Industry Committee on March 30th, 2010

[Ian Morrison]

In the field of television, for example, one of the regulations is that over the course of a broadcasting year, 60% of the programs that are aired have to be Canadian. Under the policy the CRTC put out last week, that is proposed to change to 55%. There has been debate within the commission and between the commission and the industry and other interest groups about other regulatory matters, but the weight of opinion seems to be moving in the direction of requiring television broadcasters to spend a certain proportion of their revenues on Canadian programming. That's the short answer. There's also a 30-minute answer, but I've already seen the chairman taking up his pen.

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

We've said that as a government we have no intention of touching the Broadcasting Act, with the changes in competitiveness we want to see in the telecommunications sector. Given that we're not going to touch the Broadcasting Act, does that allay some of your concerns regarding some of the things you've talked about?

[Ian Morrison]

No. When you say the government has no intention of touching the Broadcasting Act, those words are more rather than less comforting, but they are insufficient. I won't repeat everything I said in my initial remarks. Because of the integrated nature of the broadcasting industries right now, there will be major problems if you change foreign ownership provisions in telecom that will spill over to broadcasting.

I won't repeat what I said in my presentation on that. Just to rely on the presentation, I brought up several points that are substantive, I believe.

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

One of the things you talked about in your opening statements, one of the results you were concerned about of opening up this competition, is what I think you phrased as the export of high-end jobs. Do you have specific concerns about the ability of Canadian technology companies to compete in a world that's a lot more competitive?

[Ian Morrison]

I would be unwise to say in the presence of the member of Parliament for Kitchener—Waterloo, where half of it is all happening, that I had specific concerns about the ability of Canadian technology companies to compete. They do a very good job of competing on a world scale.

But taking Monsieur Paradis's comment about acknowledging that there is all kinds of room for foreign capital to enter the Canadian telecommunications field right now, that it's just rather a question of control, taking it from that point of view, when you do get to a situation of control, notwithstanding Mr. Globerman's comments, it is a legitimate fear that you're exporting some of the best jobs to other parts of the world.

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

Actually, can I just get Mr. Globerman to comment on that?

[Dr. Steven Globerman]

I would say, with all due respect, the kinds of concerns that Mr. Morrison and Mr. Paradis raised really were concerns that were front and centre in the 1970s and 1980s, when multinational companies operated models much different from the models they're operating today, and I alluded to that earlier.

Most multinational companies that I'm aware of that have been written about are moving towards global supply chains where very specific and specialized activities are being moved to locations where they're most efficiently done. It is not necessary that we're a home country company and everything that is high tech is going to be done at home and everything else will be done elsewhere. Companies, including Canadian companies, are moving some jobs abroad and bringing some jobs home that were done abroad. Foreign companies are moving research and development facilities into Canada. Microsoft has moved a big research and development facility into Vancouver.

We could go on and give any number, hundreds or thousands, of examples. It's simply not an accurate characterization of how global companies operate today to say they're simply going to be biased against doing high-tech jobs in a foreign country. They'll do it if that's the best location in which to do it.

That's the challenge that we have in Canada, to make our location the best place for high-tech companies to do business.

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

Mr. Paradis, I have a question for you too. I was thinking, as you were speaking earlier, that if some of my constituents--I'm sure thousands of them--were tuning in live on the Internet, as they were listening to your opening statement they'd be getting a little bit fired up about the level of competition in the Canadian industry.

You talked about large profits being made by Canadian companies even during a downturn. I think you said that, yes, Canadians pay more for wireless, cable, text, etc., and then you explained that it's because the industry is complacent. Those all seem pretty good arguments to me for the need for more competition.

Do you think Canadians should pay more for wireless, cable, and text in order to protect some other areas? Is that a reasonable justification? I would think that would be a pretty difficult argument to present to consumers in my area and across the country, that they should be paying more for wireless, cable, and text.

[Richard Paradis]

I think there is probably nothing underlying the financial model of the mobile providers that would stop them from lowering the amounts Canadians pay for their cell service. Mobile companies have found all sorts of ways of making money. They're making money with text messaging, and one of their biggest money-makers is dial tone downloads, which for us might not mean very much, but talk to anybody who's below eighteen years old and they'll tell you they download $2.95 a piece iTones three or four times a week, just to change the tune when you call.

There's room for the companies to bring the rates down. The problem is we haven't found one of them. Maybe one of the new entrants will be able to reduce the cost and make it simpler for a consumer to understand what he is buying for a while. Maybe it's because our companies are too comfortable, but I don't think that's a reason for necessarily injecting new players who may decide to do the same thing, or will be a little bit more aggressive. The problem is you've got to always think about how many companies we can actually have.

Remember when we first had cell technology in Canada, we had what must have been 30 or 40 companies that started up in business, and then the ones that were most successful were bought up by Bell and Rogers. This means that we've got three or four operators, and even when we introduce new ones we're going to find that eventually they'll be bought up by the major ones.

Can our market permit good profit margins, which we've seen for three or four companies? We should maybe find ways to pressure companies to bring the rates down, but it's not a solution to bring in new people. And even though he talks about the innovation that you get from bringing in foreign investment, you have to wonder who stopped us from being very inventive in what we've been doing and successful in what we've been doing.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Paradis.

We're going to go down to Mr. Davies.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chairman, and thanks to the witnesses.

Mr. Morrison, I'll start with you. I think sometimes in these complicated issues it's good to go back to first principles. So I'd like to hear from you directly how you would phrase the original rationale for introducing foreign ownership restrictions in the telecommunications sector in the first place, and perhaps let me know--or all of us--if that's still valid today, in your view.

[Ian Morrison]

I referred to section 7 of the Telecommunications Act and consequently section 16. I think the framers of the legislation almost 20 years ago--or 18, whatever it is--were pretty good at formulating. They understood that the telecommunications system is a public good that is important to the social and economic development of the country. And I think they also understood that in the context of this country being adjacent to the largest and most powerful country in the world, about which, as you know, a famous Canadian once said, “they are our best friends, whether we like it or not”.

So we have a special situation we have to deal with, and that is the fundamental principle that you see in the Telecommunications Act and that you would have to exorcize from an amended Telecommunications Act in order to accomplish the goals that Her Excellency mentioned in the throne speech of last month. The same goals are present in other statutes, such as broadcasting.

[Don Davies, NDP, Vancouver Kingsway, BC]

So as a follow-up, of course many are worried that opening up telecommunications common carriers to foreign ownership will sooner or later eventually impact programming content, and of course there are fears that Canadian content will decline as a consequence. I know that you will likely agree with that sentiment. I'm wondering if you could provide any examples that substantiate the relationship between ownership of signals and content.

[Ian Morrison]

That's a good question, by the way, which you might consider posing to the people from the Library of Parliament. They could do some research to answer such a question.

I would say, in a general way, in response to your comment and to get back to fundamentals, that it is established, not just in Canada but in other countries, that the people who own the means of communication have an influence over the content. You cannot separate those two things. It's a continuing struggle in the English-Canadian audiovisual system to maintain a share of shelf space for Canada in that system. We have been extraordinarily successful in defending a ratio of about one-third Canadian viewing to two-thirds foreign viewing--99% of that is American--over a number of decades. It requires continuing interventions on the part of a regulator, a regulator that is using regulation to facilitate markets. We also, Mr. Davies, have the benefit of more access to foreign signals in this country than, for example, our American colleagues have in their country.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

Monsieur Paradis, foreign entrants, the claim is made, almost as a matter of certainty will create a more competitive telecom market with supposedly more efficient pricing and choice, particularly in markets where there is largely a duopoly between the large telephone companies and the incumbent cable provider. If relaxation of foreign ownership rules leads to takeovers and mergers of existing Canadian firms, as opposed to new entrants, it's arguable that there will be no change, just different owners.

An article published in The New York Times just a few days ago about wireless consolidation around the world quotes the chief executive of Orascom, the Egyptian wireless company, which is the majority owner of Globalive, as saying: “The next few years will witness major consolidation. All small and medium-sized operators are looking for appropriate M&A. deals to be able to secure themselves a place on the new world map.”

In your view, is this what will likely happen if foreign ownership restrictions are lifted in the telecom sector: Canadian companies will simply be purchased by larger foreign wireless companies, and the supposed greater diversity in competition will simply not materialize? Is there a risk of that?

[Richard Paradis]

Yes, there is. I agree with you that if we did open up the market, in ten years we could find ourselves with our major telecommunications companies being majority-owned by foreign interests.

In reference to what you were asking about the relationship between telecom and broadcasting, if it were 20 years ago, and we were talking about telecommunications companies, which were just pipes in the old days, it would be less of a problem, maybe, to have this discussion. The problem now is that there's no way you can differentiate a cable company from a telecom company, because they're offering people the same services. That comes down to Canadian content and whether it's available.

When Telus offers you, in western Canada, their IPTV possibility, through phone lines, to access television programming, it's a telecom company offering you that content in your home. Because they do that, under the Broadcasting Act they have obligations about what kind of Canadian content should be offered among all the other programming choices you have when you get the service. That's a way in which the Broadcasting Act has an impact on a telecom enterprise. That's why there's a definite problem with the legislation, because now the companies have become two industries that do the same things, but they're regulated differently.

[Don Davies, NDP, Vancouver Kingsway, BC]

The last question is to Mr. Globerman.

I'm interested in the connection between ownership and research and development. I listened to your words very carefully. You were very concrete about relying on empirical evidence in terms of the association between foreign ownership and efficiency.

Your words on R and D were that it's not necessarily true that research and development follow ownership. We've all seen in the broader technology sector what happened, say, with Nortel. The divisions of Nortel were carved up and sold off to foreign companies, and we lost what was one of the largest private funders of research and development in this country. We saw their R and D leave. I'm just wondering if there is any empirical evidence that research and development generally flow where the ownership of a particular entity goes. It seems intuitive that this would be the case. Is there any evidence?

[Dr. Steven Globerman]

There has been a history of evidence on whether foreign ownership affects research and development in the host country. A colleague of mine, Don McFetridge at Carleton, has done a lot of that research.

I was alluding to that before in my opening remarks, that if you hold everything else constant--the size of the company, the industry, and the country--foreign-owned companies probably do less R and D per dollar of sales than domestically owned companies. I suppose if you took AT&T and lined it up with Bell Canada, Bell would do more per dollar of sale of R and D within Canada than AT&T.

What we're interested in as consumers certainly and as a nation as a whole is efficiency. It's not just the performance of R and D. That's what I was saying in my earlier remarks. What foreign ownership does is bring R and D done elsewhere into the country to be used by suppliers, including domestically owned suppliers through these spillover effects. While you may get less R and D per dollar of sales, you don't necessarily get less efficiency per dollar of sales.

One other point--I did make the comment at the end, and I think empirically there's lots of evidence for this--there is more decentralizing of R and D going on today by multinational companies than ever before. In the case of some countries, some multinationals, such as Swedish multinationals, do more R and D per dollar of sales abroad than they do domestically. What companies are doing now is removing their R and D centres to what are called centres of excellence.

If Canada, which does have centres of excellence, like software in Toronto.... A colleague of mine at Simon Fraser, Danny Shapiro, and I did a study that showed that many small foreign software companies do more R and D in Toronto than they do in their home country because Toronto happens to be a real centre of excellence for the type of software development that they do.

It's really not the foreign owner being obstinate about keeping R and D in the home country, either just by patriotism or other wilfulness, but it may have been the best place to do it historically. As time changes and other places become better, they're showing a great willingness to move their R and D facilities, at least a significant part of it.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Globerman.

Mr. Rota.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair.

Thank you for being here this morning.

The argument was made that foreign ownership increases or improves efficiency and productivity in the host country, and the basic premise is competition brings better service.

We all know that corporations are in it for profit, and some would argue that foreign corporations are strictly profit. They're moving into an area that seems lucrative for them. Servicing a population is not something that is first on the agenda of a corporation. I think that's something that parliamentarians have to look at.

I come from northern Ontario. The premise makes a lot of sense in larger cities, more densely populated areas like Toronto or Vancouver and all the larger centres. When we look at places in rural Canada that are less densely populated, how do we see service improving in these less densely populated areas?

What is to encourage foreign owners from coming in and saying they are going to service northern Ontario and not only service rural Canada but also upgrade? Because it would be easy to say we have that in place and it's not feasible, whereas under regulation and under a monopoly that's regulated, or even under a duopoly, you have to provide that service. What is the incentive for foreign companies, and what kind of service do you perceive? Are there any other cases where rural, distant, less dense populations get service, and at which level?

[Dr. Steven Globerman]

Would you like me to...?

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

I'll open it up to the floor.

[Dr. Steven Globerman]

Okay. I'll take a try at the first one.

Of course, it's very difficult to say with any kind of confidence, if you change the rules of the game, what's going to happen. It's certainly true that to the extent that there are economies of scale, rural areas are going to have higher costs for suppliers, who are going to want to recover those costs. That's been an issue, as you're saying, in Canada for many years. The economist's answer would be to provide a direct subsidy for disadvantaged users, but let's hold that aside, because it's a separate issue.

There are many parts of the world today, particularly in the developing world, in which rural areas are getting state-of-the-art telecommunications service because new suppliers are bringing in new models and new communications technology—wireless, short-range wireless. In fact, my sense would be that if anything, to really change the way the job is done in higher-cost rural areas would particularly benefit opening up the market to new entrants who are not wedded to old technologies, who are not building out old technologies that may not be suitable for low-density, low-scale areas.

You can go to places in Africa and Asia that are very much low-population areas and get wireless and satellite. Not everyone has it, but it's certainly an improvement over what was there before, which was one village telephone that was extremely expensive. It seems to me that this concern in fact augments an argument for opening up the market to new sources of competition, rather than saying that nothing is going to change, so that maybe it will just get worse.

[Ian Morrison]

When the CRTC inevitably appears before you, you might put on your agenda, in questioning them, to talk about—and it's possible that I have the name wrong, as it's just coming out of my brain—a “national contribution fund” that they have mandated, whereby telecommunications providers who do not offer services, for example, in large parts of your constituency are required to make a contribution in order that money go to the providers who do. So there is some existing policy and practice that derives from values in the Telecommunications Act and that seeks to address the question of rural access.

The broadcasting side presents a very difficult issue. People in northern Ontario in fact have much less access to our audio-visual system than people in the Northwest Territories, as you are probably well aware.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Rota.

We're now going to go to Mr. Braid.