table right now, so in effect it is VFS that we are talking about.
728 MR. FECAN: I'm sure you will look at many mouse traps.
729 THE CHAIRPERSON: Thank you.
730 Can you then explain to me the delay?
731 MS FEEL: Well, the delay is caused by many factors.
732 There are between the public and private broadcasters approximately 150 transmitters, even in the mandatory markets alone, that need to be converted between, you know, now and when we get it done.
733 We all rely on the same consultants in terms of technical resources; we all rely on the same regulatory processes between CRTC and Industry Canada; we rely on the same consultants and suppliers, manufacturers, and I just can't foresee, at least for us, a way of getting there from where we are today.
734 We think that 2013 is an aggressive but achievable deadline and it's one that, provided we can work out some economic stability for the organization, we can commit to.
735 THE CHAIRPERSON: And if I understand correctly, the consumer will either have to buy himself a digital antenna in those markets -- the OTA customer; right?
736 MS FEEL: Correct.
737 THE CHAIRPERSON: Or a converter box of some sort that allows him to receive the signal, and this is a cost that obviously you wouldn't carry.
738 MS FEEL: That's correct.
739 THE CHAIRPERSON: In effect, the consumer has to do that?
740 MS FEEL: That's correct.
741 MR. SPARKES: If there isn't a government program.
742 MS FEEL: If there isn't a government program.
743 THE CHAIRPERSON: Well, I know, but neither you or I know whether there will be a government program and have any control over that. So I'm going on this present status quo, which is the government has not announced any kind of program on this.
744 MR. SPARKES: But under the fall of the money, Watergate dictum, the money is going to the government for auctioning the spectrum.
745 THE CHAIRPERSON: I share your logic, you know. If you get the proceeds of the auction surely you can pay for the conversion, but --
746 MR. FECAN: Just for the record, Mr. Chairman, every other country involved in digital transition, the government has been involved in some form of helping out consumers in this and I would fully expect they would do the same.
747 THE CHAIRPERSON: Ms Feel, if I understand you correctly, really the time period of 2013 is dependent on the availability of the necessary resources to convert -- I mean in the field in terms of engineers, et cetera. Even if you had a pile of money tomorrow you could not advance that date?
748 MS FEEL: That's correct. It's just it's a bottleneck net in terms of this creates, you know, the conversion in Canada as it did in the U.S., it creates a very short term demand for a lot of resources, the technical consultant resources, manufacturing resources, and it's just there's a big bottleneck of all of us trying to do the same thing at the same time. So even with a lot of financing I'm not sure that we could get there faster.
749 THE CHAIRPERSON: Why wouldn't the fact that the U.S. has done it -- there is an awful lot of people who are skilled in this who are suddenly available and looking for work and would be able to do.
750 MS FEEL: It has helped, which is why we think we can get there by 2013. If you had asked me a year ago I probably would have given a timeframe out that was longer than that.
751 THE CHAIRPERSON: Okay. Thank you.
752 I will turn you certainly over to the tender mercies of my colleagues.
753 Michel, why don't you start.
754 COMMISSIONER ARPIN: Thank you, Mr. Chairman.
755 My first question will remain on the digital transition.
756 Obviously, the Table 1 that you have before you showing Bobcaygeon is a channel that is currently between 52 and 69, but it is not all the retransmitter stations that you have all across southern Ontario within the coordination, the zone of 360 kilometres. I just could only think about the retransmitter of CJOH in Cornwall which I guess is not outside the 360 kilometres coordination zone, it's right on the border.
757 So what are the plans of CTV regarding these retransmitters? Are you going to shut them down?
758 MS FEEL: For the transmitters that are outside of the mandatory markets, we would rely on analog as long as the analog transmission was available to us.
759 In areas where there isn't an immediate demand for the spectrum, we would hope to continue to use those transmitters for as long as we can.
760 And if there is a specific question on Cornwall, then I should --
761 COMMISSIONER ARPIN: Not necessarily specific on Cornwall because there could be many other Cornwall type of situation.
762 But the date set is August 31, 2011 so say that that date doesn't change, it is a mandatory date that has been mentioned numerous times.
763 So what you are saying here is that the Cornwall rebroadcaster of CJOH will be shut down.
764 MR. FECAN: I'm confused. I just don't see it anywhere on the list.
765 COMMISSIONER ARPIN: It's not on the list because it's not mandatory for digital transition and it's not one of the stations that is between 52 and 69. I guess CJOH is probably channel 10, channel 11, channel whatever.
766 MR. MORRIS: Okay.
767 Just to reclarify this list, we actually have two transmitters on this list, one is the CFTO rebroad in Bobcaygeon and the other one is the A Channel in Windsor -- which is towards the bottom of the Ontario list, second to bottom -- we have that already included in our mandatory changeover. So that one is gone.
768 COMMISSIONER ARPIN: Yes.
769 MR. MORRIS: Okay?
770 Within the mandatory markets it's planned to change out 22 transmitters.
771 In terms of the rebroads that you are referring to, since there is no U.S. coordination those would continue to operate in analog.
772 COMMISSIONER ARPIN: No, but they are above the 360 kilometre line.
773 MR. MORRIS: If they are not on this list --
774 COMMISSIONER ARPIN: Oh, they could be. They are not on this list because they are not at a channel that is located between 52 and 69, but they are analog transmissions.
775 MR. MORRIS: Right. But unless there are plans to --
776 COMMISSIONER ARPIN: Who could create -- there are a number of U.S. stations that are currently operating at lower parameters than the ones that they have been authorized because they are waiting for Canada to shut down.
777 MR. MORRIS: Yes, I'm aware of that and I think in total we may have two or three and we could deal with those as required.
778 MS FEEL: What my colleague is saying is, where there are specific coordination issues --
779 COMMISSIONER ARPIN: Oh no, I heard what he said.
780 MS FEEL: -- we will deal with those.
781 COMMISSIONER ARPIN: I heard and understood what he said.
782 So, for the record, you think that you have two or three and, obviously, you will have a contingency plan for those. All the others that are transmitting an analog will not create an interference.
783 MR. MORRIS: That's correct.
784 COMMISSIONER ARPIN: So your argument is that they could remain, even if they are within the 360 kilometres coordination zone.
785 MR. MORRIS: Right. As long as they don't present any coordination issues --
786 COMMISSIONER ARPIN: Yes.
787 MR. MORRIS: -- there is no reason why they can't continue to operate.
788 COMMISSIONER ARPIN: Okay. And that's your plan.
789 I'm going to get back to the value of -- and I have a few questions for you.
790 Well, you said that you were looking to negotiate market-by-market. However, DTH, currently at least, they are not offering into local, so whenever you are available on DTH you are available across the country.
791 Are you contemplating negotiating on a market-by-market basis or will you be negotiating for all the signals for a given price?
792 MR. GOLDSTEIN: Our plan is for DTH to move from a situation in which they offer our local signals across the country to a situation where they offer them on a local, into local market basis, like Cable does.
793 COMMISSIONER ARPIN: And even if there were no more CTV stations than the ones that are currently carried?
794 MR. GOLDSTEIN: We believe and we have advocated that DTH should be required to adhere to the same carriage obligations that cable does. So what would happen is, as capacity becomes available --
795 COMMISSIONER ARPIN: Okay. Let's assume that there is no capacity?
796 MR. GOLDSTEIN: I don't know that we are prepared to assume that based on their -- based on...
797 COMMISSIONER ARPIN: Let's assume that there is no other capacity to offer to local, that we have set the rules, they have a given capacity. So what you are saying, there is no more distant signal so you will be negotiating on a local basis for each of these markets with the DTH?
798 MR. SPARKES: I guess the short answer is there will be a smaller number of stations to negotiate DTH at that point.
799 COMMISSIONER ARPIN: Okay.
800 Vidéotron in its submission says that:
"Negotiations shall be limited only to stations operating in the language of the market."
801 So their assumption is therefore that means that CJOH and CFCF will not be eligible to negotiate a rate. What are your views on that assumption and to the opposite obviously, the Gatineau station will be entitled to get an Ottawa rate?
802 MR. K. GOLDSTEIN: I think that is more an issue of what goes into the value discussion as opposed to whether or not they should be able to offer a rate. Our system envisions choosing priority carriage for value for signal. So in a situation where an English service has a very, very small minority English population, that would be a discussion with the cable operator. Perhaps that would be a situation where we would offer must-carry but it would have to allow the market to decide.
803 MR. D. GOLDSTEIN: Our litmus test is local service. Irrespective of language, if you are providing local service in that marketplace to the prescription of the Commission, then you should be able to avail yourself of negotiation for value.
804 COMMISSIONER ARPIN: You spoke about the skinny basic with the Chairman. You included the local stations. Will they be only the stations for which you have negotiated a fee or will it be all the stations, including the ones for which you have sought full distribution?
805 MR. SPARKES: It would be the stations that we have negotiated carriage and those that have chosen mandatory carriage.
806 COMMISSIONER ARPIN: Take the Ottawa market, so it means that on the skinny basic you will have CJOH and CHRO?
807 MR. SPARKES: Right.
808 COMMISSIONER ARPIN: From CTV?
809 MR. SPARKES: Right.
810 COMMISSIONER ARPIN: And the other organizations if they are successful negotiating something?
811 MR. SPARKES: Right. And there are obviously some 9(1)(h) services that would be on there as well.
812 COMMISSIONER ARPIN: Yes. So at the end of the day, what will be the size of that skinny basic? If it includes the local service, the 9(1)(h), then will you have the community channel as well? Will you have --
813 MR. SPARKES: Well, it will be up to the consumer, I guess.
814 COMMISSIONER ARPIN: CPAC and the legislative assembly and --
815 MR. SPARKES: I mean there are some stations in the basic package that obviously provide a community service. The Cable Channel is one and CPAC is another obviously. But there are some specialty channels that are packaged in the basic that might not be there and that consumers would have a choice to have them or not. But there are some public service channels that need to be there obviously.
816 COMMISSIONER ARPIN: But your definition of "skinny" is a bit --
817 MR. SPARKES: Is skinnier than it is now.
818 COMMISSIONER ARPIN: Skinnier than it is now but broader than really skinny? Only the local stations --
819 MR. SPARKES: The local stations and stations that, you know, serve a public policy purpose.
820 THE CHAIRPERSON: You are really saying local stations plus mandatory services?
821 MR. SPARKES: Yes.
822 THE CHAIRPERSON: Mandatory by us.
823 MR. SPARKES: Right. Yes.
824 COMMISSIONER ARPIN: Thank you very much, Mr. Chairman.
825 THE CHAIRPERSON: Len?
826 COMMISSIONER KATZ: Thank you, Mr. Chairman.
827 Good morning. I have several questions. I want to take you to page 11 of your opening remarks this morning. You mention that you did a post-mortem, I guess, on Brandon and found out that a number of citizens in Brandon would have been prepared to contribute something for the local component of the programming that they lost.
828 I coupled that with your proposal to facilitate a value-for-signal type negotiation but I didn't hear anywhere in your thought process of negotiating the component that deals with the consumer.
829 Is there some way of incorporating -- I won't call it a plebiscite but some sort of statistically valid sample of what consumers want in a market if we do entertain a market-by-market type negotiation as you propose?
830 MR. SPARKES: Well, we have done a -- well, that poll was specific to Brandon but we have done an overall poll across the country and over 70 percent agree with our position.
831 COMMISSIONER KATZ: But when you get into a market-by-market, you may find some markets where it is relatively low, and again, it is a function of how much they want to pay.
832 What you are saying here in this, I am not sure whether it is a valid statistical analysis but 82 percent would pay up to $1. It may in fact be in another market that only 20 percent would even pay 10 cents for it.
833 I don't know and I am just trying to understand in your model when you sit down and want to negotiate with the BDU, where does the consumer fit into this? Is it just two people talking about money, ultimately at the expense of the consumer, or have you got the voice of the consumer at your table as well somehow through some sort of research?
834 MR. FECAN: Well, it wasn't up to $1, it was $1, just to be precise about that poll.
835 You know, in the U.S. the BDUs have had, I think for 18 years, the option of passing these kinds of fees through. They haven't. Why not? They are worried about the consumer. They made a value judgment that these services are important, the consumers want them, and so you haven't seen over 18 years this kind of pass-through there even though they can. Possibly another element is the competitive element.
836 So I think that is how the consumer gets represented. Plus if you agree with the skinny basic package idea, there is an opportunity for the consumer to pay less most likely than what they are paying today.
837 COMMISSIONER KATZ: So you wouldn't see a component being research undertaken by either the BDUs or yourselves jointly or independently that would form part of that value proposition?
838 MR. FECAN: Research is a proxy for the market. The market can act here.
839 COMMISSIONER KATZ: I want to take you to your submission that you filed back in September and on page 13 there is a quote in there that I want to focus on and I will read it out loud as well.
840 It says:
"Without immediate corrective action, most of Canada's licensed programming services will fall into the hands of the five large BDUs."
841 Do you recall that statement?
842 MR. FECAN: M'hmm.
843 COMMISSIONER KATZ: Are you suggesting -- because what I interpret from that is that vertical integration is not a good thing and I am trying to understand whether it is not a good thing for CTV, whether it is not a good thing for the system or whether it is not a good thing for Canadians.
844 MR. FECAN: I think there has always been an uneasy truce between pipes and content. BDUs are on the pipe side, we are on the content side.
845 I think that comment was really to say that there are only two large, in the conventional space, independent broadcasters that aren't controlled by BDUs and what we are saying is there seems to be an awful lot of tools in this power equation that the BDUs have that give them predominant power over our fate and I am not sure that is good for the system or the viewers.
846 COMMISSIONER KATZ: So you are saying that if hypothetically the market wanted to take care of its own problem and there was a consolidation and your board of directors and one of the BDUs' board of directors decides to come together in the best interest of your shareholders, that would not be good for Canadians or it would be good for Canadians?
847 MR. FECAN: I think there is a value in having independent broadcasters but the market will decide, I guess, and you will decide in each transaction whether that is a good thing for the system or not.
848 COMMISSIONER KATZ: Because I guess I look out and it appears as though that is happening. The convergence of carriage and content appears to be happening. Several of the BDUs have invested and actually purchased broadcasters, as you are well aware, and the question is whether more of that will happen.
849 MR. FECAN: It may well.
850 COMMISSIONER KATZ: In fact, several years ago, you were aligned with a large BDU as well.
851 So the question is: What is wrong with that model if that is where the market is taking it and where shareholders and investors are taking it?
852 MR. SPARKES: There has been a number of stations that have been up for sale in the last number of months and I haven't seen any BDU take up the offer, except for Shaw who bought the station for a buck and then reneged.
853 MR. FECAN: But, you know, Commissioner Katz, at the end of the day you get to decide, the Commission, in any transaction whether it is in the public interest or not.
854 I think what we are saying is because of the predominant power we believe the BDUs have over the independent broadcasters, it is entirely possible for them to try and starve us into submission.
855 COMMISSIONER KATZ: One of my last questions.
856 Rogers quoted in their submission the fact that there may be a perverse effect if this value for negotiation takes effect and that is there will be an incentive for the broadcasters to buy more American programming in order to create higher value.
857 Have you got a comment or view on that?
858 MR. FECAN: Well, we have been trying to set the -- reset the economics of the foreign market lately. I think in our last hearing we said to you that we think we are paying too much and we need to pay less. We have started doing that or trying to do that and as recently as a few weeks ago, Rogers stepped in and paid more than what we were paying before. So I guess they are talking about their own behaviour.
859 THE CHAIRPERSON: Suzanne.
860 CONSEILLÈRE LAMARRE : Merci, Monsieur le Président.
861 My questions are about the transition to DTV. It should come as no surprise to some of you. I am going to ask them in English because the last time I tried asking French technical questions through translation in English, it was a total disaster. But please bear with me.
862 What I am trying to do is actually understand exactly what you submitted. So I am going to refer to Appendix G as in George and also page 42 of your submission.
863 My first questions will be mostly of clarification. You may not be able to provide me the exact information but if you want to undertake to provide it at a later date, that would be fine.
864 Monsieur Arpin asked a number of questions about rebroadcasters and how you would tackle the issue of either transitioning them to DTV or keeping them in analog.
865 I think that what would be helpful for us to understand what you are trying to achieve is if your last column here in Appendix G that gives the percentage of your current audience that is not served by rebroads, if we have the list of those rebroads because in that Appendix you give the list of the broadcasting stations you intend to convert or not depending on demand but you don't give the list of rebroads.
866 So if we could get the entire picture, all the broadcasting stations and all the rebroads, that would be very helpful.
867 Now, with what I have right now, Toronto, Vancouver, Calgary, are currently on air in digital.
868 Montreal, Edmonton, Ottawa/Gatineau, you plan to convert by August 31st, 2011; correct?
869 MS FELL: That is correct.
870 COMMISSIONER LAMARRE: In Winnipeg, Kitchener, Halifax and Saskatoon, you would plan to convert by 2013 based on consumer demand and available resources?
871 MS FELL: Yes. I think that we have advanced in our thinking between the time of submitting the proposal and coming here today. The proposal is not inconsistent with what we have said today but we felt that it was important today to be very clear about which markets and over what time frame we would plan to make these conversions.
872 And so in our opening statement today we made a commitment that we will convert by 2013 all transmitters in all of the mandatory markets.
873 COMMISSIONER LAMARRE: Okay.
874 MS FELL: This chart here deals specifically only with the CTV transmitters.
875 COMMISSIONER LAMARRE: Okay.
876 And by fulfilling this commitment, obviously you are going to have to decide on certain priorities depending on the markets, the available resources, not only financial but also professional and technical.
877 In deciding those priorities, will you be considering the nature of the service that is being provided and the specifics of the population?
878 I am basically thinking here about the Montreal transmitter, which is an important part of the Anglophone community in Montreal, and even though it is not as much of an Anglophone market as Toronto, it should maybe be looked at in a different manner.
879 MS FELL: Well, CTV Montreal was on our list to convert by 2011 and it will be converted by 2011. That plan to do next Montreal, Edmonton and Ottawa --
880 COMMISSIONER LAMARRE: Has not changed.
881 MS FELL: -- that hasn't changed.
882 COMMISSIONER LAMARRE: And my next question would have been also the Ottawa/Gatineau region, which is the capital, national capital region, is obviously also important?
883 MS FELL: It is a priority for us as well.
884 COMMISSIONER LAMARRE: Okay. If I look at the table, you are providing the percentage of population that you are currently covering. Have you included everybody, no matter which mother tongue they have, or you have only considered English mother tongue?
885 MS FELL: This chart dealt only with the CTV stations --
886 COMMISSIONER LAMARRE: Yes.
887 MS FELL: -- and as we worked up this chart we were trying to look at --
888 COMMISSIONER LAMARRE: I understand, CTV stations, but you have a number of people you are covering here. Let's say in Toronto you have got 7 million people and in Montreal you are saying you only have 993,000.
889 So my question is: You are only referring to Anglophones throughout the chart?
890 MS FELL: That is correct.
891 COMMISSIONER LAMARRE: Throughout the chart, okay. Okay.
892 Now, you have a column that says you are giving the coverage under the B contour, the analog contour, as defined in Broadcasting Procedures and Rules Part 4; correct?
893 Thank you.
894 And then when you refer to the coverage with digital and the percentage of population you will be covering, is that in comparison to the population currently covered by the analog station or it is with the definition of the digital contour?
895 MS FELL: For that I will pass to Mr. Morris.
896 MR. MORRIS: Okay. We recently completed two out of three technical briefs for Montreal and Ottawa in post-transition, so it is high power, and what we found is in the Montreal scenario full transition, trying to equate the coverage, we are actually going to serve fewer people because of the contour, which you are familiar with. In Ottawa we are actually going to gain viewers.
897 COMMISSIONER LAMARRE: So what I am asking is in your column here, what are you referring to? Are you referring to -- when you say 20 percent of the population as compared to the population that you are currently covering in analog? Is your contour definition here the digital contour as per Broadcasting Procedures and Rules Part 10 or is it something else?
898 MR. MORRIS: I think research worked on that. At that point --
899 COMMISSIONER LAMARRE: You may want to provide us some specifics on that.
900 MR. MORRIS: Right, but we don't even have the final contour for Edmonton yet. So each one, as we go through the technical brief process, we determine that information.
901 COMMISSIONER LAMARRE: Okay. But right now you have provided me with a chart with a label on the title and I want specifics on the title.
902 MR. FECAN: We will get you the specifics. My guess is that it is comparing to the existing analog contours because the homework assignment, if you will, was who do you cover now and are you going to continue covering.
903 COMMISSIONER LAMARRE: Exactly. Okay.
904 Now, my last question is a little bit more difficult, I think, from the answers I heard you give Mr. Arpin. I do get all the points you are making about the deadline of 2011 and I do get what you are saying in your submission, that it is not until Public Notice 2007-53 that the current switchover date of August 31st, 2011 was established.
905 This being said, I cannot help but remind you that the transmission standard was first established in Canada for digital TV in 1997. Since then there has been three digital TV transition plans, even though the final one, the post-transition one was just in December 2008, and all while this was going on, the ball was rolling south of the border and Mr. Wiley can explain to you much better than I can everything that went on over there. So this is not coming as a surprise at all.
906 Now, that is my mindset for my next question. You are talking about those retransmitters, that you will continue to leave in analog mode as long as you can. Okay, now let's look ahead here. Let's try to plan ahead.
907 Even if you do that, there will come a time where that analog transmitter will come to the end of its useful life. You will have to replace it or just thrash it.
908 Are you going to plan in the long term to convert those transmitters to digital?
909 MR. FECAN: We will only be able to make that decision when we are closer to that longer term. If we are in the business and, you know, you put a time frame on, are you in it for three years, five years, 10 years, 15 years, I think the only credible and honest answer is as the useful life of a particular analog rebroad transmitter somewhere ends, you obviously try to keep it going for as long as you can and then you have to decide whether the business case can support whatever the replacement cost is.
910 I think, well, you of all people would understand these are not cheap to replace. Sometimes you need to replace the tower as well if the tower hasn't been engineered lately. And I think we are going to make that decision as we come close in each case.
911 If we want to be seen everywhere, it is not exactly good for us to turn things off but even the CBC in the case of Brandon decided they didn't need to be carried.
912 COMMISSIONER LAMARRE: But we are talking about you here this morning.
913 MR. FECAN: I am just saying that I think it is an individual economic evaluation as you come to the life of each particular transmitter whether it makes sense or not. That is the business answer.
914 The policy answer, you may well say, look, if you are in this, you are in this, and if you want to have these licences, this is what you have to do, and that might be a push back from the regulator.
915 COMMISSIONER LAMARRE: But I'm going on the assumption that you will be in business, so you will keep looking ahead and keep it in mind?
916 MR. FECAN: Yes.
917 COMMISSIONER LAMARRE: Thank you.
918 THE CHAIRPERSON: Thank you.
920 COMMISSIONER DUNCAN: Good morning. I have a few questions.
921 I want to start, I think, with the -- because the crux of the whole issue is the sad state of affairs for over-the-air broadcasters. I would like to understand how you allocate your costs across conventional and your specialty services.
922 For example, when I look at CTV in the morning and I see those newspeople, Bev or whoever, and then I look on CTV Newsnet, how do those costs get allocated?
923 MR. FECAN: I am going to ask our Chief Financial Officer to give you the precise answer but I am very glad you are watching us in the morning.
924 COMMISSIONER DUNCAN: Yes, I am. It's my go-to station, I have to admit. You might be sorry in a minute.
925 MR. FECAN: Thank you.
926 MR. FECAN: We serve our viewers.
927 MR. GOSSLING: We did talk about this in great length at the April hearing. It would be worthwhile to look at those transcripts.
928 There is an attempt to allocate programming costs between specialty and conventional. As we did mention in April, news is one that is a bit more difficult because there is so much sharing going in both directions. So it is basically done on a zero sum basis.
929 Every service contributes but we don't try to allocate the costs. We try to at the highest level allocate things like news feeds, other operating costs, but for producing individual stories they go into a pool, they go in different directions. We don't try to allocate individual costs for those types of things.
930 COMMISSIONER DUNCAN: Okay. So I am just going to try another because I think some of these dance programs I have seen on CTV obviously and also on ASN. Are you including ASN in your conventional broadcasting group?
931 MR. GOSSLING: Yes.
932 COMMISSIONER DUNCAN: You are. Okay.
933 So now if a show like "Flashpoint," which I understand was sold to CBS last year, if I have that right, where do the proceeds from that sale -- how do they show up in your PBITs, how are they reflected?
934 MR. GOSSLING: Well, any recoveries would automatically go against where the original costs went. So if we have a tax credit recovery or if we have an offset like that, that would go to the original place where the cost was.
935 Your example of the dance program is a good one because there are separate costs that we incur because it is running on MuchMusic. So that format feed that is over and above the conventional fee does get paid for by MuchMusic and MuchMusic does pay for a portion of what that show costs. But the revenue from that show on MuchMusic is very low, so they don't pay a lot but they do pay something for using that show.
936 MR. FECAN: To your "Flashpoint" question, we are a licensee of "Flashpoint." We are very proud of it. We commissioned it. We bought it as a series. We were helpful in getting it sold to the U.S. but we don't participate in a penny of that revenue outside of Canada.
937 COMMISSIONER DUNCAN: Ah!
938 MR. FECAN: We feel we should.
939 COMMISSIONER DUNCAN: Yes. I think maybe we can do something about that.
940 I am wondering, in the Maritimes -- and we obviously have regional panel members on here, and although this is a structural thing, I would like to address the situation in the Maritimes, excluding Newfoundland because it is unique and in the Atlantic provinces.
941 But you were originally required to do, I think, 16.5 hours of local in about six markets, including three in New Brunswick, Sydney and Halifax, five markets, and I don't know if Charlottetown was included in the list or not. So it was 16.5 hours.
942 The Commission definition of local presence in a market is providing seven days a week original local news coverage distinct to the market, employing full-time journalists on the ground, operating a news bureau or a news-gathering office in the market.
943 So I am wondering specifically when the requirement dropped from 16.5 to seven, what impact that change had, what you did with that added flexibility immediately and in the medium and the long term as we go forward.
944 MR. K. GOLDSTEIN: Just to clarify specifically for the Atlantic provinces, in terms of the local programming at those stations, those stations are regulated on a regional basis.
945 COMMISSIONER DUNCAN: I know.
946 MR. K. GOLDSTEIN: So each one inputs into the local newscasts.
947 COMMISSIONER DUNCAN: No, I realize.
948 MR. K. GOLDSTEIN: Okay.
949 COMMISSIONER DUNCAN: I was excluding Newfoundland, just the Maritimes.
950 MR. K. GOLDSTEIN: I don't think -- I don't have the schedule in front of me -- that the local programming dropped in any material way.
951 MR. FECAN: I don't think we dropped a minute.
952 COMMISSIONER DUNCAN: And you don't intend to then?
953 MR. FECAN: No. It works well. It seems to work well for the audience and it seems to be the right amount.
954 COMMISSIONER DUNCAN: And do you do audience testing in the various markets to find out if people are satisfied with the level of local programming?
955 MR. FECAN: Well, we probably should do more qualitative testing but the testing, I guess, in crude terms are the ratings overnight every day.
956 COMMISSIONER DUNCAN: And that is probably actually more appropriate at a licence renewal than here. I was just really interested in structure and what the --
957 So the other thing that I wanted to talk to you about is your statement that -- you say consumers are paying for their OTA services and I don't think consumers are paying -- or I shouldn't say I don't think.
958 My understanding, my view is that they are not paying for their over-the-air signal because over-the-air signals are free. What they are paying for is delivery.
959 Can you shed some light on that, reconcile that to your statement that they are paying for it?
960 MR. FECAN: I guess how we look at it is when we choose to make a product or over-the-air signal available for free to people, it is on an individual licence basis. The retransmission of that for profit is a right that we have not been paid for.
961 When we say that people are paying for it, we have done any number of surveys where we have asked people whether they think they are paying for it and they do think they are paying for it. They may not be -- they are obviously not because we are not getting the money. But when they subscribe to a cable service, they believe that part of what their money is going for is the programs and the stations they watch and they watch conventional stations more than any other. That is how we approached that.
962 COMMISSIONER DUNCAN: So I think maybe there is a subtlety there a customer, a regular customer may not appreciate.
963 But then to move on, I am sure that you have looked at all of the submissions, and Shaw, in paragraph 18 of theirs, lists a long list of benefits. They say:
"Private broadcasters already enjoy immense benefits and protections unparalleled in any jurisdiction."
964 Specifically and they go through the long list.
965 So the difficulty I am having in understanding how it is possible to have a negotiation, a fair market negotiation, I just -- are you prepared to give up this list of things which I am assuming that you have read?
966 MR. FECAN: Well, I think we could go through the list if you wish but just as a general comment, we would take exception to many of those things on the list as value for us. I think it is value for them.
967 The very first value that has been abrogated is control of our own market, control of our own airwaves.
968 Let's go to the example of "Flashpoint," if you will. I have explained to you that we are very closely associated with the show. It is important to us. We were helpful in selling it to CBS.
969 At that point we lost control of scheduling of that show because we have allowed all of these foreign signals into our country, something that within the American market they don't allow a signal from one market to get into the other. There is market integrity.
970 So therefore, now, I have to run "Flashpoint" whenever CBS does. I have lost control of a Canadian show that we had a lot to do with and we have given that control to the Americans, and why? Because we have let their signals come into the market.
971 Simultaneous substitution helps to the degree that you have caused the damage so here is a little bit of repair for the damage you caused. But that basically means I have to run it where they run it, instead of where it might do better.
972 And so when we looked at that long list of benefits, I guess that's in the eye of the beholder and I guess that's indeed what the negotiation is about.
973 COMMISSIONER DUNCAN: But if you are not prepared to give up those?
974 MR. FECAN: I think we are prepared to give -- if anything we are saying that if we ask for a fee we are giving up mandatory carriage. That's the primary benefit.
975 Simulcast is something that, you know, if they want to restore the integrity of the market we wouldn't need it, but they built their business in bringing in all of these American signals so we continue to need that.
976 Of course, if they don't want to carry us then it's not an issue because those programs won't be in the market through their system. It may be through a different BDU and it will be over the market, over the air on our station.
977 COMMISSIONER DUNCAN: So some of these things like exclusive access to local television advertising, free spectrum, you would continue with those I expect?
978 MR. FECAN: Well, no, you know we would certainly be open to them having access to local advertising for their community channel. We would be open to that.
979 I mean I don't really understand why given this, that 2 percent of their cable revenues, which I believe is $132 million, to reach an infinitesimal amount of viewers based on the viewer broadcast spectrum. But we would be open to talking about those kinds of things, absolutely.
980 MR. SPARKES: And in all of instances, they are actually doing it now. And they are, yeah.
981 COMMISSIONER DUNCAN: They are?
982 MR. SPARKES: Selling advertising at the community level.
983 COMMISSIONER DUNCAN: Only within their rights --
984 CHAIRPERSON: Can I suggest that we ask CTV in their follow-up presentation to deal with those points in short that you are raising?
985 COMMISSIONER DUNCAN: Pardon me? Sorry.
986 THE CHAIRPERSON: In the interests of time, can I suggest that we ask CTV to, in their written response, deal with the 14 points that you mentioned?
987 COMMISSIONER DUNCAN: That would be great. That would be perfect.
988 Then I had only one other question and I just wanted to clarify.
989 Are you saying with the deletion then that the consumer would be -- I think I have seen it referred to as swiss cheese, that there would be blackouts on --
990 MR. D. GOLDSTEIN: We don't think it's going to get to that. Obviously, if we can't protect our programming rights then the regime doesn't work. And in fact, for the mass majority of the experience that we have seen it doesn't happen.
991 We are of no -- we have no bigger interest in that and --
992 MR. FECAN: But consumers -- consumers would see precisely what they see when they go to the CBS internet site and try and watch CSI. They are told that it's not clear for their territory.
993 COMMISSIONER DUNCAN: That's what they would see on their television?
994 MR. FECAN: They would see some version of that or they would get a pair of rabbit ears and watch it off air or perhaps another BDU.
995 Maybe the cable company doesn't make a deal with us but the satellite company doesn't and, you know, if they switch they would see it there. But they have other options of seeing it or perhaps they will see it on our streaming site or on a VOD site.
996 COMMISSIONER DUNCAN: Thank you very much.
997 THE CHAIRPERSON: Okay, Candace.
998 COMMISSIONER MOLNAR: Thank you.
999 I would like to begin with just a point of clarification, helping me understand the negotiations with DTH.
1000 And let us assume the carriage obligations that they have today because even if at some point in the future those were to change they are not going to change in the timeframes you are suggesting these negotiations occur, or likely would not change on those. So you will enter negotiations with carriage obligations, or could, that exist today.
1001 I'm a bit confused when you suggest that you can negotiate for some signals and not for others, how you would do that with a DTH provider.
1002 MR. K. GOLDSTEIN: I think what we are trying to say with DTH and cable and recognizing that there were difficulties associated with them, and I know Mr. Sharpe highlighted them, what we are advocating is a harmonization.
1003 One of the problems with DTH over the years has been that to encourage competition 12 years ago we introduced a system that gave far less protection to local signals than cable --
1004 COMMISSIONER MOLNAR: Can I just -- I do understand what the rules are and, you know, as I pointed out and as Commissioner Arpin pointed out, the rules today are not all local into local.
1005 With the rules that exist today, how can you practically negotiate with DTH on a market-by-market or station-by-station basis?
1006 MR. D. GOLDSTEIN: There will be less stations to negotiate unless we ask for -- unless you mandate DTH coverage or carriage for those stations. Many of those markets where there is 40, 50, 60 percent DTH penetration, they won't be there, so there will be no station to negotiate on behalf of.
1007 COMMISSIONER MOLNAR: Okay. And I am trying to understand because you have proposed program deletion, essentially, right? You can pull your carriage and there is program deletion.
1008 So on a DTH service what happens? What happens to the consumer?
1009 Let's say you are going to negotiate Toronto and you are going to negotiate Ottawa. Negotiations fail in Ottawa. So you are saying we require program deletion. Well, Toronto is available so what happens? Is all CTV all of a sudden off with the bird or like how do you see this working when you negotiate station-by-station with a satellite provider?
1010 MR. SPARKES: If they are not carrying CJOH they couldn't bring in CTV Toronto.
1011 COMMISSIONER MOLNAR: So they couldn't carry any CTV, no CTV? So you can negotiate one market and essentially clear CTV off of the entire satellite system?
1012 MR. SPARKES: They could not bring in another signal from another market. I mean I don't think it is ever going to come to that because what we see in the United States is this doesn't happen and consumers are the ones who demand it.
1013 COMMISSIONER MOLNAR: But do they have the same ability?
1014 MR. SPARKES: They do. They do have the ability.
1015 COMMISSIONER MOLNAR: I mean as I look at this there is -- very simply you could get an awfully big charge for one market if that market really takes hostage every other station across the country.
1016 MR. SPARKES: Just an example, Calgary, for instance, Shaw Direct tried to pull Calgary CTV off its line-up. At 10 o'clock in the morning they did this, notified us. At four o'clock that afternoon it was back on, and why; because consumers went ballistic.
1017 MR. K. GOLDSTEIN: Just to clarify, with respect to the U.S. experience, there are no distant signals in the U.S.
1018 Market -- even on DTH, market integrity is respected.
1019 Perhaps I could ask Mr. Stansbury just to give a bit of an overview how the U.S. --
1020 COMMISSIONER MOLNAR: Sorry, I just --
1021 CHAIRPERSON: You have given the answer, in the U.S. you have local into local. We don't have that and you basically -- your whole concept is based on Canada having local into local. We don't have local to local but what Commissioner Molnar says is exactly what's going to happen. One station can hold up the whole network of DTH for ransom.
1022 MR. FECAN: Well, these signals are a different -- a whole different right and a whole different negotiation regime. I thought that's where that is.
1023 COMMISSIONER MOLNAR: Fair enough. I wasn't talking distance signals.
1024 As I said, as an example, if you attempt to negotiate Ottawa for the Ottawa station and you are not successful, what happens to every other CTV signal on the DTH providers' platform if they are deleted?
1025 MR. SPARKES: Well, Toronto would be a distant signal to Ottawa.
1026 COMMISSIONER MOLNAR: Well, they are carried. Today they are all available.
1027 MR. SPARKES: Right.
1028 COMMISSIONER MOLNAR: Today, they are available. That's the reality of where we begin, you know, and that's what I'm looking at.
1029 How do we begin negotiations under the model you propose based on our starting point? Our starting point is those signals are available.
1030 MR. SPARKES: But if one provider doesn't take the channel, doesn't agree, someone else will. So competition will dictate the results.
1031 MR. FECAN: They can negotiate --
1032 COMMISSIONER MOLNAR: I just think that one station would have an awful lot of negotiating power if it has the potential to strip the entire CTV network off the bird.
1033 MR. SPARKES: One would think that they would want to do a deal because if they didn't do it their competitor would.
1034 COMMISSIONER MOLNAR: Yeah.
1035 Moving onto another issue; on the issue of I think what you have proposed is you are willing to give up mandatory carriage for the right to negotiate, but if I understand correctly, your signal whether you negotiate it or you leave it as mandatory is mandatory for a basic cable subscriber. You suggest that whether it's negotiated or otherwise, it's part of the skinny basic package that subscribers must essentially pay for.
1036 MR. FECAN: We are suggesting that if it's there it needs to be on basic. But it may not be there if we fail to reach a settlement with a particular BDU.
1037 COMMISSIONER MOLNAR: Right. So you can choose to withhold it -- the cable company can choose to not provide it, but as a customer I can't choose not to pay for it under what you have proposed.
1038 MR. FECAN: Correct.
1039 COMMISSIONER MOLNAR: So what do you think? Why would it not be fair for customers if it is negotiated and therefore there is a cost associated with it? Why wouldn't it be fair for customers to have the choice whether or not they incur that cost?
1040 MR. SPARKES: It's a good question but you know I guess you have to go to the underpinning of the Canadian broadcasting system, whether we want one or not. And there has to be if -- you know, if we have a basic service then I think you know we need to be able to protect the Canadian broadcasting system. Otherwise, it could disappear.
1041 MR. FECAN: Our view is that it would be inconsistent with the Act to provide an off ramp for Canadian basic television services, that that would provide --
1042 COMMISSIONER MOLNAR: For consumers?
1043 MR. FECAN: For consumers.
1044 COMMISSIONER MOLNAR: Not for the system but for consumers. You are providing an off ramp for the production for delivery. You are giving yourself an off ramp that you can withhold it --
1045 MR. FECAN: Consumers --
1046 COMMISSIONER MOLNAR: -- in the broadcasting system, but you are not giving consumers an off ramp.
1047 MR. FECAN: There is only one problem with that. They can get it off air for free.
1048 MR. SPARKES: Or they can go to a competitor who will carry it.
1049 COMMISSIONER MOLNAR: But they can't choose --
1050 MR. SPARKES: Our issue is --
1051 COMMISSIONER MOLNAR: -- not to take it.
1052 MR. SPARKES: -- with a skinny basic consumers will have more choice and in fact pay less.
1053 MR. FECAN: They can take it off air.
1054 COMMISSIONER MOLNAR: They have choice of other things but not the conventional television station.
1055 MR. FECAN: They can take the conventional television stations off air for free.
1056 MR. SPARKES: And in some instances you can get a better signal with HD than you can on the --
1057 COMMISSIONER MOLNAR: Right.
1058 MR. SPARKES: Absolutely.
1059 COMMISSIONER MOLNAR: Okay, I am going to move on.
1060 My last question relates to small markets and small BDUs. I realize this is a large issue. I just want to focus for a little bit on the impact of this, on small markets and on small BDUs.
1061 You have used Brandon as the example in your opening remarks and that one dollar -- consumers, citizens in Brandon would have been willing to pay one dollar. So first of all, do you think one dollar would have saved Brandon?
1062 MR. SPARKES: Satellite carriage might have saved Brandon.
1063 COMMISSIONER MOLNAR: Right, and essentially that's part of my question. I mean, as I understand, roughly half of the audience in that market was not carried, did not receive the signal because it was not carried.
1064 So while value for signal is being put forward in the press and here today as the solution to save local TV, I guess my first question is, does that actually -- can we be assured that that would save local TV in small markets?
1065 MR. FECAN: It will save it in a lot of markets, but I know you don't want to talk about it but actually forcing cable to carry local stations would save it in the other markets.
1066 COMMISSIONER MOLNAR: So which one is more important for small market television?
1067 MR. FECAN: They are both important and it depends on the market.
1068 COMMISSIONER MOLNAR: What if we had to put them in order? Which one would be more important to save the small market stations?
1069 MR. FECAN: Depends on each market and what the satellite penetration is in each market.
1070 MR. SPARKES: Brandon has 55 percent penetration.
1071 MR. FECAN: Of satellite.
1072 MR. SPARKES: Of satellite.
1073 COMMISSIONER MOLNAR: Right, so this one dollar fee would not have saved Brandon. What Brandon needed was carriage on the satellites?
1074 MR. FECAN: I'm not so sure about that. I mean, you know if you would like us to come back with a response to that, I would like to do that. I would like to have the opportunity of doing that.
1075 COMMISSIONER MOLNAR: It would seem to be a bit unfair to -- one dollar on the 45 percent of the subscribers who took cable to get that sort of thing.
1076 MR. FECAN: Those are the ones we asked, though.
1077 COMMISSIONER MOLNAR: The ones --
1078 MR. FECAN: We asked the cable subscribers because there is no point in asking the satellite subscribers. No amount of money would have given them their station because Shaw and Bell doesn't want to carry it.
1079 COMMISSIONER MOLNAR: Right.
1080 MR. SPARKES: And the point of that survey, Madam Commissioner, was just to point out that people in Brandon value their local television station.
1081 COMMISSIONER MOLNAR: Yeah.
1082 MR. SPARKES: And they would have paid --
1083 COMMISSIONER MOLNAR: The 45 percent who chose to subscribe to that local.
1084 MR. SPARKES: -- the 81 percent.
1085 COMMISSIONER MOLNAR: It leads me to the other part of my question, and that's the small market BDUs. You asked cable subscribers in Brandon whether or not they would be willing to pay an extra dollar.
1086 And, as I am sure you are aware, it is a small market cable provider that serves Brandon, a cooperative. You know, it's not part of the big three you were talking about negotiating with. They would be in a very difficult negotiating position with CTV.
1087 I mean, potentially it's one dollar more for those subscribers. They are already in a competitive state against DTH. As you pointed out, 55 percent of the audience has already gone to satellite, so imposing an additional dollar on the cable company and that it seems to be a bit of a difficult position for them competing against DTH.
1088 So how do you respond to that?
1089 MR. FECAN: Respond to that -- is that it's their customers that are saying they are willing to pay. If they choose to mark it up more than that, that's their burden that they are placing on the customers. But the customers are actually saying, "Hey, you know what? This is important to me. You know, I'm willing to pay this to get what I want".
1090 I'm not sure how that's a burden to them. That's a benefit to them because the customers are telling them what they want and are prepared to pay for it.
1091 So I'm sorry. I fail to see the burden in that situation.
1092 COMMISSIONER MOLNAR: Was the question, are you willing to pay one dollar extra on your cable --
1093 MR. FECAN: Yes.
1094 COMMISSIONER MOLNAR: -- bill for maintaining this?
1095 MR. FECAN: Yes.
1096 COMMISSIONER MOLNAR: We would add one dollar?
1097 MR. FECAN: Yeah.
1098 COMMISSIONER MOLNAR: Roll it through DFS on a line item on the bill.
1099 MR. FECAN: We didn't get into whether it's called a CKX tax or a Commissioner Molnar tax or what.
1100 COMMISSIONER MOLNAR: Oh, please. Strike that from the record right now!
1101 MR. FECAN: It's a buck. You want to pay an extra buck a month and we are saying that they said yes.
1102 COMMISSIONER MOLNAR: Okay, thank you. Those are my questions.
1103 THE CHAIRPERSON: Thank you. You are the first one up, so you are always the longest. I have two very quick follow ups.
1104 Number one, December 14th is the date for additional submissions which we asked you for.
1105 Number two, my staff asked me if you got what you wanted in terms of signal protection, which is the various things that you are asking for simsub and non-simultaneous, what is the value of that?
1106 Or if you don't have the number can you do it in your follow up, quantify for me what you think will the additional one?
1107 MR. FECAN: We'll give you a considered response.
1108 THE CHAIRPERSON: Yes.
1109 The second question is, you know, on this value for signal if no solution is found and in effect at the end of the day you are going to get something or you negotiate something and the BDUs pass it onto the consumer, would it make sense to restrict it only to HD because there the customer actually gets an extra -- he gets a much better signal and therefore, you know, in terms of acceptability by the consumer the BDU is already charging more for HD signals than for others.
1110 So will it make -- and HD hopefully in the long run will become part of the -- will be the norm. It seems everyone is going to HD. Will it make sense to negotiate its value, to tack it on to the HD signal?
1111 MR. FECAN: Well, let us give it some consideration. I think -- you know obviously our position is that we need this tool, this mechanism, and we need it now.
1112 THE CHAIRPERSON: Yeah.
1113 MR. FECAN: Up to the degree it pushes it out or to the degree that we are all doing the marketing jobs at the BDUs and how they package it, let us think about it.
1114 THE CHAIRPERSON: Okay.
1115 And thirdly I would like your views on sort of the grand bargain that I suggested this morning, that you sit down with the BDUs and basically look at all four issues that are at play, you know. And is it possible for you in effect to work this out and then come to us and ask for sanctioning rather than us imposing it?
1116 MR. FECAN: Well, does that mean we don't have to go to the next few hearings?
1117 THE CHAIRPERSON: That might be a fringe benefit.
1118 THE CHAIRPERSON: Anyway, just think of it because I can't reiterate enough that I really would like this to be a win-win situation for everybody, for the consumer, for you and the BDUs.
1119 And rather than us trying to impose something which undoubtedly will create winners and losers and also getting it wrong because we are not the expert in the industry; you are, et cetera -- give you maximum flexibility and rough out -- after all, you are symbiotic in my view. You depend on each other. Why can't you work it out here?
1120 So let's -- if you can't comment on it -- please, I don't want to cut you off. I just meant --
1121 MR. FECAN: We have been asking them to sit down. We are still at the table waiting for them to come.
1122 THE CHAIRPERSON: Okay.
1123 Well, thank you very much. We will take a one-hour break and we will be back here at 2:05. Thank you.
--- Upon recessing at 1306
--- Upon resuming at 1416
1124 LE PRÉSIDENT: Madame la Secrétaire, nous commençons.
1125 THE SECRETARY: I would now invite Rogers Communications Inc. to make its presentation. Appearing for Rogers is Mr. Ken Englehart. Please introduce your colleagues and you will then have 20 minutes to make your presentation.
1126 MR. ENGELHART: Mr. Chairman, members of the Commission, good afternoon. I am Ken Engelhart, Senior Vice President, Regulatory. Let me introduce our panel to you.
1127 With us, from Broadcasting are Tony Viner and Leslie Sole, Nadir Mohammed, our CEO, Phil Lind, the Vice Chairman, David Purdy and Pam and Colette from Cable. I also missed Suzan Wheeler from our Broadcasting Company, Bob Buchan, our counsel and Dave Watt, our Vice President of Economics from RCI.
1128 I'll begin our presentation.
1129 As a diversified Canadian communications and media company, Rogers is pleased to address the issues in Notice 2009-411. In our remarks today, we will discuss why Canada's Broadcasters do not need US-Style Signal Compensation; why the Commission's proposals are so different from the US system; why the Commission's proposals will not work in Canada; and why a well-structured group-based licensing regime is good for the Broadcasting system.
1131 Mr. MOHAMMED: Canada's conventional television sector is not in a state of crisis. As we pull out of the recession, advertisers will continue to spend increasing amounts on over-the-air television because those stations remain the best way to sell products and services to mass audiences. Rogers owns over-the-air television and we believe in it.
1132 OTA stations already get well-compensated by advertisers, with help from BDUs and governments. BDUs have built expensive ubiquitous networks which allow OTA broadcasters to monetize their advertising. The OTA broadcasters get mandatory carriage, the lowest channel positions on the cable dial, simultaneous substitution and exclusive access to their local television advertising markets.
1133 In September, the Commission removed all limits on the amount of commercial advertising that can be aired on local television stations. This will further enhance the revenues of over-the-air broadcasters.
1134 As well, each and every year, broadcasters, either directly or indirectly receive a compensation package worth about a billion dollars. This includes a mix of federal and provincial tax credits, the simultaneous substitution initiative and payments from the programming funds, including the Canada Media and the Local Programming Improvement Fund. This compensation package doubles if we count the CBC's annual subsidy from taxpayers.
1135 Of course, there are some problems and the Commission is very familiar with them. These are: Overspending on U.S. programming; fragmentation of audiences; and the lack of DTH carriage.
1136 The destructive overspending by CTV and Canwest on U.S. programming is well known. In the paper he prepared for the Commission, Peter Miller characterizes the bidding wars for popular U.S. shows as "irrational". The numbers confirm Mr. Miller's conclusion.
1137 Growth in spending on U.S. programming by Canada's English language OTA broadcasters went from approximately $400 million in 2000 to over $700 million in 2008, a 75% increase which outpaced revenue growth of 16% by almost 5 to 1.
1138 This overspending was partly spurred by the Commission's decision over a decade ago to remove Canadian Programming Expenditure requirements, or CPE, for OTA television broadcasters. Without any requirement to dedicate a specific portion of their revenues to Canadian programming, OTA broadcasters were incented to overspend in the U.S. In its group-based licensing proposal, the Commission has proposed to reinstitute a CPE requirement. This should act as a check on U.S. programming expenditures.
1139 Fragmentation is well understood by everyone in the television business. The Commission licenses a huge number of specialty channels which compete with over-the-air broadcasters for audiences and advertisers. However, CTV and Canwest like to ignore the fact that they own a majority of Canada's most successful specialty services. As a result, their TV operations as a whole are very profitable. They do not need a bailout.
1140 As Canwest CEO Leonard Asper put it recently:
"As I've mentioned, our television business alone generates hundreds of millions of dollars in operating profits, so we have a successful business."
1141 The Commission's group-based licensing proposal, if implemented, will ameliorate the impact of fragmentation by allowing specialty and OTA services to share CPE and exhibition requirements.
1142 The fragmentation caused by new digital media is also a concern, although to date, linear television tuning is not down. Let us not forget that digital media can also create new revenue opportunities such as video on demand with new and refreshed ads, targeted advertising and online video services.
1143 Finally, the growth of DTH subscribers over the past ten years has had revenue implications for small market stations that are not carried by DTH distributors. When 40% of a station's local audience are DTH subscribers, and DTH distributors are not carrying that local signal, this greatly reduces the station's ability to sell commercial advertising. This is a continuing problem which the Commission should correct.
1145 MR. LIND: Although the system is not broken, the Commission has proposed fixing it with a U.S.-style retransmission consent regime. However, the Commission's fee proposal is very different from the U.S. model. Rogers knows this from experience, having owned and operated cable systems in the U.S. for many years, during which time we actually negotiated deals with broadcasters.
1146 Under the U.S. system, OTA broadcasters must elect every three years whether they want mandatory carriage and no monthly fee, or negotiated carriage and a negotiated fee. In the U.S., the negotiations are market-driven and free. The FCC does not set the rate. It only ensures that the parties bargain in good faith. However, in Canada, market forces would not be a factor. All parties would be entitled to final arbitration and, ultimately, a Commission-set fee.
1147 The compensation proposals being considered here today would lead to much higher payments in Canada for three reasons:
1148 First, unlike in the U.S., no TV station would opt for "must carry". They would all opt for a fee because they would continue to get "must carry" standards.
1149 Secondly, in the U.S., the stations do not want to remove their signals from a BDU's line-up because they will lose revenue if they do so. This greatly reduces their demands for compensation. In Canada, stations know that they can never be removed. Accordingly, there would be no reason for them to reduce their demands.
1150 Finally, in the U.S., cable operators and TV stations negotiate a whole range of issues which involve every aspect of their business relationship. Channel placement, carriage of specialty services, advertising by the cable operator on the TV network, advertising by the network on the cable operator's ad avails and other arrangements are all on the bargaining table. By agreeing to carry one or more of these specialty services, many cable operators have avoided paying any fee for carriage. This is why we at Rogers avoided paying these fees when we were there.
1151 Conversely, under the CRTC's plan and CTV's proposal -- that is, before they amended it today -- the final arbitration would only involve the amount of cash to be paid. So, in Canada, cable operators would pay higher cash payments because they would not be allowed to roll in all the other kinds of in-kind arrangements into the compensation negotiation. All of the elements that work to lower the amount of cash payments in the U.S. would not be present here. As a result, the cash payments would be much higher.
1152 The Commission distinguishes between the former fee for carriage proposal and the negotiation process before us today because in the former, the Commission sets the rate. However, under the current proposal, the Commission would also set the rate. The only difference being that it would have to do so after an arbitration hearing at the end of the process. This is nothing like the U.S. system and is simply a fee for carriage under another name. The Commission and the OTA broadcasters need to decide whether they want negotiations or regulations. Regulated negotiations will not work.
1153 Canadian BDUs face much higher costs imposed by regulation than American BDUs. As a result, if the burden of a cash signal compensation regime is added to the costs we already have, the total costs to the BDU would be much too high. If the OTA broadcasters want the U.S. retransmission regime adopted in Canada, we would need to do more than just remove the possibility of arbitration. We would need to eliminate all other support mechanisms currently in place and allow for the potential that certain local stations would not be carried. Although we aren't recommending it, if the Commission removed all fund payments, rescinded all buy-through obligations, allowed cable to sell ads on local avails, removed access, genre protection and packaging rules for specialty services and deregulated our VOD service, then we would accept a U.S. negotiated carriage and negotiated fee model.
1154 We prefer participating in the Canadian system over the U.S. system, but in no case can we be expected to accept a new model made up of the most onerous parts of both systems.
1156 MS DINSMORE: The Commission has also raised the issue of signal protection in this proceeding. The current signal protection regime uses simultaneous substitution. This is the best way to protect program rights in a country where so many Canadians can obtain U.S. signals over-the-air. Any system involving blackouts of the U.S. 4+1 signals would provoke a major consumer backlash. We have been distributing these signals for almost 50 years. Our customers expect to receive them as part of their basic cable package because, in many Canadian markets, they are available free over-the-air.
1157 The Commission has proposed changing the signal protection regime by marrying it to signal compensation. The Notice proposes that it may require BDUs to drop U.S. 4+1 signals if a negotiated settlement on the value of local signals is not reached between BDUs and over-the-air broadcasters. This proposal would take a bad signal compensation regime and make it much worse. Signal compensation alone would drive viewers from the system. Forcing BDUs to drop U.S. 4+1 signals would incent even more Canadians to seek unregulated alternatives.
1158 Another fundamental flaw in the Commission's fee proposal is the preferential treatment DTH enjoys. As we said earlier, the major problem local over-the-air television stations have in Canada is not that cable operators carry them, but that, too often, DTH distributors do not carry them. So, under the current proposal, cable operators would have to carry all stations and give them cash fees, while DTH distributors, if confronted by compensation demands, could simply walk away. That does not help small market television stations. And, it is unfair to cable distributors who, in carrying all, would have to subsidize all.
1159 The Commission's proposal, therefore, cannot be fairly implemented unless DTH distributors are required to carry all local television signals. And frankly, if DTH was required to carry all local stations, it would remove a major problem that over-the-air television has, thereby eliminating the need for a signal compensation regime.
1161 MR. ENGELHART: Adding the costs of a signal compensation regime to the costs of the fund and specialty service payments we already make would give distributors no choice but to raise prices. The negative impact on consumers and the system would be significant.
1162 Raising rates with no added value would almost certainly cause large scale defections from the regulated system. Some customers would downgrade their cable or DTH package. Some would vote with their fee, joining the millions of Canadian who already get their television programs from antennas, the Internet, or grey and black market satellite.
1163 Make no mistake, the market for BDU services is vulnerable. A significant rate increase with no corresponding increase in value could lead to a tipping point. Once a sufficient number of viewers desert, the entire debate about the future of local television, as well as Canadian programs, becomes academic. The success of the Canadian broadcasting system has led many to believe that it is immune to the normal economic forces that affect all consumer markets. It is not.
1164 Canadians like local television and want more of it, but surveys consistently indicate that over 80% of BDU subscribers are unwilling to pay more to receive it.
1165 The government itself voiced its own concerns about the consumer impact of the Commission's proposed signal compensation regime when it issued the recent Order-in-Council directive to the Commission, asking it to report back to the Minister of Canadian Heritage, in particular, regarding the impact on consumers.
1166 As set out in the jointly commissioned legal opinion from the law firm Fasken Martineau that we filed as part of our evidence, a signal compensation regime would also create a new form of copyright which would exceed the Commission's statutory authority. The Government of Canada has twice refused to create this copyright, and it has adopted the same policy position for the past 10 years in WIPO negotiations on the same issue.
1167 Most recently, the Standing Committee on Canadian Heritage did not support the concept of signal compensation and, in a separate opinion, the government members of that Committee strongly rejected any form of signal compensation for OTA broadcasters. For his part, the Minister of Canadian Heritage endorsed the Committee's recommendations last month.
1168 In the U.S. the decision to impose a retransmission consent regime was a decision of the U.S. Congress, not the FCC. Sound public policy dictates that, should a similar regime be imposed in Canada, it should be decided by Parliament, not the CRTC.
1169 There is also the concern that if a signal compensation regime were introduced in Canada that did not include payments to U.S. border broadcasters, it would inevitably lead to another 1970's style "border broadcasting" war.
1171 MR. VINER: While the OTA sector is not in crisis, it has some well understood problems. However, the existing protections for OTA, the recent increase in advertising minutes, the LPIF, the easing of the recession and the Commission's group-based licensing proposal will return the sector to health. Requiring DTH operators to carry all local stations would do more to help OTA stations than anything else. The signal compensation proposals, conversely, would create serious policy, consumer and legal problems.
1172 The group-based licensing proposal, if properly introduced, could make a huge difference for OTA broadcasters. As the operators of the Citytv stations, we believe in the future of free over-the-air television. That's why we are committed to building digital transmitters in all of our markets across Canada and that's why we continue to invest heavily in our stations. We also believe that the future success of these stations will depend on their ability to remain relevant to viewers. To do this, broadcasters must be given the flexibility to develop programming strategies that are neither devised, nor overly constrained, by regulation.
1173 The Commission's proposal to impose a group-based expenditure and exhibition requirement for Canadian content will give broadcasters this much-needed flexibility. It will allow all broadcast groups to maximize their programming strengths, while also ensuring that a healthy amount of funding and resources continues to flow to the production of local and national Canadian content.
1174 That said, we believe that no other rules should be imposed to complicate and restrict our ability to pursue certain business and programming strategies. Asking all over-the-air broadcasters to commission, license or produce the same type of programming is a case in point. It would create a huge challenge for our Citytv stations where our brand and experience makes us better positioned to provide intensely local programming that is created, produced and watched by local people in Vancouver, Edmonton, Calgary, Winnipeg and Toronto.
1175 As well, the re-introduction of a CPE requirement will act as a check on U.S. programming expenditures. Conversely, compensation for value would exacerbate this problem by incenting broadcasters to increase their value by overspending in the U.S. Such overspending would no longer be irrational as it would be rewarded with a high return on investment from signal compensation negotiations. This would be particularly devastating for Citytv and other smaller broadcasting groups, since CTV's position as the number one broadcaster would be permanently entrenched.
1176 Given the fragmentation in the system, OTA broadcasters can no longer be everything to everyone. Our public policy objectives must be assessed on a system-wide basis taking into consideration our collective contributions.
1177 The most important regulatory tool the Commission can give broadcasters is the flexibility to manage and respond to the unprecedented changes in the television market. We believe the broad and flexible approach outlined by the Commission for group-based licensing will help us do just that.
1179 MR. MOHAMMED: Rogers has been a strong supporter of the Canadian broadcasting system since our inception. We believe in it and its future. Through our many divisions, we have poured billions of dollars into it. We are willing to continue to work with the Commission and all other stakeholders in the system to help ensure its future. We are prepared to help broadcasters reinvigorate their business models for the digital and Internet age. We are not prepared, however, to support a fundamentally flawed compensation proposal.
1180 Rogers submits that the new, more open, regulatory approach to group-based licences and DTH carriage of all local television stations, in concert with an improving economic environment and the exploitation of digital and mobile audiences, is a far better remedy for what ails conventional television than imposing higher fees on Canadian viewers.
1181 This approach is much preferred to a compensation proposal that will result in a significant and immediate transfer of money from Canadians to broadcasters with no corresponding benefits.
1182 Those are our comments, Mr. Chairman, and we will be pleased to respond to any questions you may have regarding our submission.
1183 Thank you.
1184 THE CHAIRPERSON: Thank you for your submission.
1185 First of all, like this morning with CTV, my colleague, Rita Cugini and I will split with the main questioning between the two of you and, like with CTV, I'll start with the most controversial part first, which the value for signal.
1186 Let me say at the outset that I am very pleased that you are calling it by its name and have thought that's somewhat silly use of fee-for-carriage as you did in your written submission.
1187 It is a negotiated value for signal that we're talking about and let's get into it, but before I would just -- Mr. Lind, I am delighted that you are here because you were actually probably there when the 1971 policy was established --
1188 THE CHAIRPERSON: -- and I quoted from it this morning and I am sure you know the quote, you've heard it many times, but also the second portion which people don't here normally quote, which says:
"The task of the Commission is to relate fundamental philosophical idea of payment for services rendered and use made with the pragmatic realization that, without this payment, in the long run, the various stations on which the Cable system depends may no longer be able to provide them those many services."
1189 Clearly the Commission in those days was concerned, number 1, that there will be a payment between from the supplier to the user and, secondly, if that wasn't there, on the long run, the OTA would no longer be viable.
1190 Now, were we wrong? Is the fundamental concept that's imbedded in here no longer applicable and if so, why not? Or if it is applicable, how are you living up to it?
1191 MR. ENGELHART: Well, maybe I'll jump in, Mr. Chairman. We --
1192 THE PRESIDENT: You weren't there in 1971; were you?
1193 MR. ENGELHART: No, but I've got the document and it wasn't easy to find. We found a copy at the University of Ottawa.
1194 THE PRESIDENT: It's on the website of the CRTC if you care to look.
1195 MR. ENGELHART: Okay. Well, we didn't see it there, so, my computer skills must need work. So, that quote that you referred to was on page 21. If you read on at page 22, the Commission is not saying let's have a fee-for-carriage. They go on to say:
"However, much more than just a transfer of funds is required. Money paid by Cable television systems should be used to help broadcasting fulfil the ever-increasing public need for Canadian programs of high standard."
1196 And it goes on to say at the bottom of page 22:
"Why don't you folks go away and talk about a solution and come back to us if you can't reach one."
1197 I guess they never came back.
1198 And then, on page 23, the Commission sets out a couple of ideas. The first idea was similar to the video-on-demand service that we have today:
"Why don't you give the broadcasters some money to have a replay channel where you could replay the shows again..."
1199 -- which we do.
1200 And we had the replay channel back then and we have the video-on-demand service now.
1201 The second idea sounds an awful lot like the Canada Media Fund to me, which is, why don't you give a percentage of your revenues to pay for that expensive programming.
1202 So, when I read this whole document over, it does not say fee-for-carriage to me. It says some money should be paid and that money could be, for example, in the form of payments to what we now call the "Canada Media Funds".
1203 So, I think we have lived up to the expectations that the Commission had in 1971.
1204 THE PRESIDENT: Well, I guess we agree about 80 per cent. Yes, you are absolutely right in that example, but as you quote, it says:
"Much more than a transfer of funds is required."
1205 "Much more", to me, implies there is also a transfer of funds and the CRTC puts up certain examples for what is much more and you are quite right, most of them are here. I mean, and listen, I am not interested in revisiting 1971, it's just the basic principle which was there and prepared and imbedded in that.
1206 You as a user of the signal and you distribute it and you get money for it and you should pay for the signal. Obviously you are paying a lot of it through the various interests. But are you paying for the whole value of signal?
1207 You've heard the CTV this morning, they clearly feel you're only paying a part of the value.
1208 MR. ENGELHART: I think with the channels that we're giving, yes, we are. That, plus the payments we're making to the funds, more than pays for the signal and I've got to tell you, sir, I admit that in 1971 the Commission was a little more opaque than the clear writing that we see today, but I don't see this as a call for fee-for-carriage or signal compensation.
1209 I see this as a call for a replay channel or a Canada Media Fund or both. They are saying you should pay something, but they are not saying, pay it for the signal. They are saying it should go into delivering better programming.
1210 THE CHAIRMAN: You are paying right through mandatory carriage, through simsub, for giving a better reach to the signal of the OTA so the quality that is now and through the priority placement. Those are your principal means of payment, plus of course, as you say the CTF, but the CTF doesn't go only to OTA, it goes to a whole lot of people.
1211 MR. LIND: And LPIF
1212 MR. ENGELHART: And LPIF, and I would include our community channel as another contribution to programming that we're making.
1213 THE PRESIDENT: How does the OTA benefit from your community channel?
1214 MR. ENGELHART: They don't benefit, but it's a tie that we pay that, for example, American programmers don't pay and that Cable companies in many parts of the world don't pay. So, the Commission has said: here are things that we want you to do to support local programming.
1215 THE PRESIDENT: I am focusing of your payment for the OTA signal. But that's not a payment, you must admit.
1216 MR. ENGELHART: All right. Then, I'll take that one off the list, but I will include LPIF.
1217 THE PRESIDENT: Okay. And you were here this morning and I asked Mr. Wiley, the former FCC Chairman and his colleagues, et cetera, and I understood exactly like you've said most of the compensation in the U.S. is actually in non-monetary terms. They went to some length to contradict me and say, no, you misunderstood, it's now all monetary, but what is your comment on that?
1218 MR. ENGELHART: I think you're both right. I think that for the first 15 years, it was pretty much all in-kind. The broadcaster would say, I want some money, the Cable company would say no. The broadcaster would say, well, I've got this channel, one of my specialty channels, would you carry it? And the Cable operator would say: Okay. And so, they would pay for a specialty channel perhaps that they didn't want perhaps at a higher rate and they would otherwise agree to.
1219 That sort of took us through until three or four or five years ago. And then, now that most of the specialty channels are already carried and there aren't a whole lot of new ones coming along, the conversation is more and more ending up with a payment of money. So I think --
1220 THE CHAIRPERSON: That is the U.S. Does the same apply here?
1221 If, for argument's sake, we say yes, there shall be a negotiation, you negotiate and you negotiate whatever you want, you don't have to only negotiate money, you can do it in kind, et cetera, I just want you guys to agree, is there room for value-in-kind compensation?
1222 MR. ENGELHART: Well, I think part of the problem here is that a lot of the specialty services have mandatory carriage here. So part of the discussion in the U.S. takes place with respect to the specialties and here we really have very little leverage because they all have mandatory carriage.
1223 THE CHAIRPERSON: Not all, surely, because they all own their own Cat 2s, you know.
1224 MR. ENGELHART: You are right. The Cat 1s and the former analog services. You are correct, sir.
1225 THE CHAIRPERSON: Now, this proposal that CTV put forward is quite different than the strawman that you put up. As you know, they are suggesting essentially a U.S. version where you select every three years and where, as a result of the negotiations, in effect, the carriage becomes subject to negotiation as well.
1226 What is your view of the proposal as you heard it this morning?
1227 MR. ENGELHART: Well, as Mr. Lind said when we were before the Heritage Committee, we could have a regime where the broadcaster and us would have a negotiation as in the U.S. about anything and everything, as you have just described, and at the end of it, if we couldn't come to an agreement, they would have the right to pull their signal. We are not urging that on the Commission but we can live with it.
1228 Where, I guess, we part company from CTV is they say "and we then need to import the U.S. signal protection regime and to make that work, we need to require the cable operators to drop the Buffalo signals in the case of Toronto, for example." No. We think that is just way too disruptive.
1229 We would agree, if they wanted us to, to take off their signal. We would give them simultaneous substitution of their signal over the Buffalo signals even though we weren't carrying them anymore.
1230 But if they want us to start dropping the Buffalo signals, with all of the disruption that is going to cause to customers, we think it is just too much.
1231 THE CHAIRPERSON: I am sorry, I am not quite sure I am following you here.
1232 You say yes, you could contemplate a negotiation à la CTV proposal, except the dilution of the four plus one signal is not acceptable but you would continue substitution, simultaneous substitution?
1233 MR. ENGELHART: Yes. Yes, we could.
1234 THE CHAIRPERSON: And the reason being?
1235 MR. ENGELHART: The reason?
1236 THE CHAIRPERSON: For your not wanting to delete it. After all, they paid for the signal, they have the Canadian rights to it, and as you well know, they pay whenever that signal is transmitted from the U.S. and that is when they schedule it and they cannot really get the simsub.
1237 So why would you not -- what difference would it make to you whether you simsub or whether you delete it?
1238 MR. ENGELHART: Well, obviously it would make a big difference to our customers because if we --
1239 THE CHAIRPERSON: Yes. I am talking to Rogers, not your customer.
1240 MR. ENGELHART: Well, I guess, you know, they have just run this massive six-month campaign saying that people love their local signals, they love their local news, they love their Canadian programming, they love it, they love it, they can't live without it, cards and letters are pouring in. So surely if they pull their local signal, according to them, this would make a lot of people upset.
1241 I didn't see in their campaign that they are an efficient conduit for American programming. So if they want to pull their signal, which according to their campaign people love, that will give them the negotiating leverage that they seek and we are prepared to engage in those negotiations.
1242 But if we have to remove four plus one Buffalo signals every time we are in a dispute with the Canadian services, I think that is going to be too much disruption for our customers.
1243 And this gets us back to the comment that Mr. Lind make in his opening remarks, which is, look, if you really want to go down that path of adopting the U.S. system, I guess we are going to need the whole U.S. system because it is very painful for us to have all the worst parts of the Canadian system and all the worst parts of the American system and call that a good system.
1244 THE CHAIRPERSON: Well, let's not get into polemics here. I am trying to keep this reasonable. It's not the worst parts. They are different systems and you can't transplant them holus-bolus. We have a totally different setup in the industry. The feature of the U.S. that they want to import, you say it would have --
1245 You also said in your presentation this morning that it would have a perverse effect, it would actually encourage more spending on U.S. programming. Can you elaborate on that? I am not quite sure I follow the logic.
1246 MR. ENGELHART: Sure. I am going to ask Tony if he wants to comment.
1247 MR. VINER: Thank you, Mr. Chairman.
1248 I have to say that the compensation for value system as proposed would be disastrous for Citytv and I think a real problem for the Canadian system. I would be -- I know there's lot of people here that think I am just here because we are affiliated with a cable company but this would be a very, very bad system for us.
1249 You will excuse me but I am a veteran of these negotiations between BDUs and broadcasters. As proposed, the negotiation would take place between two commercial entities. The only value that is usually assigned, as we find in our specialty service negotiations, is the size of the audience. So the value that is ascribed to this signal is going to be ascribed based on the value of the audience.
1250 So the $355 million that CTV spends in U.S. programming, compared to the $88 that I spend, will go to their benefit and it will serve the purpose of entrenching CTV as the number one broadcaster in Canada.
1251 So let's say we adopt their proposal, so I then have three years to spend as much money as I possibly can and they have three years to spend money to defend their position so that I can actually increase my compensation for value and I just think that is the wrong way to go about things.
1252 THE CHAIRPERSON: But just a second, I mean it is not all one-sided. Surely, you heard CTV this morning. The quid pro quo for a negotiated value for signal, they say, would be the CPE and the CPE requirement would also act as a damper on excessive foreign spending.
1253 You yourself say in your submission just now that our removal of it, instead of insisting on an exhibition requirement, actually led to this irrational spending on U.S. programming. So surely, the reintroduction of the CPE would ensure that there is rational spending on foreign programming.
1254 MR. VINER: Respectfully, I disagree with that. We said it would act as a check but it really depends on the compensation for value scheme that is put in place. If it is more than the CPE or if the broadcaster recognizes that there is an opportunity to earn a larger share, it is going to be a business decision that they are going to make.
1255 Certainly, it will dampen the spending but it is important, if you are the biggest broadcaster, you are going to get the most money. How do you get to be the most popular broadcaster? You know, it is pretty well known you do that through your foreign programming acquisitions.
1256 THE CHAIRPERSON: Okay. I guess we don't totally agree on this point but I appreciate what you are saying as operator of City.
1257 Now, back to you, Mr. Engelhart. When you said you would be not unwilling to delete but willing to simsub, would you do that across all formats, whether it is HD, SD or analog?
1258 MR. ENGELHART: Yes.
1259 THE CHAIRPERSON: Okay. And tell me, I am having real trouble here understanding why we are in this mess we are in because both you and CTV or Canwest realize you need each other. Some people have used the expression "symbiotic relationship." You depend on each other obviously.
1260 Being a BDU and having no content makes no sense. Being a broadcaster and not being able to reach Canadians through BDUs, be they satellite or terrestrial, really limits your opportunities, et cetera.
1261 Why is it so difficult for you to come together and negotiate something? You have heard Mr. Fecan saying, you know, I would love to negotiate but nobody wants to sit down with me. What am I missing here?
1262 MR. LIND: We don't have our hand out, that is what you are missing. They do.
1263 THE CHAIRPERSON: In any negotiations, people want something. So I don't understand, you are happy, you don't need anything.
1264 MR. ENGELHART: I guess, Mr Chair, the U.S. is the only country in the world that has a retransmission consent regime. In every other country in the world, over-the-air television can't charge a BDU for carriage.
1265 So the broadcasters are looking at a very unique model imposed by the Congress and they are saying, well, that is the normal state of affairs. We don't think it is the normal state of affairs.
1266 We don't think that Mr. Fecan is being completely honest when he says that OTA television will disappear without this money. We think it is a good business. We own one ourselves and we think we give them valuable carriage.
1267 We are certainly happy to have all manner of discussions with them about things like video on demand but the idea that we would give them money for carrying their signals is something we think they don't need and we don't think it is good for the system.
1268 THE CHAIRPERSON: Surely, at the end of the day we are talking about money. You are making this sound like a religious crusade. I mean you need each other. Why can't you negotiate? As I say, I don't --
1269 MR. ENGELHART: Well, I mean you have to realize that a free over-the-air television signal is not that valuable for a BDU.
1270 Mr. Fecan said it today when he was talking this morning. If someone lost it from their cable, they could get it free over the air. They are giving their signals out free over the air. They are giving them out free over the internet.
1271 We have 1.8 million customers or households in Canada that do have a television set but don't have a Canadian BDU service. They are getting those signals over the air. They are getting those signals over the internet.
1272 And so it is hard for us to attract people to cable, to say to them, here, we are giving you the things that are free over the air. And when people leave us, they leave us for those free over-the-air signals.
1273 We are not saying that Canadians don't like to watch them, we are saying it is not a big draw for a cable company because they are free over-the-air signals.
1274 THE CHAIRPERSON: Please, reality is the op word. Most Canadians get their signals through BDUs, not over the air. Over the air is not an alternative, as you put it. The norm, over 90 percent of people get their signal over BDUs. So don't hold out that OTA is a viable alternative.
1275 Let's deal with the situation which we are dealing with where you are in a regulated environment. You have an unregulated competitor. It is your interest and the OTAs' interest to make sure that customers stay with you, that they use your services.
1276 The more you have this debate, the more you have this fight with the OTAs, the more you push Canadian consumers' attention to the cost of BDU service, of television service, you are going to drive them to the free alternative over the internet.
1277 I am missing something here. I don't know why you don't realize that it is in your long-run interest to come to some solution, rather than scaring the daylights out of Canadians that their TV bill will go up and forcing them to look at other means of getting their signal.
1278 MR. LIND: I think you are going to drive them away because you are going to raise the fees.
1279 THE CHAIRPERSON: I am not raising -- I am trying to explore ways of trying to get you to come to an agreement.
1280 MR. ENGELHART: I guess, first of all, I am not agreeing with you that OTA is not an alternative. In fact, I have always been surprised at how many members of the CRTC staff didn't have cable television.
1281 Secondly, if we raise their fees, that is going to drive people to unregulated alternatives. That is the problem. So I don't know how raising our costs is going to keep people on the regulated system. That is our point.
1282 THE CHAIRPERSON: I understand that. I got that point. Believe it or not, I did get it.
1283 MR. ENGELHART: Okay.
1284 THE CHAIRPERSON: And what I have been trying to explore is how can we resolve this problem without the consumer getting a bigger bill.
1285 MR. ENGELHART: Well, I will ask Mr. Purdy to talk to you about some of the ways other than compensating for local signals that we would like to explore.
1286 MR. PURDY: Thanks, Ken.
1287 Mr. Chairman, I think the difference or the gap that you are seeing between ourselves and the over-the-air broadcasters is how we think we can best help the Canadian broadcasting system.
1288 The cable company right now, we are very focused on providing what Mr. Fecan called catch-up opportunities for customers, so the ability to watch programming on some sort of delayed basis, whether it be on the on-demand platform or the broadband portal that we are about to roll out.
1289 So I believe it is a bit disingenuous of Mr. Fecan and the programmers to say that we are not negotiating with them. In fact, his own lieutenant, Bart Yabsley, would attest to the fact that I have become downright annoying in my daily phone calls to CTV trying to have conversations around VOD, broadband and some of the more advanced digital rights.
1290 I think the same would be true at Canwest, that I am also annoying and that we are having ongoing discussions daily about VOD, broadband and ways we can collaborate around the ability to watch Canwest programming but on some sort of delayed basis in a way that complements the broadcasting system and retains subscribers and in a way that they see added value.
1291 THE CHAIRPERSON: Yes, I am aware of the Purdy Portal, as it is called. I presume one of these days it will be called the Rogers Portal.
1292 But take what we just talked about, Mr. Engelhart, there are two things. Consumers shouldn't pay an extra charge unless they get extra value, okay. You are striving to find extra value. So are the broadcasters. The broadcasters also feel their signal is undervalued. You may agree or disagree.
1293 But why can't this be put together in a negotiation whereby you negotiate -- you know, after all, you are both in the same business -- and if there is an extra charge to the consumer, it is because the consumer gets extra value, whatever it is, because whatever extra value you produce, it will involve content from the broadcasters.
1294 I am sorry, I sound dumb, I probably am, I just don't get it. I just don't see why it is not in both your interest given that you have the three alternatives to come to a successful negotiation.
1295 MR. ENGELHART: I guess the problem is if they are just getting the programming they are getting today, there is no extra value. That is the whole problem. We are not going to raise rates for what people are getting today.
1296 If it is one of David's ideas, of course, then there can be value to our customers and then there can be a compensation to the broadcasters.
1297 So, for example, the Purdy Portal, as I believe Commissioner Cugini famously dubbed it, right now, a Canadian broadcaster, a big one, might get, say, $30 million a year from online advertising, probably $20 million or $25 million of costs. We can take those costs basically down to zero by going on our broadband video portal. So that is a way of delivering value to them.
1298 If the Commission gives us the right to put fresh advertising on VOD, that is a win-win. We can put their programming on video on demand. We can give them fresh ads. That will turn it from being sort of a catch-up service, as Mr. Fecan called it, to being an actual source of revenue for them and we will have happy customers because they will have more content and we can disable the fast-forwarding through the commercials so it is better than if they use a PVR, better if you are a broadcaster.
1299 So there are alternatives like that. Mobile, we are also, as you know, working towards a model where we can have click on ads and targeted ads, and those things will give them new revenue sources. And all of this stuff starts off a little small.
1300 When Nadir was, you know, presented nine years ago that he was going to get all these extra revenues from people downloading ringtones, you know, we just laughed but now it is a big business. So these digital media start small but they can turn into substantial revenue sources.
1301 THE CHAIRPERSON: I'm not going to beat a dead horse here. You heard me this morning. I asked them for two comments and I will reflect on it and I would ask you to do the same thing.
1302 One, we are going to transition not only from analog to digital but the whole industry is going to HD and if there is a negotiation of value for signal, can one somehow tie that into HD because there the customer actually gets a better product than they got before?
1303 The second one is there are all sorts of balls in the air between you and them. One of them is local avails, one of them is VOD, SVOD, a transactional deal, whichever you want to take, and there is community broadcasting which we will be doing in April.
1304 MR. ENGELHART: Well --
1305 THE CHAIRPERSON: Well, let me finish my question for now.
1306 MR. ENGELHART: Yes. Certainly, sir.
1307 THE CHAIRPERSON: My whole point is rather than focusing on value for signal, you seem to have an allergic reaction and the other side thinks it is their lifeblood and they need it, et cetera.
1308 Can one not make this part of a bigger and larger package? I am basically saying, look, you two need each other, negotiate it and then come to me with a solution and I will tell you whether it is an acceptable solution or not, rather than that we slice it into separate increments and we impose a solution.
1309 MR. ENGELHART: As I said before, sir, we are not going to negotiate value for the local signals because it doesn't deliver value to customers. But yes, we are happy to negotiate those other things with the broadcasters and believe those other things can give them some value.
1310 We can think about it some more but we are not crazy about the paying for HD idea, no.
1311 THE CHAIRPERSON: Okay, but I didn't ask you to give me a reaction because you haven't had time to reflect and work out the three. I just thought those might be avenues on which I would love to see your thinking.
1312 Now, if I understood your presentation today, what you really objected to in the Commission proposal was the arbitration and the baseball arbitration. What CTV provided this morning was basically borrowing from the U.S. and that would be not really arbitration. At best, it would be a complaints mechanism, the way I understand it. Essentially, it would be restricted to making sure that people negotiate fairly and that they do fair negotiation but the outcome would not be in any way regulated by the CRTC.
1313 What is your position on that?
1314 MR. ENGELHART: Yes. As I mentioned, if you are going to do it, that is the way to do it and we would be prepared to live with a negotiation like that whereby the Canadian operator could pull their signals.
1315 But as you asked Mr. Fecan, wouldn't that necessarily include discussions of anything and everything and he said no. I think I would say yes, if there is no arbitration at the end, then it would naturally include discussions of specialty and channel placement and everything else.
1316 THE CHAIRPERSON: On signal integrity, he sort of felt that you are capable of doing simsub both in terms of specialty and in sort of non-simsub. We tabled a study which suggested that actually it is problematic to do any of this.
1317 I presume you agree with that study or is this something that is in the realm of the possible or it is coming and it is just a question of time?
1318 MR. ENGELHART: A lot of the Keeble paper was talking about getting satellite, getting DTH up to what cable is doing right now. He also talked about non-simultaneous.
1319 I don't recall -- and maybe I read it too long ago. I don't recall him talking about the difficulties of simsub on specialty. I think it is technically doable. We don't think it is good for a variety of business reasons but it is technically doable. We are not supporting it.
1320 THE CHAIRPERSON: And on LPIF, we understood from the hearing in April -- LPIF was a subject for local programming -- local programming was a desirable Canadian product but nobody has found yet a way to make money on it, so it has to be subsidized. Yet, you seem to treat it as just an income stream like any other. I mean it is a dedicated income stream focused on local programming.
1321 Why, if there is negotiation, would it be so? I don't quite understand that. It is to pay for an unprofitable line of business.
1322 MR. ENGELHART: As Peter Miller's paper accurately describes, really, all Canadian programming is unprofitable in a sense. If you look at television, you see that Canadian programming in general covers its incremental costs. The cost of the programming is covered by the revenue and that is about it. Obviously not every show every time but in general.
1323 It is the American programming that covers its incremental cost and pays for the whole fixed and common costs.
1324 So news, I don't believe, and I am happy to pass the mat over to my colleague Mr. Viner who's more expert than I.
1325 News is, I don't believe, any better or any worse than any other category of Canadian. If you have the number one news show in a market, you can actually do very well. As a category, I think news probably breaks even on that incremental costing basis, as does every other part of Canadian programming.
1326 So I think the Commission perceived a problem with small market stations and moved to fix it with LPIF but we think that problem is a lack of DTH carriage, not an LPIF requirement.
1327 THE CHAIRPERSON: Well, if we review DTH and if those stations get carried, the problem goes away, there is no need for LPIF?
1328 MR. ENGELHART: That is correct. Now, what I think you might want to do is, you know --
1329 THE CHAIRPERSON: On what basis do you say that? Do you have any numbers to back that up?
1330 MR. ENGELHART: Well, I will see if Mr. Viner can be of any assistance.
1331 MR. VINER: Well, I think -- I don't have any numbers. Anecdotally, stations have closed and have suggested publicly that the reason that they closed was as a result of not being carried by DTH.
1332 I think, you know -- I don't particularly have a comment on the LPIF, Mr. Chairman, except to say that when it was first introduced, the idea was, of course, that it would provide for incremental local programming. Then it was modified to remove that.
1333 But I think it is possible -- and you asked Mr. Fecan today, or Mr. Sparkes, whether or not there was any additional local programming as a result of it and he said no. I think it is theoretically possible for a margin to be made on the LPIF, which I don't think was originally the reason behind it.
1334 THE CHAIRPERSON: Did you want to add something?
1335 MR. ENGELHART: No, sir.
1336 THE CHAIRPERSON: Okay. I must say I find your responses not very helpful. I think you are taking a very dogmatic stand rather than trying to understand what I am asking of you and what you are trying to approach. I think when you do your written response, you can maybe reflect on what I am saying.
1337 What I am trying to do is say -- and let me say it again. I said it this morning. I think you and the OTAs are destroying each other and chasing the viewers off cable television. I don't think it is in either of your interest. There must be a way that if people of your calibre and your business experience want to, you can find a solution where we basically grow the pie and it is a win-win situation. The consumer doesn't pay more and you and the OTAs find a way of splitting the pie in such a way that you can do your business.
1338 If you approach with, you know, this is off the table, I won't even discuss it, I don't think we will get there and I am sure anything we impose will be worse than what you can negotiate. That is why, you know, we needn't go for fee-for-carriage because it will be us deducing a value on something which you the people in the industry are much better to negotiate and determine.
1339 We can talk about the parameters of the negotiation, we can talk about what our role should be to facilitate, but I would like this to be an industry-sponsored solution that we approve rather than impose. I don't see any receptivity at all in your thinking to that and I would like you to reflect on it.
1340 Maybe I am pipe-dreaming. We will see. But it seems to me that would be the best way rather than us trying to second-guess you and impose something that is something that makes sense from a business point for you and the OTAs.
1341 Over to you, Rita.
1342 COMMISSIONER CUGINI: Gee, I was kind of hoping we would take a break in between after that.
1343 MR. ENGELHART: So was I.
1344 THE CHAIRPERSON: Okay, let's take a 10-minute break.
--- Upon recessing at 1514
--- Upon resuming at 1529
1345 THE SECRETARY: Please take your seats.
1346 THE CHAIRPERSON: Okay, madame la secrétaire, on va continuer.
1347 THE SECRETARY: Madame Cugini?
1348 COMMISSIONER CUGINI: Thank you, madame Secretary.
1349 Before we move on to the Group-based licensing framework, Mr. Purdy, since you're here and Mr. Englehart so kindly said that I coined the "Purdy Portal", we're going to talk a little bit about SVOD and TVOD in particular.
1350 You heard CTV this morning say, when I asked them whether or not this is a negotiation on commercial terms, and they said, bascially, a recovery of costs. So is both the programming that is available on Rogers on Demand and eventually on the broadband portal -- is this not just another in-kind compensation for broadcasters?
1351 MR. PURDY: Thank you, Commissioner.
1352 The discussion around supporting the video-on-demand platform is a complex one, and it is usually in the framework of a much bigger discussion, so I think it's fair when Mr. Fecan says that there is not a lot of money being made on VOD, although I would say that the sooner we can have advertising refresh or dynamic ad insertion on VOD, the more likely it is that CTV would -- and CanWest and City for that matter would be making money on the VOD impression.
1353 But it is fair to say that there is not a lot of money being made by CTV currently on the VOD platform and they are doing it as a good partner. But I would say that that partnership is not based entirely on altruism.
1354 And so when CTV and ourselves, or Global and ourselves, or City and ourselves decide to put their primetime main network programming on the VOD platform, it's usually in the framework of an overall discussion that involves a lot of puts and takes. So I think it's unfair to describe it as not commercial.
1355 COMMISSIONER CUGINI: And the same would hold true for the broadband portal that you are developing?
1356 MR. PURDY: Yes, absolutely. There is no -- nobody is coming to the broadband portal out of altruism. Everybody is doing it in the framework of a bigger discussion between a large broadcast ownership group and a large BDU, and we are talking about a lot of different things when we decide to work together either on VOD or on broadband.
1357 COMMISSIONER CUGINI: And you are obviously creating the business plan as well. Do you foresee that there will be any revenue opportunities for broadcasters?
1358 MR. PURDY: So in the case of the broadband video portal, I think Mr. Engelhart framed it really well, which is let's assume that a broadcaster is doing $25 to $35 million worth of online ad sales. I think you could reasonably assume, and Shelly Palmer, the author of "Television Disrupted", would argue that you are paying almost $1.50 for every movie or TV show that gets streamed. So the money that you are making is largely offset by the costs that you are paying to stream that content.
1359 In the case of the Rogers broadband video initiative, what we are proposing to the broadcasters and the specialty channels is that we will cast your content on our content distribution network and take your costs from X down to zero. And, again, we are not doing that out of altruism. We believe we are doing that because it will help us retain subscribers, help us grow revenue and help us prevent core cutting and downgrading in our customer base.
1360 COMMISSIONER CUGINI: And what are the costs related to?
1361 MR. PURDY: The costs for the broadcaster are the actual streaming costs. So they pay to stream the movie from their server to the customer's home. When we cache it on our network and cache it closer to the customer we remove a lot of those costs. In fact, our pitch is we take it to zero.
1362 COMMISSIONER CUGINI: Thank you.
1363 Mr. Viner, I am going to give you another opportunity because you mentioned it a couple of times in your oral presentation, about the relationship between revenues against which of course CPE will be established and how it will act as a check on U.S. spending.
1364 MR. VINER: Yeah, we do favour a CPE regime, Commissioner Cugini. I think the point that I clearly failed to make with the Chairman really related to the compensation for value regime and why we felt that it would not be successful in that context.
1365 What I was trying to say is that if the value -- the most obvious way in which to assess value is the size of the audience that you have. CTV is without argument the number one network in Canada. So by most measures it will be the most valuable. If a broadcaster -- and it gains that value and that audience in part through its investment in U.S. programming which in our case is, you know, four or five times as much as we spend.
1366 So whatever happens under this proposed regime, CTV will be seen to be the most valuable, probably CanWest will be seen to be second-most valuable and we would be third. And that if there were a three-year window, that would entrench us in third place.
1367 Now, I start every year. I compete against TSN, The Sports Network. I start every year, $25 to $30 million behind because their wholesale fee is that much higher than mine. And I claw and scratch to catch up.
1368 So I believe that, number one, it would entrench that order, and we have only owned City for coming up to two years now and we think there are still things that we might do to make us more competitive.
1369 And, secondly, I think it would encourage us because if you bought U.S. programming and you get more advertising dollars for more popular U.S. programming; number one and; number two, you would get a larger share of the compensation for value regime.
1370 Does the CPE act as a check on that? Yes, but you get two additional streams of revenue, advertising and CFB.
1371 And we think, notwithstanding the CPE, that it could -- if implemented in the way in which it was described, it could cause -- it would hurt us at City and would create a strong incentive for broadcasters to spend more money on U.S. product.
1372 COMMISSIONER CUGINI: But does that not diminish any value attributable to over-the-air television to the local programming that they provide?
1373 MR. VINER: I don't --
1374 COMMISSIONER CUGINI: Because you heard CTV this morning saying that of course the entry point for negotiation is the commitment to the seven and 14 hours of local programming?
1375 MR. VINER: Sure. And so once the stations or the networks have agreed to that and, again, I think it was the Chairman who said that we have a legal obligation to provide that programming, whether you have you know a compensation for value regime or not.
1376 So I see the compensation for value regime being layered above that. We have an obligation to provide the 14 and seven and then -- so we will do that, and we have to do it today. And then we enter a new regime of a negotiation on compensation for value.
1377 So I think the -- in my experience, that when I negotiate with the BDU for value they look at the audience delivery that I provide. And that audience delivery comes from Canadian programming; it comes from American programming; it comes from British programming, whatever programming I have on the service. And they say to me, "It's worth X because you delivered Y".
1378 And I think that on the compensation for value scheme, as described in the public notice or in the public consultation, the BDUs and the broadcasters would decide on fee for value. And I think CTV would argue that they have the most valuable signal because they have the largest audience.
1379 I would argue they -- in part, they have the largest audience because they spend the most on American programming. That's all. I think it's inherently evil but I think it's -- inherently it entrenches an order that I'm uncomfortable with because it makes -- it will make it more difficult for me to compete with.
1380 COMMISSIONER CUGINI: I mean your position is quite clear. You repeated it this morning that you believe that the streamlined regulatory approach to group-based licensing will create for Citytv a successful business model going forward.
1381 MR. VINER: We are very much in favour of a group-based CPE along with -- you know I want to give the Commission credit. I think that the proposal both for the scheduling flexibility and the group-based CPE is exactly the right thing to do.
1382 Now, I also -- to be clear, I don't think we should impose anything else. I think those should be the -- we are challenged. There is no question. We said fragmentation is a reality.
1383 So anything that you do to on the one hand significantly increase our flexibility and then on the other hand take away that flexibility on the way in which we can operate our stations, I think is not in the best interests of the system.
1384 COMMISSIONER CUGINI: So I shouldn't ask you questions about priority programming and independent production?
1385 MR. VINER: Commissioner Cugini, I'm always happy to have you asking questions. But please do.
1386 COMMISSIONER CUGINI: Well, let's -- you put forward a simplified model for calculating CPE in your written submission. And we went through it with CTV this morning and you heard their response.
1387 So I will ask you the same question: Do you believe that the CPE should be imposed across horizontally a group as opposed to, you know, the OTA sector and then the specialty sector of all the groups?
1388 MR. VINER: Well, because I was listening, I did understand the dialogue that developed from that.
1389 What we tried to do in the interests of this policy hearing is to develop a formula that we thought would be consistent. So CPE might be different for each group but the way in which we calculated it would be the same.
1390 The Chair raised the issue that it was hard as a regulator to give different levels of CPE, and I take your point. It's not the first time I have been instructed by the Commission.
1391 So it was originally our opinion that if you have the same formula you might have different CPEs. So I would like -- you know, I would like to re-examine that position, but it may be that it makes sense to have a common CPE for over-the-air and then add that into a historical CPE for the mix of services and end up with a group CPE that would be different, although it might be the same in over-the-air.
1392 So it is a possibility that you could break it down. I haven't done the numbers, so I ask only that I, you know, have the opportunity to review it -- and it's a possibility.
1393 COMMISSIONER CUGINI: Are you of the same mindset that the money generated from the CPE should go into a Rogers' media pool and then from there all programming would be produced for either OTA or specialty?
1394 MR. VINER: Yes, yes.
1395 COMMISSIONER CUGINI: Okay.
1396 Again, as I asked CTV, as you know people have said that that could lead to big budgets for a few shows or small budgets for lots of shows.
1397 MR. VINER: You know, what I think it will lead to is the unleashing of creativity by broadcasters. Some broadcasters may spend more money on big shows and some broadcasters may spend a little bit of money on a lot of shows.
1398 Part of the issue I have, philosophically, is that this is a policy hearing. And when we come to you for our licence renewals, I think one thing the last two or three years has demonstrated is that we can't predict what we will do. Right now, if you ask me, I would say we shouldn't spend any money on priority programming; that we should devote -- because we have a small window. We have a small window with the CMF. We are locally focused.
1399 But I think ourselves and CTV and CanWest, over the course of a seven-year licence, ought to have the opportunity to change and adapt. The Chairman himself has talked about the flexibility required to meet the changing needs of the audience.
1400 So I think that if you have agreed upon and standardized exhibition requirements and agreed upon and standardized Canadian programming expenditures, then I think that's all you need.
1401 You know I have been, perhaps except for Mr. Arpin, I have been around these parts longer than most and we know the experience of radio in the seventies when we had tightly defined formats; we had finely-spun regulations on FM. And what we ended up, when every FM station had the same set of regulations, is every single FM station had two minutes of news on the hour; every single FM station had an hour news magazine program. And so the unintended consequence of broad or finally defined regulation was sameness.
1402 When the Commission in its wisdom eliminated those regulations and when they said, "We are not going to define your formats. You should be able to change over the course of your licence. You have to do your Canadian content. You have to do your Canadian Talent Development but you should be able to change your format according to what your audience needs are".
1403 I think we should do that with the over-the-air television business. I think that we should decide how we serve our audiences.
1404 I think today, if I were coming to you, I would say, "I want to put all my money into local programming" but I should promise an exhibition requirement and I should promise a CPE. And then, as time goes on, I should decide that I want to do programs of national interest. I should decide that I want to do more or less local programming.
1405 Personally, I think that will unleash the creativity of the broadcaster. You may find one team does all drama and somebody else does regional news and drama and somebody else just does local.
1406 You know, I'm sorry. That was a way longer answer than you wanted.
1407 But when we dropped the format definitions 680 News was born. Nobody -- you know the FM stations who wanted to play music didn't have to do news anymore.
1408 CHAIRPERSON: Let's stay with television, okay?
1409 MR. VINER: Okay, but I think it's analogous; that's all.
1410 COMMISSIONER CUGINI: And well, your answer does also lead however to the question that I think we ended with CTV, and that is: What, in your opinion are the elements that must be common to all groups? You mentioned CPE, the exhibition requirement 55/35.
1411 Anything else?
1412 MR. VINER: Yes. I think -- personally, I believe those are the only requirements that you need. You know --
1413 COMMISSIONER CUGINI: Well, the other that's already entrenched is seven and 14 in terms of local hours.
1414 MR. VINER: Yes. I mean you could continue to do that, but that's self-serving of me because you know my five stations are intensely local and well over the seven and 14. So if the Commission thought that that was an important element I would certainly concede to it.
1415 My opinion, though, in terms of a structural hearing and a change of the structure to our current approach to over-the-air, is that in order to unleash creativity we should afford the maximum amount of flexibility. And we do that, in my opinion, by having a common CPE and having common exhibition requirements and nothing --
1416 COMMISSIONER CUGINI: And flexibility of course is a word that we will be hearing a lot over the course of the next two weeks.
1417 And I want to get more of a sense from you as what kind of flexibility you are looking for and how you can take advantage of it, given your five OTA stations and your speciality services, which may or may not be complementary in your opinion because it's sports, because it's you know outdoor life and G4 Tech and Bio.
1418 So where does that flexibility come into play or how does it come into play?
1419 MR. VINER: You know, I think -- and I'm not trying to avoid the question. I think that I could probably -- I will give you a short answer in the immediate future.
1420 But the truth is I don't know what circumstances, competitive or otherwise, I'm ultimately going to face over the course of a seven-year licence term. So it's subject to change without sort of notice.
1421 But I might -- well, the first thing I would do is, as I see things today, is spend a lot more money on local programming. And in some markets where I have, you know, far beyond the 14 hours, I would be able to retain that amount of local programming. So that's the very first thing I would do.
1422 With respect to, you know, Biography or some of the other -- in particular Biography, I would probably be able to spend more money on documentaries. But I think that what I would try to do is balance the quality of the programming I have and the quantity of programming that I have.
1423 You know, and I'm not trying to be -- I'm not trying not to be specific, except that I think that I should adapt with the circumstances and some of it will be, "Tell me what my competitors are going to do. Tell me what my competitors will do. I can tell you what I will do".
1424 Right now there is no question that the majority of the money, and the resources I would put into City television, and I would put it into -- I would put it into local programming.
1425 COMMISSIONER CUGINI: So is that why at paragraph 148 you say:
"It's important that a group licensing approach not result in the imposition of obligations with respect to certain types of programming that we are not structurally positioned to finance and advertise." (As read)
1426 COMMISSIONER CUGINI: And you give the example of drama.
1427 Does that mean you don't want to see drama on G4 Tech?
1428 MR. VINER: Well, you know, we might very well have drama over the course of time on G4 Tech. It's hard to --
1429 COMMISSIONER CUGINI: You just don't want us to tell you to do it?
1430 MR. VINER: Just don't want you to tell me to do it. We have a $4 million window or obligation baseline for drama.
1431 I think I said at the last hearing that the money we spend on a drama series could provide news in Vancouver for nine months of the year, I think was the number. We think that for City television, not for Global, not for CTV, but for us that is the right way to spend our money and a more appropriate way to spend our money.
1432 And I think that each broadcaster -- I think each broadcaster will work hard to be different and not be the same.
1433 COMMISSIONER CUGINI: And in terms of how you spend your money, one of the things that you do say in your submission is that you believe the new media expenditures should be included.
1434 MR. VINER: Well, we believe that, as you have heard -- would somebody get that?
1435 COMMISSIONER CUGINI: Thank you.
1436 MR. VINER: Yeah, we believe that broadcasters should exploit all platforms available to them. That includes over-the-air television; that includes BDUs, that includes the internet. So if we spend money in developing Canadian content for the internet, it's our view that that's appropriate.
1437 And I think the Canada Media Fund also has provision for new media investments.
1438 COMMISSIONER CUGINI: But how would you define those new media expenditures? Is that content that is exclusively for new media? Is it the cost of purchasing streaming rights from U.S. distributors or Canadian producers, the cost of web design?
1439 MR. VINER: Yes.
1440 COMMISSIONER CUGINI: All of those things?
1441 MR. VINER: Yes.
1442 COMMISSIONER CUGINI: And by the same token would you include revenues from new media if there are any to calculate your CPE?
1443 MR. VINER: Yes, yes.
1444 COMMISSIONER CUGINI: We have talked about the 55/35. You know that there is criticism that we did not in our conceptual model suggest a minimum amount of Canadian content in primetime. And from your submission you agree with that conceptual model anyway.
1445 So again I ask you that, if you have any further comments in light of what some participants have submitted.
1446 MR. VINER: I think my colleague, Mr. Sole, has some observations on this subject.
1447 MR. SOLE: The proposition as presented to us is the most flexible framework in my experience in media. If you take the proposition as it sits and allow people to decide whether to do 55/35, seven and 14, I think you will find that it will migrate through the whole schedule.
1448 But if you were to say that an element of before six p.m. and after six p.m. -- I think that's what you are suggesting and that's what the intervenors suggested -- would be part of it, it would decrease some flexibility but it would be liveable.
1449 MR. VINER: But what Mr. Sole said to me this morning at breakfast was --
1450 COMMISSIONER CUGINI: Put a plate of eggs in front of him next time. What can I tell you? Go for it.
1451 MR. VINER: Breakfast television runs, you know, from six to nine in the morning in Toronto and it's Canadian programming and it has a larger audience than many Canadian programs that run in primetime.
1452 MR. SOLE: Yeah, breakfast television represents 15 hours of Canadian television that, if you rank it without regard for primetime, it's many weeks one of the top five most watched Canadian shows in the market.
1453 COMMISSIONER CUGINI: Is that an example of a local program in the national interests?
1454 MR. SOLE: It's an example of 2010 and I think our habits of believing that this generation and the next generation lived between -- you know, that the news is at six, entertainment starts when it's dark out and that the mornings -- we are proving that it's a 24-hour day; it's a to-the-death demographic. There is lots of opportunities to be innovative and there is lots of places to do it.
1455 And when we saw this outline of your suggestion on giving OTA that flexibility, breakfast television we thought was somewhat redeemed, that it does three ratings when six o'clock newscasts do somewhat less than that.
1456 So I just want to characterize that there is more to this than the traditional structures, whether it's digital media or whether it's what we think primetime is or whether drama is more important than news. I think all of those things, left in the hands of creative broadcasters might give us the next era of OTA television.
1457 MR. VINER: But Commissioner Cugini, we recognize that the Commission may decide in its wisdom to divide up the day in another way and there is an issue of households using television. So we wouldn't be fussed by, you know, a primetime requirement.
1458 COMMISSIONER CUGINI: In terms of independent producers, once again there are three different scenarios on the table. You know what they are.
1459 Do you think that a uniform rule should be applied across all broadcasting groups when it comes to a commitment to independent production?
1460 MR. VINER: This is one area where we really do think that you have to look at the make-up of the groups. You know, if -- I thought it was interesting when you asked CTV about programs of national interest and finally decide it was everything except professional sports.
1461 If, for example, it was all local, it doesn't lend itself as much to independent production. We do an awful of documentaries on Biography and a huge proportion of those are independently produced.
1462 So again, without trying to dodge the question, I think on this one you really have to have an understanding of the make-up of the portfolio of the broadcaster, and it would depend on the genre.
1463 COMMISSIONER CUGINI: And just one final question; again out of curiousity more than anything else, the LPIF, Winnipeg is the only market in which you can take advantage of it. Have you to date?
1464 MR. VINER: Yes.
1465 COMMISSIONER CUGINI: And what changes, if any, has that made to the Winnipeg station?
1466 MR. VINER: I will ask Leslie to answer.
1467 MR. SOLE: We have cashed the cheque.
1468 MR. SOLE: We have a new morning show. We have more energy and people going in and trying to decide what a morning show is in Winnipeg. I can't put a dollar sign on it.
1469 The money encouraged us to do it but I would be less than honest other than to tell you we were going to do that anyway, that LPIF is a nice thing to have but I don't think it's going to make a difference for Winnipeg one way or the other in the long run.
1470 MR. VINER: It will help the station come much closer to breakeven.
1471 COMMISSIONER CUGINI: Well, thank you very much. Those are all my questions.
1472 THE CHAIRPERSON: Thank you.
1473 And digital transmission, if I understand it, you have no issue. You are going to be there in 2011.
1474 MR. ENGELHART: That's correct, sir.
1475 THE CHAIRPERSON: What does it mean to you as a BDU and that, you know, the various stages of readiness of the various broadcasters? You heard CTV this morning saying that they will be there but not before 2013 in the major markets. And we will hear from the others but as far as I know you are the only one who will be there, so to speak.
1476 MR. ENGELHART: I wasn't so much troubled as a BDU as I was troubled as a wireless provider because I thought they were going to auction that spectrum after like 2011 and wireless was going to use it. So I think there may be a problem there.
1477 You know, we have said if some of the broadcasters haven't got around to building a digital transmitter yet, as a BDU we would accept a virtual contour, if you will, and continue to carry them. And we are prepared to do that to help the process out.
1478 CHAIRPERSON: You said in your submission something that if there is a Freesat you would want a similar system or setup for terrestrial BDUs.
1479 Quite frankly, I don't quite know what you mean by that. Maybe you can elaborate.
1480 MR. ENGELHART: Well, say with the Freesat it ends up working like this. There is a $400 dish and installation, the federal government pays for it and then the satellite provider provides a service and doesn't have to pay LPIF as a result.
1481 We would think that the same option should be available to us except in our case it wouldn't be a dish. It would be an installation with a trap and a box. So if there is --
1482 CHAIRPERSON: But presume that the person is in cable territory?
1483 MR. ENGELHART: It is?
1484 THE CHAIRPERSON: Is in cable territory.
1485 MR. ENGELHART: Right.
1486 THE CHAIRPERSON: Why are you suggesting you are going to do a fixed wireless to serve the people who are not being served right now?
1487 MR. ENGELHART: No, but about 95 percent of Canadian households have access to cable. So I mean there is that 5 percent out there that doesn't. But we operate in -- I mean not so much Rogers, although we do in New Brunswick, but cable operators do operate in areas where there are transmitters that will not be replaced.
1488 THE CHAIRPERSON: And so let's assume for argument's sake the government says, yes, "There will be a Freesat and we will pay for the set-top dish and the installation" then you should say -- you should offer the same thing to terrestrials like Rogers and you will offer a facsimile; in effect, you are somewhat limited in your territory and you will get a free set-top box and you would provide the basic programming that Freesat provides free of charge.
1489 MR. ENGELHART: Yeah.
1490 THE CHAIRPERSON: Is that the scenario, the idea that you are trying to sell me?
1491 MR. ENGELHART: Yes, sir.
1492 THE CHAIRPERSON: Okay.
1494 COMMISSIONER ARPIN: Thank you, Mr. Chairman. So, remaining on this aspect, some of the submissions have been dealing with what they have been calling a "skinny basic" service and my question, my first question to you is, and following up with what you've just said to the Chairman regarding to a free set style of service that you could provide, what would be the appropriate size of such a skinny service to be attractive, but not expensive?
1495 MR. ENGELHART: So, just to perhaps clarify my colleague because it may have been a bit confusing talking of the Chair. We are not necessarily signing up for the idea of offering a free set service. What we were trying to say in our submission was, if there is a program out there we would like to be eligible as well and we will decide whether we want to do it or not.
1496 As a general rule, we think the skinny basic is a solution looking for a problem. If people don't want it, it has been tried by ExpressVu and people didn't really subscribe. LookTV had an à-la-carte option. They went under.
1497 We've got a basic service today that serves about, I think we're in the top three in North America in terms of penetration. So, we think people like our basic. So, we think this skinny basic idea is not going to be very attractive to customers and, quite frankly, not very desirable for BDUs either.
1498 COMMISSIONER ARPIN: Now, in an earlier portion, you mentioned that -- you talk about target and you were talking about in-kind of service that you could provide that have not yet been even offered to the broadcasters. So, before contemplating a compensation for value those should be put -- you mentioned targeted advertising and all the related possibilities that advertising will offer in the future.
1499 However, in the submissions that you filed on local avails among other things, you've said that we're far from being able to offer targeted advertising and dynamic advertising and the likes. So, have you something to offer and, if yes, when and will it be significant or are we only throwing that on the table as -- but it doesn't exist?
1500 MR. ENGELHART: So, the sort of full blown targeting that we talked about I think we've said it was three to five years and that was a few months ago. But there is some new stuff on the horizon for next year. So, I'll let Mr. Purdy explain that.
1501 MR. PURDY: So, I would characterize this as "advanced advertising" and what's immediately available for broadcasters to enjoy is the ability to refresh ads on the VOD platform. So, if you take Desperate Housewives or Lost or Heroes or House, one of the prime time main network shows, put it up on the VOD platform, currently you're allowed to leave the commercials in that ran in the initial broadcast.
1502 The challenge with that is the talent cycles of the actors in the ads actually time out sometimes before the show itself is taken off the VOD platform. So, it's really meant that to date nobody is leaving the ads in their VOD contents.
1503 So, whether it's City, CanWest or CTV, the content that's going on the VOD platform is actually going on relatively ad-free and there is certainly no advertising revenue stream being enjoyed by that.
1504 If you believe the scuttlebutt on the street that online is generating somewhere between $20 and $30 million dollars for some of the major broadcast ownership groups, there is no reason why VOD can't, with the same ad refresh capability that I spoke of, start to generate significant advertising revenue.
1505 So, we believe that dynamic ad insertion for VOD ad refresh is critical, important and material.
1506 Second to that, we are working with the broadband portal on more advanced and targeted advertising, so we will be working with them, a number of the broadcast ownership groups in 2010, to help to more efficiently and effectively monetize their online advertising. And then I think Ken is right when you look at the trials associated with targeted advertising in linear broadcast, that is going to take some time, but the work is underway.
1507 Ken wants me to also mention that we will in 2010 be rolling out EBIF applications. So, all legacy set-top boxes or all the existing set-top boxes will be capable of basic interactivity by mid-2010 and that will allow for people to request more information, order coupons or discounts to be sent to their homes. So, these EBIF applications will in 2010 provide real time interactive applications within 30-second commercials on linear broadcasting. We are intending to roll those out. How material that will be in 2010, I don't know, but it will be a big business in subsequent years.
1508 THE CHAIRMAN: Does that mean new set-top boxes or on existing boxes?
1509 MR. PURDY: No. The beautiful thing about EBIF applications is that they work on existing set-top boxes. So, if we have 1.6 or 1.7 million set-top boxes in market, all of them will be able to support this request for more information, polling, couponing. So, it will be available widely in 2010.
1510 COMMISSIONER ARPIN: So far I haven't seen a decoder with a printer, so how will I be able to use my coupon? How will I get it?
1511 MR. PURDY: Oops! No; good point. The way it works is that the set-top box has a unique address and that unique address is linked to our billing information. So, when the customer clicks and -- let's say it's Future Shop and they click on the ad and they want Future Shop brochure sent to their house, we will be able to forward that address to either the advertiser or the broadcaster, however it plays out. And that those qualified leads if you will, will be sent to the advertiser who will then send out the brochure.
1512 COMMISSIONER ARPIN: Now, my last --yes, I have a couple of questions on the pure compensation for value and my first question and if I make the assumption that the Commission, in its wisdom, concludes that compensation for value is the right thing to do. My question is: How the negotiations between your Media Division and your Cable Division will work?
1513 Will the arbitrage be done by the CEO or will you require arbitration to the CRTC in case you didn't agree?
1514 MR. LIND: There won't be any negotiations.
1515 COMMISSIONER ARPIN: The price is already set?
1516 MR. LIND: I think the Commission is going to set the price.
1517 COMMISSIONER ARPIN: Oh, no. We've said it twice, and I don't see why we will reverse our thinking. We have been talking specifically about compensation for value, we have used these words carefully to make sure that it wasn't a fee to be set by the Commission.
1518 MR. ENGELHART: So, Commissioner, in your hypothetical, is this a negotiation without a arbitration at the end or with an arbitration at the end?
1519 COMMISSIONER ARPIN: No, no. This is without an arbitration at the end. So, that's why I've spoken about arbitrage done by the CEO.
1520 MR. ENGELHART: Yes. I mean, I would say, you know, it would be our intention under such a regime, you know, obviously if we had a good faith obligation as they did in the U.S., we would sit down, but obviously our objective would be not to pay any cash compensation. So, I can't imagine that the discussion with our affiliated Media company would be any different.
1521 COMMISSIONER ARPIN: But, if you were to finally agree to a financial compensation with the other broadcasters, what will you do with your own affiliated company?
1522 MR. ENGELHART: Well, I mean, for specialty services, our Cable company pays them the same rate that other BDUs pay them. That's how we do it for Specialty.
1523 COMMISSIONER ARPIN: It means that you have a Chinese wall between your media and your distribution unit?
1524 MR. ENGELHART: No. Although I hear the media people complain sometimes that the BDU they least like to deal with is Rogers Cable.
1525 COMMISSIONER ARPIN: Now, we've heard and read that maybe I'm -- I was also there in 1971 when that July policy was issued so I was around and I understand what is written in the Public Notice. However, a few things have changed. One of them is that you've introduced digital and you're moving towards HD and there has been an argument made that maybe compensation for value shall apply only to HD. Do you have any views on that?
1526 MR. ENGELHART: We indicated to the Chair that it didn't bowl us over, but we would review it and put it into our written comments.
1527 COMMISSIONER ARPIN: Okay. Fine. Thank you.
1528 THE PRESIDENT: That's not what you told me, but I am delighted that you changed your answer.
1529 MR. ENGELHART: David wants to add.
1530 MR. PURDY: I think the only comment that I would make is -- and Mr. Sparkes referenced this already -- was that the HD signal under the scenario proposed with the HD signal be given away for free over-the-air?
1531 COMMISSIONER ARPIN: If the signal -- well, in some instances they are not contemplating implementing digital transmission and so -- but in other instances, as Mr. Sparkes explained this morning, they have a plan that goes until sometime in 2013 to implement over-the-air transmission.
1532 MR. PURDY: You see, our challenge is that the signal, whether it's SD or HD, if it's being given away at the front of the store for free and it is being given away at the back of the store in the form of online for free, it's hard for us to contemplate negotiating to pay for that signal.
1533 If we're talking about VOD, broadband and all the other wonderful things we're already talking to them about that. So, the negotiation of linear that's being given away for free is a challenging thing for us.
1534 COMMISSIONER ARPIN: Thank you very much.
1535 COMMISSIONER KATZ: Thank you, Mr. Chairman and good afternoon. I've got a couple of fulsome questions and a couple of short snappers. Let me pick up on the issue that the Chairman raised a few minutes ago with regard to you reserving your right to look at any promotion with regard to set-top boxes and the free set model.
1536 Do you see a value in being able to have a set-top box seated in a home who, up until that point in time, was not a customer of any BDUs, satellite or cable?
1537 MR. ENGELHART: Short answer, no. When we first heard about it, we thought about it and it seemed to be appealing for the idea that you just stated, but as we reviewed it more and more, we thought these are folks that, you know, have made a decision not to have cable. So, we think the up sell opportunity would be very very modest.
1538 COMMISSIONER KATZ: Do you not from time to time put on free programming of specialty programs in order to attract audiences and that model does work, no doubt?
1539 MR. ENGELHART: Yes.
1540 COMMISSIONER KATZ: So, why wouldn't the ability to seed an entire box with somebody that have them be able to from time to time see the value of that box right in his own home, by pushing a button, not provide the equivalent if not better value?
1541 MR. PURDY: Thank you, Vice Chairman. Our experience has been that there is a certain percentage of homes that are adamant about not paying for television and they will go to great lengths to not pay for television. They'll buy free to air receivers, they'll use the internet, they'll put up incredibly esthetically challenged antennas around their house. They will do whatever it takes to not pay for TV. And so, giving them a free sample and then expecting to upgrade them down the road historically hasn't worked.
1542 I think if we solved the big challenge we have in Canada in terms of intellectual property theft or free to air set-top boxes and online, internet theft of content, then maybe we would have a model, but reality is right now that there are a number of Canadians that don't want to pay for TV and giving them a free box with the intention of upselling them we don't think will work.
1543 COMMISSIONER KATZ: But you do see subscription going up when you provide a weekend of free programming?
1544 MR. PURDY: Absolutely. If we're talking about the 85 to 90 per cent of Canadians that want a legitimate source for the content and aren't interested in stealing it, given them free samples and exposing them to new product has been very helpful and we have been able to upsell them.
1545 COMMISSIONER KATZ: Thank you. Mr. Engelhart, you mentioned earlier that the notion of a skinny basic is not attractive and I think I wrote down the words here, it's not attractive to operators, but it's not necessarily attractive to consumers as well.
1546 Notwithstanding the fact that your views may not be attractive to consumers, it is a very consumer friendly offer.
1547 So, I guess the question I have is: what is the down side if it was imposed upon the industry to have a skinny basic?
1548 MR. ENGELHART: Well, I guess first of all, you know, customers do have a skinny basic now, it's called an antenna, and as Mr. Purdy said, there is, you know, about 1.7 million households who don't have a legal BDU service and many of them get their programming from an antenna. So, if you can get a bunch of stations over-the-air, there is your skinny basic.
1549 For an operator, you know, we have a very expensive network that really relies on getting a certain amount of RPU from every home passed really, in order to keep the ship afloat and we need video revenues, the telephone revenues, the internet revenues, without all of those things, the business model just doesn't work.
1550 So, you know, if people did buy in large quantities, which we don't think they would and then lowered our RPU, that obviously wouldn't help us with our business model.
1551 COMMISSIONER KATZ: Clearly in the early days, the value of American programming was instrumental in Cable. Now, if you look at a program lineup, you'll probably find that CTV, CanWest, City offers an awful lot of the American programming as well.
1552 What if the American programs were taken off of basic, created a skinnier basic and the American programs began discretionary, what would the down side be to that?
1553 MR. LIND: Massive customer reaction, for one thing.
1554 COMMISSIONER KATZ: Where in the Broadcasting Act is there an obligation to provide American programming on basic? I'm not saying not to provide it, but on basic?
1555 MR. PURDY: Mr. Katz, this is something that was discussed this morning. Everybody says we're bringing in American signals, we're bringing in American signals. American signals were in Toronto before Canadian signals. They have been there for 50 years. You cannot take them off without attracting a certain amount of customer reaction to that.
1556 COMMISSIONER KATZ: No one is saying take them off and not offer them. It's still there on discretionary basis, they are just not on the basic tier, if I can call it that.
1557 MR. PURDY: Vice Chairman, maybe I'll speak to this.
1558 MR. LIND: It has been our local. One of the real features of our offering is we offer local television on the basic -- that's what basic is. What you get on local TV, it's local TV, it's local. It isn't imported; it's local TV.
1559 MR. PURDY: The only thing I'd add to Mr. Lind's comment is I do sneak into Ottawa in cover of darkness because I was the gentleman at Rogers that made the decision to switch the PBS Watertown signal to the PBS Detroit signal. I am planning on leaving under cover of darkness as well and what we learned from that experience was that a number of customers saw PBS Watertown as part of their local station make-up. And 95% of the schedule that was available on PBS Watertown was also replicated on PBS Detroit.
1560 But that 15 or five or ten, or 15 per cent, depending on the week, that was unique to Watertown, people felt was now part of their cultural milieu or the make-up of this market. So, I can't imagine taking down Buffalo News in Toronto or Detroit news in London, Ontario. People have seen that as part of their make-up.
1561 COMMISSIONER KATZ: So, people want Buffalo news, but they don't necessarily want what is the border of Buffalo, Windsor news or St. Catherine's news.
1562 MR. PURDY: But I don't think we've already said that people don't want it. I think we've said that it's being given away for free, and charging for it seems to be the challenging when it's given away for free.
1563 MR. LIND: You know, don't tinker, don't tinker with the system. It works pretty well.
1564 COMMISSIONER KATZ: I was just wondering whether there's any value in having a skinny basic, where consumers can choose and elect to buy what they want and pay for what they want in a totally free open market.
1565 MR. PURDY: But, Commissioner, it has been proven that it isn't a success. It doesn't work. Nobody wants it. So, maybe you want it, but not the customer.
1566 COMMISSIONER KATZ: Okay. Let me move on.
1567 THE PRESIDENT: You've got to answer the question. The question my colleague put to you: what would be the down side for you. If you're right that nobody wants it, fine. So, you have a skinny basic and you have an improved basic and everybody goes towards the improved basic because everybody wants it. So, what would be the down side of offering skinny basic? That was the question commissioner Katz asked you.
1568 MR. LIND: Because it costs money.
1569 THE PRESIDENT: And how much and how difficult would it be to set up a skinny basic, et cetera, you know, and obviously it would cost money, but how much would be the incremental costs because the whole idea is giving Canadians all the opportunity of choice which you believe they won't exercise. And you may very well be right, but that's what we want to find out.
1570 MR. PURDY: So, thank you, Mr. Chairman. The costs associated with setting up a skinny basic would be the following: One, you would have to create a whole new set of analog traps so you would have to trap out either all of the analog signals or create a unique trap that just trapped out a certain number of the analog basic signals.
1571 You would then have to deploy a set-up box on every television set because if you trapped out all of what's in the existing basic package, you would then need a digital receiver and you would only be able to provision this skinny basic with digital, so you would have a cost of a set-top box for every TV set in that household.
1572 And then the third cost that is probably the most onerous and most expensive for us, most challenging, is the IT costs because you would have to be creating separate packages for just a skinny basic service.
1573 So, it's really the set-up costs. I think you know my colleagues are right, nobody will take it. Bell has tried it. Look has tried it, everybody has abandoned the practice or gone bankrupt in terms of trying to do this.
1574 And I'd only add one other thing. I believe the next call I would get once I created a skinny basic package is from the very over-the-air broadcast ownership groups that spoke about it this morning, asking how they can get their specialty channel on the skinny basic. So, I believe it's a bit disingenuous when they say they want a skinny basic when additional channels that are in the package we're talking of are either their music services or their sport services.
1575 So, I don't believe -- I believe we are doing this as a bit of a red herring. I don't believe anybody is really going to take this skinny basic. And Ken is right when he says that customers in Toronto can receive 22 signals with an antenna, 22 over-the-air broadcast signals are available in the Toronto market. I don't know why you would go to your Cable company to get those signals.
1576 MS DINSMORE: I just add one thing to that. I think that the notion of skinny basic is really being put forward as a way to make or facilitate compensation for value of the signal. So I think the reason that this proposal has gained so much currency is because it allows compensation to happen in a more customer friendly way.
1577 So, by taking services away from customers, creating a smaller basic, you can then load in the cost that will be associated with a compensation per value system and it's more -- it has got less customer impact.
1578 Although they do lose a number of services and they are actually now paying more for the over-the-air services that they were otherwise getting as part of their original basic service.
1579 COMMISSIONER KATZ: Okay. Mr. Purdy, I just ask you in your final submission when you submit something in writing to us, can you sort of address this issue in a more fulsome manner, as well, so we have it on the record?
1580 MR. PURDY: Absolutely.
1581 COMMISSIONER KATZ: Thank you. I am going to switch gears a little bit. In reading your submission in September, it appears as though you have taken the position that BDUs are not the source of the problem, fragmentation is. And fragmentation, we look at the specialty folks and I think I found some data here in your submission, as well as in CBC's with regard to the magnitude and I think the quote is $8 million dollars in 2008 for PBITs for over-the-air and $550 million dollars of PBIT for the specialty programmers in 2008. So look at it together, which is one of the reasons why we are here looking at the group licensing concept as well.
1582 But aren't the BDUs part of the beneficiaries of that specialty explosion, if I can call it that, as well and shouldn't they be part of the solution as well?
1583 MR. ENGELHART: Well, I guess I would say we have been -- first of all, we have been victims of fragmentation ourselves. Don't forget we used to be the only source of multi-channel television. Now, there are two satellite providers and Telco TV in some markets, so, you know, we've had to deal with fragmentation ourselves and that's affected us and we haven't gone complaining and asking for a hand-out.
1584 Look, I think your basic point is correct, which is that if there is more video programming out there, it's a better thing for a video distributor and certainly in the case of Rogers, we have tried to carry every single ethnic service in category B that's out there and as part of our value proposition to our customer.
1585 So, I wouldn't disagree with you that we have benefited somewhat from the explosion of specialty television, but I can walk you through the numbers or Mr. Watt could walk you through the numbers and we're still not making any profits on most of those specialty services because our programming costs are so high. I mean we are shelling out a ton of money on programming costs.
1586 So, I think the real big beneficiaries of the fragmentation have been specialty services themselves.
1587 COMMISSIONER KATZ: Do you know what you are paying under your affiliate agreement and you know what you are charging as well and you are telling us that the delta there is still not enough to provide a reasonable return?
1588 MR. ENGELHART: Yes. You have to add that to the network. Everyone always forgets about the network. It's usually expensive.
1589 COMMISSIONER KATZ: I understand.
1590 MR. ENGELHART: Yes. That's right. I mean our video business by itself, I am ashamed to say, if you do the cost allocation is in a negative position. We have positive PBIT from obviously the combined internet, telephone and video business.
1591 COMMISSIONER KATZ: And my last question, you talked about blackouts not being very consumer friendly and how it's a terrible thing to do. Why is it when I go to my condo at night and I turn on part of the Sportsnet regional channels I get a screen that says "blacked out" -- frequently, I might add.
1592 MR. VINER: Well, I don't know how frequently it is, Commissioner Katz. What we try to do a vast majority of time is to switch it to another one of our four regionals so that you should get a signal. The times that you don't are the times when there are four hockey games on exactly the same time, each with their own regional. That perhaps doesn't occur quite as, you know, on a frequent basis, but it does happen, I acknowledge, but most of the time, the vast majority of the time, and I know you work late most nights, Mr. Katz, so that's probably the explanation.
1593 But most of the time we switch programming from one of the other regions when we have a blackout.
1594 COMMISSIONER KATZ: But if I am trying to watch Sportsnet Ontario and I know that when I'm in Toronto I can watch the Leafs and I turn it on and there is no Leafs game?
1595 MR. VINER: That's right. Those are protected, those rights are protected, our regional rights. We are not allowed by the NHL or the team to show them in this area or the Ottawa Senators area. So, what we do when those are on Sportsnet Ontario, we switch them to another. We switch you to another service is what we try to do. We try not to have that screen come up and say that's not available because we think it's customer unfriendly.
1596 But we have no control over those rights. We have contracted for those regional rights and those regional rights only. Can't see the Vancouver Canucks here, can't see the Calgary Flames in Edmonton. You know, you can't see the Edmonton Oilers in Vancouver.
1597 COMMISSIONER KATZ: But over-the-air, I could though, right?
1598 MR. VINER: No, I don't think.
1599 COMMISSIONER KATZ: No?
1600 MR. VINER: Not if you didn't live there, no.
1601 COMMISSIONER KATZ: Okay. Those are my questions.
1602 THE PRESIDENT: Tim?
1603 COMMISSIONER DENTON: Gentlemen, I am going to tire your eyes somewhat but you are not expected to see it at this distance, but it's a map taken -- it's a drawing I made of the CRTC's chart 2.3.1 from our 2009 monitoring report and it shows that, since 2002, there have been significant price increases in cable and that as a matter of fact the price for internet has dropped from 100 to about 95, that telecoms has drifted upwards to about 105, that the whole Consumer Price Index has risen to about 115 and that cable has risen to just under 130, indicating that in the last few years cable, as a price, has gone up significantly more than the Consumer Price Index.
1604 There are many explanations for this in terms that you might like to give us. So as this is rather driven by the large numbers -- at least I am interested in the large numbers -- I would like you to give me some explanation for why this all this has happened and why you think it is good.
1605 MR. ENGELHART: Thank you, Commissioner Denton.
1606 So in the case of Rogers, in that time period our rates have gone up about 4.5 percent and I am going to --
1607 THE CHAIRPERSON: Excuse me one second. We have the chart here.
1608 Madam Secretary, would you please bring it to Mr. Engelhart so he can look at what is being cited?
1609 MR. ENGELHART: Right. Thank you very much. So this chart appears to be cable and satellite, including pay TV.
1610 So part of it, as you say, is inflation. Part of it is, as I mentioned before, really the impact of fragmentation. I mean we used to serve 85 percent of the homes past. Every year we are serving a smaller and smaller proportion of the homes past. I think we are down to 63 percent now.
1611 So the network costs us the same money, the maintenance costs us the same money, the repairs cost us the same money, but those costs, those network costs are now borne by a smaller group of customers. It is just the nature of being in the network business and subject to competition. So those costs have gone up.
1612 Programming costs have gone up. Our programming costs go up faster than our prices go up. In addition, it is not your father's cable TV service. There is more fibre, HD, more channels, video on demand, now the broadband portal. So it is not that you are getting the same service. Your twisted pair is probably delivering a voice line very similar to the one that you got in 2002 but cable is quite a bit different.
1613 So I think those are -- Oh! And then the last thing is these price indices never take into account our bundle discounts. So an awful lot of our customers get 5, 10, 15 percent off those prices because they buy other services and those are never shown in these price indices.
1614 COMMISSIONER DENTON: So you are arguing, first, a fixed cost which must be recouped over a small subscriber base, you are arguing a superior product, and you are arguing --
1615 MR. ENGELHART: Higher programming costs.
1616 COMMISSIONER DENTON: -- and higher programming costs.
1617 MR. ENGELHART: And general inflation. That is correct, sir.
1618 COMMISSIONER DENTON: Okay. But the general inflation would be indicated by the rise of 15 points in the CPI.
1619 MR. ENGELHART: Correct.
1620 COMMISSIONER DENTON: How is it then -- given those things, how is then that in the internet and telecoms portions of the business they have sunk relative to CPI while cable has risen?
1621 MR. ENGELHART: Well, as I said, in the case of telephone, that voice line that you got was pretty much the same voice line. There hasn't been a lot of new and enhanced features on voice line.
1622 Internet, really, we are simultaneously experiencing Moore's Law, which is making a lot of the components cheaper, and huge increases in capacity and bandwidth, and as you say, we are managing to lower prices with those things.
1623 With cable it really is the case that it is a different service. If we still offered the same 56 or 64 channels that we used to offer, we would be out of business. This line would have a very different look to it. The only way we can stay in business is to give people all the new bells and whistles. They want a better program guide. They want interactivity. They want video on demand. They want high definition. And service providers that don't do those things are in trouble.
1624 When we bought our New Brunswick systems, a lot of them didn't have those things and so the good news is their costs weren't going up and the bad news was we were in horrible shape, we had lost most of our customers to satellite.
1625 So a lot of this line ignores the fact, if you will, that the product isn't the same as it was in 2002.
1626 COMMISSIONER DENTON: But surely, you can argue then that telecommunications offers an increasingly better product and it is increasingly more diverse, increasingly higher bandwidth rates, and yet, its index has gone down to 95 compared to yours at 130 and the CPI at 115.
1627 So are they benefiting from Moore's Law but you are not?
1628 MR. ENGELHART: I am not sure what is in the telephone one, whether it includes all manner of business services or whether it is just a residential phone line. I suspect it is a residential phone line.
1629 Don't forget also our programming costs. I mean we are paying more money to the same specialty providers and we are also adding new ones all the time. So our programming costs are going up at about 12 percent a year.
1630 COMMISSIONER DENTON: What then would you say to the proposition advanced by some that it is appropriate for the CRTC to regulate some portion of your service offering?
1631 MR. ENGELHART: I mean I would tell you that I had our accountants go through and allocate our costs. We are losing money on our video business as a standalone business. So if we were regulated on a rate-of-return basis, we would get a rate increase.
1632 COMMISSIONER DENTON: Thank you.
1633 MR. WATT: Commissioner Denton, if I could, I think what you are really focusing your attention on is not the rise in cable rates relative to the CPI because you accept that there is the CPI increase and there is the increased cost due to our decreasing penetration of households served so that the homes that we do serve have to bear a higher cost.
1634 You are focusing on the differential observed between the cable rate increase and the telecom and the internet.
1635 COMMISSIONER DENTON: Yes.
1636 MR. WATT: Just a couple of points.
1637 I think, just to reiterate, telephony and internet do not have the affiliation payments and it is fully 30 percent of our video costs. Thirty percent of the revenue goes to programming costs: affiliation payments, Production Fund, community channel.
1638 So that is a cost that is -- generally the costs are on a per unit basis, so they don't go down. It is not a fixed cost that then as you get more people exhibits a declining cost trend. It actually is constant per unit. So you don't get any savings there.
1639 The other point I would make is that in contrast to the video service where our penetration per household past is declining, our penetration per household past in internet and telephony is increasing. So at least with respect to Rogers, you get that type of a cost reduction in addition to the technological advances that Mr. Engelhart spoke of.
1640 COMMISSIONER DENTON: Would this argue, in your terms, that the internet is becoming a more preferable good relative to cable then in the terms you are arguing, in terms of more service, less payment?
1641 MR. ENGELHART: Well, it is interesting you should say that. One of the investment analysts has published a thesis that cable companies should get out of the video business, offer nothing but internet service, let their customers get the programming over the top and save themselves the affiliation payments.
1642 I don't think we subscribe to that view yet but it is interesting that at least one forward thinker has come up with that same idea.
1643 COMMISSIONER DENTON: So then cable would be a pure distribution play under that scenario?
1644 MR. ENGELHART: I am not saying we are buying into that.
1645 COMMISSIONER DENTON: No, no, no. I am just --
1646 MR. ENGELHART: That is the proposal, yes.
1647 COMMISSIONER DENTON: Go ahead. This is getting interesting.
1648 MR. PURDY: But we would have to embrace the notion of intellectual property theft. So the over-the-top services that Ken speaks of are LimeWire and BitTorrent, where 99 percent of the traffic on these peer-to-peer file-sharing services are stolen and the rights holders are not being properly compensated.
1649 COMMISSIONER DENTON: So I take it -- excuse me.
1650 MR. PURDY: So for us, if we wanted to just have the high margins of being a pure internet provider, we would have to, I guess, sacrifice any commitment to the Canadian broadcasting system and align ourselves with the pirates, BitTorrent and LimeWire, which I don't believe we are prepared to do as an organization but the temptation is there.
1651 COMMISSIONER DENTON: And the temptation is there because you feel that -- well, it hasn't been sufficiently tempting because you feel that right now you are in a profitable business, that is, despite your distribution payments and the challenges you face, you are facing a quite adequate rate of return on your current technology and system?
1652 MR. PURDY: We are in a profitable business but only if we align ourselves as -- and I mean I agree with the Chairman's comments that we are in a symbiotic relationship with the broadcast ownership groups but I believe that we are debating the wrong issues and not focused on the right things.
1653 The over-the-top pirates are absolutely focused on stealing our business. The LimeWires and the BitTorrents enjoy 25 percent more peer-to-peer traffic in Canada than they do in the U.S. and what we should be aligning ourselves with, the discussion that should be happening between CTV and Canwest and Rogers Media should be how do we provide these catch-up rights to our customers in a way that adds value to the system and retains people within the system.
1654 The reason that prices have gone up is nobody comes to cable for a low-cost way of getting a linear television signal, they come to cable for a comprehensive entertainment source, and the investments we have made -- and we have recouped on some of those investments through rate increases -- have been to make sure that we don't lose people to these pirates over time.
1655 So if you take The Movie Network as an example, we have added four HD channels, we have added a free on demand service and we have added HBO content. The rates have gone up for The Movie Network but there has been a corresponding addition of value that allows for us to stop people from going to LimeWire to watch "The Sopranos" or "Oz" or another HBO original series.
1656 COMMISSIONER DENTON: I am pleased to see that you have some basis of discussion with the industry. Thank you very much.
1657 THE CHAIRPERSON: Thank you.
1659 CONSEILLÈRE LAMARRE : Merci, Monsieur le Président.
1660 Bonjour. Bon après-midi. I do have a few questions of clarification and then, as Mr. Katz put is so well, a few couple of more fulsome items. So we will start with a clarification.
1661 Mr. Engelhart, I want to make sure I understood you properly. At one point I think you said -- and correct me if I am wrong. I think you said that Canadian programming at best breaks even but it doesn't make very good profits. Is that what I heard?
1662 MR. ENGELHART: In English-language television that is true and it is pretty well described, I think, in the Peter Miller paper.
1663 COMMISSIONER LAMARRE: Okay, thank you. That is exactly the precision I wanted to have.
1664 Now, you also mentioned a few minutes ago that in Toronto there were 22 stations that could be tuned in off air and you were wondering out loud, then why would people go to cable, and obviously they are because you are a profitable enterprise.
1665 So would you not think that urbanisation and its adverse impact on electromagnetic wave propagation has a lot to do with it?
1666 MR. ENGELHART: That is definitely part of it. So if people live behind an apartment building, that is a problem for them sometimes getting the signal. In an apartment building, sometimes that is a problem for them getting the signal.
1667 An awful lot of people can and do get signals over the air but I agree with you that some of the things that happen to the propagation of the signals in a dense urban area can give people an incentive to go to cable, yes.
1668 COMMISSIONER LAMARRE: So you would agree that there is an objective attraction to going to cable even in a location where there are many off-air signals available and usually those places where there are a lot of off-air channels available are highly urban centres?
1669 MR. ENGELHART: It is sort of a good news, bad news thing. If you are an antenna person, you have got more signals and more problems, yes.
1670 COMMISSIONER LAMARRE: Now, if I may go to DTV, obviously Mr. Viner was on vacation when you wrote your submission because you have a total of two short paragraphs talking about digital transition.
1671 From what I understand from what is written in those paragraphs, and the answer you gave to the Chairman is that Rogers will complete the transition of its transmitters by August 31st, 2011 because Mr. Engelhart is breathing down the neck of Mr. Viner because he wants the spectrum back for the wireless business side. Is that it?
1672 MR. ENGELHART: Well, first of all, Mr. Viner is on vacation quite a lot.
1673 MR. ENGLEHART: Secondly, it's not me breathing down Mr. Viner's neck; it's a business decision that we've made in to put up the digital transmitters.
1674 COMMISSIONER LAMARRE: Okay. And in your reply to the Chairman, you said that all transmitters would be converted by August 31st 2011. Did you mean all the transmitters in the markets that the Commission has identified as priority markets or will all of Rogers' transmitters be converted?
1675 MR. VINER: All of Rogers' transmitters.
1676 COMMISSIONER LAMARRE: Broadcasting stations and retransmitters and rebroads?
1677 MR. VINER: Yes.
1678 COMMISSIONER LAMARRE: Merci beaucoup. Now, the second paragraph, the first sentence of it I'm going to read it out loud. It says:
"With respect to the development of solutions to support the digital transition, Rogers supports market driven solutions."
1679 Would you care to expand and not expand in telling me that whatever solution it has to be, it has to be equitable as far as between DTH and BDUs.
1680 You've made your point, but what kind of support market driven solutions are you talking about?
1681 MS DINSMORE: I think we've made this fairly clear in the report that we filed with CRTC back I think it was April of when that report came in, but the group looked at a lot of different approaches to how to handle the transition in areas outside the mandated markets.
1682 Certainly for us, I mean I guess the first thing to say is there probably won't be that many viewers living in Rogers footprint that don't have access to over-the-air television signals as long as your list gets complied with because most of the markets that we operate in will have digital transmitters put up. That's the first thing to be clear on.
1683 But, secondly, for those viewers that are not able to access over-the-air television once -- if the digital transmitters aren't built, then our view was that the best solution for them was probably going to be something around a discounted basic Cable offering, yes.
1684 COMMISSIONER LAMARRE: Okay. So, I should have phrased my question maybe -- I should have targeted better. When you say Rogers supports market driven solutions, we're talking about Rogers broadcasting or Rogers the BDU?
1685 MS DINSMORE: In that context it was I believe Rogers the BDU.
1686 COMMISSIONER LAMARRE: It was Rogers as the BDU.
1687 MS. DINSMORE: Yes.
1688 COMMISSIONER LAMARRE: Okay. Thank you. Going back to your presentation, speaking of arbitration on page 6, you make your point that arbitration, if the model that CTV and the Commission have proposed so far, the final arbitration would only involve the amount of cash to be paid and that all the other in-kind elements would be left out of it.
1689 Am I to understand that if the in-kind elements of the compensation were to be considered by whoever was making the arbitration, then you would agree to it?
1690 MR. ENGELHART: No, but we were pointing at the differences really between the U.S. model described by Professor Eisenbach in the model proposed and I guess the other comment I would have is you had an arbitration that covered all of the different elements that people were negotiating, it would be an incredibly complex arbitration.
1691 COMMISSIONER LAMARRE: And?
1692 MR. ENGELHART: That's a problem.
1693 COMMISSIONER LAMARRE: That's a problem, okay.
1694 Now, my last question, I'm sorry, has a bit of a long preamble. It's really a question of principle and it derives from the pain Mr. Viner almost felt when he was talking about possibly having to negotiate the value for a signal for Citytv if the Commission were to adopt such a system.
1695 So, assuming that such a system would be adopted, it's hypothetical, Mr. Viner spoke quite a bit about the differences between CTV and Citytv and the audience share issue and I must say I have trouble understanding why trying to assess the value of a signal would necessarily and only mean looking at audience share in the market.
1696 And the reason I am saying that is because my bedtime reading is the Broadcasting Act and when I look at Section 3.1(d) of the Broadcasting Act, it says: "The Canadian Broadcasting system should..." and the first of it, the first of the should is "serve to safeguard, enrich and stricten the cultural, political, social and economic fabric of Canada."
1697 Am I hearing that, in your opinion, should the Commission adopt a value for signal system, that BDUs like Rogers that have been part of the Broadcasting system for the better part of the last 40 years would only see the value of a signal in terms of audience share within those negotiations, if they were to take place and disregard completely the cultural, political, social and economic contribution of a programming service that is not at the top of the audience share chart?
1698 MR. ENGELHART: I think the short answer is "yes". So, you've got two different systems. You've got one system that doesn't have an arbitration. It's a free market negotiation and what the FCC has said in the U.S. and the Congress has said is: we're going to set up a negotiation and we're not going to intervene, we are not going to let the result -- we're not going to interfere with the result.
1699 It is what it is and so it quite frankly is a discussion where the broadcasters ask themselves what they think about maybe losing six months of revenue if this -- if their signal is pulled, the Cable operator ask themselves what they think about operating their BDU service without that service on there for the next six months. That is the motivation of the parties.
1700 It is as Mr. Viner described really people are thinking about what do my customers lose and what is the impact of that?
1701 COMMISSIONER LAMARRE: So, how does the Broadcasting Act, in its objective, factor into the equation?
1702 MR. ENGELHART: I think that's one of the problems with importing with the U.S. system into Canada.
1703 COMMISSIONER LAMARRE: Well, I am not saying the --
1704 MR. ENGELHART: I think you end up having to have some sort of CRTC-mediated or CRTC-imposed solution if the parties can't agree and then that solution becomes the starting point, if you will, because it's what the parties are negotiating towards and I would think that that kind of CRTC solution is going to be very different from an audience-based solution. It's going to involve the factors that you've mentioned.
1705 So, in our view, a negotiation followed by an arbitration is a very different animal from a stand-alone negotiation as the Americans have had. And I think for the reasons your question put very eloquently, it would in some ways be offside the Broadcasting Act, the American system.
1706 COMMISSIONER LAMARRE: Those are my questions. Merci, monsieur le président.
1707 THE PRESIDENT: Just as a follow-up, Mr. Engelhart. I don't want to read anything into it if you didn't say it. Does that mean any negotiation falling by U.S.-style arbitration, i.e. to ensure that there is honest and good faith bargaining, but not imposing a solution, would be acceptable to you?
1708 MR. ENGELHART: As I've said, we would accept a U.S.-style negotiation without a Commission imposition of a solution for the service in question. If they want to then bring in the U.S. 4+1s, no, we won't accept that. But if they want to pull their signal and let the chips fall where they may, we are prepared to work with that, yes.
1709 THE PRESIDENT: Thank you. Elisabeth.
1710 COMMISSIONER DUNCAN: Mr. Purdy, I just have two quick questions and they are just clarification. With respect to the skinny basic, and I know you're going to submit more information on that, but I understood you to say and I can understand that you have to install a trap, but I think you've also said you would have to deploy set-top boxes so then I wondered why you would need a trap?
1711 MR PURDY: So, the first think we would need to do is block out all the analog signals entering the home and then, you would need the provision those signals via digital, so you would need a digital receiver, a digital set-top box that would provide the conditional access for the revised basic or the skinny basic.
1712 COMMISSIONER DUNCAN: So, you couldn't just group them together and have the trap?
1713 MR. PURDY: I mean a very expensive option would be to redo the entire channel line-up and I guess have -- rebore the filters and put those -- a solution that we thought was the most effective was to trap out the analog signal and then provide these unique to each market skinny basic via digital receiver. I think it's cheaper than doing a different trap for London Ontario than you did for Ottawa and you end up with literally dozens of traps and each one be very expensive to get the initial prototype built.
1714 COMMISSIONER DUNCAN: Okay. Thank you. And the other thing I was wondering if you could just clarify it for me because I missed it. When you were talking about the VOD and what you could offer the broadcasters in saying that you were going to store their programs and reduce their costs to zero? I didn't quite --
1715 MR. ENGELHART: Certainly. Let me take another stab at it. Thank you, Commissioner. The notion is that we would deploy a centralized portal that would be connected to a content distribution network and this content distribution would go essentially to every one of our customers' homes.
1716 And so, one of the big costs that broadcasters and programmers incur now when they stream a movie or a TV show to a household is the cost of getting it from their server to the end-user. By storing their content on our content distribution network, we would take their costs down to zero.
1717 It would actually for all intents and purposes cache it closer to the customers' home, reduce the amount of distance that needs to travel, which would have two benefits. One, a better quality of service would probably ensue and, two, it would have zero cost to the programmers.
1718 So, there would be no charge for their transport of getting the movie from the CanWest server to the end-user.
1719 COMMISSIONER DUNCAN: Okay. Thank you very much. That's all, Mr. Chairman.
1720 THE CHAIRMAN: Steve?
1721 COMMISSIONER SIMPSON: Thank you very much. Going back to your earlier comment about cost of building a network. In your presentation you had indicated that over the last decade you had invested -- I would be wrong on this, but something like $6.7 billion dollars. Is that correct? And that you are really not making substantial contributions to the debt portion of that capital cost. I know you're servicing debt, but paying a great whack of interest now.
1722 I am curious if you could give me an idea and where I am going with this question is with respect to the erosion of Cable penetration you had indicated you've gone down by about 13 or 15 per cent over the last while.
1723 I am wondering if you could tell me why that is and also, will this affect the need for further capitalization of your network and to what extent over the next ten years?
1724 MR. ENGELHART: Yes. I think it has gone down about 17 per cent. Yes. When you have a network business that goes to every home, then and your penetration falls and your cost per customer goes up, it doesn't reduce your repair costs, it doesn't reduce the cost of building the network. So, every year new sub-divisions go up in our areas of about two per cent a year, one and a half, two, it depends on the housing market.
1725 We build out to those new homes in the last nine years, I think we've built out the 600,000 new homes in our area. During that time, our number of basic Cable subscribers has been pretty much flat. So, we have built an extra 600,000 homes worth of network to serve the same number of customers.
1726 So, you can see our capital costs are a lot more just for that reason and so is the network maintenance cost and depreciation. And then, when you go to upgrade the network again you have more upgrade costs per home.
1727 Does that answer your question?
1728 COMMISSIONER SIMPSON: Yes, it does. What is the attribution for the lack of penetration? Is it because the market is growing at a rate faster than you're growing or do you actually getting a net loss in penetration?
1729 MR. ENGELHART: Well, a lot of it is satellite.
1731 MR. PURDY: Yes, I'm smiling because Mr. Lind is smiling next to me. He would say it's execution and it's my fault. But the reality is we have much greater competition from satellite.
1732 In addition, Canada has a chronic problem with theft. Our proximity to the border stations has always meant that people were attracted to U.S. over-the-air signals. After that came illegal satellite, and now we have free-to-air set-top boxes.
1733 We believe that there is over a billion dollars being sucked out of the system every year by people either using grey market/black market satellite or now over-the-top distribution.
1734 So as I mentioned earlier we have 25 percent more peer-to-peer file sharing in this country. Most of that peer-to-peer file sharing is people accessing signals or content illegally. So that's part of the reason for market share erosion.
1735 COMMISSIONER SIMPSON: In this partnership or marriage you have with the broadcasters, the networks, it's my impression that they have been traditionally the source point for programming in that they are the individuals that cornered the world and instigate the Canadian and American industries to produce the programming that they do.
1736 Now, if theft is as big a problem as it is, is this not an incentive to start talking with the broadcasters about this mutual problem, because ultimately it seems if they are in a weakened position it only exacerbates the programming costs and exacerbates the problem of the very thing you are bringing to the table which you don't see a heck of a lot of value in that relationship right now.
1737 MR. PURDY: Absolutely, Commissioner, and that's why we are a little surprised by Mr. Fecan's comments this morning when he said that we are not talking or we are not returning phone calls.
1738 I am very proud of the fact that Rogers is a charter member of an organization called "Canadians against Signal Theft" and we are looking at free-to-air set-top box and illegal satellite activity. We are also looking at cable theft and people who, you know, forcibly remove filters and steal their cable signal. And we are looking at over-the-top piracy and the unique problem that Canada has in terms of its adoption of peer-to-peer file sharing and sites like Limewire and BitTorrent. So we are aligned in terms of fighting that.
1739 And I think the most productive and proactive things I have seen come out of this is CTV, CanWest and City putting their primetime May network programming on our VOD platform, recognizing that this stops people from going to the sites like Limewire and BitTorrent. The faster we can build out an advertising revenue stream against that, the better it will be for everybody but they have been cooperative in that regard.
1740 And we are now starting to talk about broadband video and cooperation. You know, this month we will be rolling out a portal whereby a number of Canada's broadcast ownership groups have gotten together with Rogers and figured out a way of offering people legitimate access to online content in a way that sustains and supports the Canadian broadcasting system and, I would say, at the expense of the pirates at BitTorrent and Limewire.
1741 CHAIRPERSON: Mr. Engelhart, did I hear you saying correctly in answer to questions from one of my colleagues that the cable business by itself is actually in the negative, that one of the reasons why the cost goes up is because you use it also for internet and phone, et cetera, that if we went -- I think you said to Commissioner Denton if we went on a rate regulated basis and you would apply rate return, that it actually would be it's negative?
1742 MR. ENGELHART: Yes, sir, we did a rate increase.
1743 CHAIRPERSON: Can you file those figures with us in confidence?
1744 MR. ENGELHART: Yes, sir.
1745 THE CHAIRPERSON: Okay. Then in closing --
1746 MR. WATT: Excuse me. Actually, panel, this is leaping ahead to the next proceeding but we did actually file them for the next proceeding coming up, I think the 2009-614. So our submission on November 2nd, so not for this proceeding but there, page 10 of our submission actually --
1747 CHAIRPERSON: Okay. So we will have them one way or the other, okay, wonderful.
1748 I didn't mean to cause extra work for you, so delighted that it's already -- in some way let me tell you that I'm somewhat disappointed. You are one of Canada's great success stories. You are a fabulous enterprise. We have enjoyed working with you. We have had some tough decisions in the past and we have worked them out, et cetera.
1749 But Rogers' attitude has always been one of working within the system and making it work, trying to understand the public policy interests that we have to represent and find a happy medium between those and the commercial interests which obviously are dear to your heart.
1750 This morning at least three times I pushed you on this point saying there has to be a way we can find a solution here rather than us imposing anything on you which you won't like, which the broadcasters won't like. There has to be a negotiation which you set. Tell me what the parameters are, how you want to do it, how is it, et cetera.
1751 And basically, I have been told in a very clear -- "We have got market power. We are entrenched and we won't do anything". At least, that's how it sounds to me. I don't think that's helpful for you or it's helpful for the system.
1752 So I would ask you strongly to look at these issues and in your additional written submissions see whether you cannot find in the best Rogers tradition a helpful way of finding a solution that works for all of us, rather than moving down a path where we are put in a position where we don't want to be, where we impose something on either you or the OTAs or both, which nobody will like.
1753 And I don't expect you to answer that. I just would ask you to think about it and see whether you can do that. I would like to deal with the Rogers that I know rather than the one like we encountered today.
1754 Thank you.
1755 We will resume tomorrow morning at nine o'clock.
--- Whereupon the hearing adjourned at 1706, to resume on Tuesday, November 17, 2009 at 0900
Lynda Johansson Jennifer Cheslock
Monique Mahoney Madeleine Matte
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