Industry Committee on April 15th, 2010

[The Chair, Conservative, Michael Chong]

Good morning, everyone. Welcome to the ninth meeting of the Standing Committee on Industry, Science and Technology today, Thursday, April 15.

Pursuant to Standing Order 108(2), we are here to study Canada's foreign ownership rules and regulations in the telecommunications sector. In front of us today for our first panel of witnesses we have Mr. Engelhart, from Rogers Communications Inc., and from Shaw Communications Inc. we have Mr. Stein and Mr. Brazeau.

We will begin with opening statements from each of the companies, beginning with Rogers Communications.

[Kenneth Engelhart, Senior Vice-President, Regulatory, Rogers Communications Inc.]

Thank you, Mr. Chair.

Rogers is pleased to be before you today to assist with your deliberations on the foreign ownership rules.

Rogers has no formal position on the merits of changing Canada's foreign ownership rules, and likely will not have a position until such time as the government releases a formal proposal. However, we think there are important considerations that should be kept in mind and guide you as you consider possible changes to the current regime.

First, if you are going to change the foreign ownership rules for telecommunications, we think it only makes sense to change the rules for cable television at the same time. Convergence has finally become a reality. The basic structure of the telephone company network is a fibre optic cable containing voice, data, and video bits. Similarly, the basic infrastructure of the cable television company network is a fibre optic cable containing voice, data, and video bits.

Telecommunications carriers and cable television companies are increasingly offering the same services. It makes no sense to allow foreign ownership for telecommunications and not allow it for cable. They are both distributors; they are both pipes. They both carry content and communications and they do not engage in programming. If you artificially change the foreign ownership rules for telecom but not for cable television, then you make it impossible for integrated carriers to pursue the advantages of foreign ownership liberalization. You would also create a strong disincentive for foreign carriers to enter the Canadian market. Why would they want to do so when they will be precluded from offering cable TV services as part of their service package?

We would note that it is not necessary to liberalize the foreign ownership rules for programming services such as radio stations and TV stations. These entities do create programming and create and foster the development of Canadian content, which is an important policy objective in Canada. There are many who feel it would be unwise to allow programming entities such as these to be foreign-owned. You could remove foreign ownership rules for telecommunications and cable television and keep the rules for radio and TV stations.

I often hear people saying that it would be complicated to liberalize foreign ownership rules for cable television and not do so for radio and TV stations. As a communications lawyer, I disagree. Cable television services have a different type of licence from programming services. Cable television has a broadcast distribution undertaking or BDU licence. The Broadcasting Act would simply be amended to say that BDU licences can be foreign-owned and programming licences cannot be foreign-owned.

People are also often confused as to how such a regime would apply to companies like Rogers, which provide telecommunications, cable television, and programming services. If a company such as this wanted to sell its cable television and telecommunications assets to a foreign entity, it simply could not sell the radio and TV stations to that foreign company. They would have to stay in Canadian hands. This would not be a form of structural separation; it would be a divestiture of these assets.

I would also like to take issue with the Competition Policy Review Panel report. This report argued that Canadian telecom companies with a market share of 10% or less should have no foreign ownership rules immediately and that larger telecom players and the broadcasting sector should see liberalization after a five-year period. If liberalization of the foreign ownership rules makes sense, it makes sense for all players. Micromanaging the market to change foreign ownership rules for one part of the market today and another part in five years introduces artificial barriers and distortions. It makes no sense to allow large global players to enter the Canadian market and to buy and sell their assets to anyone on the planet without allowing Canadian companies to do the same thing. The government needs to decide whether telecommunications networks can be foreign-owned, and if they can, all of the networks should have the same rights.

The Canadian telecommunications market is an exciting, vibrant, and dynamic market, and Rogers is proud of the role we play in it. We have the fastest, most powerful wireless networks in the world, and our ultra-fast wireline broadband networks deliver world-beating levels of reliability and performance. Canada leads the G-8 in broadband penetration, and we lead the world in the proliferation of HSPA plus, high-speed packet access wireless networks. Rogers intends to be a proud contributor to the Canadian telecommunications sector, whether or not the foreign ownership rules are changed.

I look forward to your questions.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Engelhart.

We will now have an opening statement from Shaw Communications.

[Ken Stein, Senior Vice-President, Corporate and Regulatory Affairs, Shaw Communications Inc.]

Good morning.

Thank you, Mr. Chairman and members of the committee. We at Shaw also appreciate the opportunity to participate in this proceeding.

I am Ken Stein, senior vice-president of corporate and regulatory affairs at Shaw Communications. I am joined by Jean Brazeau, who is the senior vice-president of regulatory affairs. I will start our presentation, and Jean will conclude.

We support the initiative taken by the committee to study Canada's foreign ownership rules and regulations. We urge the committee to ensure the non-discriminatory elimination of restrictions on foreign ownership under the Telecommunications Act and the Broadcasting Act.

Shaw has consistently demonstrated our commitment to Canada's productivity by investing, innovating, providing facilities-based competition, serving customers, and employing now over 10,000 Canadians. As Canada moves to a knowledge-based economy, investments in digital infrastructure are the most important investments we can make.

Shaw has invested $6.5 billion since 2000. As a result, our 2.3 million cable customers have benefited from significant capacity upgrades to support over 150 digital services, 50 high-definition channels, pay-per-view, video on demand, and 3-D television. We have over 9,000 satellite customers, including many in rural and remote communities.

We have over one million high-definition customers. We have one million digital phone customers; in fact, 42% of our cable customers now take our phone service. We have 1.7 million Internet customers. We provide customers with Internet speeds up to 100 megabytes per second, and this year we expect to become Canada's first provider to trial the use of gigabit Internet technology delivered over fibre to the home, which will offer revolutionary speeds of 1,000 megabytes per second.

We have closed the broadband gap—despite what some people may say—by providing high-speed Internet service to small towns such as Wasa, British Columbia; Magrath, Alberta; Stonewall, Manitoba; and Red Lake, Ontario. Our critically important investments and our deployment of new technologies should be supported, not undermined, by government policy and regulation, including the foreign investment rules.

We would like to make the following specific recommendations.

First, as we have just explained, we are not just a cable company. We are a fully integrated communications company. We compete with other telecommunications, cable, and satellite companies in telephony, wireless, Internet, and television distribution markets. In this converged environment, it is unacceptable to lift ownership restrictions in only one sector or for the benefit of only one group of competitors. Such an approach will inappropriately distort the market and provide certain competitors with a significant and unfair advantage. Any changes that are discriminatory or unfair will not help achieve our policy goals of increased investment and greater productivity. Furthermore, we do not support the incrementalist approach to amending the Telecommunications Act as recently proposed in the budget implementation bill, because the rule changes apply only to one narrowly defined sector.

Our second point is that Canadian cable and satellite distribution companies must not be treated differently because of misconceived cultural concerns. In countries across the world, foreign investment has helped create strong cable and satellite companies without compromising domestic cultural or other public interest objectives. The U.S. has no foreign ownership restrictions on cable companies, or for that matter on cable programming services, and they maintain those restrictions only for over-the-air broadcasters. Moreover, European Union member states do not restrict foreign investment in telecommunications and cable companies. This is so even though they are concerned about the cultural influence, as are we, of U.S. media content. To address those concerns, the EU mandates effective domestic content rules for broadcasters and it permits member states to enact cable carriage rules. This is appropriate. However, the EU sees no contradiction between open capital markets and cultural regulation. In Canada, the policy objectives of the Broadcasting Act have helped to ensure predominance of Canadian content.

The rules governing content will stay in place, regardless of who owns the pipes.

Jean.

[Jean Brazeau, Senior Vice-President, Regulatory Affairs, Shaw Communications Inc.]

Our third message is that we are opposed to the rule changes that benefit foreign entrants but harm domestic companies. Such an approach is not good public policy or in the best interests of Canada or Canadians. Therefore, it would be unfair and discriminatory to allow a foreign company to establish a new business in Canada or to acquire an existing telecommunications company with a market share of up to 10%, as proposed by the Competition Policy Review Panel. It would be ironic to provide advantages to foreign competitors while restricting the ability of Canadian companies to access foreign capital.

Finally, we would like to address an increasingly harmful level of red tape, regulation, and tax that threatens to undermine many of the government's objectives for the digital economy.

On June 1, Shaw and other parties will appear before the Federal Court of Appeal, because the CRTC wants the jurisdiction to regulate and tax ISPs. In September, we will return to the Federal Court of Appeal, because the CRTC wants to create a new copyright over broadcast signals. The CRTC proposes a regime that will allow broadcasters to remove their signals and black out U.S. programming unless distributors agree to impose another fee on their customers. These taxes are in addition to the new 1.5% levy on cable revenues for the local programming improvement fund, the required 5% revenue contribution to Canadian content, and several other fees paid by our customers to subsidize broadcasters and producers.

Currently, Shaw customers pay over $140 million dollars a year as a result of indirect CRTC taxes. This is money that is not reinvested to deploy new technologies, improve Internet speed, enhance customer service, or extend our broadband reach. The CRTC taxation and subsidy regime damages productivity and stifles innovation. This is inconsistent with the government's stated policy of stimulating economic recovery.

Regulatory taxes and subsidies are also inconsistent with the bold investment-based approach advocated by the government and currently being studied by this committee. We ask this committee to approach changes to the foreign investment restriction in a manner that is competitively neutral for all telecommunications and broadcasting distribution companies. Public policy for the elimination of foreign investment restrictions and the elimination of red tape and taxes should not pick winners and losers. It should provide a level playing field and a new climate for increased investment and productivity to strengthen Canada's economy.

We thank the committee, and we look forward to answering your questions.

[The Chair, Conservative, Michael Chong]

Thank you for your presentation.

We will start with Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Merci, monsieur le président.

I would like to ask all of you, first of all, and I would appreciate a simple answer if you can, whether, in your opinion, the government discriminated in its decision to allow Globalive to become a player in the Canadian market, arguing that it satisfied Canadian ownership rules.

[Kenneth Engelhart]

Sure, I'll go first.

I think the evidence showed that Globalive did not meet the foreign ownership rules. The Canadian test has two parts. One is the number of shares you can own, and they satisfied that part. The other part is the control-in-fact test. The control-in-fact test really says to stand back, look, and ask who really is running this thing. It is pretty clear from all the evidence that Orascom is running it. It's all their money, all their expertise, and all their brand. So we think the government made a mistake in overturning the decision of the CRTC. Even more disturbing, the CRTC convinced Globalive to make a whole lot of changes to their contract. And Industry Canada approved it even before then. They gave them their licence when none of those changes had been made, when the case was even more stark that the company was controlled by a non-Canadian. I think the wrong decision was made.

[Jean Brazeau]

I think, simply, that we would have preferred a pre-qualification prior to the auction. I think we could have resolved all the issues at that point in time. As to whether the government made the right decision, we don't really have a position on that.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

On Tuesday the CRTC appeared in front of this committee. One of the proposals made by the president was that given the very high degree of convergence--and you are two very good examples of it--within the communications sector, if I can use that term, we should not really be looking at simply making a possible modification to the Telecommunications Act, but that the time has come to unify the three acts. I'd like to have your opinions on that suggestion.

[Kenneth Engelhart]

I'm not a fan of amalgamating the three acts. If you look at the United States, they have a single communications act, but then there's a section that deals with cable TV, a section that deals with telecom, and a section that deals with spectrum issues, and those sections are all quite separate. The Americans have sort of taken three separate pieces of legislation and stuck them together in one act.

The purpose of telecommunications legislation is really to regulate until such time as market forces can take over. The purpose of broadcasting or Canadian content regulation is to make sure that market forces never take over. So the two types of legislation have really quite different purposes, and I don't see a lot of merit in combining them.

[Ken Stein]

We would agree with that position. Our view of how things need to be dealt with is that there needs to be a stronger role, quite frankly, in the policy environment, for Parliament and also for government, in terms of setting policy direction for the regulator. So our view would be that there should be more strength on that side of it. As for the need to change or integrate the acts, our view is that when you look around the world, that would not really be the solution to the problems we see facing us. The problems we see facing us over the next number of years have much more to do with the regulatory overburden than they have to do with the legislative situation.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

Can I ask if either of the two companies is currently at its maximum foreign ownership limit?

[Jean Brazeau]

I couldn't give you an exact number, but I don't think--

[Ken Stein]

We're not even close.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

You're not even close, and....

[Kenneth Engelhart]

We're not even close.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

You're not even close. Okay.

Mr. Englehart, I'd like you to talk a little bit more about the two kinds of licences. You alluded to them in your remarks. You talked about BDU licence and also programming licence. Could you for our benefit expand a little more on the distinctions between the two and on why you see no difficulty in differentiating?

[Kenneth Engelhart]

BDU licences cover the rules regarding distributors. So distributors have to carry programming from only these categories. The CRTC actually lists out exactly what foreign signals you can carry and what foreign signals you can't carry. Canada probably has the most prescriptive regulatory regime for BDUs in the world, and it's all kind of laid out there. There are rules regarding distributors and even dealing with things like the transfer of inside wiring, when the customer changes suppliers.

The programming licences of radio stations and TV stations are quite different. They deal with things like how much Canadian content you have to air in prime time, how much local news you have to show, whether you are allowed to be a sports service or a home and garden service. So the kinds of licences are quite different, and it's very simple, in my view, to say the one kind can be owned by foreign entities and the other kind cannot.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Getting to the substance of that, it is because you don't see the one as having, if you like, a cultural imperative, a cultural content factor that has to be taken into account?

[Kenneth Engelhart]

I wouldn't say that there's no cultural content to cable television. I would say that it's much smaller. It's the programming services that really decide the Canadian content. To be a cable television operator in Canada, you don't have a lot of choice in what you carry and what you don't. You have a little bit of control over what channel number you put them on and how you package them, but I don't think the packages a foreign entity is going to put things in are going to be very different from the packages that a Canadian entity would. TSN is a hugely popular sports service, and if you're a foreigner or a Canadian, you're going to want it in your most popular package.

So I think the cultural component is much less for cable TV--much less--and its role as a distributor is much greater.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Engelhart.

Monsieur Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chair. Good morning and welcome to you, gentlemen.

I will share my time with my colleague, Ms. Lavallée.

According to your response to Mr. Garneau's question, you do not consider Globalive a Canadian company under the law. A number of people, including those at the OECD, have said that we should open the market to foreign capital because, in their view, we are lacking in investment, cutting-edge technology and competitiveness.

Have you seen the OECD report? What do you make of it? And what are your thoughts on our technology, innovation and competitiveness?

[Ken Stein]

If I could start on that, in terms of the Globalive situation, the government has made a determination under the rules that, since they have a difference from the CRTC, would mean the rules probably need some clarification in this sense.

Our concern is, and in terms of the OECD, we don't want to see the rules changed to encourage and provide incentives for foreign entrants. That's fine, right? Foreign entrants can come in the country. We want to have the same rules. So if a foreign entrant is allowed to come in and use foreign investment in order to strengthen competition in Canada, then we feel, as Canadian companies, we should be able to access foreign investment to achieve the same objectives.

Shaw is a new entrant in the wireless business. We don't even have one wireless customer yet. But we would be disadvantaged against another company coming in as a foreign entrant as proposed by the OECD, when that company could come in using all the advantages of foreign investment that would be denied to Shaw.

Our concern is that there needs to be an equal playing field in this. That's our main issue with respect to this: foreign investment rules should be changed so that Canadian domestic companies, which are owned and controlled by Canadians, have access to foreign investment capital.

[Kenneth Engelhart]

Regarding the second part of your question about investment, Canada leads the G-8 in broadband deployment. We have much higher broadband deployment than most OECD countries, and the latest concern of governments has been with ultra-fast broadband. In France, you can really get ultra-fast broadband mostly in Paris. In Canada, Shaw, Rogers, Videotron, Cogeco, EastLink, we all offer ultra-fast broadband. That is 90% of Canada's population right there.

In wireless, the latest and greatest thing is ultra-fast wireless broadband, a network called HSPA plus. There are 17 networks like that in the world, and Canada has three of them: Bell, Rogers, and TELUS. So I disagree very strongly with people who say that Canada lags in investment and innovation.

Now I understand the OECD's point. They're saying free markets are a good thing and open entry of foreign entities is more free. I understand that. But I disagree with their notion that we lag the world. In fact, we're leading the world.