Canadian Heritage Committee on Nov. 25th, 2010

[Patrick Brown, Conservative, Barrie, ON]

I actually got excited when I heard about the transaction, hearing about BCE with profits of $17.7 billion in 2009. Having a successful corporate citizen like that behind local TV is certainly a powerful ally.

Are there things we can do with local TV? I realize that one of the challenges we have with local TV is that we do have some expensive U.S. programming on it. Are there ways we can shape local TV to reduce some of the more expensive aspects of that business model, to make it something we could have greater confidence in?

When we talk about thinking creatively, what parts could we change to make it something stable in Canada?

[Paul Sparkes]

We're still an advertising-based business. Our revenue is 100% advertising, and it's based on viewership. When people watch your channel, the advertisers come. We try to fill our schedule with programs that your viewers and your community want to watch. News, of course, is the main anchor for a lot of viewers, but it's not the only thing that can keep a channel going. We must have revenue based on all parts of the schedule.

Hopefully, we get another revenue source. Hopefully, the commission allows us to use some of our public benefits money to help the A channels. I think that would be a good solution as well.

[Mirko Bibic]

This is conceptual, but think of all the potential of marrying local programming with the technology. Suppose you want to watch your local programming, but you're travelling. You're not home to watch it, yet here it is; it is being streamed live or you can access it whenever you want on something like this. The eyeballs stay at home, even though you're so far away.

These are all opportunities we have that we'd love to explore, and fully intend to, if we're lucky enough that the regulators approve and we take ownership of the asset.

[Patrick Brown, Conservative, Barrie, ON]

Certainly that sounds like an exciting possibility. For example, a local MP who's stuck up in Ottawa all week could watch his A channel news here in Ottawa.

One thing I don't think you got a chance to expand upon was more on the consumer choice. I know a few people sort of rumble that it would reduce consumer choice, but my inclination is that this transaction is going to enhance consumer choice. Maybe you would take some more time to comment on how that's going to help Canadian consumers.

[Mirko Bibic]

There are a couple of aspects. With ownership of CTV, we'll be able to, as I mentioned a few times, take the content and distribute it over the various platforms, sometimes with some niche content. I gave the example in the opening statement of the Montreal Canadiens' reality show just to Bell Mobility subscribers. What does that do? That actually gives more choice to the customer. If there is a consumer who's on the fence deciding “Do I want to choose Bell Mobility or another wireless provider?”, and this is what tips them in our favour, that's great for us.

What does it do? It forces the other competitor to say “I have to do the same thing, so maybe I'll do a reality show with the Calgary Flames“, or whatever the idea is, and all of that kind of feeds upon itself in a very creative way. Yet at the end of the day—and this is the key point, Mr. Angus—that hockey game that you want to watch is available on every single platform to everybody, regardless of your wireless provider, and there's nothing wrong with exploring niche content on the margins.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Bibic and Mr. Sparkes. We appreciate your testimony.

We'll suspend the meeting for five minutes to allow our next panel to appear.

[The Chair, Conservative, Michael Chong]

I welcome our second panel to the 32nd meeting of the Standing Committee on Canadian Heritage. We have in front of us today representatives from two organizations: Mr. Engelhart, representing Rogers Communications Inc., and Mr. Hennessy, representing Telus Communications.

We invited Mr. Sasseville, who is the representative of Quebecor Média Inc., and we understood he was to appear, but he is not present, so we'll begin with our two representatives, beginning with Mr. Engelhart.

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

Thank you, Mr. Chair.

Good afternoon to you and members of the committee. My name is Ken Engelhart, senior vice-president, regulatory, for Rogers Communications Inc. I am pleased to appear before you today to discuss issues related to private television ownership and new viewing platforms in the Canadian broadcasting and communications sector.

My remarks will focus on Rogers' strategy of vertical integration and content delivery, implications of recent broadcasting acquisitions by Shaw Communications and Bell Canada, and on diversity in the Canadian broadcasting system and the accessibility of content.

Rogers was one of the first communications companies in Canada to pursue a vertical integration strategy to leverage its cable and wireless distribution networks and broadcasting content. For years Rogers was prohibited by CRTC regulation from directly owning analog specialty services, which impacted its ability to fully pursue a vertical integration strategy until the late 1990s. Nonetheless, Rogers has always seen the value in integrating content and distribution services to provide the best products and services to our customers.

Rogers' goal is bringing our customers communications and entertainment services into a simple integrated and personal experience that is easily accessible on any device, wherever and whenever they need it. This requires significant investment in wireless and broadband infrastructure, and access to a wide range of content.

Over the years Rogers has been a leader in making these investments and has partnered with a number of content providers to offer new content delivery platforms, such as Rogers' video-on-demand service and its online portal, Rogers On Demand On-line. We believe this strategy has resulted in new innovative products and platforms for consumers, and has helped position Canadian companies to compete against a variety of unregulated media providers that contribute nothing to the cultural objectives of the Broadcasting Act.

Our vision at Rogers Cable is that our customers pay one price for their preferred linear television package, but can then receive all their programming at no extra charge, on demand, online, and on their mobile phones. We are already well advanced in this service offering. Today's viewers want their content anywhere, anytime, and we must satisfy this requirement.

Canadian broadcasting and distribution companies face more and more competition from unregulated over-the-top service providers like YouTube, Apple TV, Hulu, and Netflix, and various illegal black market services. These companies pose a serious threat to broadcasting and cable companies, as they compete with Canadian media companies for scarce advertising and subscription dollars and encourage consumers to cut the cord on the regulated system by offering niche low-cost or free on-demand content.

Of course these competitors have no Canadian content obligations. The integration of broadcast and distribution companies is a natural response to this type of competition and is already well advanced in other jurisdictions, including the U.S. and Europe.

Contrary to those who believe that increased vertical integration will result in less diversity in the system, we believe it can provide significant benefits in terms of innovation, greater consumer choice and value, and continued support for cultural objectives, such as the development, promotion, and exploitation of Canadian programming.

Given the relatively small size of the Canadian media industry, Canadian broadcast and distribution companies must be well financed and structured to respond to increased competition from unregulated global players. Otherwise, key cultural and financial contributions to the system could be lost or severely diminished, including funding mechanisms such as the Canada Media Fund and the local programming improvement fund, both of which are supported by contributions from cable and satellite companies.

The Canadian broadcasting industry is no stranger to consolidation. Over the years we have witnessed a series of acquisitions, mergers, and divestitures of various media properties, some of which have been tremendously successful, and others less so. This is a healthy evolution of what has proven to be a strong and dynamic broadcasting sector. Throughout this evolution, the CRTC has continued to implement and enforce measures that ensure diversity in the system.

Key measures include limits on the number of local radio and television stations that can be commonly owned in a market; caps on the level of total television audience share that can be controlled by one company; specific requirements for the use of independent production on discretionary and conventional television; funding mechanisms to support the provision of local news programming in French and English markets; and regulations regarding undue preference on linear, online, and wireless platforms.

Recently concerns have been raised about the potential of vertically integrated companies to adopt practices that will undermine competition and limit broad access to content by offering exclusively over their own networks, whether TV, broadband, or wireless. The CRTC has announced its plans to address these concerns and other issues related to vertical integration during a public hearing that is scheduled to be held in May. This will provide an opportunity for all interested parties to provide their views on the issue of content exclusivity and establish clear rules for certain business practices.

For our part, Rogers remains focused on optimizing our customers' experience by offering them a rich array of content on the platform of their choice. To succeed, we must have fair access to content from a variety of different sources. We understand and recognize the value of exclusive content offerings, but do not see it becoming a dominant business model or practice.

We believe the CRTC's upcoming proceeding is timely, in that it will allow the commission to establish clear and transparent policies regarding use of content on multiple platforms, which will provide vertically integrated players with a predictable regulatory framework from which to operate. We look forward to participating in that proceeding.

This concludes my remarks, and I would be pleased to answer the committee's questions.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Engelhart.

Mr. Hennessy.

[Michael Hennessy, Senior Vice-President, Regulatory and Government Affairs, TELUS Communications]

Good afternoon, Mr. Chair and members of the committee.

When I presented to you a few weeks ago on the topic of the future of the digital media, I made the point that without clear and effective safeguards, unprecedented vertical integration could constitute the biggest threat to access, diversity, and choice in broadcasting. This is true not only for the public but for independent producers, broadcasters, and even distributors like Telus, which has itself invested over $2 billion in our new Optik IPTV service to compete with the cable industry. So I'm pleased that this committee and the CRTC are taking a closer look at this.

In our view, the Canadian broadcasting system has been successful in providing a diversity of programming because it has provided both foreign and domestic content. In large part, that's due to measures that ensure that foreign programming helps to contribute to fund Canadian content. That's an important point when we talk about exclusivity. The system has also been successful in providing choices of platforms, like cable and satellite, now Optik TV, and in the future Internet and mobile platforms. We think this competition has created unprecedented choice and has helped to keep prices lower than they would otherwise be.

We believe it's of fundamental importance that consumers continue to have access to the content they want on whatever platform they choose, without restriction. While the media concentration and vertical integration of content and its distribution may bring some benefits to the system, it also has the potential, absent of safeguards, to cause significant harm if measures aren't taken to guard against abuses of market power, to counter the decisions of vertically integrated companies to promote their carriage business through exclusive content, or unduly preferential arrangements at the expense of their content operations, thereby reducing revenues flowing to the Canadian broadcasting system.

So we're calling on clear rules upfront to prohibit such discriminatory practices. First, as we suggested last time, exclusive content arrangements must continue to be prohibited on all distribution platforms. We think the easiest way to do that is to begin by categorically stating that exclusive carriage of foreign or Canadian broadcast content is prohibited over the Internet and wireless delivery, just as it is today over broadcast and video-on-demand.

We think the prohibition on content exclusivity must apply to both foreign and Canadian content, because revenues from the most popular content, both foreign and domestic, create the resources to support the system overall. If revenues for high-value content are reduced by exclusive arrangements to help sell more cellphones, then the pool of moneys used to support Canadian content is equally reduced.

Second, we believe that broadcast content now held by a vertically integrated company must be made available to other distributors and carriers on fair and reasonable terms. Undue discrimination, we believe, on pricing, quality, access, and other terms has to be clearly prohibited to promote competition and to lower prices. What constitutes such undue discrimination and how complaints will be resolved must be made clear in advance of such complaints.

For example, on pricing, we suggest a vertically integrated provider might agree to make content available on a non-exclusive basis, but only at prohibitively expensive and thus anti-competitive prices. So we suggest the CRTC should set out in advance how it will determine pricing issues in such a way as to discourage attempts to overprice competitors. The commission should establish that disputes would be resolved through timely and binding arbitration, where the arbitrator would refer to data concerning historical prices to see if things have changed in a vertically integrated environment.

Third, we think timely compliance with the rules is essential. Neither of the first two rules makes much practical sense if enforcement is delayed to the point at which access or content loses its relevance. For example, getting access to streaming hockey games on mobile phones once the baseball season has started is not going to help consumers on another cellphone plan, or competition in general.

Accordingly, the CRTC must have the ability to act quickly to resolve disputes, and some form of interim relief must be ensured. We think that if binding commercial arbitration with clear timelines is used, there needn't be a delay in getting access on an interim basis to that content.

Fourth and finally, vertical integration requires special firewall measures to ensure the confidentiality of information between the content and distribution sides. This is required because negotiations for content acquisition require significant sharing of competitively sensitive information. For example, when Telus's television distribution service, Optik, negotiates for the carriage of a specialty television service, it is often required to provide details of its plans to distribute the service—in what package, with what marketing incentives, etc.

Prior to vertical integration, all this competitively sensitive information was guarded by non-disclosure agreements. Now, with vertical integration, the CRTC must step in to enforce some form of structural separation that will ensure that the information we provide to Global or CTV, or to TVA, is not immediately shared with our carriage competitors, Shaw, Bell, or Vidéotron.

Mr. Chair, committee members, let me conclude by suggesting that what we are proposing is not radical; it builds on the rules that already exist. Many of these rules are already explicit or implicit in the CRTC regulations. But what non-integrated players and consumers need in terms of access is greater clarity and timeliness to limit disputes. We think that's a very small price for the vertically integrated carriers to pay for such unprecedented consolidation.

That finishes my comments, and I would be happy to answer any of your questions. Thank you.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Hennessy.

We'll have 45 minutes of questions and comments, beginning with Madam Crombie.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Thank you, Mr. Chairman.

And thank you, Mr. Hennessy. It's nice to see you again.

Mr. Engelhart, it's nice to see you as well.

Given what you heard earlier from my colleague on the other side of the table, tell us how you feel about fee for carriage.

[Michael Hennessy]

We feel no different from the way we have felt in the past couple of years. We think it's wrong, and I think it would be moving towards the absurd at this point, to create a process wherein independent players particularly, and their consumers—and all consumers—are expected to help underwrite some of this vertical integration through fee for carriage.

[Kenneth Engelhart]

I would agree with that.

One of the things we were arguing about during that whole period was that the broadcast networks were saying: we have no business, we're going bankrupt, these networks are worthless. Now that Shaw has paid $2 billion for Global, and Bell paid more than that for CTV, it appears that we were right; that these networks still had some value. It was the broadcast networks and the specialty networks that were sold together. Still, these were very valuable networks, and obviously the new owners intend to keep operating them.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Thank you.

How can these large, vertically integrated conglomerates ensure diversity of content?

[Michael Hennessy]

I don't think you can guarantee that. I've always been of the opinion that there is increased diversity outside the system. Within the system, the money and the funding for Canadian content and the shows that people tend to watch still all reside within the regulated system. No matter what anybody says, over the last five years we've seen substantial consolidation of the most significant programming, first through the acquisition of the Alliance Atlantis properties by Global and the acquisition of Citytv initially by CTV, later spun out.

We have seen a shrinkage of ownership in the programming that counts the most. Clearly there's a lot more diversity online, but the audiences are still generally attracted to core TV programming, and that core TV programming today is really in the hands of four very large, vertically integrated entities, or will be when the CRTC approves the CTV transaction next year.

[Kenneth Engelhart]

The competition between the regulated system and the unregulated system is getting to be quite important. We've seen in the U.S. recently, in the last quarter, about a quarter of a million fewer broadcast television subscriptions. That's not because cable has moved to satellite or cable has moved to IPTV; the whole system has seen a decrease.

That's not because people are throwing their TVs away. They're watching their television on the Internet. You can buy TVs now that hook right up to the Internet. You're not watching it on your laptop; you're watching on your TV. There are companies like Hulu, Apple, and Netflicks that are doing it perfectly legally; they're paying for that content.

This is a big problem for cable TV companies. It's one reason that we have to give our customers the greatest possible diversity of choice, or they'll abandon the regulated system.

The second point I'd like to make is that the vertical integration can help with the delivery of new platforms. You have a sort of chicken-and-egg problem with a new platform: you come out with a new platform and nobody wants to put their programming on it, because there are no eyeballs attached to it; and the eyeballs don't want to watch it, because there's no programming on it.

We offered an innovative service called Rogers On Demand Online. This lets people watch their TV shows from the computer at the airport, or on their laptop wherever they are. They can watch the program they've paid for on cable TV free of charge.

Of course, none of the broadcast networks wanted to put their programming on it, but Citytv did, because we owned them. Once Citytv put their programming on, the other networks thought they had better do it too, or Citytv was going to get an advantage over us.

So having that vertical integration can actually increase the choices consumers have.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Engelhart.

Thank you, Madam Crombie. That was your time.

Madame Lavallée.

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

Thank you very much.

First of all, welcome to our committee. It is too bad that Quebecor is not here; I think you would have made quite the trio. There is a question I would have liked to ask Quebecor, as well, but I will still put it to each of you.

A phenomenon we are seeing more and more in the marketplace—and previous witnesses have talked about this, but regardless, you don't really need to be a classical expert to understand it—is the use of wireless devices and the Internet as broadcasting tools. Furthermore, those broadcasting devices are not subject to the Broadcasting Act, but to the Telecommunications Act.

Mr. Hennessy, you said that the regulations needed a bit of a cleanup, and you suggested some new rules. Against the current backdrop of convergence, where each of your broadcasters has their own wireless services, I wonder whether it would not be easier, more effective and more realistic to combine the two pieces of legislation, the Telecommunications Act and the Broadcasting Act, as the CRTC chairman has already called for publicly.

[Michael Hennessy]

I don't actually believe that. I think what you would end up with is one act that has two sections, because one is culturally driven and one is economically driven in its main priorities; one promotes open competition and the other promotes limited competition to ensure the achievement of cultural objectives. Put the two acts together and you really have two competing things in one page.

To be clear, if somebody provides a television service on a wireless device, that service itself is subject to the jurisdiction of the CRTC under the Broadcasting Act. They have simply, to date, decided to forebear from regulation. They could regulate it. I don't think it's necessary at this point, but the jurisdiction does exist.

What they don't regulate is the totality of the business of the wireless carrier, and that's probably a good thing. At the end of the day, I don't think the issue is whether you actually regulate in detail the broadcaster, but whether the consumer has access to the content and independent producers have the ability to provide their content and have it displayed on all platforms.

I think that's where we want to get to: to that form of openness, so that Canadians and Canadian producers can use the system, whether it's by the Internet, wireless, or the traditional platforms, to reach out to the world, and by reaching out to the world I think we start to create more financially viable models that aren't reliant on subsidy.

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

I have a few reservations about what you just said, including that telecommunications is economically driven while broadcasting is culturally driven. I have some reservations about that because we have audiovisual content being produced mainly for mobile phones and other content being produced mainly for the Internet. There have been webisodes that were so popular that they were turned into general-interest TV shows. Take Têtes à claques, for instance. And now we are seeing shows being made primarily for people to watch on their mobile phones. I am not sure what those are called.

So wireless companies, such as yours, are involved in broadcasting. I am not interested in a dialogue on the issue. I want to hear Mr. Engelhart's opinion in response to my question. What is your take on a combined telecommunications and broadcasting act?

[Kenneth Engelhart]

I agree with Michael that when someone broadcasts a webisode over a mobile phone, there is a broadcaster. If there's a website that's sending that program out, there's a broadcaster, and if someone collects those shows together and makes a decision whether to buy them and send them down the pipe, that person is a distributor. That's today, under the Canadian Broadcasting Act.

When the Canadian Broadcasting Act was written, it was deliberately written to be technology neutral. Now, as Michael said, the CRTC has decided to de-regulate, if you will. They have passed something called the new media exemption order that says they're not going to regulate that. But interestingly, when they looked at it last time, they said they're now going to add a caveat that there can be no undue discrimination. I think it's so they would have the leverage to deal with the concerns you're raising.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Engelhart.

Merci, Madame Lavallée.

Mr. Del Mastro.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you very much, and thank you to the witnesses.

I was somewhat disturbed during the first panel. I appreciate that Madam Crombie asked the opening question on the matter that had disturbed me. I'm curious, what do you think has changed since the last time? I understand that they're contemplating a purchase, that Bell in fact wants to proceed with purchasing CTV. I think it makes sense. I believe that in markets like this, we're seeing vertical integration around the world. This isn't a Canadian phenomenon. I agree with Telus that whatever the rules are, we should establish them.

I think it's working. I think Rogers is demonstrating that it's working. As I said earlier, we've seen Shaw buy Canwest and they've taken over the Global TV assets and their specialty assets. Rogers has been consistent with their position, even though they own Citytv and Citytv was admittedly, through the recession, in the tank on revenues versus expenses but took a position against fee-for-carriage in any of its forms.

Mr. Hennessy, you've said it's ridiculous, it's almost perverse, the idea that essentially you'd have all the broadcasters owned by BDUs and then figure out how much they should pay each other for the signals they've got out, especially when the two largest BDUs in the country are opposed to it.

What do you think has changed? Why are we hearing what we heard today?

[Michael Hennessy]

Maybe I'm being cynical--I've been accused of that before--but Bell is not short on accountants, so I would assume somebody there ran the numbers and decided that if you own the largest and most extensive broadcaster in the country, perhaps you can have a fee-for-carriage regime that returns net profit to shareholders.