ARCHIVÉ - Transcript / Transcription - Gatineau, Quebec - 2003-06-03
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TRANSCRIPT OF PROCEEDINGS
FOR THE CANADIAN RADIO-TELEVISION AND
TRANSCRIPTION DES AUDIENCES DU
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
APPLICATIONS FOR TELEVISION LICENCE RENEWALS
DEMANDES DE RENOUVELLEMENT DE LICENCES DE TÉLÉVISION
HELD AT: TENUE À:
Conference Centre Centre de Conférences
Portage IV Portage IV
Outaouais Room Salle Outaouais
Gatineau, Quebec Gatineau (Québec)
June 3, 2003 Le 3 juin 2003
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès-verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio-television and
Conseil de la radiodiffusion et des
Transcript / Transcription
APPLICATIONS FOR TELEVISION LICENCE RENEWALS
DEMANDES DE RENOUVELLEMENT DE LICENCES DE TÉLÉVISION
BEFORE / DEVANT:
Charles Dalfen Chairperson / Président
Andrée Wylie Commissioner / Conseillère
Joan Pennefather Commissioner / Conseillère
David Colville Commissioner / Conseiller
Cindy Grauer Commissioner / Conseillère
ALSO PRESENT / AUSSI PRÉSENTS:
James Wilson Legal Counsel /
Sylvie Jones Conseillers juridiques
Tandy Greer-Yull Hearing Coordinator /
Coordonnateur de l'audience
Pierre LeBel Secretary / Secrétaire
HELD AT: TENUE À:
Conference Centre Centre de Conférences
Portage IV Portage IV
Outaouais Room Salle Outaouais
Gatineau, Quebec Gatineau (Québec)
June 3, 2003 Le 3 juin 2003
TABLE OF CONTENTS / TABLE DES MATIÈRES
INTERVENTION BY CANADIAN CABLE TELEVISION 1821 / 11717
INTERVENTION PAR CANADIAN CABLE TELEVISION
INTERVENTION BY THE SCORE TELEVISION 1879 / 12046
NETWORK LTD. /
INTERVENTION PAR THE SCORE TELEVISION
INTERVENTION BY ALLIANCE ATLANTIS 1888 / 12094
BROADCASTING INC. /
INTERVENTION PAR ALLIANCE ATLANTIS
INTERVENTION BY BELL EXPRESSVU LIMITED / 1906 / 12184
INTERVENTION PAR BELL EXPRESSVU LIMITED
INTERVENTION BY NATIONAL BROADCAST READING 1940 / 12382
SERVICE INC. /
INTERVENTION PAR NATIONAL BROADCAST READING
REPLY BY NATIONAL BROADCAST READING 1954 / 12456
SERVICE INC. /
RÉPLIQUE PAR NATIONAL BROADCAST READING
REPLY BY CHUM LIMITED / 1957 / 12479
RÉPLIQUE PAR CHUM LIMITÉE
REPLY BY ROGERS SPORTSNET INC. / 1964 / 12524
RÉPLIQUE PAR ROGERS SPORTSNET INC.
REPLY BY TELETOON CANADA INC. / 1972 / 12578
RÉPLIQUE PAR TELETOON CANADA INC.
REPLY BY THE SCORE TELEVISION NETWORK LTD. / 1982 / 12631
RÉPLIQUE PAR THE SCORE TELEVISION NETWORK LTD.
TABLE OF CONTENTS / TABLE DES MATIÈRES
REPLY BY THE COMEDY NETWORK INC. / 1987 / 12668
RÉPLIQUE PAR THE COMEDY NETWORK INC.
REPLY BY 1163031 ONTARIO INC. / 1998 / 12717
RÉPLIQUE PAR 1163031 ONTARIO INC.
REPLY BY CTV TELEVISION INC. / 2012 / 12788
RÉPLIQUE PAR CTV TELEVISION INC.
REPLY BY HGTV CANADA INC. AND 2021 / 12842
HISTORY TELEVISION INC. /
RÉPLIQUE PAR HGTV CANADA INC. ET
HISTORY TELEVISION INC.
REPLY BY GLOBAL COMMUNICATIONS LIMITED AND 2022 / 12849
PRIME TELEVISION HOLDCO INC., PARTNERS IN
"PRIME TV, GENERAL PARTNERSHIP" /
RÉPLIQUE PAR GLOBAL COMMUNICATIONS LIMITED ET
PRIME TELEVISION HOLDCO INC., ASSOCIÉS DANS
« PRIME TV, GENERAL PARTNERSHIP
REPLY BY MUSIQUEPLUS INC. / 2025 / 12880
RÉPLIQUE PAR MUSIQUEPLUS INC.
REPLY BY ROGERS BROADCASTING LIMITED / 2034 / 12932
RÉPLIQUE PAR ROGERS BROADCASTING LIMITED
REPLY BY CROSSROADS TELEVISION SYSTEM / 2035 / 12943
RÉPLIQUE PAR CROSSROADS TELEVISION SYSTEM
Gatineau, Quebec / Gatineau (Québec)
--- Upon resuming on Tuesday, June 3, 2003 at 0936 /
L'audience reprend le mardi 3 juin à 0936
11712 THE CHAIRMAN: Good morning, everyone.
11713 Mr. Secretary.
11714 MR. LEBEL: Thank you, Mr. Chairman.
11715 The next appearing intervention will be presented by the Canadian Cable Television Association.
11716 You have ten minutes to make your presentation.
11717 MS YALE: Thank you very much.
11718 Good morning. My name is Janet Yale and I am President and CEO of the Canadian Cable Television Association.
11719 With me today is Michèle Beck, Vice-President, Regulatory Engineering, and Suzanne Blackwell, Vice-President, Economic Research.
11720 L'ACTC comparaît aujourd'hui au nom de ses membres pour offrir nos commentaires non seulement sur les demandes de renouvellement de licence des quatre services qui demandent une augmentation de leur tarif de gros, à savoir CTV Newsnet, The Score, Sportsnet, et VoicePrint, mais aussi plus largement sur la question des critères d'établissement des tarifs de gros.
11721 The matter of the appropriate criteria for wholesale rates must be viewed in the context of the substantial changes that have occurred in the broadcasting system overall and the distribution market specifically.
11722 There can be no question that the pace of change continues to accelerate. More than ever before, the Canadian broadcasting system must be able to adapt.
11723 The terms of licence for specialty services for the next period should be flexible enough to adapt to the rise of digital distribution and the increasing role of competition and consumer choice.
11724 Over the course of the last seven years, the Canadian broadcasting system has undergone tremendous change. Competition has fostered improvements throughout the system and a number of stakeholders have benefitted as a result.
11725 Increased subscriber reach and penetration, expanded capacity and improved signal quality have directly contributed to stronger revenue growth for specialty services.
11726 However, for the cable distribution undertakings competition has been costly in terms of lost subscribers and revenues as well as significant investments in digital and network expansion.
11727 These investments have added capacity and extended the cable network, thereby directly benefiting many specialty services.
11728 Bien que l'industrie de la câblodistribution ait subi des pressions financières considérables, elle n'en a pas moins réussi à contribuer aux fonds de programmation canadienne à raison de plus de 463 millions de dollars depuis 1996, chiffre qui soutient tout à fait la comparaison avec les 500 millions de dollars versés pour la programmation canadienne au cours de la même période par les 22 services spécialisés qui demandent actuellement un renouvellement de licence.
11729 CTCA submits that given the more competitive nature of the overall broadcasting system and the benefits this can create, the Commission should signal that it would not be appropriate to approve increases to wholesale rates for specialty services.
11730 The current and evolving market conditions dictate that specialty services should be provided with more incentive to innovate to maximize revenues from other sources and increase operational efficiency.
11731 Further, CCTA submits that simply because a service has not applied for a rate increase does not allow it to automatically be renewed at its current rate. Some specialty services have achieved profit margins in excess of 40 per cent -- more than double the industry average.
11732 Accordingly, the wholesale rates of all specialty services currently seeking renewal should be assessed based on the following two criteria:
1) financial Performance
A comparison of actual versus past projected financial performance, including actual versus projected programming expenditures; and
An assessment of profit margins as compared to expenditures on programming.
11733 The static regulatory regime has contributed to an imbalance in financial performance as between specialty services and distributors.
11734 Many specialty services have turned in very positive financial results, as both subscriber and advertising revenues outstripped forecasts.
11735 Overall, the analog specialty services achieved a profit margin of more than 19 per cent in 2002, compared to 15 per cent in 1996.
11736 On the other hand, the financial performance of cable distributors has deteriorated. The cable industry has seen profit margins fall from 24 per cent in 1996 to barely 13 per cent in 2002.
11737 Pour les distributeurs cette situation ne peut pas durer parce qu'ils doivent réagir à un marché de plus en plus compétitif et réagir non seulement à la concurrence des distributeurs canadiens détenteurs de licence, mais encore à celle des services par satellite illicites.
11738 I would like to turn now to the individual applicants that are seeking increases to their wholesale rates -- CTV Newsnet, The Score, Sportsnet and VoicePrint.
11739 The increases range from three cents for VoicePrint to 30 cents for The Score. Sportsnet would see its rate increase by 37 per cent, a 129 per cent increase for CTV Newsnet's rate, while The Score and VoicePrint would each see increases of 300 per cent each relative to the rates currently in effect today.
11740 In total, the requested increases would amount to an additional 73 cents per subscriber per month, or more than $390 million in subscriber revenues over the seven-year licence period.
11741 In each case the applicants have sought to justify higher rates based on forecasts that understate the potential for revenue growth in the upcoming licence period.
11742 Two factors stand out:
1) Subscriber Revenue
Growth in subscription revenue has been underestimated as a result of employing subscriber estimates that are below actuals to date and growth rates below those projected by industry analysts; and
2) Advertising Revenue
Growth in advertising revenue has been underestimated, relative to historical levels for the individual service and the industry as a whole.
11743 De plus certaines demandes d'augmentation des prix de gros sont basées sur les augmentations des dépenses qui n'ont pas été pleinement justifiées.
11744 In conclusion, the rate increases requested by CTV Newsnet, The Score and Sportsnet are not justified and we are opposed to granting any increase in their wholesale rates. We filed details of analysis to demonstrate why these increases are not warranted.
11745 We are supporting an increase in the wholesale rates for VoicePrint from one to two cents. CCTA considers that this increase is justify in order to allow the service to make improvements to its original, local and regional programming.
11746 The rest of the requested increase in the wholesale rate for VoicePrint is not necessary for the reasons described in CCTA's intervention.
11747 Thank you for the opportunity to appear, and we would be pleased to answer any questions you may have.
11748 THE CHAIRMAN: Thank you, Ms Yale.
11749 What I will do is begin with some questions on your presentation on wholesale rate criteria which are common to your interventions and then ask you to comment on certain other elements of the specific rate increase proposals.
11750 So I am turning to your May 1, 2003 intervention on wholesale rate criteria. My questions will be directed basically to the elements that I don't fully understand as distinct, whereas where it's clear you probably won't get a question.
11751 If I look at paragraph 4, your second point under that, your second request, where you say that:
"The Commission should review the wholesale rates of services at the time of licence renewal to asses returns in relation to performance". (As read)
11752 I guess what I would like to do is ask you what you mean by "performance" there, and in particular do you mean financial performance, which I think your oral presentation suggests you might well mean and, if so, are you looking at ranges, ranges of profitability? What other criteria? Are the current ranges satisfactory, which is what you seem to suggest in paragraph 9 of that intervention?
11753 So I guess there are three questions there: Is performance meant to be financial? If so, what criteria of financial performance should we look at? And thirdly, are the current ranges satisfactory?
11754 MS YALE: I will kick it off and then turn it over to Suzanne Blackwell.
11755 I guess our thinking was very much one that was focused on financial performance, and Suzanne can talk to you a little bit about more of the details there.
11756 I guess the context in which we were making that statement was sort of if you think about telecom rate making, it was if we are thinking about the description in paragraph 4, it's kind of a revenue requirement approach, if you will, as opposed to the current view of price caps and the thought behind the thinking that we put forward in paragraph 4, was that if we are going to be worried about financial performance in terms of achieving a certain rate of return, and many of the rate increases in front of you are focused on allowing returns to a certain level of profitability, then by the same token those who don't apply shouldn't escape financial scrutiny in terms of ensuring that their rate of return doesn't exceed a certain level.
11757 We can talk a little bit more, if you will, about what a price cap approach would look like, but that was the thought in paragraph 4, and maybe I will turn it over to Suzanne to talk about specific profitability approaches.
11758 MS BLACKWELL: Thank you, Janet.
11759 I think when we were looking at these services, looking at the financial resources they required and picking up on, as Janet said, the revenue requirement approach, that you want to provide the service with a reasonable opportunity to earn a reasonable return on their endeavours, but it has to be done in the context of what we think are the appropriate financial resources that service requires.
11760 Certainly, it's not just a particular target -- is it above or below 20 per cent -- but what makes that service at that level?
11761 What are the realistic views as to what they plan to spend, what they plan to earn in terms of revenues from subscribers versus advertising, and setting an outlook, a forecast for that service, that gives them the appropriate incentive to really maximize the revenues from advertising that would give them the incentive to make sure that their programming is appealing -- it is attracting audiences -- rather than simply relying on higher subscriber rates, or subscriber rates that may not be necessarily reflecting their ability to increase revenues from advertising in other sources so that they actually have that opportunity at the end of the day to make a reasonable return, but not to necessarily continue to obtain a large percentage of their revenues just from subscriber fees.
11762 THE CHAIRMAN: Right, and being a little more specific, in paragraph 9 of your intervention you reference the profit margins of 19 per cent on average versus 17 per cent in 2001.
11763 Do you feel that those are adequate numbers?
11764 MS BLACKWELL: Certainly those reflect the industry average for the specialty analog and I would think that those kinds of profit margins should provide a service with a comfort level. That is not to say that one percentage above that level is absolutely out and they should be brought in and have their rates reduced, or necessarily 1 per cent below means that the subscriber fees need to be increased.
11765 I think that it's a question of looking at the overall financial resources that service requires and whether or not reasonable forecasts about their revenues and their expense projections suggest that they can have that opportunity to reach, whether it's 19 per cent or grow towards that level within the next licence period.
11766 We have already discussed a fair amount of uncertainty about what could happen. So the question of really looking at what we think the service reasonably needs in order to move toward industry average profit levels. So if that's 19 per cent, do they have a reasonable opportunity to get towards that? That would be not an inappropriate target to pick.
11767 THE CHAIRMAN: If we take that -- and I am not trying to pin you to that particular number, but I am taking your sense that that is the midpoint of a reasonable range -- would you say that that would cover all of the specialty services? Would that be an appropriate approach for all of them?
11768 MS BLACKWELL: It's a good starting point. I would note that some of the services that are seeking a subscriber rate increase are not actually projecting to reach that 19 per cent. Some of them are projecting to reach 13 per cent, or 15 or 17 per cent. So if the service is comfortable with that, then that may be an appropriate level for them.
11769 THE CHAIRMAN: If that's an appropriate range, then how would you reconcile that with your views on the applicants for rate increases in this proceeding who aren't projecting anywhere near that without a rate increase?
11770 MS BLACKWELL: Well, I think that the services that are looking for a rate increase and are projecting a status quo view, either substantially negative or a lower rate of return on profitability, I think what we have looked at when we are looking at their assumptions is that we believe that those are understated and that if you apply more reasonable assumptions, assumptions that provide them with the appropriate incentive to build on their audiences and their advertising, that they will have reached profit levels that are comparable to what they were looking for under our proposal with rate increases.
11771 THE CHAIRMAN: I see. So you are saying that -- and we will go into those in a moment, but you are saying that overall that the services in question, the four services seeking rate increases, that you are opposing all but for one cent for NBRS, that with your adjustments you would suggest that they would meet their projected ranges for increases.
11772 MS BLACKWELL: Certainly the profit margins would come within range of what they were looking at, yes.
11773 THE CHAIRMAN: So even though they wouldn't necessarily be within the 19 plus or minus range, that they would nevertheless -- those are their projections and even though they are lower, you would be satisfied with those because that is what they are projecting and that they would achieve those if they made the adjustment to the calculations that you are suggesting they ought to make.
11774 MS BLACKWELL: Right. If I just for a moment take you to an example, the case of CTV Newsnet.
11775 THE CHAIRMAN: Right.
11776 MS BLACKWELL: We may get into the specifics of each individual one. We are expecting that they -- they had projected for year seven a profit margin with rate increases under their assumptions of 17.5 per cent, and I believe when we run the numbers, even at just 10 per cent advertising revenue growth -- I know that they had taken issue with whether they had achieved 15 per cent, but even at 10 per cent advertising growth, we see them earning a profit margin of 17.2 per cent by year seven.
11777 We have gone back, we have looked at the replies, we have made some adjustments as they talked about in terms of subscribers for year one, we have used an even more conservative advertising revenue growth and we still have that service reaching 17 per cent.
11778 I think in our intervention we were projecting closer to 20 per cent for that service, but if we want to use more conservative assumptions for things like advertising, then I think we still see that service providing an opportunity to have that reasonable and profitable margin.
11779 THE CHAIRMAN: Do you want to, for the record, go through the other three as well on the same basis that you just did for Newsnet?
11780 MS BLACKWELL: In the case of The Score, in our original intervention we were looking at them reaching a profit level of 29 per cent, and that is with a 5 per cent advertising growth, very low, recognizing that The Score has already achieved a fairly high percentage of its revenues from advertising.
11781 We went back and we said they had had some concerns about other revenue. We took that into consideration. So we have taken out substantially all that other revenue and we still see that service at 5 per cent advertising growth, no rate increase, still reaching a 25-26 per cent profit margin by year seven.
11782 Now, that is without them increasing their programming expenditures. So it's a question of given those kinds of returns, obviously, there may be room for them to increase their programming expenditures over their status quo view.
11783 THE CHAIRMAN: What year would that be, that 29 per cent?
11784 MS BLACKWELL: Year seven. I will speak to year seven. I mean, certainly the licence is for a seven-year period. So obviously there is going to be some racking up over the years, and certainly we have the detail necessary if we wanted to file it. It's just that in the stage of the process I think what we are talking about is our intervention had the numbers, and if we walk back from say using our lower advertising views, or making some of the adjustments that the applications have talked about in response to our intervention --
11785 THE CHAIRMAN: Okay.
11786 MS BLACKWELL: Then in the case of Sportsnet, again we took a look at some of their views on the subscriber counts and we made some adjustments there. We used just a 10 per cent advertising revenue growth and even in year seven we still see a 13 per cent profit margin as opposed to our initial intervention where we see 16 per cent. Still 13 per cent compares favourably with their view of 13.6 per cent under their with rate scenario.
11787 Now, talking about profit margins in the case of VoicePrint is a bit different because of the fact that they a not-for-profit operation. So the analysis doesn't track the same. I think they have come back in their response to our intervention about subscriber counts and I think we are really, frankly, very close in terms of the overall view as to what subscriber revenues will be.
11788 THE CHAIRMAN: In paragraph 12 you say that -- this is again your wholesale rate criteria -- the services seeking rate increases have raised the issues of wholesale rate parity and the ability to compete with services as among the rationale for their requests and that you don't accept this as a criterion -- Sportsnet as an example.
11789 MS YALE: That is correct.
11790 THE CHAIRPERSON: For the reason that you say it contributes to inflationary pressure.
11791 MS YALE: I guess the point is if you increased rates just because somebody wants to be like somebody else, then you are causing cost increases for distributors and consumers that are not based on increases in programming expenditures but simply rate parity.
11792 THE CHAIRPERSON: You mention, in the absence of market-based mechanisms, that you think market-based mechanisms would allay the inflationary pressure.
11793 You have heard probably throughout the week and yesterday again comments about the inequality in negotiating as between BDUs and programming services and the absence of a say on the part of programming services as to tiering and bundling, for example, making from their point of view these market-based mechanisms quite unequal.
11794 What would be your response to that?
11795 MS YALE: We are not saying that there should not be a wholesale rate set by the Commission. We are saying the rate should be frozen. So it isn't that there isn't a reference point, first of all.
11796 The second point is the Commission has the ability through its dispute resolution mechanisms to deal with situations where the parties are unable to agree.
11797 THE CHAIRPERSON: Would you say that the criteria that should be employed in that process would be that different from the process of rate setting?
11798 MS YALE: The dispute resolution process? I think it would depend on the facts of the case. I think it is hard to predict what the nature of the disputes would be and what would be the reason that people would have to come to the Commission for a solution.
11799 I haven't put my mind to what the context would be.
11800 THE CHAIRPERSON: A typical one, focusing on price, would be at that price we won't achieve the profitability within the range that you agree is reasonable.
11801 MS YALE: Except that we are doing quite a number of renewals now where people are not concerned about that. They are sort of saying silence on the issue of rate. So presumably the wholesale rate that is in effect is fine.
11802 I am having a hard time contemplating the problem.
11803 Our view is that we are in a much more competitive environment, and generally speaking the old days of make whole and guarantees are gone for everybody. This is about creating an opportunity, not a guarantee, as far as returns are concerned.
11804 Everybody has to in a much more competitive environment maximize their opportunities to grow revenues, distributors and programmers alike, through advertising, and in the case of programmers through advertising revenues and appealing programming that keeps subscribers loyal.
11805 Our point is simply that people should not be guaranteed a rate of return.
11806 THE CHAIRPERSON: I take that point.
11807 On the point of the criterion, assuming that the rate is the issue in dispute -- if it isn't, then this isn't the discussion.
11808 To the extent the rate is the issue, are the criteria that should be used in the dispute settlement process that different from the criteria that would be used in rate setting?
11809 MS YALE: I think our general position would be that it should be financially oriented, and it should be about this issue of the opportunity to earn a reasonable return as opposed to some of the other criteria that we have heard discussed. And we certainly have views about some of the other criteria that we have heard over the course of the proceeding that should be taken into account in setting rates.
11810 We have talked already about this issue of having comparability for rates of services that are similar in genre. We don't accept that as a criteria for establishing wholesale rates.
11811 If you are meaning some of these other criteria you have heard, whether it is value or appeal or restoring profitability, I guess a wish list of profitability or a guarantee of profitability, I would say that is not the right criteria.
11812 The real issue is: Are you having an opportunity to get to a reasonable level of profitability?
11813 Suzanne has gone through the ways in which we have made that assessment in the context of the four applicants that are in front of you seeking rate increases.
11814 THE CHAIRPERSON: One criterion you mentioned as well, that has been mentioned by a number of parties, is providing incentives for raising advertising revenues.
11815 Do you have in your mind any kind of range of ratios that would be appropriate to use in terms of measuring advertising revenues to subscriber revenues as a test?
11816 MS BLACKWELL: I'm not sure that there is a specific target. Again, it is one of those things that is better looked at on a case by case basis.
11817 We looked at it more from the perspective of growth numbers that were being built into the projections of the services. We did have an opportunity to go back and look at some of the previous applicants that have come before the Commission. Again, those cases had projected fairly conservative, almost minimal, growth in advertising.
11818 If I could just take a moment, I will share with you things like when YTV or MuchMusic were before the Commission a couple of years ago they gave projections for 2002 advertising revenues, and in both cases they were about 25 per cent above those projections.
11819 We can see in the past where the services have come forward for rate increases and they were not approved but the services have still been able to gain the kind of advertising revenue that exceeds their fairly pessimistic view of advertising.
11820 I think it is possible to provide the kind of incentives and that it can work.
11821 THE CHAIRPERSON: Right. In the case of that ratio of advertising revenues to subscriber, surely the nature of the service would be very important in what the appropriate ratio would be in that case, wouldn't it, more than say in the case of profitability?
11822 MS BLACKWELL: I think the nature of service will give some indication, also what their subscriber rate is and what their penetration rate is.
11823 Those things will all be factors that will tell you where you might expect that service to hit in terms of that ratio.
11824 THE CHAIRPERSON: Do you think there are any other financial measures that are useful in the rate-setting exercise as distinct from qualitative measures?
11825 MS YALE: I guess the only other one we have talked about in our submission is the expenditures on programming. Obviously from a public policy perspective expenditures on Canadian programming are significant and important.
11826 So to the extent that rate increases are being focused on programming rather than profitability, we would think that was a good thing.
11827 THE CHAIRPERSON: When you say in paragraph 15 -- I guess this is a quasi financial measures -- that one ought to compare actual versus past projected financial performance, including programming expenditures, how is that relevant?
11828 You guessed into the future last time and you essentially low-balled relative to the results. Is that the point?
11829 So we ought to watch you next time so that you don't do the same thing?
11830 MS YALE: It is relevant then when you look at the applications in front of you and the commitments that are being made in terms of additional spending on programming and whether or not there is an adjustment factor, if you will, in terms of the priority that is going to be given to programming versus profitability.
11831 THE CHAIRPERSON: Right. In the cases of the services that are seeking rate increases here, I could be wrong but my memory is that all of them exceeded in programming expenses what their projections had been at the outset.
11832 Is that not correct?
11833 MS BLACKWELL: There certainly are higher, and in some cases when they were originally projecting it was not clear what their carriage terms would be, in terms of digital versus analog. So some of them have had that benefit of having that analog carriage. I think I have seen it described as "beach front property".
11834 So there has been that aspect.
11835 There has been some move to more live format and change in the programming format. In some cases that was done because the service believed that that would put them in a better financial circumstance.
11836 If the service wants to pursue those kinds of objectives and it believes it will provide them with a better financial return, then that is an entirely reasonable objective.
11837 Where I think we might part company is how that is funded.
11838 If it is going to increase the audience share or the appeal of the programming, then obviously advertising revenue may be a better source in which to finance that rather than actually having it guaranteed through a subscriber rate increase.
11839 THE CHAIRPERSON: I take that point, but I was wondering what the point was of 15(a). Really all that says is look at what they projected last time and compare their current projections with their past projections.
11840 I am wondering what that tells you other than you can explain backwards a lot easier than going forward.
11841 MS YALE: There is no question that hindsight is 20/20. Having said that, when you look at predictions of penetration and projections of advertising growth, the question is, naturally I guess that people tend to understate those things at the time of application, hoping of course that they are going to beat them.
11842 I think it gives credibility to some of the adjustments that we have made. The fact that they have beaten their own projections suggests that this time as well they may be able to beat their projections and to lend support to the adjustments we have made in terms of their ability to do better than they say, whether it comes to subscriber growth rates or increases in advertising revenues.
11843 THE CHAIRPERSON: So when they have not beaten their projections, what do we do then?
11844 MS YALE: Well, you only have four in front of you who are asking for rate increases of all of those who are up for renewal. So that tells you something in and of itself in terms of the fact that most of them are doing better than expected.
11845 Having said that, I think the bottom line is this is a much more competitive environment. It is our view that with the adjustments we have made, these services are in a position to earn a reasonable level of profit and don't need a rate increase.
11846 THE CHAIRPERSON: I think I have your point on that.
11847 Let's turn to the individual comments on the various entities.
11848 You have seen, presumably, the replies of the applicants. I would appreciate your comments on the replies dealing, in particular, with your claims that they had made errors in their projections of subscribers and of advertising revenues.
11849 Do you have the Sportsnet reply?
11850 MS YALE: Yes. We could do them one at a time. We have made some adjustments based on the replies. I will let Suzanne walk you through the key issues.
11851 THE CHAIRPERSON: Let me ask you an overall question. Then certainly you can do that.
11852 MS YALE: Sure.
11853 THE CHAIRPERSON: The overall response that we are getting is that, for example, on subscriber count they say: Well, you may say what you like about Mediastats and the value of that information, but they are just counting based on cash in the till, the subscribers that they get compensated for.
11854 Do you have an overall comment on the validity of that method versus the use of Mediastats?
11855 MS YALE: Suzanne will walk you through the details.
11856 I guess there are two issues that go into the starting point of the subscriber count. The first is the Mediastats issue and we have made some adjustments where there have been some points made.
11857 The other issue that at the starting point, in terms of whether or not there has been an acknowledgement of growth from 2002, which is the last year for which there are subscriber numbers, to the first year, to year one of this new licence term, which is basically 18 months after that 2002 number.
11858 The broadcast year for year one is September 2003 to August of 2004. In many cases the starting point for year one of these applications doesn't take into account any growth from the Commission's own numbers at the end of August 2002.
11859 So it is not just the Mediastats issue. It is what kind of growth is reasonable from August 2002 to year one of the licence term.
11860 We can walk through where we have made adjustments based on some of those issues around the Mediastats versus what is a reasonable assumption of growth to use to create the year one subscriber numbers.
11861 Do you want us to distinguish between those two?
11862 THE CHAIRPERSON: I won't ask you to go through it all, but if you could do that for Sportsnet, for example, since that is the one we are looking at.
11863 MS YALE: All right. There may be one or two key ones that we want to highlight.
11864 I will let Suzanne do that.
11865 THE CHAIRPERSON: On the point about Mediastats, does it not seem reasonable to you that people should count the subscribers that they are getting paid for as distinct from any other statistical measure?
11866 MS BLACKWELL: Certainly the services have that information. We looked to Mediastats because we did have that information for January 2003, if nothing else, to show us how growth was happening from the last time frame that we had from the CRTC reports for those services to January 2003.
11867 We have used subscriber growth figures that are 2 per cent or 1 per cent growth averaging year over year. These are fairly low subscriber growth.
11868 Certainly we have no debate with the fact that we expect that we have seen some slowdown in cable subscriber growth. We are perhaps seeing the start-up in slowdown in the DTH subscriber growth, but expect that to still be reasonably robust in this year.
11869 So that has to be reflected in the numbers.
11870 Just to turn to Sportsnet, they had said in their reply that the Mediastats' numbers were overstated by DTH by 235,000, so we made that adjustment down from our estimate. Also, they had made a remark about the digital cable subscribers paid substantially less, so we discounted those by half.
11871 So you can see how that adjustment is closer.
11872 When I talked earlier about profit margins in year seven, that was reflected in where we saw those fall down.
11873 Certainly with the case of Sportsnet, with the 78-cent wholesale rate that they currently earn, when you adjust the subscriber numbers down by those amounts that has an impact on the revenues.
11874 Of course if they do better than that -- and they do talk about their service driving the tier and so forth -- that will pull through in terms of potential upside that is left there for them to gain.
11875 MS YALE: So if I could just finish, they had a year one subscriber number of just over 7 million, 7.174 million subscribers. We originally were at 7.7. So we have adjusted it down to 7.4 million and redone the numbers.
11876 The subscriber number at the end of 2002 was 7.135 million, and they had used 7.174. We are saying it is not reasonable to say that a year and a half later there is not going to be any growth. That is a not a reasonable starting point.
11877 THE CHAIRPERSON: Have you filed those new numbers with us?
11878 MS BLACKWELL: No. I am not clear what the process would be to file those revisions. We certainly could do those.
11879 THE CHAIRPERSON: I think it would help the discussion if you filed them and made sure the applicant had those numbers. It is your refinement taking account of their comments and revising your own figures.
11880 MS YALE: The point is still the same. We are happy to file them, but the key point is that the starting point that they had used in our view is unreasonable, because it provided no increase for growth.
11881 We have taken into account some of the points they have raised by Mediastats. On those there are some fair comments. I don't think -- and we can go through them case by case -- that they changed the fundamental point, which is that the year one number has to reflect some conservative estimate of growth.
11882 THE CHAIRPERSON: Turning to advertising revenues now, again the responses overall are that you basically projected 10 per cent, and they are saying that is too high. Based on the reality that they know out there, they believe that their projections as they are are aggressive.
11883 Do you have comments on that?
11884 MS YALE: Well, I guess it's a question of judgment. We looked at the historical advertising growth that they had achieved, which substantially exceeds the 5 per cent, and we said: Let's not assume they are going to achieve the historical level of growth. Let's just assume a modest amount more than they projected, which is why we said 10 per cent rather than the number that they had used, which was seven falling to five.
11885 It is just not plausible, I guess, in our view that the number will be that low, given the historical growth rates they have been able to achieve.
11886 If you look at paragraph 14, I mean their argument in Sportsnet' case is that news service percentages are high because the bases are low year over year. They have plateaued. They compare to TSN, a more mature service averaging 3.5 per cent over the five-year previous period and say that they are going to 5.5. Surely that is as aggressive as one can get.
11887 MS BLACKWELL: I think that we had talked about earlier in terms of using an assumption that provides some incentives. We also note that there has been some early projections not just with respect to the conventional broadcasters, but also the cable services, as they are called in the U.S., or the specialty services here in Canada, that indicate 10 per cent plus growth for the specialty services, both in Canada and the U.S.
11888 I believe the appendix of the CIBC analysis filed by Cogeco indicates that. Early reports out of J.P. Morgan has also indicated a 10 to 11 per cent growth, and even using their numbers the New York Times was reporting last week that that may be exceeded by another $500 million U.S. in terms of specialty services.
11889 So I think certainly for the year that we are looking at right now, we are seeing some growth. I notice that Sportsnet also has said that their current year advertising numbers are expected to be up close to $32 million, rather than what they filed in their application.
11890 If we just use that base and flow it through as the kind of growth numbers, that would add $12 million over their licence period. So you can see even if you just start from a slightly higher base by two, three, four million dollars for these services that there is that potential upside.
11891 So it's a question of when you are looking at how to adjust or set the subscriber rate for these services, do you bake in a subscriber rate that assumes a very low bar in terms of advertising growth, or do you actually wish to set it so that it is something that is more likely to be achieved?
11892 I talked about the YTV and MuchMusic example and that they are already 25 per cent above where they expected to be for 2002 in their own projections.
11893 So I think even with those more mature services -- yes, they are not the sports genres -- but TSN itself has had positive years of 14 or 15 per cent advertising growth in the last seven years. So it's not out of the question that on average they could achieve 10 per cent.
11894 THE CHAIRMAN: Thank you.
11895 So you are basically sticking to your 10 per cent both as a better reflection of what the indicators and commentators are saying the market will be plus, as an incentive, set it higher rather than lower.
11896 MS BLACKWELL: And I think, just to say that The Score were using an even more conservative 5 per cent growth. So, yes, I think that is the underlying thesis.
11897 THE CHAIRMAN: Finally, depreciation expenses. Again, that is an issue that you had contended that the depreciation was high. They have provided a reason, in the case of Sportsnet no longer being able to lease CTV facilities.
11898 What is your comment on that for depreciation expense going forward?
11899 MS BLACKWELL: Certainly they have come back and said that this is their plan and I guess it's a question for the Commission to decide if they wish to provide a subscriber rate increase that would finance that.
11900 My estimate is that it would take five cents per subscriber per month to cover that cost. If the Commission thinks that that is a reasonable cost, it should be funded from that source.
11901 THE CHAIRMAN: What do you think?
11902 MS BLACKWELL: Well, is that the most cost-effective means of obtaining facilities, facilities that are used and useful by Sportsnet alone? I mean, there are a number of factors to take into consideration and those details are not in front of us. Perhaps it's information that Sportsnet could provide to the Commission.
11903 THE CHAIRMAN: So you are not revising your view on the appropriateness of including that.
11904 MS YALE: No.
11905 THE CHAIRMAN: Thank you.
11906 Let's turn to The Score briefly. Again, a similar range of issues. Their reply -- and I am going to ask you to comment on a number of the points that they raised.
11907 Do you have their reply?
11908 MS BLACKWELL: Yes.
11909 THE CHAIRMAN: So subscriber revenues, you see at 25 and following, taking issue with your approach, and again calling Mediastats figures into question for reasons that we have discussed.
11910 Do you have any comments here -- 25 to 28 of their reply.
11911 MS BLACKWELL: Yes, I see that, and again we are looking at numbers. They said: "Okay, we were paid on the basis of 5.3 million for January 2003". Their own projections for year one in terms of subscriber account is 5.5 million and we have used a number of 5.6 million.
11912 So we are really within 100,000 subscribers in terms of debate, and it certainly is a question of when we take a January 2003 number, 2003 number from Mediastats and they say: "Okay, take out 300,000". That's fine, but there will still be projected growth that will occur over this year.
11913 THE CHAIRMAN: Okay.
11914 MS YALE: But it is not a material difference.
11915 THE CHAIRMAN: Right. Other revenue again, the million dollars. They say they no longer have the contract.
11916 MS YALE: We are prepared to -- I mean, those are facts that we didn't have at our disposal.
11917 THE CHAIRMAN: And the comments again on advertising revenues.
11918 MS BLACKWELL: Certainly when we were talking earlier about their profit margin -- and again that is taking out the other revenue -- at a 5 per cent advertising growth and that is, as I say, half of what we were employing on some of the other services.
11919 I would just also comment that I know that there was a discussion with The Score in terms of the current year projections of advertising versus their spending and that they had noted that although their programming spending had dropped off substantially in the current year that they were still maintaining normal growth of subscriber and ad revenue.
11920 So I think those projections are still -- we are prepared to stick with the 5 per cent, recognizing, of course, that they do better than that, that their profitability will be even higher than the 26 per cent margin we are looking at for year seven.
11921 THE CHAIRMAN: So basically I am on advertising you are using the same basis as we discussed with Sportsnet and your projections of 10 per cent notwithstanding what they have said here.
11922 MS BLACKWELL: That is correct.
11923 THE CHAIRMAN: I think that was all that I wanted to ask you about The Score reply.
11924 Turning to CTV Newsnet -- I don't have the reply. Did they submit a reply? Too many books. If you will be patient --
11925 THE CHAIRMAN: I have a copy now. Paragraphs 8 and 9 refer to subscriber and advertising growth forecasts. Do you have comments on those paragraphs? Are they any different from the comments regarding Mediastats and your advertising growth projections?
11926 MS BLACKWELL: Certainly their comment with respect to the Mediastats number that we used, they said that they are seeing numbers that are 10 per cent below that now. If I were to reduce the number that we used by 10 per cent, I would actually be below their year one projections and I think the difference where we are in terms of what I had -- they did go back and I said, "Okay, let's take another look at this", and we have used as a revised start-up point about 7.1 million versus their seven million even.
11927 Even with that somewhat lower subscriber count, we are still seeing a profit growth at 17 per cent profit margin by year seven and a 10 per cent ad revenue growth. Since I assume you will be moving on to advertising revenue, I would just also note that CBC Newsworld had ad revenue increase by 15 per cent in 2002.
11928 So again, using a 10 per cent advertising revenue growth for CTV I think the remarks that we have made already with respect to Sportsnet apply.
11929 THE CHAIRMAN: Right, and so on their point in paragraph 11 that in the current year they have seen advertising revenue growth stop, what is your comment on that?
11930 MS BLACKWELL: Certainly I think that if you look back at any service, that they have periods where advertising growth is not as strong, but I think a 10 per cent average over the period -- there will be periods that they may exceed that and they may not be quite as strong, but my comments with respect to the overall advertising market, I think that we have seen, and various industry analysts suggest that it's not unreasonable to set that target for them.
11931 THE CHAIRMAN: I think I have your point on that.
11932 On NBRS you are recommending a one-cent increase and your point is that on that point you are fairly close in terms of projections, both of subscribers and revenues.
11933 MS BLACKWELL: That's correct. I think both their reply as well as some of the discussion that occurred last week suggest that we are very, very close in terms of both starting point and growth.
11934 THE CHAIRMAN: Now, yesterday you heard Mr. Péladeau of Quebecor argue that there oughtn't be any more basic wholesale rate regulation, a view not shared by Cogeco, and I take it that you don't share that view as well.
11935 MS YALE: That's correct.
11936 THE CHAIRMAN: And your view is that there is a wholesale rate in place and that that should be the rate that should for the services in question go forward.
11937 MS YALE: Correct.
11938 THE CHAIRMAN: Have you read the ExpressVu intervention that proposed a method of starting off with the existing basic wholesale rate as the starting point for negotiations?
11939 MS YALE: I don't recall it in detail.
11940 THE CHAIRMAN: I have referred to it previously in the -- do you happen to have their intervention?
11941 MS YALE: Sorry, my understanding -- you are saying that it should be -- I think that they are more focused on market forces as a basic for setting rates rather than starting with an established wholesale rate which is, I guess, not very different from the Quebecor position. I am not sure where --
11942 THE CHAIRMAN: I think that they would say that the starting point, like you, is the existing wholesale rate in force and then one would move from there into the negotiations going forward.
11943 That is basically your position as well, is it not?
11944 MS YALE: Yes.
11945 THE CHAIRMAN: What link do you see between the basic wholesale rate and the tiered rate and digital rate?
11946 MS YALE: There are negotiations that take place between cable operators and over time, as we move from an analog world to a digital one, some of those starting points and assumptions are going to have to change.
11947 We haven't really started that debate in earnest. Really what we are dealing with is the status quo environment for the moment where these negotiations have taken place, in the past at least, largely on a basis that makes assumptions in terms of being able to achieve business plans, and so on. I think what all of the distributors in front of you are saying is that that is not the market reality anymore. As we compete with each other as BDUs and face competition from illegal satellite services, that we have to be able to respond to a more competitive environment.
11948 THE CHAIRMAN: What rights do you think the programming service should have over the way it's marketed to the consumer, either at a price that it's marketed or in a tier or in a bundle?
11949 MS YALE: Both things are negotiated today. It's part of the arrangements in the affiliation agreements between cable operators and service providers.
11950 THE CHAIRMAN: The evidence is that because those aren't regulated elements of the negotiations, the way the basic wholesale price is, that they don't have sufficient control over the way their services are marketed to the public.
11951 Do you have a comment on that?
11952 MS YALE: I think that's not a new issue. That has been going on for some time and I think the way in which customers are reached at the end of the day, the BDUs have an obligation to try and attract the customers in the first place and try to market aggressively to keep customers loyal in the face of competition.
11953 I think service providers are starting to recognize that they have to engage in their own marketing to distinguish their brands in a more crowded shelf space, and you see cross-promotion opportunities emerging, and so on.
11954 So I think the market is evolving as we see more and more licensees in digital competing for the attention of viewers.
11955 THE CHAIRMAN: Right, but we have one service, a regulated service, that could be part of a bundle. It isn't clear what the price to the consumer is of that service. The wholesale rate is clear, but how that is in turn marketed to the consumer in a package or a tier or a bundle is not clear. I mean, it becomes part of an offering that the BDU tries to market in a way that is --
11956 MS YALE: We are in a very competitive environment.
11957 THE CHAIRMAN: Right.
11958 MS YALE: And I think the market is what is dictating that at this point as we compete with our legal and illegal satellite competition to keep customers on our services.
11959 THE CHAIRMAN: So the public interest that the Commission is looking at in that process, what would you say that it is? To be more specific, you talked about telecom regulation before and what essentially the focus is on is just and reasonable rates to the public.
11960 Here it's almost as though the one element that is regulated is the cost to the BDUs and the reason it's regulated is because there is a public interest in ensuring Canadian programming and expenditure in Canadian programming and the belief that in order to ensure that that happens, a revenue flow has to be seen by the program service so that it can create the programming that is required.
11961 In effect, it's the reverse flow that you get in telecom rate regulation and previously in basic rate regulation when the Commission did that, and it still does for a number of cable systems.
11962 MS YALE: I guess our position is that from a public policy perspective there is no need for the Commission to get involved in retail rates. The Commission --
11963 THE CHAIRMAN: I agree with you there and, of course, the position is that we deregulate, and have deregulated most of the subscribers in Canada in terms of retail rates. But to what extent should there be a concern about the way the programming services are ultimately marketed to the public, given that this is a Broadcasting Act activity at the end of the day?
11964 MS YALE: I think the success of, in the case of the cable industry and marketing these services, is a win for the programmers and a win for the cable industry in the sense that our revenues go up and so do theirs.
11965 So the interest is that if the market is working then it works in the best interest of all the players, both consumers and having access to these services at reasonable prices, and the programmers and cable operators in growing their revenues.
11966 THE CHAIRMAN: I guess we heard last week -- I don't know whether you were present for that -- that there is a concern on the part of some programming services that particularly the larger the bundle and the more non-broadcasting services that it contains, all of which is positive from a market forces and competition point of view, but does the programming service get buried in the mix and does it get squeezed, both in terms of promotion and marketing, in the process?
11967 MS YALE: Well, I guess it is a much more competitive market. That would be my answer.
11968 At the end of the day, the appeal to consumers is what is driving the way in which these services, particularly in digital, are packaged and offered. You have different groupings of services, depending on the distributor, based on their assessment of what is going to be most appealing. The different satellite providers, as well as the cable operators, offer them in slightly different packages based on their assessment of what is most appealing to customers in their marketplaces.
11969 They are making that assessment in terms of the competitive marketplace. There are winners and losers in a competitive marketplace. That was the Commission's understanding in setting that regime for the digital licensees, and that is the reality of having to compete for the retention in a much more competitive marketplace.
11970 THE CHAIRPERSON: Of course, the problem is that we have layered vintages, if you like, of services that come on line under different series of expectations and different interpretations of the public interest.
11971 Most of the services that we are looking at today are services that are in effect mandatory carriage, if you like, and therefore there is a non market force element in it, for good reason.
11972 MS YALE: Well, it is inflexible for cable operators as well, given the constraints of analog technology. So I am not sure, from a practical perspective within the confines of analog technology, that this is much of an issue in terms of -- the constraints of those traps really limit the ability to move services around.
11973 THE CHAIRPERSON: What do you see as the major negotiating issues, other than price, going forward between distributors and programming services?
11974 MS YALE: Well, I think the key issue that we are going to have to confront is the transition to digital.
11975 THE CHAIRPERSON: Right.
11976 MS YALE: In the sense that we have not yet confronted what to do with the analog offers and how to transition services in terms of consumer acceptance, the consumer rate of adoption of digital technology on the one side, and on the other side the implications of that transition for the services and the uncertainty that is associated with moving from the security of those analog tiers to a more competitive environment in digital.
11977 I would see that as a key challenge that we are all going to have to confront collectively. It is inevitable, and it is a question of how do we get from here to there.
11978 THE CHAIRPERSON: Thank you very much.
11979 Vice-Chair Wylie.
11980 COMMISSIONER WYLIE: Good morning.
11981 I don't have any questions on your comments on the proposed rate increases, which are always helpful of course to have details.
11982 I am a bit fascinated by your proposal, beginning at paragraph 13; your proposal which is entitled "Freeze or Reduce Wholesale Rates".
11983 Although we go through various calculations, the bottom line appears to be in the previous paragraph that the specialty services are making more money than they thought and you are making less than you used to. Therefore, it calls for a review of wholesale rates.
11984 We have looked through the hearing, if you followed it, at those services that are indeed doing better than they thought they would. One of the questions the Commissioners have asked is whether in that case more should be expected to enhance the implementation of the objectives of the Broadcasting Act. Your view is reduce the rates.
11985 The Chairman had alluded to the many layered weave that we have had in the system in developing diverse and Canadian services and in establishing the distribution for them. So unweaving only one parcel of that seems a bit difficult, for me at least.
11986 One of the questions that Commissioners never get an answer to is: What is the mark-up on those services? How much are you paying for non-Canadian services? What is the mark-up on those?
11987 Then I ask myself: Can you look at one piece of it without the other?
11988 What is your view, in your careful calculations, of what we should know? And the services whose wholesale rates we may want to reduce, what knowledge should they have of that?
11989 Presumably if we lower the wholesale rate so that you can make more money, you are going to increase your mark-up; you are not going to decrease it, otherwise it is a no-win situation. The wholesale rates are less. If the mark-up is not more than twice, and it was twice before, you are in no better situation.
11990 How can you focus on just one piece of the distribution puzzle? Despite questions, there is never any answer to what is the mark-up, how much do you pay? The Canadian services don't know, but neither do I.
11991 How can I say you are not making enough money because the product you have to sell under the Broadcasting Act is too expensive and that product must be reduced because you believe there has to be a wholesale rate?
11992 I don't hear any calculations. How can we decide that the product is too expensive because those who distribute it don't make enough money when they distribute a whole lot of other things that we know nothing about?
11993 No service knows basically what the product is worth at the retail level, because they are never told that.
11994 MS YALE: Right.
11995 COMMISSIONER WYLIE: So we are going to try to tell them what it is worth?
11996 You see, it is far easier for me to look at this and say: Yes, you are doing better than we thought, so do more Canadian content. Do more of the things that the Broadcasting Act tells me I am supposed to require. You say reduce the rate so that I can improve my return without looking at whether this is cyclical.
11997 We often hear that cable operators tell us how expensive it is right now to modernize their infrastructure, to position themselves for the future. Should that be taken into account?
11998 I don't see too many calculations in that area. All it is is a fact file. The product you ask me to sell costs too much because I am not making enough money.
11999 MS YALE: I hope I don't disappoint you when I tell you I am not going to be in a position to give you that confidential information.
12000 What I can say is I don't think what we were really saying is as you describe, that it should go down because we are not making enough money. I don't think that was the link.
12001 I think the issue was it struck us as interesting, to say the least, that the services who say they are not doing well enough and need a restoration of profitability get to come before you and say we need an increase in our wholesale fee. And the ones who stay silent get to keep whatever money they happen to have, even if the profit levels exceed some minimum level that is seen by these applicants as necessary from a profitability perspective.
12002 Having said that, I certainly understand that from a public policy point of view it may be your preference to say if you are doing better than you planned, spend more on Canadian programming. That is certainly an option that is not unreasonable for you to pursue.
12003 What we were thinking of more is if we are going to think of this from a financial perspective as a revenue requirement and protect those who need more money to achieve a certain level of profitability, then we should also worry about those who make too much. It has to work in both directions, up and down.
12004 If on the other hand the Commission doesn't want to treat it that way and wants to think of it more like a price cap, if you will, where you have the opportunity to achieve a level of profitability and there should, as Suzanne has described in detail, be incentives for people to beat certain targets and then do better, fair enough.
12005 Then you can take the first half of our proposal, which is to freeze the wholesale rate, and not worry about those who are beating their financial projections on the one side, but not worry too much about those on the other side who argue that they need rate relief, as long as they have an opportunity to get to a reasonable level of profit.
12006 That would be the way that we would look at it as a tradeoff.
12007 There are no guarantees. There are no financial guarantees. It is more of an opportunity to achieve a certain level of profitability, and the starting point therefore should be a freeze and wholesale rate.
12008 THE CHAIRPERSON: Thank you.
12009 Commissioner Pennefather.
12010 COMMISSIONER PENNEFATHER: On another topic, you know that described video programming has been discussed as this hearing with the applicants. We are well aware that there are technical issues at the BDU level.
12011 Do you have any comment on the time frame for the resolution of these issues?
12012 MS YALE: Yes, we certainly have comments. We put in a submission yesterday to the CRTC on the issue of described video over SAP. Certainly in the case of NBRS we are very comfortable.
12013 I think when it comes to the implementation with respect to the specialty services, there are some fairly significant considerations.
12014 I am going to ask Michelle Beck to comment on that and what kind of time frame would be appropriate in the case of the over-the-air broadcasters and the specialties.
12016 MS BECK: With respect to the timing, I think what you are alluding to here are some issues with capacity on the satellite; so the distribution of the services to cable headends.
12017 I know Alliance Atlantis did talk briefly about it during their appearance.
12018 That is still a bit of an issue. The way that the services are distributed to headends those multiplexes, or the bandwidth that is available within those satellite channels and those multiplexes, are filled up. If each service then has to add a DVS component, that requires an additional 200 kilobits per second. And that is for each service.
12019 You have to reallocate some of the bandwidth of your video and decrease the quality on the video to accommodate the DVS.
12020 That is a little bit problematic. You do have to do that reallocation and likely move one of the services that is in fact on a current channel and move it out and likely use other satellite channels to accommodate that one service that is in excess in each of those satellite channels.
12021 The other issue that is somewhat problematic for the specialty services or those that get distributed over satellite is the fact that the satellite receivers that are located at the cable headends only decode or receive two channels of audio. That is the main stereo pair.
12022 It would require every cable operator to replace the satellite receiver at each and every headend for each and every service that they receive for analog distribution on cable.
12023 If you look at Class 1 systems, most of them have 77 channels of analog programming services. So that would mean that we would have to likely replace about 70 to 75 of those satellite receivers so that we could accommodate at least the reception of a third audio.
12024 They range in price from $1,700 to $2,000.
12025 We actually describe a lot of this in the in the submission that we filed yesterday with the Commission.
12026 In summary, the overall costs are what I would say exorbitant for the industry. That is just on the satellite distribution side alone.
12027 What we then have to do is because they are carried on analog, you use the SAP channel, the secondary audio program channel. That requires an extra module in the stereo encoder. That is a $500 cost item. Again, that investment has to be made on a per-channel per-headend basis.
12028 The problem is the stereo encoders that the cable operators have invested in, they did so back in the late 1980s, early 1990s, at a time when SAP didn't exist. So many of those stereo encoders that we have deployed don't even accept an additional SAP module to carry the DVS component.
12029 So those have to be replaced as well.
12030 COMMISSIONER PENNEFATHER: I take it you have described these capacities which are a little bit problematic and the stereo pair which is somewhat problematic.
12031 MS BECK: Right.
12032 COMMISSIONER PENNEFATHER: So a little bit and somewhat add up to what time frame for the resolution of these issues?
12033 We have had other discussions on the details of the technical issues. I take it you have tabled some estimation of costs. I was looking at the time frame to solve a little bit problematic problem and a somewhat problematic issue.
12034 What is the time frame?
12035 MS BECK: Well, the satellite capacity I am not sure I can talk to. We don't have much to do or have a lot of control over that aspect. So I can't talk to the satellite capacity issue.
12036 With respect to the investment in the equipment, what we would like to see is a commitment from the cable industry to pass through the DVS component on all of the digital services. Right now we think it is cost prohibitive for the entire industry, particularly our smaller members, to have to replace all of that technology at close to 2,000 headends, and particularly if they are carrying 77 channels of services. We just can't afford to do that.
12037 What we would be able to do, though, is certainly more readily and easily pass through the DVS in digital. There is not a huge financial impact if we are able to do that.
12038 COMMISSIONER PENNEFATHER: Are you working with the CSUA?
12039 MS BECK: Yes.
12040 COMMISSIONER PENNEFATHER: Thank you very much.
12041 Thank you, Mr. Chairman.
12042 THE CHAIRPERSON: Thank you very much, ladies. That was very helpful.
12043 Mr. Secretary.
12044 MR. LEBEL: Thank you, Mr. Chairman.
12045 The next appearing intervention will be presented by The Score Television Network Ltd.
12046 MR. LEVY: Good morning, Mr. Chair, Members of the Commission.
12047 My name is John Levy, and with me today are David Errington, on my left, and Grant Buchanan on my right.
12048 We support a seven-year renewal for OLN, but do not support their attempt to move into Category 6(a) professional sports.
12049 In their presentation last Wednesday, OLN said repeatedly that "we just want to continue to do what we have been doing" and that they wouldn't have asked for 6(a) if it had not been for the Commission's ruling on the "All Strength Challenge" program.
12050 At the outset this seems curious to us given that OLN first justified the addition of 6(a) to enhance viewing and broaden its appeal.
12051 Now, they have retreated and they are saying that they need 6(a) or modifications to 6(b) in order to reflect what they are already doing.
12052 When we first intervened, our concern was not so much what they had done so far. Rather it was about the future, given their close relationship with TSN and their proposed addition of 6(a).
12053 Now that we have more facts, it would appear that the question is whether to allow OLN to add 6(a) or keep them in a "clarified" 6(b). Both are difficult alternatives.
12054 Letting them into 6(a) based on "what they have already been doing" means that they have been in violation of their licence up until now. Leaving them in 6(b) and describing the sports they have been running as amateur is also very problematic.
12055 The matter is compounded by the applicant's lack of clarity. They really do not want to "just do what they have been doing up until now". Rather they want to use the commission "All Strength Challenge" decision to craft new rules.
12056 OLN's application states:
"[...] the biggest professional bull-riding tour is a professional sport...".
12057 Yet the Commission is now apparently being asked to define amateur in a way that will allow OLN to begin running it.
12058 Alternatively, you could call it professional and try to puzzle your way through the various imaginative attempts the applicant has made to draft the conditions of licence.
12059 If the Commission does have any sympathy for OLN on this matter, we prefer the alternative of leaving them in amateur sports. However, the new criteria for amateur sports as set out by OLN under paragraph 21 of their reply, do nothing to help clarify 6(b).
12060 These proposed criteria are just as impossible to interpret and enforce as the numerous "protections" that OLN has offered for 6(a).
12061 For example, the reference to "underexposed" to describe what programming could be allowed is incapable of definition, unless the Commission liked the suggestion of last year's Nielsen all persons 2» and 2 per cent of all hours tuned. In our view, ONL's proposed use of ratings is not relevant or practical.
12062 Further, the notion of looking to the percentage of income that athletes earn from events in order to figure out if they are amateur or not is even more impossible for the Commission.
12063 It makes more sense to look at the event rather than the athlete in determining whether an event is amateur or professional. This is the way that the current definition of amateur is applied.
12064 What is called for is more certainty, not more definitions that are incapable of consistent interpretation. To bring clarity to this situation, we prefer the following, most of which is already in place.
12065 The Commission should leave OLN in 6(b) subject to the following conditions:
12066 First, there should be no change to OLN's nature of service condition of licence. This means that every program has to "deal with outdoor creation, conservation, wilderness and adventure".
12067 Second, the Commission should publish and apply the test that it has developed in consultation with Fitness and Amateur Sport Canada and which employs in determining whether or not an event is professional.
12068 This is the definition that Vice-Chairman Colville read into the record last Wednesday. It says that an event will "normally" -- and that's an important word -- be considered professional:
a) if any of the participant is paid for appearing at the event;
b) if prize money is offered to the participant; or
c) if the goal of the event is to make a profit for anyone other than a not-for-profit entity.
12069 Subject to the following possible exceptions, every program on the OLN schedule should have to pass that test.
12070 According to OLN, the problem relates to a single event, the "All Strength Challenge" that contained a nominal amount of prize money.
12071 If the Commission is sympathetic to OLN's situation we proposed that where the winner's prize is under a certain amount -- let's say $5,000 -- the Commission could deem that even to be amateur (for the purposes of the OLN COL), assuming other criteria were met. That would give certainty that a "nominal" amount of prize money would not turn an otherwise amateur event into a professional event.
12072 The Commission's definition of amateur has the word "normally" in it, such that it allows for a case by case exceptions even if the prize money exceeds $5,000 or if one of the other prongs of the three-pronged test poses a technical problem.
12073 Third, OLN has said that it will not carry "stick and ball" sports. This has never been clearly defined, but it appears to mean "stick or ball" not "stick and ball".
12074 In paragraph 20 of the OLN reply which dealt with professional sports, OLN states that it will "not carry any of the major North American stick and ball sports", and then it lists NHL, CFL, NFL, NBA and MLB.
12075 A closer reading demonstrates that OLN has quietly tried to significantly reduce the scope of their longstanding "no stick and ball" commitment.
12076 First, they want to shrink it to just North American stick and ball sports.
12077 Second, OLN has inserted a qualifier "major", whatever that means.
12078 Third, OLN has tried to narrow the scope of the exception to justify well-known professional leagues.
12079 This is unacceptable. The longstanding commitment was not to run stick and ball sports period. That promise should be adhered to.
12080 The majority of the time spent discussing OLN's proposal has been devoted to two programs: The "All Strength Challenge" and professional bull-riding.
12081 In The Score's view it's questionable whether these fit under either the nature of service condition or amateur requirement. Nevertheless, we do not object to the Commission saying that OLN could run them if the Commission wants to carve out a special rule for OLN.
12082 Before doing so, The Score would note the following:
12083 One, the professional bull-riding tour appears to occur primarily in the United States and has been televised by OLN U.S. and by NBC. It is not programming that OLN Canada has already aired. Further, it features prize money of a million dollars U.S. to the winner.
12084 Second, the "All Strength Challenge" is a program featuring professional athletes who compete for prize money and it appears to be organized on a for-profit basis.
12085 Even so, if the Commission wants to let OLN air these programs, it is our view that it makes more sense to stick to the existing rules and create exceptions particular to these programs rather inventing new descriptions for the definition of amateur, or for that matter professional, that bleed over into other licences and sow confusion.
12086 In closing, we see no reason at the present time to allow any English-language analog specialty services other than TSN, Sportsnet and The Score to be pursuing live professional sports.
12087 In summary, our recommendation is as follows:
1. The Commission should leave the rules as they are, such that any sporting even on OLN must be both
a) in OLN's genre; and
b) either recreational or amateur, the latter according to the Commission's definition which we think should be published.
2. OLN should be required to continue with its commitment to refrain from running "stick and ball" sports as they had previously defined them, not as they are now attempting to redefine them.
3. For OLN and as a condition of licence, the Commission can exempt in advance any events which would otherwise be amateur for a nominal amount of prize money where the first place prize money does not exceed $5,000.
4. If so inclined, the Commission could also allow OLN to run as a condition of licence the "All Strength Challenge" and professional bull-riding, but every other program would have to pass the Commission's definition of amateur.
12088 Thank you and we would be delighted to answer any of your questions.
12089 THE CHAIRMAN: Well, your position is so clear that I don't think we have any questions.
12090 MR. LEVY: Excellent. Thank you very much.
12091 THE CHAIRMAN: Mr. Secretary.
12092 MR. LEBEL: Thank you, Mr. Chairman.
12093 The next appearing intervention will be presented by Alliance Atlantis Broadcasting Incorporated.
12094 MS YAFFE: Good morning, Mr. Chairman and members of the Commission.
12095 My name is Phyllis Yaffe, CEO of Alliance Atlantis Broadcasting. With me is Marc Rubinstein, President and Chief Operating Officer, and Rita Cugini, Vice-President, Regulatory Affairs and Business Development.
12096 We are appearing before you today to express our concerns about the amendments to the conditions of licence proposed by Prime and Outdoor Life Network.
12097 As we stated in our written intervention, we are not opposed in principle to any services making amendments to their conditions of licence. However, we do have concerns when the changes proposed will directly affect the competitive marketplace and will fundamentally change the nature of the service asking for those changes.
12098 In both of these cases the applicant has asked for a change in the way they deal with drama programming. Drama is a subject near and dear to our hearts because not only are we a significant producer and distributor of drama programming, but more importantly we operate Showcase Television, a network dedicated to drama programming, whose core mandate is to showcase Canadian drama in second window.
12099 With both of these applications we are concerned that the changes requested will have the result of making Prime and OLN either much more similar to Showcase or much more like general interest services, reducing diversity in the system and moving each of these services away from the niches they were designed to serve.
12100 We are also concerned that the result will be increasing competition for a scarce resource, second-window Canadian drama programming.
12101 Turning specifically to OLN, we note that OLN reduced its drama request from 15 per cent of the schedule to 5 per cent of the schedule over the broadcast year. Later, during Commission questioning, they backed away from drama entirely, indicating that their real interest was for more flexibility for sports. They were unable to project any increases in revenue from the addition of drama to their program categories, and quite prepared to withdraw their drama request.
12102 Under these circumstances, we do not believe that OLN has justified any change of condition of licence to add foreign drama, not matter what the definition. The addition of foreign drama would represent a dramatic shift from the reality programming niche OLN was designed to serve.
12103 The addition of Canadian drama is a different matter. As we have stated on numerous occasions, we believe that any niche service that is not currently permitted to air drama programming ought to be permitted to do so if such drama is original first run Canadian dram, and such drama is niche appropriate. We would support this notion in the case of OLN, subject to an appropriate definition of the niche.
12104 Our overall position is that when it comes to original Canadian drama, limited exceptions to the category restrictions are warranted to aid in resolving the system-wide challenges to the Canadian drama shortage. But these exceptions should be strictly limited to ensure that the drama produced is niche appropriate and that in terms of schedule it become a minor, less than 5 per cent of schedule, shift.
12105 Moving on to Prime, as we had stated in our written intervention, we have a number of concerns about their desired shortening of the copyright restrictions on Canadian drama. Rather than repeat those concerns, we would like to address a number of points they raised in their oral presentation and in response to Commissioner Pennefather's questions.
12106 First, they noted that the reduction in copyright would not affect "syndicated programming" as that programming does not go into syndication until after four or five years, or when 65 episodes of a series are available. While this industry standard for syndication does exist, it does not necessarily apply to most Canadian content drama. Very few Canadian series ever reach 65 episodes. In more and more cases, the second window will commence two or three years following the broadcast premiere of those programs on conventional television and will often include series which only lasted one season or less.
12107 Second, Prime noted that not many services are airing second and third windows except Showcase. While we agree Showcase is the most significant service licensing second-window Canadian drama programming, it is by no means the only service in the market for this material. APTN, Comedy, Space, Vision, W, and the provincial educational services, as well as any number of digital specialty services do broadcast second-window material on their services.
12108 More important to note is that it is Showcase's regulatory mandate to air second windows of every suitable drama in Canada. So the issue is not simply a matter of supply and demand. It is a matter of being able to fulfil Showcase's nature of service which, in the Commission's words in Decision 2001-153:
"[...] requires Showcase to be primarily a second-window exhibitor".
12109 Third, the Prime licence was issued by the Commission with the understanding that the bulk of its Canadian content spending would be dedicated to creating lifestyle and information programming targeted at a mature audience that was seen as underserved in the Canadian broadcast landscape. To shift to instead airing a larger volume of recent Canadian drama and shift Cancon expenditures to this programming will take away from the service to the community Prime was designed to speak to.
12110 Fourth, we noted that there was some dialogue between Commissioner Pennefather and the representatives from Prime about the list of programs we provided attached to our intervention.
12111 To be clear, this list was not a list of programs currently under licence to Showcase and, therefore, comments regarding exclusivity and shared windows and irrelevant.
12112 These programs are titles that to our knowledge are, or by September will be, ten years old and, therefore, available for Prime to licence within their existing conditions of licence. We note once again that most of the examples cited by Prime, "ENG" and "Street Legal", are on this list and Prime would be free to broadcast these titles now, should they wish to licence them.
12113 In addition, we disagreed with the assertion that the older programming had poorer production values. Many of the titles on this list are high-quality multiple award-winning dramas.
12114 In terms of the wealth of programming available, the list we provided was extensive and, frankly, this was not an exhaustive list. However, it is widely recognized that the number of new Canadian drama series has been declining in the last couple of years reaching a point of crisis in the industry.
12115 Showcase is dependent on second-window drama programming to fill its schedule. To allow Prime to be added to the competition for second windows for the reduced number of more recent dramas would add greater stress on the system. So the wealth of programming available is, and will continue for some time to be the older programming Prime is already permitted to air.
12116 Contrary to Prime's assertion last week, we believe that with their existing condition of licence, Prime has a greater opportunity for a producer to get greater exposure for his or her program as that program may not have been seen by viewers recently, and the Prime window would amount to a third or fourth exposure rather than competition with others for a second window.
12117 Finally, while Alliance Atlantis is a proponent of the synergies and benefits larger broadcast groups may bring to the table, this is one instance where those synergies may work to the detriment of both the broadcasting and production industries.
12118 The change in conditions of licence requested by Prime will create the opportunity for Global and Prime to licence consecutive windows of drama programming commissioned for Global.
12119 This will effectively allow Global, with no Canadian content spending requirement, to utilize the mandatory Cancon expenditure requirements of Prime to fund Global's on-air requirement to air priority programming.
12120 We do not feel that this opportunity should be created as it operates to undermine the commitments made by each licensee to the broadcast and production of Canadian programming that the Broadcasting Act mandates.
12121 In the end, we see no compelling reason why these changes are necessary or would in any way benefit the broadcasting system.
12122 Thank you for providing us with this opportunity to express our concerns regarding these applications. We would be happy to answer questions.
12123 THE CHAIRMAN: Commissioner Grauer.
12124 COMMISSIONER GRAUER: Thank you. Good morning.
12125 MS YAFFE: Good morning.
12126 COMMISSIONER GRAUER: I won't be too long and I would like to focus on the area of your concerns around Prime, in particular the whole area of original, second window, third window and obviously rights and whatnot so that I can understand it better.
12127 The first question, we talked a bit with CFTPA -- I don't know if you were here -- on Friday when they were here about the terms of trade agreements they are trying to negotiate with various broadcasters. I would like to know the answer to this.
12128 Would a terms of trade agreement between the producer and Global address some of your concerns with Prime in terms of utilizing the -- perhaps not entirely, but the Canadian content expenditure on Prime and then in second and third window on Global, in terms of compensating the producer?
12129 MS YAFFE: Mark may want to add something. I would be surprised that the terms of trade agreement could address those kinds of intricate details in terms of both the acquisitions and the financing of programming.
12130 COMMISSIONER GRAUER: So there is no way to fence it in in terms of that. Can you think of any other way that we could fence it in, any regulatory measures, conditions of licence?
12131 MS YAFFE: I don't think so. I think that is one of those issues which escapes the regulatory regime.
12132 COMMISSIONER GRAUER: When you talk about the availability of programs -- and I know we have heard from some of the other specialties. Comedy in particular talked about the difficulty of them getting programs that were not available to them. I think in particular they mentioned "22 Minutes".
12133 How does it work when you as a broadcaster-distributor-producer clearly have the rights to a lot of programming that you acquire in libraries? Is there a competitive system in terms of making that available to various broadcasters?
12134 What I am really getting at is availability of inventory out there; and second, ensuring that producers are being able to exploit the rights for their creation.
12135 I say all this because clearly if we are really going to get at this problem, we need to ensure that there are sufficient budgets and licence fees going to producers and that the system is in balance.
12136 MS YAFFE: I will begin, and Mark may want to add something.
12137 Of course the first issue is: Is there enough in the first window, because that is what creates the second and third and fourth windows.
12138 Our concern is, particularly for the Showcase genre drama, there isn't as much as there was. There may be more in the future. We are certainly looking at more things being ordered this year. By the time they get to the second and third window, those are years from now.
12139 Our first question is: Is there enough in the first window?
12140 Then, how are those rights controlled and are those programs made available to as many places in the system as possible for both the producer to exploit those rights and also for the broadcaster to have access to programming?
12141 Of course there are those sales -- and that's what they are, sales of programs to broadcasters -- that are done by the distributor. In our case at Alliance Atlantis they are done by a division called Alliance Atlantis Motion Picture Distribution, which sells television to Canadian broadcasters.
12142 Their mandate is to exploit those rights to the maximum for the benefit of the producers, whether we are the original producer or whether it is a second or third party producer for whom we are actually acting as the distributor.
12143 In our case we would negotiate with them for the programs we choose, that we feel are appropriate for Showcase, as quickly as we can get them.
12144 As I said in our statement, we at Showcase have the mandate of acquiring everything that is made that is suitable. That is our mandate. That is what the Commission asked us to do.
12145 Our view is if it is exists and it is in focus, we will try to buy it.
12146 Often the rights are gone and have gone to other broadcasters, and we have to wait for them to come out of those sales and come back to us -- not just from our own company but we will go to other people to sell as well -- but also from other distributors who control the rights to many other shows.
12147 So we are in the line-up. We certainly have a friendly relationship with Alliance Atlantis Motion Pictures. But I would say, as in all of our transactions, they are done at a market value with the right negotiations taking place. If we are not the best customer for a product, it will go somewhere else.
12148 MR. RUBINSTEIN: I would add, Commissioner, that I think the market dynamics are pretty good. I can't talk about Comedy in particular. Of course, we are talking about in our case a distribution division of Alliance Atlantis that we don't represent directly.
12149 That said, my understanding is that our distribution division really does active business with all the major broadcasters. Programming moves from broadcaster to broadcaster from time to time, as Phyllis was saying, as deals come up for renewal. The terms of those deals and those renewals will vary depending upon a whole host of factors.
12150 I think in general terms our company does a pretty vibrant partnership with all the broadcasters in distributing both Canadian and foreign programming.
12151 COMMISSIONER GRAUER: We may have covered this last week. We had a lot of people in front of us.
12152 I your view, the key goal right now is to increase the supply of original drama. Without the original programming, as you go to second and third windows with the obligations those broadcasters have, you run into the kinds of problems like the wear factor, lack of inventory; so the orderly marketplace, I guess, is a big part.
12153 Is that fair?
12154 MS YAFFE: Absolutely.
12155 COMMISSIONER GRAUER: I am going to go back to the original question I was asking last week, which is my concern that there is an expectation that everything that has a broadcast licence and is applied for should be funded by the fund; and that when it doesn't happen, that this is sort of a failure of the system.
12156 So naturally there is some concern in saying bring on all the original drama, to put that much more pressure without really having an overall sense of how it is all going to be funded.
12157 I know that producers -- and you are one -- have talked about licence fees going down, and the producers are saying they need bigger budgets to produce the kind of programming that is going to attract viewers as the system matures.
12158 I wonder if you could give your comments on that.
12159 MS YAFFE: It is certainly fair to say that increasing the number of people who could make drama would increase probably applications to CTS if one were to allow them to apply there.
12160 I don't believe that we all enter every year our view of what would work best in our network with the entitlement assumption that if we apply, we must be funded.
12161 We have all had those decisions sent to us that say I'm sorry, but this program is just not going to get funded. We are in the midst of this conversation right now in the industry, because however the lack of funding gets resolved, if it does get resolved this year, the question will certainly be in front of us, and that is: If you have managed to fund the program otherwise since you were last turned down and there is new money added to the system, what should happen to that program? It was ahead in the list and now it has found its money other places.
12162 So people do find money other ways to make programs. I certainly believe that we need to put more and more money into our programming. I am not suggesting that we can all live with the less funded programs or the lower budget programs at all times.
12163 I believe there is room for them in the system, and if they add to the complexity and the number of hours of drama being produced, the range, the opportunity for new people to get started in the business, it will all add to the value of our programming long term.
12164 I think you saw the unions agree with that yesterday.
12165 I think we all generally agree that not every program will be a million dollars. If there is a way to fund more, with or without the CTF as the only fund -- lots and lots of our shows get made right now without CTF with tax credits, with foreign sales, with distributor advances, with other things. We think that is a possibility for this kind of programming as well.
12166 COMMISSIONER GRAUER: I would argue that there are a lot of other funds that have been created as part of benefits that are available, and we have not even counted those.
12167 To be clear, when I talk about expectations, it is not entitlement. I am saying as someone who is somewhat removed from the dailiness of the system -- the fund has grown dramatically in the last few years, and so has the demand for funding.
12168 MS YAFFE: Right.
12169 COMMISSIONER GRAUER: Which is a good thing. But then when everything isn't funded and the fund is cut by $30 million, which over the course of three years -- that is where it was three years ago -- it is treated like a failure of the system.
12170 So when I said expectation, I meant that historically in the early days everything was funded. So as the competition for funds increases, presumably that should drive up licence fees. That is not a bad thing.
12171 I am concerned about permitting more until everybody gets --
12172 MS YAFFE: I think this year we certainly saw the most egregious situation where returning successful series went unfunded. I suppose that would set a new level of disarray in the system, when all of a sudden the four or five series that Canadians were watching and counting on fell out of the funding system, for all kinds of strange reasons.
12173 That is where I think people feel a slight -- maybe that is where the word "entitlement" actually exists, and maybe properly so.
12174 If a series is popular and working with an audience, one would hope that the rules that apply to funding in this country would allow it to continue.
12175 Of course, adding pressure at the bottom with more people applying, more Canadian content needs inside more licensed broadcasters will drive that pressure on the dollars.
12176 We believe, I guess, that there has to be a balance between letting new programs in and making sure that the successful ones continue to survive.
12177 COMMISSIONER GRAUER: Thank you very much.
12178 THE CHAIRPERSON: Thank you very kindly.
12179 We will now break for 15 minutes. Nous reprendrons à 15 minutes.
--- Upon recessing at 1125 / Suspension à 1125
--- Upon resuming at 1140 / Reprise à 1140
12180 THE CHAIRPERSON: Order, please. A l'ordre, s'il vous plaît.
12181 Monsieur le secrétaire.
12182 MR. LEBEL: Thank you, Mr. Chairman.
12183 The next appearing intervention will be presented by Bell ExpressVu Limited, Mr. Chris Frank.
12184 MR. FRANK: Thank you very much.
12185 Good morning, Mr. Chairman, Vice-Chairs, Members of the Commission. My name is Chris Frank. I am joined today by my colleagues Paul Armstrong on my right and David Elder on my left.
12186 The Notice of Public Hearing invited interested parties to comment on a number of important issues. ExpressVu would like to focus on two.
12187 The first is on the criteria to be used in setting wholesale rates. In that context, we have filed interventions on the applications made by CTV Newsnet, Rogers Sportsnet, The Score and VoicePrint for increases in their basic regulated rates.
12188 Second, we would like to comment on the methods we use to deliver described video programming.
12189 Regarding wholesale rates, we note that although in most cases the regulated fees do not apply to us, this rate is generally used as the starting point in negotiating rates for discretionary carriage. Therefore, the regulated rate is of great importance to both ExpressVu and its subscribers.
12190 We have outlined three key principles for setting appropriate rates: fairness to consumers, fairness to other programming services and fairness to distributors.
12191 From the consumer's standpoint, we note that rapid increase in the price of programming cannot be easily absorbed. Churn is an issue in today's competitive marketplace, especially when a digital distributor spends a considerable sum of money to acquire a new customer.
12192 Although we all work hard at customer retention, we continue to experience churn, as our packages expand to include new services and overall prices increase. We are concerned about the price elasticity of our service. We fear that large programming price increases, fuelled by double and triple digit rate increases, will lead consumers to more carefully review their entertainment options.
12193 The Commission, when it originally approves these services, made a conscious effort to approve a set that would be collectively affordable. We have concerns, based on the rate increases proposed by some specialty services, that their collective affordability will be challenged and we will see a drop in aggregate demand of programming services on our system.
12194 This lead directly to the fairness to other programming services.
12195 Because these services are not offered -- by their own choice -- on a pick-and-pay basis, they are all somewhat dependent for subscribers on the other services with which they are packaged. If one or two services in a thematic package achieve a large price increase, the retail price of the whole package would inevitably increase. That increase, as we observed earlier, could lead to reduced demand for all services in the package, or beyond to other packages and services.
12196 We believe that the cost of programming services should be fair to the distributors. What we have noted -- and our friends at the CCTA made the same observation in their intervention -- is that specialty services have been dong well financially.
12197 DTH has been in no small measure responsible for this state of affairs, bringing more households into the system, more subscription revenues -- and advertising revenue, I might add -- and more eyeballs to the specialty services.
12198 However, while the services appear to be doing well, newer digital distribution undertakings still have not reached profitability after more than five years of operation. It is a matter of balancing risk and reward. So far, it appears the risk is mostly ours and the reward is mostly theirs.
12199 We therefore suggest that the Commission examine the rate increases proposed with this imbalance in mind.
12200 A second aspect of fairness is that the wholesale rates should be the same for all distributors operating in substantially similar circumstances.
12201 Mr. Chairman, we heard Sportsnet suggest last week that make-whole rates would be appropriate for discretionary carriage. With respect, we don't think that is fair or in the public interest.
12202 Make-whole is an archaic notion, developed at a time when there were few specialty services, and particular consideration was warranted to protect the services that might be moved, in a single distributor system, from basic to a discretionary analog tier.
12203 Moreover, when RSN and the other 21 services were licensed in 1996, it appears to us that they were told by the CRTC that make-whole rate-setting was off the table. In an era of significantly expanded consumer choice, with scores of newly licensed services in discretionary packages, make whole rates are inefficient and counterproductive. They amount to a tax on distributors and impose an artificial increase on the threshold price for other programming services.
12204 In today's 300-channel universe, both programmers and distributors must accept that penetration will be driven by the customer's demand for a service or group of services and not by artificial cost mechanisms which divert subscription revenue to certain services, penalizing other programming services and distributors alike.
12205 Digital technology empowers consumers with the ability to select services and programming on a more granular basis.
12206 In short, consumers are a savvy lot, well aware of the capabilities of digital technology and the power of competitive choice. If we do not recognize this as an industry and act on it, consumers will seek other means of acquiring their favourite programs and channels.
12207 I might add parenthetically they seem to be doing that now.
12208 Simple arithmetic demonstrates that make-whole is discriminatory to all-digital BDUs. Please refer to the chart we have attached.
12209 At 60 per cent penetration, a make-whole rate would be 67 per cent higher than the regulated rate. It would be 33 per cent higher than a make-whole rate based on 80 per cent penetration. You can quickly see that the wholesale rate offered to an all-digital BDU would be substantially higher than the rate offered to analog BDUs.
12210 From our experience, Sportsnet does not appear to apply the make-whole philosophy in its dealings with cable for carriage on high-penetration analog tiers. But when it comes to ExpressVu -- and we presume other all-digital BDUs -- the offers we get from RSN tend to be in the make-whole range or higher. At some penetration levels, the rate would be significantly higher than the make-whole rate.
12211 Therefore, we urge the Commission, if it decides as a result of this hearing to address rate-setting principles, that it explicitly reject the notion of make-whole rates for carriage on discretionary tiers or packages.
12212 We also offered some specific comments on three of the specialty services that seek rate increases, which I will briefly touch on now.
12213 Regarding The Score, we object to the proposed increase from 10 cents to 40 cents, which represents a 300 per cent upward adjustment. In 2000, when the Commission approved The Score's application to provide live programming, it did so based on the licensee's promise that its wholesale fees would not increase.
12214 Now The Score is claiming that the new mandate is the underlying reason for a significant wholesale price increase. We don't think this is what the Commission had in mind when it allowed this licensee to add live sports to its programming line-up.
12215 Accordingly, we urge the Commission to examine The Score's business plan over the longer term and if it finds that a significance increase is required, to find a way to implement the increase in modest steps, staggered over several years.
12216 Regarding Sportsnet, we oppose its proposal for a 37 per cent increase to allow it to match the regulated wholesale fee for TSN. Consumer research and program ratings demonstrate that viewers perceive Sportsnet to be of significantly lesser value than TSN. We would be prepared to walk through some charts and graphs from our studies with you today, if you so desire.
12217 This evidence has been filed with the Commission and provided to RSN in another process dealing with the current rates payable by ExpressVu to RSN. By almost every objective measure, TSN out-scores all four Sportsnet feeds combined.
12218 We therefore question why Sportsnet should command the same wholesale fee. On a value of service basis, there is no justification for rate parity for all four feeds of RSN relative to TSN, let alone parity for the in-region fee relative to TSN.
12219 To be fair to subscribers, we urge the Commission to approve a more reasonable increase. This would also remove any significant impact on other programmers and distributors.
12220 In the Notice of Public Hearing, the Commission indicated its desire to discuss delivery of the Described Video feature, a service for the vision impaired.
12221 ExpressVu's digital distribution technology offers a technical solution not available to analog distributors. ExpressVu delivers the described audio on a digital audio channel and uses software in its subscribers' digital receivers controlled from its broadcast centre to marry the described audio track with the video signal that appears elsewhere in the program line-up. To the consumer, the program appears on two separate channel: the regular program on one channel and the same program augmented with a described soundtrack on the other.
12222 In late 2002 ExpressVu launched a major new initiative to improve its service to the visually impaired by establishing a series of specially designated described video channels for the conventional broadcasters. Viewers can change from one described program to another with a simple "up" or "down" button on the remote control. As more described video programs become available, ExpressVu will add more channels to support them.
12223 An important feature of our initiative is our Audio EPG. Our Audio EPG consists of a large type face alphanumeric presentation and recorded audio voice-over that describes the upcoming described video programs, the scheduled broadcast time, and the channel numbers on which they can be found.
12224 Reception of described video programming on ExpressVu requires no special or additional equipment. All of ExpressVu's digital receivers have the capability of receiving this programming. ExpressVu essentially provides this feature to all of its subscribers at no additional charge.
12225 This brings us finally to the application by VoicePrint for an increase of its wholesale rate from 1 cent to 4 cents.
12226 ExpressVu has been a strong supporter of VoicePrint since its inception. We have been at the forefront of supporting this service with both effective access and free satellite distribution. Unlike in the analog world, VoicePrint is available to all of our subscribers without special SAP decoding equipment, and it is complemented by our Audio EPG and our array of described video channels; all closely situated on our EPG for easier access.
12227 We urge the Commission to approve a rate that would allow the service to continue, perhaps not with all of their initiatives, in a way that would provide continued incentive to VoicePrint to seek financial support from other public and private sectors.
12228 We feel that BDU subscribers should continue to support this service, at a reasonable level.
12229 Finally, we repeat our objection to VoicePrint's proposal that ExpressVu subscribers should fund the distribution of free VCRs to facilitate reception of SAP signals from cable. This equipment is needed only by analog subscribers, not by our subscribers.
12230 If the Commission believes that distributors should support this initiative, we suggest that the wholesale rate be adjusted so that digital subscribers do not pay for equipment they do not need; digital equipment that they and their chosen distributor have paid for and which currently permits them access to the programming in question.
12231 Thank you, Mr. Chairman and Commissioners. Those are our comments.
12232 My colleagues and I would be pleased to answer your questions, should you have any for us.
12233 THE CHAIRPERSON: Thank you. I have a few questions, Mr. Frank, arising from your intervention and today's remarks.
12234 You probably heard that I put to a number of applicants the proposal that you had made in paragraph 8 of you intervention. I assume that was a proposal that the starting rates be the rates that are currently in force going into the future with recourse to the dispute settlement mechanism of the Commission.
12235 Is that correct?
12236 MR. FRANK: That is correct.
12237 THE CHAIRPERSON: Including the regulated basic rate, do you have any comments on the relationship between that rate and the negotiated rates?
12238 MR. FRANK: Yes. We find that the two are inexorably linked. As I said in my opening remarks, the starting point for discussions with most services, especially well established services, is the regulated rate we have reached on a make-whole provision.
12239 That is why we are strongly advocating the delinkage of the two and the Commission to explicitly reject the notion of make-whole programming. It just doesn't fit in a digital world that is married to choice and variety.
12240 THE CHAIRPERSON: Do you say that the make-whole rule is in effect currently?
12241 MR. FRANK: We certainly face that on a regular basis in our program negotiations.
12242 It is particularly important at this juncture in our company and in our sector's development, because we are just coming out of programming deals that were signed when we had either no customers or very few customers, hence no leverage.
12243 To put it mildly, the rates that we have been paying are not competitive with the rest of the industry.
12244 That might be understandable when you compare an upstart DTH company with very few customers to a very large mature cable company with many hundreds of thousands, or in fact millions. But we found that we were paying considerably more than Class 3 cable systems and SMATV systems.
12245 So we have to come a long way in a very short period of time. It would be very helpful to us if the Commission would reinforce its statement back in 1996 when we understood it to say make-whole is not on the table.
12246 THE CHAIRPERSON: That was going to be my next question. Are you familiar with that statement?
12247 Yet you want it explicitly -- what term did you use? Explicitly reject the notion of make-whole rates, which as you point out, at the time of licensing in 1996 the Commission addressed.
12248 Are you saying that as a result of dispute settlements that you have had since that time, the make-whole rate has somehow been reinforced by the Commission?
12249 As to negotiations, I suppose each side takes a position.
12250 Are you saying that the make-whole principle, notwithstanding the statement in the introductory announcement to the 1996 decision, has been reinforced in the dispute settlement process since then?
12251 MR. FRANK: Not so much the dispute settlement process, because to this date we have not had that many. But I fear that the number will increase dramatically in the future.
12252 It is more in our negotiations where programmers with a lot of leverage essentially put in front of us a rate card based on make-whole or worse.
12253 I think it would save a lot of time in the negotiations and perhaps obviate the need for dispute resolution if the Commission was crystal clear again on this point.
12254 I appreciate that it is repetitive, but I think it would be very helpful in prospective rate negotiations.
12255 THE CHAIRPERSON: I did hear, as you probably did, a number of the programming services -- I can recall one or two at least -- who said they recognize that the make-whole era is no longer with us.
12256 Notwithstanding that, you are still saying, as a Commission principle as distinct from an argument that I might want to use against you on the other side of the table, that it still has a lot of legs to it?
12257 MR. FRANK: You will appreciate, sir, that in these negotiations past Commission statements, policies and regulations often form the foundation of very key points that one side or the other wants to make or wants to gain. Whereas a service with a lot of leverage, with a lot of popularity, a service that is essential to keep under contract, might ask for make-whole provisions, if in a recent CRTC decision that notion has been explicitly rejected that would make I think the job of negotiation quicker if not somewhat easier.
12258 THE CHAIRPERSON: Why would we want to help you in negotiations --
12259 MR. FRANK: I was thinking about the system as a whole.
12260 THE CHAIRPERSON: I think I have your position.
12261 Turning back to your proposal in paragraph 8 of your May 1st intervention for the services, I am now getting a refined understanding of what you mean.
12262 You say that the services, when negotiated, established wholesale rates that differed from the regulated rates but generally based on the regulated basic rate; and that the starting point is not a new basic rate but rather the rates in effect with each distributor.
12263 You are not advocating the end of basic wholesale rate regulation, are you?
12264 MR. FRANK: Well, we put that forward as a proposition and we provided we thought a few good reasons why the Commission might want to consider that.
12265 Our main concern is the delinkage of the basic regulated rate from the negotiated discretionary rate inasmuch as make-whole provisions apply.
12266 We were trying to get to fair rates, fair for both the programmer and the distributor; rates that recognized that we shouldn't be paying for customers who are not watching the service.
12267 THE CHAIRPERSON: What do you mean by the starting point, when you say that the starting point for negotiated rates in future periods need not be a new basic rate but rather the rates in effect?
12268 If the rates in effect are in turn based on the basic rates -- and presumably it is based on a rate that is based on the basic rate, in any case, by your proposal.
12269 MR. FRANK: What we were contemplating there was that the services would want to have some kind of starting point. They wouldn't want to start in free-fall.
12270 The point we are making is that there already is a rate out there as a benchmark.
12271 I think you pointed out to the CCTA panel -- I think my interpretation is right -- that our two positions were very similar, although the language was different. That is the only point that we are trying to get to.
12272 THE CHAIRPERSON: The only party that has appeared before us that has advocated non-regulation of a basic rate expressed is Quebecor. CCTA and Cogeco have not taken that position.
12273 Which side of that are you on?
12274 MR. FRANK: Our submission asked the Commission to consider the abandonment of setting regulated fees for basic service. It was a proposition that we thought was worth considering.
12275 The essence of it is that we want to ensure that there is a delinkage between discretionary rates and basic rates. We get into a negotiation environment where everyone understands that we want to pay a fair rate but we do not want to have any kind of make-whole provisions. We do not want floors. We simply can't afford on a go-forward basis in today's marketplace to pay for customers who are not subscribing to the service.
12276 THE CHAIRPERSON: In your proposals I noticed that you don't wholly oppose the rate increases. You repeat in your presentation today, for example, in regard to Sportsnet -- you urge the Commission to approve a more reasonable increase, as you put it.
12277 Similarly in regard to The Score, you say if the Commission intends to do it, then you say stagger it over several years in modest steps.
12278 Would you care to ballpark the numbers you would mean by the reasonable increase for Sportsnet and the modest steps staggered over several years for The Score?
12279 MR. FRANK: Perhaps I could make a couple of comments before I get to the meat of your question.
12280 I sure would like to leave the Panel with the impression today that ExpressVu values very highly the specialty service sector and in fact the pay TV centre and the Canadian conventional broadcasting sector.
12281 Our point of product differentiation is Canadian programming. If you take away Canadian programming, then there is really no difference between us and EchoStar or DirecTV, and one has to ask the question: Why bother?
12282 So we recognize that Canadian programming is very important to our national broadcasting system and to our ability to sell services to our customers.
12283 Having said that, it is important to balance the financial needs of distributors, especially new distributors like ExpressVu and other new entrants, or relatively new entrants, who have not made any money yet, have not returned a penny to their shareholders, and the needs of specialty programmers to acquire both Canadian and foreign programming that is compelling and interesting to customers.
12284 That is a long-winded way of saying we recognize that this is a balancing act. It needs to be a fair balancing act.
12285 I think last night's panel from Cogeco and Vidéotron -- I think it was Mr. Mayrand who made the point that we have a very expensive highway. A number of companies have rolled out very expensive highways for programming vehicles to drive on.
12286 There needs to be an incentive to continue to develop that highway. We have high definition coming. We have interactive television coming, a host of new broadcasting services. If we don't stay competitive in terms of capacity and sophistication of capacity and the equipment used to decode the signals transported on that capacity, we are going to fall out of favour very quickly.
12287 So there is a balancing act here.
12288 I think the Commission is better positioned than us to determine what a just and reasonable -- if I can use that expression -- rate is. We are not opposed to rate increases for programming services, provided that they are justified and balanced and don't cause our whole service to become unaffordable; or put another way, affordable but customers downgrade and purchase fewer services.
12289 The pressure is on us as distributors to launch more services, create more capacity. As I said -- and I am repeating myself -- if we don't have the incentive to do that, it may not happen.
12290 THE CHAIRPERSON: The sum total of the rate increases that are being addressed is some 70-odd cents.
12291 Is that correct?
12292 MR. FRANK: I heard that math this morning, and it seemed right to me at the time.
12293 THE CHAIRPERSON: Let's assume the Commission were inclined to approve all the rate increases. Would you think that would compromise the price you would have to charge to pass those on to the public and create churn for you?
12294 MR. FRANK: Yes, I do. That will engender retail price increases in the $1.30 to $1.60 range depending on how aggressive a distributor wants to be. As a relatively new kid on the block, ExpressVu has to be very prudent about how quickly it takes its rates up.
12295 We are getting to a point where if our business doesn't start to show some black ink, our shareholders are going to start to wonder about its long-term viability.
12296 Internally, we have a high-wire act to perform. We have to keep our service competitive and interesting from a price perspective to customers; yet we also need to justify the amount of money that is being provided to us to create this wonderful satellite highway.
12297 THE CHAIRPERSON: I am back to my previous question on reasonable increases and staggered introduction of increases.
12298 If 70 cents is an amount that you feel that the retail price leads to a decline in affordability -- you have put forward the notion of increases. What level do you feel would not --
12299 MR. FRANK: We would certainly hope that the rate adjustments would be single digit as opposed to double or triple digit and that before single digit increases were approved, the Commission would think that they are wholly justified from a financial performance and programming perspective.
12300 THE CHAIRPERSON: Have you done any studies or surveys at various consumer price points that would back up what you are saying?
12301 MR. FRANK: In terms of --
12302 THE CHAIRPERSON: The increases that you are addressing in this proceeding; any evidence that you could show us that would show tail-off or churn at various price points.
12303 MR. FRANK: I can offer you what my colleague Paul Armstrong has just characterized as empirical observations.
12304 Since we have been in business, in absolute terms our ARS is flat or slightly declining. That is in an era where we have launched tens of new services. We launched 40 new services two years ago, and we would have expected in absolute terms a jump in our ARS.
12305 I think we have sufficient empirical information inside the company to suggest that the consumers's appetite for programming services is not inexhaustible and that if prices rise too quickly in certain areas, consumers will either downgrade or turn to another distribution medium, perhaps one that is not licensed for service in this country.
12306 THE CHAIRPERSON: I take your general overall point that is basic economics; that high prices reduce quantity. In terms of what we are focusing on at this hearing, you don't have any data to back up --
12307 MR. FRANK: I cannot offer you specific studies; no, sir.
12308 THE CHAIRPERSON: Thank you.
12309 Commissioner Colville.
12310 COMMISSIONER COLVILLE: I am having a little bit of difficulty understanding your point on this.
12311 You accept that there can be a basic rate to use as a basis for negotiation, but at the same time you want to delink, to use your phrase, the basic from discretionary.
12312 I am having trouble understanding where the basic rate fits, then, and why indeed we would do that.
12313 I take your point related to your chart. I gather that your view is currently we have in effect an inverse relationship between subscriber penetration and the rate; that is, as penetration goes down, the rate goes up. And you don't accept that.
12314 Is that correct?
12315 MR. FRANK: That is correct.
12316 COMMISSIONER COLVILLE: So would it be your view that you would want to see in fact a direct relationship with subscriber penetration; that is, that as the penetration goes down, the rate goes down?
12317 MR. FRANK: I think what we would prefer is a negotiated rate. That would be one of our negotiation positions, yes, but I am not sure that I would want to lock into that particular principle for all services.
12318 COMMISSIONER COLVILLE: I guess you want us to avoid the make-whole principle. What principle do you want us to adhere to? Just simply a negotiated rate?
12319 MR. FRANK: Our understanding is that in discretionary packages or tiers the rate is to be determined on an arm's length basis. I would simply like to see a statement from the Commission that make-whole, or worse, is no longer acceptable.
12320 COMMISSIONER COLVILLE: Would you accept that the rate on a tier can be somewhat higher than the basic rate then, just not make-whole?
12321 I am having trouble understanding.
12322 MR. FRANK: Yes. If I understand that, yes.
12323 COMMISSIONER COLVILLE: All right. Thank you.
12324 THE CHAIRPERSON: Commissioner Wylie.
12325 COMMISSIONER WYLIE: How are the packages or thematic packages set now by ExpressVu? Is there a whole list of services given and one is supposed to pick ten, or does ExpressVu set those tiers and say: For this it's X dollars and for that one it is Y dollars?
12326 MR. ARMSTRONG: I'm sorry, are you talking about the retail proposition or the wholesale proposition?
12327 COMMISSIONER WYLIE: The retail proposition.
12328 Are there tiers set the way they are with cable where you set them and you say: Okay, here are your choices. If you take this tier, this is what you are going to get in it and it's going to cost you X.
12329 MR. FRANK: I think consistent with the best interest of both programmers and the shareholders of ExpressVu. We price our services to encourage top down buying. In other words, we want people to buy as many service as they can possibly afford. So at the thematic package level we set prices based on wholesale rates so that we can make a certain margin and earn sufficient revenue hopefully at some point to recover our costs.
12330 Then for the larger packages we discount, accept a lesser margin, to encourage people to buy more. It's kind of like your little profit dealer at the corner of First and Main.
12331 COMMISSIONER WYLIE: I am not sure that answers my question.
12332 Do you say "This is the thematic package for "X" dollars" or do you say, "I will give you ten services that you pick, you make your package and then I will tell you what the price is"?
12333 MR. FRANK: I am sorry, I did misinterpret your question. We provide fixed amount packages, yes. We do offer some degree of pick and pay with new Category 1 and 2 services.
12334 COMMISSIONER WYLIE: But the services that have been established before Category 1 and 2, you set the packages. Because, as I said earlier, with the CCTA as long as the package and the prices in it and what I get as a service is known to me, is it surprising to you that people would say, "Well, I want make-whole. The Commission has said that if I am not discretionary, considering the commitments I have made and my CPE and whatever else, how much diversity I am going to offer, et cetera, and the nature of the service I have, this is the price when it's not discretionary".
12335 But how discretionary is it as a service provider when you are in a tier of five, six, seven more services, some Canadian some not, and you have no idea what the value of your service is?
12336 The package may be discretionary, but your service is not and you are not told what the value is because nobody tells you how much anybody else is getting, either initially or as a markup.
12337 Isn't the instinct then to say, "Well, my best bet here, since I am kept in the dark about what my product is worth, is to say make-whole. The Commission has said that if I perform in this fashion and I am not discretionary, this is what I am worth".
12338 How discretionary is this, let's say for a service like Showcase or one of CHUM's services, when you set the package, you set the markup, you set how much you pay everybody else? The service is not discretionary, so what are your instincts? It's to say, "Well, I want to have some idea of how much you are paying me and my only benchmark is wholesale".
12339 So if we wanted to say no make-whole, maybe we have to open up a little more how these things are done so that there can be a negotiation as to what your product is worth to the customer at the end of the day, unless your use BBMs or a level of advertising, or whatever.
12340 What is the smallest thematic package you offer fixed for a price? How many services are in it?
12341 MR. FRANK: Probably third-language services where we have single or --
12342 COMMISSIONER WYLIE: Not English or French.
12343 MR. ARMSTRONG: Actually, madame Wylie, I believe we have a French-language package with four services in it --
12344 COMMISSIONER WYLIE: Maybe you can guess. How large can a package be?
12345 MR. ARMSTRONG: I think the largest thematic package has ten services in it, and I would further add though that I think the services -- you could ask them, they will back up here, but I think a lot them take a certain amount of comfort from being in a package.
12346 I recall in the days of SPTV, the submissions by Ms Logan and that association, they took a lot of comfort having the services in packages.
12347 I dare say, if you asked Outdoor Life Network, which is in a package with TSN and Sportsnet, if they would like to stay in that package or whether they would like to be on their own, I would guess that they would like to be in the package with TSN and Sportsnet.
12348 COMMISSIONER WYLIE: I am not questioning the value of being packaged. I am questioning the actual very precise matter of the wholesale fee or tariff for rate you get inside that package. Believe me, I am for packages because I think they serve the objectives we are supposed to enhance, according to the legislating that tells us what to do.
12349 But I am saying, it's not surprising that the reaction is make-whole when you don't know, you are in the dark about what else is in the package and who gets how much money, et cetera.
12350 So if we want to start focusing with more economic principles on what each wholesale rate should be, combined with what we are all about, which is diversity, one would have to be more open about what is going on inside your package because if I owned a service, I would not consider that in a tier of ten I am discretionary. I am not. I may be the driver. I may be a drag-on, but the customer is not picking me.
12351 When you say "depending on who watches what", that's true on pick and pay. It's not in a tier. It's not a principle that I find very economic when one is in the dark about the whole and you only put the flashlight on the one service. That's what I would do too, is I would say "If I were not discretionary, this is how much I would get and I am not discretionary here either and I have nothing else to go by".
12352 MR. FRANK: There is a lot of territory in a potential response to that. Let me have a go at it.
12353 COMMISSIONER WYLIE: Not a lot at all.
12354 MR. FRANK: First of all, as a matter of principle and consistent with the Code of Conduct that we put in front of the Commission back in 1999 when new services were launched, we consult with our programming affiliates prior to any change in packaging. So we don't make arbitrary changes. We view it very much as a partnership and we take what they have to say very seriously prior to any decision that we make.
12355 The second point I would note is that all of our thematic packages -- and that is the way we have gone so far in our five-plus years history -- it's a common genre. If it's sports or movies or kids, there is commonality amongst all the services to the maximum extent possible.
12356 It's true in some of our French-language packages because of the paucity of services we are being forced to group fish and fowl, but to the maximum extent possible we group like-services.
12357 In terms of the value or the price that is placed on those services, as I said, it's really a function of the wholesale rates we have been paying up until now. Of course, for our larger discounted packages, which is just an ensemble of all of the thematic packages, as much as you can afford to take, we discount that quite heavily to encourage penetration because we are in the business of selling as much as we can.
12358 As to more insight, baring confidentiality issues, contract confidentiality issues, the give and take of negotiations generally surfaces most, if not all, of those issues.
12359 I would like to think that our program affiliates feel like there is a consultative process involved and that we are doing our very best to sell as many of them as possible.
12360 COMMISSIONER WYLIE: Thank you, Mr. Chairman.
12361 THE CHAIRMAN: Counsel.
12362 MR. WILSON: Thank you, Mr. Chairman.
12363 I just have two questions just to clarify a couple of matters arising from your presentation this morning with respect to described video.
12364 In paragraph 16 you refer that your technology offers a technical solution not available to analog distributors. I just wondered if you could tell me, does that -- to use your solution -- does that entail any technical changes on the part of the programmers to get that signal to you?
12365 MR. ARMSTRONG: The programmers have to provide another audio feed. My understanding is that audio feed takes about 115 kilobits of capacity. Most of our audio feeds are piped in from fibre facilities from across the country, from various hubs from across the country, and we feel there is room on those fibre facilities to add more audio tracks.
12366 So as long as they provide the audio tracks to us, we take it from there.
12367 MR. WILSON: Thank you.
12368 Just one further question. In paragraph 17 at the bottom you mention that as more described video programs become available, you express you will add more channels to support them.
12369 Do you envision that they may, at some point in the future, become capacity issues for you with that?
12370 MR. ARMSTRONG: Definitely at some point in the future. I think the requirements currently on a number of the conventional licensees are something in the order of four hours a week or a month, or something like that. This is part-time programming, if you will.
12371 So given a digital distribution system where you are bringing in a few kilobits for a period of an hour on the Thursday night, we can fit it in, but eventually -- and I think Ms Yale referred to this earlier -- if you had 78 channels blasting described video 24 hours a day, yes, that could be a problem, but in the short term we think that we have sufficient capacity that we could handle more.
12372 MR. WILSON: Thank you.
12373 MR. FRANK: Can I just add a footnote to that? Capacity is going to become an issue for all distributors as we move into an era of high-definition television. As all programming undertakings move into the interactive television world, there is going to be tremendous pressure on our equipment and constant pressure to either expand the amount of raw capacity we have available, or find ways to improve our compression system. So this will be a constant struggle in the future and your point is a very good one.
12374 MR. WILSON: Thank you.
12375 I have no further questions, Mr. Chairman.
12376 THE CHAIRMAN: Thank you very much, gentlemen.
12377 MR. ARMSTRONG: Thank you.
12378 MR. FRANK: Thank you.
12379 THE CHAIRMAN: Mr. Secretary.
12380 MR. LEBEL: Thank you, Mr. Chairman.
12381 The last appearing intervention will be presented by the National Broadcast Reading Service Incorporated.
12382 MR. TRIMBEE: My name is Bob Trimbee. I am the President of the National Broadcast Reading Service. With me today are John Stubbs, our Vice-President Operations at NBRS, and Eric Rothschild, our long-time advisor and supporter.
12383 Thank you for the opportunity to discuss described programming in the context of these specialty renewals.
12384 As you know, NBRS is a leading proponent for the inclusion of described programs in the Canadian broadcasting system.
12385 You have made it clear that you have read our written intervention so I shall be brief and then we will try to answer any questions you might have.
12386 Our position is that specialty television, like conventional television, should be required to broadcast described programs. The only exceptions should be those services whose programming doesn't lend itself to description. That would include services like CTV Newsnet, ROB TV, Pulse 24, Sportsnet, The Score and MuchMoreMusic.
12387 In our view, the other specialty services currently up for renewal should each be required to broadcast at least two hours per week of described Canadian programs during the first three years of the renewal term -- three hours in years four and five and four hours beginning in year six of the renewal term. At least half of the programming each week should be original. By "original", we mean the first time a program is broadcast by that specialty service.
12388 These are the same levels that you set for conventional television two years ago.
12389 The availability of described programming is not an issue. Specialty television typically represents the second window, so it is reasonable to expect Canadian programs they acquire on a going forward basis will already have been described for conventional stations.
12390 The cost of an hour of described programming is not an issue. The cost has dropped dramatically in the last three years -- from $5,000 an hour to as low as $1,500 an hour.
12391 Three years ago we were the only Canadian producer of described programming. Canada now has several description players and the business has become very competitive. We think that is just terrific.
12392 The technology required to distribute described programming is not an issue. Whether it's analog or digital, cable or satellite, the equipment is readily available to distribute the programs. In our view, the only issue is access.
12393 The Broadcasting Act says that programming accessible by disabled persons should be provided within the Canadian broadcasting system as resources become available for the purpose.
12394 Commissioners, the resources needed to make television programs accessible are available today. No one disputes that described programs or the technology needed to distribute them are readily available right now. Some take the position that the distribution system isn't currently set up to distribute described video. It will take time and it will be expensive to upgrade the distribution system. Until that happens, they argue that they shouldn't have to add described programming to their schedules.
12395 Some suggest you should wait for digital. Everything will be solved when broadcasters and distributors convert to digital.
12396 Commissioners, waiting for digital is not the answer. It will be years before most Canadian households upgrade to digital. Analog and digital will co-exist for a long time.
12397 The research we filed with our VoicePrint application suggests that blind and low-vision Canadians may find it difficult to afford the upgrade to digital. Again, we say waiting for digital is not the answer.
12398 Some have told you that additional satellite bandwidth is required to distribute the description soundtrack. They suggest this poses a significant obstacle, both in terms of cost and capacity -- extra costs for bandwidth, extra costs for receivers, extra costs for cable headends. We find all of the arguments predictable and familiar.
12399 The same arguments were made in the United States by broadcasters and distributors. What we also know is that the Americans came up with cost-effective solutions once the FCC required them to distribute described programs.
12400 The solution for American networks was to distribute the described soundtrack as a separate mono audio stream. This approach requires minimal satellite bandwidth and low-cost audio receivers at the BDU headend. From what we are told the American approach is cheaper and simpler than anything discussed during these proceedings.
12401 That said, we are not here to debate the cast of upgrading facilities to distribute described programs. We don't think you will ever get accurate estimates from broadcasters or distributors as to the costs. It's certainly not in their interests to have you believe it is doable or inexpensive.
12402 Commissioners, the issue is access. The solution depends on you. You have the authority to require specialty broadcasters to include minimum levels of described programming in their schedule. You have the authority to require distributors to distribute the described signal. We believe you should do it now as part of these renewals. There is no justification to delay.
12403 This was confirmed last Thursday when Prime became the first specialty service to commit to meet the described program levels that we have proposed. Congratulations to CanWest for taking the lead.
12404 Prime decided to make the commitment after two major BDUs advised them that within 90 days they will be able to distribute described programs to at least 42 per cent of Prime's subscribers. It's a terrific start. Prime said the percentage will grow over the licence term. This news would suggest that the distribution of described programs is not nearly the technical challenge that you have been led to believe.
12405 Commissioners, one thing is certain. If you impose these obligations on specialty broadcasters and distributors, they will find a way to do it for far less than anyone suggests it will cost right now.
12406 Canadian broadcasters have demonstrated many times that given the impetus, they will find a way. Nothing we have heard in the past week changes our position. The time to mandate access is now. It will make a world of difference to some 2.8 million blind, low-vision and print-restricted Canadians.
12407 Thank you for your time and attention.
12408 THE CHAIRMAN: Thank you, Mr. Trembee.
12409 Commissioner Pennefather.
12410 COMMISSIONER PENNEFATHER: Thank you, Mr. Chairman.
12411 Good afternoon, gentlemen. Your written intervention and today's comments render your position quite clear. I don't have many questions, but as you yourself noted, there has been a few changes along the way this week -- more information, further commitments. So I just need a few clarifications.
12412 Your thesis I guess is wrapped up in paragraph 28: If we impose it will happen. Let's look at the obligations though. Although you say we are not here to debate numbers, that's fine, but you have also proposed certain production figures.
12413 I just wanted to clarify two things. The numbers that you provide for production costs, do they apply to all different kinds of programming? This is in your written intervention at paragraphs 27 and 28.
12414 MR. TRIMBEE: Madam Commissioner, I will ask Eric Rothschild to answer that question.
12415 MR. ROTHSCHILD: Commissioner Pennefather, what we have seen as that the cost of an hour of described programming has dropped dramatically in the three years since we appeared before you making the case with conventional.
12416 It used to be $5,000 an hour for just about anything. Now it's as low as $1,500 an hour and some of that is the function of is it episodic, or is it one-of, is it a movie --
12417 COMMISSIONER PENNEFATHER: So it can vary.
12418 MR. ROTHSCHILD: It can fluctuate. John, perhaps you can talk -- John Stubbs perhaps can enlighten us on what some of those factors are?
12419 MR. STUBBS: Episodic television needs less research into describing it, more complicated programming and individual stand-alone. Like a documentary on Tall Ships might need more significant research into it, but the cost doesn't vary greatly, but those factors do play into the cost.
12420 COMMISSIONER PENNEFATHER: Thank you.
12421 On the obligation side, again in your written intervention, you have tabled a proposal for what the requirement should be for peak viewing time. I am assuming you would apply this to all the services, no matter what their nature of service.
12422 So let me ask you this: What is your comment on a different commitment if that service has the kind of programming which is largely informational, for example where you have kinds of gardening shows, or other shows, where there is a considerable opportunity for audio descriptions. What is your comment on different obligations in that regard to what you have proposed here?
12423 MR. ROTHSCHILD: Commissioner, when we put that forward we were thinking primarily of drama and episodic television, entertainment programming of that sort.
12424 We have suggested, for instance, that the information programs, or information services like The Score or ROB TV or CP24, there is no need for description there because it won't help to make their program more accessible.
12425 In terms of whether it's cooking shows or gardening shows in a service that has that type of an orientation, we are not wedded that the notion has to be in peak viewing time. We would just like to see an amount of programming described through the broadcast day.
12426 COMMISSIONER PENNEFATHER: So a variety on your proposal is appropriate depending on the service. Is that agreed?
12427 MR. ROTHSCHILD: Correct.
12428 COMMISSIONER PENNEFATHER: Your comments related, both in written and today, I assumed, to English-language services. Do you have any comment on this for those Canadians of French-language background regarding the French services of blind Canadians in that area?
12429 MR. ROTHSCHILD: Commissioner, at the time of the renewals for conventional television groups you chose to impose similar obligations on TVA as you did on CTV and CanWest and at the time this group appeared before you and made the case that it was no more of a challenge to produce described programming, French-language described programming, than it is to produce English-language described programming.
12430 So if it was appropriate for a French-language service, the description would make the programming more accessible, I think you would hear from us saying that we think that they should have similar obligations.
12431 COMMISSIONER PENNEFATHER: Thank you for that.
12432 I guess my last area -- and you have been very clear -- you feel that the BDU issues, as I call them, are resolvable, and your sense if we look just at the analog, because you were here and you have commented and read ExpressVu's intervention on the fact that digital and DTH doesn't seem to be a problem, potential capacity problems aside.
12433 But looking very strictly at the services we are addressing here today, what is your sense of the timing for the resolution of the issues which seem to be a little more of a problem, a little more problematic, as was said earlier, than you may be proposing here? What is your sense of the timing for resolving these?
12434 MR. ROTHSCHILD: Commissioner, I may ask John Stubbs if he has something to give more specifically, but just as a general position our position has been that the technology is readily available to upgrade the BDUs, and I don't think you have heard anybody sit here this week and say that it isn't. They talked about the cost of it and that they don't particularly want to pay for it, but no one said it isn't available.
12435 There has been discussion about the cost and certainly we heard the CCTA this morning talk about there 77 channels that are Class 1 systems, they might have to upgrade. That's certainly pretty different from our calculation -- and I think that if you began to look at it on a station-by-station basis, they admitted that they don't need additional equipment for conventional over-the-air, for out of market over-the-air, for border stations. No one is asking them to do description on exempt services. No one is asking them for the community stations. This group isn't making the case that news services should have description.
12436 I think when you actually put it under a magnifying glass and take a hard look at it, the technical challenge and the cost have been overstated dramatically. It's perhaps half the services in a BDU that have to be upgraded.
12437 It's interesting that the costs they talked about today are actually much more in line with the costs that we talked about three years ago in terms of what it costs to the headend, somewhere between $500 and $2,000 to do the upgrade.
12438 The costs, the way we looked at them -- we are not here to argue about costs. We look at it as that is the only argument against it. The technology is there.
12439 COMMISSIONER PENNEFATHER: I take your point, you are not here to argue about costs, but you are looking at realistically achieving the results which are appropriate from our point of view for the public interest, I think the whole solution is interesting as opposed to just saying, "We impose. Go and make it happen".
12440 It's important for us to understand for those Canadians for whom these services are destined, that this really does happen. So that's why, while it's not perhaps interesting to you to discuss costs, it's interesting to me to understand what the implications are.
12441 My last question is: I assume from your presentation -- and I know you have read the replies, including CTV's reply and seen the response from Global -- that a phased-in approach is appropriate.
12442 MR. ROTHSCHILD: Commissioner, if you were to say that you would like to see these obligations come into effect for broadcast year 2004-2005 as a starting point -- so we are looking at just over a year from now -- I think that we would feel that was appropriate.
12444 MR. STUBBS: Yes, we would be agreeable and would support that type of an approach.
12445 COMMISSIONER PENNEFATHER: Thank you very much, gentlemen.
12446 Thank you, Mr. Chairman. Those are my questions.
12447 THE CHAIRMAN: Thank you very much, gentlemen.
12448 Mr. Secretary.
12449 MR. LEBEL: Thank you, Mr. Chairman.
12450 This was the last appearing intervention we will hear. So we are now ready to begin Phase III in which applicants will be provided with an opportunity to respond to all interventions submitted on their application. We intend to proceed in the same order as in Phase I.
12451 So we will ask now NBRS to respond at this time if they are ready. You have ten minutes.
12452 THE CHAIRMAN: Thank you.
12453 Then we will start at 2:15. Nous reprendrons à 14 h 15.
12454 THE CHAIRMAN: Mr. Secretary, I should be able to follow your instructions better than I do.
12455 Sure, let's begin this phase of the hearing and start with NBRS before lunch since they are already here.
REPLY / RÉPLIQUE
12456 MR. TRIMBEE: Commissioners, I have just introduced our members and we have not changed.
12457 We have addressed many of the issues raised by intervenors in our written reply. We are far from alone in dismissing the CCTA's subscriber numbers and its financial projections. There is only one meaningful source for subscriber numbers and those are the numbers on the cheques remitted by BDUs each month with their payments. CCTA now confirms our revised subscriber numbers.
12458 In our renewal application, we proposed a range of programming initiatives and access initiatives. None of the intervenors challenged the appropriateness of our programming initiatives. None of the intervenors challenged our research that confirmed the need for our renewal initiatives. None of the intervenors challenged our research in terms of willingness to pay amongst consumers.
12459 Fifty-seven per cent said they were prepared to pay four cents for VoicePrint. That rose to 70 per cent amongst those who know about VoicePrint.
12460 The issue is how to provide access to 2.8 million blinds, low-vision and print-restricted Canadians. The access issue wasn't addressed by intervenors. When we appeared before you, we described our expanded local program centre initiative, a programming-based alternative to giving away SAP receivers for free. Under this scenario, we wouldn't give away a single SAP receiver.
12461 As you requested, we filed detailed information to show how we would implemented the expanded local program centre initiative. None of the intervenors has challenged the appropriateness of the expanded local program centre initiative. The financial information shows that the expanded local program centres would be at least as expensive as giving away SAP receivers for free.
12462 The bottom line, VoicePrint needs four cents if we are going to implement our programming initiatives and begin to address the access issue during our renewal term.
12463 Commissioners, as we have said to intervenors, we should be doing much more to achieve the objectives of the Broadcasting Act for Canada to remain a leader in addressing the needs of those with disabilities.
12464 Fulfilling the promise of Canada's national reading service means expanding our programming and addressing the access issues.
12465 Commissioners, thank you for this opportunity to reply to the intervenors.
12466 THE CHAIRMAN: Thank you, Mr. Trimbee.
12467 Just one question arises. Were you present for the ExpressVu intervention today? They make the point -- I didn't question you on it the first time around, but they make the point that digital subscribers should not pay for the equipment because they would only be used with cable TV and not with DTH services. It was an issue they raised and in fairness to them, would you comment on that?
12468 MR. ROTHSCHILD: Mr. Chairman, in our written reply we acknowledged their intervention and their concern about the use of pass-through fee money to pay for a technology that isn't required to receive direct-to-home satellite services. We gave you an undertaking that if you were to approve the four-cent pass-through fee we would use those monies that came from DTH subscribers exclusively for the programming initiatives and the outreach program as opposed to the SAP receiver program and we would be prepared to report to you on that.
12469 Of course, if you were to authorize us to implement, rather than the SAP receiver program, the expanded local program centre initiative, it wouldn't be an issue regardless because there would be no technology involved.
12470 THE CHAIRMAN: Thank you.
12471 Can we break for lunch now, Mr. Secretary?
--- Laughter / Rires
12472 MR. LEBEL: It sounds fine to me, Mr. Chairman.
12473 THE CHAIRMAN: Good.
12474 We will resume at 2:20, 14 h 20.
--- Upon recessing at 1250 / Suspension à 1250
--- Upon resuming at 1423 / Reprise à 1423
12475 THE CHAIRMAN: Order, please. A l'ordre, s'il vous plaît.
12476 Mr. Secretary.
12477 MR. LEBEL: Thank you, Mr. Chairman.
12478 The next applicant to respond will be CHUM Limited's MuchMoreMusic. You have ten minutes to make your response.
REPLY / RÉPLIQUE
12479 MR. SWITZER: Thank you and good afternoon, Mr. Chair, Madam Vice-Chair, Mr. Vice-Chair, Commissioners.
12480 For the record, my name is Jay Switzer, President and CEO of CHUM Limited.
12481 Before we present our reply comments, I would like to briefly reintroduce members of our panel.
12482 To my immediate left, David Kines, Vice-President and General Manager of our music channels.
12483 To David's left, Sarah Crawford, Vice-President, Public Affairs.
12484 To my immediate right, Peter Miller, Vice-President, Planning and Regulatory Affairs, and to Peter's right, Peter Palframan, Vice-President, Finance and Administration.
12485 Over the last few days the Commission has heard presentations from a number of different intervenors. These intervenors have commented on a variety of issues ranging from described video to the need for more Canadian drama.
12486 In addition, throughout this hearing, the Commission has been asking licensees of successful services whether it would be appropriate to increase their requirements relating to Canadian programming.
12487 On Friday, we filed our response to the questions we were asked during MuchMoreMusic's appearance before the Commission last Monday.
12488 Of course, we would be pleased to discuss any aspect of that response with the Commission as well as any of the other responses we provided following these reply comments.
12489 There are only two areas we would like to discuss in this reply.
12490 During the hearing, the Commission has been asking applicants what criteria should govern whether or not a wholesale rate increase is warranted. CHUM has not applied to increase the wholesale rates of any of our services.
12491 However, in its intervention Cogeco has argued, and the CCTA again touched on this morning, the notion of wholesale rates of those services with "abnormally high profit margins" should actually be reduced. Cogeco identified two CHUM services, MuchMoreMusic and Space in this category.
12492 As we noted in our appearance before the Commission last week, MuchMoreMusic has one of the lowest authorized wholesale rates of any Canadian specialty service -- three cents -- making the service an incredible value for both distributors and subscribers. Approximately two-thirds of MuchMoreMusic's revenue comes from advertising, a number that will grow to three-quarters over the next licence term.
12493 MuchMoreMusic's success has not come from the regulated portion of its revenue, but from advertising, demonstrating that we are in tune with what our target audience wants.
12494 As MuchMoreMusic's wholesale rate is low, a reduction of even one cent could see subscriber revenue drop significantly.
12495 Space has an authorized wholesale rate of 29 cents, and while Space is almost always distributed as part of a tier, this number should represent the floor of what an appropriate subscriber rate should be for discretionary carriage.
12496 However in 1997, in order to get widespread carriage, Space had to agree to a rate with Vision.com that was far less than its authorized rate, a rate that Cogeco continues to benefit from.
12497 Space has grown to be one of the most popular Canadian specialty services and drives cable and DTH penetration. Like MuchMoreMusic, Space relies heavily on advertising revenue with only one-third of its revenue coming from subscriber fees.
12498 To suggest, however, that Space has abnormally high profits is simply wrong. Space's average PBIT margin for its first five years of operation was 21 per cent, only slightly above the industry average of 19 per cent. In fact, of 38 profitable specialty services in 2002, Space ranked 26th in profit margin.
12499 At CHUM we are astonished by Cogeco's assertion that the wholesale rates for MuchMoreMusic and Space should be reduced.
12500 Their success is mainly attributable to the quality programming on the channels and they rank among the most popular services in the country, demonstrating that they clearly pull their weight.
12501 We also find it interesting that a distributor that has reaped the rewards of rate deregulation is looking for regulatory support to force its suppliers to lower the rates they charge.
12502 We note that Cogeco has not indicated a willingness to reduce what it charges subscribers for service should its proposal be accepted by the Commission.
12503 We have committed for all of our services to attempt to acquired a described version of programs wherever available, and we would like to touch on this area of described video as our final point.
12504 Traditionally, the National Broadcast Reading Service and the Commission have highlighted the importance of describing dramatic programming due to the high audiences these programs attract, their non-descriptive nature and the fact that they have significant budgets that can accommodate the cost of description.
12505 We earlier committed to broadcast a minimum of one hour per week of described video on Space starting in September 2004. Given the historical sharing patterns between the service and CHUM's New Net stations we should, in fact, be in a position to air three hours of described Canadian programming in September 2004, increasing to four hours in September 2006, matching the commitments of our New Net stations.
12506 While Space can air a reasonable amount of description, we do not believe that specific requirements relating to described programming for CHUM's other specialty services up for renewal are appropriate, given the nature of the programming on those services.
12507 As NBRS noted in its intervention, certain services are readily accessible without description. NBRS has included MuchMoreMusic and CP24 in this group. We believe that Star! should also fall into this category.
12508 As noted earlier, Star!'s programming consists primarily of news magazine shows, programs that are generally descriptive in nature. Moreover, the current nature of these programs means that they are generally produced with a very short window of time making descriptions difficult.
12509 Consequently, we do not believe that specific hour requirements relating to described video would be appropriate for Star! Where we can get described programming, of course, we will air it.
12510 As we noted last week, we are exceptionally proud of what MuchMoreMusic achieved over its first licence term and we are looking forward to building on the success of the service going forward.
12511 That concludes our reply comments and, of course, we are pleased to respond to any questions.
12512 THE CHAIRMAN: Counsel.
12513 MR. WILSON: I just have one question, Mr. Chairman.
12514 If I can just take you to the definition of music-related that you provided with your supplemental answer. There is just one portion of that that I would like to clarify.
12515 Part of that definition would define music-related as programs featuring music artists. I guess I would just like to get a better sense of the parameters of that.
12516 Would that include, for example, movies where a musical star, Jennifer Lopez or Madonna, was the star of the movie?
12517 MR. MILLER: Yes.
12518 MR. WILSON: Thank you.
12519 I have no further questions, Mr. Chairman.
12520 THE CHAIRMAN: Thank you very much.
12521 Mr. Secretary.
12522 MR. LEBEL: Thank you, Mr. Chairman.
12523 The next applicant to respond will be Rogers Sportsnet Incorporated.
REPLY / RÉPLIQUE
12524 MR. BEEFORTH: Commissioners, thank you for giving us this opportunity to provide reply comments to some of the interventions that we heard.
12525 Yesterday Cogeco and Vidéotron opposed our request for a rate increase. They are concerned that specialty services are too profitable. We have lost $33.2 million to date. We are not profitable and we won't be with without a rate increase.
12526 They claim that both our subscriber and ad revenue growth estimates are conservative. However, we submit that our forecasts are in fact aggressive. We have forecast flat subscriber numbers for cable and continued strong growth for DTH. Our ad sales are likely to grow slowly now that we are a mature service with a full slate of programming.
12527 TSN's ad sales only grew 3 per cent in the last five years. Most of our inventory is sold out, and we have the fifth highest cost per share point amongst specialty services. Nonetheless, we have forecast ad sales of 7 per cent for the first two years of our renewed licence term and 5 per cent thereafter.
12528 Cogeco and Vidéotron argue that they would do better in their negotiations with specialty services in a fully open unregulated market. This is unlikely to be true for popular sports services.
12529 In the U.S. they have an unregulated open market, and the cable operators there have gone to Congress about the high cost of sports specialty services. In Canada we believe that in a fully open unregulated market Sportsnet would be able to secure a basic rate much higher than $1.07.
12530 Vidéotron's complaints about their programming costs have nothing to do with Sportsnet's request for a rate increase. None of Vidéotron's Quebec cable systems are required to carry the Sportsnet service. Vidéotron has a completely open unregulated negotiation process with Sportsnet for all of its systems.
12531 The CCTA's intervention repeated their written argument that Sportsnet has understated subscriber numbers and understated ad revenues.
12532 Dealing first with the subscriber numbers, they have accepted that the Mediastats numbers are inaccurate for DTH and have partially revised their numbers downward. However, the Mediastats numbers are wrong for DTH and cable distributors.
12533 Our subscriber numbers are the numbers that CCTA members and DTH providers pay us for. No other numbers are relevant.
12534 The CCTA raised a new argument this morning. They argued that we have shown no growth in subscriber numbers between August 2002 and August 2003. Therefore, they have assumed that subscriber numbers have increased by 200,000 during this period.
12535 In fact, our subscriber numbers have been declining during this period. From January '02 to January '03 we lost more than 100,000 subscribers. Therefore, the use in our forecast of a slightly higher subscriber number for year one was again aggressive.
12536 With respect to ad revenues, the CCTA has not added anything new to their written comments. They noted a number of times that Canadian BDUs operate in an increasingly competitive environment. The Canadian advertising market is also more competitive with the addition of new, over-the-air and digital channels. Despite this, though, we are forecasting substantial ad revenue growth.
12537 Turning now to ExpressVu, we would like to thank them for acknowledging that we should get a rate increase, although reduced from our request. They have argued that rate increases should be based on the value of the service. Sports services like Sportsnet are very valuable for distributors, and we believe that measured on value Sportsnet should command a high rate.
12538 ExpressVu has compared us unfavourably to TSN. However, as we noted in our written comments, their own survey shows that viewer satisfaction of the two services is similar.
12539 While they used a number of metrics to compare Sportsnet and TSN, in our view the most relevant is reach. Adjusted for our reduced distribution, data from 2003 shows that TSN and Sportsnet have the same reach.
12540 Finally, we would also like to comment on the issue of guidelines for wrestling and other potentially offensive programming content.
12541 We have been operating under CAB guidelines, but Commissioner Pennefather's questions last week showed us that we should have our own guidelines in these areas, and we will develop these forthwith.
12542 Chairman and Commissioners, those are our comments in reply to the intervenors. We are open to your questions.
12543 THE CHAIRPERSON: I just have one, which is your point about your loss of 100,000 subscribers. I take it that was calendar '02?
12544 MR. BEEFORTH: That is correct, January to December.
12545 THE CHAIRPERSON: How was that loss distributed across the cable systems or across the BDUs, more accurately?
12546 MR. BEEFORTH: I will ask Julie Osborne to answer that.
12547 MS OSBORNE: Wayne Yutman has the specifics there. When we made our assumptions we -- actually, Wayne, why don't you give the numbers.
12548 MR. YUTMAN: The specifics for the decrease would come from the cable areas. Specifically, Shaw and Vidéotron would have dropped to the tune of approximately 430,000 subs. That would have been offset by increases that we had in DTH, to the tune of approximately 125,000 reduction during that period of time.
12549 Doug had mentioned over 100,000. It is approximately 125,000.
12550 THE CHAIRPERSON: You are saying that you took a loss of about 400,000 from Shaw and Vidéotron. Does that mean in the other cable systems, and you said DTH, made up for all but 275?
12551 What were your Rogers' numbers?
12552 MR. YUTMAN: A combination of the digital, as well as -- again, Rogers also dropped but not to the same extent. I am basically giving the ones that are of a material amount.
12553 Rogers did drop to the tune of approximately 15,000 to 20,000.
12554 THE CHAIRPERSON: And DTH made up for it. Was it evenly spaced between the two DTH services, the growth?
12555 MR. YUTMAN: Yes.
12556 THE CHAIRPERSON: It was. All right; thank you.
12558 MR. WILSON: Thank you, Mr. Chairman. I just have a couple of questions.
12559 Early in the hearing in the discussion with the Outdoor Life Network, Commissioner Colville read into the record a definition of professional sports and amateur sports.
12560 I believe you have been provided with a copy of that definition.
12561 I am wondering whether you have any comments as to the issue of how to define that distinction between professional and amateur sports.
12562 MR. BEEFORTH: My first comment is to agree wholeheartedly with you that it is very difficult to define. Twenty-five, thirty years ago it was pretty cut and dried. The lines have blurred enormously since.
12563 I did get a copy of the definition of amateur and professional. The only comment I would have is, as with any definition about anything, there are probably reasons why the definition doesn't exactly fit. One concern that would come to my mind would be in the third area where it talks about undertakings for non-profit motives.
12564 I am unclear how something like what is considered to be amateur hockey, junior hockey in Canada, would fall into those guidelines. In those cases at a number of levels of minor hockey you have team operators who are in business to make some profit, but the players themselves don't make any money.
12565 So that one may fall through the cracks.
12566 MR. WILSON: Thank you. I just have one other question.
12567 In your presentation and today you have talked a great deal about TSN and that sort of competition. To what extent are other sports services, such as The Score and some of the Category 2 digital sports services, competitive with your service?
12568 MR. BEEFORTH: They are all competitive from the point of view that they can all, under their conditions of licence, pursue the acquisition of programming and more specifically regional programming.
12569 We have tried to convey the heartfelt message that regional is -- I think I used the term "our life blood". As long as any other broadcaster is able under their condition of licence to acquire regional programming, then they would be of concern to us.
12570 MR. WILSON: Thank you.
12571 I have no further questions, Mr. Chairman.
12572 THE CHAIRPERSON: Thank you.
12573 Thank you very much.
12574 Mr. Secretary.
12575 MR. LEBEL: Thank you, Mr. Chairman.
12576 The next applicant to respond will be Teletoon Canada Inc.
12577 MR. LEBEL: You have ten minutes to make your presentation.
REPLY / RÉPLIQUE
12578 MS FIRESTONE: Good day, Mr. Chairperson, Vice-Chairs and Members of the Commission. My name is Hillary Firestone. I am the Vice-President, Marketing and Promotions.
12579 I am joined on my right by Carole Bonneau, Vice-President, Programming. Also with us is Stephen Zolf, our Legal Counsel and partner at Heenan Blaikie.
12580 Unfortunately, Mr. Len Cochrane, Teletoon's President, has taken ill and was unable to make the trip to Ottawa for this phase of the hearing.
12581 Teletoon would like to express our appreciation to the many producers, animation companies, new media producers, educators and industry associations who filed interventions in support of our application. Over 40 interventions have acknowledged Teletoon's important role in the development, production and promotion of quality Canadian programs in the animation sector.
12582 On Friday we provided the Commission with written clarification with respect to our proposed amendments. This written filing addresses many of the concerns raised. Today we will address certain general policy issues, as well as the specific comments raised with respect to the proposals set out in Teletoon's application.
12583 With respect to Teletoon's Canadian programming commitments, there has been much discussion at this hearing as to the appropriate level of Canadian content commitments by the specialty services licensed in 1996. We wish to briefly summarize Teletoon's existing and proposed commitments for the next licence term.
12584 First, Teletoon's current 40 per cent Canadian programming expenditure requirement is higher than any other specialty service with a core kids audience.
12585 Second, there has been much discussion of "abnormal profits" and "high rates of return". We are not denying Teletoon's terrific success in its first licence term. We feel, though, that the issue of a given service's profitability or success may be looking at the issue from the wrong end of the telescope.
12586 In our initial application for Teletoon seven years ago we projected at that time that approximately $40 million would be spent on Canadian programming. So what happened? Well, due to the efforts of our team, we more than doubled these results, spending more than $90 million in less than seven years.
12587 In fact, we spent more than any other Class of '96 service on Canadian programming, even when you compare those services with Canadian programming expenditure conditions that exceeded Teletoon's 40 per cent requirement.
12588 We also note that all of our Canadian spending is now on original animation.
12589 Teletoon's contributions, as well as those of the multitude of services before you in this proceeding, need to be seen in their proper context.
12590 In 2001, English language specialty services still have less than 10 per cent viewing share in the English market, versus a 33 per cent share for conventional television.
12591 According to the Commission's Broadcasting Monitoring Report, total Canadian expenditures for 30 English-language specialty services totalled $400 million in 2001, which actually exceeded the total for English conventional television of $395 million.
12592 You have already heard about the current environment that specialty services will operate in. In addition to increasing competition, rampant signal theft and an uncertain economy, there is the troubling prospect emerging for our distribution environment. We were pleased to hear Quebecor and Cogeco outline their "world view" yesterday of how the industry should move forward in relation to the distribution of our services.
12593 From your perspective as a regulator, we trust that you can appreciate the risks that lie ahead for us in our efforts to have our service distributed on fair and equitable terms and conditions by all BDUs.
12594 In spite of these warning signs, Teletoon has assumed that our current subscriber and advertising revenues will "hold the line", even in the face of potentially lower penetration and more challenging packaging arrangements.
12595 Teletoon is absolutely determined to maintain the focus of our service and we are optimistic that we can deliver on our niche as Canada's premier animation service.
12596 In response to intervenors and concerns expressed during the hearing, we wish to summarize our commitments and contributions.
12597 We will continue to expend a minimum of 40 per cent of our revenues on Canadian programming, resulting in projected spending of $185 million in the next licence term, all directed to independent Canadian animation producers.
12598 We will improve our current commitment to commission 546 new half-hours of Canadian animation programming, to a level of 700 new commissioned half-hours of Canadian animation programming in each of French and English, for a total of 1,400 half hours over the next licence term.
12599 Teletoon intends to do no in-house program production, meaning that 100 per cent of our Canadian program acquisitions will be for original programs.
12600 We will be increasing our on-air commitments for the next licence term. Specifically, we will continue to maintain 60 per cent of the broadcast day for Canadian programs. We will also continue to have 60 per cent of our newly defined 2:00 p.m. to 8:00 p.m. prime time will be Canadian.
12601 We further commit that all Canadian programs will be reasonably scheduled throughout the broadcast day.
12602 As an additional assurance we would agree to a condition of licence that a minimum of one hour of Canadian programs be scheduled between 8:00 p.m. and midnight.
12603 Finally, we will air any available and suitable Canadian animation in the evening period.
12604 Fifty per cent of our schedule and 50 per cent of our original Canadian program acquisitions will be from unrelated parties.
12605 One hundred per cent of our script and concept expenditures will go to unrelated parties.
12606 Our programming executive team is completely independent and unaffiliated from our shareholders.
12607 We will report annually to the CRTC to outline our compliance with the conditions of licence and the particulars regarding the airing of and amounts paid for programs produced or financed by unrelated parties.
12608 We will agree to cap all programs from Categories 12, 13 and 14 at 5 per cent of our schedule.
12609 At least 90 per cent of our remaining schedule will be exclusively animated programming, with only a small amount (not more than 10 per cent) left for non-animated formats.
12610 To make sure that we don't drift from our animation niche, we will make the additional commitment that all of the remaining 10 per cent of our schedule will be "animation related". We are convinced that this will meet the concerns of SRC, TQS and Télé-Québec, who have raised concerns with respect to Teletoon's proposed new program categories.
12611 We have also agreed to drop Category 7(g) from our proposed amended list of programs.
12612 We will continue to honour our safe haven commitments, as outlined in our written filing last Friday.
12613 Our closed captioning commitment provides for 90 per cent of Teletoon's English service to be captioned immediately, with Teletoon's French service rising from 70 per cent to the 90 per cent level by year 6.
12614 In terms of descriptive video, we are prepared to do whatever is necessary at our end to resolve capacity issues, while also participating in industry-wide efforts to resolve end-to-end delivery issues among BDUs.
12615 We will continue our current practice of ensuring that Canada's cultural diversity is reflected internally at Teletoon and on our program schedule.
12616 MS BONNEAU: With regards to animation productions In Quebec, we wish to briefly comment on the discussion yesterday during the appearance of La SARTEC and l'UDA. They outlined their concerns for their members' role in the production of French-language animation in Quebec.
12617 We would like to reiterate that we take seriously their concerns and we are sincere in our efforts to assist all key players involved in the development and production of Quebec-based original animation production.
12618 We wish to note for the record that throughout the current licence term at least 50 per cent of all of our commissioned programming was Quebec based. The challenge, however, relates to the fact that original high-quality French-language animation programming relies critically on a co-production model, with Quebec-based producers generally in a minority position vis-à-vis producers from France. The French-language portion of the program is usually done by the majority production partner, using producers from France. The Quebec-based producers, who are bilingual, provide the English portion.
12619 Despite these realities and challenges, we propose the following specific commitments, beginning immediately.
12620 Through key Quebec-based industry associations such as UDA, SARTEC and APFTQ, we will meet with the Quebec-based animation producers and talent to discuss the overall issues and how we can influence better outcomes for creating Quebec-based French animation, and we will keep the Commission informed of this initiative.
12621 We will place a priority on those productions that commit to do the French version using Quebec-based talent.
12622 We will acquire all French-language dubbed audio tracks created in Quebec for all non-Canadian programs or for co-productions, when available, rather than the internationally dubbed versions, regardless of the additional costs.
12623 We will provide a minimum of one-third of all of our script and concept development dollars to Canadian French-language producers.
12624 MS FIRESTONE: Finally, in response to CFTPA, we refer the Commission to our written filing on Friday, in which Teletoon addresses in detail why the current 50 per cent requirement with respect to the broadcast of and expenditures on programs from related parties remains appropriate.
12625 We thank you for your time, and we appreciate the opportunity to appear before you at this final stage of the hearing.
12626 THE CHAIRPERSON: Thank you very much.
12627 Mr. Secretary.
12628 MR. LEBEL: Thank you, Mr. Chairman.
12629 The next applicant to respond will be The Score Television Network Ltd.
12630 MR. LEBEL: You have ten minutes to make your presentation.
REPLY / RÉPLIQUE
12631 MR. J. LEVY: Thank you.
12632 Mr. Chairman and Members of the Commission, my name, again, is John Levy. With me today are Grant Buchanan, David Errington and Benjamin Levy, on my far right.
12633 A number of interveners suggested that our application is all about paying for past mistakes. It isn't and the new rate does not do that. For us, this is about looking forward. We have proposed a rate that reflects the value that the network already delivers and the continued provisioning of our sports news and information service with a limited amount of live event programming.
12634 Bell ExpressVu suggested that the market should determine our rate. In our case the BDU factor overrides this as the BDU, not the market, is making the decision. Moreover, our two most direct competitors are controlled by the largest satellite and cable operators in the country who also happen to control 42 per cent of all the subscribers we reach. This makes the problem particularly acute and imbalanced.
12635 Our market research shows that subscribers place a higher value on The Score ($0.52) than the ten-cent wholesale rate. Thus, while we agree that the rate should reflect the market, we need your help to get there.
12636 For sure rate-setting is an art, not a science, and the Broadcasting Act requires the Commission to consider many things when licensing and renewing services' licences.
12637 We have suggested that with respect to The Score, viewing ought to have a fundamental place in the decision-making process. This is how the Copyright Board set distant signal rates after starting out with a blank sheet.
12638 We submitted a very interesting chart called Subscriber Revenue Per Average Minute Audience which shows how widely viewed The Score is compared to its very low wholesale rate.
12639 The CCTA and others suggest that we were on our way to profitability without a rate adjustment. In reality, without a rate adjustment, our PBIT continues to be pathetic and well below any measure of acceptable industry returns. Fully implemented, our model shows a PBIT of less than 19 per cent, and even then that level would only be achieved in year 7.
12640 The BDUs were unanimous in opposition to rate increases. Yet our evidence demonstrated that the rates that they charge to subscribers are going up substantially and will continue to do so, such that the subscribers are already paying. The problem is that the dollars are not flowing through the dam in the middle to facilitate the creation of Canadian content programming.
12641 Bell ExpressVu suggested that a figure less than $0.40 might be appropriate. We have shown that a decision with the same $0.10 rate would be a disaster for us, and we have shown why we think that $0.40 is fair. Depending on how much less than $0.40 the rate is, it might allow us to continue and to contribute, but at $0.25 the number of the core initiatives we are already delivering and others that we had planned clearly fall away.
12642 In conclusion, we would say to those who intervened against us, the $0.40 rate, there are a number of factors that show the new rate is necessary and warranted.
12643 To recap:
12644 First, the service has matured from a text based service with some highlights to a full 24-hour-a-day sports news and information service providing a limited amount of live event coverage from coast to coast to coast.
12645 Second, sports is a very expensive genre and our costs are reflective of this.
12646 Third, we are already watched and liked and we have provided the statistics and have conducted the research that shows this.
12647 Fourth, our business model is real with projections that are in line with industry numbers.
12648 Fifth, at $0.40, even in year 7 our PBITs never get back up to the industry average.
12649 We wish to reassure the intervenors and the Commission of our confidence in, and commitment to, the model we have proposed. In that regard, we will, if granted the requested $0.40 rate, raise our CPE from 45 per cent to the 47 per cent that is the amount shown in our model as filed.
12650 In addition, we will further commit that if our PBIT in any year of this licence term exceeds the average PBIT for English-language analog specialty services, we will increase our CPE to 50 per cent of revenues in the subsequent years.
12651 This concludes our reply and we would be pleased to answer any questions that the Commission might have.
12652 THE CHAIRPERSON: Counsel.
12653 MR. WILSON: Thank you. I just have one point that I want to clarify.
12654 Dealing with Category 2(a) and 2(b) programs that you are proposing to offer, I want to confirm your commitment that with such programs, you would break away every 15 minutes for newscasts and whether you could give us some more detail on the nature of those breaks in terms of what you see as the length and format of those breaks.
12655 MR. J. LEVY: We fully intend to continue to be completely consistent with the way we are programming the network now. Our commitment is (a) the ticker, which is a component of it that never goes away. So that stays the same.
12656 And even within the 2(a) and 2(b), we will continue to break away, do squeeze-backs on average every 15 minutes like we are doing now in the continuing of the providing of sports news and information.
12657 So exactly what we are doing now will continue to be the case in all of our new programming that we hope to implement over the next licence term.
12658 MR. BUCHANAN: I would like to add one comment.
12659 We wanted to confirm our earlier discussion relating to the evidence that the CCTA led this morning and how that was going to be handled by the Commission in the situation as it affects the services that they spoke of.
12660 We understand they have rejigged their numbers, and we were trying to catch it on the fly this morning.
12661 MR. WILSON: To confirm, when that material is filed, you and the other applicants it applies to will be provided a copy. You will be given an opportunity to respond to those numbers in writing, should you so wish.
12662 MR. BUCHANAN: Thank you.
12663 THE CHAIRPERSON: Thank you very much, gentlemen.
12664 Mr. Secretary.
12665 MR. LEBEL: Thank you, Mr. Chairman.
12666 We will now hear The Comedy Network Inc. in response.
12667 MR. LEBEL: Whenever you are ready.
REPLY / RÉPLIQUE
12668 MR. BRACE: Thank you. Good afternoon.
12669 Mr. Chairman, Vice-Chairs and Commissioners, we are pleased to appear before you again.
12670 For the record, my name is Rick Brace and I am the President of CTV.
12671 Joining me once again are, to my left, Ed Robinson, President and General Manager of The Comedy Network (or to quote Caroline Maria from her appearance before you yesterday, "the lunatic running the madhouse").
12672 To my right is Kim McKenney, Director of Finance, CTV Specialty Channels. Beside Kim is Elizabeth Duffy MacLean, Group Vice-President, Regulatory Affairs.
12673 Behind me is Monique McAlister, Legal Counsel from Goodmans.
12674 At the side table are Ivan Fecan, President and CEO of Bell Globemedia and Kathy Robinson from Goodmans.
12675 In this reply we will be addressing the intervention by the CFTPA, as well as responding to questions raised by the Commission in our initial appearance.
12676 Before we begin, I just wanted to mention that I was at CTV's Fall Launch yesterday, where we previewed the fantastic new and returning shows on CTV. I think it is worth noting that two of these shows will be featured on all of CTV's conventional nationwide are "Comedy Inc.", with Roman Danylo, and "Comedy Now". Both are Comedy Network original programs.
12677 As a direct result of the nurturing and investment of the resources by The Comedy Network, we have been able to grow these two shows and create new Canadian stars. And that's just what we hope to accomplish with this application. While we are very focused on the amount of Canadian programming we provide, we also want to focus on the quality that we deliver to our viewers, to create the kind of Canadian programs that viewers want to watch.
12678 MR. ROBINSON: We would like to take this opportunity to thank the many viewers, independent producers, actors, advertisers and others who have written 134 enthusiastic letters of support for our application.
12679 Yesterday you heard from Greg Lawrence of Ocnus Productions, Any Nulman of Airborne Entertainment and Caroline Maria of Cinemaria -- three of the 29 independent producers who wrote letters of support.
12680 You also heard from Roman Danylo, one of the very many talented young comics we get to work with here in Canada and who have become Canadian stars as a result of their exposure on The Comedy Network.
12681 We are also delighted that many of our viewers have taken the time to write and express their support for our application. For example, one of our viewers, Jason Nelson, wrote:
"Over the past 6 years, The Comedy Network has clearly established itself as a key engine for the growth of Canadian comedy, and proof that Canadian talent can succeed given the right circumstances."
12682 We believe the programming strategy we outlined for you will provide the right circumstances.
12683 Turning now to our reply to the CFTPA intervention: We are pleased to receive the CFTPA's support of our renewal. The Comedy Network has always been a strong supporter of the Canadian independent production community, and with our proposed amendments, we hope to provide many of these independent producers with the opportunity to take their programming to the next level.
12684 The success of our service is really due to the success of the independent producers who create bright and innovative material. We have grown in tandem with many Canadian independent producers: from their first foray into television production by producing "Canadian Comedy Shorts" to the development of critically acclaimed television series, such as "Kevin Spencer" and "Puppets Who Kill".
12685 These successes have been mutually beneficial, providing independent producers with oftentimes their first big television break and allowing The Comedy Network to become known as the destination for great original Canadian comedy programming.
12686 The CFTPA has expressed its concern that we have not provided sufficient evidence to support our request to reduce our Canadian content in prime time. The reasons for our proposal were fully explained in our supplementary brief and in our earlier appearance before you.
12687 Instead of restating the need for our proposal in our own words, we urge you to read (or perhaps read again) the 29 letters of support from the independent producers who have written on our behalf. They speak with passion and commitment and enthusiasm for their relationship with us and the work that they want to do and we want to support.
12688 We believe that Leah Mallen of Screen Siren Pictures in Vancouver sums it up best when she writes:
"I am aware of their reasons for wishing to decrease their current Canadian content requirements, and I believe it will result in the opportunity for higher investment in new, original Canadian programming, that demands higher licence fees and budgets to compete in today's marketplace, and a 60% evening broadcast requirement would still ensure that The Comedy Network remains committed to an above-average percentage of Canadian programming airing on their channel. By being able to offer a greater investment in high quality Canadian stories, The Comedy Network will continue to develop audience loyalty."
12689 We believe that our programming plan will allow us to provide independent producers with greater opportunities to create high quality Canadian programs with more episodes, to truly rival their U.S. competition and to captivate Canadian viewers and keep them coming back for more.
12690 MR. BRACE: Now we would like to address the questions raised by the Commission in our initial appearance.
12691 When we appeared before you last Tuesday, Commissioner Grauer asked what we would be willing to give back to the system in return for a reduction in our evening Canadian content requirement. We have deliberated this question very seriously, and we believe that our proposed programming plan will give back more to the Canadian broadcasting system. And here's how.
12692 We will invest higher licence fees in original Canadian productions, resulting in higher quality Canadian series with better production values and with more episodes.
12693 We will air more original episodes and fewer runs of older acquired Canadian series, thereby reducing our wear factor and audience erosion. Moreover, all of our original productions will receive their first run showing in prime time, leading more viewers to original Canadian programs.
12694 The increased viewership will result in a rise in our advertising revenue. Chairman Dalfen asked what is the breakdown between our subscriber and advertising revenue for the 2003 broadcast year. We are projecting advertising revenue of 43.4 per cent of our overall revenue by the end of the 2003 broadcast year. With our proposed amendment, we project that our advertising revenue will rise to an average of 49.5 per cent of our overall revenue over the next licence term, compared to an average of 39 per cent over the existing licence term.
12695 As a result of our commitment to spend 41 per cent of our previous year's gross revenue on Canadian programming, more money will be spent on Canadian programs over the next licence term. In fact, our plan calls for Canadian programming expenditures of $90 million over the next licence term, compared to $49 million this licence term.
12696 And at 60 per cent, our prime time Canadian content level would still be among the highest of all analog specialty services, excluding news and information services.
12697 Therefore, we believe that with our proposed amendments, our contributions to the Canadian broadcasting system will be substantial. However, we appreciate that the Commission does seek some additional reassurance that our proposal will have a positive measurable impact on original Canadian productions.
12698 So if our proposal to adjust our prime time Canadian content from 72 per cent to 60 per cent is approved, we would be prepared to increase our Canadian programming expenditures to 43 per cent of the previous years' gross revenues. This would bring our overall Canadian programming expenditures to approximately $93.4 million over the next term, up from $49 million this term.
12699 In addition, we would commit that a minimum of 85 per cent of our expenditures on original Canadian production will go directly to Canadian independent producers over the next licence term.
12700 We believe that these commitment demonstrate our dedication to ensure that The Comedy Network will continue to be the showcase for original Canadian comedy programs.
12701 We note that the CFTPA stressed in its appearance before you that first run, original programs are its first priority. We believe that our programming plan and our increased commitments to Canadian programming expenditures and to original independent production expenditures will be of great benefit to Canadian independent producers.
12702 MR. ROBINSON: With our programming plan, we are asking you to let us focus on quality: to let our Canadian comics, producers and writers work on the calibre of projects that have the potential of becoming "top ten" hits with Canadian viewers. We, and many others, believe that this plan will be beneficial to Canadian viewers, the comedy community and the Canadian broadcasting system.
12703 Humour is a wonderful thing and our Canadian sense of humour is a glorious thing. We want to support the very best of Canadian comedy and to bring it to our television screens.
12704 We thank you for your attention, and we would be pleased to answer any questions you may have.
12705 THE CHAIRPERSON: I regret to not have any questions, given that Mr. Fecan is here. If he would like to make a comment, he is free to do so on the proceedings of the past week.
12706 Otherwise, we don't have any questions.
12707 MR. FECAN: Thank you for the opportunity, Mr. Chairman.
12708 All I would like to say in terms of this particular application is really what we are asking is to grow with our constituency, with our stakeholders.
12709 The licence, as granted originally, was appropriate for the time and for that community. That community has grown. We need to be there with them and help them get to the next level. That is really what is in our minds in designing all of this.
12710 We appreciate that you heard us. Thank you.
12711 THE CHAIRPERSON: Thank you very much.
12712 Mr. Secretary.
12713 MR. LEBEL: Thank you, Mr. Chairman.
12714 We will now hear Outdoor Life Network in response.
12715 MR. LEBEL: Whenever you are ready, Mr. Brace.
12716 MR. BRACE: Thank you.
REPLY / RÉPLIQUE
12717 MR. BRACE: Mr. Chairman, Commissioners, my name is Rick Brace and I am the President of CTV.
12718 Before beginning our presentation, let me re-introduce you to the members of our team.
12719 Seated immediately to my left is Bart Yabsley, Executive Vice-President, CTV Specialty Television. Seated to my right is Anna Stambolic, Director of the Outdoor Life Network. Next to Anna is Kim McKenney, Director of Finance.
12720 Immediately behind me is Elizabeth Duffy MacLean, Group Vice President, Regulatory Affairs.
12721 At the side table, once again, Ivan Fecan, President and CEO of Bell Globemedia and Kathy Robinson from Goodmans.
12722 Before addressing the concerns of opposing intervenors, let me first acknowledge the over 100 interventions that were filed in support of our proposals for the upcoming licence term.
12723 We are particularly thankful to our viewers who have provided us with ongoing support and valuable feedback over the licence term. We are also grateful to our partners in the independent production community, many of whom are smaller producers from regions outside of Toronto, Vancouver and Montreal. These producers have created high quality Canadian programming for OLN over the past seven years and they support our growth plans.
12724 Mr. Chairman, Commissioners, we filed a detailed written reply to interventions which is on file with the Commission, which we do not propose to repeat before you today. We are of course prepared to answer any questions arising from our written reply.
12726 MS STAMBOLIC: During our presentation in-chief, there was a lively discussion about our plans in the area of drama and sports programming and we would like to follow up on that discussion and, in particular, respond to the various questions we had undertaken to address on these issues in our reply appearance.
12727 I would like to deal first with Category 7 programming. Our plans in this area are modest. We would like to have the ability to program Category 7 programming for up to 5 per cent of our schedule. This programming would be entirely consistent with our niche nature of service and would not transform OLN into a serious player in the drama genre.
12728 As we said in our initial presentation, we have budgeted a total of $900,000 in incremental program costs over the new licence term to fund acquisitions of both Category 6a and 7 programming. This is less than $130,000 per year and with a 10-cent wholesale fee it would just not be realistic for us to acquire large volumes of high profile Category 6a or 7 programming.
12729 What we are seeking in terms of Category 7 programming is treatment similar to that accorded by the Commission to other licensees. We note for example that specialty services such as Court TV, Animal Planet, ESPN Classic Canada, MuchLoud, MuchVibe, the NHL Network and Fashion Television have all been permitted to program Category 7 programming for up to 15 per cent of their schedule. We originally requested the same flexibility. We then reduced the amount of Category 7 programming to 5 per cent and only one feature film per week in response to the intervention by Alliance Atlantis.
12730 Given the volume of Category 7 programming we are requesting, we believe it would be overly restrictive, and in our view unfair, to require OLN to make incremental commitments to expend specific amounts on drama licence fees or to earmark a specified portion of our Canadian programming expenditures for Canadian programming drawn from Category 7.
12731 We also believe that incremental commitments to Canadian content for Category 7 programming are not appropriate for OLN. We were pleased that the CFTPA has agreed that our proposals to increase Canadian content levels to 50 per cent overall and 35 per cent in the evening broadcast period represent the right mix for OLN.
12732 OLN has a proud tradition of commissioning high quality Canadian programming and we will continue to provide opportunities to independent producers throughout the new licence term, a tradition that will extend to Category 7 programming.
12733 To this end, we would be prepared to accept a condition of licence requiring that no less than 75 per cent of new independent productions come from non-affiliated producers. We also commit that OLN will not access funds from the CTF in respect of any Category 7 programming it commissions.
12734 We are also willing to place some parameters around the Category 7 programming to be offered by OLN. Accordingly, we would suggest that the following wording be added to our conditions of licence:
"The licensee shall only broadcast programs from Categories 7a (ongoing dramatic series), 7c (specials, mini-series or made for TV feature films), 7d (theatrical films aired on TV) and 7g (other drama) in which outdoor recreation, conservation, wilderness or adventure are the central theme."
12735 This thematic restriction is modelled after restrictions applicable to licensees such as CMT, the Food Network, and WTSN, to name a few. The conditions of licence of these licensees only impose thematic restrictions on the type of feature film programming (Category 7d) broadcast by these services.
12736 In our case, we are prepared to accept a thematic restriction applicable to all of our Category 7 programming.
12737 Finally, we are prepared to forgo the addition of Category 7b (ongoing comedy series (sitcoms)) in the event that the Commission deems it necessary.
12738 MR. BRACE: I will now turn to our sports programming proposal. In our written reply, we put forward four restrictions to "fence in" our request to add Category 6a programming to OLN's schedule, namely:
12739 (1) a complete prohibition on the major North American "stick and ball" sports -- NBA, NFL, CFL, MLB and NHL;
12740 (2) a limit of 15 per cent of the schedule;
12741 (3) a requirement that all 6a sports would be thematically limited as per OLN's nature of service; and
12742 (4) a stipulation that only underexposed sports would be broadcast.
12743 During discussions with Vice-Chair Colville we agreed that an efficient and acceptable solution to the current uncertainty surrounding the classification of OLN's sports programming would be to add some clarifying language to OLN's licence renewal decision in lieu of granting authority to broadcast Category 6a professional sports programming.
12744 To this end, we propose that the following wording be added to OLN's licence renewal:
"Category 6b (amateur sports) programming may include outdoor recreation, conservation, wilderness or adventure themed sports programming (including those sports programs broadcast by OLN during the first licence term) that is underexposed or primarily involves athletes/participants that are not generally dependent for their livelihoods upon the salaries and/or prize money available to them through their participation in such sports. Only those outdoor recreation, conservation, wilderness or adventure themed sports which represent no more than 2 per cent of total hours tuned (All persons 2», English-language licensed Canadian conventional and specialty television universe) measured over the immediately preceding broadcast year would be considered 'underexposed'. For certainty, OLN shall not broadcast any of the major North American 'stick and ball' sports: NFL, NHL, NBA, CFL or MLB."
12745 This language includes the restrictions we proposed in our written reply. At the same time, it brings clarity to the current dilemma OLN faces in terms of programming certification.
12746 During the intervention phase of the public hearing, the challenges associated with categorizing sports as 6a or 6b were well demonstrated by a number of appearing intervenors. Intervenors appearing on behalf of The Score acknowledged that there is no clear definition as to what is professional and what is an amateur sport in any given instance. Other intervenors made the point that professional ability does not necessarily mean the athlete is professionally compensated.
12747 There is clearly no "one size fits all" approach that would be appropriate. Our proposal ensures that OLN's viewers will continue to be able to see their favourites on OLN, regardless of whether a modest amount of prize money is involved or not.
12748 Mr. Chairman, Commissioners, we believe that the restrictions proposed in the areas of Categories 6 and 7 programming fully address the concerns raised by intervenors and at the same time are responsive to the issues raised by the Commission.
12749 Turning now to the independent programming committee, CTV, as manager of the network, will propose to OLN's shareholders Vice-Chairman Colville's suggestion that Section 2.1 of the Services Agreement be amended to expressly state that the Board of Directors shall not have any control or influence over any programming decisions.
12750 We plan to file with the Commission as soon as possible, and in any event by no later than August 31, 2003, the revised Services Agreement.
12751 Mr. Chairman, Commissioners, that concludes our presentation and we would be pleased to answer any questions.
12752 THE CHAIRPERSON: Thank you.
12753 Commissioner Colville.
12754 COMMISSIONER COLVILLE: Thank you, Mr. Chairman.
12755 Mr. Brace, I would like to see if we could spend some time coming to a clear and precise definition of professional and amateur sports.
12756 I'm just kidding!
--- Laughter / Rires
12757 MR. BRACE: I was wondering how long we might have.
12758 COMMISSIONER COLVILLE: I suspect we would be here for a long time.
12759 Actually, I was thinking about the issue that The Score raised this morning even before they did it. We have a number of options in front of us now, and one of them kind of comes from the way this problem was created for you in the first place, and that is that the current definition created a problem with some of the sports that you wanted to raise.
12760 MR. BRACE: That is correct.
12761 COMMISSIONER COLVILLE: If we chose not to adopt the approach that you suggested during the discussion we had earlier and proposed in your reply today -- and I am not suggesting that we are rejecting that out of hand now. It is certainly one of the things we want to consider in our deliberations.
12762 Another option is to take the approach of maintaining the existing definition and creating some specific exceptions in order to allow you to carry the sports that you wish to carry. That would include most particularly, given the discussion we had previously, professional bull-riding and the "All Strength Challenge".
12763 Are those the two main ones that you want?
12764 MR. BRACE: Those are the two main ones that we discussed on the record. I think we mentioned professional beach volleyball and other sports that are in the same kind of genre, that are in the same kind of what I would call tier of sports.
12765 We listened this morning with interest to The Score's intervention and their proposal. The concern we have is, as I said the other day, I am not sure we can ever come up with that exhaustive list. I think all of us want to avoid coming back to the Commission on a regular basis to get the blessing before going forward with the acquisition.
12766 There is the concern of how do you make a commitment and then get kind of pre-certification. By that time you are kind of out of sync, and our schedule as a result of that is going to suffer.
12767 We really wanted to encourage, as best we could, putting something into the licence that really did give the kind of comfort that we need. We checked over the last couple of days, and even Sport Canada now has decided that they have no definition.
12768 So we really are kind of left a bit swinging in the breeze. It is unfortunate, because I would love to be able to fence this in to the best of our ability.
12769 We feel that in making the commitment and guarantee -- more than a commitment; a guarantee -- that the North American professional stick involved sports are clearly outside the boundaries. We would really stick to what we are doing.
12770 One, it is what we had been doing and what audiences are responding to.
12771 Two, it gives us an opportunity for a little bit of growth.
12772 The urgency and the real concern for us is that we are committed to do amateur sport. Within our schedule, although we are able to do as much amateur sport as we really wanted to, where there is no real restriction on that, in point of fact we schedule about 27 per cent.
12773 Based on some of the notions that we have talked about in kind of putting a fence around this thing, we would have trouble with probably around 75 per cent of that programming, because there are different levels of prize money, and so on and so forth.
12774 As I say, it is kind of that niche tier that we are talking about that is well below what you would consider to be the kind of prime time network sport type offerings, or even for that matter the sports offerings that either The Score has telecast with major league baseball or that TSN and Sportsnet carry on a regular basis in terms of what we would call a major event.
12775 Our budgets don't reflect the ability to do that. Also, if we got heavily down that road, it does move us away I think from what is our core competency, which is the outdoor life strategy that we followed. That has been the fundamental for our success.
12776 Sorry for the long answer, but it is difficult to try and fence this one in.
12777 COMMISSIONER COLVILLE: You were back to your proposal, which essentially is: Let us into professional sports, and we agree to keep these ones out.
12778 My question still is: If we stuck to the existing situation, which was "let's keep it to amateur sport but we will make a few exceptions for these specific sports, professional bull-riding, all strength challenge, beach volleyball", those capture the major ones --
12779 MR. BRACE: If we could -- and sorry for the long answer, because now that I understand what you are really asking, we are totally satisfied to stick with 6b. If I sounded like I was going towards 6a, I am not.
12780 If we can put kind of that fence around and if it includes examples with a little bit of understanding -- as I say, if there is a way we can do it without coming to the Commission on a regular basis, which I don't think either of us are particularly interested in, that would satisfy the need.
12781 COMMISSIONER COLVILLE: Thank you very much.
12782 MR. BRACE: Thank you.
12783 THE CHAIRPERSON: Thank you very much.
12784 Mr. Secretary.
12785 MR. LEBEL: Thank you, Mr. Chairman.
12786 We will now hear from CTV's Newsnet in response.
12787 MR. LEBEL: Again, Mr. Brace, ready when you are. You have ten minutes maximum for your presentation.
REPLY / RÉPLIQUE
12788 MR. BRACE: Thank you. I have moved over one seat, just for variety. It's a long day for you folks.
12789 Chairman Dalfen, Vice-Chairs, Commissioners, my name is Rick Brace and I am President of CTV.
12790 With me today are Robert Hurst, President of CTV News, to my left; Joanne MacDonald, Vice-President, CTV News; Kim McKenney, Director of Finance, CTV Specialty Networks; Elizabeth Duffy-MacLean, Group Vice-President, Regulatory Affairs; and Rick Nicholls, Business Manager for CTV News.
12791 At the side table are Ivan Fecan, CEO of Bell Globemedia and Kathy Robinson, Legal Counsel from Goodmans.
12792 First, we will briefly address the supplementary financial information that we filed as requested by the Chairman during our initial appearance. Then we will reply to the concerns raised by intervenors.
12793 As requested, we filed financial projections which reflect the business plan Newsnet would implement if the 11-cent rate increase were denied. We also provided details of the improvements that will result if the increase is granted. These projections make it clear that the requested increase of 11 cents is modest, but essential.
12794 Without the requested increase, CTV Newsnet is not viable. The fundamental business model for headline news has changed since Newsnet was launched. We spent significantly more than we planned, to meet increased viewer demands for immediacy. As a result, we lost $16 million over the licence term.
12795 This is not a short-term challenge. Given our low wholesale rate, the significant costs of operating a credible, real-time headline news service mean that Newsnet is permanently impaired.
12796 Such ongoing losses cannot be sustained. Without the increase, we would reduce costs by $21 million to reach a business plan for Newsnet that is break-even, at best, for the new licence term. Most of the improvements we have made would be lost, and additional improvements would not be implemented.
12797 Newsnet's audience has already begun to erode, and advertising revenue growth has declined. If programming costs are reduced, our audience and advertising revenue will continue to decline.
12798 Without the proposed rate increase, CTV Newsnet will no longer be the alternative news headline voice in Canada. We won't be a credible news option to U.S. sources. Trust and credibility in the news business is earned day by day, week by week, but it is easily lost. The first time there's a big story, one that matters to all Canadians -- another Swiss Air, a new virus or an earthquake here at home, or the next war -- if we are not there, we won't be anyone's alternative.
12799 MS MacDONALD: If an 11-cent increase is granted, Newsnet will be the Canadian headline news service that today's viewers demand. It will be immediate, relevant and credible. We will maintain the improvements we have made, at a cost of $21 million over the next licence term. We will also make $14.6 million in further improvements over the new term, to increase the immediacy of our news-gathering and reporting.
12800 These improvements, which are detailed in our supplementary filing, include:
12801 (1) introducing live anchor reporting capability every afternoon;
12802 (2) adding east and west regional news chase teams; and
12803 (3) commencing in year 2, adding live anchor reporting in the late morning and prime time period.
12804 We will also invest $7.1 million in improvement-related expenses, bringing the total to $42.7 million.
12805 As our supplementary filing indicated, increases in viewership to CNN's "Headline News" since it introduced a live anchor format suggest that moving to a live anchor format will increase audiences for Newsnet.
12806 Less than $10 million of additional subscriber revenue over the licence term will go towards our bottom line. Together with the increased advertising revenues, this will bring Newsnet's PBIT margin from negative 20 per cent closer to the industry average. We believe that the industry PBIT is the appropriate benchmark.
12807 Public and private broadcasters' objectives regarding PBIT do differ; public broadcasters do not have the same bottom-line concerns.
12808 MR. HURST: Virtually all of the negative interventions regarding Newsnet were from RDUs. We filed complete written replies to those. However, we will address the following points they raised as reasons to deny our requested rate increase: value to consumers and the validity of our forecasts.
12809 Some BDUs said that a rate increase would not deliver good value to consumers, but they did not provide supporting evidence. The research we commissioned shows that 70 per cent of respondents would consider 19.5 cents for Newsnet excellent value if the increase is linked to improvements in the service. We also received strong support for the rate increase from hundreds of positive intervenors.
12810 We challenge the criticism of Newsnet's forecasts offered by the CCTA. The CCTA's subscriber forecast for Newsnet does not reflect non-paying or discounted subscribers, such as bulk residential subscribers, or the reality of our 65 per cent take-up rate from satellite.
12811 We cannot comment on the revised CCTA forecast put on the record this morning, because we have not been provided with that analysis.
12812 Our subscriber revenue forecast is based on actual fees received. It also reflects the assumptions that total television households will not increase dramatically over the licence term and that the growth of DTH at the expense of cable will cause our subscriber base to decline.
12813 We also challenge the CCTA's projection of 10 per cent annual growth in advertising revenue. Our projection of 6 per cent growth in advertising revenue for Newsnet reflects the industry average projection of 3-4 per cent, plus the impact of proposed improvements.
12814 Some small cable operators suggested that a rate increase would cause more Canadians to opt for illegal foreign grey market services or black market boxes. The proposed increase will have the opposite effect by strengthening Newsnet.
12815 Stronger services, particularly stronger news services, will make Canadian BDUs more attractive than foreign services and black boxes, not less.
12816 A national survey on consumer attitudes regarding home entertainment was recently conducted by the CCTA. That survey showed that viewers want Canadian programming, and they particularly want news and information Canadian programming from a Canadian point of view. No other programming was in such high demand. In the CCTA's survey, 85 per cent of respondents said that Canadian news broadcasts with a national perspective are the single most important type of television programming to them.
12817 MR. BRACE: During our initial appearance, the Commission asked about the relevant criteria for wholesale rate increases. In our view, they include:
12818 (1) the licensee's contribution to the Canadian broadcasting system;
12819 (2) audience appeal -- how viewers value the service;
12820 (3) the current wholesale rate and how it compares to the rates of others;
12821 (4) the service's potential to grow advertising;
12822 (5) the licensee's contribution to the mix of services;
12823 (6) the strength of the business plan; and
12824 (7) the financial position of the service.
12825 Judged by these criteria, the requested rate increase for Newsnet is justified.
12826 Newsnet contributes significantly to the broadcasting system. We are 100 per cent Canadian. We cover breaking news in Canada's various regions and around the world, from a Canadian perspective.
12827 With the proposed rate increase, we will hire more journalists and crews. We will cover more stories from more locations, from more regions, and with more immediacy.
12828 Canadians support us. Viewers have told us that they value Newsnet. Four hundred and thirty intervenors specifically supported our requested rate increase. You heard directly and eloquently from five of them. The research that we commissioned showed that a solid majority of Canadians would support an 11-cent increase with our proposed improvements.
12829 Newsnet currently has one of the lowest wholesale rates compared to other English language analog specialty services. Even with the proposed 11-cent increase, Newsnet's rate will remain below the industry average, and it will be more than fair in comparison to Newsworld and CNN.
12830 Newsnet has the potential to grow advertising. We have invested significantly in meeting increased viewer demands for immediacy, but advertising has plateaued. In order to drive increased audiences and growth in advertising revenue, we need to move to a live anchor format, as CNN Headline did two years ago.
12831 Newsnet is vital to the news mix available to Canadians. Canadians need and deserve access to competitive, credible, timely, balanced news services. Newsnet offers an important alternative news voice to Newsworld and to foreign news services. Without a strong Newsnet, viewers will increasingly turn to U.S. services.
12832 Newsnet's proposed rate increase is based on a solid business plan. Our business plan provides the resources Newsnet needs to serve viewers, to continue the improvements we have offered and address their concerns about repetition.
12833 Fully $42.7 million, or 82 per cent, of the increased subscriber revenue, will be directed to the screen. That is our commitment for the record.
12834 With its current wholesale rate, CTV Newsnet is not viable. Significant ongoing losses cannot be sustained. The proposed rate increase will offer an acceptable return, well within the industry average, and allow us to continue with an improved Newsnet.
12835 In conclusion, we respectfully submit that destabilizing CTV Newsnet would not be in the interest of the Broadcasting Act, nor of Canadian viewers. With the requested increase, Newsnet can fulfil its obligation to the Canadian headline news alternative, bringing Canadians perspective on events at home and around the world. It can be the service Canadians want and need it to be.
12836 Thank you. We would be pleased to answer your questions.
12837 THE CHAIRPERSON: Thank you very much.
12838 Mr. Secretary.
12839 MR. LEBEL: Thank you, Mr. Chairman.
12840 We will now hear from HGTV Canada Inc. and History Television Inc., in response.
12841 MR. LEBEL: Mrs. Yaffe, whenever you are ready.
REPLY / RÉPLIQUE
12842 MS YAFFE: Thank you very much.
12843 I am only going to, first of all, thank our intervenors and also thank the Commission for your patience and for your careful listening to our arguments over the last few days.
12844 We have nothing to add to the record.
12845 THE CHAIRPERSON: Brilliant and eloquent. Thank you.
12846 Mr. Secretary.
12847 MR. LEBEL: Thank you, Mr. Chairman.
12848 We will now hear from Global Communications Limited and Prime Television Holdco Inc., partners in "Prime TV, General Partnership", in response.
REPLY / RÉPLIQUE
12849 MS BELL: Good afternoon. I went to the same school as Phyllis Yaffe. I have pretty much the same comments.
12850 We would like to thank all of the positive intervenors and the Commission for its patience and hard work in this hearing. I am here to answer any questions you may have.
12851 THE CHAIRPERSON: Commissioner Pennefather.
12852 COMMISSIONER PENNEFATHER: There was one clarification, if you could help us.
12853 I think in submitting some information to us you talked about a list and had a group of three examples of ten-year --
12854 MS BELL: The one we filed on Friday?
12855 COMMISSIONER PENNEFATHER: That's right.
12856 I think the question was simply why all episodes? It says all episodes must be within the ten-year limit.
12857 Can you explain why all the episodes would necessarily have to be beyond that ten-year limit?
12858 MS BELL: I think that is something that we discussed a little on Thursday when we appeared before you.
12859 One of the things that happens when you are airing strip programming and older shows is that at some point, if you don't have enough episodes, viewers start phoning you saying, "I have seen half of them but why do you keep repeating the same ones?"
12860 It is because we are not ready to air the next ones, because they are not all ten years old. That is what that restriction does.
12861 COMMISSIONER PENNEFATHER: The ones you listed, you say that those are the only ones, or examples of ones -- are they the only ones, those three, that are clear for all episodes?
12862 MS BELL: I think they were clear for all episodes and also that we felt they would fit within our mandate to serve 50-plus.
12863 COMMISSIONER PENNEFATHER: On that latter point, because then that becomes very keen, the determination of 50-plus. Is that as described in your application or do you wish to elaborate on that at all?
12864 MS BELL: It is described as in our application.
12865 COMMISSIONER PENNEFATHER: Do you want to just add to how you determined that only those three would meet both the criteria of all episodes of ten years and be applicable to the 50-plus population?
12866 MS BELL: I think in terms of the episodes, it is just what is available.
12867 In terms of the 50-plus, we look at past ratings, and we try to estimate what the average age of viewers would be at this time.
12868 The fast rule isn't that a program audience ages one year for every year the program ages. That doesn't work with programs that are currently in production. If you look at "Coronation Street" or "Frasier", what happens is those productions are still being produced. The casts change. The story lines are updated with current times.
12869 But what you often find with older programs is that in fact if the average age was about 38 ten or twelve years ago, the people who were watching it at that point seem to like to watch those same shows again. So they have aged along with the program.
12870 It doesn't always work out that way, but it does work out in a number of instances.
12871 In fact, when we look at the ratings, it seems to be working that way.
12872 COMMISSIONER PENNEFATHER: Your assumption is that we and the programs have aged well. Is that correct?
12873 MS BELL: Absolutely.
12874 COMMISSIONER PENNEFATHER: Thank you.
12875 Thank you very much, Mr. Chairman.
12876 THE CHAIRPERSON: Thank you very much, Ms Bell.
12877 Mr. Secretary.
12878 M. LEBEL: Merci, monsieur le président.
12879 Nous entendrons maintenant MusiquePlus Inc. (MusiMax) en réponse à ce moment-ci.
RÉPLIQUE / REPLY
12880 M. MARCHAND: Monsieur le Président, mesdames et monsieur les Conseillers, membres du personnel.
12881 Je suis Pierre Marchand, Vice-président et directeur général de MusiquePlus inc. M'accompagnent aujourd'hui, à ma droite, Bernard Dumais, vice-président principal exploitation et à ma gauche, Michel Arpin, secrétaire corporatif de MusiquePlus inc.
12882 Comme vous le savez, monsieur le Président, MusiMax a répliqué par écrit aux interventions qu'il a reçues, et même à celles que certains intervenants n'ont pas cru bon de lui transmettre.
12883 Nous avons également eu l'occasion de discuter plus avant de certaines des questions soulevées par les intervenants lors de notre comparution, la semaine dernière.
12884 Enfin, nous avons transmis au Conseil, tel que demandé, un document qui fait état des engagements additionnels significatifs que MusiMax est disposé à prendre pour répondre aux préoccupations et attentes exprimées par Mme Andrée Wylie lors de notre comparution.
12885 Nous croyons donc avoir déjà eu maintes occasions d'exposer notre position et ne voyons pas d'éléments nouveaux à ajouter en réplique orale.
12886 Nous serons évidemment heureux de répondre à toute question que le Conseil souhaiterait nous poser sur nos engagements.
12887 Mais avant de terminer cette brève réplique, nous souhaiterions formuler quelques commentaires sur les interventions des entreprises de distribution de radiodiffusion.
12888 En fait, nous voudrions tout simplement rappeler que le Conseil a toujours établi un lien direct entre les obligations des services spécialisés, en matière de pourcentage de contenu canadien et de dépenses de programmation canadienne, et leurs modalités de distribution.
12889 A chaque nouvel appel de demandes de licence, le Conseil a clairement précisé les exigences minimales que devaient rencontrer les services.
12890 Ces obligations étaient décroissantes selon que leur plan d'affaires repose sur une distribution à la base ou sur un volet à forte pénétration, sur une distribution analogique dans des volets de pénétration moyenne ou sur une distribution entièrement numérique.
12891 Pour ce qui est des services de 1996, le Conseil a clairement précisé, dans l'avis public CRTC 1996-120, que les services désireux d'être distribués au service de base ou à un volet à forte pénétration devaient rencontrer les mêmes obligations que les diffuseurs conventionnels en matière de contenu canadien et que, sauf pour les services de musique, ils devaient prendre des engagements de dépenses de programmation canadienne en pourcentage des revenus.
12892 MusiMax -- comme les autres services de 1996 désireux d'obtenir une distribution immédiate dans un volet à forte pénétration -- a donc construit son plan d'affaires comme sa promesse de réalisation en fonction de cette double prémisse.
12893 Sept ans plus tard, le Conseil demande à ces mêmes services au mieux de maintenir et idéalement d'accroître la contribution qu'ils apportent au système de la radiodiffusion canadienne. Ce que MusiMax a accepté, notamment en proposant de s'assujettir à de nouvelles obligations en matière de dépenses d'émissions canadiennes.
12894 Il nous semblerait donc logique que le corollaire établi par le Conseil en 1996 entre le niveau élevé d'obligations auquel est astreint un service spécialisé et la garantie d'une distribution au service de base ou à un volet facultatif à forte pénétration, soit lui aussi respecté.
12895 Or, c'est exactement le contraire que proposent les distributeurs.
12896 D'une part, ils s'opposent à toute hausse de tarif des services de 1996 en difficultés financières et à toute réduction des obligations d'un service qui ne soit pas sanctionnée par une baisse de tarif.
12897 D'autre part, ils se refusent absolument à continuer de garantir à ces services le type de distribution qui correspond à ces niveaux élevés d'obligations.
12898 Ils proposent plutôt une réduction générale des tarifs, voire, dans le cas de Vidéotron, par exemple, l'abandon pur et simple des statuts de distribution dans la réglementation et de la mention d'un tarif dans les décisions du Conseil avec pour objectif avoué de réduire sensiblement les tarifs actuels des services de 1996 tout en s'autorisant à les transférer, à leur gré et quand bon leur semble, dans des volets à faible pénétration, voire à ne plus les distribuer qu'en mode numérique ou à la carte.
12899 Bref, ils veulent que les services de 1996 maintiennent des obligations égales ou supérieures à celles imposées aux services distribués à la base, tout en les traitant comme des services entièrement numériques, voire des services étrangers, en terme de distribution.
12900 C'est là, à notre avis, une vision :
Totalement irréaliste au plan économique;
Totalement en porte à faux par rapport aux prémisses de départ établis par le Conseil en 1996; et
Totalement contraire à l'esprit de la Politique canadienne de radiodiffusion.
12901 Le système canadien de radiodiffusion ne peut fonctionner adéquatement que si toutes les entreprises qui le composent acceptent de respecter leurs obligations.
12902 On ne peut, d'un côté, demander aux services spécialisés d'accroître constamment leurs obligations à chaque renouvellement de licence, et de consacrer toujours plus de ressources au financement des émissions canadiennes, et, de l'autre côté, dégager les distributeurs de leurs obligations en matière d'assemblage et de tarification de ces mêmes services.
12903 Cela ne ferait pas de sens et nous conduirait directement à un cul de sac, dont le public et les producteurs d'émissions canadiennes seraient les premiers à en faire les frais.
12904 C'est pourquoi nous espérons que le Conseil mettra autant d'énergie et de détermination à s'assurer que les distributeurs continuent de respecter les obligations qu'ils ont contractées envers les services spécialisés, qu'il en a mis, au cours de la présente audience, à s'assurer que les services spécialisés de 1996 continuent d'apporter une contribution optimale à l'atteinte des objectifs de la Politique canadienne de radiodiffusion.
12905 Je vous remercie de votre attention. Nous sommes ici pour répondre à vos questions si vous en avez.
12906 LE PRÉSIDENT: Madame la conseillère Jones.
12907 Me JONES: Bonjour. J'ai trois questions de clarification seulement.
12908 A la page 14 du document que vous nous avez donné hier, les conditions de licence proposées, la condition de licence (f) qui dit que toutes les émissions dramatiques diffusées par la requérante doivent être reliées au monde de la musique ou mettre en valeur une personnalité du monde de la musique.
12909 Pouvez-vous indiquer si ces vedettes incluraient un film mettant en vedettes des actrices comme Jennifer Lopez ou Madonna?
12910 M. MARCHAND: Absolument. Jennifer Lopez et Madonna sont des exemples de chanteuses qui sont également des actrices mais, évidemment, dans des films qui sont des films à caractères musicaux.
12911 Donc si, par exemple, Jennifer Lopez joue dans le film « Selena , la chanteuse qui est décédée, évidemment c'est le genre de films qu'on veut diffuser. Si elle joue le rôle d'une agente policière, ce n'est pas le genre de films qu'on cherche à diffuser du tout, non.
12912 Me JONES: Merci.
12913 Ma deuxième question c'est pour la condition de licence proposée 1(h) qui parle de 50 pour cent des heures de diffusion d'émissions qui ne sont pas considérées de manière prépondérante à la musique, et cetera, et qui sont diffusées en période de soirée.
12914 Ce 50 pour cent, est-ce que c'est calculé sur une base hebdomadaire ou quotidienne, le 50 pour cent des heures de radiodiffusion?
12915 M. MARCHAND: Le 50 pour cent d'émissions canadiennes en heures de grande écoute.
12916 Me JONES: Non, c'est le (h), le 50 pour cent de diffusion d'émissions non consacrées de manière prépondérante à la musique, leur diffusion en soirée.
12917 M. MARCHAND: Excusez-moi, je cherche ma page. Pardonnez-moi.
12918 Me JONES: C'est à la page 14.
12919 M. MARCHAND: On souhaiterait que ce pourcentage soit établi sur une base hebdomadaire.
12920 Me JONES: Sur quelle base avez-vous établi ce pourcentage? Sur une base hebdomadaire ou quotidienne?
12921 M. MARCHAND: Hebdomadaire.
12922 Me JONES: Hebdomadaire. Merci.
12923 La dernière question, un peu plus bas sur cette même page, à la page 14, au point 3 :
« La titulaire doit répartir également les vidéoclips qu'elle diffuse au cours de chaque semaine de radiodiffusion et de façon raisonnable durant sa journée de radiodiffusion .
12924 Est-ce que vous pouvez confirmer si cette condition de licence inclut les vidéoclips canadiens et les vidéoclips de langue française?
12925 M. MARCHAND: Absolument, les deux.
12926 Me JONES: Merci. Ce sont toutes mes questions.
12927 LE PRÉSIDENT: Merci, messieurs, pour votre présentation claire et forte.
12928 Monsieur le secrétaire.
12929 MR. LEBEL: Thank you, Mr. Chairman.
12930 I will now ask Rogers Broadcasting Limited (OMNI.2) to respond to interventions at this time.
12931 When you are ready, Mrs. Ziniak.
REPLY / RÉPLIQUE
12932 MS ZINIAK: Thank you.
12933 Good afternoon, Mr. Chair, Vice-Chair, Commissioners.
12934 We would like to take this opportunity to thank you, thank the Commission. As well, we would like to thank the five intervenors who spoke yesterday very enthusiastically and also for their commitment.
12935 We would like to say that we very much value the public process and would like to say that we also were very much inspired by our 181 intervenors who wrote in their interventions and sent in their comments and who did demonstrate the valuable service, the valuable public service of OMNI.2 that broadcasts to 24 ethnocultural communities and how excited they would be with this valuable public service.
12936 So we thank you and we would like to now entertain any questions that you have to date.
12937 THE CHAIRMAN: I think we are a bit questioned out, Ms Ziniak.
--- Laughter / Rires
12938 THE CHAIRMAN: Thank you.
12939 MS ZINIAK: Thank you.
12940 THE CHAIRMAN: Mr. Secretary.
12941 MR. LEBEL: Thank you, Mr. Chairman.
12942 I will now ask Crossroads Television System to respond to interventions at this time.
REPLY / RÉPLIQUE
12943 MR. VANSTONE: Mr. Chairman, we would like to thank the Commissioners and the staff for staying behind to hear our response.
12944 MR. GRAY: Thank you, Mr. Chairman and Commissioners of the panel.
12945 THE CHAIRMAN: We thought that was your reply.
--- Laughter / Rires
12946 THE CHAIRMAN: I guess not.
12947 MR. GRAY: We will keep it short.
12948 I am Richard Gray, President of the CTS. This is Fred Vanstone, our Chairman of the Board and on my right is Richard Landau who is our Executive Producer of Balance Programming.
12949 Taking my cue from the last person, I would like to also thank the 1,293 people who took the trouble to write in and respond in favour of the CTS application. What we will do is very quickly respond to the one who intervened against us.
12950 The VisionTV intervention opposing the CTS rebroadcast transmitters focused on two areas: One was policy, and the other was the effect on Vision of CTS rebroadcast transmitters.
12951 Concerning policy, the Commission's policies are working. CTS is evidence that the religious policy is working and we are proud of our results.
12952 Cable priority positioning has served the Canadian broadcast community well and we share the same view of OMNI.2's application that space is available in the basic cable line up with non-Canadian services and a high level of simulcast programs now in place in that lower band.
12953 It was interesting surfing up and down the dial, as all men do when they are in a hotel room, to be able to watch HomeTown Television, CHCH, City and OMNI.1 readily available on that basic band which really brought home to me what we have talked about at the hearing, the reality of the marketplace and how it is there.
12954 As confirmed by Rogers' Vice-President of Corporate Engineering in the OMNI presentation, over-the-air frequencies will continue to be available even assuming that both OMNI.2 and CTS do receive broadcast licences, rebroadcasting licences.
12955 The only negative intervention opposing CTS was from Vision, a national specialty service. There were no local television broadcasters that objected or opposed our application.
12956 As I mentioned, we did get much support from the public and also much positive support from the multi-faith community in both London and Ottawa, as evidenced, that they believe CTS is welcome to fill the local needs and also evidence that there is no other local broadcasters ready to step in and establish a local religious station.
12957 David Mainse spoke on the Friday when we appeared of the importance of reaching the over-the-air audience provided by the rebroadcast transmitter, and this is a distinctly different audience than being served by the Vision model.
12958 CTS is licensed as a commercial balance to religious broadcasters, the broadcast industry and advertising agencies that define the market as regional and we are here to respond to that reality.
12959 We require priority carriage to properly access the advertising pool for conventional television broadcasters.
12960 Vision's licence does not contemplate regional advertising revenue. In fact, a separate pool of ad agency revenue exists for national specialty services.
12961 Vision has predicted a modest $150,000 to $300,000 decline in their revenues as a possibility if CTS does have rebroadcast transmitters. This is not evident from the history. Vision's revenues have risen in each category since CTS was licensed five years ago and, as we know, Vision has recently been granted a $2 million annual increase in cable pass-through subscriber fees.
12962 If Vision is truly concerned about that $300,000, David Mainse, Reverend David Mainse has indicated to me that he would be happy to, once again, begin purchasing 11:00 p.m. Monday through Friday on Vision for $300,000 annually if Vision would like to reinstate him to that traditional time that he had for more than a dozen years.
12963 Contrary to Vision's written intervention's concerns, we have found to example of religious programs migrating from Vision to CTS. We have identified six different paid programs on VisionTV's current schedule that once were on CTS in our first five years, but are not now on our program schedule.
12964 Mr. Chairman, we believe our application is consistent with your guidelines, and we would be pleased to answer any questions if you have any.
12965 Thanks very much.
12966 THE CHAIRMAN: Thank you very much.
12967 MR. GRAY: Thank you very much.
12968 THE CHAIRMAN: Mr. Secretary.
12969 MR. LEBEL: Thank you, Mr. Chairman.
12970 Bea-ver Communications Inc. indicated they would not appear in this phase of the public hearing. So this completes this phase of the public hearing.
12971 THE CHAIRMAN: Thank you very much.
12972 For the record, I want to extend the thanks of the other Commissioners and myself for the excellent job that you have done, Mr. LeBel and Ms Greer-Yull and Mr. Wilson, and all of the remaining staff who has been so helpful to us all throughout the hearing. Thank you very kindly.
12973 MR. LEBEL: Thank you, Mr. Chairman.
12974 Before you pull the plug, I would like to indicate that there are a number of non-appearing applications on the agenda of this public hearing.
12975 Interventions were received on some of those applications and the Commission will consider these interventions along with the applications and decisions will be rendered at a later time.
12976 Thank you, Mr. Chairman.
12977 This now completes the agenda of this public hearing. Thank you.
12978 THE CHAIRMAN: You have the last word, Mr. Secretary. Take it.
--- Whereupon the hearing concluded at 1614 /
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