TRANSCRIPT OF PROCEEDINGS
FOR THE CANADIAN RADIO-TELEVISION AND
TRANSCRIPTION DES AUDIENCES DU
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
HELD AT: TENUE À:
Empire Landmark Empire Landmark
Rooms 520/522 Salles 520/522
Vancouver, B.C. Vancouver (C.-B.)
Le 3 mai 1999 May 3, 1999
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and staff attending the public hearings, and the Table of
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Canadian Radio-television and
Conseil de la radiodiffusion et des
Transcript / Transcription
Public hearing / Audience publique
BEFORE / DEVANT:
Cindy Grauer Chairperson / Présidente
Andrée Wylie Commissioner / Conseillère
Broadcasting / Vice-
Andrée Noël Commissioner / Conseillère
AUSSI PRÉSENTS / ALSO PRESENT:
Karen Moore Conseillers juridiques /
Jean-Pierre Blais Legal Counsel
Michael Burnside Hearing Manager /
Gérant de l'audience
Marguerite Vogel Hearing Secretary and
Director, Vancouver Office /
Secrétaire de l'audience
et Directrice, Bureau de
HELD AT: TENUE À:
Empire Landmark Empire Landmark
Rooms 520/522 Salles 520/522
Vancouver, B.C. Vancouver (C.-B.)
Le 3 mai 1999 May 3, 1999
TABLE OF CONTENTS / TABLE DES MATIÈRES
Presentation by / Présentation par:
Canadian Satellite Communications 7
Intervention by / Intervention par:
Canadian Cable Systems Alliance Inc. 120
Bell Satellite Services Inc. 163
Canadian Cable Television Association 206
Alliance des Radios communautaires du Canada Inc. 226
CanWest Global Communications Corp. 236
Reply by / Réplique par:
Canadian Satellite Communications 276
Vancouver, B.C. / Vancouver (C.-B.)
--- Upon commencing on Monday, May 3, 1999 at 0905/
L'audience reprend le lundi 3 mai 1999 à 0905
1 THE CHAIRPERSON: Order please.
2 Good morning, ladies and gentlemen, and welcome to this public hearing. My name is Andrée Wylie. I am the CRTC's Vice-Chair, Broadcasting, and I will be presiding over this hearing, during which we will examine the proposed merger between CANCOM and Star Choice.
3 Bonjour, mesdames et messieurs. Mon nom est Andrée Wylie, je suis la vice-présidente de la diffusion du CRTC. Bienvenue à cette audience.
4 Allow me to introduce my colleagues on this panel. They are Commissioners Andrée Noël to my right and Barbara Cram to my left. The staff who will be assisting us during this hearing are Hearing Manager Michael Burnside, Legal Counsels Karen Moore and Jean-Pierre Blais and the Hearing Secretary Marguerite Vogel who is the Director of our Vancouver office. Please don't hesitate to call on them if you have questions regarding matters of process.
5 Comme vous le savez, le Conseil a entrepris au cours des dernières années de reveoir toutes ses grandes politiques en radiodiffusion. Ses objectifs sont, d'une part, d'assurer aux auditeurs et aux téléspectateurs du pays l'accès au plus large éventail possible d'émission radiophoniques et télévisuelles de qualité tout en accordant une place de choix au contenu canadien et, d'autre part, de veiller à ce que les coûts pour les consommateurs demeurent à un niveau raisonnable.
6 Pour faciliter l'atteinte de ce dernier objectif, le Conseil a favorisé l'établissement de la concurrence dans un certain nombre de marchés et notamment entre entreprises qui distribuent des services de radiodiffusion quelque soit le mode de distribution utilisé -- ondes, fibre optique, satellite, et cetera.
7 Today we will examine the application by CANCOM and Star Choice proposing to merge some of their activities in order to be better positioned to compete in the satellite relay distribution market. The applicants maintain that by combining their expertise and satellite infrastructure they will have the ability, the integrated structure and sufficient financial resources to compete effectively with the companies already established in this market.
8 The Commission will hear the presentations of all interested parties and will take all views and comments presented, whether appearing or not, into account before rendering its decision.
9 To make sure we get through today's agenda, depending on the pace at which we move, we might have to prolong the evening session and sit after 6:00 p.m., since we would like to complete this item today and another hearing is beginning tomorrow morning. We will let you know if we decide that that's necessary ahead of time.
10 I will now ask our Secretary, Marguerite Vogel, to go over some administrative and housekeeping matters regarding the conduct of this hearing. Madam Secretary.
11 MS VOGEL: Thank you, Madam Chairperson.
12 First, I will describe the procedure that will be followed for hearing today's applications. Non-competitive applications are heard in three phases. Phase I is the presentation by the applicant to the Commission. Twenty minutes is allotted for this presentation. Questions from the Commission normally follow the applicant's presentation.
13 Phase II is where the appearing intervenors make their presentations to the Commission. Ten minutes is allocated for each of these presentations. Again, there may be questions from the Commission following each intervenor's presentation.
14 Phase III provides an opportunity for the applicant to make comments or rebut the interventions that have been filed with respect to its application. Ten minutes is allocated for the rebuttal. Again, questions may follow.
15 For your general information, the public files associated with items at this hearing are available for viewing in Room 526, just across the hall from this room. CRTC staff in that room will be pleased to assist you, but please be aware that while an application is being heard, the public files associated with it will be in this room and not available for viewing.
16 There is a verbatim transcript of this hearing being taken by court reporters who are located at the table to my left and behind. If you have any questions about how to obtain all or parts of this transcript, please approach the court reporter for information.
17 Finally, if you want to have messages taken, we will be happy to post them outside of Room 526. The phone number in our public examination room is 666-2356. If you have any further questions, please don't hesitate to contact any one of us. We will be more than pleased to assist you when we can.
18 And now, Madam Chairperson, with your leave I will call the first item.
19 Item 1 on the agenda reads as follows:
"Canadian Satellite Communications Inc. (CANCOM) filed an application that seeks approval for changes in the effective control of both CANCOM and Star Choice Television Network Incorporated pursuant to a Reorganization and Share Exchange Agreement between CANCOM and Star Choice Communications Inc.
As a result of an approval of the transactions, WIC Television Ltd. would no longer control CANCOM while Shaw Communications Inc.'s direct and indirect interest in CANCOM would be permitted to increase to more than 30%. SC Television and Star Choice, its parent company, would be permitted to become wholly-owned subsidiaries of CANCOM. Also, Shaw would be permitted to acquire an indirect interest in the specialty programming service Report On Business Television. The proposed transaction triggers the requirement for several regulator]y approvals, which are described (in your agenda). In addition, CANCOM requested that certain conditions of licence regarding structural separation be modified or added with respect to the respective licensee."
20 For information on all the applications associated with this item, I would refer you to page 1 and following of your agenda. Go ahead whenever you are ready, please.
21 THE CHAIRPERSON: Good morning, madam, gentlemen.
PRESENTATION / PRÉSENTATION
22 MR. McEWAN: Good morning.
23 Madam Chair, members of the Commission, my name is Duncan McEwan, President and Chief Executive Officer of Canadian Satellite Communications. Before beginning our presentation, let me introduce the members of our panel.
24 Seated on my right is Richard Stursberg, President and Chief Executive Officer of Star Choice Communications Inc. Next to Richard is Brian Neill, founder of Star Choice, a significant shareholder and the company's Chairman. Seated on my left is Rolf Hougen. Rolf is CANCOM's founder, a shareholder and member of the CANCOM Board of Directors. He was also a member of the independent committee that recommended approval of the transaction to our shareholders.
25 Behind me is Patricia Dumas, our Head of Communications and Government Relations, and our legal counsel, Stephen Whitehead. Also at the hearing are senior executives from CANCOM, Star Choice, WIC and Shaw.
26 The applications before you represent an important step in the evolution of the satellite industry in Canada, and they are rooted in a clear vision for the future of our two companies.
27 Today we would like to talk to you of our plans for the future, describe the nature of the transaction that we are asking you to approve and review the public benefits that will result.
28 At the heart of our plan is a vision for the combined company, the "new" CANCOM.
29 With your approval, we will build the new CANCOM into a technologically sophisticated, innovative, well-financed Canadian satellite company that is a leader in the satellite business both domestically and internationally, with the resources to compete against large, integrated communications companies -- such as BCE Media and others -- over the long term.
30 Upon completion of the share exchange, shareholders of Star Choice will become shareholders of CANCOM. Star Choice will become a wholly-owned subsidiary of CANCOM and CANCOM will be owned 36 per cent by Shaw, 29 per cent by WIC, 23 per cent by members of the public and 11 per cent by Rogers.
31 MR. HOUGEN: Madam Chair, members of the Commission, I founded CANCOM in 1979 from my home base in Whitehorse, Yukon and I have participated in its development over the years.
32 At the time, the government was searching for a solution to the hundreds of satellite dishes springing up across Canada receiving unauthorized U.S. television programs.
33 CANCOM's purpose was to extend broadcast signals to communities located beyond the reach of off-air television, as well as provide direct-to-home service to uncabled regions. It turned out to be a difficult and cash-consuming project, but we eventually turned the corner and achieved our goal. In accomplishing this, CANCOM contributed to the Canadian Broadcasting System through the extension of service, the creation and support of small cable systems and the creation of many important aboriginal initiatives.
34 From these pioneering days CANCOM has built on its experience. We have added an impressive array of advanced satellite communications services to our product base, such as uplinking services, tracking, distance learning, mobile messaging, voice and data transmission.
35 By diversifying our revenue streams and maintaining a position at the leading edge of new technologies we have been able to systematically lower the rates and increase the number of services we provide to our cable customers.
36 Over the years, we have learned a few things about the satellite business\. First, we have learned that the high fixed costs of satellite transmission have to be offset by multiple revenue streams. We have also learned that running various lines of business from a common satellite platform is essential to long-term growth. In these increasingly competitive times, a single purpose business like the satellite relay distribution undertaking, or referred to as SRDU, is much less sustainable on its own.
37 The acquisition of Star Choice provides an essential opportunity for us to expand into the fastest growing segment of the satellite business.
38 Remember that DTH is not new to CANCOM. CANCOM was the first provider of DTH in Canada, using C-band, a role which we continued until we became one of the principal founding shareholders of ExpressVu. In fact, we've only been out of the DTH business since we sold our remaining ExpressVu interest last June, and the Star Choice deal allows us to re-enter a business that we both know and believe in.
39 I served as a member of the Independent Committee of Directors that evaluated the transaction from the perspective of CANCOM's minority shareholders. The committee's conclusion was unanimous: The Star Choice deal improved our prospects for the future, and was the right deal for the company, and as you know, the minority shareholders voted overwhelmingly to agree with our conclusions.
40 Thank you very much.
41 MR. NEILL: Madam Chair, Commissioners, I would like to talk for a few minutes about the satellite industry from the perspective of a direct-to-home operator. I was the founder of the original Star Choice, which as the Commission knows was started in Fredericton, New Brunswick, where it still employs 250 New Brunswickers at its world class call centre.
42 It is probably worthwhile reminding you that of the five DTH services originally licensed, only two, Star Choice and Bell ExpressVu, remain today. As Rolf found in the early days of CANCOM, the satellite business is a high cost, high-risk exercise, particularly in a country as large and sparsely populated as Canada. I should also point out that, unlike the early days of CANCOM, today we have to grow our business in an intensely competitive environment.
43 Against the odds, Star Choice has stayed in business, grown, merged, and grown again. We have managed to stop the grey market and repatriate many of its customers by offering an attractive homegrown alternative to unlicensed U.S. competition. And, most importantly, we have managed to stay level with a major competitor.
44 As a whole, the DTH industry has encountered strong customer demand for the high quality digital distribution alternatives to the incumbent cable industry. Although this is good news, it is also very expensive news, because we subsidize the cost of every new subscriber we get, rather like the wireless phone industry does, so the more successful we are the more money we need. Every new DTH subscriber represents a cost to Star Choice of over $500.
45 Early on, we recognized that it was essential to offset the fixed costs of satellite facilities with additional revenues generated from the same infrastructure. We are doing this today through our SRDU and uplink businesses but more is needed to sustain the rapid growth of our retail DTH business.
46 Star Choice competes head-to-head with Canada's largest telecommunications company, the BCE group. In recent months, BCE has consolidated all of its satellite-based businesses under BCE Media. BCE Media is now operating a fully integrated satellite business that offers all of the products and services that CANCOM and Star Choice individually offer today. In addition, BCE Media's affiliate, Telesat Canada, is the sole source supplier of fixed satellite services to our industry.
47 The licensing of Bell ExpressVu as an SRDU two weeks ago was the last piece in BCE's integrated satellite puzzle and the speed with which it was licensed means that SRDU competition will be immediate and very intense.
48 To date, we have managed to compete head-to-head with Bell ExpressVu in the DTH business, as evidenced by the fact that we each have over 200,000 Canadian customers. And if anyone doubts our commitment, let me tell you that in the last 18 months our bondholders and shareholders have invested over $350 million to bring our service to Canadians.
49 However, to sustain our growth, we need improved resources. We need to make more efficient use of high-cost infrastructure. We need more diversified revenue streams and we also need access to steadier cash flow to improve our financial depth and our ability to raise money. This proposed transaction with CANCOM provides us with all of those key ingredients.
50 Star Choice shareholders have recognized the value of the CANCOM transaction to our future. I was one of the members of the Independent Committee of the Star Choice Board that recommended this deal to the minority shareholders, who subsequently voted over 99 per cent in favour of this transaction.
51 Madam Chair, members of the Commission, we hope that you too will recognize the importance of this transaction to the orderly development of a sustainable, competitive satellite marketplace and we urge you to approve the transaction on an expedited basis. Thank you.
52 MR. McEWAN: This is a logical and very necessary step for CANCOM.
53 I became CEO of CANCOM just over one year ago, and shortly afterwards conducted a strategic review of the company with management. We concluded that CANCOM must concentrate its resources on its core competencies in satellite technology, with the objective of building a substantial North American satellite services provider. Among the consequences of this decision was the sale of those assets that were not core, particularly our minority interests in several specialty applications.
54 At the same time, we also exited ExpressVu because we had been diluted over time from a significant founding shareholding to a very small minority position, and we simply weren't getting the strategic benefits that we needed to go forward.
55 But for all the reasons that Rolf and Brian have outlined, it was obvious to us that being involved in a DTH service was critical to our future, and that meant approaching Star Choice.
56 Attached to this presentation is a chart of the multiple business lines of our two companies and it's also on the easel to your left. Alongside those of BCE Media -- so you can see on the left the business lines of BCE Media, then CANCOM and then Star Choice. You can see the potential that CANCOM and Star Choice combined have to meet and match this competitive force in BCE.
57 Between us, we are already active in almost all of the business lines of the competitor, and a leader in several.
58 However, in developing this chart a year ago it showed us the challenge that a stand-alone CANCOM was facing at the time. We are experiencing intense and increasing competition from BCE Media cross our unregulated businesses, particularly in our learning division, and would shortly confront it in our regulated SRDU business as well. Our conclusion back then was that over time a stand-alone CANCOM would be increasingly vulnerable.
59 A merger with Star Choice addresses that vulnerability. It would produce many strong synergies such as a combined administration and overhead, cash flow, financing and tax benefits, and above all, the major synergy: More efficient use of satellite transponders.
60 All satellite-based lines of business, whether they be SRDU services, DTH, mobile messaging, tracking or uplinking, utilize the same infrastructure -- satellite transponders. Transponder costs are fixed and, therefore, the key to succeeding is to leverage those high fixed costs into multiple revenue streams.
61 As you can see in the diagrams at the back of your presentations, these diagrams are now on this side representing the transponders, both CANCOM and Star Choice operate on multiple transponders and, in the case of CANCOM, we also operate on several satellites. We intend to rationalize the infrastructure to minimize duplication and cut costs.
62 This is a strategy that BCE Media is already pursuing and, with the licensing of its SRDU business, it is now able to offer all of the satellite-based lines of business from a common technical platform. CANCOM and Star Choice Seek to attain the same level of integration and efficiency with this transaction. Indeed, we believe that it is the only way that both our companies can be sustainable, diversified satellite players in the long term.
63 MR. STURSBERG: The next few months will be very intense within our industry. New satellites are being launched, dual illumination arrangements are being made and technology platforms are being shifted. Next month, Bell ExpressVu will begin migrating to NIMIQ and in October Star Choice will begin utilizing additional transponders on ANIK E-2 followed by a transition to ANIK F-1 early next year. This transitional period will be extremely complicated from all perspectives, and any lingering uncertainty surrounding our merger will make an already difficult transition even more problematic. Star Choice and CANCOM need to know where they stand within this framework in order to plan their long-term businesses.
64 From a public markets perspective, CANCOM and Star Choice agreed to the merger in November, 1998, based on a share exchange ratio that reflected prevailing market circumstances. The valuations used were later updated in accordance with securities legislation and both companies obtained shareholder approvals on the basis of these valuations. These valuations are in danger of lapsing if the transaction does not close by early July.
65 We think the proposed merger has a lot to offer all interested parties, and makes a great deal of sense.
66 As Duncan described, our collective vision is to create a strong, innovative satellite business that offers a broad range of products to customers at all levels, both domestically and internationally. The implementation of this vision yields significant public policy benefits.
67 First, our combined SRDU business will offer small cable systems a wide range of signals at costs that will be disciplined by market forces as Bell ExpressVu and CANCOM-Star Choice compete for BDU customers.
68 Second, the merger of Star Choice and CANCOM provides our DTH business with the supplementary revenue streams and access to financing that is necessary to sustain our growth as a competitor to cable and other DTH services. Approval of this deal ensures retail customers will have the widest possible choice of distribution alternatives over the long term.
69 Third, our competitive presence will force the cable industry to accelerate its digital roll-out. This will create more capacity for the broadest possible distribution of Canadian programming services.
70 Fourth, the merger of CANCOM and Star Choice will create competitive balance in the system. Approval of this transaction together with the licensing of Bell ExpressVu as an SRDU, sets the stage for an intense competitive rivalry between two integrated satellite companies. We believe this rivalry will establish Canada as a leader in the satellite industry and benefit consumers through more choice and better service.
71 Fifth and finally, the benefits of this transaction extend far beyond the regulated SRDU and DTH businesses to the tracking, distance learning and data businesses, all of which support the regulated services and are important to the competitiveness of Canadian industry.
72 MR. McEWAN: Madam Chair, members of the Commission, we believe that approval of these applications is clearly in the public interest.
73 We think we have a strong, positive and compelling vision for the company. With your approval, CANCOM can take the next important steps to becoming a highly competitive, technologically sophisticated, well-financed satellite company that offers a wide variety of services to customers across Canada and beyond.
74 We thank you for this opportunity to appear before you and we look forward to your questions.
75 THE CHAIRPERSON: Thank you, gentlemen.
76 In the Commission's view, your proposal raises three issues which will form the backdrop for my questions. First, whether the integration at the corporate level to a share exchange of two satellite relay distribution undertakings is in the public interest.
77 Second, whether it would be appropriate to relax or even eliminate any of the conditions attached to one of the SRDU licences concerned, rather than attaching those conditions as well to the other, conditions which reflect the need identified by the Commission for structural separation of the SRDU operations from the cable operations of a major shareholder, the company holding one of the SRDU licences.
78 And, third, whether given the Commission's declared concerns regarding vertical integration between major cable licensees and specialty services in the present circumstances, Shaw Communications should be authorized to hold an indirect interest in ROBTv.
79 I hope you will bear with me if I speak of SRDUs, Shaw, WIC, BSSI, CANCOM and Star Choice rather than, for example, Shaw Communications Inc. and Canadian Satellite Communications Inc. Where you feel that such shortcuts may prejudice the discussion, feel free to require that I be more specific.
80 Now, there are two parties before us. I will assume that, unless you indicate otherwise, any response will be the position of both parties, but I leave it to you as to who answers my questions.
81 So then the first issue, whether this application is in fact in keeping with Public Notice 1998-60 which, as recently as June 1998, established a policy framework for SRDUs based on competition for the first time. If I look at paragraph 12, it says in part:
"The Commission's policy framework for the SRDU marketplace favour entry to all qualified applicants, with primary consideration begin given to the financial ability of the sector to sustain competition, rather than to the financial viability of specific undertakings." (As read)
82 You are before us today asking effectively to reduce competition in the provision of SRDU services by integrating the operations of two of three SRDU licensees. What exactly has changed since June 1998 to justify the Commission favouring entry to a third SRDU provider, but allowing almost concurrently the elimination of another SRDU provider, rather than encouraging competition for the subscriber base among the three competitors?
83 MR. McEWAN: Thank you for that question. There are a number of answers I will start off and then Richard will pick up.
84 The original decision 98-60 laid out a framework -- accepted a policy framework for competition in the SRDU business and laid out the objectives, including extension of service.
85 We believe that this transaction will actually assist in the long-term achievement of those objectives and the element that has changed from then until now is the emergence of a major satellite competitor at the BCE level.
86 We had at the time of 98-60 two licensees, CANCOM and Star Choice, who have begun competing with each other quite aggressively. At the same time, we have the emergence of Bell satellite, which not only now has an SRDU licence, but has a variety of both regulated and unregulated businesses, all of which feed off a common platform and all of which effectively provide multiple revenue streams that permit much more flexibility in the manner in which they approach the marketplace.
87 What we are attempting to do with this transaction is provide a similar synergy so that we can provide an even match between ourselves and Bell Satellite Services across the entire range of products that the two companies offer, all of which will assist in the furtherance of the 98-60 objectives, extension of service, more flexibility in pricing, a larger array of product offerings and we think that this is the fundamental rationale for our application to you.
88 THE CHAIRPERSON: Now, at page 9 of your supplementary brief you state that:
"CANCOM/Star Choice will have the resources to remain competitive as a provider of DTH and SRDU services in Canada. Whereas Star Choice and CANCOM individually might not." (As read)
89 And at page 2:
"Absent this combination, it is doubtful that CANCOM and Star Choice operating independently will be able to sustain competition against BSSI in the long term." (As read)
90 Which -- given that the Commission's statement that I just read at paragraph 12 on 98-60, that priority ought not to be given to the financial viability of specific undertakings, should the Commission allow a reduction in competition on the ground that either one of Star Choice or CANCOM may have difficulty remaining viable? I am referring to the paragraph that said that primary consideration would be given to the financial ability of the sector to sustain competition, rather than to the financial viability of specific undertakings.
91 MR. McEWAN: Again, I will start and this time I will pass to Richard.
92 Our goal here is to deliver sustainable competition, and we think that this transaction is the way to deliver that competition. It comes back to this infrastructure question. We have at CANCOM a single infrastructure for each of our different business lines and that means that ultimately we will have challenges when compared to our competitors who can put multiple business lines on a single infrastructure.
93 Now, I accept that that by itself is not what was laid out in the proposal, but instead what we are talking about here is the long-term viability of competition, and we think that the ability to have matching infrastructures which will allow further price reductions beyond what is possible when you have a single infrastructure is in the public interest and does further that competition.
94 Perhaps I could ask Richard to fill in.
95 MR. STURSBERG: Well, just to pick up on what Duncan is saying, I think that it comes down to something relatively straightforward which is this. When Duncan talks about having multiple revenue streams off a single infrastructure, that means that that infrastructure is economically more efficient over the long term than one in which you don't.
96 I will give you a simple example of how it might work. If, for example, for purposes of argument, a transponder is worth $1 and you have to make 20 cents profit on it, then you have to sell it for $1.20 to get it. If I only have one revenue stream, so I only have an SRDU revenue stream, then I have to charge $1.20 to be able to recover my costs.
97 But if I have another revenue stream running off the same transponder, which is the direct-to-home satellite revenue stream and I can pick up say 60 cents there, then it is clear that I can reduce my pricing on the SRDU side if I want to in half and still make the same amount of money.
98 Now, if BCE Media enjoys that kind of economic efficiency because they can run both SRDU and DTH off the same set of transponders and CANCOM cannot, then its long-term viability and its ability to be able to meet the price competition will be compromised. So our general sense is that when we look forward in terms of this industry, we want to be able to maintain competition over the long term, and we are more likely to be able to do that even if we only have two big competitors enjoying the same economic efficiency, one to the other, than if you have three in the short term.
99 It's not unlike -- I will just use this example for a moment, when the cellular industry was first licensed, there were two big competitors, and each competitor could internalize the same set of efficiencies and economic terms as the other. The net result was that while you only had two big competitors, competition in the Canadian market drove prices for cellular service lower than they were in the United States market where there were more competitors and ensured an extension of service in the Canadian market that was greater than what occurred in the U.S. market.
100 So the long and the short of our view is that while there might be a reduction in the number of SRDU competitors in the near term, having two that enjoy those kinds of economic efficiencies going forward will guarantee that there will be more sustainable competition and better competition for small cable companies in the longer term.
101 MR. NEILL: If I might, if I might add, Madam Chair, in actual fact this application is about precisely what you are talking about because the sector only comprises the three of us. And, in fact, the conclusion we have come to is that given the state of the situation with BSSI the other two may not be able to continue to compete effectively in the sector if we are not sort of playing by the same rules.
102 Therefore, the financial ability of the sector to provide service to the industry could be compromised if we cannot be a strong sustainable competitor. So, in actual fact, the application is all about our financial ability to continue to compete in the sector.
103 THE CHAIRPERSON: Your application raises the spectre of failure of one of the two companies or an inability to remain viable, as I understand it. If this application were to be denied, which one of the parties, in your view, would have the greatest difficulty in remaining viable?
104 MR. McEWAN: The issue, Madam Chair, is not actually the viability of the companies. I think both companies can remain viable.
105 In CANCOM's case what we would do is essentially review our ability to fulfil the offerings that we currently offer and we would have to make adjustments over time, but in neither case I believe we are talking about the failure of a company from a financial viability perspective.
106 This is a market. You asked -- related though to the 1960 decision. I would like to come back to part of that, the framing of that policy. It said, and you have read it to us, that the concern was with the financial size of the marketplace, rather than with the -- it's the ability of the sector to sustain competition, rather than to the financial viability of specific undertakings.
107 If I could pick up on the question that you asked just a moment ago, this is the sector which will face -- which will be in decline. This is not a sector that is going to grow overall in terms of economic terms. There is competition in that sector from terrestrial alternatives. There is intense competition there. There is intense competition from the satellite sector. We experience it now with Star Choice and will shortly from BCE. And the net effect is the -- although the number of channels continues to increase slowly, the prices are coming down dramatically. It's a sector that is diminishing in size.
108 So as part of your consideration, I would urge you to look at the sizing of this SRDU marketplace and look at the prospect that over time, although it may grow in terms of absolute numbers of channels, its economic power is diminishing and look at that in balance against what we are trying to do here, which is create two much larger, much more intense competitors across the broad panoply of satellite services in Canada.
109 We have a number of different product lines. We have a DTH operation. We match them one to one.
110 THE CHAIRPERSON: If I look at the first chart that you have attached to your presentation, why would CANCOM not continue to be a viable competitor if this application were denied, given its many years as a monopoly provider, its well-established subscriber base and its great success in expanding its lines of business?
111 I am not looking at the combination here.
112 MR. McEWAN: I understand.
113 THE CHAIRPERSON: I am looking at the first chart, which is not -- oh yes, which is on my right here.
114 MR. McEWAN: What you are looking at there is the number of lines of business that CANCOM is in. We maintain a separate infrastructure for each one of those business lines. So we have transponders for our tracking division. We have transponders for our voice division. We have transponders for our learning division and we have transponders for our core SRDU business. So we maintain a separate infrastructure for each one of those.
115 So we have to recover our costs by business line and while right now -- and that's an historic event.
116 What we are proposing to do with this transaction is merge, which takes us to the second chart, several of those business lines onto a single infrastructure. What this provides us with is tremendous pricing flexibility. It means that we can begin to look at arrangements in which the costs of that transponder are offset among a number of different businesses, as opposed to the dedicated SRDU business we find ourselves in right now.
117 And while it is a very good business for us at the moment, it is under pressure and we have a limited amount of space to go. Because we have to meet the costs of those transponders within that business line at a certain point, we hit against our cost base.
118 The two alternative companies, Star Choice and ExpressVu, do not have that circumstance. They can incrementally price because they are already using their transponders in recovering their transponder costs across a much broader base of business, specifically the DTH business. And what we are trying to do here is come up with an arrangement that allows for a much more efficient use of satellite services and a much broader way of cost recovery which will allow for an increasing level of price flexibility in the market.
119 So, in the short term CANCOM has had a very good run at this and we intend to compete intensely in this market for as long as we can, but we cannot incrementally price based on our existing infrastructure, and we see that as a long term strategic challenge.
120 The growth opportunities for our company in Canada aren't that great. And (c) I have been looking for them. The DTH business is the logical one for us to try and get into and we think we can do that and still meet your objectives.
121 MR. STURSBERG: It might be helpful just to put the relative size of these businesses into some sort of context. The DTH business in Canada has grown very rapidly. We are now with ExpressVu, the two of us together, about 400,000 subs. That makes us the fifth largest DTH in the country.
122 THE CHAIRPERSON: Which is only relevant when you consider the size of the first seven.
123 MR. STURSBERG: No, but let me carry on in the sense that BCE's view is that the total number of subs will be about 1.5 million between the two of us in 2001. Frankly, we are not as optimistic as they are, but we think that we will easily be at, between the two of us, 1.8 to 2 million subs five or six years out.
124 Now, that would make us then the second largest, of the two of us together the second largest BDU in the country after Rogers.
125 The total revenues associated with that would mean that somewhere between 75 and 80 per cent of the total satellite revenues five or six years from now will be coming from the DTH business and the other 20 per cent will be, 20 or 25 per cent will be the other kinds of businesses that Duncan has been talking about, SRDU, tracking, distance learning and so on and so forth.
126 So that this revenue stream, while it is relatively modest today when you look at CANCOM, becomes a very, very important, and indeed the dominant revenue stream. So if you are not in the DTH business and you are a satellite provider, you can see how it is going to cause you some problems going forward.
127 THE CHAIRPERSON: That brings up an interesting question. You obviously base your application or justify it because of a desire to have a more efficient development of technology platform and better use of satellite space and cost efficiencies, and you make clear throughout your application and again this morning, that these synergies are necessary for the competitive operation of the non-regulated lines of business, as well as the regulated and state, I think in response to the first set of deficiency questions, the response dated February 12 at page 4 that:
"Similar and significant efficiencies would accrue to the unregulated satellite services' business which CANCOM/Star Choice would offer if this application were approved." (As read)
128 And further up on that page you point out, which is I guess a question of timing, but what you point out is:
"In its last financial quarter, CANCOM's net income from unregulated operations exceeded its net income from regulated operations." (As read)
129 But your statement, Mr. Stursberg, is that that will be reversed in the future?
130 MR. McEWAN: Can I just start off, if I may, Madam Chair, --
131 THE CHAIRPERSON: Before you do that, that's repeated again in the second responses to deficiencies, dated February 22, where at page 2 you say that:
"Most of the opportunities which the applicants have identified for the more efficient deployment of technology platforms occur in non-regulated areas." (As read)
132 And before you respond, and I will tell you what my question is: Should the Commission take into consideration in limiting or reducing competition in the delivery of SRDU services the ability of the company's concern, should that be a major concern for the Commission in its regulatory role that to facilitate competition and effectiveness in the delivery of non-regulated businesses?
133 MR. McEWAN: I will start off answering that question, if I may, Madam Chair. The goal of the Commission, and it has been clear, is to achieve vibrant and intense competition in this sector. We believe that this can be achieved most effectively by putting in place an infrastructure that allows us the greatest possible flexibility in our pricing because with that flexibility it will be possible for our customers to achieve, by essentially bidding off the suppliers one against another, their maximum gain. And that is achieved by considering not just the individual infrastructure, but the combined infrastructure.
134 And what we are trying to do -- what we are doing is saying, yes, it is necessary to consider both the unregulated and regulated businesses because it is the unregulated businesses and their growth and their increasing profitability that allows us the flexibility to be intensely competitive in the SRDU business, and that is precisely what we are trying to do with this application.
135 THE CHAIRPERSON: Given that this application is for the merging of what the Commission had hoped would be competitive operations in a regulated sector, which presumably is our concern because we are usually told we have concerns we shouldn't even have -- I would hate to admit that we have any unregulated businesses -- have the parties tried to identify other solutions that would allow them to rationalize their operations in non-regulated business and achieve cost efficiencies without diminishing competition in the delivery of SRDU services?
136 MR. McEWAN: In fact, that was one of the things that we looked at at CANCOM first of all.
137 This is by our kind of basis to achieve the efficiencies and there was no real way that we could achieve that through let's say a contractual arrangement with Star Choice, although we did think about that in the early days. This seems to us to be a much more effective and appropriate way of doing it.
138 In that first example too, it would be hard to manage that sort of arrangement, apart from the contractual basis, without actually having intimate knowledge of one another's business lines and SRDU activities, which would be anti-competitive itself. So it was hard working it through to come up with a way to do that, but we did actually look at that in our first pass.
139 MR. STURSBERG: Can I just maybe give you an -- I think it's important to understand that the regulated and unregulated businesses are very difficult to disentangle, in the sense that they work together, both at an economic and technical level. I will give you an example.
140 We sell -- there is a thing that is sometimes called business TV and what it really means is you buy a DTH service for your business. Say, for example, you are a bank and you want to put in television sets in the waiting room so that people will have something to do while their mortgage application is being considered.
141 Now, if we sell a service like that to the bank, then they can also use the dish that they put on the roof to receive the DTH service for the purposes of having an interactive distance learning service. What that is is that when, for example, the bank wants to teach all of its employees about the new mortgage arrangements, then they have a training session where somebody comes and explains it and the signal is distributed through the satellite infrastructure to all their remote branches and all of the people who have to sell mortgages there.
142 So what happens under these circumstances is the signals can run on the same set of transponders. They run on the KU transponders. They run over the same architecture, in the sense that they run through the same satellites and the same uplinks. They can be cross-sold because when you go to the bank you say, "Well, if you would like to be able to have the business TV, plus the interactive distance learning, you can obviously sell them together and, importantly, you can also make certain kinds of savings in terms of the satellite infrastructure that run on both."
143 So, for example, if we have a pay-per-view service, people watch pay-per-view in the evenings and on the weekends. But if you have an interactive distance learning service that only happens during the daytime. So what you do is you turn down the pay-per-view channels from 9:00 to 5:00 during the day and you use that transponder time then to sell interactive distance learning.
144 So all of these things work together. These are unregulated businesses in terms of interactive distance learning and regulated business in terms of DTH, so that they run on the same infrastructure. They share the transponder time and they can be cross-sold. So in that sense it's difficult to disentangle the two when you are trying to understand the economics of the business, but it also means, which is a good thing, that unregulated services can support regulated services that are central to the Canadian broadcasting system.
145 THE CHAIRPERSON: I do understand, Mr. Stursberg, the synergies that can be achieved. What I am trying to weigh is the extent to which that should underlie a Commission's decision to reduce competition in the delivery of regulated businesses, but I do understand the possibilities here. It's a question of weighing whether it's in the public interest to consider that as a major underlying factor for allowing the reduction of competition.
146 Now, in the businesses that the Commission regulates did I hear you say, Mr. Stursberg, that by, I forget what year, this balance in the income that would accrue from regulated, as opposed to unregulated business, will change dramatically and be as much as 80 per cent of the total business?
147 MR. STURSBERG: No. What I meant was that the DTH business will become 75 to 80 per cent of the total business.
148 THE CHAIRPERSON: And the SRDU business?
149 MR. STURSBERG: Well, the SRDU business is relative -- it's going to be, as Duncan said, it's a flat business and in those circumstances -- hold on just a second.
150 THE CHAIRPERSON: And what was the year you gave me?
151 MR. STURSBERG: Well, it depends on your estimates. BCE's estimate is that the DTH business, combined us and them, will be 1.5 million by 2001.
152 THE CHAIRPERSON: What are yours?
153 MR. STURSBERG: We think probably about -- our current estimate is 1.8 to 2 million by 2007.
154 THE CHAIRPERSON: No. I am talking about the level of revenues that will accrue from the regulated business, as opposed to the unregulated businesses in the train of discussion we are having now.
155 MR. STURSBERG: Yes. The SRDU business will be a tiny piece of that. If it's -- you know, basically, it's a flat business, as Duncan says, so if you are looking out six or seven years, you know, maybe it will be $40 million and that's going to be against a base of DTH revenues that are going to be $1.5 billion, $2 billion.
156 So the SRDU business becomes a very, very small portion of the total regulated business. The DTH business, as I say, becomes the biggest component of the overall satellite services business. So when you are talking about hanging revenue streams off a common transponder infrastructure, whether it's to support the SRDU business or any other, the DTH business becomes very central to it.
157 And the DTH and SRDU businesses work very closely together, more closely together in some circumstances than the others, just because if we are already uplinking all these services for DTH, then we can sell them for SRDU purposes. So if you are already uplinking four plus one for DTH, then that gives you an opportunity to be able to sell them for SRDU, and that's where you get the really powerful economic synergies going forward into the SRDU markets.
158 THE CHAIRPERSON: Which would, in your view, not be possible if the Commission didn't accept the argument that you can't get there without this combination because the point I am making is now it would appear that we would accept this argument based on synergies accruing to the non-regulated businesses --
159 MR. McEWAN: Madam Chair, if I could -- sorry.
160 THE CHAIRPERSON: -- and shortly, I think you said, what did you say, 2001, it would be 80 per cent of the business?
161 MR. STURSBERG: The BCE estimate is 1.5 million subs by 2001. As I say, ours is not quite as optimistic as theirs. So we are looking out towards 2006, 2007 when it will be 75 to 80 per cent.
162 THE CHAIRPERSON: For that balance to have been achieved?
163 MR. STURSBERG: Right. Exactly.
164 THE CHAIRPERSON: Mr. McEwan.
165 MR. McEWAN: Yes, Madam Chair. Thank you.
166 What I think you have got to focus on in this transaction is the intensity of the competition.
167 THE CHAIRPERSON: We are not focusing on the same thing, so we just have to find --
168 MR. McEWAN: Well, no, I'm sorry. The intensity -- I want to speak about the intensity of the competition. Your concern, as you have expressed it, is that there may be a reduction in competition that comes out of this transaction as we move from three competitors down to two. What I would like to address is the nature of that competition and the intensity of it.
169 What we are hoping to do with this in the SRDU business, purely the regulated business, is increase the intensity of that competition by increasing the ability of the parties that are engaged in it to flexibly price, to be there for the long haul and to offer signals and the extension of service that is currently part of what's there for the long haul without there being a weakening of the competitive framework of the marketplace.
170 I think absent this transaction, competition is somewhat weaker than you will find with the two large integrated very dynamic competitors that are in front of you. We are going from two competitors. We just went to three. It will still come back to two. It will be an intensely fought duopoly across a range of both regulated and unregulated businesses. I think the competition will be there and it will be driven by the customers. In competition it's our SRDU customers who drive the marketplace who are going to come and say who is going to give us the best price, who is going to give us the best signals and there will be flexibility within this package within these two competitors to respond.
171 THE CHAIRPERSON: That brings me to another question. The rationale for your application is very largely the need to meet the competition expected from a very particular party, that is BSSI, which just recently entered the SRDU market. At your supplementary brief, page 2, the second paragraph, you say:
"Approval of this application is necessary to ensure that there will be an entity, the combined CANCOM/Star Choice, with the resources required to engage in long term, sustainable competition in the DTH and SRDU sectors against BSSI." (As read)
172 At page 5 of the first letter, a response to deficiency and that's the one dated February 12, 1999, you talk about a significantly imbalanced competitive landscape if the Commission were not to approve this.
173 So it seems obvious that the assumptions made are -- or the rationale put forward is very much based on the particular competitor, integrated competitor, which everybody likes to remind us has lots of money and will efficiently compete in the market. You see BSSI as a formidable, well-financed competition for both CANCOM and Star Choice.
174 BSSI was not yet granted its SRDU licence when you made these statements. I don't expect that your views have changed at all now that it has one.
175 MR. McEWAN: No, that is correct.
176 THE CHAIRPERSON: That its integrated business, which we don't have a picture of there, but I guess that's their plan?
177 MR. McEWAN: The chart on that side indicates the business lines that they are in and the business lines that --
178 THE CHAIRPERSON: Oh, yes, and it's attached to --
179 Should the Commission again concern itself with the threat of BSSI in both the regulated and non-regulated businesses that it carries as it determines the appropriateness of allowing the merging of the two companies? In other words, if it were just SRDU --
180 MR. McEWAN: Well, Bell Satellite forecasted that it would have -- its business plan forecasts 3.4 million channel subscribers by year four of its operation. So they are certainly intent on getting into the SRDU business in a significant way.
181 The question as to whether to consider the unregulated and the regulated businesses of both parties still comes back to this issue of our ability to increase flexibly price and be more intensely competitive if we are matched and can make the same use of transponders for both the DTH and the learning and SRDU business.
182 So I guess that's both a yes and a no answer, but we are looking at an integrated satellite company on both sides of the fence, SRDU being one of a range of services that is offered, DTH being another of a range. Those two are regulated. All the others are unregulated, but it's the combination that allows us to feel confident that this will be an intense competition over the long haul.
183 MR. STURSBERG: Can I just give you the example again to tie the DTH and SRDU businesses together economically. If we just take for purposes of argument the number that I used before. Say, for example, 80 per cent of your revenue is coming from DTH and 20 per cent from some other place and of that, I don't know, say the whole thing, the whole other is coming from SRDU and a transponder costs a dollar.
184 As I mentioned, you can run -- so we uplink American four plus one for our purpose, DTH. You can also sell it for SRDU. So I have a dollar in cost.
185 If Duncan has only one line of business, which is the SRDU business, he has to find a dollar in revenue from the SRDU. But if I can cover 80 cents of that dollar in transponders from my DTH business, I can offer the SRDU part for 20 cents.
186 So, if I am not in the DTH business and that's fundamental to it, then I think we are going to find Duncan in a situation where he can't meet those kinds of economic efficiencies.
187 THE CHAIRPERSON: Has CANCOM ever considered applying for a DTH licence?
188 MR. McEWAN: Well, in fact, we did. We were a part of the original ExpressVu consortium, but were unable to stay pari passu with our investment as the service rolled out. We were not a majority player, so we were not able to get the strategic benefits we needed and we did in fact exit, but we were part of ExpressVu to start.
189 CANCOM has been in the DTH business, as I mentioned in my oral, from the start.
190 THE CHAIRPERSON: But CANCOM itself has never applied, if I recall.
191 MR. McEWAN: CANCOM has never applied.
192 THE CHAIRPERSON: Now, if we just focus on the SRDU business and if we explore the circumstances surrounding your description of your application as a competitive response to BSSI in the SRDU business, is it -- considering what you describe as the SRDU business being a minor part of the revenues, your view would be that your application is only based in a minor way on the fact that added to the services that BSSI is able to provide in an SRDU licence?
193 MR. McEWAN: For CANCOM the SRDU business is quite important. It's still a major, major part of our revenue stream. So let me just emphasize that although in the long haul with these integrated companies it may become a smaller part of the revenues at the moment, it's still a sizeable part of our business. That again goes to part of the challenge that I think is out there, which is that over time while for us it will remain an important part of our business landscape, we do have a fixed cost.
194 We have little flexibility and we would be the ones that might face problems in that sooner than others, which means that there will be I think a weakening of competition since suppose we were to start to withdraw from that market, Star Choice would be left in that market unable itself to achieve quite the same efficiencies off all the other businesses because it would be like us a somewhat more limited business, and we are really looking for a different arrangement where there is parity across the board.
195 I am not sure I answered your question direct.
196 THE CHAIRPERSON: I am just looking at the threat of BSSI in the current circumstances and the extent to which that is a serious threat, at least in the short to medium term because CANCOM is a longstanding SRDU operator. It has close ties with its affiliates. How long would it take for BSSI to make significant inroads in the SRDU market?
197 MR. McEWAN: Well, I think that's, no matter what we are looking at, a competitive environment. I don't want to call or try and forecast what that competitor will do.
198 Our intention, collectively and individually, is to maintain as much of the market as we possibly can. So I am reluctant to cede any of it to them because we are intense competitors at the moment.
199 But I think that they can incrementally price, which we cannot, because they have this DTH service that they are delivering anyway. They move to a new high power NIMIQ satellite shortly which will give them tremendous capacity and power abilities.
200 So we don't underestimate don't underestimate Bell's ability once it is determined to get into the marketplace to try and dominate that marketplace. They have declared, both from Mr. Monty and Mr. Good that they intend this to be a major business line of the company, and with that kind of a stake in the ground for its success, I think there is a very good chance they will be a very serious competitor and it will be both strategic and aggressive and it will be strategic across all their business lines and they will use their own synergies and their own integration to its maximum benefit.
201 THE CHAIRPERSON: There will be some serious drawbacks for some time, even though CANCOM, and my understanding from the application is that Star Choice is binding itself to do the same, will allow contracts to be exited, long-term contracts, but at a price. That is the differential between what would have been paid if you had entered into a short-term contract. So that can be a disincentive for changing a supplier initially, plus the incumbency of CANCOM and there is also a problem of equipment because a change from CANCOM or Star Choice would involve a change in DVC compression technology and, therefore, the need for different equipment.
202 These would have -- there is a possibility too that for some customers the signals that would be offered by the competitor, BSSI, would be different, which is not appealing to cable operators because it is not appealing to their subscribers. So there are many disincentives at least on the short term, or possibly medium term, to BSSI being a major competitive threat in the SRDU business.
203 I saw you writing furiously, Mr. McEwan, so you are going to set me straight.
204 MR. McEWAN: Well, you covered four different elements there, the contracts --
205 THE CHAIRPERSON: Well, all the disincentives. If you think of more you can provide them to me.
206 MR. McEWAN: No, these are perfect questions. The contracts, the signals offered, perhaps I could deal with them one by one.
207 The contracts, we do have bulk buying agreements with a large number of cable operators. The vast majority of those are coming to the end in the next one or two years. It's the end of those contracts that will provide a potent time for competitors to come into the marketplace because, obviously, when a cable customer or any BDU customer sees the end of a contract coming, they are going to shop around for the best possible price, the best possible service, the best possible signal mix and they will be the ones initiating the overtures to the various competitors in the marketplace.
208 The contracts themselves, they can be exited but, as you mentioned, what's required there is that people pay out the differential for the balance of the term. Since we are nearing the back end of these contracts, that differential becomes increasingly small and that's offset by a tactic that all of us use in the marketplace, which is to provide free periods.
209 So when you are trying to win back a customer from a TRDU, a terrestrial, which is something that we have had to face, or when terrestrial operators or, in fact, other SRDUs try and win our customers, one of the offsets that they provide is a period of grace that is like a free preview period for a specialty channel which more than offsets the differential, or you can actually -- as a provider you could buy out that contract yourself. You could provide the BDU with an offsetting amount of money in some other fashion.
210 So we see that actively being overcome in the marketplace and these contracts are up. So on the contract issue, I think that barrier, if it was ever a barrier, is diminishing and there are offsetting circumstances.
211 In terms of the equipment, all of us operate in DVC. There are decoders that are required and again the approach to decoders is something that is up to each individual operator. We have to, when we go in, figure out ways of making it attractive for customers to take the decoders, as will our competitors. It is really more a problem for the provider than it is for our customers because they put us in the situation of looking to see how we will make it attractive for them to come to our signals.
212 Lastly, in terms of signals offered, NIMIQ is launching and there is no question that once that extra capacity comes in, there will be a large amount of additional signals in all likelihood applied for an offered. All of us need to compete in the DTH business with the broadest possible number of signals. That's how you win customers and there will be more and more signals up there.
213 Richard just wrote a note of a very important example of the way this has worked out. We have lost the contract. We were bidding on the contract, but have lost the contract to take on TVA, as you may be aware.
214 THE CHAIRPERSON: I knew this would come up.
215 MR. McEWAN: Well then, I will wait until it comes up later on.
216 THE CHAIRPERSON: No, no, go ahead. It would have been really a failure of this panel not to raise it and then it would be these people need to merge if they can't even bring that up.
217 MR. McEWAN: I'll wait for a specific question.
218 THE CHAIRPERSON: Do you have details about -- when you say it's the back end of these contracts and that financial penalties, so to speak, of getting out of long-term contracts, do you have more details about what do you mean by that? How many contracts, how much life left? Have you ever given that level of details to the Commission?
219 MR. McEWAN: No, we have not. I believe, though, but I would need to turn to both Stephen Whitehead and somebody who is in the audience to get the precise details, but 60 to 70 per cent of our contracts come up in the next one or two years. Am I correct, Stephen?
220 MR. WHITEHEAD: I don't have that detailed information. I think we could get that for you though.
221 THE CHAIRPERSON: And it would be interesting to know and perhaps by the reply you can give us some range of how many are still extent?
222 MR. McEWAN: I am getting nods from my colleagues in the audience, but we will provide you with an undertaking to give you that.
223 THE CHAIRPERSON: And that have a long term to them, rather than just the general statement.
224 You mentioned TRDUs. At page 3 of the first response to the deficiencies, in talking about the corporate threat -- the competitive threat rather from the BSSI, you talk that BSSI has a lot of advantages too and that they have corporate affiliates, that Bell ExpressVu operates many TRDUs and Bell ExpressVu may have preferred access to this customer base. You are talking here about people who use wire line to transfer.
225 MR. McEWAN: That's correct.
226 THE CHAIRPERSON: I guess that's to be combined with your argument, if I recall, about if you look at the receipt of channels by subscribers you made an accounting of how many of these channels are delivered by a SRDU means. Am I right?
227 MR. McEWAN: That's right. Basically, about 5 per cent of the channel delivery market in this country is SRDU and the balance is off air and terrestrial.
228 THE CHAIRPERSON: And it would be microwave and some wire line, I suppose?
229 MR. McEWAN: That's right, microwave, fibre optic.
230 THE CHAIRPERSON: And the terrestrial would take in the microwave as well.
231 You also cite in your application the threat of more competition if the Commission were to have allowed Class 2 and 3 BDUs to receive their signals from U.S. providers. Now that the Commission's determination is out not authorizing such receipt what's the level of impact of the Commission's determination on the impact on what you describe as a threat of undue competition in the SRDU business because you cited at length, of course, BSSI's advantages, but also the competition that would come if the Commission had determined to authorize this receipt? Is that making your situation better?
232 MR. McEWAN: Well, I think what we are very reassured about --
233 THE CHAIRPERSON: Or worse by the Commission finding that perhaps there is not as much competition as you thought.
234 MR. McEWAN: It's better. There were many arguments that we presented, as you know. Some of them jurisdictional, some of them to do with the merits of the case itself. The Commission developed the policy framework. The policy framework was implemented with 98-60. It's the framework for competition in this marketplace. It really can apply to all aspects of signal delivery and I think it's a very solid and now implemented policy that can stand for the long haul and will see competition and you will have achieved your objectives in this very flat marketplace.
235 So we are reassured by it and think that it reaffirms the policy framework.
236 THE CHAIRPERSON: Given that BSSI has only been licensed to provide SRDU services and given that both your licences -- that the term of your licence expires in August of 2000, is this application not premature, so that at that time it would be easier for the Commission to weigh whether 98-60 and its desire to achieve competition requires to be tempered and this merger approved because there is indeed signs of undue competition or threatening competition, that in fact I guess your argument at the end of the day is if you don't allow us to reduce competition today then there won't be any next week?
237 MR. McEWAN: Not quite that dramatic, but --
238 THE CHAIRPERSON: I thought I would perk you up here.
239 MR. McEWAN: We actually have a very good corporate reason. I mean the reason the timing is now is from a corporate perspective this is the perfect time and may be the only time when we can contemplate bringing these two companies together.
240 From the CANCOM perspective, we need new business lines. Speaking corporately now as the CEO of CANCOM, we are determined to be a satellite services provider and we have terrific expertise in our operations. We understand satellites extremely well, but we are not that big.
241 We have been looking around for ways to grow and this is the logical way to grow, but there is only a short window in here when Star Choice still is uncertain enough in the minds of the marketplace that we can get it at a price that frankly we can afford, because there is no question that these DTH operators are going to be successful. Their rapid growth indicates that success. They need financing. If they get that financing in place without having access to our cash flow, which is what we really bring to the table, as well as the synergies, we will have missed the window and CANCOM will not be able to get into this business. So we think strategically we have to do it now, even though for policy reasons it might be preferable to have waited a while. There wouldn't be an application at that time.
242 The other point I make is obviously a year from now this is all in front of you again. We will be applying for renewal, so there is still an opportunity to review the success, although hopefully after the merger has gone through, but there is still a review opportunity.
243 THE CHAIRPERSON: But you understand my point was that there would be an opportunity at that time for the Commission to look at the market and what's happened because you were fairly precise by filing this application based on the grounds that BSSI would be undue competition before it was licensed.
244 MR. McEWAN: We could see the writing on the wall I think.
245 THE CHAIRPERSON: This -- what we have before us is a share exchange agreement. However, in various places in your application there are messages as to what could happen if this were approved after the share agreement. For example, at page 2 of the application you talk about approval of the share exchange being -- establishing CANCOM/Star Choice as a strong satellite based communications company.
246 On page 5, the answer to No. 6, the last sentence:
"CANCOM currently intends to effect an amalgamation or to otherwise integrate operations with Star Choice/CANCOM Communications Inc. and Star Choice Television Networking. Shortly, following approval of the transaction no additional financing will be required to complete the proposed transaction." (As read)
247 Do you intend to keep both licences after this merger?
248 MR. McEWAN: Only to the extent that we need them until we have amalgamated the companies from a corporate perspective and then we would turn back whichever licence popped out at the back end of that process. We intend to amalgamate and reduce to a single licence.
249 THE CHAIRPERSON: And how would you likely effect that amalgamation? Of course, as a regulator I am looking at your statement at page 6 of your supplementary brief, where you say that such an amalgamation could be completed without any additional approvals of the Commission.
250 MR. McEWAN: We are still examining the manner in which we are going to amalgamate. Part of the difficulty we face in being precise about this is that we are still competing with each other and we are being quite scrupulous in keeping the detailed business affairs of the two companies apart. There are certain elements that we need to review further before we can be precise about how we are going to amalgamate. I am sorry, we are still working through that process.
251 THE CHAIRPERSON: And you are not in a position to --
252 MR. McEWAN: At this time we are not.
253 THE CHAIRPERSON: But the aim from the way your application is justified, the aim would be to integrate all the lines of business?
254 MR. McEWAN: We intend to become a single, integrated operation which will be CANCOM. The actual corporate manner in which we do that is simply the uncertainty. It's the legal manner in which we manoeuvre the corporate arrangements, but the upshot will be a single integrated company.
255 THE CHAIRPERSON: And it's not impossible, is it, that -- or let me rephrase this. Is it possible that in this amalgamation without requiring prior Commission approval there could be a change in the relationship between the corporations at the level of ownership of owning interest?
256 MR. WHITEHEAD: Madam Chair, maybe I could respond to that. The statement in the supplementary brief about affecting the amalgamation without further approval from the Commission -
257 THE CHAIRPERSON: No, I realize that you will come, if you have to, but I am asking you whether -- I am sure you will. I am asking you whether at that time there could be an increase or a difference in the ratio of the shareholdings that would not reach levels requiring approval, but would nevertheless alter the current ratios?
258 MR. McEWAN: None of that is contemplated in what we have in front of you. None of that is --
259 THE CHAIRPERSON: But it's not impossible?
260 MR. McEWAN: It's not impossible, but it's not very likely.
261 THE CHAIRPERSON: You have not agreed that such an amalgamation would reflect exactly the ratios that are reflected in the share change agreement?
262 MR. WHITEHEAD: Madam Chair, the reference to amalgamation in the supplementary brief contemplated a vertical short form amalgamation where all that happens is that the subsidiary is amalgamated into the parent, so there is no change. That was what was contemplated.
263 THE CHAIRPERSON: That's what is contemplated, but it's not -- what I gather from your response is that it may not be the way it is done.
264 MR. McEWAN: It's very like to be the way it's done.
265 THE CHAIRPERSON: It's likely.
266 MR. McEWAN: It's very likely.
267 THE CHAIRPERSON: And so there is a possibility that it would be done differently and change the ratios without -- for example, increase Shaw's participation without requiring approval?
268 MR. STURSBERG: Can I help with this? The ratios of share ownership won't change. The ratios of share ownership are dictated by the share exchange ratios.
269 So what happens is that for every 4.8 Star Choice shares, the Star Choice shareholders get one CANCOM share. So the positions as they fall out are just a result truly of the arithmetic of the 4.8 to one share exchange ratios. That's how they come to be that way.
270 THE CHAIRPERSON: If that is indeed -- I was just postulating the possibility that you would have a different agreement at that time.
271 MR. STURSBERG: No, no.
272 MR. McEWAN: The agreement between the two companies, which is the one that we have our shareholders vote on and, therefore, we are bound by is the one that is in front of you.
273 THE CHAIRPERSON: So it would retain the same --
274 MR. STURSBERG: That cannot change regardless of the mechanics of the amalgamation. The share exchange ratios can't change and, therefore, the ownership positions of the various parties can't change. That's what indeed all the various shareholder votes were on and the valuations were on and all that.
275 MR. McEWAN: They are fixed.
276 THE CHAIRPERSON: Now, at page 4 of your supplementary brief there is a statement there that in the first paragraph, the -- towards the end, that there was a possibility of warrants being exercised by Shaw. Oh no, I think it's in the application, not the supplementary brief, at page 4. On the top, under "Warrants".
"Shaw would hold warrants to acquire 350,619 common shares of CANCOM following the transaction. The exercise of these warrants will be subject to CRTC approval if required." (As read)
277 Is that taken into consideration in the ratios that we are looking at or could it change the ratios if the warrants were exercised?
278 MR. NEILL: It's taken into consideration in the ratios that were given to you in the oral presentation. That's what is known as a fully diluted calculation, assuming the warrants are exercised.
279 THE CHAIRPERSON: So that it would take a completely different arrangement between the parties than the one before us for any of these ratios to change, which is not impossible of course in the future.
280 MR. McEWAN: That is correct. We have had our shareholder votes and we are committed to this course of action.
281 THE CHAIRPERSON: Now, let's talk about operational efficiencies in the regulated business. When you were asked to identify these efficiencies you pointed to the desirability of eliminating duplicate signal carriage, the need to reduce duplicative transponder cost and to rationalize your operations with regard to the frequency band use.
282 We have discussed briefly this morning and I think you addressed this in your presentation as to how you -- well, it's mostly in the reply.
283 I don't want to prejudice the intervention reply part of this process, but the impact of some of the changes that may occur as a result of the merger between Star Choice and CANCOM will also bring with it some technical changes possible because the technology used is not the same and, therefore, cost to subscribers.
284 Now, I understand from paragraph 35 particularly, in your reply, and 76, that you will ensure that the need for the change of decoder as between your subscribers will be compensated for.
285 MR. McEWAN: That is correct.
286 THE CHAIRPERSON: And in this compensation you say that you will take into account that decoders have a five year service life. So that means that someone who has a decoder that is older than that would not be compensated. Is that how I understand it?
287 MR. McEWAN: The policy we are putting in place is the one we describe here.
288 On the other hand, if we don't handle this well, we will lose those customers. So while we are not going to --
289 THE CHAIRPERSON: Yes, except that the customer is going to have to get a new decoder if he goes to the competitor in any event?
290 MR. McEWAN: That's right, but again, if we mishandle that, by which I mean that we would be flexible in our approach to that for customers who are outside the five-year window, but we are not putting it in as a commitment or a policy right now.
291 THE CHAIRPERSON: I guess as flexible as your competitor. Right?
292 MR. McEWAN: As flexible as the competitor.
293 MR. NEILL: And then you should know, Madam Chair, that currently that's the case. In order for somebody -- for us to get a customer from CANCOM, they have to go on a different technology and we have to deal with that competitively, as do they. So it will be the same issue.
294 THE CHAIRPERSON: We will hear, obviously, from the intervenors later as to what their view of this is.
295 Now, with regard to signals, I guess that's the concern that if there is a merger of the two the signals provided may not be the same and that would be disadvantageous to the cable operator who let's say chose to stay with you rather than to go to ExpressVu, but would be disadvantaged at the signal level.
296 There are mixed messages about what your intentions are with regard to signals. You talk about -- I think it is in the second efficiency response about the elimination of duplicate signal carriage, but in your reply, I think it's paragraph 41, yes, you say:
"The applicants currently intend, with one exception, --" (As read)
297 Which we have already talked about, with CFTM or TVA:
"-- with one exception to continue distributing all of the signals which they currently distribute. Therefore, there would not be a disadvantage." (As read)
298 However, I think it is at paragraph 77, you speak of in response to the CCTA intervention, and again we will rediscuss that at the intervention stage, that:
"Any transition plans relating to the elimination of duplicative signals will not be formulated without substantial input from the applicant's SRDU's customers." (As read)
299 I find those a bit contradictory, in that you say you won't drop any signals and then if you do you will discuss it before with your customers.
300 MR. McEWAN: There are actually two different things, Madam Chair.
301 THE CHAIRPERSON: Oh, sorry.
302 MR. McEWAN: We are both committed to maintaining our existing signal lineup. What we are really talking about is where the same signals are distributed in two different technologies. We then may migrate to a single platform to achieve the efficiency we are talking about.
303 THE CHAIRPERSON: The same signal, but delivered through a different DVC technology.
304 MR. McEWAN: Exactly, and there are six signals that are currently overlapped between the two providers.
305 THE CHAIRPERSON: And what indeed would be done in that situation?
306 MR. McEWAN: Well, we will examine how many customers each of us has on the signals. Again, we don't know. We have not disclosed our business to Star Choice or them to us and determined what the best business basis would be to do it on and then talk to customers about how they would feel about this and what arrangements they would need to see before they would consent to that. So, it will be not an imposition, but something that we do discuss with our customers.
307 THE CHAIRPERSON: Now, to go back to the equipment, if you have equipment that is five years old and that's the life of it, is that a depreciation concept or does it stop operating after five years?
308 MR. McEWAN: No, it's a depreciation concept.
309 THE CHAIRPERSON: So the customer who have a five-year old one and doesn't want to change technology at his expense or her expense, I suppose, would have to bear the cost?
--- Pause / Pause
310 MR. McEWAN: We just had a little discussion here on the panel, I'm sorry. Richard's point was not necessarily because in fact it goes back to the competitive point. We will have to manage that in an appropriate way or face a disgruntled customer and there will be again the discipline in the marketplace. If we fumble that there will be a problem.
311 The number of signals that we are talking about is not that great. It's -- as I said, the six, one of which is TVA, so the net is five of the signals that we both offer jointly and we will have to investigate carefully with our customers how to do that, but it is a technology switchout, not a signal switchout.
312 MR. STURSBERG: Sorry, just to add one thing. This is exactly the point that Brian was making when we found that when we are in these businesses if we ask people to move off the platform they are on with CANCOM now and come to our platform, they say, "Well, fine, but what about the decoders?"
313 So we have had to make arrangements that are satisfactory to them before they are prepared to move. They say exactly the same thing will happen, as Duncan says, because what they will say is, "Well, you want me to move over. Fine. I'll go and have a talk with ExpressVu."
314 THE CHAIRPERSON: Yes. The difference in price in contracts, for example, between the two of you would also be taken into consideration I gather from your reply, that you would not penalize someone if the rate cards -- and there I guess -- I suppose there's some confidentiality between the two parties at this stage as to what those rates are.
315 MR. McEWAN: We actually don't know their prices.
316 MR. STURSBERG: I don't --
317 THE CHAIRPERSON: But you are binding yourself to compensate. There is a difference.
318 MR. STURSBERG: Yes, we are certainly binding ourselves to compensate and the other thing that we are binding ourselves to is, obviously, that the contract that had been signed with Star Choice will be respected in terms of all of their conditions, including price.
319 But for the reasons that Duncan has mentioned, because of the competition policy reasons, we don't exchange that information.
320 THE CHAIRPERSON: Yes. That's addressed in your reply at paragraph 44. So I guess the fact that you are prepared to bind yourself to that, not knowing what the real rates are, is a reflection of the already good trust between the two of you because you don't know how --
321 MR. McEWAN: What we are doing is we are binding people to a compensation package, but we are saying we will honour the existing contracts.
322 THE CHAIRPERSON: If there is a rate differential as between the two.
323 I think this would be a good time to take a 15-minute break and we will be back. Thank you.
--- Recess at 1045 / Suspension à 1045
--- Upon resuming at 1105 / Reprise à 1105
324 THE CHAIRPERSON: Order please.
325 Structural separation. I am sure I will be thoroughly confused before we get through this, so why don't you just accept those conditions of licence and we will go home.
326 So here's for confusion. If we go back, structural separation requirements between Shaw's BDU cable operations were first imposed when it was licensed to operate a DTH BDU undertaking in competition with cable in 1997 and then some structural separation requirements were also imposed on Star Choice when Shaw merged its DTH operations with Star Choice also in 1997 and they were imposed on Star Choice when it was granted an SRDU licence.
327 They were imposed largely in recognition of Shaw's strong position as an incumbent cable operator and in the consequent potential ability of Shaw to lessen competition in the provision of service.
328 If I look at the supplementary brief at page 16, and I think that's also in other parts of the application, there is a recognition of the goal. In the middle paragraph when you talk about original condition of licence and what they were intended to do and why they don't do what they were intended to do, you nevertheless acknowledge that it doesn't in any event accomplish what is understood to be the true intention of the condition to ensure separation between the SRDU/DTH business on the one hand, and Shaw and its core cable business on the other.
329 So I guess we can agree that that was the underlying intention of the structural separation was to recognize -- in recognition of the strong position of Shaw in the cable business.
330 In your application in the supplementary brief at page 14, you state that in your view a requirement of a condition of licence prohibiting the giving of undue preference is likely sufficient in going forward to deal with these concerns, but you nevertheless suggest amendments to the conditions imposed on Star Choice and there appears to be what is recognition in the application that they should also be imposed on CANCOM. But somewhat at the eleventh hour, but for reasons that I am sure you will expand on, in your reply you take the position at paragraph 19 and 102 that you don't think any of these conditions of licence, amended or not, should be attached to the CANCOM licence and they should be removed from the Star Choice licence.
331 In light of the fact that the conditions were imposed to ensure separation between SRDU/DTH and Shaw's core cable business, how do you justify your position and your statement in the supplementary brief and again in the reply -- I will read it to you, at page 15, that:
"If they were to be applied to these companies and not to BSSI there would be a real risk, --" (As read)
332 The second paragraph:
"-- of creating a competitive imbalance if detailed conditions of licence affecting efficient operation and management are imposed on one competitor but not the other." (As read)
333 Why would it be such a competitive imbalance if the underlying purpose of the condition was a regulatory concern that there be separation between the incumbent's core business operation and other competitive operations? What has changed so dramatically since then, when we consider that Shaw will have at minimum 36.6 per cent?
334 And in light of the fact, without getting into it, we all know that there is an application before the Commission where the percentage of voting shares and, therefore, of the capacity to influence in CANCOM would be increased if that other application were approved, possibly without the need for regulatory oversight. I suppose at the time this could be addressed, but even at 36.6 per cent plus another major cable operator at 11 per cent why would these conditions no longer be necessary?
335 MR. McEWAN: Madam Chair, an underlying theme of this whole application of ours is what we call competitive parity and this structural separation issue is an area that Richard is going to concentrate on.
336 THE CHAIRPERSON: But there is no parity because the circumstances are different. Just as you say that BSSI has more money than you, they say you have more cable subscribers than you -- they have fewer rather, cable subscribers, than you, so there is really no parity. It's a strange -- if we start with the premise that it's the cable operation and the strength of the incumbent in that business that raises the problem, why is -- where do you see parity when you begin with the base of the pyramid that is different?
337 MR. STURSBERG: In 1997, when you applied the structural separation conditions, as you rightly point out, the concerns that the Commission had at the time was whether there would or would not be some inhibition on the competitiveness and the aggressiveness of the DTH business run by Star Choice in terms of seeking out cable subscribers. I guess the concern was, well, if you have a big cable company who owns a significant and indeed a controlling position in Star Choice, would they then inhibit it in some way from seeking out cable customers? That was the concern that you had in 1997.
338 So where are we today? Is there any evidence whatsoever that the participation of Shaw and Star Choice has inhibited Star Choice's ability to get cable customers?
339 I think the first point to note is that --
340 THE CHAIRPERSON: Maybe the conditions worked.
341 MR. STURSBERG: Well, let me come to that because I would like to talk about what's happened and why.
342 We now have over 200,000 subscribers. We are at about parity with respect to ExpressVu. We have done as well as ExpressVu has. If we were conflicted you would think we would do less well.
343 When we look at the base of subscribers that we take, interestingly, we do better in the west than we do in Ontario and we do best, curiously, in Alberta. We have gone aggressively and we are going more aggressively after cable subscribers and we will continue to do that.
344 But I think the reason why we have done well has really got nothing to do with the structural separation arrangements. It has to do with the fact that the only practical way to run this business is to run it flat out. If we found ourselves in a situation where we were falling behind ExpressVu, then it would be very damaging to our business because business is subject to momentum effect, such that we sell through dealer networks.
345 If the dealers think it is easier to sell ExpressVu, and 70 per cent of our dealer network sells both, if they think it's easier to sell ExpressVu because they are doing better, then that's where they are going to go and that would have significant negative financial consequences.
346 So it is very, very important for us to keep pace with ExpressVu, and apart from that even if you wanted to be able to somehow or other manipulate the sales, it is impossible to do. The reason it is impossible to do is because the point of contact with the customers is Radio Shack, it's Sears, it's Future Shop, it's Canadian Tire, that's who sells. So what you would have to do is you would have to convince Radio Shack and Canadian Tire, well, when you sell, just sell a little bit over here, but don't go over there. And we'd like you to sell in this territory, but not in that territory and they'd throw you out of the store. They'd say that's impossible. We couldn't possibly deal with those kinds of arrangements. They just wouldn't work as a practical matter.
347 So our general view is that these kinds of structural separations are, frankly, unnecessary. That this company has, it must and it is impractical for it not to compete very, very aggressively with the cable companies.
348 On the issue of competitive parity, the only point we make is this, that when Bell was asking for the SRDU licence we said to the Commission, well look, they control Telesat and traditionally one of the reasons why you put in structural separations is precisely to avoid one part of a business giving an advantage to itself.
349 In this case they control Telesat. We buy all of our facilities from Telesat. There is nobody else that we buy satellite transponders from. They are fundamental to our business.
350 We said, okay, sure, SRDU -- they should get into it, absolutely. But please make sure that you impose a similar separation on the relationship between Telesat and ExpressVu for the reasons I have mentioned.
351 It is interesting to note that of the six persons on BSSI's board of directors, four of them, Alain Gour, Larry Boisvert, William Anderson and Jean Monty, all sit on the Telesat board. In your decision you said, no, we don't think that's appropriate, so we said well, fine.
352 But if it's unnecessary to impose the structural separation conditions on us and they are not imposed on Bell, then we say to you now we think the better course is and the simpler course is just basically to say, well, we don't need any structural separations.
353 I make one last point, which is the issue that underlay this is in large measure is it possible to provide an undue preference of one variety or another? We think as a practical matter your undue preference tests will deal with that problem.
354 THE CHAIRPERSON: With regard to Telesat, is it your view that it is different, that there is a difference because Telesat is regulated under the Telecom Act and tariffed?
355 MR. STURSBERG: Well, I think that the --
356 THE CHAIRPERSON: And subject to various regulatory requirements.
357 MR. STURSBERG: Well, yes, but, you know, we are too. But I think that the --
358 THE CHAIRPERSON: Well, that's exactly what these conditions of licence are for. It is not necessarily the same rules, but it is to alleviate concerns.
359 Interestingly, if I look at the licensing decision, 98-172, which gave Star Choice its SRDU licence, yes, at paragraph 8:
"CANCOM itself was reported to have expressed to the Commission the concern that with the Star Choice DTH distribution undertaking acting as a retailer in competition with BDUs and Star Choice SRDU acting as a wholesaler selling signals to BDU competitors, this degree of vertical integration would lessen competition generally.
CANCOM also argued this situation would reduce its own ability to compete." (As read)
360 So that was CANCOM's recognition of the need for the structural separation based on the incumbency of the cable operation.
361 Maybe Mr. McEwan can tell me -- well, that's at paragraph 8 in 98-172, which is the Commission's report or view or note of CANCOM's position vis-à-vis the need for structural separation requirements on Star Choice. Why would they not be necessary now to protect BSSI in the same manner that CANCOM thought they were necessary to protect it?
362 MR. STURSBERG: Can I -- I think there are two issues here, one of which is whether Star Choice will compete effectively against the cable industry, that's one question and that's what we just talked about.
363 The second question is whether in offering both a DTH and an SRDU service it will provide an undue advantage to its DTH service against small cable companies, which I believe was the other part of your concern.
364 THE CHAIRPERSON: And presumably SRDU as well.
365 MR. STURSBERG: That's what I mean, so that it would say, I tell you what, I will give myself a better rate on four plus one signals in my DTH business than I would give to a small cable company and, therefore, disadvantage them. I would provide myself as a DTH supplier an undue preference. I think that was your other concern.
366 THE CHAIRPERSON: But do you think that the rate is the only concern that there may be? I think the Commission has expressed other concerns, such as the flow of information, the entire relationship down to program undertakings as well.
367 MR. STURSBERG: And the DTH/SRDU problem also in terms of flow of information, as I understand it the concern was, well, we might in the process of doing the SRDU business get information about how small cable companies were operating that we could then use to advantage our DTH business.
368 Now, as far as that aspect of it is concerned I think, first of all, on the pricing matter the undue preference test obtains.
369 Secondly, that if we were to actually do that, if we were to take the information that we get from our SRDU customers and use it back against them, I am not sure that we would be in business for very long.
370 THE CHAIRPERSON: But, Mr. Stursberg, one of the concerns that you put forward to not have these conditions of licence is that they are damaging to your desire to have synergies and an integrated business. So isn't that the flip side of our concern?
371 You say don't impose those conditions because it will prevent us from having this integrated relationship and now you are telling me the integrated relationship would not help anything in any event. So maybe you should just be two different companies.
372 MR. STURSBERG: Well, the way the structural separation conditions are drafted now --
373 THE CHAIRPERSON: Well, we can get to that. I am talking about whether there should be any.
374 MR. STURSBERG: That's fair, but I just want to make the point that there is a whole series of different kinds of synergies that we would like to be able to get. So, for example, if we have a man or a woman that was an engineer sitting in the network control centre, we don't want to have one engineer to run the network for DTH and one engineer to do the SRDU. That's what the conditions would currently require now. So we want to be able to get all those efficiencies.
375 As far as the question about the relationship between the SRDU arm and the DTH arm are concerned, there will still be separate staff dealing with marketing and sales of those two products. The reason for that is, as I mentioned earlier, the DTH marketing and sales effort goes through retail chains. It goes through Radio Shack. That's who sells. You come in the door, you meet the Radio Shack employee, he sells you the service.
376 In the case of SRDU, the sales force is actually internal to the company and the salesman goes out, meets the cable company and makes the sale. It's a company-to-company sale. It's a completely different set of arrangements.
377 We will not bring those two together because they are completely different. One is retail. One is wholesale and they require very different kinds of sales staffs.
378 So what we want to be able to do -- so that wouldn't happen even if you abolished all the structural separations. We would still have separate sales forces and those separate sales forces would be the only people that actually know what the sales and marketing information was like.
379 If you want, we would be perfectly happy because we think it would be good business practice in any event to say, well, you know, if we are dealing -- we will treat the sales force for the SRDU business as a CSG, as they do in the inner exchange in the long distance business and say that's fine. All that information must never be passed to the retail marketing side.
380 We would be perfectly comfortable with that because we would be very unwise to do anything other than that. It would be very poor practice.
381 THE CHAIRPERSON: Mr. Stursberg, twice now you have raised this issue that the marketing is done by Radio Shack and Canadian Tire. That's not necessarily going to be the case forever. There could be different ways of marketing DTH, which I would suggest may in fact work better. You don't want a condition of licence that says "thou shalt not market themselves".
382 MR. STURSBERG: Well, even --
383 THE CHAIRPERSON: That is what you are doing now, but it doesn't mean that it is the only way of marketing DTH.
384 MR. STURSBERG: No, but I am perfectly happy to take a condition of licence in which we would say the sales force for selling SRDU must be separate from the sales force for selling retail DTH. The reason for that is this, you may be right. Maybe what will happen is we will retreat from selling through retail chains or supplemented by doing outbound telemarketing or whatever it would be, but no matter what we do it is still going to be a completely different sell. One is to a retail customer and the other is a business-to-business sale.
385 The sales cycles are totally different. The nature of the relationship is totally different. The amounts of money involved are totally different. We will never, ever, ever have the same sales force for the retail side as we will for the wholesale side, no matter how the retail side evolves.
386 THE CHAIRPERSON: But that doesn't mean information can't be passed on.
387 MR. STURSBERG: That's what I say, I am perfectly happy to take that, but by the same token, in fairness, BSSI has exactly the same problem. They don't have the same problem with respect to cable, but they have the same problem by being conflicted between the SRDU and DTH markets and they have no requirements there with respect to separations or separate sales forces.
388 But as I say, I think we would be very unwise as a practical and commercial matter in terms of how we deal with our customers ever to pass that information from one side to the other. There will always be separate sales forces and if it is a matter of giving comfort to people, we would be happy to take a condition that will continue to operate that way.
389 THE CHAIRPERSON: Before I forget, you raised as an example of the fact that there was no advantage in the relationship between cable and DTH that in fact there were more subscribers to DTH in Alberta than anywhere else.
390 Mr. Stursberg, you must know what the percentage of uncabled areas in Alberta is compared to Ontario. Is it noticeably different because it would explain why you would have --
391 MR. STURSBERG: I don't know offhand, but I can tell you this --
392 THE CHAIRPERSON: -- why you would have more subscribers there because you seem to suggest that that's where Star Choice was the most aggressive in selling DTH as a proof of the fact that there is no problem with -- there is no need for structural separation.
393 MR. STURSBERG: I don't remember the numbers offhand. I don't believe, however, that they are terribly different as between Ontario and Alberta.
394 But what I can tell you is --
395 THE CHAIRPERSON: You don't remember what the percentage of cabled homes --
396 MR. STURSBERG: No, but I am happy to get them for you and send them along.
397 THE CHAIRPERSON: I find it difficult to accept that one of the reasons why these conditions are not necessary is look at how well you did with DTH in Alberta.
398 MR. STURSBERG: All I was going to say is that we sell in Alberta more DTH than we do in Ontario. I attribute that, frankly, to --
399 THE CHAIRPERSON: No, but if there are more subscribers who don't have cable.
400 MR. STURSBERG: I understand the point.
401 THE CHAIRPERSON: It's a lot easier to sell a lot in that area.
402 MR. STURSBERG: I don't believe it is terribly different, but we sell in Alberta heavily into the cabled territories. The number of subs, the portion of total subs that we sell into cabled territories in Alberta is the same as it is anywhere else. So, we are selling more at the same ratio in Alberta as we are in other places.
403 THE CHAIRPERSON: Now, in your -- as we discussed earlier, in your application in response to a deficiency question, I think the 12th of February one, at page 13 you say:
"We are not prepared to agree at this time to accept the conditions of licence set out in the schedules that you have attached without the amendments that you have proposed." (As read)
404 And then today, well with some conditions, you appear to be prepared to accept not the ones that we suggested, that you are not prepared to accept any condition. They have to be removed from Star Choice and they will be imposed on CANCOM.
405 Now, before we engage into a -- yes?
406 MR. STURSBERG: I'm sorry, I don't think that's quite -- our position is this, that we would prefer and we think it would be the wiser course not to impose any separations on us, but we will accept, if the Commission thinks it is essential, the modified separations that we have proposed. We proposed those modified separations only because we thought that they reflected better what it was that the Commission was trying to do, which was essentially keep separations between Shaw and its capacity as a cable company and Star Choice. But whether we lease, you know, fibre from Fibre Link, you don't care, or whether we were to buy CMT or YTV from Shaw, you don't care. That's the fundamental question.
407 So all we have tried to do with the separations as they were originally structured is redraft them so they do precisely that.
408 THE CHAIRPERSON: Okay, that's clear.
409 In your reply you say:
"The applicants now propose that no structural separation conditions remain in the DTH and SRDU licences of CANCOM, or CANCOM doesn't have any that I know of in NSC television." (As read)
410 That's at paragraph 102, so that is not your position?
411 MR. STURSBERG: No. Our position is --
412 THE CHAIRPERSON: Because there is no point in getting involved into a discussion of the amendments if you are not prepared to accept as a condition of approval that some conditions be imposed.
413 MR. STURSBERG: We will accept that, but as I mentioned before our preference would be not to.
414 THE CHAIRPERSON: So we can discuss then the amendments that you have proposed and then I suppose we will want a statement from you as to if the Commission were not prepared to amend them and were only prepared to keep them as they are and impose them on CANCOM whether or not that's a no starter for you on this merger?
415 MR. STURSBERG: Well, we think that -- frankly, I find that a little bit surprising because I think when we go through them you will find that --
416 THE CHAIRPERSON: Well, it's from page 13, where you say --
417 MR. STURSBERG: Right.
418 THE CHAIRPERSON: "We're not prepared
to accept the conditions of licence without the necessary amendments." (As read)
419 So we will want to know what your position is.
420 MR. STURSBERG: It's because the conditions of licence, as currently drafted, as I mentioned, would make it very difficult for us to be able to realize the efficiency we are talking about.
421 To come back to my earlier example, if we are sitting in the network control centre and we have to have one person running the DTH and one person running the SRDU, it's just very, very difficult. It means you can't get the efficiencies.
422 But I think we will find that if we go through them that what it is you are seeking to do will be fully accomplished by the redrafted conditions of licence as they would by the original ones.
423 THE CHAIRPERSON: So perhaps then, if that's your position, it's worthwhile getting into this rather refined discussion of what the changes would be in your view and why and whether in our view it would achieve what's necessary.
424 So if we look at your -- I guess they are appended to your schedules to your supplementary brief. Now, if I understand 10(2) would be the current with the change?
425 MR. STURSBERG: Yes.
426 THE CHAIRPERSON: And 10(3) would represent what would be added to CANCOM's licence. Correct?
427 MR. McEWAN: In each case on the schedule what you have on the left-hand side is the current and the one on the right is the proposed. So, Schedule 10(2) is the DTH conditions. Schedule 3 is the SRDU conditions and Schedule 4 would be --
428 THE CHAIRPERSON: Oh, 10(4) would be what would be on CANCOM?
429 MR. McEWAN: That's right, which is a blend of 2 and 3.
430 THE CHAIRPERSON: The amended ones blended of the two. I have one sheet missing.
431 So the first one is in relation to being a separate entity and you would propose to add SRDU, and then instead of having other -- "and companies or separation from, companies or other entities controlled directly or indirectly by Shaw," you would have "and all subsidiaries of Shaw licensed as cable distribution undertaking."
432 In this context what do you intend "subsidiary" to mean?
433 MR. STURSBERG: This is simply to capture your earlier point that these separations are really directed as Shaw as a cable company. So it would be the company that held the cable licences. So their other affiliates would be untouched by it.
434 THE CHAIRPERSON: And by subsidiary what do you mean in this context by a subsidiary?
435 MR. STURSBERG: Well, maybe I should pass this question back to Stephen Whitehead for the detailed legal --
436 MR. WHITEHEAD: I think subsidiary would simply mean a company controlled by Shaw. We do mean it in the legal sense of a subsidiary being a company that is controlled by another company.
437 THE CHAIRPERSON: And it would then have the effect of reducing it to the cable companies and not going into specialty services?
438 MR. McEWAN: It would have that effect.
439 THE CHAIRPERSON: By reducing it to cable distribution undertakings which before would have gone further and captured the specialty services undertaking?
440 MR. STURSBERG: That's right.
441 MR. McEWAN: If I may, Madam Wylie, this specific -- the specific example that we had focused on in developing this was, first of all, that the intention was to capture the separation between the cable operations and that was your intent. We had assumed that that was the intent and, therefore, would have clarified that.
442 But at the same time felt that there were companies, and in particular we are thinking of Shaw Fibre Link as an example, which is a terrestrial carrier, which we might use to trunk signals back and forth or to facilitate in other ways which might be appropriate for us to do business with. So it was that example rather than specialities that we were looking for in drafting this.
443 As a starting point, we had intended to focus this on what we felt was the intention of the Commission, which was structural separation between SRDU and DTH, both together from the cable operations.
444 THE CHAIRPERSON: Would you have a problem with going one step down and adding specialty services?
445 MR. McEWAN: Can we just caucus for just a second to think about that?
446 THE CHAIRPERSON: And feel free to wait until one of the lawyers has any questions and if they do or even at the reply stage if you want to think about it.
447 MR. STURSBERG: You know, my only concern is this, that when I look at --
448 THE CHAIRPERSON: Because of the integration there as well --
449 MR. STURSBERG: I understand that --
450 THE CHAIRPERSON: I understand that some of the businesses are not, but there is an integration down at that level.
451 MR. STURSBERG: Right. As I understand the vertical integration question it is a question about the relationship between specialty services and dominant BDUs and that's your question.
452 Now, so long --
453 THE CHAIRPERSON: Then it's integrated.
454 MR. STURSBERG: Yes, and that's fine, but it's between dominant BDUs and specialty services.
455 Now, we are not in any sense a dominant BDU. In fact, I dare say in our lifetimes none of us will ever see us as a dominant BDU, so that issue does not arise with respect to us.
456 And so long as the prohibition is --
457 THE CHAIRPERSON: No, we are not talking about you, obviously, here. We are talking about one of your major shareholders.
458 MR. STURSBERG: No, I understand that. I am going to attack back to it again because what you are saying is would it be all right for us to be integrated with a specialty that might be owned by one of the Shaw companies. Right?
459 So all I am saying is that if it were us that were integrated with them, the problem of having a dominant BDU integrated with a specialty does not arise, so long as we still cannot be integrated with Shaw Cable. So I would make that point. So I don't think that that would really create a difficulty for your vertical integration issue.
460 But the other point I would make is this, that it is very clear that where BSSI is going is into also the ownership of specialty programming services. They have, as you know, extensive applications in front of you right now to participate in French-language services. They have bought services in the United States. I don't know what their plans are with respect to them i the future, but I think it would be -- again, I wouldn't want to reduce our flexibility, depending on how things evolve in the future against BSSI.
461 So just to summarize, number one, I don't think it raises any vertical integration questions so long as the separations between us and Shaw Cable are in place.
462 Secondly, I think again it would put us at a disadvantage vis-à-vis BSSI who clearly is going in that general direction.
463 THE CHAIRPERSON: Of course, the argument made is that its the strength or the presence or dominance in the market of cable, and I don't think that has been reduced since we last spoke, that is at stake here and there are many parties who make a distinction between a nascent company and vertical integration, as opposed to a dominant company with regard to vertical integration.
464 You may not accept that, but that has clearly been one of the positions put forward.
465 MR. STURSBERG: I accept it wholly. I think that's exactly right.
466 THE CHAIRPERSON: That there could be an asymmetrical view of these based on the bottom of the pyramid.
467 MR. STURSBERG: No, I agree with that view. That's exactly what I was saying. I agree with you completely. That's why if a non-dominant nascent player like Star Choice has an interest in a programming service, it does not raise any of the vertical integration concerns associated with a cable company having an interest in a programming service. Those concerns do not arise.
468 So my only point to you is there is no problem if Star Choice has those interests because we are nascent. We are non-dominant, so long as we can't integrate Star Choice with the cable company, which is, again back to your original point, the fundamental concern.
469 THE CHAIRPERSON: Yes, and that's what we are speaking about, right, is structural separation or separation without the formality of -- you know, it's the indirect position at a fairly high level and one that may increase if further applications that are before the Commission are approved, the position of a dominant cable player, i.e. Shaw indirectly, as a major shareholder of Star Choice.
470 MR. STURSBERG: I agree with you and that's why I say if the structural separation condition is that we cannot be linked with the cable company of Shaw, then I think that completely covers the concern you have raised about programming as well.
471 THE CHAIRPERSON: Now, the second one with regard to the board, you would want an amendment to the condition that reduces or draws down the prohibition from persons who are members of the board of Shaw, or any company or other entity controlled directly or indirectly by Shaw to none of the licensee's board shall be persons who are members of the board of Shaw Communications Inc. only.
472 Explain how this would provide the intended structural separation?
473 MR. STURSBERG: Well, the --
474 THE CHAIRPERSON: If it's only limited to Shaw Communications Inc., if the aim is not to have members of boards of related companies, any related companies sitting on the board, because if the board members are identical whether it's a broadcasting company or a programming or --
475 MR. STURSBERG: Well, it wouldn't work that way though. If they were a member of a broadcasting board, but not a member of the Shaw board which is the board for the cable companies, then they would be able to sit on our board. But if they were a member of the broadcasting board and a member of the Shaw board then they would not, on the basis of what we have proposed here.
476 But the general notion here is that the Shaw board is the board for the cable companies and so it captures again what it is you are attempting to do.
477 THE CHAIRPERSON: And in this case would you have -- what would your response be to the same suggestion that it would not be limited to cable, but would also include specialty services?
478 MR. STURSBERG: Well, my response would be the same. I don't think it raises any of the difficulties, so long as there is nobody on the Shaw board, or if they had a cable board, who sits on the new CANCOM board.
479 MR. NEILL: Madam Chair, if I could add, this current condition also creates a situation, and this is part of what we are trying to fix here, is that technically the way it is worded no member of the Star Choice communications board can sit on the Star Choice television network board because Star Choice communications is controlled -- was in the eyes of the Commission controlled at one point in time, it may not be today, but that anomaly could potentially exist and that was one of the reasons why the wording is so broad it creates those kinds of, you know, unworkable situations.
480 So I think the object is we are not trying to create a situation where there still couldn't be the separation you are trying to achieve, but we just found the wording of the section to be entirely too broad for our purposes.
481 THE CHAIRPERSON: Now, the condition with regard to employees sharing between the BDU, including the DTH/BDU and the licensee is you propose a deletion. Is the deletion in any way related to the fact that the way it is drafted it leads to an interpretation that would suggest that it would mean "No employee of the SRDU shall at the same time be employed by a BDU or DTH that is controlled by Shaw, or employed by any company controlled by Shaw", as opposed to meaning "Employed by a company controlled by Shaw or controlled by a company or entity controlled by Shaw", or even if we made that correction I agree that the condition as it is proposed can be read that way.
482 But if we were to alter it to say, "That is controlled directly or indirectly by Shaw Communications or controlled by any company", rather than the possibility of reading it as employed by a company. Would that alleviate the problem that you have perceived, or how do you read it? What do you think it means?
483 MR. STURSBERG: What I think it means the way it's drafted now, and I come back to my example again of the engineer in the control room. The DTH company is controlled by Shaw, i.e. Star Choice, and there's an employee in the control room. Therefore, that employee could not service the SRDU side of the business. So, we think that's kind of impractical. I mean that's the long and the short of it. I am not sure particularly why we need this, so long as there are separations between the cable company and the DTH company.
484 So I am not sure, frankly, --
485 THE CHAIRPERSON: Do you see some employees? You have obviously taken the worst case scenario here of the engineer.
486 MR. STURSBERG: Yes.
487 THE CHAIRPERSON: Who probably only calculates and pushes buttons and doesn't pass on information.
488 Are there not other types of employment where there would be a problem if it were integrated?
489 MR. STURSBERG: Well, I think that the -- if we come back to what the fundamental issue is, the fundamental issue is (a) to make sure that there's a separation between the DTH company and the cable company. I mean, the person is typically either an employee of one or the other. So, I mean that's -- you have got to choose where you are going to work full time. So I don't know that there's a particular problem about that.
490 The problem is dealt with more at the level of the separation of the companies and the separation of the boards, as we were talking about earlier.
491 The second question with respect to whether you want a separation within the company for the purposes of the SRDU versus the DTH business, I would simply come back to the observation that I made earlier, that, frankly, I don't think it is necessary. I think it is a little unfair, since it doesn't apply to BSSI which has exactly the same conflict as we would have, if there is any conflict.
492 And, finally, that we are perfectly happy to deal with that problem by setting up customer service groups in which the sales and marketing arms would be separate.
493 So the long and the short of my answer is I don't think it is really necessary to achieve what it is that you want to achieve.
494 THE CHAIRPERSON: And the one with regard to the passing of information, I am not quite sure what is intended by the proposed amendments. We don't have a problem with an affiliation agreement between the licensee and the BDU and when such information is not available that there would be aggregate information only supplied. And do you want to have -- regarding the BDUs here we have regarding compliance the Commission's condition of licence, or the one applied right now, compliance with the terms of the DTH/SRDU signal supply agreement.
495 And you want to change it to the BDUs compliance with the terms of the affiliation agreement are transmitted to the licensee. What is the aim of --
496 MR. McEWAN: Fundamentally, this is a process of clarification only. We believe that it is the BDU that we would need to seek to be in compliance, rather than the SRDU and really these are points of clarification only.
497 Maybe Mr. Whitehead who we had a substantial discussion with and maybe Mr. Whitehead --
498 THE CHAIRPERSON: Let me see whether Mr. Whitehead you -- why can't we just have simply regarding compliance with the terms of the affiliation agreement, rather than specifying the BDU's compliance?
499 MR. WHITEHEAD: No reason at all. We thought that the reference to SRDU was intended to be a reference to BDU, but it could just be regarding compliance. There was no substantive change intended here. We were simply trying to clarify the intended operation.
500 THE CHAIRPERSON: Thank you.
501 So what I heard is you have put on the record the problems you have with the conditions of licence at day's end. Your position is not that you would not proceed with the deal unless conditions were removed from Star Choice and none added to CANCOM and you have made your arguments as to what amendments you feel are reasonable and the reasons for them. I am sure our lawyers will have further questions on that.
502 You will be before us as well at the reply stage. You will have had a better chance to discuss some of the matters that you may need some discussion about.
503 MR. STURSBERG: Just to be absolutely clear, could I just make sure that I -- our proposal is that there not be structural separations, but if the Commission feels that structural separations are important we will accept them as a condition of licence, but we think that it would be wise to amend them in the ways in which we have talked about.
504 The only other thing I would say is that I do draw a distinction between the relationship between the Shaw's cable business and our activities on the one hand and the question of the separation between the DTH and SRDU businesses internal to our operations which, as I mentioned before, we are in exactly the same situation as BSSI. There is absolutely no difference between us. Again, I think that's an area where you could, even if you imposed structural separations on the cable side, dropped that without any difficulty.
505 THE CHAIRPERSON: Now, with regard to ROBTv, at page 1 of your application you say that you are applying for authorization for Shaw to have an indirect ownership in ROBTv. You make the point at page 5 as well that you are not caught by the reg because CANCOM itself is not a licensee within the meaning of the specialty regulations.
506 You acknowledge, however, in your reply at page 34 that because partnerships are not persona or personae in law that technically in a partnership each partner holds a licence and relationship between them with regard to the ratio of their participation in the partnership is dealt with in a partnership agreement. So, technically, you need an approval.
507 Now, you would agree -- well, first of all, in your supplementary brief, as well as in your reply, you state in the supplementary brief at page 6 and it is repeated I think in paragraphs 22 and 24 of the reply, that CANCOM has announced publicly that it is seeking to divest itself of this minority interest.
508 At paragraph 22 you say CANCOM has already announced its plan to dispose of its interest, and 24 CANCOM reiterates that it intends to sell its interest in ROBTv. Does that remain the intention?
509 MR. McEWAN: Categorically. This is an anomaly here which has to do with the fact that the service is part of the CANCOM portfolio, but it is not one that we intend to maintain and we are committed to selling.
510 THE CHAIRPERSON: And so let me ask, would it be a problem if that were a condition of this approval? I know that it raises the percentage I believe to 8.8 per cent indirectly by Shaw.
511 MR. McEWAN: We have no problem at all with there being a condition that CANCOM dispose of this asset. The only issue we have is whether there's a timing -- whether it's a prior event because of the difficulty in finding a buyer and going through the process, but we have no problem with a general condition that would say CANCOM must dispose of this asset.
512 THE CHAIRPERSON: Yes.
513 Now, I suppose, Mr. Whitehead, would you agree with me that when the Commission does hear the WIC/Shaw application, if the situation is still that the indirect ownership through CANCOM of ROBTv would be before us again because it would potentially increase beyond 10 per cent.
514 MR. WHITEHEAD: I think that's correct.
515 THE CHAIRPERSON: In any event, it would still be a partnership?
516 MR. WHITEHEAD: That's right.
517 THE CHAIRPERSON: So you would be before us with ROBTv at that time?
518 MR. McEWAN: Presumably, at that time the WIC interest in ROB would then be before you, but we are talking here about the CANCOM interest and I understand the difference. But, yes, there would be a separate --
519 THE CHAIRPERSON: Yes, but the Shaw interest via the CANCOM interest, which is the vertical integration between cable and specialty services that the Commission has express concern of in the current industry circumstances.
520 Mr. Whitehead is scratching his forehead. Do you think that if it's still a partnership that is before us in the WIC/Shaw deal -- I had better see whether my lawyers are scratching their head here -- that the same thing would occur because there would be -- well, there would be an increase beyond 10 per cent --
521 MR. WHITEHEAD: Madam Chair, if --
522 THE CHAIRPERSON: -- of the voting shares I think when you calculate it through if the WIC/Shaw deal were approved. Potentially it would rise to I think 12 or something like that.
523 MR. WHITEHEAD: And if you follow that reasoning, Madam Chair, then no approval is in fact required under the specialty services regs at this time.
524 THE CHAIRPERSON: No, but it's required under licensing. Under the licensing concept which the reply agrees that that's the way the Commission licences partnership because the partnership not being a persona in law, each partner is a licensee.
525 MR. WHITEHEAD: The disposal by CANCOM if it's interested in ROBTv certainly requires your approval, no doubt about that.
526 The only point I was making is that as was noted in the supplementary brief, Shaw's indirect interest in ROBTv, if this application is approved, --
527 THE CHAIRPERSON: Is at 8.8.
528 MR. WHITEHEAD: -- which is below the 10 per cent threshold.
529 THE CHAIRPERSON: Yes, but what I was asking is would you agree that when the Commission hears the WIC/Shaw deal, which if it were approved as it is, the indirect voting interest of Shaw in ROBTv would increase beyond 10 and you would be back before us.
530 MR. WHITEHEAD: I think that's true, although I'm not -- privy to the WIC/Shaw deal, but I think that is the case.
531 THE CHAIRPERSON: Well, if you just calculate, the 49.96 per cent through the 29 point whatever, the 29.6 in CANCOM.
532 MR. WHITEHEAD: Yes, on that basis, yes.
533 THE CHAIRPERSON: Then you add a 3.5 percentage to the 8.8 and you go beyond 10. So you would be back before us if you haven't sold yet.
534 MR. WHITEHEAD: Yes.
535 THE CHAIRPERSON: Is there something else that you want to -- well, let's wait until we see if there are other questions because I don't have any more.
536 Commissioner Noël? No.
537 Commissioner Cram?
539 MS MOORE: Thank you, Madam Chair.
540 First, could you please indicate when you would be in a position to provide for the public file the details discussed earlier this morning regarding the number of contracts that are ending?
541 MR. McEWAN: I am just going to take a moment to discuss that.
--- Pause / Pause
542 MR. McEWAN: We are going to try and have the information for you today.
543 MS MOORE: Thank you.
544 Next, could you please file with the Commission a list of all the U.S. 4+1, the Canadian or other signals which you want to be authorized should this application be approved and, if so, could you again indicate when you would be in a position to file that for the public record?
545 MR. McEWAN: My understanding is that those would be the lists of authorized signals that currently the two separate entities are carrying and no addition to that. Am I correct?
546 Yes, that is our understanding, the authorized signals of the two companies.
547 MS MOORE: Thank you.
548 In Schedule 2 of your application, the statement of control, you state that:
"Following the exchange no single shareholder will hold more than 50 per cent of the voting shares of CANCOM and no single shareholder will elect or be able to elect a majority of the board of directors. CANCOM will be controlled by its board of directors." (As read)
549 In your view, could you just indicate who controls and assuming that the transaction goes through why that's the case?
550 MR. McEWAN: There is no single controlling shareholder of CANCOM. There is no single control of CANCOM. We have a diversified shareholding and a diversified board of directors.
551 MS MOORE: You have stated at page 6 of your supplementary brief that if it is determined that the integration of the company should be affected in a manner which would require specific approval of the Commission, the applicants hereby request such approval. Could you please comment on why it would be appropriate for the Commission to grant such approval at this time in the absence of concrete details if the integration were not to take the form of an amalgamation?
552 MR. McEWAN: We recognize that -- we put this in anticipating that we would have more clarity as to the nature of the amalgamation. We do not have that, so we recognize that it may not be appropriate to continue with that request.
553 MS MOORE: As you are aware, there are two trust arrangements in place, which I will refer to as the Hilton trust and the Guest trust. I would like to know if you are in a position to provide an undertaking that those trust arrangements would not be used on or before Friday, July 9, 1999?
554 MR. McEWAN: We are prepared to make that commitment.
555 MS MOORE: And this would apply to everyone who would benefit from those trust arrangements?
556 MR. McEWAN: Maybe you should hear from us separately.
557 MR. STURSBERG: Yes, we're comfortable with that.
558 MS MOORE: With respect to ROBTv, would you have any comment if the Commission were to find it to be appropriate to have a condition of licence that an application regarding the proposed divestiture of ROBTv be filed within a reasonable time?
559 MR. McEWAN: Yes, that sounds acceptable.
560 MS MOORE: And would 12 months be a reasonable time?
561 MR. McEWAN: Yes, I think that would be a reasonable time. Can I just caucus, but that sounds reasonable.
562 THE CHAIRPERSON: Surely we're hear WIC/Shaw before that.
563 MS MOORE: Just to clarify, as a condition of approval, not a condition of licence.
564 MR. McEWAN: Correct.
565 MS MOORE: Thank you.
566 Those are my questions, Madam Chair.
567 THE CHAIRPERSON: That's it? Yes?
568 Do you have anything else you would like to tell us at this stage before we have lunch and hear the intervenors, unless they have all disappeared with your brilliant answers.
569 MR. McEWAN: I am looking quickly around the room, but I suspect we will be here after lunch.
570 THE CHAIRPERSON: They are still there?
571 MR. McEWAN: One point of clarification, we will honour all the contracts. This had to do with the switchout, our signals, where there is a duplicate signal. We will maintain the contracts that each of the subscribers had at that moment. They wouldn't be switched to a different contract. They will be -- the single contract that they had will be honoured.
572 Apart from that point of clarification, I think we have covered everything. One last point I would like to leave you with though is that our feeling that this transaction far from lessening competition increases it. We think there is over the long term going to be a very strong and vibrant and intense competition in the satellite services sector. Thank you for your time.
573 THE CHAIRPERSON: Thank you very much.
574 This seems perhaps like an early lunch for Vancouverites, but a more sensible break before we hear intervenors. So we will be back at 1:30. I thank you for your co-operation.
575 Nous reprendrons à 1 h 30.
--- Recess at 1200 / Suspension à 1200
--- Upon resuming at 1330 / Reprise à 1330
576 THE CHAIRPERSON: Order please. Good afternoon.
577 Madam Secretary, please.
578 MS VOGEL: Thank you, Madam Chair.
579 Our first intervenor this afternoon is Canadian Cable Systems Alliance Inc. Proceed whenever you are ready.
580 M. WECKERS: Merci beaucoup. Madame la Présidente, medames Commissionaires, mon nom est Walter Weckers, président de CCSA et je suis accompagné de Allison Townsend, notre avocat et David Saxe qui est un membre de notre comité exécutif. Nous vous remercions pour votre invitation de participer dans cette audience-ci.
581 It strikes us that others take exception to our presence, or challenge the legitimacy of our participation. Yet, companies operating in hundreds of communities serving hundreds of thousands of customers across the country have charged us with the responsibility to look after their commercial interests when dealing with a number of challenges, including the issue of securing competitive program supply contracts.
582 Let us set aside whether CCSA supports or opposes this merger.
583 We are here because the transition from a monopoly environment to a dynamic competitive market is not yet complete.
584 Historically, the price paid by smaller cable systems to CANCOM has been high. During an era of CRTC sanctioned monopolies for wholesale transport and for retail distribution, this model worked. In fact, CANCOM and smaller cable companies had a symbiotic relationship. CANCOM customers may have complained about the pricing structure, but, in a monopoly model, one could turn a blind eye.
585 Retail competition has now taken hold with two well financed DTH competitors and MDS systems. They work with the unlicensed SMATV industry and today even natural expansion by cable into new subdivisions is no longer assured.
586 What does this mean for small, independent and often remote cable BDUs?
587 First, years of effort to secure competitive prices have not produced a significant result. CANCOM has successfully extended the benefit of monopoly contracts beyond the expiry of their monopoly licence into an era of competition.
588 Second, we are forced to deal exclusively with our competitors to secure access to critical signals and this is not healthy competition. PN1999-72 regressed the Commission's proposed policy framework for competition in the satellite relay distribution industry. This policy framework was intended to permit Class 2 and Class 3 BDUs to receive critical signals from independent sources. That's our loss.
589 Third, prices charged by CANCOM are at least an order of magnitude greater than documented competitive North American prices. CANCOM seems not concerned. Why? Because we are consistently denied cost-effective solutions in the North American marketplace. Consequently, there is effective competition at the retail level today, but only marginal competition at the wholesale level.
590 Fourth, small and independent cable companies are exasperated with the process. Are we being marginalized? This is no longer a hypothetical question. It is a question that we invite the Commission to examine seriously.
591 What tools are available to us?
592 Consolidation. This is happening today, for reasons good and bad.
593 Cost Cutting. That's our mandate.
594 Buy at a lower price elsewhere. This requires your sanction.
595 Expansion. For this we need operating margins that support investing in digital television. This is yet another reason why we must reduce transport cost for signals.
596 MR. SAXE: Let us now focus on why CCSA is here today. We want to urge the Commission to address the following questions in its deliberations. Will this merger strengthen the competitive environment for smaller, independent cable BDUs and can CCSA companies and other smaller cable BDUs cope with the terms and ramifications of the merger?
597 The CCSA position is as follows:
598 With respect to technological change there should be no cost to CCSA companies resulting from signal or technology changes initiated by CANCOM/Star Choice. SA decoders should be exchanged for commercial grade GI decoders at no cost, whether owned or leased and regardless of the age of the existing decoders.
599 If leased, there should be no change in leasing terms and at expiry ownership of the decoder should revert to the BDU.
600 There should be no increase in service fees or decoder provisioning costs as a result of technology changes.
601 Elimination of signals.
602 There should be no signals eliminated without involving CCSA on behalf of our companies in meaningful consultations.
603 If CANCOM changes signals or technology, a CCSA company should be able to switch to the CCSA/Star Choice master affiliation agreement at its option, or terminate the contract without penalty or buyout. In a competitive environment, signal switches are negotiated.
604 Competitive pricing.
605 Star Choice prices are substantially lower than CANCOM's and should continue to be available on a going forward basis to our companies for the full 10-year duration of the master affiliation agreement. CANCOM has rejected a request to reduce its price to the approximate level of Star Choice. The CCSA/Star Choice agreement contemplates that any CCSA company may adopt this arrangement at any time during the 10-year term. The arrangement was negotiated specifically to allow CCSA companies to adopt the contract upon the expiration of their current long-term contract with CANCOM. This prospective, going-forward aspect of the contract was and is a critical feature that must remain intact.
606 Duopoly versus open competition.
607 A duopoly in the SRDU market is not effective competition, especially when both remaining STDUs will be direct competitors to us.
608 Effective competition in wholesale signal distribution can only be achieved when signals can be sourced from multiple and independent service providers. It is interesting to observe that when Star Choice was faced with competition from CANCOM and ExpressVu, meaningful negotiations between Star Choice and CCSA resulted quickly and to mutual benefit in an agreement that provided pricing well below that of CANCOM.
609 CANCOM is asking you to minimize competition at the wholesale level. This reduces the incentive for the two remaining SRDUs to compete as aggressively for market share.
610 MS TOWNSEND: CANCOM has provided responses to CCSA which may initially appear adequate. A critical assessment reveals vague, uncertain statements which undermine the spirit and intent of the CCSA/Star Choice master agreement. Will the agreement survive? This is what CANCOM has said:
"The applicants are prepared, however, to confirm that SC Television will remain bound by the affiliation agreement in its current form in respect of signals delivered using KU band transponders and general instrument technology." (As read)
611 What if SC Television ceases to exist through corporate restructuring or the surrender of licence, which we have heard here today is the current plan? It's imperative that CANCOM or the newly formed SRDU be seized with assuming this contract on a going forward basis. CANCOM further qualifies its response by limiting the agreement by technology, a decision over which it has sole control.
612 In response to CCSA's concern that its companies should not bear the costs of a wholesale unilateral switch of technology, CANCOM responds:
"...currently (CANCOM) intends to offer compensation to all BDUs which are required to replace decoders before the end of their service life as a result of any shift in technology initiated by CANCOM/Star Choice." (As read)
613 What does this commitment mean? It means that CANCOM will unilaterally determine the value of a decoder and make this dependent upon the BDU committing to a further extension of the monopoly contract.
614 Finally, in relation to the elimination of Signals CANCOM commits that, quote:
"Any transition plans relating to the elimination of signals will not be formulated without substantial input from the applicants' SRDU customers." (As read)
615 CCSA will represent CCSA companies in those discussions, though CANCOM claims they are not a customer.
616 Bell ExpressVU -- a new competitive alternative?
617 It should be remembered that three was a moment in time when Bell ExpressVu was expected to be the third competitor vying for our business. This is why Star Choice was incented to conclude an agreement with us. A key competitive player is now being removed from the marketplace.
618 This factor and the ongoing monopoly era CANCOM contracts which still govern 80 per cent of the market, as noted by CANCOM, marginalize any effective competition in the SRDU market.
619 MR. WECKERS: Madam Chair, Commissioners, it occurs to me we are singling a single note over and over again and I am wondering why. It raises the question: Are the concerns of the small, independent BDUs adequately represented? Are they in fact being heard? If there is a role for them, let's identify it, agree on it and move on. If there is no role for them, let's identify that, agree on that and move on. Thank you.
620 THE CHAIRPERSON: Thank you, Mr. Weckers, Madam and Mr. Saxe.
621 Commissioner Noël, please.
622 COMMISSIONER NOËL: Good afternoon.
623 If I can just find my little booklet. I gather from your presentation -- can you hear me? I gather from your presentation that you are not satisfied by the reply that CANCOM/Star Choice has stated in paragraph 75 of their reply. Could you explain to us why you still have concerns about the master affiliation agreement between Star Choice and CCSA in more detail please.
624 MR. WECKERS: I think we would like to hear an unequivocal answer that that contract will not only continue, but will remain available for people who will eventually end their CANCOM agreement and whether or not we then have to go to ExpressVu or not remains a different issue.
625 That agreement was negotiated. It is valid. It has been relied upon by the companies within our organization. They simply want to make sure that it can be used and they can use it as a tool for planning their own future.
626 We are just beginning to meet with the competition in the form of Bell ExpressVu. That may take some time. We do not know the outcome of those negotiations, but there is an agreement in place that we simply would like to continue to use.
627 COMMISSIONER NOËL: If the CANCOM -- and since the CANCOM/Star Choice commitment seems inadequate to you, are you requesting that the Commission incorporate such a confirmation as a condition of licence or a requirement expectation or by any other means?
628 MR. WECKERS: We would welcome certainty on that issue.
629 COMMISSIONER NOËL: And if CANCOM/Star Choice chooses not to honour its master affiliation agreement, don't you think that the more appropriate forum for this matter to be handled would be the courts?
630 MR. WECKERS: We believe that that would not be efficient. We have to bear in mind that we are dealing here with small companies who do not have the financial resources to withstand that kind of cost.
631 We all know that the legal system is not inexpensive and there is a significant lack of balance, if you will, between the size of CANCOM/Star Choice on the one hand and some of the members we represent on the other hand. So we believe that the best way is in this environment to stipulate the way in which we are going on and clarify what is expected from all participants.
632 COMMISSIONER NOËL: On page 4 of your intervention you note that the CCSA/Star Choice agreement provides favourable arrangements for equipment. You recommend that there needs to be a guarantee that there will be no financial burden imposed on customers of the merged operation.
633 According to your presentation of today you are not happy with the answer that was provided by CANCOM in paragraph 76 of its reply, that they currently intend to offer compensation to all BDUs which are equipped to replace decoders before the end of their service life as a result of any shift in technology initiated by CANCOM/Star Choice.
634 Could you explain why you are not still satisfied?
635 MR. WECKERS: Yes, and perhaps Mr. Saxe will add to it as well. It was briefly touched upon this morning that the useful life of a decoder is well beyond five years if properly maintained, and that, consequently, in many cases there would be no compensation.
636 What we are saying is that the management of Star Choice and CANCOM should be able to absolutely avail itself of the best and most advantageous technology that is available to them.
637 What we are adding to that, however, is that cannot be done at the expense of their customers, especially when that customer is also a competitor. We are concerned that the imbalance between us will continue to grow. So that is why we maintain the view that if there should be sufficient reason for CANCOM/Star Choice to implement a significant technology change, they should keep their customers harmless from that decision, since it is Star Choice/CANCOM that will benefit from it.
638 COMMISSIONER NOËL: What type of guarantee are you seeking in this hearing process?
639 MR. WECKERS: It's very hard to ask for a guarantee on anything it seems because there may be issues of jurisdiction involved here. My view would be that there would be a very clear signal, if not a condition of licence, to hold customers harmless if there should be a decision to move to a different technology.
640 There has been discussion this morning on the need and the benefit of establishing a common single platform for the joint operation of these companies. That makes very good commercial sense. I don't dispute that they have that right to do that. In fact, I would be surprised if they did not do that.
641 So, it makes sense for them to make that statement. It makes sense for them to implement those changes. What does not make sense to us is that the cost or at least part of the cost to implement that change should be downloaded on the customers.
642 Again, the irony is that by increasing our operating costs in doing so, (a) they decrease our ability to compete with them, and at the end of it all the bottom line of the whole discussion here is that we are suffering from the fact that agreements that were established during the era of monopoly continue today, when we are fully exposed to competition, including competition from the applicants.
643 COMMISSIONER NOËL: From what we heard this morning, the agreements that will live through a proposed merger have a lifespan of about two years and that would cover about 70 per cent of CANCOM's actual contracts. How do you respond to that factor?
644 MR. WECKERS: It varies. There are some that expire soon. There are some that expire two, three, four years from now.
645 There is a buy-out provision and it was alluded to this morning. So on the surface it would seem that all of the steps have been taken to allow for a process for a company to make a decision to abandon CANCOM in favour of a competitor and that happens to be Star Choice today.
646 It is interesting to note that to our knowledge there is perhaps one or two companies that have seen their way to actually bite the bullet, which indicates that the conditions for abandoning that contract outweigh the benefits for going to a competitor, even though a per signal per subscriber per month basis there would be a significant saving.
647 So what we see here is that by accident of history or by design of CANCOM we were unable to terminate these agreements at the time when the monopoly expired and the price we pay continues to be (a) monopoly price. And we now, on top of that, when we are saying that we would like to abandon that contract for a good reason we are now to pay a penalty. So there is a monopoly price plus a penalty, plus the cost of decoders and now please go to the competition.
648 So it is a very effective tool to reduce their risk and to maintain the revenue stream at a high level until that contract eventually does expire and we are not satisfied with that arrangement.
649 Now, you may not be able to change it, but we don't have to like it.
650 COMMISSIONER NOËL: I have been hearing you say that you now have to compete with the same people if there is a merger, but on the other hand you mentioned that you came to a satisfactory master agreement with Star Choice. If my understanding is correct, Star Choice is the one that had the two licences, the SRDU and the DTH licence. Why would the picture change in that respect if the Star Choice and CANCOM activities are merged at the SRDU level?
651 MR. WECKERS: Fundamentally, because what we have read there is no unequivocal statement that what we have negotiated with Star Choice will survive.
652 COMMISSIONER NOËL: Will?
653 MR. WECKERS: There is no guarantee in what we have been able to read, no unequivocal statement that it will survive and it will continue to be available. That's the concern that we have.
654 COMMISSIONER NOËL: Okay
655 MR. SAXE: If I could allude or add a bit to this. When Star Choice received a licence, their SRDU licence, at the time I believe ExpressVu had stated at the same hearing that they had already submitted an application or would be doing so very soon.
656 CANCOM had an SRDU licence at the time, so there were basically three and Star Choice was one of those three. They had an incentive to negotiate. That incentive was because they would be one of three, as opposed to one of two, and we were able to negotiate quite quickly and quite satisfactorily to us.
657 So there is a difference. If there is two there isn't the same incentive of trying to get ahead of the next person.
658 COMMISSIONER NOËL: And you don't think BSSI would be interested in competing with the newly formed CANCOM/Star Choice outfit?
659 MR. SAXE: I'm sorry, that BSSI --
660 COMMISSIONER NOËL: The BSSI people.
661 MR. SAXE: Would be prepared to talk to us or --
662 COMMISSIONER NOËL: Pardon?
663 MR. SAXE: Who would be prepared to talk to us or --
664 COMMISSIONER NOËL: Yes. Why not?
665 MR. SAXE: We are hoping that they will, but there's an interesting anomaly here in that the pricing for Star Choice was substantially below the pricing that CANCOM has indicated they could provide to us. Even now they are saying that they are not committing to lowering the price very much. So there is a potential here for two companies to merge, where you have got agreements with prices up here and you've got agreements with prices here, and there is no indication that one is coming down.
666 So we will do our best to negotiate with BSSI as well, but we don't think that it's the same incentive. There has been a change in circumstances.
667 COMMISSIONER NOËL: Now, if we go to signals at page 4 of your intervention, you express your concern over a merged CANCOM/Star Choice unilaterally eliminating signals. You state that:
"If either CANCOM or Star Choice proposes to eliminate a signal, any affected BDU could agree to the signal switch as long as the BDU could also at tits option pay the lower of the available rate, either CANCOM or Star Choice current or future agreements.
If the BDU does not agree to the switch it should not be allowed to happen." (As read)
668 At paragraph 77 of its reply CANCOM/Star Choice states that:
"Transition plans relating to the elimination of duplicative signals will not be formulated without substantial input from the applicants' SRDU customers." (As read)
669 It is noted that currently both CANCOM and Star Choice are authorized to distribute a number of Canadian and U.S. network signals, with the exception of the preponderance -- and French-language requirement, the Commission does not require SRDUs to distribute any specific signals. That is, SRDUs may drop signals without the Commission's authorization.
670 Could you explain why the Commission should adopt your suggested approach which, in effect, places a veto in the hands of BDU affiliates in the event that these two SRDUs are permitted to merge?
671 MR. WECKERS: My first reaction to that is to say that we need to give some tools to small independent cable companies, whereby they can have a means to reduce their operating costs.
672 It was interesting that a comment was made this morning that one of the benefits that Star Choice and the DTH industry is bringing to the market is that it will force the cable companies to make investments in digital television and we agree with that, that competitive pressure is there. It is real. It is very effective.
673 What is happening though, and we are talking here about not the large cable companies. We are talking about small cable companies. What is happening is that the small cable companies are paying a disproportionately high price for the program services that they need to develop their program package lineup, at the same time when they need to free up capital that will support the introduction of digital television that will compete effectively against Star Choice, CANCOM, ExpressVu.
674 So what we say is give the tools that at least gives notice to the folks that we are dealing with that they need to sit down and plan with us a method in which some of the savings that they are going to be able to access by virtue of creating a single platform can be shared.
675 There are very interesting examples, by the way, of what happens when a small cable company manages to reduce its operating costs. It finds its way back into additional programming to bolster the program services they offer and to remain competitive. So it is that objective which we would like to put forth and that is what we would hope to accomplish.
676 It's not a frivolous request to say let us have a veto. I don't think there is such a thin as a veto because we still have an obligation to carry these signals. We merely have a choice between one or the other to take them from, and there is no compulsion at this point in time on the part of CANCOM to open up that kind of a negotiation. They are protected with an agreement that carries on until it expires.
677 We are trying to find ways to minimize now the damage that these monopoly prices are causing in the marketplace.
678 COMMISSIONER NOËL: We are still talking about those agreements that, according to CANCOM, are going to expire within a year or two, which represents 70 per cent of the agreements in place at CANCOM?
679 MR. WECKERS: That's correct.
680 COMMISSIONER NOËL: Okay. What about the recent licensing of BSSI? Does it mitigate your concern in respect of that matter?
681 MR. WECKERS: Well, it's an interesting time in which we live. Thank goodness there was no problem in translating the decision or printing it or we might have ben here with only one competitor left to choose from.
682 So I think that our friends at CANCOM and Star Choice desperately needed your approval for that particular decision and I am sure they thank you for it.
683 COMMISSIONER NOËL: Still on page 4 of your intervention, you state that customers generally do not favour change, especially frequent change, unless it is for their benefit.
684 Under your proposal, signal changes might be agreed to if the BDU was offered a lower rate from the SRDU. Do you intend that BDUs would reduce their rates by an equal amount in order to compensate subscribers for the inconvenience of having their signals changed?
685 MR. WECKERS: I think that would be an individual decision to be taken by each of the licensed BDUs. I believe that, first of all, they would welcome the fact that they would now pay a market price for a product, not a higher price than necessary.
686 And I believe, as I said before, that they are very much under pressure to invest in the ongoing well-being of their cable systems to withstand competition.
687 I don't believe it is an answer for a BDU to necessarily reduce price. The answer I think is to increase service and that is given the general availability of channels in these smaller cable systems, compare that to the large number of choices that is being made available by CANCOM and by BSSI, by ExpressVU, I think it would perhaps be a commercial mistake to give a certain amount of money back to the customer and it would be more effective to invest in their operations, be that digital television, be that simply the addition of more analog channels, it doesn't matter.
688 However, at the end we do not speak on behalf of each and every BDU when it comes to that decision. They would have to look at their market, look at their subscriber base and then determine where to go.
689 MR. SAXE: I would like to add a bit of personal experience to that. I did have represent Kawartha Lakes Cablevision, which has approximately 1,700 subscribers. We did have a CANCOM contract which expired I believe about a year and a half, or probably two years ago, and in that period we were unable to come to a satisfactory arrangement in terms of what I felt was reasonable pricing.
690 So we waited until Star Choice actually received their licence, their SRDU licence, and we were able to negotiate a master affiliation agreement.
691 When I switched our signals to Star Choice something very dramatic happened. First of all, instead of taking seven signals from CANCOM, I was able to afford to take 10 signals from Star Choice. We had extra funds which we were able to start our system rebuild which we were unable to afford to do before.
692 In addition to that, we added several additional Canadian specialty services and all of that at the same time we converted our company from a loss position to a reasonable profit position, simply as a result of being able to negotiate a good agreement.
693 We would have had the option to reduce rates, but then we would not have been able to add all these services into all of those things. So there is a very direct relationship between being able to lower our wholesale prices, or our wholesale costs, and improve service to subscribers.
694 MS TOWNSEND: Excuse me. The unusual nature of the contract that we seek to protect is the fact that it is on a going forward basis. It is available for these small BDUs to adopt at any time after the expiration of their CANCOM contract.
695 So the fact that CANCOM or Star Choice say they will continue this contract does not give us the assurance that these small BDUs after their CANCOM contracts expire will be able to opt into the contract, as was intended during the negotiation. That is one of our key issues here.
696 COMMISSIONER NOËL: Okay. You indicate that some of CANCOM's rates are lower than they were. You add that Star Choice negotiated rates that are substantially lower than any proposals since made by CANCOM and you state that duopoly is not competition. Explain how the Commission can conclude that these lower rates do not result from competition?
697 MS TOWNSEND: I think that one thing that directly and fundamentally impacted the Star Choice negotiation was the fact that there really were three players in the marketplace.
698 At the time that we negotiated that contract, which was at the time that Star Choice was licensed, everybody in the room knew that it was just a matter of time before ExpressVu got a licence. So it was in that context that we were able to negotiate this agreement.
699 There were three players, whether it was approved by the Commission at the time or not. There will now be two.
700 COMMISSIONER NOËL: And now you fear that there will not be real competition between BSSI and the proposed merged CANCOM/Star Choice?
701 MR. WECKERS: We believe there will be competition, but we continue to be concerned about the fact that over a period of time the number of cable companies will continue to pay prices that are not competitive. We have been unable, through accident of history or whatever, to avoid that predicament, even though it was predicted. Is a duopoly effective? It certainly is better than a monopoly, that is for sure.
702 So we certainly welcome any competition, but we also believe that there should be continued encouragement for other people to open up other avenues. We are obviously disappointed that our proposal to permit Class 2 and Class 3 systems to obtain signals directly from, for example, a U.S. supplier in some cases was not acceptable to the Commission. That was something we proposed. It is not to be. Are we going to give up on that? Not necessarily, but in the meantime those are the rules.
703 The rules now are a duopoly. We know that when there was a reference to the industry earlier, we know that all the price flexibility, all the per second and whatever pricing occurred when there was more than two. Flexibility in the marketplace arrived later and we believe that will be the case in the wholesale signal distribution as well.
704 MS TOWNSEND: One of the things that will mitigate against BSSI will be the decoder switch, the switching technology because if the valuation is left totally up to CANCOM it will be dependent on whether that BDU remains a CANCOM customer or not, so it will be difficult to switch.
705 COMMISSIONER NOËL: I have heard this morning, and correct me if I am wrong, that the proposed merged Star Choice/CANCOM people were opening an ear to negotiations in terms of equipment that has been amortized over five years, but that is not totally unworkable, that they might be open to negotiations on replacement costs?
706 MR. SAXE: One of the things that we would like to hear is that there will be no cost to the operator for any switch.
707 One of the circumstances, for example, that may occur is if a company is under contract with CANCOM they have a decoder, for example, that may be five or six years old. They have three years left to go in their contract and CANCOM suggests or indicates that there is going to be a switch in technology to the Star Choice technology.
708 In that circumstance it may be that there will be no compensation because the decoder is more than five years old. There will be no ability, as CANCOM has indicated, for them to break the contract and, therefore, they will have to pay the same price. There is no incentive for CANCOM to provide any funding for the new decoder because there is still three years left to go before there is potential competition for that customer.
709 If CANCOM indicates that in that circumstance they will provide full cost recovery for the decoder, then we would probably be satisfied. The problem is we can see too many possibilities where in what they have said doesn't cover very plausible circumstances and that's all we are looking for, is to ensure that at the end of the day they acknowledge the intent of what we are trying to do and the intent that there won't be a cost to the BDU.
710 COMMISSIONER NOËL: But don't you feel that if you have two years remaining on your contract the proposed merged company will have the incentive to keep you as a happy customer at some point in time?
711 MR. SAXE: Well, I guess it may be right, it may not be right, but we can look back at what has happened over the last few years. And what we found is that it's not the case.
712 What we don't know -- there have been two very distinct personalities between CANCOM and Star Choice. What we don't know is which personality is going to survive the merger.
713 COMMISSIONER NOËL: But it remains that CANCOM was working in a monopoly environment in those years, which is not the case any more.
714 MR. SAXE: Well, even in the last year there has not seemed to be an indication from CANCOM that they are prepared to move where they have companies under contract. If they are approaching the end of the contract, then they may start to work towards resigning them, but in the middle of the contract there has been no indication that we have seen that they are prepared to show -- that they are going to move on that.
715 COMMISSIONER NOËL: I am going back to what I heard this morning, 70 per cent of the contracts will be up in one to two years.
716 MR. WECKERS: That is true, but competition is today. There is effective retail competition in the marketplace. Cable companies are not at will to change prices up for argument's sake. They are under pressure, as they should be, to improve the service and to increase the selection of service.
717 The competition is happening today. So the irony and the injustice is that a portion of the marketplace that consists of small, independent companies has not been given in some form the ability to benefit or to reduce its cost as that competition arrived. That is the problem. There can be no disputing that and this is what incenses us.
718 COMMISSIONER NOËL: What I am asking you is: In view of the fact that the majority of CANCOM's contracts, long-term contracts, are coming to an end in the very near future, don't you think that it's an incentive for them to negotiate renewals in good faith with your representative or your associations? I mean, it would be bad business to do otherwise?
719 MR. WECKERS: Well, I would have expected them to.
720 COMMISSIONER NOËL: If you say the contrary, it means that they are looking forward to losing all the customers.
721 MR. WECKERS: They will may well do that and they may well play a game of brinkmanship here.
722 The issue is one that if there is indeed this environment today, why is CANCOM not reacting positively to a proposal that we have tabled with them, whereby they would adopt pricing similar to what we have been able to adopt with Star Choice because that seems to be the marketplace.
723 Now, today there is only one SRDU that is up and running. The other one has just been granted a licence and one of these SRDUs is now arguing for a merger with a company that has a fairly significant base of subscribers. They are paying far more for those services.
724 Commercially it makes sense for CANCOM to hang on to that revenue as long as they can. I don't fault them for that. So yes, it becomes a question of brinkmanship. At what time do you blink? We cannot force them to blink until maybe sometime later when we get closer to the end, but in the meantime they have an ability in the agreement that let's say abandoning the agreement apparently is too expensive even for BDUs to consider. I mean that's the reality.
725 It's one thing to say you have an option to do something, but the cost of the option is prohibitive. That's not an option.
726 COMMISSIONER NOËL: You referred earlier in your presentation in one of the answers to the cellular phone market where competitive became effective only after the entry of a third, fourth or fifth supplier.
727 Considering the specifics of the SRDU market how many service suppliers could the industry support according to your association?
728 MR. WECKERS: I do not have the answer. It's interesting, though, to note that CANCOM will be competing in a North American environment. So this just raises an additional concern, are these monopoly rates that we continue to pay for the next several years in fact channelled into funding not only the start up of a competitor within Canada, but a form of competition in the States? Will that attract a price war for services in the United States that they engage in? Will that in fact bring others into the Canadian market? We believe there should be an invitation and there should be an option and an opportunity for independent non-aligned investors to proceed and establish additional SRDU licences.
729 I think in your framework you have made reference to the fact that you would not necessarily care if someone was able to make a go of it. Of course, we would be interested in a viable competitor, and anyone who wanted to proceed with that would have the same concern.
730 We believe that, to the extent possible, we should invite --
731 At one point in time, by the way, we were of the belief in Canada that there could be five -- I believe it was five -- DTH services: Alphastar, Homestar, Star Choice and ExpressVu; at least four, plus CANCOM. There seemed to be no particular reason why that was called ridiculous. Perhaps there was mere corporate posturing to get a licence and then merge afterwards, but at some point in time the Commission was convinced that that was not an unreasonable number. Why can't that be returned? Why can we not return to that stage?
732 COMMISSIONER NOËL: You are talking about DTH licences.
733 MR. WECKERS: It doesn't matter; DTH. They are all inter-linked. That is again part of the reality.
734 COMMISSIONER NOËL: But at an SRDU wholesale level, do you see room for five players in Canada?
735 MR. WECKERS: I don't think so.
736 COMMISSIONER NOËL: How many?
737 MR. WECKERS: I would be giving you an uneducated answer, and that would be silly on my part. I'm sorry.
738 COMMISSIONER NOËL: Three at least.
739 MR. WECKERS: More than two.
740 MR. SAXE: Maybe to answer that is not with a number but rather to say unless there is an SRDU with real incentive to negotiate independently, without that, then there may be not enough.
741 If we had one that was vertically integrated and we had one that was totally independent, then maybe that would be enough. When we had anticipation on 1998-60 that the Commission was understanding the position of Class 2 and 3 systems, possibly allowing us to source our signals directly from U.S. satellite, we felt that was a solution. That would have given us at least some lower cost non-Canadian signals, where we could then afford to -- what would happen with the Canadian signals.
742 We felt that would have been a solution.
743 It is hard to give a number. What we really need is a third party to negotiate with a true incentive to negotiate with us.
744 COMMISSIONER NOËL: According to the CANCOM/Star Choice presentation of this morning, they need to be merged in order to face competition from BSSI, which is a fully integrated satellite operation with DTH, SRDU and control on the birds.
745 Do you really think that a plain SRDU operations with no control on the birds and no downstream operations could survive?
746 MR. WECKERS: If we assume for a moment -- well, I have to go back to the presentations we have made before. Unfortunately, you probably --
747 We have said that there should be a way for us to access the U.S. market for transport; not for program content, but for transport, and use the enormous economies of scale that we can do there, just as Star Choice/CANCOM now will enter that market for the same reason of carving out a niche.
748 If CANCOM does not need a licence from you to do so, if CANCOM makes a commercial decision to enter the U.S. market, why could we not invite a U.S. party to provide transport only for us if that happens to be less expensive?
749 COMMISSIONER NOËL: But that U.S. party would provide you only with U.S. signals. Somebody would have to provide you with the Canadian signals, and at what cost. If you buy your U.S. signals from a U.S. provider, who is going to provide you with only the Canadian signals at a reasonable cost?
750 MR. SAXE: The Canadian signals are available. They are available from the -- right now they are available from Star Choice, from Bell ExpressVu. They are available; they won't disappear.
751 If we could get sufficient savings on the non-Canadian services and reasonable prices on the Canadian services, it would have satisfied us.
752 COMMISSIONER NOËL: I understand that they are available, but at what cost will they be available if you are using U.S. satellites to get your U.S. signals?
753 MR. WECKERS: We would be speculating about the competitive reaction of companies when such an event should occur, number one. That is hard to do.
754 Number two, the fact that we would be able to access a third party competitor would be, for us at least, a positive dynamic development in the marketplace.
755 It is not inconceivable that the Canadian services could be uplinked as well in the future.
756 COMMISSIONER NOËL: We will move to some other topics now.
757 On page 9 of your intervention you allege that Star Choice is in non-compliance with its DTH licence since it pays nothing for the satellite transmission costs associated with the DTH delivery of Canadian satellite and pay services.
758 At paragraph 104 of its reply to interventions, CANCOM/Star Choice states that:
"SC television does not distribute specialty and pay services at its own cost."
759 Could you explain the relevance of this allegation to the application currently under consideration; and more specifically, assuming that this allegation is correct, would the situation be exacerbated should this application be approved?
760 MR. WECKERS: Could you refer us to --
761 COMMISSIONER NOËL: Page 5 of your intervention, and it is paragraph 104.
762 It is not you; it is somebody else. Sorry.
763 MR. WECKERS: That is why we were not answering it. Thank goodness we didn't answer that one. At least we were genuinely puzzled.
764 COMMISSIONER NOËL: It's not you; it is somebody else. Sorry about that.
765 I have no more questions.
766 THE CHAIRPERSON: Mr. Weckers, some of the things that you are very interested in saving and preserving that have been achieved to date in your negotiations or dealings with SRDU providers have been achieved during a period when there were two providers: Star Choice and CANCOM.
767 Is that right?
768 MR. WECKERS: Actually, it happened when there were two with the tacit or open understanding on everyone's part that there would be three. That's when it happened.
769 THE CHAIRPERSON: Well, I think it is dangerous to predict who is going to get a licence and on what terms.
770 MR. WECKERS: We can only point towards the time when the negotiations --
771 THE CHAIRPERSON: And how long ago would it be that you were sure that there would be a third?
772 MR. WECKERS: Well, I can confidently say that when Star Choice made an application for an SRDU I certainly was convinced that ExpressVu would do the same. I don't think that was rocket science.
773 THE CHAIRPERSON: So then the achievement of some of the gains that you want to preserve now you feel were not arrived at simply because there were two in the market, Star Choice and CANCOM; that already in negotiating with you they were as good at predicting as you were and they knew that there would be a BSSI, so they had better give you a good deal now before the Commission gave them a licence.
774 Is that your position?
775 MR. WECKERS: That certainly played a role in it, yes.
776 THE CHAIRPERSON: Therefore, you would not have achieved that in a duopoly, would be the next answer.
777 MR. WECKERS: That could be speculation too, by the way.
778 THE CHAIRPERSON: Well, no. That is your statement; that duopoly is not competition.
779 MR. WECKERS: Technically, of course --
780 THE CHAIRPERSON: At paragraph 8.
781 MR. WECKERS: Technically speaking, I am wrong; duopoly is competition, but it is not the degree of competition that we believe is going to be as strong as we would like it.
782 THE CHAIRPERSON: When you are at the receiving end, of course the more the better.
783 My next question is: Absent these glitches that are going to be borne by someone, or the cost of the glitches regarding technology and so on, that flow from the fact that you have two companies that are providing service and merged with different technologies and different rates, et cetera, absent all that would you support this merger? If everything you want were promised by reply stage, everything you have asked and the comfort and the guarantees that you want, then would you support?
784 I am trying to see whether you buy at all the idea that to have sustainable strong competition from which can accrue some advantages to your members we need more than two. You have to weigh, like all of us: Is it possible to have more than two and really offer you what you need?
785 MR. WECKERS: I think our answer is, first of all, that we do not control, nor do you control, a third or a fourth or a fifth party coming forward.
786 THE CHAIRPERSON: No. But there are basics. We know how much population we have. We know the market. There is a basis there from which to operate, which is what we heard this morning.
787 MR. WECKERS: We have said that we want the Star Choice contract to survive. We want the small BDUs to be protected from the cost of technology change, and we have made a number of other recommendations.
788 We do not have any philosophical reasons other than those to oppose the shareholders' desires to bring their two companies together. That is fine. We don't mind them getting stronger. We would like simply our place in the sun and some reasonable way of continuing, especially since they are our competitor. And that is something to be borne in mind.
789 So do not permit them to use remnants of the monopoly to compete against us.
790 I think, in a nutshell, we have said what we have said. We would like those concerns to be addressed. If that is done, then clearly you would have removed our objection.
791 THE CHAIRPERSON: When you say "competing against us", you are talking about DTH.
792 MR. WECKERS: Correct.
793 THE CHAIRPERSON: You are on the customer side in the SRDU business.
794 MR. WECKERS: That is correct.
795 COMMISSIONER NOËL: And yet you choose your best deal with the company that was also licensed as DTH.
796 MR. WECKERS: Isn't that ironic. Should CANCOM not have been the champion, no, it wasn't. It is a sad statement, but CANCOM -- well, it's not a sad statement.
797 CANCOM had a revenue stream that was regulated by monopoly, and the distribution of their signals was extended with companies that worked in a monopoly. In those days everything was final, although there was a lot of grinding of the teeth about what the prices were, et cetera. But people could live together and did live together.
798 We have now an environment where that is no longer the case. That is the consideration that we ask you to take into account.
799 COMMISSIONER NOËL: Think of the following proposition: If you are getting into a new market where there is one incumbent distributor of SRDU signals, like Star Choice did a few months ago, what would your position be? Would it be aggressive and lower the prices or to attract some client?
800 I am just suggesting that maybe the prices that you negotiated with Star Choice were lower than their costs?
801 MR. WECKERS: Well, you will have to ask Star Choice that. It was negotiated, so we assume these were prices that they were comfortable with. Certainly when we look at how they compare to some prices in the United States, they seem to be reasonable and compensatory.
802 So we don't believe that they made a bad deal. They made a good deal for us, but I think they made a good deal for themselves too.
803 THE CHAIRPERSON: Thank you, Ms Townsend, Mr. Weckers, Mr. Saxe.
804 MR. WECKERS: Thank you.
805 THE CHAIRPERSON: Madam Secretary, please.
806 MS VOGEL: Our next intervenor this afternoon is Bell Satellite Services Inc.
807 THE CHAIRPERSON: Good afternoon, Mr. Frank, Mr. Elder.
808 MR. FRANK: Good afternoon, Madam Chair, Members of the Commission.
809 My name is Chris Frank, and I am Vice-President - Government Relations and Corporate Development for Bell Satellite Services Inc. With me today is Mr. David Elder, Legal Counsel representing BSSI.
810 We appreciate the opportunity to appear at this public hearing in order to expand on the positions taken in our intervention of April 8th.
811 BSSI wishes to make it clear at the outset that it does not object to CANCOM's taking control of the Star Choice SRDU undertaking, subject to appropriate safeguards. However, we continue to believe that the applications currently under review are premature, inasmuch as they appear to be only the first stage of a multi-stage reorganization of the broadcasting interests of Shaw, WIC and CanWest Global.
812 To consider the present application independently of the delayed Stage 2 process creates a problem or an apparent contradiction. The applicant argues that since the new entity will be shareholder-owned with no clear-cut control, the conditions of licence applicable to Star Choice because of Shaw's dominant ownership position are not required. However, the popular business press is alive with news that the merged entity will be owned and controlled by Shaw.
813 We believe that the existing Star Choice conditions of licence are appropriate, since the new combined entity presently has substantial cable ownership and 100 per cent of the country's SRDU subscribers. For greater certainty, we have assumed that the SRDU conditions of licence respecting common employees will apply to the DTH operations as well.
814 The market power and the potential for abuse of that dominant position, as well as the integrated nature of the Shaw group of broadcasting companies, are such that approval of this application without appropriate safeguards would impede the progress of competition.
815 If the Commission is persuaded that it is in the public interest to approve this application, BSSI does not object, provided that there are sufficient and effective safeguards to protect against possible abuse of the dominant position of the combined entity in the broadcast distribution industry and specifically in the DTH and SRDU sectors. Given the apparent intention of Shaw to take clear control of the merged CANCOM/Star Choice, BSSI submits that the need to maintain and extend to CANCOM the current conditions of licence applicable to Star Choice is all the greater. We submit that these conditions are critical to ensuring that new entrants such as BSSI have a fair opportunity to develop a viable integrated satellite business.
816 The impact of this proposed merger on the SRDU marketplace will be significant, with competition reduced from three service providers to two. A new entrant faces some formidable business challenges. There are relatively few customers in the SRDU market, with many under long-term contracts with the incumbents. While CANCOM and Star Choice may argue that these contracts are non-exclusive, for all practical purposes this does not mitigate the barriers that a long-term contract creates.
817 For example, there is no need for a broadcasting distribution undertaking to purchase a second set of U.S. 4+1 signals from a competitive SRDU; indeed, most are precluded by regulation from doing so. As well, switching to another SRDU would necessitate a customer's accommodating a different digital video compression format, resulting in additional expense.
818 Finally, securing an early release from such a long-term contract invokes what could amount to a significant financial penalty, something few, if any, SRDU customers are likely to be willing to pay. Therefore, non-exclusivity of such contracts is irrelevant.
819 An additional barrier results from the fact that many cable licensees that purchase SRDU services have an ownership affiliation with Star Choice and CANCOM, more so now given Shaw's recently-announced acquisition of Fundy Cable. This strongly suggests that they will not be subscribing to services from a competing SRDU, regardless of price, service or other considerations.
820 BSSI proposes that the Commission carefully assess these barriers to entry into the SRDU market. The objective of such an assessment would be to determine whether any further actions or undertakings are required to allow new suppliers to provide effective competition in the context of the significant market consolidation proposed by this application.
821 CANCOM has argued that, inasmuch as BSSI, under the terms of its new SRDU licence, does not have conditions of licence requiring structural safeguards, CANCOM should not be subject to such conditions of licence either. Accordingly, CANCOM purports to withdraw its proposal for structural separation conditions in the DTH and SRDU licences of CANCOM and Star Choice Television. In BSSI's view, such a revised proposal is not only inappropriate, for reasons that the applicant continues to misunderstand, but also represents a fundamental change to the application as filed and gazetted.
822 Conditions of licence are at the very heart of the licensing process. Many interested parties, concerned about potential abuse by Shaw of its dominant and preferred market positions, may have been satisfied with CANCOM's original proposal to retain the Star Choice conditions of licence, in modified form, and determined that there was no need to intervene in this proceeding. To consider this application without the conditions of licence originally proposed would raise serious issues of natural justice and administrative fairness.
823 Accordingly, BSSI submits that this revised proposal should be rejected by the Commission.
824 In any event, CANCOM's position with respect to these conditions is indeed ironic, given that it was in no small part due to the intervention of CANCOM with respect to Star Choice's original licensing application that the Commission imposed these conditions in the first place. CANCOM and other parties had expressed the concern that, with the Star Choice DTH distribution undertaking acting as a retailer in competition with BDUs, and Star Choice's SRDU acting as a wholesaler selling signals to BDU competitors, this degree of vertical integration would lessen competition generally.
825 CANCOM also argued that this situation would reduce its own ability to compete. Taking these arguments into consideration, the Commission then imposed conditions regarding structural separation.
826 In this current circumstance, a merged CANCOM/Star Choice would be affiliated with the second largest terrestrial BDU in Canada. Shaw not only is a dominant BDU operator but also controls several specialty services and holds significant interests in others. The Commission's concern has been that Shaw could use its position in these markets to confer unjust preferences on Star Choice to the disadvantage of its DTH competitors.
827 BSSI's situation in the broadcasting industry is fundamentally different however. BSSI has few affiliates active in the broadcasting distribution sector and these are very small entities (i.e. class 3 BDUs). Indeed, the Commission has recognized this critical difference. In granting the application for BCE to assume control of ExpressVu, the Commission noted that, since neither BCE nor ExpressVu had other interests in the broadcasting distribution industry, there was no potential for ExpressVu's being granted an undue preference from these affiliates to the detriment of its DTH competitors.
828 In addition, the Commission specifically found that there were safeguards in place under the Telecommunications Act that were not available under the Broadcasting Act. The very reason for implementing the conditions of licence in question is to avoid the abuse of links to a large, dominant incumbent cable television distribution undertaking.
829 However, since BSSI has no such links, there was no need to impose similar conditions of licence on BSSI's SRDU undertaking. CANCOM's repeated pleas for blind parity simply make no sense.
830 Therefore, should the Commission approve these applications, then BSSI submits that, at a minimum, Star Choice's existing conditions of licence should be attached to CANCOM's licence because Shaw remains a dominant cable licensee. With its proposed ownership interest in CANCOM in this application and its publicly announced intention to take control of the merged CANCOM/Star Choice entity, nothing will have changed since the Commission approved Shaw's control of Star Choice and Star Choice's subsequent application for an SRDU licence.
831 Therefore, the same conditions of licence, with some minor modifications, should be attached to CANCOM's licence as are currently attached to Star Choice's.
832 With respect to the access requirement of Star Choice's DTH licence, and BSSI's assertion that Star Choice is non-compliant, CANCOM claims that this requirement is not a condition of licence per se, and that even if it is, it is superseded by the new BDU Regulations.
833 Respectfully, the applicant is incorrect. There is no conflict between this licence requirement and the Regulations, and therefore the requirement has not been superseded by these Regulations.
834 Finally, even after the explanation provided by the applicant in its response to our intervention, BSSI continues to question the need for a merged CANCOM/Star Choice to hold two SRDU licences with different conditions. If the goal here is to create a single DTH/SRDU/HITS operation, then there should be no such need. CANCOM appears to suggest that (1) it may conclude that there is a requirement to hold both licences; and (2) that the timeframe for making such a determination should be considered open-ended.
835 BSSI reiterates its request that, in the event that the Commission finds CANCOM's maintenance of two licences acceptable, the Commission impose the same conditions on both licences; i.e., the ones in the current Star Choice DTH and SRDU licences.
836 This concludes BSSI's opening remarks. We would be pleased to answer your questions.
837 THE CHAIRPERSON: Thank you, Mr. Frank.
838 Commissioner Cram.
839 COMMISSIONER CRAM: Thank you. First, I want to make a couple of disclaimers. I am a neophyte commissioner, so please bear with me.
840 Secondly, I wanted to be clear, as with Commissioner Wylie, that I will be using shorthand in terms of the names; and if there is a problem, please let me know. I will be using Bell, Shaw, et cetera.
841 If I could take you to your intervention, page 2, paragraph 5, you are talking about the prematurity issue and this being one stage in a multi-stage reorganization. I take it that what you are referring to is one stage by shaw in a multi-stage operation?
842 MR. FRANK: Correct.
843 COMMISSIONER CRAM: What would happen to CANCOM and the other shareholders, minority shareholders involved here, if we did defer this or set it off?
844 What do you believe would happen to them?
845 MR. FRANK: That's a very good question. I really don't know the answer to that question.
846 COMMISSIONER CRAM: What would happen if stage 2 never happened?
847 MR. FRANK: Presumably, then, they would be free to make this application again.
848 COMMISSIONER CRAM: Without prejudice to --
849 MR. FRANK: Without prejudice or perhaps wait for the licence renewal, which I heard this morning was next year.
850 COMMISSIONER CRAM: If I could then take you to the issues of the competitive market, at page 3, paragraph 8, I think you are talking about the market.
851 You heard this morning comments being made about the SRDU market being essentially flat; the prognostication being that it will be poor in the future.
852 Do you agree with that?
853 MR. FRANK: We share Star Choice's belief that the DTH market is going to grow considerably over the next five to ten years. I believe that there will be a significant SRDU business.
854 If there wasn't going to be a reasonable business, we would have never applied for a licence in the first place.
855 I do agree that there probably will be a flattening as DTH takes hold. It really depends how digital technology develops.
856 COMMISSIONER CRAM: So then the trend is SRDU business will flatten and DTH will increase?
857 MR. FRANK: It depends how quickly cable embraces digital technology. If cable drags their feet the way they have been, then there will be ample opportunity for Star Choice and ExpressVu's DTH business. If cable is quick to digitize, then the competition will be much fiercer and the SRDU business will be more vigorous.
858 COMMISSIONER CRAM: Let's take the next 10 to 15 years. Do you believe that the Canadian market is capable of sustaining three competing SRDUs in the long term? That's why I am saying in the next 10 to 15 years.
859 MR. FRANK: Over the next 10 to 15 years? That's such a long period of time.
860 COMMISSIONER CRAM: Okay; five and then ten.
861 MR. FRANK: I think over the next five years, yes, three companies could survive. But I reiterate what I said early in my presentation. We are not opposed to this application per se, provided that the right safeguards are in place.
862 COMMISSIONER CRAM: We will get to the conditions.
863 In terms of if we had three competing SRDUs and if one was relatively strong and the other two were looking at spectres of failure, what would that mean in terms of the competitive market in say five years or ten years?
864 Would it mean competition would be gone? The other two would leave the market.
865 MR. FRANK: The two that are relatively weaker, are they the two integrated DTH companies, or is one of them an independent?
866 If the existing company with most of the subscribers is the independent and the two integrated DTH companies are playing catch-up, I think that catch-up can materialize in a reasonable period of time because of the efficiencies associated with a single satellite platform.
867 COMMISSIONER CRAM: So the real issue is the integration of the DTH and the SRDU.
868 MR. FRANK: There is no question that that is a benefit.
869 COMMISSIONER CRAM: If we had in a hypothetical world two integrated and one unintegrated, one of the integrated and the one independent being relatively weaker financially, what would happen to our competitive market say in five or ten years?
870 MR. FRANK: That's a very good question. I am hesitant to make a prediction.
871 It's not just financial resources; it's also the satellite platform. It's also the technology that the company is using. It's also the foresight of its management. Those are all factors.
872 COMMISSIONER CRAM: I understand.
873 MR. FRANK: There is no question, if the heart of your question has to do with the efficiencies, that if you have an integrated undertaking, that obviously is more efficient, especially if you are playing catch-up.
874 COMMISSIONER CRAM: If I understand, you were further talking in your intervention, at page 4 and page 6, about accesses and requiring undertakings. Are you now abandoning that when you say you have no objection whatsoever to the merger, or should I be asking you questions about those undertakings that you were requesting us to look at?
875 MR. FRANK: We have significant nervousness about the transaction. That's why we said we would seek appropriate conditions. This is going to be a very powerful company attached to a very powerful terrestrial BDU with very significant programming holdings.
876 We are also very concerned about long-term contracts. At the present time, as large as the applicant would have you believe we are, we have no SRDU customers. We didn't start our business before we got our licence. We waited until we got our licence, and now we are just beginning to get operational.
877 COMMISSIONER CRAM: If you could go to page 4, paragraph 13 --
878 MR. FRANK: I have it.
879 COMMISSIONER CRAM: There is a reference to the fact that entry will be more difficult because of the contracts, and then you say:
"With the proposed merger, all of these contracts will be held by one company, making entry into the market all the more difficult." (As read)
880 They are still the same contracts as they were before the merger, aren't they?
881 MR. FRANK: That's true.
882 COMMISSIONER CRAM: So really, very little has changed? How does the fact that they are amalgamating --
883 MR. FRANK: I guess what has changed is that you have gone from three competitors to two competitors. I have heard this morning the name BSSI associated with vigorous competitor. I am simply signalling to you that we have no SRDU customers at this point.
884 There are relatively few customers in the SRDU business. Most, if not all of them, are locked up in long-term contracts, many of whom are affiliated one way or the other with the combined entity. The prospects are slimmer than if those contracts didn't exist.
885 COMMISSIONER CRAM: But the day before amalgamation and the day after amalgamation will make no difference in terms of contracts.
886 MR. FRANK: That's correct. But as I said, there has been a material change in the dynamics of the business. We are going from --
887 COMMISSIONER CRAM: But you are faced with the same contracts as were there before. There is really no big change.
888 If I understand correctly, in Decision 98-171 last June we talked about not intervening in these long-term contracts. Is it fair to say that when you applied for your licence, you were aware that these long-term contracts existed?
889 MR. FRANK: Yes, that's fair to say.
890 COMMISSIONER CRAM: So you chose to apply, notwithstanding that and in full awareness of that.
891 MR. FRANK: That's correct.
892 COMMISSIONER CRAM: So clearly there is nothing we can do about those contracts at this point in time.
893 MR. FRANK: Well, we were hoping that you would inquire into them and that, through your suasion, you might be able to get undertakings from the applicant that there would be a more cost-effective way of shortening the contracts in such a way that the competition might be joined sooner rather than later.
894 If the contracts are two to five years, that's a while to wait for competition.
895 As I said, the material change in circumstance is the fact that the industry has now gone from three to two players. If the industry is looking for us to be a competitor in the near term, then we have a major barrier to entry; and they are those contracts.
896 COMMISSIONER CRAM: But it is the same barrier that existed when you made your application.
897 MR. FRANK: Yes, that's correct.
898 COMMISSIONER CRAM: And nothing has changed since that time.
899 MR. FRANK: Except that -- yes.
900 COMMISSIONER CRAM: That the contracts are held by one party as opposed to two people.
901 If we can go to page 6, paragraph 20 --
902 MR. FRANK: My colleague just mentioned to me that there used to be competition, and now there is very limited competition. I think we are dancing around the head of a pin. Your point is well taken; that those contracts existed beforehand. But our response is that competition seems to have been materially lessened by diminution of competitors from three to two.
903 COMMISSIONER CRAM: In paragraph 20 we are talking about barriers, and I believe there is a reference to the technologies, the switching technologies, and a reference to undertakings.
904 In the last sentence it says:
"The Commission could then decide whether there are further undertakings that the applicant should make to effectively address these problems if it wanted its application to be successful." (As read)
905 What are you proposing there?
906 MR. FRANK: Specifically?
907 COMMISSIONER CRAM: Yes.
908 MR. FRANK: It is the long-term contract issue.
909 COMMISSIONER CRAM: Again, we are right back to the contract issue?
910 MR. FRANK: Yes. We are simply listing the effect of barriers to entry that we have to face to become a competitive force in the near to middle term.
911 COMMISSIONER CRAM: But you agree with me that you didn't raise this --
912 MR. FRANK: I take your point.
913 COMMISSIONER CRAM: So that is the only undertaking you are talking about us addressing, in paragraph 20?
914 MR. FRANK: That is it.
915 COMMISSIONER CRAM: If we could go to page 9, paragraph 28 -- I think this is the question my sister commissioner was trying to ask. You are talking about non-compliance by Star Choice.
916 If I refer you to paragraph 104 of CANCOM/Star Choice's reply, on page 36, starting at the second sentence, it says:
"SC television is often able to minimize such costs by coordinating the DTH delivery of its signals with the delivery of specialty and pay to BDUs. This is possible because it is the same platform issue." (As read)
917 You have now said again today that you believe they are still in non-compliance, given this explanation? Is that your position?
918 MR. FRANK: We think that there is a major inconsistency in their response, yes.
919 This issue of technology is a very vexing one because originally Star Choice and ExpressVu started with a different digital video compression technology than is employed by cable. The reason is pretty clear. If you buy your technology from the same supplier who is supplying the cable industry and you are in direct competition, you put yourself in a strategically impossible position.
920 It was when Star Choice was bought by Shaw that they made their switch from divicom to GI. As a result of that, you have the situation now where they get the beneficial use of a considerable amount of space segment to deliver Canadian specialty and premium services.
921 This application before you is for an SRDU licence, but a natural and obvious adjunct to SRDU is HITS, head-end in the sky. As technology and the industry develop, there is going to be a substantial appetite on the part of small and medium sized cable companies for a one-stop shop; the ability to buy not only conventional television signals, American and Canadian, through an SRDU licence, but to buy digital specialty and premium services already digitized so they can pass through their head-end to their subscriber.
922 If competition in SRDU is the name of the game here, then it is very important that both companies have access and the ability to provide that one-stop shop. At the present time we are very afraid that that might not happen; that we may be precluded from delivering pay and specialty services to cable television head-ends simply because of the situation that exists here.
923 There is a cost constraint and there may also be a contractual problem. That is why we have raised it.
924 It is raised very much in the context of a competitive SRDU/HITS business. I realize that HITS is not what this licensing hearing is all about, but you yourself have raised the time horizon of 10 to 15 years. And if we want competition, then I think people have to be aware that there is a difficulty here.
925 COMMISSIONER CRAM: I wanted to then go into conditions of licence. I want to get on the same page, because I have been looking at this and confess I am terribly confused.
926 Would you agree with me that the rationale for conditions of licence are the issue of the attachment to Shaw's BDU undertakings?
927 MR. FRANK: I'm sorry...
928 COMMISSIONER CRAM: The connection; the fear -- and I think at page 4 of the brief you filed today you talk about the concern that Shaw could use its position in these markets to confer unjust preferences on Star Choice to the disadvantage of its DTH competitors.
929 MR. FRANK: Yes.
930 COMMISSIONER CRAM: Would that be the sole purpose of these conditions?
931 MR. FRANK: I think that's the genesis of the condition. I think the purpose for the condition is to create an environment where there will not be an abuse of dominant position, such that we have fair and sustainable competition. I think that's sort of the umbrella we are talking of and the specific or point item is Shaw's dominant position, both in terrestrial broadcast distribution and also the ownership control and in some cases minority ownership positions in many programming specialty and perhaps in the future premium television as well, pay TV and pay-per-view.
932 COMMISSIONER CRAM: If I can then take you to one of the conditions and it's the one that you are referring to, the common employees, if you have got the main book it's Schedule 10(3), page 2 to the supplementary brief in the application.
933 MR. FRANK: Yes, I have that, 10(3).
934 COMMISSIONER CRAM: Yes. And if I substituted -- and I am looking at this and you heard this morning I think it was Mr. Stursberg talking about this being in relation to the fact that it's an SRDU and a DTH -- it's page 2 you should be looking at.
935 That's from my cross-examining for 19 years, I can tell what you are reading that far away.
936 MR. FRANK: I didn't realize I was so transparent.
937 COMMISSIONER CRAM: I can see the page.
938 MR. FRANK: Or just a blank look on my face.
939 COMMISSIONER CRAM: What I am trying to see is what this does, the employee issue, how that promotes an abuse of dominant position in a marketplace? And like I need some concrete examples because this is really going right over my head, I have got to tell you.
940 MR. FRANK: Well, let me try and help you there. We currently have a contract, a five-year contract with CANCOM, and through --
941 COMMISSIONER CRAM: Who is we then?
942 MR. FRANK: I'm sorry, Bell ExpressVu buys certain distant Canadian and U.S. signals from CANCOM.
943 As a result of that they are privy to certain information, subscriber information that is of competitive value and we would not want that passed on to the DTH side of the house. That's about as concrete as I can make it.
944 COMMISSIONER CRAM: But do you agree with me that if Star Choice were your SRDU's contractor, subcontractor, that they would be in the same position because there are no conditions on you?
945 MR. FRANK: Why would Star Choice buy from us?
946 COMMISSIONER CRAM: I guess the question is why would you continue to buy from BSSI -- or from CANCOM?
947 MR. FRANK: That in and of itself is a good question, but all I can say to you --
948 COMMISSIONER CRAM: So once the five years are up we've got another issue.
949 MR. FRANK: It flows from a history, an ownership history that only played out recently.
950 COMMISSIONER CRAM: So the reason we would give this condition to the amalgamated Star Choice/CANCOM and not give it to Bell is because Star Choice would never contract with Bell? What about any other DTH?
951 MR. FRANK: Well, you asked me for a concrete example and I am speaking in our own context. I assume that there are other BDUs out there who would feel the same. They wouldn't want their information passed along to the DTH company which could then target them with whatever strategies the joint entity came up with.
952 COMMISSIONER CRAM: But that same thing could happen to you, couldn't it? Say -- because I am trying to work my way around this.
953 MR. FRANK: Yes, surely.
954 COMMISSIONER CRAM: Say Rogers contracted with you and because there is no condition of licence on you nothing would stop BSSI from using that information.
955 MR. FRANK: Well, I can confirm that Rogers hasn't approached us to buy signals.
956 COMMISSIONER CRAM: That wasn't an indirect way of doing that, but I mean --
957 MR. FRANK: But they are a very sophisticated organization and if they did, if they did I am sure that they would want the necessary contractual safeguards put in place to ensure that there wasn't that kind of leak of information.
958 That deal would be prospective and, as we have spoken about at great length today, I think we are talking about a lot of deals that are already in place and this change in industry structure is overtaking those contracts and there is a fear that there will be a leakage of information.
959 Now, I will be a little bit more expansive and say that I heard Mr. Stursberg this morning and the example he quoted about the technical folks that makes sense to us. We don't want to, in spite of what I read in the reply, we don't wish to bring a knee-jerk reaction to this application. We are not trying to dampen the competition per se. We are simply trying to put in place safeguards, so competition can actually evolve.
960 So if the applicant has proposals which we could look at and read in the cold light of dawn, we wouldn't be objecting to something that made eminent sense. So, if you wanted to take the technical side of an operation out, there still remains the strategic and corporate side, sales and marketing and financial.
961 There is the spoken word between board members. There is spoken word between employees at various levels and in various divisions of an organization. There is also the management information system.
962 Mr. Stursberg also mentioned this morning that Radio Shack is the primary outlet or one of the primary outlets for --
963 COMMISSIONER CRAM: And Canadian Tire.
964 MR. FRANK: -- for SDTH. I just went into the Radio Shack down the way at lunch time.
965 COMMISSIONER CRAM: And did a contract with them?
966 MR. FRANK: I am sure Mr. Stursberg will be amused to know that his latest Star Choice offer is contained inside a Bell ExpressVu dish which I certainly found kind of ironic.
967 In any case, what I am trying to say here is that there is all kinds of opportunity for leakage in information. This is a very large entity that is being contemplated here with tentacles into all kinds of businesses. It's the distribution business and the programming business that we are concerned with. We are not concerned about the unregulated business, Shaw Fibre Link and the like.
968 We simply as the new kid on the block want to make sure that there are adequate safeguards put in place, so that we have an opportunity to bring the kind of competitive dimension to the business that people were speaking of this morning.
969 COMMISSIONER CRAM: So if I can paraphrase then, your concerns are really twofold, or I can break it into two time periods. One transitional time period for existing contracts, given the new amalgamated environment and the new competitive environment, so it would be your five-year contract and the concern of that.
970 But then the second issue of future contracts, you appear to be saying it's caveat emptor. If you don't want us to pass it around amongst Bell, then you make a contract like Mr. Rogers would, saying "I expect my information to be confidential." Is that what I am hearing you say?
971 MR. FRANK: Yes, that goes to one specific element. I think that's a fair characterization. And I heard Mr. Stursberg -- I think it was Mr. Stursberg or Mr. McEwan, please don't hang me on this, but I heard somebody on the panel say that they were contemplating some kind of customer sales group mechanism. That would be another very helpful specific element, but it's broader than that.
972 We are concerned, generally, about information coming and going in a very large organization with common board members, with common employees in areas such as corporate and strategic development, financial information and marketing and sales.
973 COMMISSIONER CRAM: You heard Mr. Stursberg on the issue of sales though, so does that remain a concern?
974 MR. FRANK: Sure. I heard the interplay between Mr. Stursberg and Madam Wylie. I think Madam Wylie's point was bang on. Today both DTH companies use companies like Future Shop and London Drugs and Canadian Tire and Radio Shack as their main interface with the public, that's for the equipment only. But tomorrow it could be a completely different scenario. There is still the issue of the customer sales reps and the selling of the services. The hardware is simply a means to an end.
975 I think it was Mr. Neill who said very proudly this morning that 250 or 300 New Brunswickers are still involved in Star Choice's state-of-the-art call centre.
976 We also have a state-of-the-art call centre and believe me, and I am sure Mr. Neill will back this up, a lot of business id done through there and a lot of information is generated. It's the passing of the information which I think needs to be controlled and that's really what we are about.
977 COMMISSIONER CRAM: So it may well be that it's not the issue of -- well, it has got to be the issue of the employees, wouldn't it? So it would be employees in terms of information of a competitive basis or a competitive nature?
978 MR. FRANK: Competitively sensitive information which is obtained because an independent third party is doing business with one of the companies under the Shaw umbrella.
979 COMMISSIONER CRAM: Can I take you to the bottom of page 2 of what are your remarks today.
980 MR. FRANK: I'm sorry, I have got a lot of books here.
981 COMMISSIONER CRAM: And again, I am getting into the interrelationship between --
982 MR. FRANK: Excuse me, Commissioner. Could you tell me the paragraph please. I have big font here because my eyesight isn't as good it as it used to be.
983 COMMISSIONER CRAM: It starts "An additional barrier".
984 MR. FRANK: Yes, I have it. Thank you.
985 COMMISSIONER CRAM: And I am having some problem with this, in the sense that you are talking a barrier being the fact that Shaw is a large BDU. So, what I see here is you are saying it is unlikely that Shaw would ever not use the services of Star Choice/CANCOM because of that affiliation. Is that the point you are saying?
986 MR. FRANK: That's my point.
987 COMMISSIONER CRAM: Why wouldn't they be looking for the best deal for themselves and their subscribers if you could provide a better deal?
988 MR. FRANK: Does Mr. Macey buy at Gimbel's? I really can't come up with a better answer than that. I don't believe that any of the Shaw cable companies would be taking their SRDU business from us. I think that has been borne out in the very recent past.
989 COMMISSIONER CRAM: Thank you. That's all my questions.
990 THE CHAIRPERSON: Commissioner Noël.
991 COMMISSIONER NOËL: I am going back to the beginning of the discussion that you had with Commissioner Cram. I am sure when you -- and correct me if I am wrong, I am sure when you applied for an SRDU licence that you had a business plan in your minds and that this business plan meant to capture some of the SRDU customers that were customers of CANCOM and Star Choice. Did you have projections of how many of these customers you could capture and in what period of time? You didn't go there with your hands tied at your back, saying "Well, they have long-term agreements and we are dead at the start."
992 MR. FRANK: We developed a business plan, yes, and a business plan is based on projections. We did develop a business plan.
993 COMMISSIONER NOËL: Okay. That's the question I had.
994 How many customers in your business plan? Sorry, what's the market size in terms of SRDU customers? How many physical customers are there on the market?
995 MR. FRANK: Well, I don't have my SRDU business plan/application with me, but if memory serves me correctly there is about 7.5 million cable subscribers.
996 COMMISSIONER NOËL: I am talking at the wholesale level.
997 MR. FRANK: At the wholesale level it's probably considerably less than that.
998 COMMISSIONER NOËL: And they can be easily identified and targeted with some marketing strategies?
999 MR. FRANK: That's correct.
1000 COMMISSIONER NOËL: Thank you.
1001 THE CHAIRPERSON: Mr. Frank, you seem to have a concern about the fact that the proposal to remove -- to not attach any conditions of licence to either of the applicants' SRDU or DTH licences was only put forward on the 20th of April. Do you feel that you have had sufficient opportunity now to discuss the appropriateness of not imposing them? Are you satisfied that you have had a proper opportunity to tell us your views about the appropriateness of that 20th of April proposal?
1002 MR. FRANK: Yes.
1003 THE CHAIRPERSON: Is your lawyer not in agreement? He is not satisfied?
1004 MR. ELDER: Well, I guess the answer would be we are satisfied, but it remains to be seen whether there are some others that might not be satisfied.
1005 THE CHAIRPERSON: Yes, but I am asking you whether you are satisfied.
1006 And your view is that there should be some conditions and they should be sufficient to meet your concerns. Do you feel you have had a proper opportunity to tell us what those conditions should be? Are you satisfied with the ones that are on the licence, that are on the Star Choice licence as sufficient to meet your concerns that are currently attached if the Commission were not to retain the proposal that may be amended and it would simply retain them as is and attach them to CANCOM. Would that be a satisfactory solution for you as to what is needed to meet your concerns in that area? Or do you have more to say about the validity of the amendments put forward?
1007 I am just trying to find out what is BSSI's position here. We now have ascertained that you feel there have to be conditions, safeguards have to be put on, but I haven't heard you address whether the amendments suggested in the discussion we have had to date about them would lead you to endorse them as satisfactory solutions.
1008 MR. FRANK: I would be delighted to go through each condition and give you the benefit of my opinion.
1009 THE CHAIRPERSON: Yes. You may want to do that in light of the fact that you appear to see a procedural problem. You tell us they are easy to identify if you use Schedule 10 and the amendments proposed, so that you can tell us whether if we were to retain the proposal of amending them in that fashion that would be sufficient to meet your concerns, or whether you want them retained as they have been imposed.
1010 I don't intend to go into commas and so on, but we want to make sure that your views are on the record --
1011 MR. FRANK: I can give you the gist of --
1012 THE CHAIRPERSON: -- in that regard in more specific terms than to date.
1013 MR. FRANK: Yes. I would be delighted to do that. I will give the gist of our position and if you want more precise legal wording Mr. Elder --
1014 THE CHAIRPERSON: Yes, and I understand legal counsel will have some questions, but it shouldn't take long --
1015 MR. FRANK: No, not at all.
1016 THE CHAIRPERSON: -- to just tell us whether you buy or not the proposal as made.
1017 MR. FRANK: Well, at 10(2), clearly the first, there is no change.
1018 In the second condition we have a general preoccupation on the DTH side being DTH specific and vice versa on the SRDU side. So, we don't see the need for having SRDU and DTH. It's simply -- these refer to DTH and so SRDU we think is redundant.
1019 At the end where they have got the double underline, subsidiaries of Shaw Communications, licences, cable television or cable distribution undertakings, we prefer the word "affiliate" and affiliates of Shaw Communications which are licensed or authorized under the Broadcasting Act -- in other words, capturing both the distribution and the programming side.
1020 In the next one the same thing. The Board of Shaw Communications Inc. and the boards of the cable company and the programming company.
1021 THE CHAIRPERSON: So you would be prepared to accept a change that would specify those two and would then not overlap into the non-regulated businesses?
1022 MR. FRANK: Yes. David, did you want to add anything to that?
1023 MR. ELDER: No, that's fine.
1024 MR. FRANK: And that pretty well flows right through the piece, except when we come on the SRDU conditions of SCTV. On the second page there is the business of no employee of the SRDU licence. If Mr. Stursberg and his colleagues have some clever wording here which would take out the obvious employees who would benefit without the prospect of undue advantage we would be amenable to that.
1025 Obviously, we don't want to capture his engineering department or folks like that. It only makes good business sense to have single satellite operators.
1026 THE CHAIRPERSON: You haven't thought of how that could be done?
1027 MR. FRANK: We haven't got wording, no, except to say that this safeguard is important for us, as I said from --
1028 THE CHAIRPERSON: But you understand the caveat or limitation at least with regard to the engineers?
1029 MR. FRANK: Yes.
1030 THE CHAIRPERSON: So we are all satisfied that the engineers don't talk too much.
1031 MR. FRANK: Well, they do, but they talk in a language which seems to be quite common and highly useful and is applicable to our company as it is to their company. We certainly understand what --
1032 THE CHAIRPERSON: We will have to specify that engineers sending e-mails is not allowed either.
1033 MR. FRANK: I have to be careful now, Mrs. Wylie. I have a son who is an engineer.
1034 THE CHAIRPERSON: You are a lucky man.
1035 Thank you, Mr. Frank.
1036 Legal counsel.
1037 MR. BLAIS: I would like to pursue a bit this procedural issue which you have decided to raise. I was intrigued, I am on page 3 of the regular print. I don't know where it is on your large print. It is the paragraph that starts "Conditions of licence are at the very heart of the licensing process."
1038 Is it your view that we are presently in a licensing process? I didn't realize that we would be issuing a licence at the end of the day.
1039 MR. ELDER: No, that's true. I guess we are not in a licensing process, but we are considering a rather extraordinary application to consolidate a market and the conditions of licence that would be offered up pursuant to that are in issue.
1040 MR. BLAIS: Now, section 8 of the CRTC Rules of Procedure clearly provide for the possibility for the Commission to allow amendments to applications at section 8 and also at section 41 it seems quite clear that the Commission may approve the whole or part of any application, or grant such further or other relief in addition to or in substitution to that applied for. Are you suggesting that despite these two provisions somehow the Commission is legally prevented from considering the position that has developed in the application, intervention and reply stages?
1041 MR. ELDER: Well, obviously, that's a question that the Commission is going to have to decide. I don't think that through its regulation making power it can sort of contract itself out of sort of principles of administrative law.
1042 Obviously, BSSI has had a look at these conditions and has seen what has been tabled and we have had a full opportunity to speak to them. We just raise the issue that there may be others who read the application as initially gazetted and if there is a new proposal where they would drop all the conditions of licences heard there may be other parties that feel that they have been kind of left out of the hearing process.
1043 MR. BLAIS: So you are concerned about these potentially interested parties that weren't sufficiently interested to intervene in the first place?
1044 MR. ELDER: Well, presumably they may not have been sufficiently interested to intervene because they read the application and were satisfied with the conditions as they were proposed.
1045 MR. BLAIS: Is it your legal view that interested parties and sophisticated players from one degree to another have no duty to follow the proceedings of the Commission?
1046 MR. ELDER: I would hesitate to call it a duty. Certainly it is probably the better course, but I would also suggest to you that particularly when you are talking about SRDU licences there are an awful lot of much smaller BDUs that probably don't have those resources.
1047 MR. BLAIS: Thank you.
1048 Those are my questions, but my colleague has some.
1049 MS MOORE: I just want to clarify, at page 5 of your oral submissions you state the same conditions of licence, that is that apply to Star Choice, with some minor modifications should be attached to CANCOM's licence. I just want to clarify that you have indicated all of the minor modifications that you think would be appropriate.
1050 MR. ELDER: Yes, I believe we have.
1051 MS MOORE: Thank you, Madam Chair.
1052 THE CHAIRPERSON: Thank you, Mr. Frank and Mr. Elder, unless you have something else to add.
1053 MR. ELDER: Actually, maybe I will just add one thing.
1054 THE CHAIRPERSON: We are not going to have a course is jurisprudence are we?
1055 MR. ELDER: No, no. I would just make the point when we were talking about the conditions where we have got SRDU and DTH undertakings shall do this, we made the point that if it's on the DTH licence that part should only refer to the DTH undertaking, but we wouldn't object necessarily to another exception further down the line for the SRDU. It's just a question of where you place it, if you follow.
1056 THE CHAIRPERSON: You are speaking of which condition?
1057 MR. ELDER: Well, let's take --
1058 THE CHAIRPERSON: I was so sure you were going to talk procedure that I completely tuned out.
1059 MR. ELDER: No, no.
1060 For instance, if we look at in 10(2), the second condition of licence.
1061 THE CHAIRPERSON: Yes.
1062 MR. ELDER: It currently says:
"The SRDU and the DTH undertakings shall --" (As read)
1063 Well, this is a condition of licence for the DTH undertaking. So, as Chris already mentioned, we think that should remain saying only the DTH undertakings in the beginning, but obviously at the end you could have a problem that you couldn't have an integrated sort of SRDU undertaking and that's not necessarily what we are saying.
1064 THE CHAIRPERSON: Thank you very much, Mr. Frank and Mr. Elder.
1065 We will take a break until a quarter to four. Thank you.
--- Recess at 1530 / Suspension à 1530
--- Upon resuming at 1545 / À la reprise à 1545
1066 THE CHAIRPERSON: Order, please. Madam Secretary.
1067 MS VOGEL: Thank you, Madam Chair.
1068 Our next intervenor this afternoon is Canadian Cable Television Association. Whenever you are ready.
1069 THE CHAIRPERSON: Good afternoon.
1070 MR. WATT: Good afternoon, Madam Chair, Commissioners. My name is David Watt, and I am interim President of the CCTA.
1071 With me today are Jim Forsyth, General Manager of Campbell River TV (on Vancouver Island) and a member of CCTA's Small Systems Task Force. Jim is a youthful 30-year veteran of the cable industry. He began his career with CUC in Scarborough before moving to CableNet in the Burlington-Oakville region. Then about 20 years ago he came west and spent 10 years with CableNet in Kamloops, before moving on to Comox; and the last five years now with Campbell River TV.
1072 On Jim's left is Michele Beck, CCTA's Vice-President, Regulatory Engineering; and on my right is Jay Thomson, CCTA's Vice-President, Legal and Regulatory Affairs.
1073 On April 8th, the CCTA filed an intervention supporting the CANCOM/Star Choice merger, subject to a number of conditions. Those conditions relate to matters which are very important to CCTA's small system members, who in many cases rely on SRDUs to access both Canadian and foreign signals.
1074 CANCOM has a business -- and a successful one -- because of small cable systems. It is therefore incumbent on CANCOM, as one of the applicants, to address the concerns the small systems have with the proposed merger.
1075 Our overriding objective in supporting the merger is to ensure that a competitive SRDU marketplace continues to exist in Canada. We recognize that with the approval of the CANCOM/Star Choice merger, the merged company would have the resources to sustain itself over the long term.
1076 With the Commission's recent licensing of BSSI to operate an SRDU as well, approval of the merger will mean there will be two well-financed, fully-integrated operators and, as a result, what we hope will be a dynamic and competitive SRDU marketplace.
1077 We believe we would have been assured of such a dynamic and competitive marketplace had the Commission adopted the policy it had proposed last summer; namely, to allow Class 2 and 3 BDUs to access the U.S. 4+1 signals from U.S. satellite providers. We were thus very disappointed when the Commission announced last week that it would not adopt its own proposal.
1078 As regards the current application, we outline five concerns in our intervention: first, the costs and the transition schedule associated with the swap-out of receiving equipment that will be required if the merger goes forward; second, and most important, the applicants' plans to become a HITS provider; third, the potential for dropping of existing signals; fourth, competitive pricing; and fifth, the illegal SMATV market.
1079 We were pleased to see that the applicants attempted to respond to many of our concerns in both their April 20th written reply and their appearance today. In many ways we were satisfied with their responses.
1080 At the same time, however, we would like in some cases to have some more clarity as to their final actual position.
1081 Jim will now take you through the specifics of our remaining concerns.
1082 MR. FORSYTH: For example, the applicants stated in their written reply that they "currently intend" to offer "compensation" to all BDUs who are required to replace decoders before the end of their service life as a result of any shift in technology initiated by CANCOM/Star Choice.
1083 If this represents only their current thinking, does this mean they could change their mind at a later date? If this is merely their intention now, does this mean they will not commit to it? And what do they mean by offering "compensation"? It is our position that the applicants should commit to providing full assistance to BDUs in the case of a shift in technology resulting from this merger.
1084 Cable operators should not have to bear any of the equipment swap-out costs that would not otherwise be triggered except for this merger. This means, among other things, that the applicants must cover the replacement costs whether the decoders are leased or have been purchased, whether from the applicants or anyone else. It means that the new decoders are commercial grade, not residential. It means that the applicants cannot arbitrarily apply a five-year service life to decoders that are subject to longer term contracts -- for example, eight-year contracts.
1085 If small systems have to bear any of these unexpected and unbudgeted costs, it could cripple them. Therefore, we submit that the applicant must commit unequivocally to cover all of the costs associated with the swap-out, and that this commitment should be reflected in the Commission's decision.
1086 We have also asked that the applicants establish an orderly transition schedule for the swap-out. This is necessary, for example, to ensure we can schedule the required work that we'll have to undertake in the most cost-efficient manner. We are pleased to see that the applicants have agreed that this is a reasonable expectation. We therefore ask the Commission to include this expectation in its decision.
1087 We are also pleased that CANCOM has confirmed that it will honour the technological obsolescence protection clause contained in its current service agreements.
1088 We also note the applicantS' statement that, if the Commission deems it necessary, they will undertake that no BDU customer will experience a rate increase during the term of its contract as a result of a shift in technology. We ask the Commission to require that the applicants, at a minimum, make this undertaking.
1089 We believe, however, that what they should really undertake to do is to pass on the efficiencies gained from the shift in technology by way of charging their customers lower prices. For example, where the two SRDUs currently offer a particular signal at different prices, the merged company should undertake to offer it at the lowest of the two prices.
1090 In our written intervention we highlighted the major importance which small cable operators place on the development of "head-end in the sky", or HITS, initiative. We cannot emphasize this point enough: small systems will need HITS to survive in the competitive environment. Without a reasonably-priced HITS solution, small systems will lose more and more customers to the DTH competitors.
1091 We therefore welcome the applicants' statement in their written reply that they are committed to HITS and to working closely with BDUs to coordinate its development. We ask the Commission to reflect this commitment in its decision.
1092 The applicants have stated that at this stage in the regulatory process they must keep any details of the HITS plan confidential (at least from each other). If this is indeed the case, we ask the Commission, should it approve the merger, to include in its decision a requirement that the applicants file those details within 60 days. Such details would include, for example, the costs, technology, implementation timetable and prices.
1093 MR. WATTS: Madam Chair, Commissioners, those are our comments. In closing, we would like to reiterate that we believe we and the Commission share the same objective in this case; namely, to ensure that the competitive SRDU environment you introduced less than a year ago is maintained, and that the benefits of competition continue to flow to SRDU-reliant BDUs and their customers.
1094 With approval of this proposed merger, the only two SRDU operators -- CANCOM/Star Choice and Bell ExpressVu -- will also be our direct competitors in the distribution market as DTH operators. This is another reason why it is imperative that, in approving this transaction, the Commission address the concerns we outlined in our written intervention and which we have expanded upon today.
1095 Once those concerns are addressed, we believe that this merger will be in the public interest.
1096 Thank you, and we welcome your questions.
1097 THE CHAIRPERSON: It would appear from your presentation that you were very successful with your intervention, since you now seem satisfied with many of the responses and the only thing left for us is to express our commitment, in your view, on many of these points.
1098 MR. WATT: I think that is true on many of the points. We certainly would like to touch upon one of our major issues, as I indicated in the opening remarks -- probably what we feel is the most important long-run consideration for a small cable system going forward; and that is the head-end in the sky concept, or HITS. That is a topic that has not received very much attention thus far today.
1099 THE CHAIRPERSON: I will come back to that.
1100 Do I read you well that over the swap-out what you would want is -- however of the equipment, if it is necessary -- is that everybody be made whole, so to speak; that it not be related to a five-year depreciation of the equipment. If there is a need to change technology, the customer should not have to be penalized in any way whatsoever; that he be made whole financially over this need.
1101 Is that correct? Is that what you mean by full assistance?
1102 You seem to be concerned about the use of "currently", their "thinking is", et cetera. Full assistance: does that mean --
1103 Am I not using a term you recognize? Is that not English to say to be made whole?
1104 MR. FORSYTH: I think that is good enough for us.
1105 MR. THOMSON: It is not a concept that we usually follow --
1106 THE CHAIRPERSON: Meaning that there is no penalty; that however you do it, you are as whole as you were before you started.
1107 MR. FORSYTH: The cost in switching technology for the operator is -- it doesn't cost them anything, if that is what you mean by make whole, for the term of the service agreement; not necessarily the term of the --
1108 THE CHAIRPERSON: Yes. It seems to me there will be different circumstances. In some cases the equipment will be older than five years but quite sufficiently operating, so that it is not limited to -- not fenced in any way, but that no one will be penalized by entering.
1109 MR. FORSYTH: Please remember that the operator will be forced to switch technology. Had CANCOM continued on as a separate company, technology would not have changed.
1110 THE CHAIRPERSON: Yes. Isn't that what we talk about when we talk about the need to change equipment, because of the change in technology? Your concern is that their commitment in the reply is not sufficiently full to ensure that.
1111 So I am trying to see what full assistance means, because it is not much clearer than currently thinking. Therefore, I am asking you if your bottom line is that there be no financial penalty as a result.
1112 MR. WATT: The answer to that is yes. As you pointed out, there are a number of circumstances which could apply here.
1113 As we understand the CANCOM offer currently, it is based on a five-year service life. Although it is not stated clearly, our belief is that, for example, if you are four years into that particular contract, then the compensation that you would be entitled to would be one-fifth of the value of the decoder, which then could be applied to the new decoder which you must, as a result of this merger, acquire.
1114 THE CHAIRPERSON: And hardly anything if you are on the eleventh month of the fifth year.
1115 MR. WATT: That is correct.
1116 THE CHAIRPERSON: And that is not whole.
1117 MR. WATT: That is certainly not whole, and that is the point that Jim was making. Our preferred position is that we would be made whole because we are in a sense --
1118 THE CHAIRPERSON: You see, you have learned a new term.
1119 MR. WATT: Were this merger not to go through, the status quo would be that the small system operator would not incur these costs.
1120 CANCOM and Star Choice have explained well the cost savings and the imperative to reap the economies of scope through the merger. Our position is that a portion of these cost savings should be remitted back to the small systems operators who are suffering, in a sense, a hardship, a penalty as a result of this particular merger.
1121 There are a number of other circumstances, as you suggest. The case that Jim mentioned where an operator will have an eight-year signal contract and a five-year equipment contract, with every expectation that that equipment will be useful throughout the entire period of the signal contract.
1122 Again, the small system operator is facing a burden that he did not anticipate and which he will not, at least at the outset, necessarily reap significant benefit from, because he is subject to a service contract and his right will not, as I understand it, in the immediate time period be reduced as a result of the competitive nature of the industry that you would expect to go forward. He will benefit at the end of the eighth year, but we are faced with the first four years.
1123 THE CHAIRPERSON: That is why it is interesting to discuss the concept of full assistance, because there will be some variations in the customer's position. It is difficult to say in each circumstance how you ensure that he is in the same position as he would have been if he had not been required to change.
1124 There has been not as much discussion about the HITS issue as you would have liked. Since you are here, why don't you explain to us exactly what it is in the best of all worlds that you would want to happen with regard to HITS; what you see technologically, the process and when it should occur.
1125 MR. FORSYTH: The limitation that a small operator has with digital or switching to digital technology is simply the head-end cost. HITS is a solution to that.
1126 Obviously, the Commission's objective is to get the cable operators to move into the digital arena. If they can't afford to do it, then they are going to be in a very difficult position with the DTH suppliers.
1127 That is why we are asking for some sort of condition that will confirm that HITS will be available at least to small operators, or any operator that wants to access it.
1128 MR. WATT: Possibly I would ask Michele Beck to give a brief technical explanation as to precisely what is required.
1129 MS BECK: HITS is basically a service where signals are distributed via satellite in a digital format that is very cable-friendly. The technologies on the satellite have to be compatible with the the technologies that the cable industry would be using from the head-end basically to the customer terminal, the set-top.
1130 The signal would in fact be received at the head-end and would be basically passed through in the digital format, basically from one full transponder that comprises likely eight to ten signals. That would pass through directly down a cable channel.
1131 The cost of this passthrough equipment or transcoding equipment basically makes digital affordable, or an affordable option for the cable company. If you don't do it that way, it is simply not an option for cable, particularly small systems, to offer a digital service.
1132 Another aspect, a requirement to making HITS viable for the small system, is that the HITS provider also has to provide the authorization function. Apart from the actual transcoding equipment, the authorization equipment is again a very costly component of a digital service. So the equipment that we are looking for also from basically a digital satellite service provider, or an SRDU provider, is to offer as well the authorization function so that small systems do not have to invest in that technology.
1133 THE CHAIRPERSON: Would I be correct if I translated that in pedestrian terms as the SRDU perform for a number of small cable operators what the large cable operators perform at their own head-end?
1134 MS BECK: That is correct.
1135 THE CHAIRPERSON: That would be a service that would be sold to the small cable operators.
1136 MS BECK: That is correct.
1137 MR. FORSYTH: At a reasonable price.
1138 MR. WATT: The reason for that is that the minimum cost of a digital head-end is in the order of $200,000, and what you would hope to be able to do for the number of small cable operators is to have the cost of the head-end borne by the SRDU provider and then spread over the entire population of the small cable universe.
1139 Just to expand, we have heard this morning the forecast predictions of 1.5 million to 1.8 million DTH subscribers out five, six, seven years from now. It is not a secret that many of those subscribers will come at the expense of small cable systems. In fact, without a digital offering, one could foresee that small cable operators may become a rare entity in five to seven years from now.
1140 So it is absolutely critical that small systems have this type of capability.
1141 We also heard earlier from Mr. Frank that the type of technology selected by BSSI is not at this time compatible without considerable additional cost with cable technology. Consequently, when we look to a HITS solution, we really are looking at the new entity or an entity which uses cable-friendly technology.
1142 THE CHAIRPERSON: You have expressed a number of concerns in your intervention, which appear to have been heard and some response given to them. But you don't express any concern about the fact that DTH providers and cable companies involved --
1143 Are there not many disincentives to proceeding with a HITS solution? Is that not a concern; that one of the disincentives to proceeding to a HITS solution is that it is not necessarily in the interest of the parties concerned?
1144 MR. FORSYTH: I think from the small system operator's perspective, we would rather have a position where there are two competitive giants out there in the marketplace. Maybe they are competing with us, but they are also competing with one another.
1145 THE CHAIRPERSON: I wasn't addressing whether or not the merger was a problem, but whether or not safeguards, structural separation, et cetera would be necessary. Is it not related in part to whether or not they proceed with HITS if we see, for example, that cable operators will own some of these small cable systems that you feel will be vulnerable to being poached by DTH?
1146 MR. WATT: Well we certainly, to go back to the outset, have spoken a lot today about industry structure and whether a duopoly provides efficient choice to provide a competitive marketplace. We are facing here a slightly more complicated situation than a normal duopoly, in the sense that the two companies that are providing the SRDU function also are competitors through their DTH arms.
1147 In part, one of the reasons we are highlighting the concerns with respect to HITS is our concern that there may be different economic forces at play within the combined SRDU/DTH provider. So we are bringing this to your attention to hopefully have you do something about it. It is a regulatory issue dealing with the market structure that we face today. We do bring concerns about that.
1148 With respect to other issues in this regard on the question of structural separation, I think as people have earlier spoken today, I don't think there has been too much debate with respect to maintaining the structural separation between the terrestrial cable distribution arm and the satellite provider. Where there seems to be agreement is between the DTH arm and the SRDU arm of a satellite provider, many of the restrictions do not need to remain in place.
1149 A larger concern, from our perspective, with regard to HITS would be a concern with respect to the first type of structural separation. We have every expectation to believe that you will maintain that structural separation.
1150 THE CHAIRPERSON: With regard to HITS, what you envisage is not a benefit; you envisage a business, something that would be a business proposition for the SRDU provider. It would be a business.
1151 MR. FORSYTH: Yes.
1152 THE CHAIRPERSON: That would be sold at, you said, a reasonable price. But presumably you are aware of the cost that that would entail.
1153 MR. FORSYTH: Yes. Our concern there is that there obviously is no competition, as expressed by Bell ExpressVu.
1154 THE CHAIRPERSON: And many disincentives, of course, from helping the small cable operators to be in a position to enter the digital world easily, because otherwise subscribers could do it by simply subscribing to DTH eventually. Is that correct?
1155 MR. FORSYTH: Yes, that seems to be the feedback from the small systems; that they just can't get into the digital arena and compete in the real world. Theirs is an analog world and will continue to be until they can get into the HITS services available to them. They just can't move to the digital.
1156 It is a $200,000 head-end cost. And for 300 subscribers, it's just not --
1157 THE CHAIRPERSON: So it is somewhat of a question between how much you help to keep the small cable operators to continue to operate independently as small operators.
1158 MR. WATT: Going back to the point, however, it is our expectation that this will be run as an economic business on the part of CANCOM/Star Choice. Such a business exists in the United States with the HITS offering by TCI. Our understanding and our belief is that it can be made available on an economic basis, given the broad distribution to the universe of small cable subscribers.
1159 THE CHAIRPERSON: And you would want not necessarily a mandated HITS program, but that there be a requirement that the applicants get on with making a plan and filing it with the Commission.
1160 Do you expect that at the end of the day the Commission would mandate a HITS program?
1161 MR. WATT: The answer to that is "no". It is very important to answer, though, so I just made sure.
1162 MR. THOMSON: We wouldn't anticipate that the Commission would make a requirement of starting up a HITS initiative. As you identified, it's a business proposition. Nevertheless, it's a business proposition with a strong public interest aspect to it.
1163 So to the extent that the Commission can get involved from an overseeing position, I think that is worthwhile and important to everyone involved. But it doesn't necessarily mean that you have to regulate it or license it.
1164 THE CHAIRPERSON: I never meant that.
1165 MR. THOMSON: If you raise it in your decision coming out of here, it raises the profile. It is going to be something that is always in the Commission's mind; therefore, will be --
1166 THE CHAIRPERSON: I didn't suggest that we would necessarily license it or regulate it, but that we would mandate its existence in some way or another. What you want is some suasion to get discussions and negotiations going.
1167 MR. THOMSON: That's right.
1168 THE CHAIRPERSON: You have won quite a bit today. Maybe you will do even better at reply.
1169 You see, when you are President of the CCTA, what kind of power you wield.
1170 MR. WATT: Yes, it's a heavy burden; but we do our best.
1171 THE CHAIRPERSON: But it has its rewards.
1172 MR. WATT: Thank you very much.
1173 THE CHAIRPERSON: Thank you.
1174 Madam Secretary, please.
1175 MS VOGEL: Our next intervenor this afternoon is l'Alliance des Radios communautaires du Canada inc.
1176 M. MAURICE MCGRAW: Madame la Présidente, mesdames et messieurs les Commissaires.
1177 Permettez-moi tout d'abord de me présenter tout en vous brossant un bref tableau, un bref résumé de la mission de l'Alliance des Radios communautaires du Canada, organisme que je représente. Mon nom est Maurice McGraw, je suis président de l'Association.
1178 L'ARC du Canada est un organisme national qui représente 28 radios communautaires francophones et acadiennes à travers le pays. Dix-huit de ces radios sont actuellement en opération, les plus anciennes étant en ondes depuis une dizaine d'années.
1179 L'ARC du Canada a comme mission de contribuer à l'épanouissement des Canadiens et Canadiennes d'expression française par la création, le maintien et le développement d'un réseau de radios communautaires de qualité.
1180 L'ARC du Canada a pris connaissance du dossier de CANCOM visant à faire approuver des changements au contrôle effectif de CANCOM et de Star Choice Television Network Incorporated. Après analyse du dossier, l'ARC du Canada appuie la demande de changements de contrôle proposés par CANCOM.
1181 Permettez-moi d'effectuer un retour en arrière sur l'une des décisions que le CRTC a approuvée le 4 février 1998, décision CRTC 98-23. Le Conseil approuvait à ce moment une licence à l'ARC du Canada pour opérer un réseau radiophonique national pour relier par satellite ses 18 stations membres en ondes partout au pays. L'ARC du Canada tient à signifier que, sans l'appui financier de CANCOM -- qui verse cinq pour cent des revenus à la création et distribution du contenu canadien suite à une politique du CRCT -- la mise en oeuvre de son réseau national, le Réseau francophone d'Amérique, appelé RFA, maintenant devenu une marque de commerce de l'ARC du Canada, aurait été pratiquement impossible à réaliser.
1182 Grâce à une généreuse contribution de l'ordre de 355 000 dollars pour la présente année financière, le soutien de CANCOM permettra d'améliorer le contenu local de nos radios membres. Par le fait même, les communautés desservies par nos radios seront dotées de services supplémentaires permettant d'échanger des programmes entre les communautés, dont de l'information, des émissions culturelles, musicales, d'actualité. Ceci confirme le rôle clef de CANCOM dans le système canadien de la radiodiffusion.
1183 Enfin, en plus de consolider plus d'une centaine d'emplois permanents en région, l'apport de CANCOM à l'ARC du Canada et RFA créera directement dix emplois permanents additionnels à son Centre de production national situé à Ottawa.
1184 L'ARC du Canada appuie la demande de CANCOM étant donné que la fusion de CANCOM et Star Choice permettra à CANCOM de demeurer compétitive, tant au niveau de ses activités réglementées, étant une entreprise de distribution par relais satellite, EDRS, qu'à celui des autres services par satellite. Tel qu'indiqué dans sa demande, CANCOM s'attend à une concurrence accrue non réglementée, qu'il s'agisse du groupe BCE ou de d'autres fournisseurs de services étrangers, compte tenu des engagements du Canada envers l'Organisation mondiale des communications, OMC.
1185 Mercredi le 24 mars dernier, la plus importante entreprise de communication au Canada, BCE a annoncé son intention de réorganiser son entreprise et de vendre 20 pour cent de ses actions de Bell Canada à la compagnie américaine Ameritech. Ce futur partenariat, sous réserve de l'approbation des organismes de réglementation, dont l'investissement de Ameritech est évalué à 5,1 milliards de dollars, renforcera la position de BCE dans le domaine des communications au pays.
1186 Il est clair que BCE a l'intention de monter une opération à grande échelle pour s'attaquer à tous les aspects du marché des services par satellite que CANCOM dessert traditionnellement, y compris le secteur EDRS réglementé. Il est également évident pour des observateurs de l'extérieur comme l'ARC du Canada que BCE dispose actuellement de ressources financières énormes. Cette future transaction, si elle est approuvée, ne fera qu'accroître la position de BCE dans tous les domaines des communications au Canada et à l'étranger. Dans ce contexte, si CANCOM doit survivre à la concurrence féroce que lui livrera BCE dans le marché des services satellites, elle doit impérativement se positionner pour faire face à cette concurrence.
1187 L'ARC du Canada comprend que la vision du Conseil par rapport au développement du secteur canadien des communications, tel que formulé dans son document "Le CRTC: De la vision à l'action" de mai 1998, entre autres énoncés se lisant comme suit:
"Nous encourageons la formation d'industries de communications solides, concurrentielles et sensibles aux préoccupations sociales."
1188 Et que:
"Au pays, ces industries saines et concurrentielles contribueront à façonner l'identité canadienne et à assurer la présence du Canada à l'étranger."
1189 Ces énoncés encouragent la fusion envisagée de CANCOM et Star Choice. La présente demande de CANCOM reflète bien cette transition du rôle de fournisseur de services EDRS jouissant d'un monopole au sein d'un environnement beaucoup plus dynamique dans lequel elle doit offrir une gamme complète de services par satellite, en plus des services traditionnels réglementés de manière à rester concurrentielle.
1190 Selon l'expérience de l'ARC du Canada, CANCOM a toujours su apporter une contribution valable et significative aux objectifs fondamentaux du système canadien de radiodiffusion et dans un environnement concurrentiel ce niveau d'engagement ne peut qu'être maintenu ou augmenté en prenant pour acquis que CANCOM deviendra avec la fusion plus forte et concurrentielle.
1191 L'ARC du Canada et ses 28 radios membres sont directement intéressées à la prospérité de CANCOM. Depuis des années, et plus particulièrement depuis septembre 1998, dans le cadre de sa contribution de cinq pour cent à la création et la présentation de programmation canadienne, CANCOM assure un soutien financier direct à l'ARC et à son réseau national, RFA. Ce soutien financier direct de CANCOM à l'ARC du Canada vient d'être confirmé pour la deuxième années financière de la licence de CANCOM tel que noté dans la réplique de CANCOM face aux intervenants.
1192 Une autre raison qui motive pourquoi l'ARC du Canada appuie la fusion de CANCOM et Star Choice est du fait que le Réseau francophone d'Amérique, RFA, devra s'autofinancer à la suite d'une période de rodage et d'implantation prévue sur trois années. C'est donc juste de dire que RFA devra subvenir à ses besoins pour faire ses frais en offrant aux entreprises canadiennes ses services. Ces services sont, entre autres, la publicité nationale qui sera le poste de recette principal du Réseau francophone d'Amérique.
1193 À ce niveau, une société solide comme CANCOM avec sa fusion à Star Choice lui permettra de participer à notre programme de publicité nationale et développer un partenariat durable et solide. RFA desservira pratiquement l'ensemble des communautés francophones à travers le pays. Notre signal sera entendu de l'est à l'ouest du pays donc il est capital pour RFA d'être en mesure d'approcher des entreprises du type de CANCOM pour continuer sa mission tant au niveau des services offerts à ses radios membres qu'à ses clients du type de CANCOM.
1194 L'ARC du Canada est heureuse de la prise de position du Conseil expliquée dans l'avis public CRTC 1999-72 du 26 avril dernier qui mentionne, entre autres:
"Le Conseil a décidé, par voie majoritaire, de ne pas approuver une proposition qui aurait autorisé les entreprises de distribution de radiodiffusion de classes deux et trois à recevoir les signaux des stations de télévisions américaines directement des fournisseurs de services par satellite américains." (Tel que lu)
1195 Il va sans dire que les fonds attribués à l'ARC du Canada par CANCOM auraient été grandement affectés si le Conseil avait approuvé cette décision. L'ARC du Canada pourra donc entreprendre la deuxième année financière de son projet RFA avec plus d'assurance en vue du développement et l'épanouissement de son réseau national. Enfin, ce soutien financier offert par CANCOM permet à l'ARC du Canada d'appuyer bon nombre d'initiatives radiophoniques locales et à créer bon nombre d'emplois permanents dont les principaux bénéficiaires sont les communautés francophones et acadiennes vivant en situation minoritaire au pays.
1196 L'ARC du Canada est également intéressée au maintien d'une concurrence saine à tous les niveaux du secteur des services par satellite. La fusion de CANCOM et de Star Choice permettra à CANCOM de livrer une concurrence vigoureuse à la compétition qu'elle provienne du groupe CBE ou d'autres joueurs du marché des services par satellite. On peut s'attendre à ce que la concurrence entre BCE et CANCOM, ou tout autre joueur, puisse entraîner des résultats bénéfiques pour toute la gamme des usagers de services par satellite.
1197 Enfin, l'ARC du Canada est convaincue que la demande de CANCOM permettra à cette dernière de maintenir sa capacité concurrentielle sur le marché des services par satellite au Canada.
1198 Veuillez prendre note, mesdames les Commissaires, que la contribution financière volontaire de CANCOM à l'ARC du Canada n'est assujettie à aucune condition ou particularité entre les deux parties.
1199 À titre de principal responsable de l'ARC du Canada, je vous remercie de l'opportunité offerte de vous présenter cette allocution et je tenterai de répondre au meilleur de ma connaissance à vos questions.
1200 LA PRÉSIDENTE: Merci, Monsieur McGraw. Madame Noël?
1201 COMMISSAIRE NOËL: Merci, Monsieur McGraw. Alors votre intervention en faveur de la demande de fusion entre CANCOM et Star Choice se fonde principalement sur la qualité de votre relation avec CANCOM et son appui financier auprès de votre organisation.
1202 Est-ce que dans le cadre de la fusion étant donné que WIK Western ne contrôlerait plus CANCOM si la transaction était approuvée, est-ce qu'il y aurait un impact quant à vous sur les relations et le soutien financier que CANCOM pourrait apporter à votre organisation?
1203 M. MAURICE MCGRAW: Cet élément-là à ce moment-ci n'est pas une inquiétude de notre part étant donné que, comme je l'ai mentionné dans le document, la deuxième année l'engagement pour la prochaine année est confirmé de la part de CANCOM.
1204 Maintenant c'est un engagement qui porte sur trois ans et il n'y a pas d'éléments en jeu qui pourraient affecter cette relation-là.
1205 COMMISSAIRE NOËL: Et si le Conseil n'acceptait pas la demande de fusion, pensez-vous qu'il y aurait un impact sur l'engagement de CANCOM pour la troisième année?
1206 M. MAURICE MCGRAW: À ce niveau-là, je crois que la solidité de l'entreprise pourrait possiblement être affectée. Donc pour nous d'avoir une entreprise solide non seulement pour la troisième année, mais pour l'avenir, comme je l'ai expliqué, lorsque nos recettes principales pour ce qui est du réseau francophone de l'ARC du Canada seront la publicité nationale, il faut s'assurer que l'entreprise soit...
1207 COMMISSAIRE NOËL: Que les commanditaires soient encore sur place.
1208 M. MAURICE MCGRAW: Exactement, que ce soit pour une question de publicité, de prestige ou de marketing pour la compagnie CANCOM et Star Choice.
1209 COMMISSAIRE NOËL: Je n'ai pas d'autres questions, Madame Wylie.
1210 LA PRÉSIDENTE: Nous vous remercions, Monsieur McGraw de votre présentation et de votre intervention.
1211 Madam Secretary?
1212 THE CHAIRPERSON: Thank you, Mr. McGraw.
1213 Madam Secretary?
1214 MS VOGEL: Our next intervenor this afternoon, Madam Chair, is CanWest Global Communications Corp.
1215 THE CHAIRPERSON: Good afternoon, Mr. O'Farrell, Mr. Dalfen, and Mr. Strike.
1216 MR. O'FARRELL: Madam Chairperson, Commissioners, my name is Glenn O'Farrell, and I am the Vice-President of Legal and Regulatory Affairs for the Global Television Network.
1217 With me today are Tom Strike, to my left, Senior Executive Vice-President of CanWest Global Communications; and Charles Dalfen, Legal Counsel from the firm of Tory, Tory, Deslauriers & Binnington.
1218 This might be his first actual appearance in that capacity.
1219 We appreciate the opportunity to express our views and concerns regarding the applications filed by CANCOM seeking approval for changes in the effective control of CANCOM and Star Choice.
1220 MR. STRIKE: Foremost among our concerns today is that the appropriate application is not among those currently before you.
1221 In our submission, and as detailed in our written submission, what is really before you today is a disguised request by Shaw Communications Inc. to unilaterally control the merged CANCOM/Star Choice entity.
1222 We submit that Shaw currently controls WIC, without having received the necessary Commission approval to do so. As a consequence, approval of these applications would effectively give Shaw an aggregate 66 per cent direct and indirect interest in, and clear control of, CANCOM. Yes, there is no application before you today which seeks approval for Shaw to control CANCOM or to approve its ownership, directly and indirectly, of more than 50 per cent of CANCOM's shares.
1223 In its reply to our written intervention, CANCOM has suggested that:
"...any concerns of the Commission relating to Shaw's participation in WIC can be, and should be, dealt with in the context of an application relating directly to the ownership of WIC's shares and assets."
1224 With respect, CanWest submits that the Commission must consider this issue now, as it has a direct impact on the applications before it today. Before you are applications that, if approved, would result in Shaw control of the merged CANCOM/Star Choice entity.
1225 Even if the Commission is not yet certain that it agrees with us that Shaw has de facto control over WIC, and hence over a combined CANCOM/Star Choice entity, to the extent that it believes that this could be the case, surely, on balance, it would not be advisable to unconditionally approve these applications, since to do so would establish a fait accompli before the pertinent policy issues can be fully reviewed and a deliberate decision made. Surely the Commission would not want to back into a situation where excessive Shaw power in the Canadian broadcasting system had been allowed by inadvertence.
1226 Indeed, to approve Shaw going above the 30 per cent threshold to 36 per cent would itself put Shaw in a directly dominant position over CANCOM, even without considering its indirect ownership position through WIC.
1227 With all due respect to CANCOM, the Commission cannot defer its consideration of this issue until a later date. We submit that the Commission must address this issue now. Shaw will control the merged CANCOM/Star Choice entity upon approval of these applications, and yet the approval of the Commission has not been properly sought in this regard.
1228 This alone should be sufficient reason for the Commission denying these applications.
1229 Further, this Commission has consistently required applicants who seek approval of a change of control of regulated undertakings to demonstrate that, under the circumstances, the applications that they have put before the Commission are the best available and that their approval is in the public interest.
1230 Control of CANCOM would give Shaw massive combined power over terrestrial and satellite broadcast distribution systems in many parts of Canada, as well as over many important radio, television, pay and specialty services. This would raise serious issues of cross-ownership of programming and distribution undertakings, as well as of concentration of ownership in the Canadian broadcasting system.
1231 Because of the enormous concentration of distribution and programming undertakings, it is therefore questionable, in our submission, whether the Commission's approval of these applications would be in the public interest.
1232 We note also in this context the recently announced acquisition transactions by Shaw in respect of cable distribution undertakings in Atlantic Canada which have yet to come before this Commission for approval.
1233 Our concern in this regard is compounded by Shaw's regulatory conduct, to which we have made reference in our written submission. Is it appropriate to reward such behaviour by approving these applications? We say the answer is "no".
1234 As a result, we submit that these applications should be denied.
1235 MR. DALFEN: In its response to CanWest's intervention, CANCOM failed to acknowledge that the uncertainty surrounding WIC's ownership weakens its regulated undertakings and, ultimately, the Canadian broadcasting system as a whole.
1236 Should the Commission determine that approval of these applications is appropriate and consistent with its DTH and SRDU policy, then we urge the Commission to make its approval subject to a condition precedent of its further approval of the appropriate applications by WIC, which would represent the comprehensive and final disposition of WIC's regulated undertakings.
1237 CANCOM's attempt to refute the appropriateness of imposing such a condition precedent is inadequate, particularly in light of the Commission's decision CRTC 97-84, a decision that related to Videotron and CFCF.
1238 While the circumstances of these applications and those in the Videotron case are not identical, the same fundamental public interest issues exist.
1239 In the Videotron decision, the condition precedent was imposed on the basis of public interest considerations following a lengthy period of uncertainty relating to TQS and CFCF-TV and its impact on their position in their respective markets.
1240 In the circumstances of these applications, a condition precedent would be appropriate on the basis of public interest considerations following a lengthy period of uncertainty relating to WIC's regulated undertakings, and its impact on their position in their respective markets.
1241 WIC's licensed undertakings are currently experiencing serious difficulties under uncertain and unresolved ownership. One only has to look at WIC's publicly reported financial reports to confirm the truth of this statement.
1242 For example, WIC's recently released second quarter financial results show that, in contrast to other major broadcasting groups, WIC's operating income from conventional television, radio and specialty service channels has dropped to $37.7 million for the six months ended February 28, 1999; from $40.5 million for the comparable period in 1998. This can be attributed primarily to a dramatic 24 per cent drop in its conventional television operating income before amortization and restructuring.
1243 These are significant financial indicators of the disruption that is, in CanWest's view, accountable in large measure to WIC's ownership uncertainty.
1244 In the Videotron decision, the Commission recognized that its decision to impose a condition precedent would temporarily prolong, but ultimately resolve, the prevailing uncertainty undermining primarily TQS, and decided to put in place an expedited procedure for processing applications that would bring efficient closure.
1245 In CanWest's view, given WIC's circumstances, it would also be appropriate for the Commission to establish, as it did in the Videotron decision, an expedited process tied to a condition precedent to ensure a timely resolution of the ownership of WIC and its regulated undertakings.
1246 MR. O'FARRELL: In its response to our intervention, CANCOM suggested that approval of the application, subject to a condition precedent, would effectively unravel its proposed merger with Star Choice. In our view, such a proposition is simply untenable from both a commercial and practical perspective.
1247 There is little, if any, realistic likelihood that the Share Exchange between CANCOM and Star Choice would be abandoned should its completion be delayed under the terms of a definitive, expedited process established by the Commission further to a condition precedent. The shareholders of both CANCOM and Star Choice, including minority interests, have overwhelmingly approved the proposed merger for the obvious competitive, commercial and practical motives that the applicants have urged today in support of the approval of the applications.
1248 It should be noted that such votes of shareholder approval took place only weeks ago. It is not as if the proposed merger plans have been gathering dust on the regulatory sidelines.
1249 Suggesting that the merger would no longer be desirable to either CANCOM and/or Star Choice simply because its completion were to be delayed for a matter of months, is a frivolous and disingenuous suggestion.
1250 The circumstances that motivate the merger today amount to competitive and industrial considerations that will hardly be extinguished by the mere passage of time, a tightly scripted timeframe. For the foreseeable future, BCE Media's ExpressVu and its nascent SRDU undertaking will serve as the pre-imminent rationale for the merger of CANCOM and Star Choice and therefore render the abandon of the Share Exchange a rather unrealistic likelihood.
1251 In conclusion, we acknowledge and are pleased to report that significant progress has been made recently by the parties in resolving WIC's ownership situation. However, we must also acknowledge that Shaw and CanWest have yet to come to a definitive and binding agreement, amounting to the resolution of all outstanding issues, and several commercial hurdles remain to be overcome.
1252 Nevertheless, if one of the Commission's goals is to find the quickest way to bring a resolution to all of the issues surrounding the ownership of WIC and its regulated undertakings, then we respectfully suggest that of the alternatives available to you in regard to your decision on the present applications, unconditional approval will be the least likely one to contribute to attaining that goal.
1253 Should the Commission approve the applications before it today, subject to a condition precedent tied to an expedited resolution process, it will have made a significant contribution to resolving the current situation of uncertainty, which has gone on for far too long and which has proven to be counter-productive to the goals of the broadcasting system. By way of contrast, to reward Shaw with unconditional approval would send the message that there is no rush to resolve the WIC ownership situation.
1254 There is no doubt that approval of the applications subject to a condition precedent would be inconvenient to the applicants. However, balancing that private inconvenience against the benefit of triggering the overall resolution of WIC's ownership makes it clear that unconditional approval would be ill-advised.
1255 The public interest, in our view, demands an overall and final resolution of the WIC matter, on an expedited basis. You are in a position to effect that.
1256 We thank you for your attention, and we would be happy to answer any questions that you might have.
1257 THE CHAIRPERSON: Thank you, Mr. Strike, Mr. O'Farrell and Mr. Dalfen.
1258 Commissioner Cram, please.
1259 COMMISSIONER CRAM: Thank you, gentlemen.
1260 I repeat what I said before. When you say we are in a position to effect an appropriate end, that obviously has to be subject to an agreement, doesn't it?
1261 MR. O'FARRELL: We believe you have an alternative today. If indeed you come to the conclusion that for your SRDU/DTH policy and reasons related to those policies that it would be appropriate to approve these applications, we suggest that unconditional approval would not serve the purpose of assisting in resolution of the ultimate ownership of WIC.
1262 Therefore, when we suggest that you can cause an effect in resolving that ownership situation, we are indeed inviting you to consider the option of a condition precedent tied to this expedited process to receive and process applications.
1263 COMMISSIONER CRAM: So by resolving one issue, which is the issue of ownership of WIC, the only way we can do that is by unresolving or holding another issue.
1264 Is that right?
1265 MR. O'FARRELL: No, not quite. We think you can resolve -- if you so decide from a policy perspective that it is appropriate to approve the applications that are before you, you can do so. And in doing so, you can extend your leverage, if you will, to perhaps bring about a resolution to its ownership in an expedited manner, by tying this approval to a condition precedent.
1266 We don't think it is a matter of offsetting one against the other. We think it is more a matter of looking at the situation from a holistic point of view and seeing what the Commission can do under the circumstances that would be useful and constructive in the greater context, or the larger context.
1267 COMMISSIONER CRAM: Mr. O'Farrell, what you are proposing is that we would then say that the amalgamation is approved, subject to a condition precedent that the WIC applications be dealt with.
1268 MR. O'FARRELL: In short form, yes.
1269 COMMISSIONER CRAM: I go back to my first question: That is not something within our control. That is something within, partially, your control and the control of Shaw.
1270 MR. O'FARRELL: Indeed it is. But it is also something which you have, I believe, some opportunity to influence, if I may use that.
1271 If we could go back to the TQS situation related in the oral presentation, and to which we made reference in our written intervention, if you recall what happened there, it was basically a situation where the Commission had come to the conclusion that it wished to approve the transaction but require a divestiture to a third party conducted under a trust agreement acceptable to the Commission, and wished to do so in a manner that would serve the public interest by establishing this expedited process, so that the uncertainty would not be prolonged indefinitely.
1272 In that context, the public interest consideration is not unfamiliar to the public interest consideration which relates to WIC's regulated undertakings today; and that is, the uncertainty has gone on for some time. I think all parties want it to come to an end. You have, in our view, an opportunity to influence that.
1273 COMMISSIONER CRAM: You would agree with me though that in TQS it was one undertaking, and we are certainly talking about more than one with WIC, and you would also agree that the record actually showed there was interest by others in the purchase of TQS. You also agree that apparently negotiations have been going on for in excess of a year already with no resolution in sight.
1274 So in any way if we did a condition precedent and said subject to this, we have to have a reasonable time within which, wouldn't you think it would be resolved?
1275 MR. O'FARRELL: Well, if you want to go back to the timeframe that the Commission used in the Videotron CFCF --
1276 COMMISSIONER CRAM: Four months, three months.
1277 MR. O'FARRELL: Exactly. The decision was on February 27th. Applications were to be filed by the end of April, and ultimately a decision at the end of August.
1278 If you look at the timeframe that we find ourselves in today, assuming that your decision on this application were to come out in say a matter of months -- two months for the sake of discussion -- were you to establish a similar timeframe, with whatever caveats you would like to bring to that, you would find yourself somewhere in March of the year 2000, which is not --
1279 COMMISSIONER CRAM: For the filing of the application?
1280 MR. O'FARRELL: No, no, no, as the resolution --
1281 COMMISSIONER CRAM: For the final disposition?
1282 MR. O'FARRELL: Yes. And just the additional editorial comment was that if the timetable, if my sense of your timetable is correct, that would be more or less the time that you would be preparing, if not conducting, the licence renewal hearing of CANCOM as its licence expires at the end of that broadcast year.
1283 COMMISSIONER CRAM: You would suggest that we would have a condition precedent to any approval, saying subject to the successful disposition of applications by WIC as to its shareholdings?
1284 MR. O'FARRELL: I think we suggested language in our written intervention that could be helpful to you.
1285 COMMISSIONER CRAM: I read that, yes.
1286 MR. O'FARRELL: I won't try to repeat it for you here.
1287 COMMISSIONER CRAM: Right at the end, yes.
1288 MR. O'FARRELL: It is essentially a situation where the Commission would expect to have applications filed by such a date, and then ultimately reserve on those applications by way of a public consultation process that would involve the public and third parties who would have a view on whether or not those are the appropriate applications under the circumstances.
1289 We see this, to be very candid with you, as an opportunity that you may wish to exercise. We are simply raising it as something that we think is in your purview and that would be constructive in ultimately breaking the log jam, if you will.
1290 COMMISSIONER CRAM: Say we did that and say we said such applications have to be filed by the 31st of December, or something like that, and there were no applications filed.
1291 MR. O'FARRELL: Well, you would have a licensee today that would be beholden to explain why no applications had been filed if indeed one of the deadlines in the expedited process had not been respected.
1292 COMMISSIONER CRAM: But again, it wouldn't really be WIC's fault, would it, in the sense that it is WIC's application but the two parties with whom I understand the negotiations are going on are yourselves and Shaw. It is again something outside of their control.
1293 MR. O'FARRELL: That's correct. I was referring to CANCOM would be beholden to explain in light of the fact that CANCOM is the applicant here today, which for the time being is still controlled by WIC.
1294 COMMISSIONER CRAM: So CANCOM would have to explain to us why one of its shareholders has been unable to have the negotiations of two further third parties completed by a certain point in time.
1295 MR. O'FARRELL: Charles Dalfen may want to help me out here.
1296 But in all instances that I can think of, the Commission has given a great deal of detail in the ownership structures of licensees. Whether the licensee is CANCOM or whether it is any other licensed undertaking that comes under the Commission's jurisdiction, what you find in the licence decision is the ultimate ownership where responsibility ultimately lies.
1297 We feel that there is an opportunity for you to bring some influence to resolving that, albeit in somewhat of an exceptional way. And we certainly recognize that.
1298 COMMISSIONER CRAM: We are talking third parties and then derivative third parties, and I am having problems with using that kind of a mechanism.
1299 MR. O'FARRELL: They are not derivative third parties. With respect, I think they are principal shareholders and controlling shareholders.
1300 Charles, if you have anything to add to that...
1301 MR. DALFEN: What you have which is four square with the Videotron situation is you have complex transactions involving multiple players. You may have no problem with some of the policy issues involving some of the transactions, but you may have trouble with other elements of them. So it is a matter of circumscribing the ones you have problems with.
1302 In that transaction there was no problem with Videotron taking over the CF cable assets; yet there were two other entities, TQS and the CFCF-TV assets, which were independent entities with their own subsidiaries, where there was a problem with that going to Videotron. So you in a sense said: We will approve the transaction we don't have a problem with, subject to other third parties coming forward and putting applications in in a timely basis.
1303 The same situation obtains here. Under the hypothesis we are talking about of your not having a policy problem with the CANCOM/Star Choice merger but their being problems with the ownership, you might want to do the same thing and simply say: The part we have no trouble with we approve, but we can't put it into effect until the entire situation is resolved.
1304 Otherwise, you would get a situation where, to put it simply, if CanWest is right about Shaw control and Shaw does control the overall entity, and would control the combined CANCOM/Star Choice merged entity, then notwithstanding that you might not have problems with that merger you might wish to explore issues related to that control that are not being explored at this hearing because you don't have that issue before you.
1305 So what you do is you have --
1306 COMMISSIONER CRAM: I go back to my question: A condition precedent means that we are saying to CANCOM and Star Choice that CANCOM must get its present majority shareholder to make an application by the 31st of December to resolve its ownership, and that is requiring you to do something that is without its control because it depends on two further third parties.
1307 Is that what you want us to do?
1308 MR. DALFEN: That would not be that dissimilar from -- if you put TQS in the situation of CANCOM, you would have a similar situation in 1997.
1309 COMMISSIONER CRAM: You agree, though, that the distinction there is the assessment of possibility of completion? In the CF case there was certainly evidence of others being interested in that.
1310 MR. DALFEN: There was some evidence; that's true. There are two parties here who are willing to do a deal. So it is a matter of you putting the time limit on it. They put a two-month time limit from the date of the decision; you could do the same.
1311 COMMISSIONER CRAM: Yes.
1312 MR. O'FARRELL: If I may add a comment, Commissioner Cram, in formal discussions with the Commission over the past number of months we have felt the sense of urgency growing in the Commission's mind to deal with the WIC issue; in other words, to resolve its ownership. In preparing this intervention, the thought of a condition precedent was designed to attempt to feed into perhaps what might be, if not the perfect solution, nor an ideal solution, a solution that you may want to consider to assist the resolution of that matter, first of all.
1313 Second of all, we maintain that the applications that are before you are the wrong applications, for the reasons that we have articulated. There again, the condition precedent could assist you in addressing those discrepancies and deficiencies.
1314 Lastly, should you adopt a condition precedent and, as you were asking earlier, the applications were not filed by the given dates stated in your decision and you felt it was reasonable to waive the condition, you could simply waive the condition in favour of the applicants here today such that they would be free from having to honour it.
1315 Therefore, I don't think it is a box from which there are no solutions or exits.
1316 COMMISSIONER CRAM: Yes. That is what I was concerned with; that we were left with putting them in a position where they would have to do something for which they had no ability, no control over it at all.
1317 You are saying the out is that we would waive the condition at the end of the day, or that we would give them leave, I guess, after a certain amount of time to do that.
1318 MR. O'FARRELL: If circumstances warranted it, I am sure you would feel justified in doing so.
1319 But back to the previous point I was making: Is this the right application that is before you today? As we said, even if you are not certain that it agrees that Shaw has de facto control, there is a fait accompli here that you may be backing yourself into, and we are just waving that flag for you to take issue with as you deliberate on these applications.
1320 COMMISSIONER CRAM: There is another way of looking at this whole thing, isn't there? At page 9 of what you used today, you talked about the issue of delays and on the next page you talk about the uncertainty and how long it has been going on in terms of "the WIC ownership imbroglio".
1321 There is another way of looking at this application. One way is saying that at least we can bite this part off and give that part of certainty while the other uncertainties remain out there. What would be the downside of that?
1322 MR. O'FARRELL: I am not sure that I understood your question.
1323 COMMISSIONER CRAM: Well, give WIC some certainty in the sense that at least we have the amalgamation of Star Choice and CANCOM bitten off; that that is handled and that has been dealt with.
1324 Wouldn't that at least provide some certainties?
1325 MR. O'FARRELL: You see, our question as relates to that comment is: Who really is in control of CANCOM at the end of the day? To what extent has WIC been diluted and to the benefit of whom?
1326 COMMISSIONER CRAM: I want to talk about that. Your concern, at least as you say in your law case and apparently here, is the issue of dilution of WIC shares primarily, if I understand it right, in the Share Exchange ratio in the agreement. I wanted to go through the various scenarios.
1327 If we do not defer or put a condition precedent on this application -- if we do not -- your assertion is that your derivative interest in WIC -- that you have lost moneys by virtue of the Share Exchange ratio.
1328 Is that the idea and that is the assertion you have made in court?
1329 MR. STRIKE: That's correct.
1330 COMMISSIONER CRAM: So if you are correct in that assertion, you are going to get money in another forum. Your damages will be covered there; correct?
1331 MR. STRIKE: If successful, that is correct.
1332 COMMISSIONER CRAM: If your assertion is --
1333 MR. STRIKE: However, I might point out that if what you are talking about is some sort of cash damage, I am not sure that that is adequate.
1334 COMMISSIONER CRAM: So your damages are not only money.
1335 MR. STRIKE: Well, WIC is losing a control position to a more passive investment position.
1336 COMMISSIONER CRAM: And that would not be covered in your claim in court?
1337 MR. STRIKE: I don't think it's covered. I am not sure there is an effective remedy for it.
1338 COMMISSIONER CRAM: If your assertion is incorrect that the Share Exchange ratio was improper or in some way disadvantageous to the WIC shareholding in the amalgamation, you win, wouldn't you? Again, if we did not defer and if the Share Exchange ratio was right or was correct or was proper, you would win because your holding in WIC would increase in the CANCOM, wouldn't it?
1339 You would benefit because you would have no losses.
1340 MR. STRIKE: I am not sure that that is correct. But not being a lawyer, it is hard for me to answer the question.
1341 MR. O'FARRELL: I think the same answer that Tom provided to the first question applies to the second.
1342 COMMISSIONER CRAM: So it is the non-monetary issue of bargaining power that you are worried about.
1343 MR. O'FARRELL: It's the loss of a controlling position into a passive investment position in an ongoing business.
1344 COMMISSIONER CRAM: You say there is no effective remedy to any of that, but it can't be valued. Is that the point?
1345 MR. O'FARRELL: It certainly has the possibility of a remedy, but we have no certainty today that that remedy will be available to us.
1346 COMMISSIONER CRAM: Forgive me if I call it that intangible of a position, a better position versus a lesser position.
1347 Aside from that, any damages you would have if the share ratio exchange issue is to your disadvantage, you would be recompensed elsewhere, if we did not defer.
1348 MR. O'FARRELL: Correct. Assuming that the court would find in our favour, yes.
1349 COMMISSIONER CRAM: Well, courts are always right.
1350 MR. O'FARRELL: But not always in our favour.
1351 COMMISSIONER CRAM: Sorry about that. So the only way, in my view, that you would lose money would be if we did defer this, because if CANCOM is correct -- and you may disagree with me -- strategically, it is in their best interests to amalgamate now. If you have a derivative shareholding in CANCOM, if we defer, CANCOM loses; but then so does everybody else, including CanWest, by a loss of what they call their strategic advantage that they would gain by amalgamating now.
1352 It seems to me that that is the only way you would lose.
1353 MR. O'FARRELL: With respect, I think that if there is a loss in that equation, it's not to us, but it would be to Star Choice, in which we have no interest.
1354 But as to CANCOM, CANCOM would continue to carry on its business, file an application for a licence renewal in the timely manner that the Commission determines is appropriate. I don't think we would be suffering financially, or otherwise, as a result of your deferral in that context.
1355 COMMISSIONER CRAM: So the only difference here as to whether we defer or not, from your perspective, is the intangible issue that we have been talking about, the passivity in the shareholding, the position in that.
1356 MR. O'FARRELL: No. That is certainly one, as we discussed. But clearly what is on the table for us is this much larger question as to how can we offer in this particular context a suggestion to the Commission, in dealing with this application, which may assist the ultimate resolution of WIC's ownership situation, which is very much on the table.
1357 COMMISSIONER CRAM: On page 7, paragraph 25, you were talking about this not being the best application under the circumstances; and then you go on to refer to Shaw's record, if I can call it that. You go on for some paragraphs.
1358 Are you saying that Shaw should not be involved at all then in CANCOM and Star Choice?
1359 MR. O'FARRELL: Commissioner Cram, what we are saying is that in circumstances such as these where there are no competing applications, the Commission's policy has been to require that applicants demonstrate that under the circumstances the application that they present represents the best application under the circumstances.
1360 What goes to that is the applicant and the applicant, if indeed it has a regulatory track record.
1361 We find in the recent past that the Commission has time and time again found itself involved in what I would call differences with Shaw, that certainly the Commission would take into consideration in awarding yet another privilege from this Commission in the context of an application such as this.
1362 Therefore, when we say you will make your assessment, we are sure as you usually do, as to what is the best application, that factor certainly will be one of the things you look at; as to who or what are the credentials of the applicants that are before you.
1363 COMMISSIONER CRAM: If I am right, or if you are right in your assertion about the shareholding issue and the Share Exchange ratio in your assertions in court, and if you don't pierce the corporate veil, it appears to me that by virtue of the amalgamation Shaw's holdings are in fact lesser than they really should be by virtue of the amalgamation, if we accept your argument about the Share Exchange ratio being detrimental to Shaw.
1364 Am I not right?
1365 MR. O'FARRELL: I am not sure I follow you; I am sorry.
1366 COMMISSIONER CRAM: We have Star Choice and we have CANCOM. It is your point that Shaw has taken a loss by virtue of the inequitable Share Exchange ratios in the amalgamation.
1367 Wasn't that your assertion?
1368 MR. O'FARRELL: Not quite in those terms, no.
1369 COMMISSIONER CRAM: On page 4, the net equity values in the Share Exchange ratio -- Shaw suffers a loss in its capacity as a WIC shareholder.
1370 MR. O'FARRELL: In its capacity as a WIC shareholder, yes; but not in its capacity as Shaw Communications outside of its holdings in WIC.
1371 COMMISSIONER CRAM: But the amalgamated CANCOM/Star Choice, then, if your assertions in that quarter are right, will have a lesser Shaw holding than it would have otherwise or should have had, based on your assertions.
1372 MR. O'FARRELL: I will let Tom speak to that in a second.
1373 But before he does, I would like to suggest that from our perspective, the transactions, whether it is the transactions that are part of this application or subsequent transactions that would ultimately resolve the WIC ownership uncertainty, from a Commission perspective, should it not be a question of broadcasting policy principle rather than evaluation of damages or quantification of damages?
1374 We feel that what we are here arguing or submitting today is a position on policy principles. The ultimate fallout in terms of damages to parties or their quantification are not necessarily a matter that the Commission has in the past paid a great deal of attention to. It has confined itself really to what are the principles that we have to be guided by in discharging our role under the Broadcasting Act.
1375 We maintain our position that in considering this application, yes indeed there are commercial implications, and we have tried to articulate them. Maybe that was a mistake to articulate them.
1376 We are not suggesting that those are the guiding principles that you should be looking at as you deliberate. In fact, we are suggesting that it is on the policy issues and on the principles of the policies that these applications should be either (a) denied because they are not the right applications; or (b), if you are to approve them because you feel from a policy perspective, looking at SRDU and DTH policy, they are appropriate, well then you may want to consider from a policy perspective attempting to create an instrument that would have some influence over the larger issue, which is: When is WIC's ultimate ownership uncertainty going to be resolved?
1377 Tom, did you want to comment?
1378 COMMISSIONER CRAM: The purport of my last question was: If the shareholding interest in Shaw is lesser than it should have otherwise been in the totality of the two, as you appear to be asserting in court, then why are you objecting to Shaw in fact reducing its shareholding in the amalgamated company.
1379 So it is less worse than it was before. I am sorry if my question was oblique, but that is what it meant.
1380 I am only taking your pleadings and coming into this forum. If the shareholding is less by virtue of that ratio, why are you complaining?
1381 MR. STRIKE: In fact, what we are saying, and what we have said in our intervention, is that Shaw has an interest in both WIC and in Star Choice; and by virtue of its current ownership in WIC, has an indirect interest in CANCOM.
1382 As a consequence of the merger of the two, there is a loss, in our opinion, to all of the shareholders of CANCOM, including WIC and therefore including Shaw. But because Shaw is on the other side of the equation as well, it is more than offsetting that loss in value that it is accruing to WIC by picking up through its ownership of Star Choice and therefore by the exchange ratio into the ownership of the combined entity.
1383 On balance, there is actually a financial benefit being conveyed.
1384 COMMISSIONER CRAM: Thank you. No more questions.
1385 THE CHAIRPERSON: Thank you, Commissioner Cram.
1386 Gentlemen, I would like to bring this back to what it is we do here. We regulate broadcasting undertakings, and it so happens that we regulate certain levels of changes of ownership and we regulate changes of control. Both thresholds and control require prior approval.
1387 Presumably, if we are concerned about control of WIC by Shaw, we could call them to a hearing to look into that and make a decision.
1388 In fact, we have an application before us. We have gazetted it; we have withdrawn it; we can gazette it again and make a decision.
1389 What the Commission has decided to do is to hear today whether or not it was in the public interest at large to allow Shaw to increase its ownership or to attain an ownership, a voting level of 36.6 per cent in CANCOM.
1390 Parties have argued that we should not do that at this time, and the Commission has decided to look into that. That is what is before us.
1391 The other issues you raise -- as I say, the Commission has before, as you well know, called the party to a hearing to explain whether or not control had changed without approval. In this case, we could do it via the application that is before us.
1392 As a regulator, we are not without mechanisms if we have concerns, and those mechanisms can be used easily.
1393 To tell the truth, I find your parallel with the Videotron situation a little bit of a "comparaison boîteuse", as we say in French. What we had with Videotron was a party that came before us with a proposal that included a number of parts. What we are talking about is it included taking over the cable operation, which in turn had some ownership in TQS, and the Commission felt that it was at ease with giving approval to the cable operation but not to the ownership of TQS. It said: Well, you divest of TQS and then you can consummate the deal about cable.
1394 I find it hard to compare it to what we have before us today.
1395 I think a better parallel would be if we heard the WIC/Shaw application without a divestiture of assets that the Commission wasn't prepared to allow them to own and said fine with owning 49.96 per cent of the voting shares of WIC but you can't consider having had approval for this until you divest of.
1396 I find the comparison you are making today does not work very well. Number one, it goes from the bottom up rather than the top down.
1397 Mr. Dalfen, perhaps you can set me straight about whether the "comparison is boîteuse" or not.
1398 MR. DALFEN: I'm not sure it is "boîteuse", but we are in a bit of a "boîte" here as to figure out what to do. Perhaps if we look at it --
1399 THE CHAIRPERSON: We know what your position is. It has been expressed when we discussed whether to hear this application today or not. But that has been done. What we have before us is whether or not we approve this. We approve the 36.6 per cent and perhaps this pending application would be put as a criterion in deciding whether it is in the public interest or not.
1400 To use a deferral and say that it is similar to Videotron, I need to be better informed before I buy that.
1401 MR. DALFEN: Well, let me try this. In the supplementary brief of the applicants, they set forth the shareholding of CANCOM. We are looking at CANCOM here, not at the Shaw/WIC application.
1402 In that list it is very simple: there are four listed CANCOM shareholders: WIC at 29.6; Shaw at 36.6; and others.
1403 I guess the question the Commission has to ask is: Would their decision this application on CANCOM be the same if truly Shaw were at 36.6 and an arm's length entity called WIC were at 29.9, as is set forth in the supplementary brief? Would that decision be the same as it would be if the Commission believed that that 29.6 and 36.6 should be combined so that there was Shaw-stated control?
1404 Because there is uncertainty about that, and you have chosen to sever those two applications, you may not be in a position to answer that question clearly.
1405 So we are trying to find a way of providing you with the tools from Commission precedents, and so on, as to how you might re-sever those applications so that you don't rule on these as though WIC and Shaw were independent entities when there is some doubt about that. But you allow yourselves to continue to hold this decision. Even though you may approve certain parts of it on broadcasting policy terms, you give yourself a recourse to go back at it and to say: "Wait a minute. When we looked at it, it appeared that Shaw and WIC were different people. But if in fact it is Shaw directly and through WIC, then that is a different story."
1406 THE CHAIRPERSON: Yes. If I understand your position, it would be better to look at the real control in WIC/Shaw before you decide on the other ownership, so that you knew exactly. I believe that it could possibly put -- even with the 49.9 per cent and no decision on control, if that deal went through or if it were in effect now, it would put the indirect ownership of Shaw in CANCOM at a level which I think exceeds 50 per cent.
1407 If you want to impress us with the idea that we have already used the mechanism called a condition precedent to achieve some aims, I am with you. But to compare it, we are not quite there yet.
1408 MR. O'FARRELL: On that point --
1409 THE CHAIRPERSON: And wouldn't it be nice if we were.
1410 MR. O'FARRELL: We certainly recognize it. As to call it a "boîteux", it may be "boîteux". But the idea was certain public interest considerations motivated you in that circumstance to break from what traditionally was your role. I can't think of many conditions precedent in the past having been imposed by the Commission in whatever type of transaction if was considering.
1411 We said maybe there is something in it. Maybe the creative juices that flowed in the Commission at that time to come to the conclusion that you wanted to do something; you wanted to protect the public interest consideration; you wanted to ensure that the so-called uncertainty of TQS' ongoing experiences would be limited. So you created this instrument.
1412 We are not suggesting that they are parallel courses that define the circumstances of TQS and the circumstances that you have today. Not for a moment.
1413 We are suggesting that in that is an opportunity for you to consider how you may be able not to find that you have backed yourself into a corner by approving this today unconditionally, only to find out later, as Charles just pointed out, that these are not unrelated parties that are defined in the supplementary brief as the primary shareholders of the merged entity.
1414 THE CHAIRPERSON: If this comparison is indeed "boîteux", your first solution or alternative is to deny it because we would have been persuaded that it was a mistake in the circumstances to -- we would be better informed as to the appropriateness of approving this at this time, even though we decided to hear it.
1415 That is your first alternative.
1416 MR. O'FARRELL: Absolutely.
1417 THE CHAIRPERSON: And that does not a need any crutches.
1418 MR. O'FARRELL: No. And we would like also to -- if you want to raise the issue, Charles -- point out to you that not only do we feel that this is not the appropriate application under the circumstances, as we articulated for you in our written brief and have attempted to summarize for you today; we don't find the application before you today that requires a person such as Shaw who has an interest in WIC and therefore a direct and an indirect interest, to require under Section 5(d), I believe it is -- 4(iv), I'm sorry, of the BDU Regs -- that its shareholdings as proposed and as outlined in their own brief, that application is not before you either.
1419 We find you have been saddled with the wrong applications, moreover incomplete applications and not the proper applications.
1420 So on the grounds of those findings, should you come to those conclusions, we suggest that you should deny.
1421 But should you not come to those conclusions, this is where we thought we would offer the Commission the alternative to consider using a creative instrument such as a condition precedent to approve it. It would make sense from a policy perspective. But then to try to create a situation where you wouldn't be backed into a corner should the ultimate resolution of WIC prove to you that the shareholders that CANCOM has indicated in its supplementary brief are indeed unrelated.
1422 THE CHAIRPERSON: Thank you very much.
1423 This is, as I understand it, the last intervention. We will, in the interest of giving the applicants a few minutes to prepare a reply, reconvene at quarter to six.
1424 Mr. McEwan thinks this is reasonable.
1425 So, at quarter to six we will hear the reply.
--- Short recess at 1730/ Courte pause à 1730
--- Upon resuming at 1745/À la reprise à 1745
1426 THE CHAIRPERSON: Order, please. Madam Secretary.
1427 MS VOGEL: We are now ready to begin Phase IV. This is the opportunity for the applicant to rebut and/or reply to the interventions that have been filed today.
1428 Whenever you are ready.
REPLY / RÉPLIQUE
1429 MR. NEILL: Thank you, Madam Chair, Members of the Commission.
1430 We are pleased to have this opportunity to respond on behalf of both CANCOM and Star Choice to the interventions in respect of our applications for approval of the Share Exchange.
1431 I should add that we are joined at this time by Jamie Scarlett, who is CANCOM's Corporate Counsel and Corporate Secretary.
1432 Before we begin, we would like to take this opportunity to express our appreciation to the interested parties and our customers who filed more than 50 written interventions in support of the Share Exchange. Those intervenors share the belief held by CANCOM and Star Choice that the merger will create a Canadian integrated satellite services company with the resources to compete effectively in the long term and to thereby continue providing benefits to the Canadian broadcasting system.
1433 There are a few main points that we would like to review with you at this time.
1434 In addition, as you know, we submitted a comprehensive written response to interventions on April 20th, which has been referred to earlier.
1435 The first issue relates to the suggestion that the focus of this proceeding is on the benefits that would accrue to CANCOM and Star Choice. Our response is that the focus of the Commission has always been on the strengthening of the SRDU and DTH sectors. Our application is designed to do exactly that.
1436 While it is true that merger will reduce the number of SRDU companies from three to two, it will ensure that there are strong integrated competitors. We think this is essential to the long-term competitiveness of the SRDU and DTH sectors.
1437 Completion of the Share Exchange will increase effective competition in both of these regulated businesses. It results in more efficient use of infrastructure, a wider range of services, and strengthens both regulated lines of business.
1438 Competition increases with the Share Exchange. It is not diminished in any way. There will not be any net reduction in competition; rather, completion of the Share Exchange ensures competitive balance in the long term.
1439 It has also been suggested that this merger will harm small cable; but the benefits to small cable from the Share Exchange are very significant. Let me review them.
1440 A wide range of signals at costs disciplined by the operations of two integrated providers; maintenance of our current range of signals and the likelihood of an expansion of signals in response to competitive forces.
1441 Full consultation with our SRDU customers before making technological changes. Opportunities for the development of HITS and the consequent ability of small BDUs to offer digital services in a cost-effective manner.
1442 Financial assistance to BDUs and any migration of CANCOM and Star Choice SRDU services to one technological platform.
1443 Together, these benefits will enable small cable to remain effective competitors with other BDUs, including direct-to-home services.
1444 As requested by the Commission, CANCOM can also now confirm the following information regarding our contracts.
1445 Approximately 40 per cent of current CANCOM channel subscribers have contracts with remaining terms of less than one year, another 45 per cent with less than two years, and most of the balance with remaining terms of less than three years. We have provided this information in writing to the Secretary of the hearing.
1446 To respond to the specific concern by the Canadian Cable Systems Alliance relating to its Star Choice Master Affiliation Agreement, let's emphasize that the benefits of that agreement will remain available after the Share Exchange, even if the Star Choice SRDU licence is surrendered.
1447 There has also been a suggestion that Bell Satellite Services, or BSSI, will not be an effective competitor in the SRDU sector. Let us be clear. BCE has announced that BSSI is the means by which it will compete in the broadband delivery of programming to Canadians.
1448 The financial resources of BCE are immense. BSSI is already a fully integrated satellite services and facilities provider. It already possesses authority from the CRTC to do everything that CANCOM and Star Choice hope to do. It is not subject to any structural separation conditions.
1449 THE CHAIRPERSON: Thank you.
1450 MR. NEILL: We are not finished. I was just waiting for Commissioner Noël.
1451 We want to speak a little bit about the timing. I was just thinking, as I was listening to the remarks that Mr. McEwan just made, that when I listened to Mr. Saxe give his remarks, I made some notes -- left over from my 20 years of sitting around courtrooms -- and I heard him say that after Star Choice was licensed and the CCSA had negotiated their agreement he signed an affiliation agreement. He used it. As a result, he got cheaper prices and more signals.
1452 I am assuming what he said -- I notice he didn't say he reduced the price to his consumers, but I hope everybody appreciates that that is certainly outside our control. We clearly put him in a position to do that.
1453 I think what he said he did do was he passed on more signals at the same price to the customers of his BDU. It seems to me that -- as they say, the proof of the pudding is in the eating. The system is functioning as it should be functioning. All we are really trying to do here -- and he is telling you that; he is telling you that the system is working currently.
1454 We are simply telling you that we have a new competitor that we have to get ready to deal with, and this kind of situation will continue in the future. This will be the result of competition, as you heard Mr. Saxe say.
1455 We want to emphasize again the necessity of the Commission considering this application at this time. As Mr. Stursberg said earlier, a number of key developments affecting the satellite sector are occurring now. Migration to the satellites which were replacing Anik E satellites begins this month, with the launch of NIMIQ.
1456 Opportunities to make the most efficient use of scarce satellite capacity should be implemented now. The benefits of integration which we described to you this morning can best be realized if CANCOM and Star Choice, with your approval, move forward quickly on migration plans. The benefits of planning migration as an integrated entity extend far beyond CANCOM and Star Choice. They extend to programmers and BDUs, for example, by creating an opportunity for HITS and by expanding the choice of programming using the expanded satellite capacity which will result from the new satellites and efficient planning.
1457 Before I go on, I want to make a personal aside about the representations CanWest have made with respect to this issue of the timing and it being delayed; their personal observations -- not necessarily reflective of our position on the application.
1458 I listened with interest to the remarks that Mr. O'Farrell made, and I think it is important that you should understand that I am one of those "others" he referred to. I think that the others, those of us who don't work at Shaw and don't work at CanWest, have been involved in this initiative since it started. By my standards, where I come from, I think I am a significant shareholder in Star Choice, certainly not by the standards involved here.
1459 I listened carefully to what he had to say, and the conclusion I came to was what he was really wanting to do was use me and the other minority shareholders as a bargaining chip in this ongoing struggle between he and Shaw. I don't much appreciate that, and I don't think most of the rest of the minority shareholders of these companies do.
1460 That is not what this application is about, and there are other people to consider in that regard.
1461 I think that the merits of the application far outweigh the advantage that somebody might like to use this proceeding for to get that kind of advantage. It is hugely important to the people involved in this matter that we move forward now.
1462 You will hear more about why that is so in the remarks. But the fact of the matter is that this is not a good reason not to move forward. If there are good regulatory reasons not to move forward, if you are not satisfied with the nature of our application, that is one thing. But it is certainly not a good reason to not move forward because somebody wants to use us as a pawn.
1463 Another reason this application is timely and also very important is that Star Choice needs financing this summer to sustain its growth. We have been very successful in competing against BDUs. We have been able to match the subscriber base of our DTH competitor ExpressVu. This has required significant financing; as I indicated earlier, over $350 million over the past two years.
1464 Approval of this application will allow Star Choice to continue this momentum in concert with CANCOM and the strong competition that the merged companies' DTH operations will provide to cable will be a significant inducement for the roll-out of digital cable.
1465 Finally, the emergence of BSSI as a fully integrated satellite services provider necessitates a competitive response from CANCOM and Star Choice. We are convinced that denial of this application would diminish competition in the DTH and SRDU sectors over the long term, because each of us would be at a severe structural disadvantage to a very strong competitor without sustainable competition in the regulated sectors. The benefits to the Canadian broadcasting system which result from such competition would be diminished.
1466 I used the analogy yesterday, when we were talking about this, that it reminded me of the situation where you had a horse race. There are in fact three horses in the race. Unfortunately, one of them has four legs and the other two each have two. It is easy to know who will win that race.
1467 I think this is very much the situation here.
1468 THE CHAIRPERSON: But making the horse whole may have its disadvantages.
1469 MR. NEILL: Well, to have a fair race should hopefully outweigh the small disadvantages that might be there.
1470 Mr. Frank, I thought, frankly summarized the situation very well. He said, in answer to one of your questions, that to be a competitor was not just about money, which is easy to say when someone just gave you $5.1 billion. But he says it is not about money; it is about a platform; it is about an integrated platform being more cost efficient, and it is about the foresight of management in dealing with the industry. That is precisely what our application is all about. The very things that he summarized is precisely all we are asking to do here.
1471 MR. McEWAN: Thank you, Brian. You have actually taken some of my thunder, but I am just going to steam through the rest of this anyway.
1472 Bell Satellite Services and CanWest have argued that this application is premature. They suggest that the Commission cannot deal with this application until applications relating to WIC, Shaw and CanWest/Global have been disposed of. We disagree strongly.
1473 The Share Exchange is a transaction which was initiated by CANCOM management, has been approved overwhelmingly by the non-Wic, non-Shaw shareholders of both CANCOM and Star Choice. It is completely independent from both commercial and regulatory perspectives to whatever may transpire at the WIC level.
1474 I know that the directors of WIC and Shaw take great exception to many of the remarks made by Bell Satellite and CanWest representatives at the hearing today. Whatever may transpire at the WIC level will, in due course, come before the Commission for its review.
1475 Approval of the share exchange does not preclude the Commission in any way from approving, denying or imposing conditions in respect of the WIC transactions and the 29 per cent that WIC will have in the merged company.
1476 As Richard Stursberg emphasized in our presentation for you this morning, CANCOM and Star Choice require a decision on the Share Exchange as early as possibly, ideally before mid-July. Delaying consideration of this application, as suggested by Bell and CanWest, would increase the likelihood that the share exchange would not be completed even if the Commission deemed it ultimately to be in the public interest.
1477 The danger arises, therefore, that if the deal is not concluded quickly it may prove impossible to conclude at all.
1478 Madam Chair, Commissioners, on behalf of all of us at CANCOM and Star Choice, thank you very much for this opportunity to present our applications to you.
1479 We would also like to thank Commission staff for its prompt response to all the issues that we have raised, sometimes on short notice, over the last few months.
1480 We of course would be pleased to answer any questions that you may have.
1481 THE CHAIRPERSON: Commissioner Noël?
1482 COMMISSIONER NOËL: Mr. McEwan, in the first part of your replique, in answer to a question from legal staff, you mentioned that 40 per cent of the contracts were less than one year and 45 per cent were less than two years.
1483 MR. McEWAN: Another 45 per cent.
1484 COMMISSIONER NOËL: Another 45 per cent. That's what I wanted to make sure. So the total is 85 per cent, which leaves 15 per cent of the contracts which would last for more than two years.
1485 MR. McEWAN: And most of those expire in the subsequent year.
1486 COMMISSIONER NOËL: Thank you.
1487 THE CHAIRPERSON: Counsel?
1488 MS MOORE: Thank you, Madam Chair.
1489 With respect to the Star Choice master agreement, you said earlier that the benefits under this Star Choice master agreement will continue even if the SRDU licence is surrendered.
1490 When you say "benefits", do you mean the exact same terms and conditions?
1491 MR. McEWAN: Yes.
1492 MR. STURSBERG: Yes.
1493 MS MOORE: Thank you. As I understand the agreement, cable operators that currently are not involved can opt in, on the same terms and conditions, any time during the ten-year period covered by the agreement.
1494 Is that correct?
1495 MR. McEWAN: You are referring here to the specific CCSA agreement?
1496 MR. STURSBERG: Yes, she is. I don't think you know that agreement, Duncan.
1497 MR. McEWAN: We are not privy to this agreement, so...
1498 MR. STURSBERG: Yes, people can opt in; that's right.
1499 MS MOORE: Is your commitment to guarantee the benefits only to those cable operators who are now part of it, or will the same benefits be available to anyone wanting to join during the existing term; i.e., will it still be possible for cable operators to opt in on a going-forward basis?
1500 MR. STURSBERG: Well, the agreement is with the CCSA. If they are members of the CCSA, that's all right.
1501 MS MOORE: So even if the SRDU licence is surrendered, there will still be an option for operators to opt in?
1502 MR. McEWAN: What we are saying is that the corporate entity of CANCOM in the new CANCOM will honour all the agreements of both of the separate companies subsequent to amalgamation.
1503 MS MOORE: So it will still be possible to opt in.
1504 MR. STURSBERG: Yes.
1505 MS MOORE: Thank you. I would like to refer you to Schedule 10(3) with respect to the proposed modifications of the condition of licence.
1506 MR. McEWAN: Yes, we have it here.
1507 MS MOORE: I see Mr. Whitehead is still searching, and I would be happy to have him with us on the same page as well.
1508 MR. WHITEHEAD: I have it.
1509 MS MOORE: Thank you. With respect to the third paragraph, this is the condition that begins "The SRDU undertaking to be carried on by the licensee shall remain at all times an entity that is independent", et cetera.
1510 When you were asked earlier what your interpretation of the term "subsidiary" is, you stated "a company controlled by Shaw".
1511 The current language makes a distinction between companies and other entities. Why did you feel it necessary to remove the notion of entities when you were proposing modifications to this condition?
1512 MR. WHITEHEAD: I think, counsel, the more important part of the modifications was that which restricted it to persons licensed as cable distribution undertakings. If it said companies or other entities, that would not be a concern.
1513 MS MOORE: When these conditions were approved, the Commission had not yet considered and approved the MediaCo application. We have heard your arguments today as to why the programming should be separate. And assuming the Commission continues to have a concern in this regard, would it not be appropriate not only to keep the current language as drafted but also to add language that would extend to related companies that are not subsidiaries, such as MediaCo?
1514 MR. McEWAN: We would like to take a moment to think about that.
--- Short pause / Courte pause
1515 MR. STURSBERG: If I understand your question correctly, it is the same question that we talked about with Commissioner Wylie earlier this morning, which is: Is it appropriate, under the circumstances, to place restrictions on relationships between CANCOM and programming entities?
1516 I think our answer at the time was as follows: that the issue of vertical integration and policy problems surrounding it arise only in the circumstance where there is integration between a specialties service provider and a dominant BDU.
1517 In the case of Star Choice or the integrated Star Choice/CANCOM, we will definitely not be a dominant BDU and therefore there should be no cause for policy concern.
1518 MS MOORE: I note that earlier BSSI raised the idea of capturing the notion of affiliates as well as subsidiaries. I would just like your view on that.
1519 MR. WHITEHEAD: Counsel, Shaw Communications, as I understand it, is at the top of the corporate chain. So by referring to companies or entities controlled directly or indirectly by Shaw Communications, you would be catching everybody in the Shaw family.
1520 MS MOORE: My understanding is that with, for example, MediaCo. it could be considered a sister corporation rather than a subsidiary?
1521 MR. WHITEHEAD: I am afraid I am not familiar with the corporate structure of MediaCo.
1522 Could you give me a moment, please?
--- Short pause / Courte pause
1523 MR. WHITEHEAD: I can confirm that MediaCo. is not a subsidiary of Shaw Communications.
1524 I guess subject to Mr. Stursberg's comments on the policy aspects of that, I would agree with you that if you wanted to catch MediaCo. within that, you would refer to affiliates.
1525 MS MOORE: Thank you. I would like to move on to the condition of licence regarding membership on the board of directors.
1526 You have noted, regarding this condition, a concern that the current language be interpreted to mean that members of SCI would not be able to sit on the board of Star Choice Television.
1527 Rather than deleting the condition in its entirety, wouldn't it be appropriate to keep the current language but to provide a specific exception with respect to the concern that you have raised?
1528 MR. STURSBERG: I'm not sure that I am following you. I think what we had proposed by way of a change is, as it reads right here:
"None of the licensee's board of directors shall be persons who are members of the board of directors of SCI." (As read)
1529 MS MOORE: That is correct. But what would your view be in terms of keeping the current language in its entirety but carving out an exception for the one specific situation that you raised as a concern in light of the language as it is currently drafted?
1530 MR. STURSBERG: In other words, you would make an exception only for fibrelink?
1531 MS MOORE: No, an exception that would --
1532 MR. NEILL: No. I think she is talking about the example I gave that somebody could --
1533 MS MOORE: Perhaps I could clarify.
--- Short pause / Courte pause
1534 MR. McEWAN: Sorry. We are wrestling with this.
1535 MR. NEILL: Well, I gave you one example. The difficulty with the wording is that as time goes by, others could arise. In fact, that example may be less important in the future because Star Choice Communications will become a wholly owned subsidiary of CANCOM if this transaction goes ahead.
1536 I was citing an historical example which causes pain, because it is a very wide definition. We thought ours was appropriate to accomplish the purpose without having such a wide web of catch phrases. For every little change that gets made in the corporate organization some place it will automatically get caught by this clause.
1537 It reminds me a lot of the legislative sections that are drafted that way. That was our concern.
1538 MS MOORE: Clearly the exception would be for the transition period. If there are no other specific concerns that you can identify at this time, I would note that if concerns arose in the future you would be in a position to raise those when the licence is up for renewal.
1539 MR. NEILL: Yes, that's true. That's fine.
1540 MS MOORE: Earlier today BSSI indicated that while in its view the condition of licence prohibiting common employees should not be removed, it acknowledged that it might be appropriate to make an exception regarding certain classes of employees; for example, technical support staff.
1541 Would this, in your view, be an appropriate solution with respect to this condition of licence?
1542 MR. STURSBERG: Well, I think that if we are going to start carving out a whole series of different categories of employees, the easier course might be to carve in the employees that we are actually trying to deal with.
1543 As I understand it, the concern they have raised is this question about whether there can be some form of information moving between the SRDU and the DTH side of the businesses that would disadvantage their DTH business.
1544 Bell is very familiar with this problem. The way it is dealt with by Bell is to through customer service groups. I think the easiest way to deal with it is to take the exact analog that Bell is familiar with, which is a customer service group, and impose it here if they have concerns about it.
1545 We understand the model. It is simple and it will be easy to implement under the circumstance, given the different sales structures I was talking about earlier.
1546 MR. NEILL: I can add to that. I think the issue is really a little broader than that in this case; and that is that BSSI doesn't have this restriction. I understand that if it were so, one of their panellists might not have been able to participate today, because he is an employee of Bell.
1547 This employee thing is really awfully broad.
1548 I understand the concern, but it is the same concern for every BDU. In other words, it is not just BSSI that is concerned, and it has been that way since we were licensed. You heard that it is working. Nobody is complaining about it. But to put restrictions on what we do with our employees and not have that restriction on our competitor seems a little silly.
1549 We feel very strongly that this particular condition serves no useful purpose in the competitive environment. That information will be protected by contract, as it should be. It is not reasonable to be restricting how employees move around in that circumstance.
1550 MR. STURSBERG: As we say, if you would like to, we will happily step up the customer service group just like they have at Bell, but we would expect that they would do the same thing at Bell Satellite Services.
1551 MS MOORE: Thank you. Earlier today the CCTA expressed the concern that cable operators should not have to bear any of the equipment swap-out costs that would not have been triggered but for the proposed merger.
1552 Are you in a position to commit unequivocally to cover all of the costs associated with the swap-out?
1553 MR. McEWAN: No. We would prefer to stick with what we have proposed. And we would once again remind everybody that the marketplace is going to require us to treat people in a fair and appropriate manner.
1554 One of the problems we face, if we do a comprehensive switch-out, is that it could easily arise that somebody might have one year left on a contract, and they would be asking us to pay the full cost of a decoder. And then at the end of that one year, what would happen to that decoder?
1555 We would prefer to go with the formula that we have right now.
1556 MS MOORE: Thank you. My final question is with respect to CCTA's suggestion that should the merger be approved, the Commission should include in its decision a requirement that the applicants file details of its head-end in the sky initiative wit6hin 60 days. They have suggested that such details would include, for example, the costs, technology, implementation timetable and prices.
1557 Would you be in a position to make such a commitment today?
1558 MR. STURSBERG: We are committed to doing a HITS initiative.
1559 The difficultly in doing it, however, is that what you have to have is all the programmers agree, because ultimately they will have to be happy to work in the same technology, happy to have their services lined up appropriately by transponder. And you have to have it done in a way where all the various BDUs are comfortable with the way in which it is being structured, because the transponder structures will reflect their requirements by way of tiers and what not.
1560 That much being said, what we need to do to be able to get it together is we need to sit down and have serious discussions with all the programmers, serious discussions with the cable industry, to be able to bring forward to you a sensible and comprehensive plan to do it.
1561 We would like to do that; but as I say, the thing is not completely in our hands.
1562 If it was a requirement that we do it, I would be happy to step up the requirement. I am just a little bit concerned about the timeframe surrounding it. I am just not sure that we could do it in 60 days.
1563 MS MOORE: What would be a more reasonable timeframe, in your view?
1564 MR. STURSBERG: I don't know. We haven't started the discussions with the programmers or with the rest of the cable industry yet.
1565 I don't know. Six months would probably be reasonable. It is pretty trick, to be honest with you. In fact, it is very tricky.
1566 Brian is just saying that it doesn't work well until we get on with the new satellite.
1567 But beyond that, I think that a lot of the negotiations surrounding how to get it together with the programmers and the cable companies are going to be quite complicated. There will be three parties associated with it -- well, there are going to be multiple parties, but there is going to be three groups. And even among the programmers they are going to have different views, and among the cable companies they are going to have different views. So it is going to take us a little while.
1568 Certainly we would like to do this. We think this is going to be a very important initiative for us and for the industry.
1569 I think six months would not be unreasonable.
1570 MS MOORE: Thank you, Madam Chair. Those are my questions.
1571 THE CHAIRPERSON: Thank you, counsel.
1572 You have nothing more to add?
1573 MR. McEWAN: No. We would just like to conclude by thanking you all for a very thorough process. We appreciate your time.
1574 THE CHAIRPERSON: Thank you very much.
1575 This completes the hearing of Item 1 on the agenda, as well as Item 13 on the list of non-appearing applications also before this panel, which is an application by Shaw for rationalization of cable operations in Calgary and other surrounding areas in Alberta.
1576 The rest of the agenda will be heard beginning tomorrow morning at 9 o'clock by a new panel.
1577 At this time, I wish to thank all the participants, applicants, and intervenors before us for their cooperation, and certainly thank my colleagues for their help, and the staff, as well as the interpreter and the court reporter.
1578 We have had a long day, but hopefully we are smarter for it. We wish you all a good end of the day. Some of you may be back tomorrow morning; some of you may not.
1579 Thank you.
--- Adjournment / Ajournement