Canadian Heritage Committee on May 11th, 2010

[The Chair, Conservative, Gary Schellenberger]

I call the meeting to order.

Our time slots for witnesses will be shortened by 10 minutes each because we have some committee business we have to do at the end.

Welcome to the Standing Committee on Canadian Heritage meeting 14, pursuant to Standing Order 108(2), a study on emerging and digital media: opportunities and challenges.

Our first witnesses are Jeremy Butteriss and Kenneth Engelhart from Rogers Communications. From marblemedia Inc., we have Mark Bishop.

If you could keep your opening comments to close to 10 minutes, it would be appreciated. That way we can get an extra round of questions.

Whoever wants to start the presentation from Rogers, please do.

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

Thank you, Mr. Chair.

Good morning, members of the committee.

I am Ken Engelhart, senior vice-president, regulatory, for Rogers Communications Inc. With me is Jeremy Butteriss, senior director, broadband entertainment, Rogers Cable. Rogers welcomes the opportunity to discuss developments in emerging and digital media in Canada and how they are affecting Canadian cultural industries.

Time constraints will limit most of our comments to television broadcasting on the Internet. We have organized our comments using some of the questions posed by the committee.

Jeremy.

[Jeremy Butteriss, Director, Broadband Entertainment, Rogers Cable, Rogers Communications Inc.]

Thanks, Ken.

Thank you, everyone.

Consumers today want to watch what they want, when they want, and where they want it. They want to watch their favourite show at 8 p.m., but if they miss it they would rather see it later. They want to see content on their TVs and on their mobile devices and computers. A business plan or public policy initiative that does not come to grips with this aspect of consumer behaviour is doomed to failure.

There are many experts who predict that all television viewing will migrate to the Internet. Already we see services like Hulu in the U.S. These over-the-top providers threaten to put cable television providers and perhaps Canadian broadcasters out of business. This process is called disintermediation, and it has already replaced many bricks-and-mortar businesses with online businesses.

The “anywhere, anytime” vision, however, does not mean it is inevitable that all video viewing will take place from the Internet. We believe over-the-air broadcast networks and cable television networks could be with us for some time to come. But to survive, these networks need to be efficient and give consumers the functionality they demand.

So what can Canadian cultural industries do to benefit from developments in the emerging and digital media and prepare for future developments? We'll answer this question from the perspective of Rogers Cable and how we are hard at work giving customers anything, anytime, and anywhere by upgrading the Canadian television experience using modern digital technology.

Digital television viewers can see their favourite channels from other time zones, giving them a time-shifting option to watch their programs earlier or later than they air locally. Personal video recorders--PVRs--are also used by 20% of our customers. They allow consumers to easily record, fast-forward, rewind, and pause television programs. In addition, a large number of programs are available on video-on-demand, allowing customers to watch them whenever they want.

Rogers on Demand also offers Rogers on Demand Online, a service we launched last November. The vision behind this service is that consumers can watch the shows they subscribe to either on television or on the Internet, on a PC. While not all TV programs are yet available on RODO, we do have a very healthy offering of over 37 content brands. The service has been very well received by consumers. In the future, we intend to expand the service to mobile phones as well.

Digital technologies can also do more for the broadcasters. Cable operators in the U.S. are beginning to develop targeted advertising platforms so that different ads can be sent to different people, depending on their neighbourhood or their preferences. One of those is called Project Canoe.

This would allow TV broadcasters to charge more for their ads, which in turn would improve their business cases. In effect, it would make television advertising more targeted and measurable, like Internet advertising is today.

Ken.

[Kenneth Engelhart]

If Rogers succeeds in harnessing digital technology to modernize its cable television service, it means that the CRTC can continue to impose the Canadian content regulations it imposes today. These have served Canadian cultural industries well. For example, 55% of a television network's content has to be Canadian. However, if all television content migrates to the Internet, Canadian television will lose the benefit of Canadian content quotas.

We need the CRTC to adopt flexible policies to aid us in this transition, and with one notable exception they have. They have allowed us to put television programs on video-on-demand and to insert fresh ads so that broadcasters will have an incentive to provide programming to us. They have not imposed taxes or fees on our Internet service. They have indicated a willingness to allow us to sell ads on our U.S.- originated cable programming to pay for a targeted ad system, as U.S. operators do.

The one area of concern we have is the CRTC's recently announced value-for-signal decision. This will require us to pay large amounts for linear television at a time when customers are increasingly moving away from linear TV to watching on-demand and online.

There are also policies the federal government could adopt. For example, pursuant to section 19 of the Income Tax Act, Canadian firms cannot claim advertising expenses as an income tax deduction when they advertise in U.S. magazines or border TV stations.

The same rule should apply to U.S. websites. This will make it more expensive to place ads, for example, on Hulu, if it comes to Canada. The aim should be to make sure that Canadian advertisers prefer Canadian-owned and -operated services.

Federal tax credits should also be available for online content. The existing rules only allow credits for filmed entertainment production. Some provinces have moved in this direction, such as B.C., Ontario, and Quebec.

Canadian copyright payments are also out of control. We pay more copyright both for online and traditional media than U.S. media companies pay. This makes it hard for us to adapt and compete. For example, digital copies of music are more costly to download online than if purchased on a CD because of copyright tariffs and levies. Piling on additional copyright payments for digital media will continue to drive consumers to acquire music and other copyright products through unlawful file sharing on the Internet and to unregulated U.S. over-the-top providers like YouTube.

It is also a mistake when copyright discourages broadcasters from modernizing their operations. For example, if a radio station plays CDs, they face two different copyright payments. If they load the CDs into a server, they could have to make four more payments. Canadian radio stations pay twice as much in copyright payments as American radio stations. This is particularly disturbing since over half of the copyright payments go outside of Canada.

Canadian copyright payments need to be kept in check or Canadian radio broadcasting will not be able to compete against the Internet or other new technologies. This is one reason why we don't have Internet radio stations, and are now inundated with foreign services from more cost-effective territories.

In the U.S., PVRs are becoming more cost-effective by using the network PVR. A PVR is just a digital cable box with a hard drive in it. The network PVR centralizes the hard drive at the cable company's primary headquarters. This means that all digital boxes can be PVRs, giving all customers the flexibility of the PVR at a greatly reduced cost.

The last version of amendments to Canada's Copyright Act, Bill C-61, specifically prohibited the use of the network PVR by cable operators. We think this a mistake that should be corrected in the next copyright bill.

Rogers recommends a balanced approach to copyright reform and implementation of the WIPO treaties that will continue to reward innovation and creativity.

If we succeed in our vision of providing customers with television on any platform, it clearly will be good for our business. As discussed before, it will also allow the continuation of the Canadian content regulatory system. It will also allow creators of artistic and cultural content to be compensated for their works. An environment where all content is available free on the Internet does not provide the creator the ability to be compensated for their works. Our model will preserve the existing value chain and allow all providers to be compensated.

We do not believe changes to foreign ownership rules will have an impact on Canadian culture and content. Canada's foreign ownership rules can be changed for telecommunications carriers and cable companies. These businesses are primarily pipes that carry content. The foreign ownership rules can be preserved for the content providers. Radio and TV stations and specialty channels can remain in Canadian hands. This would provide the capital-intensive distributors with lower-cost access to foreign capital while ensuring that the vital content producers are Canadian.

Thank you.

[The Chair, Conservative, Gary Schellenberger]

Thank you for that presentation.

Now we move on to Mark Bishop, please.

[Mark Bishop, Partner/Producer, marblemedia Inc.]

Good morning, Mr. Chairman and committee members. Thank you all for this opportunity to be here today and be a part of this discussion about this important study of emerging and digital media.

My name is Mark Bishop. I'm originally from Saint John, New Brunswick, and I now live in Toronto. I'm pleased to be here today to speak on this subject. I'm a board member of the CFTPA. I know that two of our staff appeared before you last week, and I support their remarks.

I'm the chair of the board of Interactive Ontario. Ian Kelso, our president, appeared two weeks ago, and I support his remarks.

I'm here today as co-founder and executive producer with marblemedia. Marblemedia is an integrated digital media production company. We are uniquely positioned in the marketplace in that we create content and distribute our own 360-degree multi-platform content.

We've grown from a shop of two in my dining room, nine years ago, to now 30 full-time employees in our studios in Toronto. We generate $15 million to $20 million in convergent production revenues every year.

Our focus from day one for the company has been on content, on telling stories that engage audiences on multiple platforms. We've pushed the envelope of experimenting with new platforms from the beginning of our company. High definition, web TV, mobile, convergent, transmedia--you name it, we've done it.

All of this has really been with the support of a number of the funding agencies in Canada that have allowed us to grow our company. The Telefilm Canada new media fund, the Bell broadcast and new media fund, now the Canada media fund, and many others have provided a springboard for our growth and allowed marblemedia to be seen internationally as a leader.

We were awarded Company of the Year at the Canadian new media awards in 2008, and we were named an “international next generation content producer” by the Hollywood Reporter last fall.

Our success has been in prime time and youth programming on all platforms. Some of our titles include Taste Buds, deafplanet.com, This is Emily Yeung, and This is Daniel Cook.

I wanted to mention This is Daniel Cook. I know it was mentioned as a reference by my colleagues at the CFTPA last week. Again, it's a cross-platform preschool series, for which we produce the web and TV in Canada. We've sold the television series internationally to 90 countries, and it has been dubbed into 11 languages. We created a six-volume DVD series, a soundtrack, books, and even a visit on the Oprah Winfrey Show.

We've also sold the web content. The interactive web games and mobile content have been licensed internationally to broadcasters and game portals. The interactive site “thisisdanielcook.com”, the preschool property corresponding with the television show, had 1.7 million hits per month at its peak, with a 14-minute average time that our preschoolers were visiting the site. That's pretty impressive when you think of the fact that it's a six-minute television property that we're talking about.

I share all of this to show that the investment of government in the content production industry works. It creates content for Canadians to enjoy, it creates jobs in Canada, it builds companies capable of export through the sales of Canadian cultural content internationally on all platforms. The investment provides a springboard to allow marblemedia to be a world leader in convergent storytelling. Our award-winning projects now attract foreign producers to increasingly work with marble and invest in our Canadian stories.

These new partnerships are emerging with lots of different players, content aggregators. One example is a new marblemedia digital web-based project with a company called Vuguru. They're an L.A.-based digital studio founded by ex-Disney CEO Michael Eisner. We've just committed to a new project with them where marble will produce and distribute the project in partnership with Rogers.

Another marblemedia project is a TV and web pre-licence of a new cross-platform kids series. We have presold the television and the interactive to the BBC and to ABC Australia, which both came on first, and then they encouraged our Canadian broadcast partner to come on board.

So there is lots of activity, but there is room for improvement, which I'll touch on today.

To get back to some of the things that are working for independent content creators, Minister Moore announced the official announcement of the CMF, the Canada media fund, on March 26. For us, that was an important link between the television and the interactive funds. It has sparked a great industry dialogue, one that has been ongoing for the past year. It has pushed broadcasters in Canada to think differently about content. It encourages experimentation in business models and storytelling.

With changes in social and technology trends, content is becoming platform-agnostic. Whether it's broadcast on TV, streamed online, or available for download on the...[Technical difficulty--Editor]...storytelling can now be a multi-screen and interactive experience.

The creation of the CMF is reflecting this new reality. It will have a positive, long-term effect on the independent content producers.

Our recommendation is to look at stabilizing the fund beyond one or two years. A five-year commitment from the government would allow for all stakeholders to develop longer-term business plans.

We'd also recommend looking at triggers other than TV broadcast, which is still the gatekeeper to unlock the funds with this new initiative.

The tax credits are another financial initiative to discuss. The TV and film tax credits are available federally, and most provinces have provincial tax credits. On the interactive side, the tax credits are still separate, and only exist in a few provinces, such as Ontario. The tax credit was intended to allow capitalization of companies and springboard their growth. This capitalization is key, although most have to reinvest their TV tax credits in projects, which was not the original intent. The drought of capitalization in this regard is crippling many companies.

The interactive tax credits, however--in Ontario as an example--have really allowed us at marblemedia to invest in R and D, to invest in new technology and innovation. Our recommendations are to review those policies, to expand the federal television and film tax credit to include new media, and to review those trigger points, as mentioned before, to not just include television broadcast.

On the national digital strategy, I was very pleased to have an opportunity to revise my comments based on yesterday's great news. From the mention in the throne speech and now the plan moving forward with industry and stakeholder consultation, the strategy is exciting to see. It's great to see that content is at the core, and is working with industry.

Digital media is crucial to both Canada's cultural and economic future. As Minister Moore said yesterday, “We recognize the important role the digital media and content sector plays in the digital economy, and we intend to develop a long-term plan that will stand the test of time.”

All of this will allow us to compete with others who are ahead of us, such as Australia, New Zealand, and Great Britain. We need top-notch pipes and wires controlled by Canadian companies and filled with our Canadian professionally produced content. Canadians will watch and will interact with our content if we make our compelling content available on the appropriate platforms.

We are delighted to see the government at the table leading this dialogue. Marble will continue to be an active participant in these talks, which include our partners at the CFTPA, Interactive Ontario, the National Film Board, and others.

On the subject of terms of trade, we feel that terms of trade are needed to help level the playing field. Producers are now having to bring on multiple broadcasters and multiple platforms, and often are faced with the difficult task of giving up their rights for no additional fees. It's tough work to negotiate, because the reality, with the producers and broadcasters in their tug of war, is that the broadcasters control all, as they have the key to unlock the CMF, the Bell fund, the tax credits, and other financial incentives.

Terms of trade are necessary to make this model of content export and revenue generation work for the entire system. We need to keep independent producers with independent voices at the heart of this. We were pleased to see that the CRTC expects the 2011 licence fee renewals will include this.

On the topic of foreign investment, we see the co-production treaties only reflect film and television. They're dated and they need to be revised. Our co-production treaties need to embrace interactive content and interactive platforms. As Canadian licence fees decrease from the broadcasters--and we see that more and more--we need partnerships and foreign investment into our content.

In closing, we at marblemedia are excited for the future of content production. Canada can and must be a world leader in the digital content age. We need the government as a partner to support our business by fostering a climate of innovation, storytelling, and export. Your collaboration is key.

The national digital media strategy is an ongoing discussion and is integral and vital to our future success. It puts professional content at the core, and access to that content on Canadian-owned services is key. The creation and distribution of content--again, professionally produced Canadian content, the majority of which would hopefully be from independent producers--must be available for Canadian audiences on whichever Canadian screen-based platform they choose.

Terms of trade are necessary to ensure equity and fairness in the system of independent producers and broadcasters. They allow all partners to conduct business fairly, and they allow new revenue streams to be realized.

It's time to review and update the existing programs, like the Canadian film and video production tax credit, the co-production treaties, and even the CMF. We need to look at full cross-platform content. TV broadcasters shouldn't be the only gatekeepers to trigger those funds.

As Canadian independent producers we will continue to innovate, adapt, learn, take risks, and push the limits on the new digital universe to tell our stories to audiences.

This concludes my comments. Thank you for the opportunity and for taking the time to conduct these proceedings. I look forward to questions.

[The Chair, Conservative, Gary Schellenberger]

Thank you.

Mr. Rodriguez, please.

[Pablo Rodriguez, Liberal, Honoré-Mercier, QC]

Thank you, Mr. Chair.

Good morning, everyone, and welcome.

Ken, I'll start with you. It's good to see you.

I am going to ask you some questions about your presentation. You mentioned that many experts are predicting that all viewers will be watching television on the Internet. So I ask myself if there is a future for conventional, linear TV. Are the CTVs and TVAs of the world doomed to disappear?

[Kenneth Engelhart]

Thank you for that.

I think there is, and the analogy I would draw is with the telephone network. A few years ago we heard that the telephone network was doomed; everyone was going to use voice over IP. They were going to make all their phone calls over the Internet. Sure enough, some companies like Skype and Vonage have nice businesses doing that. But the overwhelming majority of phone calls are still made over the phone network.

The reason, first of all, is that the phone network is a low-cost, efficient, high-quality way of making phone calls. Secondly, the phone companies have adapted by using Internet technology without using the Internet.

I think the same analogy applies to TV. If the cable television companies and the broadcasters adapt to the new digital technologies, they will keep a lot of eyeballs glued to the TV because it's a better viewing experience. If they modernize their networks they can stay in the game.

[Pablo Rodriguez, Liberal, Honoré-Mercier, QC]

What do we do to keep having a say on Canadian content? They say that fewer and fewer people will be watching conventional, linear TV, even if it continues. More and more people are watching television on-demand or on the Internet. With the mechanisms we have today, like the CRTC or anything else, what do we do to make sure there is still Canadian content on the air or online?

[Kenneth Engelhart]

It's a very important question. If we don't solve that problem, the TV business all around the world will be in trouble. The most classic example is the record labels. They saw all of the music content basically not just put online, but stolen. So people are getting all of that content for free. The only reason we still have a music industry is because the artist can make money from touring. But if we can't make sure that the people who produce TV are going to get compensated, we're not going to have a TV industry.

So it's important for the content creators. It's important for the Canadian regulatory system. We believe that even though a lot of the viewing is going on demand and on the Internet, the business model will still be the monthly subscription model. That's the model that makes sense. It creates the value that people--

[Pablo Rodriguez, Liberal, Honoré-Mercier, QC]

I understand, but how do we make sure that there is Canadian content? For example, how can we establish basic rules for Canadian content as we can today with linear television?

[Kenneth Engelhart]

That is why we feel very strongly that what we're doing at Rogers will allow that to continue. People will still pay their $60 a month. They will get Rogers cable TV. They will be allowed to watch it on linear television, on video-on-demand, on the Internet, and on the cellphone. But the linear programming part will still be regulated the way it is today, and that will ensure--

[Pablo Rodriguez, Liberal, Honoré-Mercier, QC]

But not the rest, because it's hard to regulate--

[Kenneth Engelhart]

No, but the rest is all linked to the linear. It's all part of the same subscription. It lets people watch what they want when they want. But the content is created for the linear and regulated by the CRTC, so it will continue to be promoted.

[Pablo Rodriguez, Liberal, Honoré-Mercier, QC]

I will ask this question quickly because there is not much time left.

With regard to foreign ownership, you seem to be saying that we can change Canadian rules on foreign ownership in telecommunications with no problem while keeping rules on foreign ownership for those who provide radio and television content. But things are more and more integrated today. A telecommunications company may also own a company that provides content, and vice versa. Everyone is into distribution, telephones, creating content.

I do not see how you go about dividing or separating the two.

[Kenneth Engelhart]

Of course you're right. Cable TV has a content component because we get to package, we get to price, we get to pick the channel they're on. Even telecommunications has a content component now, because people are using the telephone networks, the wireless networks, to download videos.

I guess our view at Rogers is that there's a trade-off. If you allow the pipes to be foreign-owned, you get the big benefit that those very capital-intensive businesses get access to foreign capital. You don't lose that much in the way of control over your cultural destiny, because those are primarily pipe businesses, and in the case of cable TV they're heavily regulated pipe businesses.

On the other hand, if you look at television producers, it's not a very capital-intensive business. They don't have a big need for foreign capital, yet they are far more important from a cultural perspective than the pipes.

So when you look at those two factors--capital requirements and the importance of the broadcasting to the cultural sector--we think it makes sense to allow foreign ownership for the pipes and not for the content.

[The Chair, Conservative, Gary Schellenberger]

Thank you.

I will give Madame Lavallée a little extra time too, because I did that for Mr. Rodriguez.

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

Thank you very much. I appreciate that.

[A voice]

Oh, 15 minutes for sure.

[Voices]

Oh, oh!

[The Chair, Conservative, Gary Schellenberger]

No, it will never go that far.

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

You are all using up my time.

It is good that I have more time: I am going to need it because I have several questions. I am going to make some comments and then end with a question.

I am a little uncomfortable telling you this, Mr. Engelhart, but you do not provide a lot of service in Quebec apart from wireless. But I am still going to pass on some comments I have received about Rogers, and they are not fun to give or receive.

I have heard that Rogers may not be a good corporate citizen and that you may be in the business of television like someone else might be in the business of selling handbags. But making television is a privilege. It is a privilege to be able to provide one's fellow citizens with information and entertainment.

Making television is a privilege. But Rogers has a “bottom line” approach, meaning that its interest is in knowing how much can be made. This is why you take positions that are not very beneficial to artists. Let me explain what I mean. On Local Programming Improvement Fund royalties, for example, you produced an advertising campaign whose logic just did not stand up to intellectual scrutiny. In your advertisements, you said things that—forgive me for saying this—were not even true.

Then, in regard to copyright, you want to take money away from artists in Canada and in Quebec, whose average salary is $23,500. They need that money for sure.

Think of something else. Attack the companies that produce optical fibre, not artists making $23,500 per year. You say you have to pay more here than in the United States. We understand that; we pay more for a lot of products here than in the United States. Canada is a big country, with a lot of remote areas to serve. And we only have 30 million people, whereas there are 300 million in the United States. Population density alone means that we pay more for most things.

Then you say that Rogers is in the business of telecommunications, not broadcasting. But he who controls the medium controls the message. You must surely see the proof of that in your huge world of convergence. Quebec is a world of convergence, too, with Vidéotron and Quebecor. Wireless companies that are only subject to the Telecommunications Act will be moving into broadcasting now. I do not even need to give you examples of that, you know them better than I do.

For all these reasons, when you undertake some digital initiative or make suggestions on digital development, we cannot help believing that you are more interested in your profit than in the welfare of the artists who should be the ones profiting, than in the Canadian public that wants Canadian content and than in the Quebec public that wants Quebec content.

[Kenneth Engelhart]

Well, thank you for letting me put our view on that on the record, but I think....

First of all, I'm sorry to hear that you've heard negative comments about Rogers from your constituents. I can tell you that Ted Rogers always instilled in the company and in us the view that it had to be more than profits, that we had to be part of the Canadian broadcasting system, that we had to marry our private interest with the public interest. That was always what he believed in, and we have always tried to preserve that balance.

I'm not here to argue against the Canadian content rules. I am not here to argue against copyright. I am saying that in matters of copyright, we need a fair balance. We need to take a reasonable position, especially because a lot of the copyright payments we make go to the U.S., to musicians there. It doesn't make sense that our copyright board--

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

Forgive me for interrupting you, Mr. Engelhart. Rogers makes hundreds of millions of dollars in profit, and the artists' annual salary is $23,500. Does that seem like a fair balance to you?