Industry Committee on April 13th, 2010

[Konrad W. von Finckenstein, Chairman, Canadian Radio-television and Telecommunications Commission]

Thank you, Mr. Chairman.

I will make a brief opening statement. We will then be happy to answer your questions.

The committee is examining issues related to foreign ownership in the telecommunications sector. These issues have taken on greater importance with the arrival of convergence. The convergence of telecom and broadcasting has now been widely recognized as a fact of life. What is still being debated, however, is its impact on Canada's legislative and regulatory structure.

In 2006 the Telecommunications Policy Review Panel recognized that:This convergence of telecommunications and broadcasting markets brings into question the continued viability of maintaining two separate policy and regulatory frameworks, one for telecommunications common carriers like the incumbent telephone companies and one for their competitors in most of the same markets, the cable telecommunications companies.

This scene was repeated by the Competition Policy Review Panel, commonly known as the Wilson panel, which stated the following in its 2008 report: The Internet and other information and communications technologies have changed the business landscape for these industries. In essence, with convergence, it is increasingly difficult to define distinct “telecommunications” and “broadcasting” industries or sectors, particularly when it comes to delivery or distribution networks.

Despite these observations, both the TPRP and the Wilson panel proceeded to recommend only the liberalization of the foreign ownership restrictions governing telecommunications. In addition, both panels recommended that the liberalization should initially be applied only to new entrants.

Where the commission stands on this issue is quite clear: we want vigorous competition. Canada would benefit from having additional facilities-based carriers. Foreign investment, properly regulated, can play a key role in supporting such carriers. The present rules are too restrictive and complicated. A liberalized and simplified policy to govern foreign investment is essential to improving competitiveness.

However, some considerations have to be kept in mind in any attempt to liberalize the rules.

First of all, requiring a regulator to apply two sets of rules for broadcasting and telecom introduces artificialities into a converged company's corporate conduct and produces artificial corporate structures. This obviously runs counter to the natural benefits of convergence.

Second, in view of the convergence of telecom and broadcasting, any liberalized foreign ownership rules for telecom should give due consideration to the social and cultural objectives of the Broadcasting Act.

Third, while market liberalization should be pursued vigorously, it should not discriminate between potential new entrants and incumbent firms.

Finally, we believe that it is widely agreed that, given its economic importance, control of the communications sector should remain in Canadian hands.

In short, the challenge for you as legislators and for us as regulators is to strike the right balance to achieve liberalized foreign investment while maintaining Canadian control.

The present rules and regulations make up a complicated web of boundaries, categories and constraints. They are in urgent need of an overhaul. They do not at all address the reality of convergence. Broadcasting distributors now deliver telephone service. Phone companies deliver television service. The Internet delivers everything and mobile devices bring it all into your hand, wherever you are. Technological convergence has led to corporate convergence: mergers and acquisitions bring all of these services together under large ownership groups.

At the CRTC, we have been doing what we can internally to implement regulatory convergence. We have created the policy development and research branch, which brings together activities common to broadcasting and telecom. We also conduct joint telecommunications and broadcasting hearings whenever possible. For instance, we examine the accessibility of both types of services in a single hearing.

But the legislative and regulatory structure we administer still preserves the old distinctions of broadcasting and telecommunications, or in other words the distinctions between content and carriage. For Canada to remain a leader in a converged world, we need to abandon these artificial and outdated concepts.

Canada clearly needs unified legislation to cover telecom, broadcasting, and radio communications. Other countries have already done this. It is time for us to do the same.

We also need more institutional simplification so that foreign investors don't face the prospect of being subject not only to different legislative regimes, but also to different regulators that make conflicting decisions. In short, we need a unified approach to clear the way for convergence, competition, and creativity.

But that is really for another day. Today you are considering foreign ownership rules. We need to simplify these rules. We should not be juggling complicated percentage requirements for operating and holding companies or dealing with percentages of board members and other such things.

Here is a simple approach consisting of two rules that we propose. First, no foreign entities should be allowed to own, directly or indirectly, more than 49% of the issued voting shares of a Canadian communications company. Second, no foreign entity should have “control in fact” of a Canadian communications company. This would apply to all communications companies, whether they're engaged in telecommunications or broadcasting. It would also apply both to incumbents and to new entrants.

I would like to stress the importance of keeping that “control in fact” in Canadian hands. The CRTC is mandated to promote and protect Canadian cultural and social values. This mandate is even more challenging in a world where digital information doesn't recognize any national borders. I'm confident that Canada can simplify and clarify the rules for foreign investment in communications, while still ensuring that culturally or socially sensitive areas remain firmly Canadian in character. I'm equally sure that you cannot instill Canadian values by regulation.

Before giving you my closing remarks, I would like to propose to the committee a change that should be part of any regulatory reform.

The CRTC should have the ability to assess administrative monetary penalties, or AMPs, under both the Telecommunications Act and the Broadcasting Act. In telecom, we are now applying smarter and lighter regulation. We are moving away from the old approach that prescribed in advance to the players what they were permitted to do. We now prefer to prohibit certain conduct and only step in if somebody breaks the rules.

But in order for us to make an effective intervention, we need the right tools to ensure compliance. Let's say a radio station violates the terms of its licence, or a telecom carrier is not complying with the ownership rules. Currently, the punitive actions we can take are either too light or too harsh. But with AMPs authority, we could impose a penalty that is appropriate for the violation.

We currently have such a tool in enforcing the national do-not-call list and the regulations made thereunder. The spam bill that was debated during the previous parliamentary session proposed to give us similar powers. But rather than following this piecemeal approach, I hope the committee, while considering liberalization of ownership rules, will also recommend the adoption of comprehensive AMPs with respect to all CRTC responsibilities.

Thank you very much. We will be pleased to answer any questions.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. von Finckenstein.

We'll begin with Mr. Garneau.

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

Thank you very much, Mr. von Finckenstein. I have several questions for you and very little time.

First, in your words, why did the CRTC rule that Globalive did not meet Canadian ownership requirements? I suspect it revolves around the definition of “control in fact” and I'd like to ask if it's something that needs further definition to clarify and to ensure that we don't have different interpretations in the future.

[Konrad W. von Finckenstein]

“Control in fact” is a well-known concept in law. There's ample jurisprudence on it. The leading case on this is a case involving Canadian Pacific Airlines. We used that law and jurisprudence and applied it to the facts of the Globalive carrier case.

We came to the conclusion, which we set out in our decision after a lengthy hearing in open court with submissions from both sides, with tests for these factors, that for Globalive, in effect, Canadians did not have control of that corporation. Now, you should know that we do not have the power to give a conditional approval. We could not have said no, you haven't, but we'll give you two years to bring yourselves onside, or something like that. We had to make a decision, yes or no, according to the legislation.

We made that decision and we issued it and that's the end of the story. As far as we are concerned, we applied existing jurisprudence.

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

In its throne speech, the government talked about looking at the possibility of greater foreign ownership in the telecommunication sector. At the same time, it has also stated that it's not going to open the Canadian Broadcasting Act. It seems challenging to me, given the convergence of the telecom sector and the fact that they have broadcasting interests.

Is it possible to change foreign ownership rules without making changes to the Broadcasting Act, given that it says that “the Canadian broadcasting system shall be effectively owned and controlled by Canadians”?

[Konrad W. von Finckenstein]

As I tried to make clear in our opening statement, we feel that convergence is here. To make a distinction between telecommunications and broadcasting is artificial. It doesn't make sense. As you know, you can watch any television program on the Internet or on cable. When you watch programs, some are interactive, and you can phone in or type and send e-mail messages that appear on the screen. You interact. Is this telecom? Is this broadcasting? Or both?

I mean, it is all one. The technology is one. The industry is one. Legislatively, if you deal with them separately, you're going to force them into artificial distinctions in order to take advantage of the legislation. That's not going to create efficient companies or competitive companies. That's why we say you have to deal with both of them.

But given the very cultural concerns that you've expressed and that we have, etc., we feel that the best way to do it is to simplify the rules, not to have a different rule for holding companies and operating companies. We have special board rules, etc. We don't need all of that.

Make it very simple in regard to any foreign company. As long as the Canadians own 51% of the voting shares and the control in fact is there, that's fine, and they can invest as much as they can in Canada. They can be very successful. I mean, a lot of companies in the past.... Rogers is a perfect example. It had huge financing from abroad, but there was no question that Ted Rogers was in control.

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

In 2008 there was that auction in which Globalive and other companies participated. After paying $422 million, Globalive was successful in securing a portion of the spectrum. Now, it took some 15 months before the ruling was made by the CRTC. You've explained the decision that was taken by the CRTC.

There will be future auctions. Does it make sense to proceed the way the government did, to allow that 15 months to go by, and then essentially, after a company had paid its money, to discover 15 months later that they were not complying in terms of foreign ownership rules? It seems to me that this was a mishandling of the situation and that it should be done differently. What are your thoughts on that?

[Konrad W. von Finckenstein]

Well, you see, when people apply to be licensees, etc., they don't necessarily know whether they will succeed and what the final structure will be, so to pre-clear them is very difficult. That's why the government adopts the perfectly sensible approach of saying, “Here are the conditions, and if you're successful, you have to be Canadian controlled”.

I don't think there was anything wrong with the way they approached it. The problem was that the initial decision.... I don't know when it was made or on what basis it was made. They would have had the same facts before them; I can't tell.... The process, as you know, is not transparent, and as for the materials they filed with Industry Canada to get the initial permission to bid, I have not seen them, so I don't know. I can only speak of what they put in front of us.

They came before us and said, “We are now set up and we want to operate”. They said, “This is how we're going to run ourselves and this is where our money comes from, and this is our technology and where it comes from, and this is where our the trademark comes from”. It's all the same process, they said, and they said that they thought they were in Canadian control. On the basis of the facts they presented to us, on which there was heavy cross-examination, we came to the conclusion that no, they were not, but several times during the hearing we asked them to make changes.

They did make quite a few changes and considerably restructured the thing. They came before us with two companies, and by the end of it, there was only one company. The two were merged, the voting structure was changed, and so on. They made considerable changes, but they did not make the essential ones that we felt were necessary.

As I mentioned, I wish I had had the power to give them conditional approval. Since we didn't have it, we said no, but we made it quite clear what they would have to do in order to come onside.

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

Thank you.

In finishing, I'd like to have your views on regulation of the wireless sector, which of course is growing considerably. I think you've made comments about that in the past.

[Konrad W. von Finckenstein]

In the wireless sector, when we had our hearings on new media, we pointed out that the existing exemption is complete and there's no way for us to intervene, even if there is discrimination or self-serving, which are the normal reservations we have when we exempt somebody, because of the sector's competitiveness: unless you do something, we will step in. We suggested that there was an oversight and that it should be corrected, and we put it in our hearing for the fall.

The wireless industry came forward en bloc and said that they agreed with us, that it was an oversight, and asked us to please change that. We agree with that. We should have the right to intervene if there's self-serving or if there's discrimination, but the rest of it should be unregulated. It should be exempted. We filed an amendment and are seeking comments on it. Depending on what the input is, we will probably go along with that, because the wireless sector, at the present time, works very well and very competitively. We are of the firm belief that we should not step in unless there is market failure.

As I say, the thing is in process and I have to wait for the inputs to see what they are. But we've issued a notice saying that this is the offer from the wireless industry, that they are prepared to accept that we can step in should there be self-serving and discrimination, and we seek your comments on whether we should accept it or not.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Garneau and Mr. von Finckenstein.

We will now go to Mr. Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chair.

Gentlemen, good afternoon and welcome to the committee.

On March 25, we heard from representatives of Industry Canada, who told us, “Before issuing spectrum licences, Industry Canada must confirm compliance with these ownership and control requirements.” The licences were sold in 2008. In October, the CRTC decided that Globalive did not respect Canadian ownership requirements. This decision was then modified by the government, which decided that the company did meet the criteria.

You explained earlier that when a company wants to purchase spectrum licences or submit a bid, it must disclose what the company is and who controls it. I imagine that it was based on this information, at the outset, that Industry Canada allowed Globalive to bid and that the licences were sold.

When were you notified that Industry Canada continued, even after the modifications, to state that the company complied with Canadian ownership requirements?

[Konrad W. von Finckenstein]

When Globalive came before us, it stated at the time that it had received Industry Canada approval and wanted to obtain ours. It wanted to be interconnected with the other telephone companies. Of course, if a telecommunications company cannot have interconnection, then it is useless. It is essential to have the right to interconnect and, to do so, the company must be controlled by Canadians. Globalive appeared before us to state that it wanted to purchase spectrum licences, that it had obtained authorization from Industry Canada, and that it was now seeking ours.

I would like to point out that we wrote to the company in December 2008 to ask it to contact us at the same time as it was contacting Industry Canada. That way, both of our organizations could have worked together to make a decision, have discussions [Inaudible—Editor]. Globalive chose not to do so. It first obtained consent from Industry Canada, and then came to us at the last minute. That was its choice. I believe that a period of eight months elapsed between these two events. It was the company's decision.

[Serge Cardin, Bloc, Sherbrooke, QC]

In such a case, it is clear that it would have been a good idea to discuss the matter together before making a final decision.

[Konrad W. von Finckenstein]

Exactly. We would have liked to avoid what did happen in this case, that is, that two different decisions were made.

[Serge Cardin, Bloc, Sherbrooke, QC]

The question has already been asked, but could you tell me exactly what information led you to the conclusion that Canadian companies are not actually the ones that control Globalive? In your opinion, how can the foreign company indirectly manage Globalive's affairs? What led you to conclude that the requirements were not being complied with?

[Konrad W. von Finckenstein]

As we stated in our decision, there were a number of facts. All the money came from Orascom. This company owned approximately 80% of the equity. All of the technology was [Inaudible—-Editor]. It had a trademark. All the funding came from the same source. These factors led us to conclude that it was Orascom that had the control.

[Serge Cardin, Bloc, Sherbrooke, QC]

I will now turn the floor over to my colleague.

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

We know that wireless technologies are offering an increasing number of broadcasting services. I do not think I need to provide you with examples, but we know, among other things, that this type of technology offers 16 applications, including broadcasting from CBC and Disney. Those are two good examples. Wireless technologies can do that under the Telecommunications Act.

Is that why you cannot impose broadcasting rules on wireless technologies in order to protect Canadian and Quebec content?

[Konrad W. von Finckenstein]

Our broadcasting regulation system is based on a world with borders. We determine what can be transmitted or not. The content must be 60% Canadian and 40% foreign, for example. Then, with the advent of convergence, we could no longer control Internet or wireless technologies.

How can you tell someone with a wireless device that he can visit certain Canadian sites but not certain foreign ones?

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

We're not talking about Web sites, but about applications. You can listen to Radio-Canada radio live. This means that an American or any other company could, for example, offer only American content, both as concerns magazines—because magazine articles are available—and for Disney or CBC broadcasts. That could be done.

[Konrad W. von Finckenstein]

Technically, it would be very easy to sidestep all the rules that we would like to impose. I don't see how we could do so. We could try to do so, as you suggest. Right now, the content is there. Cell phone owners can use applications as they wish. I don't believe that we will be able to control or prohibit certain uses.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Finckenstein.

Mr. Braid, the floor is yours.

Go ahead, Mr. Braid.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you very much, Mr. Chair.

Thank you, Mr. von Finckenstein, for joining us this morning.

Sir, in your presentation, you indicate and suggest that we can certainly consider liberalizing foreign investment restrictions for telecom in Canada. At the same time, we could continue to achieve social and cultural objectives and protect Canadian content and culture.

In one of your recommendations, you also suggest that we may even wish to consider unifying the various acts. Could you please outline and articulate the important elements of the Broadcasting Act that we would want to maintain or that we would want to continue to have apply to the telecommunications and broadcasting sectors to protect Canadian content and culture?

[Konrad W. von Finckenstein]

The Broadcasting Act has a whole shopping list of objectives, but they basically boil down to two. It should be an overwhelmingly Canadian system offering Canadian content, and Canadians should have access to it both as viewers and as participants, i.e. as producers. Those are the overriding key objectives.

If you bring in a Canadian communications act and you combine the two acts, you want to make sure you maintain that as much as possible. Obviously, in the age of convergence, in the age of digitization where all content can be offered, this becomes more and more difficult.

In the past under the Broadcasting Act, we would control what you could run on a radio station or what you could broadcast, so we would control what the cable companies could offer you. Therefore, it was a defined universe. We could impose rules.

Now that you have an open universe, you have alternatives. Right now, you can watch most programs on the Internet or on your hand-held devices, so this becomes much more difficult. Therefore, rather than dealing with trying to use regulatory arbitrage, really, you're driven very much more to an age of subvention, of finding ways to support and aid in enabling Canadian programmers.

Why do we say 49%, etc.? Why does there need to be control? In a combined company, you want to make sure that the controlling minds, the controlling people, are Canadians, and they understand Canada, and they understand our bicultural, our bilingual situation.

Let's face it, if we don't do this, by and large it will be bought up, and you will have a “transplant” communications industry that will be the training ground for young executives from foreign countries. No matter what regulations you put together, you can't instill in them what Canada is all about so that they can reflect that in the programming. You can do that only if the Canadians are in charge.

That's really what the bottom line is here. If you do take away the ownership, I'm afraid.... If you try to do it by regulating, you may not succeed, and there's no way you can go back.