Industry Committee on April 15th, 2010

[Serge Cardin, Bloc, Sherbrooke, QC]

I will give the floor to my colleague.

[Carole Lavallée, Bloc, Saint-Bruno—Saint-Hubert, QC]

I am the Bloc Québécois heritage critic. I am not normally on this committee; I am on the Standing Committee on Canadian Heritage.

The cultural community in Quebec is very concerned about the threat that opening the telecommunications sector to foreign ownership poses to culture. A number of witnesses have told us that the telecommunications and broadcasting sectors will be one and the same in the future. Even though you may not want us to combine the two pieces of legislation, the fact remains that telecommunications stakeholders and companies are now involved in broadcasting. Even if they are only in telecommunications, companies that control access, control content, and content is culture.

We see that you are in majority Canadian-owned companies under the CRTC's rules and that you are not willing to make concessions for the cultural community. You do not want to pay the CRTC fees to encourage local production. You feel fettered by all the CRTC measures requiring Canadian or Quebec content to be shown during prime time.

So how can we expect companies with majority or extensive foreign ownership to agree to comply with measures aimed at protecting Canada's and Quebec's culture?

[Kenneth Engelhart]

First of all, we have tried to be sensitive to those concerns in our remarks today. That's why I said you could allow programming services to remain Canadian-owned. That seems to be a concern with people.

My argument is let the programming services, the ones that really develop Canadian content, remain Canadian-owned; but the distribution businesses, telecom and cable, can be foreign-owned.

I'd also disagree with your assessment that cable television companies don't make contributions to Canadian content. We give hundreds of millions of dollars in subsidies to funds. We are also one of the most heavily regulated cable television sectors in the world. The CRTC is very prescriptive about what we can carry and what we cannot carry, how we package it, and how we place it before customers. All of those rules are designed to give Canadian services priority of placement.

[Carole Lavallée, Bloc, Saint-Bruno—Saint-Hubert, QC]

If I still have time, I would like to add something before we move on to someone else.

The reason it is the most heavily regulated sector is that when it is not regulated, you do nothing. Take the film industry, for instance. Movie theatres are not regulated. In reality, 98% of Canadian movie theatres—it is not quite so high in Quebec—show American movies. That is what happens when we do not regulate.

Furthermore, the vice-president of CBC himself said that Canada was the only country in the world where people preferred to watch the television shows of their neighbour, the Americans.

That is all; I will let you respond.

[The Chair, Conservative, Michael Chong]

Mr. Englehart.

[Kenneth Engelhart]

I can't speak for the movie distributors, but we own Rogers Video and we make a real point, even though we're unregulated, of having Canadian videos and identifying them in a Canadiana section.

[The Chair, Conservative, Michael Chong]

Thank you very much.

We are going to go now to Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair, and thank you to the witnesses for coming before us today.

In your remarks, Mr. Englehart, at the beginning you talked about having the fastest networks. I'm sure we will have some witnesses come after you who will say the same thing. How do we know? Who really has the fastest networks?

[Kenneth Engelhart]

It's a very good question. One of the difficulties, when you look at international studies of how fast these things are, is that the OECD, for example, looks at advertised speed. That's not a good way of figuring out who is the fastest. People lie a lot in their advertisements about how fast their networks are.

At Rogers, and I believe most of the cable companies in Canada are the same, we engineer our network so that we give you the speed advertised most of the time. It's not a guaranteed service. We engineer our networks so that in peak periods 80% of our customers get the speed that is advertised. Customers can measure this themselves using speed-test sites. That is really the acid test: what are people actually getting in their homes?

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I want to go back to testimony from our previous day of meetings, from Dimitri Ypsilanti from the OECD. I'll just read from his testimony and then have you remark on what he has to say. He says:

What about the costs of foreign investment restrictions on the telecommunication sector? I believe these costs are quite high. First, there's a higher cost of capital and the potential difficulty for new entrants to get access to equity capital. Canada, relatively speaking, has a fairly small capital market, and in a capital-intensive sector such as telecommunications, it is important for companies, even if they're Canadian-based companies, to go outside to obtain equity capital

Let me start with Shaw and get your remarks on that.

[Ken Stein]

I think Mr. Shaw a number of years ago indicated exactly that point. It's not necessarily a cost, as such, but it's a check mark; in other words, that when you're looking for investment, people see any regulatory restrictions as something they have to be concerned about and look at, to determine what the efficiency of the investment is.

There are foreign investment limitations when you are raising capital. Absolutely, you have to raise significant amounts of capital outside of Canada, from capital pools. We couldn't have spent $6 billion over the last decade without having to go to foreign markets to raise much of that capital. We have done some significant bond deals in the past year of over $1 billion in Canadian and U.S. markets.

It's a very important issue for us in terms of being able to raise the capital in the first place and then being able to attract investors of the kind we want to attract.

[Jean Brazeau]

Let me add that when we go to the U.S. market, Canada is a very small country for the U.S. investors. They have a pool of investment to make, and they allocate this pool of investment to various countries. There are various sectors as well. By the time they get to telecom or broadcasting in Canada, it's fairly far down the list of the investments they're making.

Then they look at the ease of making that investment. The more regulation you have and the more constraints you have, the less interesting and the higher risk it is for these investors. They just then say “sorry” and go somewhere else. They'll go to.... I don't know; pick a country.

So even though we're not pure new entrants—although Ken mentioned that we are in wireless—we still face many challenges in raising that capital.

[Kenneth Engelhart]

I would agree with those comments.

I'd agree with the gentleman from the OECD that the trade-off you have to make as a government is that on the one hand, if you liberalize, you lower the cost of capital in the fashion that the OECD said; on the other hand, you have to worry about the loss of head office jobs, R and D jobs, and the like.

That's the kind of calculus the government has to go through.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Earlier there was a question about not having taken greater advantage of what the current rules allow by way of foreign investment. I think I may be hearing a little bit about why that might be the case, in terms of the overall package and in terms of investors who potentially want to make a more significant investment, if they can't make that more significant investment, not making an investment at all. Is that an accurate portrayal?

[Kenneth Engelhart]

If you read Mr. Rogers' biography, High Wire Act, you'll find it describes the high wire act whereby he was trying to raise capital throughout his career, almost going under three times.

During that career, I'm sure he could have benefited from foreign ownership liberalization. However, at this point, Rogers is not capital-constrained; we really don't have any difficulty, after Mr. Rogers' successful 40-year journey, in raising capital. That's why we don't need to have foreign ownership of our floating equity.

[Ken Stein]

We have no constraints in terms of capital at this time. Our main concern with changes to the rules would be that we would be disadvantaged going forward; that the small pool of money Jean was talking about would no longer be available to us at Shaw but would be available to somebody else who is coming into Canada to do stuff. That would be our concern.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

It's fair to say that it may have been more of a concern back when these companies were starting. Then again, it may also be a hindrance to new entrants getting into the market and competing. Might that be accurate?

[Kenneth Engelhart]

As I said before, I agree that removing these rules lowers the cost of capital, absolutely.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Okay.

Also, the OECD report and other commentators have mentioned that Canadians pay more for their services and simply don't get the same level of service or technology. More than one commentator has said that. It seems to be something that's widely accepted. What do you have to say to that?

[Kenneth Engelhart]

I really think that many of these studies, particularly many of the OECD studies, have a lot of malarkey in them. The OECD wireless study, for example, shows the U.S. as the most expensive wireless country in the world. Most people think the U.S. has a very competitive wireless industry.

You have to look at the right metrics when you're making these comparisons. In wireless, for example, you could ask what the average revenue is per minute. That's the simplest, easiest way to compare countries, and when you do that, Canada is one of the ten cheapest countries in the world. If you look at our broadband services and at the speeds you're actually getting, as opposed to the speeds that people are advertising, again we provide some of the best value in the world. So I think that if the studies are done properly....

There was a World Economic Forum report that came out showing Canada as seventh-best in the world. Professor Waverman wrote an editorial in The Globe and Mail a few weeks ago in which he showed that the OECD studies were wrong and that Canada was one of the cheapest countries.

If you look at the right numbers and look at the question properly, I believe we're doing very well in Canada.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Engelhart.

We'll go to Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

Thank you for being here today.

Since we're talking about revenues, what were your profits last year?

[Kenneth Engelhart]

I don't know the exact number, but you have to look at a company over the course of the business cycle. Over the course of the business cycle our profits have not been unusual, and over the course of our history our profits have probably not been positive.

[Jean Brazeau]

I think a better number to look at is return on capital. If you look at the return on capital, the amount of capital that was invested in companies like ours, the return is pretty low. It would be in the low single digits.

[Brian Masse, NDP, Windsor West, ON]

I'd ask the researcher to provide information of our incumbents' profits over the last ten years. The reason I ask is because I've heard complaints this morning about the CRTC and the fees you're paying. You mentioned it's passed on to the cable subscriber, but I think that's important in the equation of looking at this.

One of the interesting things that I thought didn't get a lot of attention when the CRTC appeared before us the other day was that they didn't think there was room in the Canadian market for seven or eight players. The implications are that we open up, there will be mergers or buy-ups, consolidation again, and perhaps we'll be back to a few players. I wonder what you think about the statement that the CRTC made at the hearings last week.