TRANSCRIPT OF PROCEEDINGS
FOR THE CANADIAN RADIO-TELEVISION AND
TRANSCRIPTION DES AUDIENCES DU
CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
BROADCASTING APPLICATIONS AND LICENCES/
DEMANDES ET LICENCES EN RADIODIFFUSION
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
Hull, Quebec Hull (Québec)
December 6, 1999 Le 6 décembre 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
Broadcasting Applications and Licences/
Demandes et licences en radiodiffusion
BEFORE / DEVANT:
A. Wylie Présidente/Chairperson
D. McKendry Commissioner/Conseiller
A. Noël Commissioner/Conseillère
B. Cram Commissioner/Conseillère
J.-M. Demers Commissioner/Conseillère
ALSO PRESENT / AUSSI PRÉSENTS:
P. Cussons Hearing Manager /
Gérant de l'audience
G. Batstone Legal Counsel /
D. Santerre Secretary / Secrétaire
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
Hull, Quebec Hull (Québec)
December 6, 1999 Le 6 décembre 1999
TABLE OF CONTENTS / TABLE DES MATIÈRES
Questions by the Commission 27
Questions by Commission Counsel 308
Hull, Quebec / Hull (Québec)
--- Upon commencing on Monday, December 6, 1999 /
L'audience débute le lundi 6 décembre 1999 à 0902
1 THE CHAIRPERSON: Good morning and welcome, ladies and gentlemen.
2 Mon nom est Andrée Wylie. Je suis la vice-présidente du CRTC et je présiderai cette audience.
3 Permettez-moi de vous présenter mes collègues qui composeront avec moi le comité d'audition. A ma droite, Barbara Cram, à sa droite Jean-Marc Demers, à ma gauche David McKendry et à sa gauche, Andrée Noël.
4 Le personnel du CRTC qui nous aidera lors de cette audience sont notre conseiller juridique, Geoff Batstone, les gestionnaire de l'audience Peter Cussons et la secrétaire d'audience, Diane Santerre. N'hésitez pas à faire appel à eux pour toute question de procédure.
5 Comme vous pouvez le constater, l'ordre du jour de l'audience est très chargé.
6 We will begin this procedure by examining applications from CTV for authority to acquire effective control of NetStar, the parent company of The Sports Network, Le Réseau des Sports and Discovery.
7 In order to examine fully the magnitude of the proposed transaction and its impact on all aspects of the Canadian broadcasting industry, we will discuss a number of elements of this transaction, including the concentration of ownership in sports programming services that could result, the potential effects on programming rights, questions of rebranding, the suggested tangible benefits package and the role that ESPN would play in the proposed ownership structure.
8 Nous étudierons ensuite une demande de Sportscope en vue de modifier deux de ses conditions de licence actuelles et d'en ajouter une nouvelle.
Sportscope exploite actuellement un service national spécialisé de langue anglais qui est consacré exclusivement aux événements majeurs dans l'univers du sport.
9 Sportscope a demandé des modifications qui lui permettraient de diffuser des événements sportifs en direct qui réduiraient de 100 pour cent à 80 pour cent le contenu canadien de ses émissions dans l'ensemble et qui feraient passer de 100 pour cent à 60 pour cent le pourcentage minimum de la période de radiodiffusion en soirée consacrée à des émissions canadiennes.
10 Sportscope a aussi demandé qu'on lui permette de partager son signal national de manière à pouvoir offrir des émissions régionales jusqu'à concurrent de 10 pour cent de sa grille-horaire trimestrielle.
11 In addition to applications from CTV and Sportscope, this panel will examine a number of other applications over the course of the hearing. We will hear competing FM radio applications from CHUM Limited, Larche Communications and ROCK 95 Broadcasting for Barrie, Ontario.
12 For the Hamilton-Burlington area, we will examine competing FM applications from Affinity Radio Group, Douglas Kirk and Rae Roe and Newcap Inc.
13 We will then examine an application from Newcap Inc. for authority to acquire the assets of a number of Newfoundland radio stations.
14 The Commission notes that if approved, this transaction would give Newcap ownership of four radio stations in St. John's, an outcome that is not in line with the ownership policy set out in our current commercial radio policy.
15 Next on the agenda is an application from Rogers Ottawa to consolidate a number of individual cable distribution licences into a single licence for Ottawa and the surrounding area. As part of this application, Rogers proposes to raise cable rates for some affected subscribers and lower rates for others.
16 Applications from Jan Pachul for a new English-language low power television station for Toronto and Joseph Rajda for a broadcasting licence to operate an English-language low -power FM radio station in Nepean will follow.
17 Finally, we will hear an application from Anthony Zwig for a broadcasting licence for an English-language FM radio station in Belleville, Ontario.
18 Je poursuis maintenant avec les questions d'ordre administratif et de régie interne quant au déroulement de l'audience.
19 Au cours des six prochains jours, le Conseil entendra un certain nombre d'exposés par divers intervenants. Je précise que les mémoires déposés au Conseil feront partie intégrante du dossier public.
20 The proceedings will be transcribed and filed on the public record. To ensure that the people responsible for recording the transcripts are able to provide an accurate record, I would ask that when you speak you press on the small button on the microphone in front of you to activate the microphone -- not a big mystery to some of you.
21 In order not to create interference, we ask that when you are not speaking you please turn the microphone off. The red light indicates whether the microphone is on or off.
22 We expect this hearing to run well in Saturday. As we have a lot of material to cover in the allotted time, we will start at 8:30 each day starting tomorrow morning. We may also have to extend the hours we sit some days beyond business hours in order to finish this week. I will keep you posted as to our schedule as the hearing progresses.
23 Thank you. Merci. And I now ask Madam Secretary to invite the first applicant after preliminary announcements.
24 THE SECRETARY: The first announcement I have to make is the Commission announced in Notice of Public Hearing 1999-10-5 issued on the 3rd of December, 1999 that the applications by Wick for the authority to affect a change in ownership to allow Shaw Communications Inc. to acquire 49.9 per cent of Wick class-a shares and 52 per cent of Wick class-b shares has been adjourned to a further public hearing in the spring of 2000.
25 This will allow the Commission to hear these applications, together with those that were filed earlier this month in the context of the Shaw current global Wick transaction. Consequently, item 19 of the Notice of Public Hearing is withdrawn from this proceeding.
26 Thank you.
27 For your general information, we would like to inform you that the public files associated with the items at this hearing are available for viewing in the Papineau Room. CRTC staff, Josette Leblanc, 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.
28 Donc la traduction simultanée est aussi disponible et vous pouvez obtenir les écouteurs à l'extérieur de la salle auprès du commissionnaire pour suivre ces délibérations.
29 We would also ask so that the transcript staff and interpreters can follow the matters accurately to not speak too quickly. Take your time and speak clearly. The transcript will be posted every day on the Commission's Web site and for those of you who wish to purchase copies of the transcript, they will be available from the court reporter.
30 Nous demandons aussi que les téléphones cellulaires soient fermés.
31 We would ask also that the journalists and cameramen do not interfere unduly with the proceeding.
32 Thank you.
33 Now we will proceed with the first application by CTV on behalf of The Sport Network Inc., TSN, Le Réseau des sports, RDS Inc. and 2253285 Canada Inc. Discovery operating as a discovery channel for authority to effect a change of the effective control in NetStar.
34 Mr. Beatty, la parole est à vous.
35 MR. BEATTIE: Madam Chair, members of the Commission.
PRESENTATION / PRÉSENTATION
36 My name is Allan Beattie and I am Chairman of the Board of CTV.
37 I would like to introduce the members of our panel and a few key people in the audience.
38 In the front row facing you, starting from your right are Gordon Craig, Chairman and Chief Executive Officer of NetStar Communications Inc., then Trina McQueen, Executive Vice-President of CTV. Beside her is Ivan Fecan, President and Chief Executive Officer of CTV. Then Robin Fillingham, Executive Vice-President and Chief Financial Officer of CTV, and Kathryn Robinson of Goodman, Phillips and Vineberg, our legal counsel and a member of the CTV board.
39 In the second row are Suzanne Steeves, Senior Vice-President and General Manager of CTV Sports and Sportsnet, Rick Brace, President of the Sports Network, Gerry Frappier, President of Le Réseau des Sports, and Ken Murphy, President of the Discovery Channel.
40 To my right is Stephen Armstrong, of Armstrong Consulting. Next to him are Margaret Sanderson, an economist and Vice President of Charles River Associates, Bart Yabsley, Vice President and General Counsel, Corporate, and Secretary of NetStar, and Mary Currie, Chief Financial Office of Netstar.
41 In the audience, I would like to introduce Jim Thompson, President of NetStar Sports Group, Lorne Stephenson, Executive Vice President, Administration, for NetStar, Elizabeth Duffy-Maclean, NetStar's Director of Business Affairs and Craig Gibson of KPMG, and Willy Burkhardt, Senior Vice President and Managing Director of ESPN International.
42 I would also like to introduce to you Mr. Donald Campbell, the trustee who holds the NetStar Communications shares pursuant to Commission authorization.
43 I would now like to ask Mr. Fecan to begin our presentation in chief.
44 Thank you.
45 MR. FECAN: Madam Chair and Members of the Commission.
46 We come before you today with a sense of pride and excitement about the potential of this vitally important application for CTV.
47 Chairperson Françoise Bertrand has said that content is at the heart of the Canadian broadcasting system and we agree.
48 The members of the CTV team have a long-standing commitment and a track record for quality Canadian programming. We have an ambitious agenda for it.
49 I also want to say that we welcome the Commission's television policy released in June. It provides an equitable framework in which each major broadcasting company can achieve success through its own model.
50 As you know, conventional television audiences are eroding. This trend is likely to continue. Specialty services, on the other hand, are growing rapidly.
51 This is a trend we correctly predicted several years ago and one on which we based our programming and growth strategy. We understood then that if we wish to preserve the role and very foundation of CTV's conventional service as our major source of strong and relevant Canadian programming we needed to ensure its health, strength and viability through the programming and other synergies we could achieve by building specialties.
52 However ahead of the curve we thought we were, the rate at which conventional is declining and special are accelerating has exceeded everyone's expectations.
53 The transaction we are now proposing is essential to diversify CTV's revenue streams and to strengthen the company financially so that we continue to provide important Canadian programming. With NetStar, the proportion of CTV's revenues derived from specialties would increase dramatically.
54 The CTV model, as you know, is based on growth within Canada. This means we must continue attracting Canadian audiences, advertisers and investors who provide the capital for our growth. Therefore, the NetStar acquisition is crucial for us.
55 The Commission has also recognized in its television policy that to date consolidation in our industry has "resulted in efficiencies and synergies which should provide increased Canadian investment in Canadian programming and a greater likelihood of the export of that programming." The Commission set an expectation at that time that consolidation of broadcasting, production and communications companies "will continue, to the benefit of Canadian audiences, the Canadian broadcasting system and the public interest."
56 We believe this transaction meets that expectation and is highly positive for the Canadian broadcasting system.
57 The Commission also recently reiterated the complementary nature of TSN and Sportsnet. We believe our application will result in the most elegant reconciliation of regulatory and business ideals, and that viewers will benefit from enhanced television choices as a result.
58 Aussi, il était grand temps que CTV devienne un radiodiffuseur vraiment national ayant une présence dans le marché francophone. Avec l'acquisition de RDS ça sera chose faite.
59 Voilà une perspective formidable et très enrichissante pour nous. Les artisans de RDS sont débrouillards et compétents, mais ils connaissent aussi les limites de leur marché et de leurs ressources relativement limitées.
60 La famille de CTV offre donc de nouveaux horizons formidables. RDS pourra acheter et partager des droits qui n'étaient pas à sa portée auparavant et, inversement, il pourra élargir son public, par exemple en collaborant avec SportsNet dans l'est du Canada.
61 Voilà une excellente nouvelle pour tout le monde.
62 I would like now to ask Gordon Craig to explain the background of the transaction.
63 MR. CRAIG: Madam Chair, Members of the Commission, we are proud of NetStar's accomplishments and their contributions to the Canadian broadcasting system.
64 TSN has fulfilled its promise to become the flagship of all the specialty services, with top-quality broadcasts delivering the full spectrum of professional and amateur sports.
65 RDS showcases sports and sports heroes to the largest francophone audience viewing specialties today.
66 Canadians have rated the Discovery Channel number one above all their other television choices in Nielsen's survey of viewer satisfaction. Discovery also commissions more Canadian documentaries than just about anyone else in the industry. In fact, since the launch of TSN in 1984 the NetStar services have invested more than $700 million on quality Canadian programming -- programming that Canadians have wanted to watch.
67 Because of our strong belief in the NetStar broadcast assets, my colleagues and I led a consortium to acquire them in 1995. However, we recognize that we would be facing two major industry trends: continuing consolidation in broadcast ownership, and the role of size as a critical factor for success. Standing still was simply not an option. over the past few years we have had many discussions with potential partners including Baton.
68 Eighteen months ago the Canadian shareholders responded to an offer from CanWest Global. In January of this year CanWest announced that it had negotiated successfully to acquire 68 per cent of NetStar and merge the two companies. However, under the shareholders' agreement approved by the Commission in 1996, ESPN, as a constrained shareholder, could and did seek out an alternative buyer. The agreement with CTV was concluded on February the 5th.
69 CTV did not create this situation. It simply stepped up to the plate quickly and surely when the opportunity arose. As it turns out, we believe CTV is the right, compatible partner for us. This transaction will enable the NetStar services to continue their proud history of commitment and contribution to the Canadian broadcasting system.
70 MR. FECAN: I would like briefly to summarize our position on a number of issues in which the Commission has expressed an interest.
71 This transaction, in our view, increases the level of Canadian control of NetStar, replacing an investment consortium with a Canadian broadcaster as a strong, single shareholder. CTV is firmly in control with responsibility for day-to-day management of these services and full operating control. To ensure there is no question of this fact we will be proposing certain changes to the shareholders' agreement before you.
72 We should remember that ESPN has been there from the founding of TSN in 1984, as a program supplier and sometimes as a co-producer, but always choosing to enter our market in partnership with Canadians. With the Commission's approval, the relationship evolved into minority shareholder status in 1995, with the normal minority shareholder rights guaranteeing fairness and equity.
73 Next, I would like to discuss the market for sports rights.
74 On one end of the rights spectrum you have the minor-professional or amateur sports programming that appeals primarily to niche audiences. There are no bitter fights for the right to carry programming such as badminton, lacrosse, mountain biking, billiards, karate or darts, although these programs and sports have narrow, intensely loyal followings. Because TSN and Sportsnet carry sports 24 hours a day, it is only logical that we would have room for these niche offerings.
75 Many of our 200 positive intervenors are from that part of the spectrum, and they feel we serve them well. They expect this application to have positive results for them, and we agree. Programming TSN and Sportsnet within one specialty family, and in respect of their complementary mandates, will create more diversity and choice for viewers and, therefore, more room for this kind of programming.
76 At the other end of the spectrum you have the highest-profile, most expensive marquee events that draw by far the greatest number of viewers. These are primarily the domain of conventional stations. This is because these rightsholders want the greatest exposure to hype their market presence to maximize sales of tickets and all of their ancillary products.
77 For these kinds of rights -- think of the NHL play-offs and the Stanley Cup, the Grey Cup, the Super Bowl and the Olympics -- the competition is intense. CBC and Global are the powerhouses in this market.
78 CTV is not a major player now in this market and will not be in the future because it fits neither our programming nor our business strategy. We have to balance spending on these most expensive sports properties with our need for the priority Canadian programming to which we are committed.
79 In between these two ends of the spectrum we find our financial bread and butter, for example, the regular season games of major North American professional league sports like Major League Baseball or NHL hockey. This is must-have programming for us and it provides us with the financial base to program amateur and niche sports.
80 From one contract to the next the leagues package these rights differently, selling to various conventional or specialty broadcasters to maximize their value. These rightsholders are powerful sole-source suppliers, almost all U.S.-based. These leagues can and do package their product as they wish, according to their own revenue and profit imperatives, and often without much regard for our scheduling requirements.
81 If this application is approved, TSN and Sportsnet will still have to offer rightsholders market value for these must-have products or risk losing out to rivals in a healthy, competitive environment where conventional broadcasters can still be very much a part of the action.
82 As long as conventional broadcasters believe this kind of programming will perform for them they will always win these rights if they want them because they can offer the leagues greater reach. But as sports specialty services, we still need them.
83 In terms of impact on the industry, we are the third largest broadcast group by revenue now, and we will still be third with approval of this transaction. If CTV is to have to the resources to continue on its ambitious Canadian programming agenda, and to attract significant audiences to Canadian content, then we must not be held back from the growth necessary to fund it.
84 In addition, Commission approvals have resulted in specialization by genre which have allowed various companies to accumulate both expertise and efficiencies: Shaw and its affiliate Corus have concentrated on youth programming; CHUM on music and entertainment; and Astral on movies. In turn, CTV now wishes to develop expertise and critical mass in specialty sports.
85 Our presentation today is the latest step in a long and complex process during which CTV has built its group of conventional stations and specialty services. At every step of the way we have happily done our fair share and more, contributing both tangible and intangible benefits.
86 Many great Canadians and institutions have honoured us with their support of this application, and we thank them.
87 I would like to ask Trina McQueen to tell you more about the significant and incremental benefits package we are putting forth as part of this transaction.
88 MS McQUEEN: This transaction positions a great Canadian company to contribute more to Canadian broadcasting, and it develops some good Canadian muscle to stand against what we expect will be tougher foreign competition.
89 But it does more. It generates new creative electricity and energy that may be its biggest and most lasting benefit. Wonderful television most often comes with lots of opportunities for all sorts of talent. Together, CTV and NetStar will have the size, the experience, and the commitment that will generate all kinds of sparks.
90 The expertise that we will develop in live sports will have spin-offs for news, comedy and variety. Sports needs first-class animation, graphics and editing. Increasing the level of that talent at CTV will help our science programs, our local news and our on-air presentation on every channel and station. Overall, this transaction will give us the size to develop talent and to take creative risks, and the Canadian viewer will benefit.
91 But valuable as they benefits are, they are intangible, so we have tangible benefits: more than $35 million of them. We think they are an expression of the passion and the dreams that we have for this new CTV and for our industry. We hope that in this application you will see fresh thinking, intelligence and a terrific fit.
92 We will start with talent, where CTV always starts. We will contribute to a study of that elusive goal, the development and the retention of Canadian starts. We will invest in the Canadian Film Centre, the Ryerson Media Writing Workshop and the Academy of Canadian Cinema and Television. Amateur athletes are CTV stars too, and we will show them off with more than $15 million worth of events.
93 We also believe in learning: with Discovery's Science Noodles, so that even the youngest children can taste the wonder and the fun of science; for young adults, a range of university scholarships; for budding broadcasters, sports journalism scholarships; French communications scholarships; and, at the highest academic level, the first-ever Chairs in Science Broadcasting. And we will encourage Canadian universities to share their research with viewers by funding Discovery Expeditions.
94 We will spend more than $25 million on new Canadian programming, including sports documentaries, Sports Heritage Minutes, and a Great Canadian Books project. Our one-and-a-quarter million dollar contribution to the Banff Television Foundation will ensure that distributors of Canadian programs will continue to have a special international showcase.
95 We believe that talent is everywhere, and so we have provided special grants for development to Canadian Women in Communications, to the Media Awareness Network, and one-and-a-half million dollars to the Aboriginal People's Television Network for co-productions, program acquisitions, training and mentorship. And there is an extra $700,000 pool for diversity initiatives to make our academic and professional grants accessible to minorities and to the disabled.
96 It is $35 million that will be well spent on projects and programs that would never occur without this application.
97 We have been very pleased that intervenors have used words like "outstanding", "innovative" and "above and beyond" in supporting the benefits package. We are touched that so many of the intervenors wrote that because of our record, CTV and NetStar can be trusted to do what we say.
98 Now we would like to tell you a little bit more about the particular benefits to the sports community.
99 M. FRAPPIER: Merci, Trina. Bon matin.
100 Plusieurs des avantages tangibles proposés dans le cadre de cette transaction s'appliqueront au Québec ou aux francophones. Les Jeux du Québec constituent l'événement le plus important du monde du sport amateur au Québec et pourtant les Jeux ont toujours eu de la difficulté à attirer la couverture qu'ils méritent.
101 Nous proposons donc, dans l'intérêt public, un engagement important envers les téléspectateurs francophones et les athlètes québécois. RDS couvrira les Jeux jusqu'en 2005, inclusivement, c'est-à-dire les Jeux de 2001 à Rimouski et à Lachine et ceux de 2003 et de 2005 dont nous ne connaissons pas encore l'emplacement.
102 Au coût de 2.5 millions de dollars, cette couverture pourra également s'étendre aux téléspectateurs anglophones par l'alimentation Sportsnet dans l'est du pays. Cette première diffusion en anglais ouvrirait une nouvelle fenêtre aux athlètes québécois.
103 Les bourses en communication de RDS aideront à développer le journalisme sportif à travers des partenariats avec des groupes tels que la Fondation sports études, le Collège de l'Assomption et le Défi sportif également.
104 Et, évidemment, le Québec aussi vit une réalité de plus en plus multi-ethnique et complexe. L'initiative en faveur de la diversité saura ouvrir des possibilités aux minorités ethniques et aux autres du Québec ou des francophones hors Québec également.
105 MS STEEVES: Our work in amateur sport has helped us understand how much it can mean for a small town to host a major event. That's why we came up with the idea for the small community broadcast development fund. Sports organizations often don't even consider underequipped communities as host locations. Our fund would help these communities gain a place on the national sports stage.
106 We propose to work with the national sports federations to fund upgrades to infrastructures for broadcast events. The impact will be real and significant. We might, for example, provide funds to improve the lighting in George Vézina Arena in Chicoutimi to accommodate the televising of junior hockey or to install a television power drop to the next Special Olympics.
107 These are legacy benefits, fostering a development of communities and sports organizations, bringing viewers a window into communities they would not otherwise get to know, and providing facilities that any broadcaster can use, again and again.
108 MR. BRACE: The single largest item in our benefits package is the Canada Games at just over $9 million. For 34 years this festival of Canadian youth has showcased athletes at the very beginning of their careers, providing them with their very first opportunity for national competition.
109 The Games are tremendously important at the grassroots level, but they only occur every two years and they are not a mass-market draw. In the 1995 transaction, the Commission approved NetStar's offer to provide coverage of the 1997, 1999 and 2001 Games as an incremental benefit.
110 We are now proposing as a significant and new incremental benefit to extend this to a combined total of 125 broadcast hours of coverage for the 2003 New Brunswick Winter Games, the 2005 Saskatchewan Summer Games and the 2007 Yukon Winter Games. Sportsnet's regional feeds will have 20 to 30 hours of each of these Games to offer viewers enhanced coverage of their local athletes and teams.
111 Women's hockey has exciting potential for future core sports programming, but it needs development. Our legacy will be the Canada Cup of Women's Hockey, at a cost of one and a quarter million dollars.
112 These are tangible benefits in the area of sports programming, but there are also intangible benefits that arise from the ability to program TSN, RDS and Sportsnet. Amateur sports would be the first beneficiaries.
113 For example, TSN has CIAU rights for basketball, football, hockey and volleyball, but can only schedule the championships. With this transaction, Sportsnet's regional services could carry the lead-up games. This would be a direct benefit to the amateur athletes and to the audiences who would not otherwise get to see them. The transaction would also result in a better focus on the complementary mandates: TSN's national service and Sportsnet's regional orientation.
114 Common management would make program acquisition and scheduling more efficient as well as increasing the variety and choice of programming available. Cross-promotion would give viewers a better knowledge of that choice and grow audiences, particularly for niche and amateur sports programming.
115 We would maintain the distinct voices and news programming of each service, but through efficiencies such as pooling archival footage and sharing facilities, we could cover more news events. The amateur leagues will benefit from increased exposure of their product, but the biggest winners at the end of the day are viewers who enjoy greater clarity when looking for programming and more diversity.
116 MR. FECAN: In conclusion, Madam Chair and Members of the Commission, we are proud of this application and of our record of quality. We are delivering on an imperative for the Canadian broadcasting system: Canadian programming that resonates with audiences.
117 Commission approval of this transaction would allow CTV to provide $35.2 million worth of tangible, incremental benefits to support Canadian talent, amateur athletes and Canadian programming and to become a positive force in the French language broadcasting environment for the first time.
118 It would create a strong, truly national broadcaster able to fulfil its ambitious Canadian programming agenda; a financially more stable and diversified entity able to pursue that agenda with confidence and panache and a powerful creative engine at the service of Canadian viewers.
119 But above all, it would increase Canadian control of NetStar in the hands of an experienced Canadian broadcaster; put the resources where they belong, on the screen, to the benefit of the viewers; fortify the complementary mandates of the Sports net and TSN services and thereby increase viewer choice and diversity.
120 These are all benefits to the Canadian broadcasting system and to Canadian viewers and we submit that they are in the public interest.
121 We look forward to our discussion with you and we await your questions.
122 Thank you. Merci.
123 THE CHAIRPERSON: Thank you. Good morning, ladies and gentlemen.
124 The panel will discuss with you a number of areas of your application. They will be those that, in the panel's view, require clarification or confirmation or raise concerns. It may seem that they are the only areas we are interested in. I want to reassure you that we are not blind to the positive aspects of your proposal, even if time constraints make it difficult to discuss those in any detail.
125 Moreover, as you pointed out, supporting intervenors will stress those positive aspects of your application as early as tomorrow.
126 In order to provide some framework for our discussion, here are the areas on which we intend to focus and in the following order.
127 First, issues of concentration of ownership; secondly, issues of the future control of NetStar; third, the proposed tangible and intangible benefits; fourth, the synergies flowing from the proposal and, fifth, the value of the transaction.
128 Those areas are not, of course, necessarily discrete and there will obviously be some overlap. Moreover, you may, of course, occasionally provide answers to questions that were not asked, but hopefully not too often, given our schedule.
129 We leave it to you to decide who can most effectively answer our questions, unless otherwise indicated. I will begin with the first area of questions related to issues of concentration.
130 Your proposal, should it be approved, and should it develop as planned, would leave NetStar with de jure control of one national English language specialty sports programming service, TSN, one national French language specialty sports programming service, RDS, two pay-per-view sports programming services, 40 per cent ownership and management control of an English language regional sports programming service, Sportsnet, and one third ownership and management control of a specialty service offering a substantive amount of sports programming outdoor.
131 In addition, a major shareholder of NetStar, CTV, owns a national language TV network and 26 TV stations which together reach 99 per cent of Canadians and provide some hours of sports programming in their schedule. If you have no objection to my summary for the purpose of our discussion, I will refer to the CTV NetStar group.
132 I point out as well that the CTV NetStar group could also hold 24.9 per cent of a pay-per-view and pay service which relies in part on sports programming for its revenues. No one has any objection to this summary?
133 MR. FECAN: Just on one small point. We, of course, the two pay-per-view you mention, one I think, as you indicated, we have 25 per cent ownership that I believe Astral runs and the other, the CTV sports pay-per-view licence, is probably one that we will be forced to consider selling in that it is in conflict with the first pay-per-view shareholders agreement.
134 It doesn't change your point substantially, but just for the record.
135 THE CHAIRPERSON: Which one? I understand there were two licences issued, the CTV-1 for the THN-1 for digital terrestrial, I gather.
136 MR. FECAN: Okay. That's fair. We would be in conflict with Viewer's Choice Canada shareholders agreement and, therefore, should you approve this, we would need to either resolve that conflict in some way or sell the sports pay-per-view, the CTV-2 sports pay-per-view licences.
137 THE CHAIRPERSON: That is not something that is addressed in your application, so it would just be -- you don't propose any particular resolution. It could be resolved without selling.
138 MR. FECAN: The moment the Viewer's Choice shareholders' agreement would require us to sell if we have a conflict in a related business.
139 THE CHAIRPERSON: If.
140 MR. FECAN: If.
141 THE CHAIRPERSON: In your supplementary brief at Appendices A and B of your supplementary brief, which I gather you must have with you, you set out what you understand to have been the growth strategies of broadcasting distribution undertakings and broadcasting programming undertakings, in large part with CRTC approval through vertical and horizontal integration, to enhance those undertakings, strength and competitiveness going into the 21st century. I think you also mentioned this morning the need for consolidation and greater strength.
142 I assume that these appendices are there to illustrate what you characterize at page 17 of your supplementary brief as a general and inexorable trend toward more consolidated and diversified entities.
143 MR. FECAN: It certainly seems to be the trend.
144 THE CHAIRPERSON: Would you agree that consolidation, to the extent proposed by your application, in the broadcast provision of one very distinctive or specific type of programming, that is sports programming, raises very specific concentration issues with respect to questions of market dominance or undue competitive advantage, to the possible detriment of the broadcasting system and, eventually, of Canadian viewers, or do you put both of these on the same footing?
145 MR. FECAN: I think the first is the general environment that we are really addressing.
146 Your more specific issue about this particular proposed transaction clearly raises concerns, but we think we have really good answers and perspectives on why those concerns, however merited they are, result in benefits to the broadcasting system and to Canadian viewers.
147 THE CHAIRPERSON: You do agree that it raises concerns. How would you summarize these concerns?
148 MR. FECAN: I would imagine that it really depends on how you look at it. I suppose I could argue every side of the case, but if you permit me to argue my side --
149 THE CHAIRPERSON: So there are two cases? But you did acknowledge concerns, presumably in the area we are looking at now, that is concentration and potential undue competitive advantage in one area, a very distinctive area of broadcast programming, that is sports. So, I assume that when you say that it raises concerns you had some in mind related to my comment?
150 MR. FECAN: Well, I think if you were -- it depends on how you look at it, I suppose. I think if you were to --
151 THE CHAIRPERSON: If you look at it as a regulator. You couldn't imagine such a face, could you?
152 MR. FECAN: If I could imagine.
153 Well, if you look at it from the perspective of concentration in broadcasting what this would do for the CTV group, as perhaps the moniker I will use to cover the licences that you described.
154 THE CHAIRPERSON: My moniker was CTV/NetStar group.
155 MR. FECAN: We would go as a group on an audience of two plus share viewing in Canada from 12 share of view to 16 share of viewing, 16.2. That in itself doesn't seem to be cause for alarm.
156 If you tighten it more to men 18 to 49, which is often used as a proxy for sports viewing, and I don't put forward a good argument as to why that is a valid proxy or not, but it seems to be the proxy many people point to in both positive and negative interventions, our share of viewing in Canada would go from 11.2 to 17.8.
157 If you look at viewing to the top 25 sports programs in the entire country -- well, I guess we are using Toronto here as a proxy for the entire country, with apologies to the rest of Canada, we would go approximately from about 1 or 2 per cent to about 12 or 13 per cent viewing for the top 25 sports programs in Toronto. Number one in that category, at about 64 per cent, is the CBC. Number two in that category would be CanWest Global at around 19 per cent. We would catapult to third in that particular category. I am looking at men 18 to 49.
158 If you look at viewing for all sports program, again using Toronto as a proxy for the rest of the country and my base year is 1999-98, men 18 to 49, CTV group, CTV NetStar group, all sports programming, would go to 50 per cent from approximately 12 or 13 per cent.
159 Fifty per cent sounds like a lot, but when you think about it, if you have two specialty channels at 24 hours a day that do sports, I would submit to you that's exactly the kind of number that you would expect. I would also submit to you that if you did the same analysis for music, music videos or any kind of music on television, the CHUM group would be well in excess of 50 per cent on music, with MuchMore Music, MuchMusic, Bravo with the classical music that it might have, and so I think if you have specialized channels, by definition you are going to have concentration of one sort or another.
160 I think it is rather remarkable that with the proposed concentration in front of you, fully half of viewing goes to other sports programs.
161 THE CHAIRPERSON: It's interesting that the concerns that you raise are not any one that I had thought were at the top of my list, but since you raise the audience and the revenues, we will perhaps have a hiatus and discuss that a bit, I notice at page 51 of your supplementary brief that you seem to put a lot of emphasis on the fact that we shouldn't worry about this transaction at the level of concentration because if approved it would not have a significant impact on the revenues or audience share of the CTV NetStar group, which is the point I gather you just made.
162 Should the Commission as a regulator not worry as well or even more what the effect of concentration in the area of sports programming on the ability of one single purchasing group to leverage its dominance and effectively dictate what is broadcast? Why do you place such importance on the fact that -- well, you say at page 51:
"Concerns with respect to concentration could arise if a proposed transaction were to result in a materialistic significant change in the share of television advertising or revenues accruing to a single company." (As read)
163 Which is the point you just made again this morning.
164 I am not sure in weighing these two measures, that is the increase in revenues and audience share against the increased ability to dominate the sports programming field, which one we should worry the most about, or which one we should use as a point of reference or a measure of whether concentration is undue or would be undue if we were to approve this transaction.
165 MR. FECAN: Well, if you would like me to comment on the concentration in terms of rights I would be happy to do so.
166 THE CHAIRPERSON: Well, I would ask you to indicate which were your concerns, since you acknowledged that there may be some, but that they are weighed against the advantages we shouldn't worry about them and you raised revenues and audience share. I am not sure why you feel this is such a significant measure for us of whether there would be undue concentration.
167 MR. FECAN: Well, I guess we looked at it from three different perspectives. We looked at it from the perspective of the viewer and we think this will result in more diversity.
168 We looked at it from the perspective of the advertising market and we felt that this would not have a significant undue influence on the advertising market, and pretty well by and large the largest advertising agencies in the country agree. And then we looked at it from the points of view of different rights holders and we kind of looked at three different categories of sports programming, and we tried to illustrate that probably our largest volume of sports programming is in terms of the niche programs, which we would have a large impact in, as one would expect, from having two specialty channels in English Canada if you approve this.
169 We would have, in our view, a very small impact on "le plus ultra", the most rarefied of sporting properties, the Grey Cup, the Stanley Cup, the Super Bowl. We are not as much of a player there now, and for our part we don't intend to pre-empt Lloyd for two months in a row. It is just not part of our programming agenda, not part of what we want to do.
170 We think there is lots of competition in the in between category of the day to day professional games. This competition depends on price, performance and scheduling, between whether it goes to specialty and conventional.
171 That is why when we looked at the three different aspects of the transaction from that sense we concluded that we had a good case to put before you. We look at audience share because it is just another measure of determining whether we would somehow, in either the broadest universe or the most narrow universe, have some sort of disproportionate role. Then we also in our thought process said clearly this is a change. We are not saying it is business as usual. This does change a few things.
172 Therefore, the benefits have to justify that. They have to outweigh the concerns.
173 That is why we constructed the benefits package as we did and put forward things that we thought were benefits in the public interest that outweigh what concerns you may have.
174 That is kind of the thought process that we approach it with.
175 THE CHAIRPERSON: Perhaps we can pursue further the question of the effect of this transaction if it were approved on diversity and on the ability of other broadcasters to stay as players in the broadcasting industry.
176 Despite what you say about CTV perhaps reducing its role in the sports area, you point out as benefits at the very beginning of your supplementary brief, at page 6, that CTV and NetStar together can provide a wide variety of platforms: local, regional, specialty and national exposure, in all kinds of combinations; and that all kinds of combinations would become possible as do inter-company reformatting and co-production.
177 And slightly lower down, that having a single management group making decisions on windows, rights and business points will make the complex process of funding the program smoother and more efficient.
178 I assume that these are put forward as positives.
179 By the same token, could these cost synergies not lead the CTV/NetStar group to have an undue impact on price of sports programming and on its availability on differently owned platforms to the extent that diversity for the consumer may eventually be affected?
180 MR. FECAN: I think it is important to state and remember that rights-holders are sole source suppliers of product we must have. As I have indicated to you before, I don't know that there is necessarily huge competition for badminton or lacrosse right now among broadcasters in Canada. So I will just put that category aside for a second.
181 I think that at the moment the record shows that the CBC and Global have all of the highest, most premium properties, and it is not our interest, as the CTV conventional group of stations, or however you want to describe it, to go after that. We have a different programming strategy that is based on news, drama and documentary.
182 I don't think you are going to see us necessarily looking to carry the Stanley Cup Playoffs.
183 In that middle category I think it really depends on what the leagues want to do. The National Hockey League, for instance, very much wants conventional television exposure. I think every league does. But the National Hockey League makes this work positively for a conventional broadcaster, the CBC, by scheduling games on Saturday night, back-to-back double headers with Canadian teams that are broadcast friendly. The broadcasters like that.
184 Other leagues may not be as friendly in terms of scheduling.
185 The price discipline in the market also comes in that we really need Canadian teams to survive and to work. Without Canadian teams working and surviving, we haven't got that great program to offer viewers.
186 If we offer less than the market deserves for that particular right, a conventional broadcaster will snap up and take it. I think there is a real price performance scheduling ratio that comes into play in terms of whether something goes to specialty or something goes to conventional.
187 I think in most cases the leagues will tell you that if they have their druthers, they would be on conventional because it is greater exposure. It is a wider reach. It is more meaningful. But not every league will sell games at prices that make it cost-effective for conventional television. Not every league will schedule the way the NHL does so that it is scheduling friendly for a broadcaster.
188 I think that control and that issue of this middle group, the bread and butter group, really resides in the hands of the rights-holders in the leagues.
189 THE CHAIRPERSON: So you don't think that we should have any concern that the CTV/Netstar group having all these windows -- local, regional and national -- at its disposal could unilaterally decide what is broadcast based on its corporate considerations on maximizing revenues since you have all the windows.
190 MR. FECAN: I would like to turn it over to Gordon Craig, because I think Gordon can provide a terrific perspective on how it actually works in the rights area.
191 Just before I do, what I am saying very clearly is that we don't intend to increase sports programming on CTV conventional stations. In fact we intend, over time, to decrease it. I would categorize that as our conventional stations, regardless of whether that is local or national.
192 From our point of view, that is what we are saying. That is not something that we really intend to do with this. We would like perhaps to increase some of our science documentary. I think that kind of provision you see there may be more related to that than to leveraging our conventional to increase our ability to get sports.
193 At the end of the day it is the rights-holders who will determine at what level, where and how they want to sell their product, at what price, to whom.
194 THE CHAIRPERSON: We can discuss that further.
195 I note, for example, in looking through your latest report to shareholders that you have a section on CTV sports, where you say to your shareholders:
"The CTV sports, group comprising of CTV network sports, CTV SportsNet, and the Outdoor Life Network..."
196 This is before today, and before a few months from now.
"...provides excellent opportunities for cross promotion and beginning-to-end event coverage. This creates great cost synergies for all three networks, as well as multi platform viewing and sponsorship opportunities." (As read)
197 My question is: Aren't these cost synergies that you have benefited from, that can accrue from being able to offer programming platforms in multiple windows for the same sports programming, not potentially capable of decreasing diversity?
198 MR. FECAN: Before I turn to Gordon, I think what we are saying, however, is that should you approve this transaction, then the CTV conventional group of stations will start doing less sports.
199 That is the change between then, what was written about a year ago, and what we are looking at now.
201 MR. CRAIG: Madam Chair, it is very important to come back to the fact -- and I think you are probably going to hear us reiterate this point throughout the day. But the leagues themselves have complete control over how they package their rights and the selection of the broadcaster in each category. They break them down into national broadcast rights, national cable rights, regional cable rights, local broadcast rights.
202 In this instance, in your scenario, the CTV network would have to bid in the category of conventional rights against other conventional broadcasters. TSN would have to bid for the national cable rights as packaged by the leagues. SportsNet would have to negotiate with individual teams for local and regional rights.
203 It is not in the sports leagues interest to consolidate these packages. This would simply eliminate some of the bidders -- some of the potential bidders.
204 Frankly, there is a very good example of how this did not work for the broadcaster in the last go-round for NHL hockey rights. The CBC and TSN attempted to bid as a consortium and the National Hockey League chose not to even entertain our right as a consortium because it eliminated other players. It is definitely not in the sports leagues' interest to allow that sort of packaging and they have not done so.
205 THE CHAIRPERSON: Could it not be common, their interest, with this new sports group dominance? Can they not be affected by what can basically be dictated because of the dominance in the market?
206 MR. FECAN: These leagues are very savvy, sophisticated players. Two have intervened. One against, Major League Baseball; one for, the CFL. The others have chosen to not intervene one way or the other.
207 I think they will do what they believe to be in their interest at all times. I imagine that doesn't involve working solely with one broadcaster. It hasn't at any time ever, in my knowledge in the sports world. Gordon has a much more in-depth view of that world. I can't imagine they ever have -- you know, never say never, Madam Chair, but I don't think it's in the cards.
208 THE CHAIRPERSON: Are you suggesting that the manner in which sports rights were sold in Canada wasn't affected by the addition of a national sports service, specialty service? That the way in which things are done don't change or move depending on the players and how they are configured?
209 MR. FECAN: I think they change all the time, but at no time is it in their interest, I believe, to deal with only one party and they have always found ways of moving their rights around to maximize their up side.
210 MR. CRAIG: Madam Chair, it's a fact too in every one of the professional rights agreements that exist in Canada, the cable networks choose their inventory of games after conventional broadcasters have exhausted the needs for their contracts.
211 THE CHAIRPERSON: In the area of the CTV network's future plans I would like perhaps to ask you further questions.
212 There seems to be some shift in what the network intends to do in the area of sports, if I look at the intangible benefits that are put forward and this report to shareholders and what you are saying this morning, so I would like to be a little clearer on that.
213 For example, would CTV rebroadcast on Sportsnet's programming originally aired on TSN? Could CTV itself provide incremental coverage of certain sports to maximize the synergies that would flow from this transaction if it were approved?
214 MR. FECAN: Before I pass it on to Trina, our objective is to firmly embrace the priority programming regime that you have set out last June. That is where we are going with the conventional group of stations.
215 To answer some of those specific questions you raise in terms of how CTV might deal with the issues you raised -- Trina.
216 THE CHAIRPERSON: Yes. I remind you that we will discuss this further, that it has been your position that conventional broadcasters can indeed be competitive bidders despite their conditions of licence, et cetera, et cetera.
217 Ms McQueen?
218 MS McQUEEN: I think conventional broadcasters of course will continue to be in sports. We are not saying that CTV is going -- as a network will get out of sports.
219 What we are saying is that our reaction to the Commission's program policy we look at our model as one that does not include an increase in sports programming. We are going to meet that model in other ways.
220 When you look outside our conventional channel I think what you see really is more diversity for viewers. That is because of the ability that we have, as you pointed out, to acquire a number of rights which wee can show on different platforms.
221 There is a kind of crossway of looking at this in the sense that doesn't this allow us to dictate what will be shown, but I think the rosy way of looking at it, which is closer to the truth, is that we can respond to our viewer's desire for sports in a much more effective and efficient way with those platforms. So it will be done from a viewer perspective, as television always is.
222 One of the ways we can do that is by using the regional and the national sports channels to give people who are fans or fanatics of a certain sport a real opportunity to indulge their passion.
223 Perhaps Rick and Suzanne could give some examples of how the viewer will benefit from these platforms.
224 MR. BRACE: Thank you, Trina.
225 Madam Chair, to just answer a couple of your questions, in terms of duplication on the networks there is no intent to duplicate program on the networks. We will, in very rare circumstances where a program is of specific interest to the entire country and perhaps airs very early in the morning, like the British Open golf for example, may repeat that in the regions on Sportsnet later on, to the benefit of the viewers.
226 But the real benefit here is that we are going to be able to access a lot of unused inventory. There are numerous contracts that we hold where we can't possibly schedule all of the inventory that is part of that contract. In cases like that, like with the Canadian Hockey Association, like the Canadian Curling Association and others, we will now be able to not only carry the events which we have traditionally carried, but also perhaps lead-ups to them.
227 Probably the best example is CIAU where we carry the basketball championships in Halifax on an annual basis. Basketball is particularly of specific interest in that region and it would make sense that the round robin games leading up to the championship could find a home because of the synergies created by the production facilities being there, et cetera, to carry those games on Sportsnet.
228 MS STEEVES: Just to add to what Rick said, many of the lead-up events are actually of more of a regional interest. They have more regional interests than they have national interests, so this is where the services really can be complementary.
229 MS McQUEEN: The other thing to, I think, understand about sports is that it really does follow the ebb and flow of other kinds of programming in the sense that sometimes audiences want it and sometimes they have less desire for it.
230 If certain sports offer a product that is declining in audience interest, then conventional broadcasters will inevitably be less interested in it. If that sport fields better teams, provides better competition, develops great stars, we can see that conventional broadcasters will come back to certain sports that they have had diminishing increases in.
231 It's a natural level that sports has to meet an audience demand just as any other kind of programming has to meet an audience demand.
232 The reason why sports has diminished on some conventional stations in some kinds of sports is simply because there has also been a declining audience interest and private broadcasters have been able to make higher margins by programming other kinds of sports because there is audience and advertiser interest.
233 If those sports become popular again, there is absolutely no reason to expect that some channels may wish to have them back again.
234 THE CHAIRPERSON: The Commission staff, in a deficiency letter to which you responded on the 10th of September -- which would be at pages 3 and 4 of your response, it was question 1(e) -- you were asked about duplication. 1(d) and 1(e), so it's pages 3 and 4.
235 You were asked about the possible duplication of programming and that is where you state, as you do now, that simulcasts may occur between RDS in French and TSN in English, or RDS in French and Sportsnet in English, but do I understand that that would be the extent of it?
236 MR. FECAN: That's our final answer.
--- Laughter / Rires
237 THE CHAIRPERSON: Also, you discussed again this morning your view that -- which is not very final -- your answer to 1(e) is:
"Should approval of this application be granted, we would anticipate gradual reductions over time of the sports programming broadcast on CTV's over-the-air network schedule in order to provide Canadian viewers with the fullest diversity of Canadian programming possible." (As read)
238 Now, if I were to insert the words "to provide Canadian viewers with the fullest diversity of Canadian sports programming", that would also provide diversity; and when we talk about the broadcast options that the CTV/NetStar group could offer, which would include national, regional, local, over-the-air cable and pay-per-view shelf space, without much competitive pressure possibly, one could argue -- for example, if I use Toronto to illustrate, would the CTV/NetStar group not be in a position to offer windows for sports programming on TSN, Sportsnet, CTV, CFTO, pay-per-view, Outdoor Life, and even CKCO? And if I were to go to Vancouver, we would have the same situation, where it doesn't matter what the sports package looks like, you could offer windows for all of it, could you not?
239 MS McQUEEN: Only if it were in the interest of the audience. In other words, that is the final --
240 THE CHAIRPERSON: No. Potentially, if it were in your financial interest as well, because, on the one hand, one of the intangible benefits of this transaction is to reinforce your ability to be a large company that is capable of making the most of the programming rights that you buy, et cetera, so your interests would be to your providing diversity on these platforms.
241 MS McQUEEN: But it's always got to be in response to an audience demand. The real competition I think that we have is for viewers as part of our specialty services, and for advertising on both conventional and on specialty. If we use these platforms so that one or the other is providing sports to which there is no audience interest, we do not make good business decisions, and that is what we want to do.
242 THE CHAIRPERSON: No. I'm not sure that we are talking about the same thing.
243 MS McQUEEN: Okay.
244 THE CHAIRPERSON: Obviously the first decision will be: Does the audience want this?
245 My question is: Are you going to be the only group able to offer it to them? It is transparent, to a certain extent, because there are discretionary packages, et cetera -- Sportsnet is on basic in Ottawa, for example -- it would be transparent to me or my husband or my family how basically I get a diversity of programs. It would just be over time that there would possibly be a negative effect on the competitive world of sports programming and a medium-term or long-term negative effect on diversity. It wouldn't be immediate.
246 MS McQUEEN: Okay.
247 THE CHAIRPERSON: So what we are talking about is whether it is in the public interest to give to one group the possibility of offering all the platforms for programming that obviously you think the audience wants, but for the audience it doesn't really much matter where it is coming from except perhaps that they have to pay for the discretionary service.
248 MS McQUEEN: So the nub of your question is really: Are there other broadcasting interests that could compete with all these platforms that the CTV/NetStar group has? Because, presumably, if there are other organizations that can compete effectively, the fact that CTV/NetStar has a number of platforms is kind of fine but of much better diversity than --
249 THE CHAIRPERSON: Yes. We can pursue that aspect of it: The competitive bidders that you put forward as a countervailing force, how realistic is it to count on them? That is one issue.
250 But, at the outset, what I'm discussing is: Isn't there an issue here or a possibility, absent countervailing forces, for this scenario of more limited competition in the immediate, and what effects for the broadcasting industry, other broadcasters, and eventually the audience on the medium and long-term?
251 MR. FECAN: If I can address the Toronto example, because I think it is useful to work through it.
252 Pay-per-view for sports is -- at the moment, our particular pay-per-view licence is not much of a factor. Whatever pay-per-view exists is --
253 THE CHAIRPERSON: Not yet.
254 MR. FECAN: Not yet. Let's come to --
255 THE CHAIRPERSON: You haven't turned in your licence, Mr. Fecan.
256 MR. FECAN: Well, we have used it a few times and, you know, I can tell you that the NFL Sunday Ticket and NHL Centre Ice is with the BDUs and not with us.
257 THE CHAIRPERSON: Well, some of it may be with you if we approve this. Correct?
258 MR. FECAN: It's not at the moment and I don't imagine it will be.
259 THE CHAIRPERSON: No, no. But that is what is before us.
260 MR. FECAN: But there is a countervailing thing there.
261 CKCO, just to kind of get that off the table, is no longer seen in Toronto.
262 THE CHAIRPERSON: Maybe I can chop that one off and start with the beginning.
263 MR. FECAN: Rogers changed their broadcast area so it doesn't get into anything except Mississauga --
264 THE CHAIRPERSON: Perhaps this was excess on my part.
--- Laughter / Rires
265 MR. FECAN: Outdoor Life is amateur sports. You know, I suppose you could say a hockey game that is amateur that is on an outdoor rink, we might be able to squeeze it in but it would be a bit of a push. So what we are down to is the two potential specialty networks, Sportsnet and TSN, and the CTV conventional stations.
266 There, I think, as we have heard from Gordon Craig and as is the overwhelming experience of our team, the rightsholders decide where they want to put it, and the rightsholders -- as they did when NHL was renegotiating Saturday Night Hockey -- didn't want to deal with a consortium that straddled conventional and specialty. They broke the rights up separately because it was in their interest to do so.
267 In terms of the future, I think, you know, the one thing all of us in the room could probably agree on is that there is going to be more change and not less. I think that is definitely -- I mean, I can't imagine us saying, "Well, you know, there is going to be less choice, less change in the future." That discounts all of the applications that I'm sure you are going to hear in the spring sometime for yet a new tier of digital specialty channels. It discounts the Internet issues and issues like Manchester United buying back their broadcast rights so that they could have the ability to market them on the Internet when video streaming becomes more of a reality in how many years that is going to be.
268 However, there is going to be choice. We know there is going to be more choice in the future. So I think whatever you are looking at now, there is going to be a lot more tomorrow and a lot more the day after.
269 Right now, the gatekeepers in this particular situation are the leagues that determine how they want to package their rights and to whom. It has just not been in their interests to deal on block between conventional and specialty.
270 So I don't think -- you know, I mean, life is full of unrealized fears. I don't think there is a fear here that in our experience is going to become reality.
271 THE CHAIRPERSON: When you speak of unrealized fears, to try to assess the likelihood of it occurring or the potential of it occurring and to try to find a proper balance -- when you speak of the leagues, I think you say they are monopoly vendors -- it still remains that vendors have to adjust their vending style to the situation they find in the purchasing world. It works both ways.
272 MR. FECAN: But it is not the only factor. How their particular product competes, how it performs, is a big factor. How much they want to charge is a huge factor.
273 You know, if I came off winning the world series, I might think I'm worth a lot of money. A few years later, a strike later, a bad team later, I might still think I'm worth the same money, but I'm not because the viewers don't want it.
274 THE CHAIRPERSON: If you were the pitcher and you had invested properly, you would be fine.
275 MR. FECAN: Well, he was the highest paid pitcher in history.
--- Laughter / Rires
276 THE CHAIRPERSON: As long as you won one world series you would be all set.
277 MR. FECAN: So I think vendors have a whole bunch of issues they have to deal with and it's not just to who the buyer is, it is: How are you performing; how much money do you want? There is a whole range.
279 MR. CRAIG: Madam Chair, if we want to get into the unpredictable future, there is absolutely no reason at all why CanWest Global could not bid for national hockey rights on a network basis and then local rights for every Canadian team on their local Canadian station and own hockey. They have chosen not to do that. But that opportunity is there for them as well.
280 MR. FECAN: At the end of the day, the leagues have the leverage in this situation. It is very much -- there is powerful countervailing leverage.
281 THE CHAIRPERSON: Now, would it be fair for me to put forward the proposition that the requirement under section 7 of CTV's offer agreement, that CTV's interest in sports related specialty and pay-per-view services be transferred to NetStar, to conclude that that confirms in part the advantage of having one ownership group controlling to the maximum possible the maximum number of sports programming broadcast outlets possible in Canada?
282 MR. FECAN: What it's intended to confirm is the benefit of having NetStar, TSN and Sportsnet managed through a common management structure. That's what it's intended to capture. It's also intended to capture another thing and that is that the idea of that section is that CTV's chosen instrument in the sports field will be NetStar. Those were the intentions behind the section.
283 THE CHAIRPERSON: Now, I notice that this morning you have appended an amendment to section 2.1.13 of the proposed shareholders agreement. I haven't had a close look at it yet, but we can discuss the difference further.
284 As a first step, is that not also a confirmation of the desire to effect as much control as possible since it -- or to maximize control over the market in the hands of NetStar by providing it with a potential veto over NetStar's dealings but non-arm's length parties. I know that there is an amendment. We will deal with that later.
285 As a first, when we look at that section, doesn't this confirm the feeling that there is a corporate financial advantage to controlling the maximum number of outlets possible?
286 MR. FECAN: The amendments I think that you are referring to on the shareholders agreement --
287 THE CHAIRPERSON: Well, I'm not referring to the amendments yet. We will deal with that when we deal with control. This was the first reflection of what the shareholders felt would be a good way of doing business between them. Doesn't it confirm that the best way is to have the most outlets controlled in one spot?
288 MR. FECAN: Trina.
289 MS McQUEEN: I think it's not quite that way because what that actually does is sever CTV network from the specialty services, so in the thought that there would be all this multiplicity of platforms controlled under a single entity, in fact the conventional sports would be outside that.
290 THE CHAIRPERSON: I was referring more to what ESPN would see in its interest as a provider of sports programming in its arrangements with its Canadian partner, not from the perspective of control, we will discuss that later, but simply from the perspective of what is the more efficient way of doing this and is the most efficient way capable of generating disadvantages for the broadcasting system. It speaks to concentrating the use of programming rights.
291 MR. FECAN: What it intends to do is more focus TSN and Sportsnet as complementary mandates and to make the most efficient use of resources, particularly back office resources, excess inventory, that kind of thing. I think that's really the intent of that section.
292 THE CHAIRPERSON: But I saw it as an ESPN requirement to make sure that the group didn't deal with non-arm's length party without it's having a say.
293 MR. FECAN: Well, I think --
294 THE CHAIRPERSON: The original section.
295 MR. FECAN: Well, I think you will see in the redraft it more clearly deals with what we all thought the deal was. I think it is much more precise than some of the language in the draft shareholders agreement you saw in front of you.
296 We really felt, as I mentioned, the section is to the advantage of viewers because it more closely will allow us to focus the different mandates of NetStar and Sportsnet. That's really what we were going for with that.
297 THE CHAIRPERSON: I'm not talking here about the requirement of ESPN to gather all the sports related interests of CTV into a NetStar. I'm talking about the section that you proposed an amendment to this morning which I saw as ESPN's desire to ensure because it's a provider of sports programming that the corporation that would result would not deal with non-arm's length parties without its approval.
298 MR. FECAN: That no longer stands.
299 THE CHAIRPERSON: Yes. I mentioned that at the beginning. I haven't read the amendment. I'm talking about when you sat down to draft a shareholders agreement, there were requirements there made by various parties, by ESPN, which suggest confirmation of the negatives that could accrue.
300 MS McQUEEN: Well, I think to be frank, the reason when we sat down to talk about that, that ESPN was concerned about, is that we could load up all kinds of costs and bounce them over to ESPN. As a minority shareholder, they would be really unable to do anything about this. The notion really was to protect a minority shareholder from assuming costs from related party transactions. That was the basis of it and the amendment then refined the thinking so it was more appropriate.
301 MS ROBINSON: Perhaps, Madam Chair, if I might just add to that. The purpose of the section in the draft shareholders agreement which was before you was precisely that, to deal with related party transactions. The provision would be a typical protection that would be afforded to a minority shareholder.
302 Having said that, and having considered carefully the positions that have been taken in various interventions before you, we said to ourselves how best can we address this concern that despite the fact that it is an ordinary provision, it might give or be perceived to give an inappropriate level of control to ESPN.
303 The purpose of the amendment which we have proposed is to really change that provision into a mechanical cost allocation of how the costs are actually allocated. That was the intent of the original section and we would agree that the drafting of that section did not precisely capture that intent. We hope that the amendment that we have provided to you does so.
304 It was really a typical provision for the protection of a minority shareholder in related party transactions, but having considered that in a context of what others have said and perceptions, we are in agreement that there is a better way to reflect that and that's what we hope we have brought before you today.
305 THE CHAIRPERSON: I think this may be a good time to take a ten minute break, or slightly more than ten. Twelve. We will be back at 20 to 11.
306 Thank you.
--- Recess at 1030 / Suspension à 1030
--- Upon resuming at 1047 / Reprise à 1047
307 THE CHAIRPERSON: Welcome back.
308 To meet suggestions of undue competition if this application were approved as filed, you offer a list of potential competitors to the CTV network group that would remain for the purchase of sports programming rights for exhibition in Canada. You reiterated this morning your view on this.
309 I would like to discuss with you, as I indicated earlier, the realistic potential of some of them as a countervailing force. You list, for example, at page 3 of your supplementary brief what you call a significant body of alternatives for the state of programming rights exists, conventional broadcasters foremost among them, but also other specialty services, cable channels, satellite distributors and third parties.
310 You include, and you did again this morning, conventional broadcasters as foremost among those alternatives and also other specialty services, cable channels, satellite distributors and third parties, and you make similar claims at page 10 of the response to the deficiency letter in response to Question 10(a) and again at page 26 in response to Question 9(f).
311 First, I would like to discuss conventional broadcasters as a group of potential competitors, if this application were approved and in light of the way in which the Board's rights are sold.
312 At page 41 of the supplementary brief you say:
"All Canadian general interest broadcasters have licence conditions which leave them free to choose sports programming if they believe it will deliver audiences. Among those whose programming schedules have traditionally had a specific sports component are: --" (As read)
And you list broadcasters who have actually broadcast sports programming.
313 If we turn the page, at 42 you say:
"These prospective buyers are not limited to sports specialty services, but may include conventional television services, as well as discretionary programming services, whose programming conditions of licence either permit them to broadcast sports or do not prohibit them from doing so." (As read)
314 Are you putting forward the view that conventional services because they are not prohibited from broadcasting sports programming by their licence that they are free to broadcast as much sports programming as they want, which is what you seem to suggest again at page 43, that you base yourself on, well, they are not prohibited from doing it, so they can turn themselves into serious competitors for broadcast rights as conventional broadcasters.
315 MR. FECAN: Madam Chair, the proposition is that assuming they meet their conditions of licence and serve their community, it is up to them whether they wish to buy product from Warner Brothers, Paramount, Major League Baseball or NHL Hockey.
316 THE CHAIRPERSON: But I thought we went through this morning the way programming rights are sold and that it doesn't leave that much opportunity for major programming properties.
317 MR. FECAN: I think that's solely in the control of the rights' holders. If, as the NHL has chosen to do, schedule things in an attractive way for the CBC, so that the CBC has a full night of hockey, it makes sense.
318 At one time, several years ago, Major League Baseball scheduled games, Toronto Blue Jays' games on Friday night and that was good, regular programming. The NFL schedules games on Monday night for ABC, prime time big matches that work for ABC. They schedule other games for their other rights' holders on Sunday afternoons and Sunday evenings, specifically for the broadcaster. So, I think scheduling is a big issue and I think the other issues then are price and performance.
319 Does the audience want it? Is the price a good price compared to what other non-priority, non-condition of licence programming can a broadcaster access? So I think those are the matrix of those three things.
320 THE CHAIRPERSON: So to you, given their mandate, their business plans, their core audience expectations, their conditions of licence, it remains a realistic assumption that conventional broadcasters, with very few exceptions of course, CTV, CBC, can serve as a countervailing force to any market clout exerted by the CTV NetStar group?
321 MS McQUEEN: I think what we wanted to get across by that list was that there is no limit to the possible competition or there are no limits.
322 THE CHAIRPERSON: Well, realistically.
323 MS McQUEEN: Realistically? I think, realistically, there is an ability for conventional stations to choose sports if that makes good business decisions. There are no regulatory impairments to choosing sports programming. In fact, there may be an incentive because it is Canadian programming.
324 There is no impediment, except is this a choice that will please audiences and, therefore, be a good decision.
325 So the fact that people have chosen not to compete doesn't mean that they couldn't if there were a competitive interesting product available.
326 MR. FECAN: And the CBC has as much said so in their intervention, that it is very much a factor and it is cost effective for them because they are measuring the cost effectiveness against indigenous Canadian programming. So, therefore, while it occupies a certain percentage of their schedule, it occupies a higher multiple of their revenue.
327 THE CHAIRPERSON: I did accept from that comment CBC and CTV, and CTV is already in the CTV/NetStar group because of their national reach and their ability to bid for programming, either along with or in addition to a national sports specialty service.
328 Now, what we are talking about here at page 43 is even your suggestion that OnTV, Hamilton, right, could choose to become a sports superstation with no amendment to its conditions of licence.
329 Well, theoretically, Ms McQueen, of course I could be a nun.
--- Laughter / Rires
330 THE CHAIRPERSON: Which would probably be a good investment.
331 If I look at Appendix E to your supplementary brief and Table 3, where you list major sports rights distributed by U.S. and Canadian carriers, and I look at the column of OnTV, what are the indices there of it materializing that OnTV would be a sports superstation?
332 MS McQUEEN: I think, Madam Commissioner, and I am sure just as you are an excellent Commissioner you would be an excellent nun.
333 UNIDENTIFIED SPEAKER: The mother superior.
--- Laughter / Rires
334 MS McQUEEN: I think what we are basically saying here about whether OnTV could or could not be something is that when we look to the future it is one sure bet that every single broadcasting or production/broadcasting organization in this country is going to be coming in front of you asking to grow bigger.
335 As these entities and these organizations grow larger, I think if you permit any of them to grow larger and, in fact, your Commission policy has suggested you think that might be a good idea, I think again what we are trying to say is I don't know whether it would be realistic or not for OnTV to become a sports superstation, but it is one strategy that is available to it. In the same way, I don't know what will happen at the end of the Global/WIC transaction that you will hear, but that might create another national network that would be in the market to bid for rights.
336 So, I think you can't eliminate theories of the future or possible scenarios of the future in considering this decision. I know that everybody just laughs at us for putting WTN in the list, and we are not saying that --
337 THE CHAIRPERSON: About as funny as me being a nun.
338 MS McQUEEN: And we are not saying that they are ever going to have the Grey Cup on, but we are just saying that there are possible scenarios and possible strategies for competition in sports. That we don't think, even though they may be not adopted at the moment, there is no reason to suppose that that product was attractive to audiences, and WTN has on occasion scheduled some sports, that they wouldn't provide the competition.
339 In other words, although they are not doing it now, I think it's probably slightly more likely that some sports might be attracted to them than the convent would be to you.
340 THE CHAIRPERSON: If we look again at this chart, you separated the Canadian carriers and you look at who has competed or what major sports rights have been distributed. Is there any reason to believe that this configuration would change in any way in the manner you suggest if we were to approve this transaction?
341 MR. FECAN: I think what we are suggesting is that conventional broadcasters with national or semi-national reach will compete as they currently do for the most premium, "le plus ultra", of rights that local broadcasters may, depending on the strength of the team, the price of the rights, go after local rights for things. You are going to find a lot of fluidity, depending on how well it is doing and how much it costs; whether the audience wants it or not.
342 THE CHAIRPERSON: And regardless of what the ownership configuration of sports outlets is.
343 MR. FECAN: I think what CKVR does, or what RO does, or what OnTV does, is what they will do for their own self-interests within their conditions of licence.
344 THE CHAIRPERSON: Will it not also be what is realistic for them to do in light of the market as it exists, which includes the further concentration of sports rights in the hands of a larger group?
345 MS McQUEEN: I am not an economist, but my understanding from Economics 100 was that if the price went down -- that is, if CTV's ability to buy sports, as you suggest, across a number of platforms depressed the price of that sport -- other people who are not limited by any kind of regulation might come into the market when that product becomes attractive.
346 What we are saying once again is that if CTV behaves in a way to depress prices or to use its ability to schedule large numbers of hours of sports, and that depresses the price, then other players are more likely to come into the market and they have the opportunity to do so.
347 THE CHAIRPERSON: What importance would you give to the program supply agreement that you have for a great number of hours of sports programming with ESPN, which is a large provider in this context?
348 MS McQUEEN: Rick Brace, could you talk about that program supply agreement and how much it provides to TSN?
349 MR. BRACE: Certainly, Trina.
350 Madam Chair, the program supply agreement with ESPN is just that; it is a bulk agreement whereby we can access a certain number of hours on an annual basis.
351 THE CHAIRPERSON: How many?
352 MR. BRACE: I believe 1,100 hours for a set fee.
353 In point of fact, in the early days of TSN fully more than 20 per cent of our total hours was used up by ESPN programming. That has since diminished to the point where this year we are at about 14 per cent and estimate the next year will go down to 13 per cent, understanding that the programming that we acquire from ESPN is by far and away the programming that kind of fills out our schedule. It is not the top drawer programming that they provide to us. It is a bulk deal that provides a great number of hours.
354 As I say, the number of hours that we are actually using on an annual basis is declining year over year.
355 MS McQUEEN: You might wonder why we don't get the big ticket sports from our ESPN colleagues who obviously have a great deal of market power.
356 Again, I would ask Rick to explain why that program supply agreement does not deliver the highest of the sports programming.
357 MR. BRACE: In our experience the rights-holders have determined that they want to deal directly with the broadcast outlet that carries their programming.
358 There are kind of two currencies that we find are readily put on the table. One, of course, is price; but the other one is exposure.
359 What they try to do in most cases is negotiate agreements that obviously gives them a fair price, in their estimation, but also gets the greatest number of events on the network. In doing so, they prefer to work directly with the network.
360 In addition to that, there is a lot of added value that is now put forward by rights-holders in terms of number of promos that you are going to air on a weekly basis, features that you will give them, carriage of shoulder programming like magazine shows.
361 There is a great deal more that is in their kit bag as they come selling than what they would expect as an arm's length relationship to happen if we were to deal through ESPN for that programming.
362 It really is a situation where rights-holders are determined to deal direct, and in fact do.
363 THE CHAIRPERSON: If I look at section 7.2 of the proposed shareholder agreement, does it not effectively prevent ESPN from selling any sports programming in Canada to anyone but NetStar?
364 MR. FILLINGHAM: I don't think that section precludes. I think what it is doing is offering to NetStar on the first offer.
365 THE CHAIRPERSON: That is on page 31 of the proposed shareholder agreement.
366 MR. BRACE: I could suggest that the format of that contract is such that we have a maximum number of hours which we own under the bulk purchase. Over that, we have a first right of refusal.
367 But understand that TSN, I believe, estimates that they have somewhere in the neighbourhood of 7,000 hours on an annual basis that are potentially for sale. So we own a very small piece of the pie.
368 THE CHAIRPERSON: I am looking at the shareholder agreement.
369 MS ROBINSON: I might respond to that, Madam Chair.
370 The provisions that are set out in section 7.2 and section 7.3 are right of first negotiation. So under the shareholder's agreement ESPN is obligated to offer any programming, which is not covered by the program supply agreement, first to NetStar. So it is a first look, if you have it.
371 And then subsequently, if those negotiations don't reach fruition, if it then decides to conclude agreements with someone else it cannot do so on terms that are more favourable than the ones that it offered to NetStar.
372 So it is a right of first negotiation, a first look, if you have it, with the prohibition that it could not then subsequently enter into arrangements with another party on more favourable terms.
373 THE CHAIRPERSON: If I go back to Appendix E to your supplementary brief, Table 3, and I look at how the programming is distributed by Canadian carriers, would it not lead to the conclusion that in most cases the major sports properties require a sales arrangement between a national specialty service and an over-the-air network that has national reach?
374 MR. FECAN: I think what I understand you to say is that in most cases a league, the NHL, will have a whole bunch of different levels of rights: conventional national rights; a cable package, which is a national right; and then individual teams would have local or regional rights in addition. So there is that.
375 Then there is the pay-per-view rights that they would sell. If you pay X number of hundreds of dollars, you get every NHL game played first season, and the BDUs are vendors of those. They package it at the moment in those kinds of rights.
376 THE CHAIRPERSON: If I look at that table again, in your view would the CBC have continued ability to buy sports rights in conjunction with TSN when TSN is owned 80 per cent by CTV?
377 MR. FECAN: Again, it depends on the rights-holder. As you heard from Mr. Craig, when TSN and CBC tried to buy rights in the fashion where all conventional, national and cable national were sold as a package, the rights-holder said no, this is not in our interest.
378 In the case of the Olympics, where TSN is a smaller partner in the CBC's ten-year Olympic deal, the rights-holder felt it was to their advantage.
379 We as a company look forward to working with CBC and other potential partners in any deal that makes sense.
380 As I mentioned, we don't intend to change our conventional television strategy to increase our sports rights. In fact, we look to gradually over time reduce them.
381 THE CHAIRPERSON: You mentioned more than once the ability of Global and other conventional broadcasters to be competitive bidders and countervailing forces in the purchase of program rights. Have you made a calculation of the number of hours of sports programming that the CTV/NetStar group would have access to in 1998-1999 had it been configured as it is proposed here?
382 MR. FECAN: While we search for the number just a clarification.
383 The total universe available to us or what we would have had if we --
384 THE CHAIRPERSON: Well, if we look at some of the charts that are put forward. My recollection is that some intervenors will put numbers forward. So as to what that would end up with and also a calculation of how many hours CBC had, how many hours Global had, even with the configuration as it is, as a bit of a test or reference point as to how realistically they will be competitive bidders of the same strength or better in this new world which is a countervail to the concerns of concentrations that are raised.
385 You know that numbers are raised as to what are the hours.
386 Perhaps you don't want to discuss it now, but at the reply stage those hours will be put forward, I suspect, or have been put forward on the record by intervenors.
387 MR. FECAN: While Rick gets ready his calculation, if you permit me a bit of context.
388 I don't know that all hours of sports broadcasting are created equal. I'm not sure you can say an hour of mountain biking is the same as an hour of Super Bowl or an hour of Grey Cup or, for that matter, a regular season hour of a professional sports franchise.
389 So that is why we approached it initially, in your very first question, from the point of view of sports viewers, a percentage of sports viewers that each group would have. Because that maybe does a bit better job of reassessing the value of those particular hours.
390 But I believe Steve now has the answer to the question.
391 MR. ARMSTRONG: Well, we looked at Calgary, for example, and I can read you out the numbers of hours in an average week or I can simply give you the percentage, whichever way you would like me to go.
392 THE CHAIRPERSON: Well, some of the numbers put forward -- and again you can reply to them at the reply stage -- are total hours. What does the framework look like now as a basis for trying to think of what it may look like afterwards?
393 I know you take the position that Global can broadcast a lot of sports and CHCH can become a sports superstation, but one has to look at what the world looks like now and what are the indices that are going to change for the better if my problem is concentration; not: Well, they can if they want to.
394 I suspect if I left for the convent I would hope my husband would constrain me.
395 So, you know, you have to look at the situation that you have. You can --
396 MR. FECAN: With the proviso that all hours are not created equally, here is a look at the hours.
397 MR. BRACE: I have done some quick cuff accounting here just to add up the totals, but there are about 150 hours on an annual basis on CTV; there are 8,760 hours on TSN; and on the four regions of Sportsnet a further 15,000.
398 So we are just over, I guess, 23,000 hours in all within the services.
399 But I want to echo Mr. Fecan's point on the not all hours are created equal.
400 We have kind of looked at the categories of those hours, and I will give the TSN perspective and maybe Suzanne could give the Sportsnet perspective.
401 But in breaking down into really three categories, and maybe even four, fully 42 per cent of the hours on TSN are dedicated to news, information and magazine-type programming.
402 A further 50 per cent are dedicated to second and third-tier programming which we could define as round robin curling, amateur sport and minor professional, darts and snooker.
403 Then I would add maybe even a category before our top profile and a further 8 or 9 per cent would be in that area with what I would call our Leafs package and our regular season Blue Jays, major golf finals, and so on. Really there is only maybe just under 1 per cent that is truly at the pinnacle with what we would compare to Global for example, that being the World Series, which is the only truly number one event that we carry. I suppose on a stretch we could say the Formula One, the Grand Prix du Canada might be another one, but I think that is a bit of a stretch.
404 So that what I'm trying to point out here is that in terms of the hours that we carry, really less than 1 per cent would potentially, in our estimation, at this point be of interest to the major rights holders. The rest of the packages are things that are really incremental and available to us.
405 I will just pass on to Suzanne for her numbers.
406 MS STEEVES: In the case of Sportsnet, news, information and magazine-type programming or shoulder support-type programming represents about 67.5 per cent of the programming that is scheduled.
407 Second and third tier programming, as Rick has referred to it, is another 25.75 per cent of our schedule.
408 What we would refer to as the bread and butter programming, the programming that drives our schedules, whether it be the Vancouver Canucks in the Pacific region or otherwise, would be 6.75 per cent of our program schedules.
409 We would have nothing that would fit the description of sort of high-profile, marquee-type event programming.
410 MR. FECAN: The kind of programming that Rick and Suzanne talked about when they refer to the second and third tier, these are the programs that there is very little competition for. These are also the programs from which the bulk of our positive intervenors came from.
411 MR. CRAIG: Madam Chair, it is also -- I would like just to reiterate, measuring hours is not an appropriate measure for market position at all when you are comparing specialty networks with other broadcasters.
412 Sports are all we can broadcast, so 24 hours a day is going to be sports. So the hour equation is just not appropriate at all for this kind of measurement.
413 That's what I think Mr. Fecan originally talked about audiences, which is the true measure of dominance in the sports marketplace.
414 MS McQUEEN: Just so that you will get the feeling that one of our core arguments is that ours is an illegitimate way to look at sports competition, the reason that these channels were licensed was specifically to provide sports for which there was no competition and no market, that there was a demand on the part of sports fans, specialty sports fans to have more programming and that conventionals could not supply that bulk of programming. So that is why TSN and Sportsnet really exist is to provide those hours.
415 To say that because we therefore provide the hours it gives us a kind of advantage doesn't really work.
416 What is competitive is the high-profile sports properties that drive either audience revenue on the conventional stations or subscriptions on the specialty channels. The rest of it is for the enjoyment of specific niche sports viewers and that is why we do it, because that is what our licence is for.
417 THE CHAIRPERSON: Mr. Craig and Ms McQueen, you posit as a response to a concern that to allow the combination under one roof of both specialty services a network outdoor life, RDS, and so on, as well as the pay-per-view, is not as great a problem because we have competitive bidders out there. So when you say there are competitive bidders I look at your chart and I say: Well, how many hours of sports programming do they actually air? What are the indices that that will increase?
418 For example, Global. Do you know how many Maple Leaf games Global broadcast in 1998-1999?
419 MS McQUEEN: No, I don't. But when I look at the top 25 sports programs on television, and the audiences for them, Global definitely is a factor.
420 Again, the core of our argument is that when we are looking at the sports properties that are at the top of the list, there may not be many hours, for example in Grey Cup, but that is a hugely significant sports property and Global has it.
421 THE CHAIRPERSON: Does Mr. Brace know how many games?
422 MS McQUEEN: CBC has it, I'm sorry. It's the Super Bowl that -- sports is my life, as you can tell.
--- Laughter / Rires
423 THE CHAIRPERSON: You may end up in the convent too.
--- Laughter / Rires
424 THE CHAIRPERSON: I thought I saw you raise your eyebrows that perhaps you had an answer as to how many Maple Leaf games.
425 MR. BRACE: Yes. They shared the package in their last year with OnTV and I believe it was somewhere in the neighbourhood of a total of 25 games.
426 THE CHAIRPERSON: I see. Global?
427 MR. BRACE: Yes, Global shared it with OnTV in their last year of carriage.
428 THE CHAIRPERSON: How many games?
429 MR. BRACE: I believe it was a total of 25. I think they split it half and half.
430 THE CHAIRPERSON: Between the two?
431 MR. BRACE: That's correct.
432 THE CHAIRPERSON: You filed, in response to question 11(a) at page 12 of your deficiency response, an appendix called Appendix B which is entitled "Canadian Broadcasters That Have Competed Historically For Major Sports Rights". When I add all those up I get 25 properties and there are 17 properties listed where Sportsnet and TSN have competed.
433 MR. FECAN: We are searching for the chart. Hang on.
434 THE CHAIRPERSON: It is attached as Appendix B to question 11(a), so it's Appendix B to the September 10th letter.
435 MR. FECAN: Okay. We have it.
436 THE CHAIRPERSON: My question is: If we were to allow this transaction, would this chart look the same?
437 MR. FECAN: No, because what we would -- what our intention is is to focus the two sports channels on their relative mandates more vigorously, in other words, NetStar will be focused more national, Sportsnet will be focused more regional. In some cases where it says they competed, I think what we meant to say is "we both carry" -- we both carry their games, not necessarily a full-out competition.
438 THE CHAIRPERSON: Prior to the launch of Sportsnet, did TSN have any competition for national cable rights to major league sports properties?
439 MR. FECAN: Gordon?
440 MR. CRAIG: No. Other than a conventional broadcaster, if they came to the party, I'm sure the given leagues would definitely reconsider whether they have two conventional packages or one conventional, one cable, but --
441 THE CHAIRPERSON: And who would that party likely be is what --
442 MR. CRAIG: It would have to be another national broadcaster.
443 THE CHAIRPERSON: Yes. But who would that likely be? CBC, CTV?
444 MR. CRAIG: CBC in many instances. For figure skating it is CTV. It could be Global for NFL.
445 THE CHAIRPERSON: We were looking here at hockey, baseball, basketball, football, auto racing and tennis.
446 Would the merger have an impact on competition for national cable rights to major league sports properties? In your view, it wouldn't?
447 MR. CRAIG: No, it wouldn't. We would, as Mr. Fecan said, clearly ensure that the two sports networks observe their mandate as licensed.
448 THE CHAIRPERSON: This mandate is not quite as restricted as all that, is it? There is a possibility of some national on one and some regional on the other, and you also have an application before the Commission asking that, on digital, the four feeds of Sportsnet be delivered to each subscriber. So the regional/national, even if you abide by your nature of service as the Commission has reminded you you ought to, there is still there quite a bit of leeway?
449 MR. FECAN: While there may be to some degree, we feel it is in the best interests of the viewers to more carefully focus the channels nationally and regionally. That would be our intention.
450 THE CHAIRPERSON: But that is not the argument that was put forward when there was what some considered an attempt to stray from the mandate because it was in one's better interest.
451 MR. FECAN: That was a very specific situation and I think we really need to give you the context of that situation so that you can better understand what truly happened.
452 As you know, a few years ago there was a hearing called for specialty channels, other specialty channels. From that hearing Sportsnet was licensed. At the time I think there were two choices that you had in front of you, one for a two region specialty sports network and one for a four region specialty sports network. For whatever reasons the Commission decided that the four region specialty sports network, Sportsnet, was the one to get the licence.
453 As I'm sure, Madam Chair, you will remember, it was a digital licence, and it was predicated on a fairly high cost base because covering four regions is expensive, and it was predicated on digital carriage. As we all know, digital was not as big a factor as quickly as some thought. Therefore, if CTV was to launch the licence, if the gatekeepers were to get us on, we needed to get national rights. At the same time, it was in TSN's interest, NetStar's interest, to vigorously try and make sure we didn't get on.
454 We eventually were able to get the National Hockey League national cable package. I think it was in the NHL's league to give it to us, aside from the fact that I think, you know, the money was at least as good, because it had enabled the regional teams like the Ottawa Senators, the Calgary Flames, the Edmonton Oilers that didn't really have an outlet, a cable outlet, for their games to have a new revenue source and in that way help protect their existence and give them a shot at staying in the country. So I think, you know, the NHL had two good reasons to want to give it to Sportsnet.
455 As a result of us doing that, there was some skirmishing over the Toronto Maple Leaf rights, which I think NetStar felt they had to get to protect their business, and there were a couple of skirmishes beyond that. But there really hasn't been head-to-head competition since that point because really the head-to-head competition was about whether Sportsnet would get on or not get on.
456 As I indicated, we felt that we had to get that kind of package in order to get analogue carriage from the gatekeepers and to get really good channel numbers, channel positions, from the cable units, so we kind of had to do it to get on.
457 Since then, you know, the competition is a very different kind of situation. I think we are all now very hard trying to respect our mandates and focus the channels to what they do best. Sportsnet does best when it has the games that it was intended to have. Its most popular region is the Pacific region because it has the games, the home town games, that the people in B.C. want to watch. Where it doesn't do well, it doesn't have those kinds of things.
458 I really feel that I needed to give you the background to give you a sense of what the blip was that caused some competition at the outset and to tell you that I don't think that is the day-to-day reality of these two channels any more.
459 THE CHAIRPERSON: If digital ever does become a reality, which we are told it will, then if your application were approved to deliver all four feeds, you would deliver a national service, right, to the digital subscriber?
460 MR. FECAN: If the application were approved and if we had the rights from the rightsholders to do that, but a few years ago we sat in the same place and talked about when digital would be reality.
461 THE CHAIRPERSON: Your second group of competitive bidders are other specialty services -- and this is where Ms McQueen is prepared to humour me about WTN -- and you suggest in your supplementary brief at page 43 that other specialty services and, in particular prime TV, and WTN would be competitive bidders and the reason given is primarily because they are not prohibited from broadcasting sports. Well, in fact, my understanding is that prime TV is not permitted to air live sports and WTN makes even Ms McQueen smile, so why are those the only two that you could bring up in light of the fact that one can't broadcast sports, live sports, and that the other makes people smile?
462 MS McQUEEN: Actually, it was everybody else that laughed at us, not we laughing at ourselves.
463 If I were a programmer at WTN and I thought the margins were okay, I'm not sure why women's sports would not be well within the mandate of that channel and attractive to the audience. It seems that one of the things that we are seeing at the end of this century is an increase in interest by women, among women in competitive sports. Ladies golf, tennis and curling are all sports that are both participated in by women at a very high level and also attractive to women viewers.
464 The Canada Cup of Women's Hockey which we listed as a benefit has been identified by sports people as something that is becoming more and more interesting as a professional sport.
465 Although as it stands now, WTN has not chosen to program those, I don't think it's really that hilariously outside their mandate. It is hilarious to think they will program the Super Bowl or the Grey Cup.
466 THE CHAIRPERSON: A third category of competitive bidders are other Canadian Pay-TV and pay-per-view services. In light of NetStar's ownership in Viewer's Choice, albeit a minority one, and its control of direct which in the future may have an impact, can you elaborate on the significance of other pay and pay-per-view services as countervailing competitive forces to the CTV/NetStar group and the significance of that competitive force.
467 MR. FECAN: The obvious example, of course, is what's happening in the market, "NFL Sunday Ticket", the NHL Centre Ice packaged Bell ExpressVu has.
468 THE CHAIRPERSON: The NFL package is on Viewer's Choice in which you have an ownership property. Correct?
469 MR. FECAN: Bell ExpressVu is offering it.
470 THE CHAIRPERSON: But there's a package also.
471 MR. FECAN: I'm not familiar with Viewer's Choice.
472 THE CHAIRPERSON: This package of sports. Isn't there a package of sports carried on Viewer's Choice?
473 MR. CRAIG: The NFL package has been extended to cable through Viewer's Choice, but it is still controlled by Rogers. I don't believe the NHL package has been cleared for cable.
474 THE CHAIRPERSON: But it's never done. It's on an outlet.
475 MR. CRAIG: Well, the NHL package is only on DTH, I believe. That's what we understand.
476 THE CHAIRPERSON: But not "The Sunday Ticket".
477 MR. CRAIG: "The Sunday Ticket", "The NFL Sunday Ticket" is available --
478 THE CHAIRPERSON: Available to cable subscribers.
479 MR. CRAIG: -- I believe through Viewer's Choicer in the east. I'm not sure it's available in the west.
480 THE CHAIRPERSON: It's available anyway.
481 MR. FECAN: It's available through cable.
482 THE CHAIRPERSON: Through Viewer's Choice.
483 MR. FECAN: But we do not control that service and would not. I can assure you the splits aren't worth looking at either.
484 THE CHAIRPERSON: So that's not then a very important competitive group.
485 MR. FECAN: It's competitive in that category. I mean if you are a hockey fan and that's all you want to watch, you have got another place to go get that to satisfy your appetite.
486 THE CHAIRPERSON: And eventually this could be also on Direct, could it not?
487 THE CHAIRPERSON: Yes. I don't think that's a real prospect given the shareholder agreements.
488 THE CHAIRPERSON: There is a letter on file that Direct is still an active licence. Both licences are still active. We have been told, I believe, that it was launched.
489 MR. FECAN: It has been launched. Suzanne, you might want to talk about its initial outing.
490 MS STEEVES: It has been launched. As the Commission knows, the licence is an event-based licence. Therefore, it's not up continuously like a movie channel would be.
491 We did go into the market with pay-per-view soccer, English Premier League soccer, just to see, you know, what the interest would be with such sports. We lost a fair bit of money on that proposition. As you know, the licence has no analog, there's no analog equivalent to it, so the only market we had was the DTH and the digital cable market. Therefore, the number of subscribers we could access was so limited that we in fact did not do very well financially with it.
492 THE CHAIRPERSON: The last category of competitive bidders that you put forward are the third parties. How often are sports rights sold to third parties?
493 MR. BRACE: Actually, they are fairly active. There are groups like IMG, International Management Group, which are quite active in that area, ISL, Independent Sport and Leisure, which control major events like World Cup of soccer, for example, and a group in Ontario, the Murray brothers, who control a lot of the golf inventory. Their method of operation is to actually acquire those rights and quite often package them with sponsorship across the entire category.
494 For example, the Murray brothers, who own the rights to Masters Golf take that property and package it with advertisers and then deliver it to, in this case, Global for the final rounds. It really does create an opportunity for them in terms of going to the ultimate rightsholder in order to create that transaction.
495 You find it kind of in the, what I would say higher profile, but certainly not at the NHL-NFL level, that kind of thing. It's kind of one step down from that in terms of where you see those people active.
496 THE CHAIRPERSON: Even then are these third parties not eventually also dependent on how much freedom there is there in the purchaser market because they have to sublicense these products to recoup their investment, so a change in the configuration of the purchasing outlets and concentration of ownership there would affect them as well.
497 MR. BRACE: Once again, though, they do hold all the cards. If I can use the Masters as a good example for us. If you take the Murray brothers who do package all of the inventory with that, what ultimately happened for us is that where TSN would carry the first two rounds on the Thursday and Friday, unless we were to do the deal through them, we would have no opportunity to go to the marketplace to effect advertising because, of course, we didn't have the jewels in the crown which were the final two rounds. They were on conventional.
498 They packaged it in such a way that they really controlled how it ultimately would be distributed. It's quite common with a lot of the third party rightsholders like IMG and ISL to do that.
499 THE CHAIRPERSON: At page 45 of your supplementary brief, you state that most ports properties are already tied up in long term rights contracts and will therefore be unaffected by the proposed transaction.
500 If I look at the charts which were filed in confidence listing the programming properties rights agreements that are held by Sportsnet, CTV and TSN and RDS, does that confirm your assertion that most of the major properties have long term contracts beyond 2001 and 2002?
501 When I look at these charts, I find it difficult to say that it's most of.
502 MR. BRACE: I think that our definition in terms of sports rights long term really is anywhere from three to five years.
503 THE CHAIRPERSON: Well, even with that measurement, considering your year one would be 2001, do you still feel that most of them are long term and won't be affected by this transaction?
504 MS STEEVES: If you look at some of the more notable contracts like the Toronto Maple Leafs, for instance, Rick can give you the exact year, but --
505 THE CHAIRPERSON: You may not want to.
506 MS STEEVES: Yes.
507 THE CHAIRPERSON: This is granted confidence.
508 MS STEEVES: Yes.
509 THE CHAIRPERSON: A quick look down the list doesn't confirm to me that it's most of them. That leads me --
510 MR. FECAN: Perhaps when we said most, we meant the big important ones that drive revenue.
511 THE CHAIRPERSON: Even there. It leads me to ask you if this transaction were approved, what new sports properties would you likely pursue once those current long term rights contracts have expired and what would be your strategies to the extent that you are prepared to discuss them on the record to acquire them?
512 Would it be an all in one basis pursuing rights to a specific property on multiple distribution basis? For example, pay-per-view rights, specialty cable rights, national conventional rights in the context of the cross-synergies and advantages of being able to offer multiple platforms? What would we likely see once these contracts expire? As I pointed out, for some of them, it will be in short order.
513 MS McQUEEN: Well, always understanding that in the context of the professional sports leagues, the rightsholders will make the decision about how they package and allocate the rights.
514 THE CHAIRPERSON: Wiithout regard to the change in the landscape.
515 MS McQUEEN: They will make the decision based on the primary exposure for their product and the primary exposure for their brand, the best deal that they can get by looking at the various broadcasting entities, but setting that in context in just saying that it will be the rightsholders who will make a lot of the basic allocation decisions, Rick and Suzanne, do you want to talk a little bit about that?
516 MR. BRACE: Yes. I don't think that our acquisition in terms of the properties that we are going to pursue will change a great deal, the properties we have identified, the work force of the ones that we will stick with.
517 I think that our program strategy that we have determined in going forward is that both networks are really going to stick more closely to their mandates, TSN as a national network and Sportsnet as a regional network.
518 Really where we are going to see the advantage is in the situation that a lot of the contracts that we currently have have incremental inventory that we can't possibly schedule because they occur at the same times as other programming in our network. In fact, we have these conflicts.
519 In a situation where we are not undercalling Management, obviously the choice has been to warehouse these properties and they don't see the light of day. The benefit we see by bringing it together is now programs that are kind of sitting on the shelf and are available because we are buying the exclusive rights to a certain property for a season or for an event, whatever the case may be, can now see the light of day to the benefit of the viewers across the windows that we offer.
520 MR. FECAN: Madam Chair, if I may just finish the reply. I think we can't state often enough that these leagues are sole source suppliers. They determine what they want to sell, in which way, on what level, how much they want. It's not something that we can just say "Well, I would like to take one of this and two of those and a few of those over there". They make that decision. They come to us. They come to the market. Then we have to figure out whether it works for us or not.
521 In the case of the Grey Cup, the Super Bowl, the Stanley Cup, there is an awful lot of audience interest. There is an awful lot of demand. There is an awful lot of competition.
522 In the case of much of the other programming we are talking about, there are other channels and other venues, as we pointed out, that could, if it is in their interest, pursue those. But we don't have that choice. All we can carry is sports. That is their ultimate countervailing power. Without regular season professional sports, it is going to be a very different sports channel, driving very different kinds of programs and it will not look anything the way it looks now.
523 So, we have a huge amount to lose if we don't offer fair market prices and if we don't get them for the sports channels because there is nothing else we can carry, and that's the real countervailing power.
524 THE CHAIRPERSON: Yes, but the other side of the equation is if you are the main parties to whom they can sell, the landscape has changed. For example, would it not be in the CTV/NetStar group's interest to obtain the rights to all high profile sports such as you mentioned, the Super Bowl, eventually the Olympics, major league playoff games? Who would actually be the challengers once this is merged?
525 MR. FECAN: We would have to wait a long time for the Olympics. That's gone for 10 years.
526 THE CHAIRPERSON: Well, it's probably eight or nine by now, but I know that that's the case in that case, but 10 years will go by very quickly. We may not be digital yet even.
--- Laughter / Rires
527 MS McQUEEN: But if the Olympics --
528 THE CHAIRPERSON: And I may be a saint by then.
529 MS McQUEEN: Well, I definitely won't be.
530 THE CHAIRPERSON: If I join the convent, heavens knows.
531 MS McQUEEN: The one thing again is that we have to look at these rights as existing in certain categories and there is absolutely no doubt that going forward, no matter what happens to CTV/NetStar, there will be competition for the Olympics. There will be competition for the NFL. There will be competition for the Grey Cup. There will be competition for the Stanley Cup. All of these are in a rapidly fragmented audience, one among the very few, the couple of handfuls of events that can still draw a mass audience.
532 So there is absolutely no question that there will be competition at that highest level and CBC is obviously one bidder. Global is also a bidder for some of those high profile sports events.
533 In the middle there is the regular season professional sports. Again, we acknowledge that there may be some declining interest and fewer bidders than there used to be for those, but we again have to have them. It's essential to our business.
534 Mr. Fecan has said because we can't program anything else -- well, we could, presumably, buy other sports. But what drives people to buy sports specialty channels is professional sports. That is in the end the reason that they put their money on the table to buy a sports channel.
535 The sports channels tend to be the drivers of the tiers. We know that if TSN or Sportsnet does not have a sufficient complement of major professional sports that people will start wondering whether they should pay for that tier or whether they shouldn't. That means the cable companies will be very much less anxious to help us in terms of subscriber fees and in all the other things that cable companies help us with.
536 So I can't emphasize too much that the necessity for those two specialty services to have professional sports. We must have them or else we are not a channel that can succeed.
537 MR. CRAIG: Madam Chair, I would like to just table an example of that league or franchise power. In this last year with Blue Jays' baseball there were some 40 games that were not being broadcast by either CBC or by TSN, and the Blue Jays shopped those 40 games to Global, to CH, to the CHUM group to no avail.
538 When there was an interest expressed by Sportsnet they attempted to get a little bit of competition going. However, the conventional broadcasters in this instance decided not to bid, but Sportsnet needed the inventory and the Blue Jays were still able to extract market value out of Sportsnet with nobody in this instance bidding against them because they had to have the inventory and Sportsnet, I understand, didn't want to do all 40 games. They only wanted to do something like 30, but they were forced to take and pay for 40 games to get the inventory and they needed it, so they took it.
539 The power and the leverage is always with the sports teams when they are dealing with the sports networks because it is must have inventory for us.
540 MS McQUEEN: Another example, the CBC in its intervention said that they reason they got the Olympics was not because they paid more, not because of a rights issue, but because of the quality of their broadcasting. So we can see that these rights are allocated by the rights' holders for various reasons, and whatever the reasons are for allocating sports rights to league professional sports we have just got to have them.
541 THE CHAIRPERSON: You were asked by the Commission in the deficiency letter at Question 10(a), the response to which is on page 10 of your 10 September letter, you were asked to define market power. You define it as:
"...the ability to profitably decrease prices below competitive levels. In other words, neither TSN nor Sportsnet would have the ability to decrease the amount paid to rights' holders below competitive levels without concern that they would be unsuccessful in acquiring desirable sports rights." (As read)
542 In the second paragraph you explain that:
"This is due to the fact that TSN and Sportsnet would continue to compete with a variety of other parties for the rights to sports properties." (As read)
543 Considering our discussion of this morning about these categories of competitive bidder, would you at least agree that in assessing the competitive power of potential buyers capable of competing on an equal footing, so that this market power, as you define it is not actually possible to be exercised, would you agree that one must measure whether the potential competitor has equivalent bidding power and interest in the sports property that is greater than interest in other programming, room in their schedule, the ability to dictate the manner in which the rights are packaged?
544 And if you agree that these are factors, whether we talk about WTN with a smile or prime TV who hasn't a right to do it and Global has only done a little bit of it, to what extent can we assess competition for major sports rights through an all-inclusive universe of potential bidders without putting in these caveats?
545 I mean, can you just say -- it's a repetition perhaps of my former question, but they can do it. They are not prohibited by regulation to do it. Therefore, they are a competitive bidder and their response to concerns about concentration and you include everybody who can possibly do it.
546 MR. FECAN: Well, you bracketed the question in relationship to major sports rights. If that's what you mean, then the evidence is self-evident.
547 For all of the top 25 or top 50 sports products in the country there is huge bidding for it and TSN, CTV/Sportsnet have a very small portion of it. We have not been successful because largely it goes to conventional platforms that can do massive exposure.
548 Of more of the regular day-to-day kind of major league sports, the regular season games, it's the issues you talk about which I think are true, I suppose, I mean price, performance, scheduling. All are integral factors in assessing one person's interest versus another person's interest.
549 In our situation, however, we have to have it. We have to have it.
550 THE CHAIRPERSON: Your argument, for example, is that because TSN and Sportsnet, who you would own, have to have the sports, you would have to buy it whatever terms are put forward and CBC could still be the conventional network across the country that carries it and it wouldn't be CTV, or likely to be CTV when you look at this from a market power.
551 MR. FECAN: Well, we have stated our intention in not adding and our intention to gradually over time decrease sports on CTV conventional. TSN and Sportsnet don't compete with the CBC.
552 But, you know, if --
553 THE CHAIRPERSON: And so has the CBC said during their hearing that they would decrease sports by 20 per cent, but it still remains that all the evidence is that the national sports are sold to a conventional across the country broadcaster over the air and a sports network.
554 In fact, one would ask whether it's in the public interest to remove all sports from over the air because 25 per cent of the population of Canada still get their television over the air without cable. So that surely will also be a factor for the rights' holder.
555 It is certainly a factor when you look at the public interest, to what extent should the conventional broadcasters remove sports from their schedule and to what extent is that in their financial interest. Would you be prepared to actually say that CTV will only have "x" number of hours of sports programming in its schedule?
556 MR. FECAN: We would certainly consider it, yes.
557 But before we pursue this line of questioning, I would ask Margaret Sanderson, who is an economist, to comment on some of these countervailing issues, because it is an area of specialty that I am, frankly, not the most qualified to speak on.
558 THE CHAIRPERSON: Well, my questions would probably be expected from a nun. They are pretty basic.
559 MS SANDERSON: Madam Chair, maybe the way to understand this is to think about what would happen if after this transaction the merged entity, TSN/Sportsnet/CTV, tried to reduce the amount that it paid for particular high-profile sports properties. What would be the options available to the teams or the leagues in that type of setting?
560 The reason that people broadcast sports is that they get viewers and, through that, conventional broadcasters get advertising revenue and specialty channels get both advertising revenue and subscriber revenue.
561 In essence, if this new combined Sportsnet/TSN tried to depress artificially the amount it paid for these particular rights, then what that is doing is that is making programming of these sports properties more attractive.
562 CBC in its intervention has stated that in fact this type of programming is very cost effective for them.
563 What we would expect to see is you would expect to have the rights-holder, who is now being offered less money for something they feel is worth a fair amount of value, to now shop it around and to go around to other players.
564 If it is more attractive to them to bid, CBC and other players are going to come forward and offer more money, and it is not going to be ultimately in TSN, this combined CTV/NetStar's entity to try to depress the rights, because they could ultimately lose them.
565 MR. FECAN: And we can't live without them.
566 THE CHAIRPERSON: The rights is one issue, which of course the sports people in intervention, if they feel that it is in their interest to actually appear and say that -- and some have. That is one issue.
567 The other issue is diversity too; the ability of the group you have, through its cost synergies, its purchasing clout, its multiple windows, of effectively deciding what gets on and what does not, which is an issue to me of concern to the regulator, the effect on diversity, which is perhaps related to the depressing price but is not the whole issue.
568 MS McQUEEN: We think that this transaction in fact will increase the diversity of programming because it will eliminate what I might call squabbling and rivalry in which some programs actually now are being suppressed, if that is the proper word, through a kind of defensive playing.
569 I don't know whether Rick and Suzanne, who are sitting here side by side, would like to tell you of at least one instance in which playing defensively, as well as playing offensively, reduced some diversity.
570 MS STEEVES: I would be delighted.
571 I think one of the more recent examples would have been the Blue Jays package that Gordon referred to a few minutes ago.
572 When CTV/Sportsnet acquired that Blue Jays package, it is well in advance of selection of the games; and Sportsnet, being the third broadcaster in, had third pick or basically what was left of the Blue Jays schedule.
573 TSN, in selecting its games, knew full well that Sportsnet was not in a position to schedule games, baseball games, during the April period of NHL playoffs, because we carry 14 first round NHL playoff games.
574 In behaving competitively and in ensuring that we would reduce the opportunities to garner viewers, TSN left the games in those two weeks of April available to us, which created a real problem because we had to pay for those games but we are not in a position to broadcast all of them.
575 MS McQUEEN: That is just one example of how the flat-out rivalry can in fact suppress diversity.
576 What we will be able to do -- and I should say, subject to the boards of directors, which are different for each of these sports channels, is make decisions that will allow the sports fan to have the widest possible choice. And there are many of these examples in the book.
577 For example, where there are lead-up regional events to a national competition, it makes sense to allow viewers to have the regional ones on Sportsnet and the national ones on TSN.
578 Again, it gives us also the opportunity to respond to viewer needs in ways that we can't when we are just dealing with one particular sports channel; that is, we can program a wider number of sports and make sure that those are seen through cross-promotion, through cross-publication, through ensuring that the schedules are truly complementary, which is after all what the two services were licensed to be.
579 One of the intangible benefits of this application is the fact that the viewer will benefit. There will be more and diverse sports available at no extra cost to the viewer.
580 THE CHAIRPERSON: One of you -- I think it was you, Mr. Fecan -- brought up the 1996 round of licensing of specialty services during which, Mr. Craig will remember, TSN noted that the combination CTC/Sportsnet would give a significant advantage over other rights buyers based on its ability to offer attractive pricing, a national reach, and a large niche audience of sports fans, as well as multiple windows of sports programming.
581 I quote here TSN saying that approval of that application would give the applicant, CTV, the possibility to be:
"...the dominant force controlling the sports broadcast marketplace, with the ability to spread rights and program inventory across all market segments."
582 And again I quote:
"There can be little dispute that the applicant's dominant position would be most prevalent in terms of buying power for sports programming and properties." (As read)
583 I am wondering what happened on the way to the forum.
--- Laughter / Rires
584 MR. FECAN: Well, aren't we fortunate that we are the beneficiaries of experience here. Last year, in the Toronto market as a proxy, TSN had about 38 per cent of viewing for all sports programming, men 18 to 49; CBC was no. 2 with about 24 per cent; and the powerhouse that you referred to had about 11 to 12 per cent.
585 THE CHAIRPERSON: So the forum is not completed yet, but the potential is there.
586 MR. CRAIG: I think that statement was also made without the understanding of the conventional broadcast scheduling strategies that they are not going to --
587 THE CHAIRPERSON: You are better informed now, Mr. Craig.
588 MR. CRAIG: I am certainly better informed now.
589 THE CHAIRPERSON: I only have a few more questions.
590 The impact of this on independent producers, what is your estimate of the total amount of money that would flow to independent producers as a result of this transaction?
591 How would you ensure that this money is fairly divvied up to such producers?
592 MS McQUEEN: I am afraid I am going to have to do math in public, which is not something that I excel at.
593 THE CHAIRPERSON: Or you can do it over lunch, which should be fun, and tell us then.
594 MS McQUEEN: Okay.
595 THE CHAIRPERSON: What about the second answer?
596 MS McQUEEN: The second answer: How would we be sure?
597 THE CHAIRPERSON: That licence fees would not increase as a result and that certain producers would be favoured considering the clout you would have when you consider the sports properties as well as Discovery.
598 MS McQUEEN: Well, I doubt that there would be a producer who would be pitching us at the same time a package which included some documentaries for Discovery and some documentaries for TSN. It might happen.
599 THE CHAIRPERSON: But because of your benefits package, you would still have an increased relationship presumably with independent producers.
600 MS McQUEEN: Yes, we would. And that was one thing that I wanted to divide up into the normal kind of programming that we do, plus the benefits which are incremental over what we would normally do.
601 It is in our interests -- and I will let Ken speak about the Discovery experience. But it is certainly in our interests to have a wide range of independent producers producing programs for Discovery documentaries or sports programming.
602 The reason for that is obvious: different talents for different programs; use of regional programs, especially on Discovery.
603 Our expectation on Discovery, Ken, can you talk about that for independent production?
604 MR. MURPHY: Certainly.
605 Madam Chair, first of all I would like to re-emphasize that it is absolutely in our interest to have a vibrant and dynamic and diverse independent community. We rely on them predominantly.
606 Further, I would point out that we have a commitment that we have rigorously adhered to in our licence to direct 70 per cent of our Canadian program expenditures toward the independent community and we have done just that. We would be hard-pressed I think to, on the one hand, meet that commitment and yet, on the other hand, see independent producers squeezed to the point where either they are unable or unwilling to supply those kinds of high quality documentaries to us.
607 So I would hope that that combined with the level of support forthcoming from the independent community and our track record should bring some comfort on this question.
608 THE CHAIRPERSON: How will the multiple windows and incremental programming, and so on, how does that affect the independent producer?
609 MS McQUEEN: I think that that is to the benefit of the independent producer and so did the independent producers association, or the CFTPA thought that too.
610 One of the difficulties in putting together funding by independent producers in this country is the need to go and accumulate a large number of license fees in order to make the production possible.
611 We will be able to provide a number of different kinds of licence fees. I think there is an example in the book that if we were doing a nature series, perhaps the series is done in Vancouver, there is a regional licence there, Discovery might take it with a national licence, CTV might be interested in a re-purposing of that as a two or three-part series. At each of these levels the independent producer would receive licence fees, which is great.
612 But I think what would also be great is that the producer would be able to sit down with a group of people and have that done, so to speak, as one-stop shopping rather than trying to bring a number of disparate broadcasters together in a very difficult competing needs, competing ideas about windows, and so on. So it will be an efficient way to do it.
613 The concern that the producers association had was: Would we do this with separate licence fees? And we are committing to do that with separate licence fees.
614 MR. FECAN: But just to add to the question and to the answer, I just want to say that --
615 THE CHAIRPERSON: Not to the question.
616 MR. FECAN: Oh. I understand my role.
617 THE CHAIRPERSON: Mother Superior won't allow it.
--- Laughter / Rires
618 MR. FECAN: At CTV I really want to point to our track record working with independent producers. We are the only private network with development offices in Vancouver and in Halifax, west and east. We have a strong ethos of working with independent producers along the development, the financing, all of those phases.
619 We have enjoyed terrific programs from independent producers and by and large pretty well at this point all of our non-news, non-information, non-sport programming -- I'm talking about the CTV as it currently exists -- comes from independent producers. It is a really good relationship and I see the opportunity of expanding that relationship to some of these other areas we are proposing benefits on.
620 But the ethos, the culture of CTV is to work really well with independent producers.
621 MS McQUEEN: The other thing that I might say -- and we appear before you as corporate people, but as a programmer to me the real and most important benefit of this are the opportunities it will give us to develop Canadian talent and Canadian stars. We have to be a larger organization to do that properly.
622 If we can have local platforms, regional platforms, specialty channel platforms and conventional platforms, I think it doesn't take a lot of imagination to see how we can bring through the system young people who are just staring out, offer them opportunities and then offer them larger opportunities and then offer them even larger opportunities.
623 Even in many cases we will probably set new independent producers on their way who will start with us, learn their craft and go to set up their own production companies.
624 I think that of all the benefits that this transaction will give to Canadian broadcasting that is probably the largest.
625 We need more opportunities to develop talent, to give talent opportunities, to know who is good over there that we can put somewhere else, and this transaction will do that for CTV in a way that it has never had the chance to do before.
626 THE CHAIRPERSON: We will discuss this further tomorrow with intervenors, but I was interested in hearing you about in sports programming if we put aside the Discovery type of production, a concern could be raised that the clout that this group would have in the area of sports programming could be a concern to independent producers.
627 MS McQUEEN: Well, I think that independent producers in sports need more opportunities. That's what they really need. I think that in our --
628 THE CHAIRPERSON: Well, presumably they all think that. The question is: Would they all be able to participate or would relationships develop, for whatever reason, that would be disadvantageous to some?
629 MS McQUEEN: Well, if you are asking us if we will want to have relationships with the people who are the most talented. Yes, we will.
630 THE CHAIRPERSON: That again is a judgment.
631 MS McQUEEN: And it's the judgment that broadcasters ultimately have to make, and it is a judgment that the audience makes on us whether we have done it right or not.
632 THE CHAIRPERSON: And you don't think it makes any difference if in a particular area of programming the judgment is made by one group rather than two?
633 MS McQUEEN: Well, I think that independent sports producers have opportunities on other channels. For example Life and Times has done many sports heroes. There have been sports documentaries, they are popular and they have appeared on many specialty channels, histories of sports, and so on and so forth. I think what this does is expand the number of opportunities for sports producers to be developed.
634 And yes, we will have a few more opportunities and, you know what, I think that gives us the opportunity to take a chance on someone. I think it gives us the opportunity to take risks, that people who don't have the number of opportunities for sports production just can't do.
635 THE CHAIRPERSON: I have just one small area I would like to ask you questions about.
636 You put forward at page 33 of your supplementary brief as one benefit of approval of your proposal the maintenance of a separate Canadian rights market for sports programming.
637 Pages 8 and 9 of your 10 September letter, in response to question 7, you say that there will be an -- that this merger or this combination:
"...would create an incentive for sports programming rights holders not to sell American rights packages and to instead maintain a separate Canadian rights market for sports programming." (As read)
638 I'm trying to assess the value or significance of this benefit.
639 At page 12, in response to question 11(b), you even talk of a practice -- in sports programming I assume, of acquiring -- yes, of acquiring North American and world sports rights or rights to sports properties. The only example given is rights to PGA golf tournament and NASCAR racing championship.
640 What incentives would motivate a rights holder to sell North American rights and the likelihood of this becoming a trend in sports properties, for example hockey, baseball, football, basketball?
641 MR. CRAIG: I will ask Rick to assist me in this answer, but --
642 First of all, I think you have heard from a number of us that we are not talking about the major league sports when we are discussing this subject, the baseball, the NHL hockey, NFL football and NBA basketball want to deal directly with broadcasters in the U.S. and directly with broadcasters in Canada.
643 What we are talking about here is a scenario that has evolved with foreign -- either superstations or some of the specialty sports services or cable networks from the States, like Speedvision or like the Golf Channel, that are carried in our marketplace that have acquired the North American rights for properties that then the Canadian broadcasters are shut out of.
644 Rick, are there any specific examples?
645 MR. BRACE: There are a couple of specific examples. Mr. Craig is right, it really does refer to the superstation -- not so much the superstations but the services, the U.S. services that are coming in and Speedvision and Golf are two very good examples of those.
646 For example, Speedvision negotiated diligently and I think at one point thought they had acquired the rights to Formula One racing for both sides of the border for North America. We had to work very diligently to make sure that we could acquire those rights.
647 In terms of the Golf Channel, there are eight PGA Tour events that we had traditionally carried that are now no longer available to us because the Golf Channel was able to acquire those for North America, the idea being that they distributed on both sides of the border so when they are out purchasing their rights the effort is obviously to acquire the rights for both sides of the border so they are not in a situation where they are forced to black out.
648 MR. CRAIG: One of the things, Madam Chair, that this does is eliminate that property for our francophone audience on RDS, which is very important to us.
649 THE CHAIRPERSON: So your suggestion is that the increased power this group would have would be able, then, to impede or foreclose this trend?
650 MR. CRAIG: It would help.
651 THE CHAIRPERSON: So why wouldn't it also give power to dominate the purchase of rights that are strong enough to impede a trend to North American rights?
652 MR. CRAIG: Because we are talking about this mid-tier of sport that conventional broadcasters aren't interested in.
653 THE CHAIRPERSON: But wouldn't the CTV/NetStar group be interested in some of these sports?
654 MR. CRAIG: For the cable networks, definitely. The cable networks have to have this kind of inventory. That's all we broadcast.
655 THE CHAIRPERSON: I'm asking, if you bring that as an -- intangible benefit is to stem the trend towards North American rights and you want us to give greater strength to your group so that you can do that, doesn't that also say that you will be a dominant player? You know, if you turn it around.
656 MR. FECAN: I think it's apples and oranges because I think as the rights become more attractive the countervailing power of the leagues as sole-source suppliers really is the active factor. So, you know, I think we are really talking about apples and oranges there.
657 THE CHAIRPERSON: Would CTV have any plans to develop a programming agreement between Sportsnet and ESPN that would increase the amount of ESPN programming in the Canadian market?
658 MR. FECAN: We have no such plans.
659 THE CHAIRPERSON: My last question: This morning in your presentation at page 2, the bottom of the page, says:
"The transaction we are now proposing is essential to diversify CTV's revenue streams and strengthen the company financially so that we can continue to provide important Canadian programming with NetStar's proportion of CTV's revenue derived from specialties would increase dramatically." (As read)
660 I had had a look at your unaudited end of the year 1999 results at CTV. Do you really feel that one of the reasons for the Commission to approve this is necessary to strengthen CTV's financial position?
661 MR. FECAN: Yes, absolutely, because the world we live in there is a world where our margins are contrasted against those of our competitors in the public markets and we do not have the strongest margins.
662 We see conventional broadcasting getting weaker. We see that the trend has accelerated over the summer and if you looked at our unaudited results you would have noticed that the fourth quarter was showing signs of that. We see that continuing into this fiscal year, as do our competitors. We see the revenues from specialty, both in terms of audience demand and of course advertiser increasing. We see that accelerating quicker than I think any of us had anticipated.
663 So what this particular proposition does for us, and it is really important to, if you will, the financial plumbing of the company, is it changes the revenue mix substantially from one where almost all of our revenues, over 90 per cent, come from conventional to one where it is closer to two-thirds of our revenues come from conventional, the balance from some mix of specialty advertising and specialty subscription. This has the effect of helping stabilize the company against the situation that is happening on the conventional side.
664 We really thought we saw this coming. We got into the specialty area not as early as Gordon and his colleagues but as recently as we could a few years ago. From a financial plumbing point of view, that is one of the key issues for us in terms of the acquisition of NetStar because we believe it gives us the stability and the revenue streams to deliver on our Canadian programming agenda.
665 So that wasn't there as an incidental line. It is very much --
666 THE CHAIRPERSON: But you would agree that at the end of the year August unaudited financial statements show a much better position than the projections that were filed with the application for CTV?
667 MR. FECAN: I think it showed a good position, but I have to -- and, of course, this was our first chance.
668 THE CHAIRPERSON: I said "better than the projections".
669 MR. FECAN: Well, you know, you say tomatoe, I say tomato. The market thought it was worse than what they felt we ought to be doing compared to the margins that our competitors have.
670 In terms of raising capital, in terms of having the resources to do what a widely-held public company has to do in order to grow, we have to be competitive in terms of our closest-ranked public company competitors: CanWest, TVA, Astral, CHUM, and there may be others. But, you know, the group I'm referring to is the TSC broadcasting sub-index.
671 THE CHAIRPERSON: You must admit, Mr. Fecan, that our difference in pronunciation has given you a golden opportunity to put this on the record.
--- Laughter / Rires
672 MR. FECAN: Thank you.
673 THE CHAIRPERSON: I have made a very important decision. I am not going to the convent.
--- Laughter / Rires
674 THE CHAIRPERSON: We will be back at 2:00. Thank you very much. We will pursue it then.
--- Recess at 1224 / Suspension à 1224
--- Upon resuming at 1400 / Reprise à 1400
675 THE CHAIRPERSON: Good afternoon. Welcome back.
676 Commissioner McKendry.
677 COMMISSIONER McKENDRY: Thank you, Madam Chair.
678 I just had a couple of questions where I wanted to make sure I understood a couple of things that had been said this morning.
679 The first one relates to the 30 Blue Jay game package that Sportsnet acquired. I want to make sure I understand the problem there. I take it there is a problem from the viewer's perspective or looking at this from the viewer's perspective.
680 My understanding, and you correct me where I don't have this right, is that Sportsnet was required to purchase 30 games from the Blue Jays -- ideally it would have preferred something like 20 games I think I heard you say -- and because of competition between Sportsnet and TSN, some of the games that you did want to show you couldn't show because you had hockey scheduled at that time. Is the outcome of that that viewers didn't see some baseball games that they would have seen otherwise?
681 MS STEEVES: Yes. That's correct. It was actually 40 games that the package consists of and there were games that we either had to join in progress or could not schedule.
682 COMMISSIONER McKENDRY: Of those 40 games, how many games weren't seen by viewers?
683 MS STEEVES: I think it was two games were not seen and then we joined in progress a number of others.
684 COMMISSIONER McKENDRY: And those two games weren't shown on any other network or station. They just weren't shown.
685 MS STEEVES: That's correct.
686 COMMISSIONER McKENDRY: Are you saying if we approve the applications that are in front of us all of those games would be shown in that kind of situation?
687 MS STEEVES: Rather than looking to create a situation where in fact we are not focused on the viewer but we are focused instead on, you know, trying not to ensure the other network is maximizing its revenues and its viewers, we would in fact be working to instead put the viewer first.
688 MS McQUEEN: The answer basically is yes. They were prevented from showing those games to the viewers by a deliberate action of TSN's in making sure they couldn't.
689 COMMISSIONER McKENDRY: And we are talking about two baseball games?
690 MS McQUEEN: Two baseball games not seen in their entirety, but a number of other games not seen -- sorry -- two baseball games not seen in whole and a number of part games that were missed.
691 COMMISSIONER McKENDRY: How many games were joined in progress out of the 40?
692 MS STEEVES: I would have to check, but I would be prepared to check and get that information back as quickly as possible.
693 COMMISSIONER McKENDRY: Thanks.
694 Now, I'm just trying to understand the problems in the current environment from a viewer's perspective. This is one: two more baseball games would have been seen and some games wouldn't have been joined in progress.
695 Can you give us any other examples of situations from the viewer's perspective now where the viewer isn't seeing some sports that they would see if your applications were approved?
696 MR. BRACE: Can't be specific on ones that haven't been seen at all, but in a situation where we are scheduling in a rival mode -- and I was the perpetrator of that evil that was just discussed here, but there are many instances where, for example, we go head to head with the same format of programming, i.e. soccer games, golf matches or a golf magazine show against a golf match, that in a complementary environment you would absolutely avoid, just like if you would program your own network you would ensure that you do something that offers choice and diversity to the public with the ability to work with TSN and Sportsnet. It gives us the opportunity to make sure that the viewer has choice so that if, for example, there was a premier league soccer game scheduled on Sportsnet, TSN would carry potentially a CIU volleyball match or something of that description, or even some magazine programming, but certainly programming of a different genre so that the viewer has the opportunity to kind of pick the particular type of program that they may be interested in.
697 MS McQUEEN: There are two kinds of counterprogramming. One you do in the sense that you are trying to reduce your opponent's audience attractiveness, and there is another kind that you are doing to provide the viewer with a real choice. This shifts TSN and Sportsnet from the first kind rivalry to the second kind, which is offering the viewer diversity.
698 COMMISSIONER McKENDRY: How often today do TSN and Sportsnet program against each other? How often would I see a football game on both networks at the same time --
699 MR. BRACE: I don't think --
700 COMMISSIONER McKENDRY: -- a car race or --
701 MR. BRACE: I'm sorry, Commissioner McKendry.
702 I don't think that you would see a football game head to head, but certainly it continues. I mean, we are currently scheduling, you know, in a competitive mode.
703 MS STEEVES: Perhaps the single best example at the moment would be our sports news. Our sports newscasts are scheduled with the evening newscasts head to head, and that is not necessarily in the interest of the viewer who could benefit from seeing a national sportscast at one time and a half hour later possibly watching a regional sportscast.
704 COMMISSIONER McKENDRY: If we approve your applications, then, you are not going to program news with respect to sports at the same time?
705 MR. BRACE: Yes, that's correct, Commissioner McKendry.
706 COMMISSIONER McKENDRY: Just let me ask you another question now about Blue Jay baseball. This really relates to diversity.
707 Sportsnet and TSN use different on-air personalities for the games, different commentators. I think Sportsnet had Joe Carter this year, as I recall. Will you use the same on-air people if we approved your applications for all baseball games?
708 MR. BRACE: Our direction and I think our feeling and our philosophy is that commentators and information-type programming are really the signature of your network. To really give it a different identity, we feel that it is absolutely fundamental that we maintain distinct voices in both of those areas.
709 So to answer your question specifically, it would be our intention to keep separate broadcast teams and also separate news identities and a distinction there as well.
710 MS McQUEEN: We want each of Sportsnet and TSN to be terrific audience attractive channels. That is in our business interests.
711 Having two different personalities, having distinctive newscasts, all of that contribute to a channel that is fun and exciting for the fan to watch. It also gives a complementary. If you don't like Fred on Sportsnet, you can watch Betty on TSN. It has the viewer at the heart of that kind of competition. You really are offering the viewer a choice.
712 MR. FECAN: Elaborating on that point, it's our intention to have separate brand management for the different channels because really each channel has its own personality, has its own flavour, one hopefully mostly national, one a lot more regional.
713 You want to have the diversity in editorial voices. You want to have the diversity in commentary. However, you want to be able to sit at a table and figure out how to best maximize what you have and not play demolition derby in a counterprogramming mode or warehouse stuff which was the Blue Jays example. I think by having the ability to sit at a table and kind of figure out "Okay, from the sports fans point of view, what's the best viewing experience we can give on any 24 hour basis and have all those pieces there?"
714 I think that provides one of the synergy links without in any way affecting negatively and I think affecting positively the diversity opportunity because you still preserve the different voices.
715 COMMISSIONER McKENDRY: I just have one last question. I wanted to make sure that I understood a little bit better the leverage that you said that the leagues had this morning in terms of being able to obtain adequate rights and so on if we approved your applications.
716 On one hand I heard that the leagues have leverage, a great deal of leverage. Then on the other hand I think I heard this morning that rightsholders are interested in two things, and the two things I wrote down were price and exposure. I took exposure to be the size of the audience and the number of games.
717 If exposure, audience size, number of games is an important element for the leagues, to the extent that you aggregate audience through these applications, doesn't that detract or undermine the leverage that the sports rightholders would have? You have the audience, a big audience. That's very important to them. Doesn't that shift the power balance between the leagues and yourselves because you have aggregated the audience?
718 MR. FECAN: It's an interesting concept, but you can only play a game once. When a game is going on, it's a single location. I think every league that I can think of would prefer to have that league available to conventional audiences because it just reaches everybody.
719 I think the concept we were trying to bring to you this morning is that if I have got "Who Wants to be a Millionaire?" on Monday, am I going to preempt that for NFL? I don't think so. If I have got "Suddenly Susan", do I want to dump "Suddenly Susan" and go with "NFL Monday Night Football"? If the price is right, you bet.
720 It's that countervailing power that the leagues have and the ability of conventional broadcasters to get in on the action if they think it's to their advantage on a given night with a given property at a given price.
721 If they can't move all their games to conventional, and in most cases, you know, there's just too many games out there, then cable packages are a second choice. Now, they're good, they reach sports fans, but it's not as good.
722 Then there is another level which we sort of only briefly touched upon which is the games that the various local teams have that they own the rights to. The Vancouver Canucks have "x" number of games not included in either of the national packages or the cable packages that they can sell and, as in the case of the Edmonton Oilers, Calgary Flames, Ottawa Senators, that's a direct revenue benefit to them, directly, so they're very interested in those particular things. That's what they look for.
723 In any league there's really to begin with two different rightsholders. There's the national package, then there's the local guys that have those rights. I think the first choice is always with conventional if you can get it. The second choice is pretty good, but there's other conventional bidders out there, depending on price of performance.
724 Again, the constant for us is that it must have programming if you are a specialty, if you are a sports specialty channel. If you don't have pro sports then you are not going to have a very good business.
725 COMMISSIONER McKENDRY: Just to make sure I understand what you are saying. If you have TSN, your sports dat, your conventional network, RDS, your pay-per-view, if you have all of these things, it doesn't increase your leverage with the rightsholders.
726 MR. FECAN: Because there are different classes of rights. The pay-per-view rights are not sold with national cable rights. Regional rights, the Ottawa Senators rights are sold by Mr. Bryden. They are not sold by the NHL in New York. The money goes to him. It doesn't go to the NHL in New York.
727 Even with what we have been calling sole source suppliers, there's different factions within that group. You know, they know that we need them and they know that they at a certain price point have other opportunities to go elsewhere. That's what they manage to convince us to pay market rate.
728 COMMISSIONER McKENDRY: Thanks very much.
729 THE CHAIRPERSON: Commissioner Cram.
730 COMMISSIONER CRAM: Thank you. I just have one question on what you were talking about. I believe it was you, Mr. Brace, that was talking about sort of the synergies but that you would be using essentially incremental programming. Say each TSN and Sportsnet owned the rights to something and you had incremental programming, but neither one of you could use it because you didn't have the space. Is that correct?
731 MR. BRACE: Yes, that's correct.
732 COMMISSIONER CRAM: But this particular transaction is not going to increase the shelf space you have.
733 MR. BRACE: It doesn't increase the shelf space, but it increases the accommodation space. Maybe I can use one more example to maybe demonstrate what I mean.
734 In the case of major league baseball, just to use a professional sport example, we are obligated by contract to carry all of the World Series games. In other words, we can't preempt them for any other programming. That presents a problem for us in other areas, specifically with the NFL.
735 In order to carry our 18 week schedule of NFL, there is an overlap. As a result of that, in the case of major league baseball we potentially on an annual basis have four conflicts. These are four NFL games, Sunday night NFL. It's a cable package so it's not available over the air anywhere. It's the package that we actually acquire directly from the NFL through ESPN.
736 We have no home for those. In fact, this year because it only went four games, the World Series only went four games, we had two NFL games that we actually had to tape delay which, of course -- you know, a taped delayed NFL event is not exactly something that's in the viewer's choice and certainly not the choice of the NFL.
737 What I'm suggesting is in cases like that where you have conflicts or you have extra inventory that you are just not able to schedule because you have got too much in the bucket, we have a perfect opportunity in a complementary environment to use that inventory that we have bought and paid for.
738 We have got a perfect opportunity to schedule it on Sportsnet to the benefit of the leagues, but also to the viewers who at the end of the day, some of them very much want to watch NFL and they don't want to watch the World Series and that's kind of a good example of what I'm trying to get at.
739 MR. CRAIG: Commissioner Cram, I would just like to go back and perhaps correct a perception we might have left.
740 In the first instance with CIU, under the present ownership structure those preliminary games were not offered to Sportsnet. Under the common ownership structure, they would be, so there would be space for them to be accommodated.
741 MR. FECAN: And that's an example of the kind of programming synergies that I think are clear positive benefits. When you roll a bunch of trucks to cover an athletic event, a meet, a tournament, whatever, there's any number of things that may make sense for a national carrier like TSN. There may be a whole bunch of other things that may make sense following the hometown athlete that may be in the second race and somebody else from the east that may be in the fourth race.
742 The facility sitting there, it's idling if it's just serving one national output. If you have the opportunity to also serve the regional voices, the facility is there. You have this synergistic benefit that I think through cooperation, I think you have the opportunity of getting at that. Otherwise, you know, if you are playing demolition derby, you are not really going to let the other guy in there. Why help them?
743 COMMISSIONER CRAM: The conclusion I come to then, and I will use the Olympics, if you have the rights to the Olympics and you have got the crew, the trucks and everybody else there filming away and doing everything, then what means is there will be more Olympics on the two stations and less of anything else.
744 My point was that when you show the other two NHL games or NFL games that something has to go. In terms of the diversity of the two combined, are we really simply increasing program of one genre or for one particular sport for which you paid the rights and are we losing the others? That was my point.
745 MR. FECAN: It's a great catch and what goes is the repeats because these channels have high repeat factors. I mean, it's one to one or 1.2 to one, so it allows us to upgrade the quality by having more original programming because then you don't need to repeat everything as much as we have to make ends meet.
746 MS McQUEEN: And the second thing that could go is the low end foreign programming that we run, to be replaced by Canadian events.
747 COMMISSIONER CRAM: Isn't that what some people like though? I mean, the insomniacs of the world, don't they like to watch their favourite NFL or NHL game at 2:00 in the morning? I thought that was part of the attraction. I have it wrong? I mean, I don't know. I mean, I thought that was.
748 MR. FECAN: Go ahead.
749 MS McQUEEN: I'm sorry, I am not quite following you. Are you saying that the NFL game wouldn't be played? But it would. It is kind of the low-end programming that I am talking about.
750 COMMISSIONER CRAM: No. I am understanding the repeat programming now.
751 MS McQUEEN: Oh, the repeat programming. Okay.
752 COMMISSIONER CRAM: I understand that people are saying there is no such thing as a repeat because repeats sometimes have as much ratings as the first play. So, I am wondering what the gain is when you are going to delay repeats?
753 MR. FECAN: I think -- maybe Rick would like to comment on that and I can see that being true in certain forms of entertainment programming, but when you know the outcome of a game and between our news channel and Headline Sports and every sportscast around it's hard to miss it.
754 MR. BRACE: I think that what really goes is just what Ms McQueen said and that's some of the foreign programming, and this is in exchange for -- I look at our list of Canadian amateur sports for which we hold rights and for which we can only do the championships and with the production facility there, as Mr. Fecan points out, to be able to go into Halifax, as I said earlier, and do the basketball championships and have three days on Sportsnet that could be done on a regional basis, and then get the efficiency to of course do the final, it's a benefit to Canadian amateur sport. It is offering Canadians more Canadian content.
755 I think that at the end of the day there are a number of examples that we can bring to the table that make sense for us to do that.
756 MR. FECAN: And I think that's what a lot of our positive intervenors are pointing to because they want to get more exposure for their particular sport. They understand that you are not necessarily going to roll a truck for some of the smaller stories, but if it is there it is foolish not to use it if it is all in the family, so to speak.
757 COMMISSIONER CRAM: So if we approve this transaction would you agree to a higher Cancon COL?
758 MR. FECAN: We would consider -- we would have to get back to you on that.
759 COMMISSIONER CRAM: I have been asked by the Chair to do the issues on control. I apologize first, I never have been a solicitor and so perhaps my interpretation of the agreements, the various agreements, may be wrong.
760 I wanted to start off with the circumstances of the first offer, your offer. If I understand it, CanWest had made an offer to the shareholders and at that time ESPN, under the shareholders' agreement, had the right to solicit a new offer.
761 Do I read it also correctly that under the program supply agreement that they also had the right to terminate that agreement?
762 MR. FECAN: I think they did under certain changes. I think there is a percentage --
763 COMMISSIONER CRAM: More than 40 per cent?
764 MR. FECAN: -- threshold, but then they waived that in our situation.
765 COMMISSIONER CRAM: So, aside from section 6 of the offer where they waived that in relation to any offer CTV may make, and indeed at the time in January/February, ESPN had the right to unilaterally terminate the programming supply agreement in addition to soliciting an offer at that time?
766 MR. FECAN: I believe that's correct.
767 COMMISSIONER CRAM: And, presumably, in terms of the offer and the shareholders' agreement, it was negotiated between the two of you and it was consensual?
768 MR. FECAN: Yes. But it did have to be on all fours with the CanWest offer. That was the nature of this particular clause.
769 COMMISSIONER CRAM: Then can I ask you why it is you, CTV, who would be paying a penalty if there was a non-closure of this agreement under I believe it's item 3 of the offer?
770 MR. FECAN: By exercising that particular clause ESPN closed the door on one of their options, and that particular option was the right to sell along beside the Canadian shareholders at whatever their price was. So as soon as they exercised the right to substitute they closed that door. They closed their automatic put to -- at that time it would have been to CanWest.
771 So, what that's there for, is there to do, is to focus our minds to apply quickly, not let it drift for a couple of years while we work on one form of a supplementary brief or another kind of deal or something else, and to just ensure that the parties don't dawdle.
772 COMMISSIONER CRAM: So then, have I got it right that it was a price exclusivity?
773 MR. FECAN: Once they exercised that particular provision they no longer could piggyback. So they gave that up. They gave that up to come with us, and so they wanted to know that we were going to be motivated in driving this application forward and not to, you know, take our sweet time about it. So, that was kind of the notion there.
774 COMMISSIONER CRAM: So then the $10 million U.S. was -- and it wasn't the price of exclusivity. It had to be the price of exclusivity that they weren't dealing with CanWest any more and dealing with yourselves only, and then that you would deal expeditiously with the whole thing. Is that correct?
775 MR. FECAN: It's a way of looking at it, although I think in the reality of the situation because they exercised their particular right to substitute and we offered within a few hours of each other, I think at the end of the day what it really was was them giving up the option of piggybacking and for that brief period of time having exclusivity because we came in pretty quick.
776 COMMISSIONER CRAM: And have I got it right that that $10 million, and subject to my frail knowledge of mathematics, it would be worth about $15 million Canadian and the value of their shares would be worth about $105 million net, in terms of the net numbers, net of debt numbers?
777 MR. FECAN: Are you speaking -- the $10 million is just that, $10 million. So it's whatever the exchange rate is.
778 I don't think the value of their shares comes into that particular provision.
779 COMMISSIONER CRAM: No. I was just trying to get into a percentage of the price of exclusivity as a percentage of the shares.
780 MR. FECAN: We figure -- oh, I see. I believe that the value of their portion of NetStar is about -- I think you say $190 Canadian.
781 COMMISSIONER CRAM: Okay. As I said, my poor math.
782 So why would -- the agreement then makes you pay $10 million U.S. if we do not approve this because they have then given up the opportunity to deal with CanWest.
783 MR. FECAN: They have given up the opportunity to piggyback on CanWest's offer and sell out, not to stay in with CanWest. They could have always stayed in with CanWest. What they gave up was the right to just sell along with the existing Canadian shareholders, take their money and leave.
784 COMMISSIONER CRAM: And you are giving them the equivalent in section 3 then? You are giving them the $10 million and then you are giving them the equivalent offer?
785 MR. FECAN: In section 3? I am not sure what that one is. Section 3 is financing.
786 COMMISSIONER CRAM: I'm sorry, it's the agreement to offer, so on page 3 of the agreement to offer.
787 MR. FECAN: The non-closing is on page 3, section 3. It's the $10 million for non-closing at a certain point. I think the date is August 5, 2000.
788 COMMISSIONER CRAM: Then the bottom part of that paragraph, if I read it correctly, subject to our non-approval again, you would then provide them with an offer similar to that which you are offering to the Canadian shareholders?
789 MR. FECAN: That's a different circumstance slightly. The circumstance there is after your deliberations you conclude that this transaction is in the best interests of the public, you approve it, but you put on it some conditions. These conditions may well be conditions that we as CTV say, "You know what, we can live with that. We really want NetStar. We are going to go forward."
790 And ESPN says: "Well, you know, this is really a different deal. This is not the deal that we thought."
791 So at that point we have the opportunity to buy them out at that original price set almost a year ago, the 190 Canadian price. The $10 million doesn't come into play then, because we are closing.
792 COMMISSIONER CRAM: So it would be one or the other.
793 MR. FECAN: Yes. We are closing.
794 They don't like it, but we want it. We didn't want our ability to accept NetStar or to own 100 per cent of NetStar or to close on this thing to be in any way controlled, impinged or impaired by ESPN saying: "Hey, we don't like this. We don't want to be in this."
795 We wanted to be able to say yes, and close. If they feel that this is not a good thing, then they have at that point an opportunity to go and not be any worse off then they would have been a year ago.
796 COMMISSIONER CRAM: Included in the whole structure is the change in the voting structure where you are bringing in special voting shares and ESPN is going to have a 20 per cent voting power when they have 31 per cent equity.
797 How did this come about?
798 MR. FECAN: In came about in order to comply with a Cabinet directive on foreign control and ownership. It came about because this was the first opportune time to bring NetStar into full compliance. And it came about because, as some of you know, both Trina and I have an interest in the programming and we would like to be able to sit on the NetStar board and influence and control programming; so to ensure that we have control of the programming and that some of the individuals here who have a particular interest in programming have control.
799 COMMISSIONER CRAM: What was the incentive to ESPN to agree to this?
800 MR. FECAN: The incentive was that those are the rules of the road in Canada, so we have to apply with the rules in Canada. This is the first real opportunity, I think since the directive has been in place, if I am not mistaken, that NetStar has been in front of the panel in this kind of forum. Their licence renewal I think is a year or so off.
801 So we wanted to bring it into compliance at the first available opportunity.
802 COMMISSIONER CRAM: Would you agree to a COL that NetStar would remain at the 80/20; and if there were any changes, it would be subject to Commission approval?
803 MR. FECAN: Yes, I believe we would on that.
804 Perhaps I could consult with Kathy.
805 MS ROBINSON: That is already built into the shareholder agreement. It is clear that we cannot change that structure without the prior approval of the Commission.
806 COMMISSIONER CRAM: Is there an economic value attached to each of the special voting shares; and if so, what?
807 MR. FILLINGHAM: They are at nominal value.
808 COMMISSIONER CRAM: I now want to go to the rebranding, which is again in the offer, at paragraph 5 at page 4.
809 There is a reference to your having requested the rebranding. Why wouldn't you just do it? If you wanted to do it, why wouldn't you just do it?
810 MR. FECAN: Well, we don't own the ESPN mark.
811 COMMISSIONER CRAM: What I mean is: Why is there a need for any further investigation? If you want to do it, if you ask to do it, if you request to do it, why wouldn't you do it effective the date of approval?
812 MR. FECAN: We would like a lot of time to study it.
813 Our company, if I can describe Baton for a second, has been around for a long time. But we have always gone for the stronger brand.
814 When we were given permission by the Commission to buy CTV, there was no question in our minds that the Baton brand would disappear and the CTV brand would stay.
815 We think that TSN is a terrific brand, and there is no disrespect intended to Gordon and his team.
816 We think, however, that ESPN may well be a stronger brand, particularly with a worldwide brand recognition strength that ESPN has. This is something we want.
817 However, it is also something that we want to think about a fair amount. We have done a fair amount of market surveying already on this issue and tracking public opinion on it. The early results of the public opinion are that at the moment the TSN viewer is two-and-a-half to three-to-one in favour of a change as long as the programming and the personality don't change.
818 The brand of a company is an important thing, and the brand of a channel is an important thing. We wanted a good long period of time for sober second thought, surveying, thinking about it, before we made our final decision which would be, if you approve this deal, 18 months from then.
819 COMMISSIONER CRAM: I find it hard to imagine that in any circumstances -- say section 5 was not in the offer -- that in a year's time you would say to ESPN "would like to rebrand" and they would say "no".
820 When you say you have to have time to study, and sober second thoughts, why was it even necessary to have this in the agreement?
821 MR. FECAN: We don't have, for one thing, a draft fully final trademark agreement. There are lots of things we still have to discuss in terms of whether this will work for us or not.
822 We have a bit of a road ahead of us on this, and we are not prepared to do that right away.
823 COMMISSIONER CRAM: I understand that. But my point is: Would you anticipate that in a year, if section 5 was not in the offer, ESPN would say "no, you can't use our trademark"?
824 MR. FECAN: I am not sure what they would say. I don't know.
825 COMMISSIONER CRAM: Do you believe that it is a concession of ESPN to give you the trademark on the terms of the trademark agreement?
826 MR. FECAN: What I believe is that we went for what we wanted. We wanted a whole bunch of things, and we went for them. They may well have wanted some of them as well; they may not have.
827 It is always a concession to give something that is your trademark. That is not something you do or take lightly.
828 I would imagine that ESPN would want to think about it. They thought that we were a good group and would treat it well. But having said that, we haven't yet got a full trademark licensing agreement that either side is comfortable with.
829 COMMISSIONER CRAM: You are saying then that this is all subject, no. 1, to the agreement and, no. 2, to the polling.
830 Is that really what it comes down to?
831 MR. FECAN: It is subject to our best efforts in deciding, 18 months from when we hopefully have approval of the transaction, in concluding that it is in the best interest of that licence to do so.
832 And, as broadcasters, that is what we are going to do. We don't want to necessarily rush to one judgment or another. We will be using our instincts. We will be using polling. We want to have a satisfactory trademark agreement. We will be using everything at our disposal to try and make the best decision for the channel.
833 It will be our decision and solely our decision.
834 COMMISSIONER CRAM: Do I understand it -- and what I was trying to get at are the circumstances that you wouldn't proceed with the rebranding.
835 If I understand it, they are subject to three things: a sufficient agreement, an acceptable agreement; the polling; and your instincts?
836 MR. FECAN: Yes.
837 COMMISSIONER CRAM: Is that it?
838 MR. FECAN: Yes. Broadcasters work on instincts a lot.
839 In sum, it is our best business judgment of whether it is a good thing for that particular channel, or not, at that time.
840 Right now, the polling may be positive, and in a few months there may be a backlash against the idea. We just want to be sure.
841 COMMISSIONER CRAM: In terms of the advantages that you see to rebranding in Canada, what are they?
842 COMMISSIONER CRAM: Primarily the connection to a worldwide brand with greater recognition around the world, not unlike other worldwide brands that exist in Canada: home and garden.
843 COMMISSIONER CRAM: Are you talking about greater recognition around the world or are you talking about greater recognition in Canada?
844 MR. FECAN: In Canada. And the polling so far demonstrates that there is a preference.
845 COMMISSIONER CRAM: If you did the rebranding -- and I want to go to the draft trademark agreement that was forwarded.
846 In section 31 -- It is 3.1; I'm sorry. I can't read my own writing. It is lines 3, 4 and 5. And I recognize that this is draft.
847 Would I understand that any goodwill that TSN/ESPN would have after the rebranding, again by virtue of it being ESPN, would then not belong to NetStar?
848 MR. FECAN: I am not sure in what context goodwill is used here.
849 I think what they are saying here -- and it is a draft, and we have many miles to go still -- is that the trademark is theirs. They own it.
850 And as I understand it, this is the standard trademark licence agreement that they use in other parts of the world. It is not inconsistent with a few other trademark agreements I have seen, but it is a particular specialty and we need to do our homework on this agreement to satisfy ourselves that it is something we like and can live with.
851 COMMISSIONER CRAM: When TSN was valued by KPMG they valued intangible assets and that, Mr. Gibson, includes goodwill, doesn't it?
852 Where are you, Mr. --
853 MR. GIBSON: Yes, it does.
854 COMMISSIONER CRAM: And there is a value to that goodwill?
855 MR. GIBSON: Yes. I think it is --
856 COMMISSIONER CRAM: So you would lose the value of that TSN name in terms of the value to NetStar.
857 MR. FILLINGHAM: I think that we are mixing and matching the goodwill valuations here.
858 The goodwill valuations arising on a purchase transaction are calculated in accordance to the purchase price and the valuation of the tangible asset. The goodwill --
859 COMMISSIONER CRAM: And intangible.
860 MR. FILLINGHAM: The goodwill, in reference I think -- and I don't think that, as Ivan has mentioned, this is a draft agreement, but the goodwill in this section is really dealing with any undefined values that can arise in the future from the use of a trademark. I don't think that that is an unusual clause for any kind of long-lasting protection for a licence trademark agreement and is totally different from a valuation of goodwill for purposes of any purchase that Mr. Gibson would be valuing.
861 COMMISSIONER CRAM: Mr. Gibson, you were the person from KPMG?
862 MR. GIBSON: That's correct.
863 COMMISSIONER CRAM: I'm sorry, maybe I have created a logical misleap and I didn't mean to do that.
864 The present valuations upon which you were paying for the shares includes a valuation for the tradename "TSN" in the intangible assets, and I believe Mr. Gibson has said yes, so, upon the rebranding, any goodwill value for TSN would be lost from the valuation of NetStar. Is that correct?
865 MR. FILLINGHAM: The goodwill that Mr. Gibson helped us split the valuation of that arose on this transaction is the value that definitely has accrued through the development of the businesses of NetStar, the whole combined business including the TSN sports business.
866 But specifically from an accounting and a valuation purpose, the value assigned here on the NetStar books if a rebranding were to occur, there would be no transfer of value pursuant to this agreement. This agreement is just dealing with future values for a trademark that could accrue, goodwill arising, from the use of the name. It would have nothing to do with the value of this enterprise.
867 COMMISSIONER CRAM: If TSN did not have a name, if it was "no name", literally no name, and let's say we are at the point -- the day of rebranding and it had no name, you are saying it would have the same value?
868 MR. FILLINGHAM: The goodwill valuations that are expressed here would have the same values even if the rebranding were to occur. Assuming that this corporation can maintain the cashflows that pertain really to that goodwill valuation, whether it was named TSN or ESPN on all of the combined assets, rebranding would not impact that valuation.
869 COMMISSIONER CRAM: So your assumption, then, is that it would continue the carriage that it presently has on all BDUs, that and the same type of programming. Is that the point?
870 MR. FILLINGHAM: Yes. And the future valuations that would accrue to the company NetStar, whether it was in the future through an ESPN name or a TSN name, will remain with the company, assuming that the cashflows of that company are maintained and grow, value will accrue to the shareholder regardless of the name, 68 per cent of which is to CTV.
871 COMMISSIONER CRAM: What about the value of the TSN trademarks? Were they included in your valuation, Mr. Gibson?
872 MR. GIBSON: When you are looking at the value of goodwill --
873 MS SANTERRE: Mr. Gibson, would you please take a microphone.
874 MR. GIBSON: Thank you.
875 Robin has described it correctly in that goodwill results because of profits which follow a corporation's asset base and those assets are buried, hard assets and soft assets, and include all the program libraries, certainly the infrastructure that's in place, the contracts and all the other intangible assets that are there and all the tangible assets. So Robin is absolutely correct in saying that as long as those profits continue to accrue post any change, that value will stay there.
876 COMMISSIONER CRAM: And did you value the trademarks in the valuation or did you --
877 MR. GIBSON: We didn't break out separately the intangible valuations, no.
878 COMMISSIONER CRAM: So there is a value because you didn't use a termination method of valuation to that as an intangible asset?
879 MR. GIBSON: If the total value of the transaction, for instance in this case, is $400 million and you get it back up to the gross asset value, there is a split in that value between intangible and tangibles, and part of that intangible value will fall to the libraries that exist, all the contracts. And, no, we didn't go down and break down the individual pieces; we had no need to.
880 COMMISSIONER CRAM: But they would be included in that intangible portion of your valuation?
881 MR. GIBSON: Yes. Absolutely. Yes.
882 COMMISSIONER CRAM: Okay.
883 So come the day -- and I'm saying let's assume that this happens, that the rebranding happens -- what happens to those trademarks and their value?
884 MR. FECAN: Which trademarks?
885 COMMISSIONER CRAM: The trademarks owned by TSN.
886 MR. FECAN: We continue to own them.
887 COMMISSIONER CRAM: And they would be called TSN and TSN would be called ESPN.
888 MR. FECAN: All we are looking at --
889 COMMISSIONER CRAM: Do you think that would diminish the value of them?
890 MR. FECAN: What we are looking at doing is putting an ESPN Canada label on the TSN service. We still own TSN.
891 COMMISSIONER CRAM: Oh, yes. I understand that.
892 What influence on TSN would ESPN have by virtue of the rebranding?
893 MR. FECAN: I don't believe they would have any influence on programming or operational control or anything else that I think is essential or matters according to the Cabinet direction and the law. We control TSN.
894 COMMISSIONER CRAM: What about the issue of requesting prior approval under 4.2?
895 MR. FECAN: This is for promo material. And presumably we are a bit conducting a negotiation I suppose of ESPN in public, but I think this is one of the clauses that we might want to talk to them about.
896 COMMISSIONER CRAM: Okay.
897 In terms of any copyright material, do I understand you to say that if you are copyrighting it it will be a separate copyright from ESPN?
898 MR. FECAN: Well, the shows, the material, is owned by NetStar. NetStar, if we did this, would be a sub-licensee or would sub-licence the use of the ESPN mark for one of its services, not unlike I guess, you know, Discovery Canada is sub-licensed to the mark of Discovery for its on-air service.
899 COMMISSIONER CRAM: And you would proceed with this notwithstanding that under 11.4 ESPN has the right to terminate this at any time without cause after three years?
900 MR. FECAN: This might be another clause that we will want to talk to them about.
901 COMMISSIONER CRAM: Because I then want to get into the repercussions of their termination which is in 12, and the second paragraph of that, line 6:
"In addition, ESPN shall be the sole owner of all copyright, publishing and intangible rights in the graphic content of any physical materials solely insofar as they bear the ... [et cetera] provided it is severable..." (As read)
902 It then goes on to say:
"...and shall have the unqualified and exclusive right to broadcast, reproduce, copyright, publicly exhibit or otherwise use such physical material." (As read)
903 Are we just talking assign here or are we --
904 MR. FECAN: I think we are talking mic flashes, is my interpretation. But again --
905 COMMISSIONER CRAM: Because when they are talking about a right to broadcast it makes me think of programming.
906 MR. FECAN: Well, it may be it refers to promo, promotional materials, although I can't imagine how a promotional material about directing people to watch Hockey Tonight on ESPN Canada is going to be of much use to them anywhere.
907 MS McQUEEN: I think that that just -- it says quite clearly that it is only solely insofar as they bear the licensed trademark. So they could come in with their moving van and take out anything that said ESPN on it, as long as it was severable, but they can't take anything else.
908 COMMISSIONER CRAM: So do I hear you, then, that -- and we were talking about the three things: instinct, pooling and the agreement, an acceptable agreement -- an acceptable agreement would not include that unilateral right determination?
909 MR. FECAN: I think what I would say is that we will, at all times, act in the best interests of this company. That particular clause troubles me. If you will, I would like to have that negotiation with ESPN.
910 COMMISSIONER CRAM: So you are not saying -- has there been no discussion on this?
911 MR. FECAN: Very little on the draft trade mark agreement which gives you an idea of why we feel we need some time before we make a final decision.
912 COMMISSIONER CRAM: Thank you. Say we did approve this transaction, say you did rebrand, say ESPN had the right to terminate, what will be the impact on NetStar if we did?
913 MR. FECAN: I think what the polling told us is that as long as the programming and style and nature of the service remained the same, as long as it remained controlled by Canadians, there would be an impact but not an impact that we couldn't deal with. In part, that also deals with the concept of if for some reason they wanted to pull the brand, one would have to assume it's a pretty unhappy relationship we have with them. There's an opportunity then to buy them at 90 per cent of their value, in other words at a discount. I guess that's the kind of the notion of damages that is sketched in there. I think it would be a pretty unhappy relationship for them to want to do that.
914 If on the other hand they stayed in, which is hard to conceive, if they wanted to pull back the brand, then I think that would say that in their view it would not have a big impact on the company.
915 THE CHAIRPERSON: It's precisely the purchasing at the 90 per cent value that makes me think that there have been some discussions about this and that what you are saying is not far along and this may be the decision-maker for you. Is that it?
916 MR. FECAN: It's certainly going to be very central in our decision-making in terms of whether we go forward or not, but there will be other things that we will want to consider as well. You are right. That's what that concept of 90 per cent is there to deal with.
917 THE CHAIRPERSON: If we backed up a few steps and said in 17 months from approval, if it's given, you say "Dear ESPN: We choose not to rebrand", what do you believe would be the impact on Net/Star?
918 MR. FECAN: Obviously if we made the decision not to rebrand, we would think it would be in the best interest of NetStar to stay the course on the TSN mark. Then clearly a situation is created where ESPN can choose to exit the deal.
919 COMMISSIONER CRAM: And the impact on NetStar?
920 MR. FECAN: Well, I think, and again I think ESPN has been a great partner and a long term supplier of programming to NetStar. In the short time we have known them, they seem to be very much good partners, but in the event they choose to leave, we end up owning 100 per cent of NetStar. That's not an unhappy outcome for us at all.
921 I mean we like the deal that exists, not the trade mark deal but the actual deal that this transaction is based on. We like them as a partner to the degree we have got to know them. Previous management thinks they have been good partners, but we would be very happy to own 100 per cent of this and we have the credit line to do it.
922 THE CHAIRPERSON: I hear you from CTV's point of view. The question was what's the impact on NetStar?
923 MR. FECAN: Well, clearly if we decided to not rebrand, we think it's in NetStar's best interests that the TSN mark stays. That's part of the decision-making process we need to make.
924 COMMISSIONER CRAM: So if you choose not to rebrand, it will be based on your decision that the impact will be negligible.
925 MR. FECAN: If we choose not to rebrand, it will be because we think the TSN mark is stronger and perhaps some of the conditions that come with the ESPN brand mark. The trade mark agreement may well be not acceptable to us. We have to make the decision, but in all cases we are going to make what we think is the best decision for the channel.
926 Subject to your approval -- well, actually, we have already paid a lot of money for this. Subject to your approval, we get to keep it. We are not going to do anything that we think can in any way hurt this thing. We think it's a big part of our future.
927 COMMISSIONER CRAM: So do I hear you then that if -- let's say then the polling comes out that everybody would want ESPN, the recognition is higher, et cetera, but the agreement is a no go and you would choose not to rebrand, what would then be the impact on NetStar at that point?
928 MR. FECAN: I think at that point, I mean if it was a situation where our audience was saying that this might be a positive for us by a pretty good margin but we felt that, you know, we just can't live with this agreement the way it's written, then I think clearly -- I don't think that will be a loss to NetStar in the sense that it will lose face or lose something. It's a lost opportunity perhaps.
929 COMMISSIONER CRAM: It appears then that ESPN is then free to seek other investments. Do you have any idea what other investments would exist for them here in Canada?
930 MR. FECAN: Can you just tell me what --
931 COMMISSIONER CRAM: It's the end of the agreement.
932 MR. FECAN: Are we on trade mark?
933 COMMISSIONER CRAM: Yes. I'm sorry. I'm still there.
--- Pause / Pause
934 COMMISSIONER CRAM: I can't find it.
935 MR. FECAN: The night is young.
936 COMMISSIONER CRAM: Yes. I wrote it down in my notes and then can't find it. I want to go on to the shareholders agreement and first talk about Directors. Have I got it right that in terms of Directors, it's four CTV plus one observer?
937 MR. FECAN: It's four plus one Directors. We much like in the Discovery shareholders agreement have the opportunity for ESPN to have a non-voting observer. Of course, if that becomes something the Commission is concerned about, we can just go to a board of ten, eight and two.
938 COMMISSIONER CRAM: I looked at paragraph 2.1.1 referring to the observer. It's the second part of it, on the next page. 2.1 goes into the next page. It doesn't refer to the observer being able to participate like the DCI group. Was that deliberate?
939 MS ROBINSON: The intent was to give an entitlement for the observer to be present. In terms of the participation, that would be up to the board to make a decision on that on an ongoing basis.
940 COMMISSIONER CRAM: All right. So the lack of the words "and participate in" in the DCI agreement really means that you are leaving the issue of participation and the level of participation up to the board at the time.
941 MS ROBINSON: We felt it was appropriate here in terms of this agreement that the board have that decision-making power on an ongoing basis to make that determination.
942 COMMISSIONER CRAM: Okay. Presently how do you, CTV, how do you see the role and the purpose of the observer?
943 MR. FECAN: If my fellow Director from ESPN wants to bring along someone that will help advise him and help him be a better Director, I don't particularly have an issue with that. The issue for me is that the company stays in Canadian control at all times.
944 If there is any aspect of this that troubles the Commission, we would be very happy to go to a board of ten. The reason we went with five is because just from a governance point of view, in a fast moving business we would sooner have a smaller board than a board of ten.
945 It was a convenience for us, but we could certainly deal with ten if there was any kind of issue that this raised with you.
946 COMMISSIONER CRAM: And a quorum then refers to nominees. Does the term "nominee" when referring to ESPN mean this can be the observer or has to be the director?
947 MR. FECAN: My understanding, counsel will correct me if I am wrong, is it's the director. There can only be one director, if there is one seat for that director.
948 MS ROBINSON: Yes, I confirm that.
949 COMMISSIONER CRAM: And a decision of the board to be effective requires an affirmative vote of a majority of those entitled to vote, as opposed to the previous agreement constituting a quorum. Was that meant to be significant?
950 MS ROBINSON: No. It was meant to be that the decisions of the board are carried by a majority and that's how the provision is intended.
951 COMMISSIONER CRAM: I believe you said in one of your supplementary answers that there were no veto rights by virtue of the fallback meeting, as I call it, the fallback meeting. What happens at the fallback meeting if only ESPN attends?
952 MR. FECAN: Well, they wouldn't be entitled to vote on anything operational or that deals with programming or any control issue.
953 But, you know, as managers of the company I think we are going to want to be at any board meeting.
954 COMMISSIONER CRAM: I understand that, but you have got to understand that the test of control includes hypotheticals also. It doesn't include just necessarily practicals.
955 So, it appears to me that there is a possibility at a fallback meeting that if you are not there the motion is going to be passed.
956 MR. FECAN: We will certainly look into that and if that hole is there we will plug it.
957 MS ROBINSON: It's my opinion that that hole is not there because when one takes a look at the substantive matters, for instance, that are covered in section 2.1.10, those require a resolution or an affirmative vote of shareholders holding an aggregate, at least 81 per cent, of the special voting shares.
958 So I think when you take a look through the whole agreement and the provisions with respect to veto rights and how meetings are properly constituted, any matters of substance in terms of the day-to-day management of the business, any programming decisions, et cetera, can only be taken at meetings where the majority Canadian shareholder is present.
959 COMMISSIONER CRAM: I am sorry, I was talking about directors, a meeting of directors and 2.1.10 is shareholders. We will get to shareholders, but my question was in relation to a meeting of the directors.
960 Now, I frankly agree with you, Ms Robinson, that a lot of the duties of the board are reduced to the shareholder level here, but what about the directors? What about the director level and a meeting of the directors on the fallback meeting?
961 MR. FECAN: We thank you for bringing this to our attention and we will study it immediately.
962 COMMISSIONER CRAM: Maybe I can ask you later about that.
963 MS ROBINSON: Yes. Certainly the intent and the wording of this provision with respect to quorum, I believe I am correct in saying, mirrors both the existing agreement which has been approved by this Commission on two occasions and as well mirrors the provisions of the Discovery shareholders' agreement. But certainly the intent is that the decisions of the directors are taken by a majority of the Canadian directors and that's the intent.
964 So this is wording that has been previously approved by the Commission and which is mirrored in this agreement.
965 COMMISSIONER CRAM: I agree with you and the issue that we have to concern ourselves with is not only the agreement itself, but if we had at a directors' meeting four plus one, plus one observer from ESPN, and if we then had the fact that the ESPN representatives, be they a nominee or an observer, have extra contractual rights under the program supply agreement and possibly under a trade mark agreement, would that not possibly shift the scales in terms of control and power within the board of directors?
966 MS ROBINSON: No, because I think it is very clear in terms of the amendments, both in terms of what is here and also in terms of the amendments that we provided to you this morning that programming decisions are made by CTV and that ESPN and any party related to it is not controlling any programming decision directly or indirectly, and that's the amendment we put forward.
967 It would be our view that that was there in any event. I would point out that the matters that are in section 2.1.10 of the agreement directly mirror the provisions of the current NetStar shareholders' agreement. However, because of the sensitivity of the Commission and of the direction in terms of programming decisions, we felt it was appropriate to suggest the inclusion of an additional clause specifically on programming, and that makes it clear that all programming decisions are made by CTV, full stop, period.
968 COMMISSIONER CRAM: We will then move on to the shareholders because that's where we appear to be at.
969 I understand the necessity of 51 per cent being required for a quorum, and if I understand you, Mr. Fillingham, and your letter of September 23rd, only special voting shareholders attend and people vote in accordance with the shareholding, the 80/20 shareholding. Is that correct, at shareholders' meetings?
970 MR. FILLINGHAM: Yes.
971 COMMISSIONER CRAM: And if CTV was then not at a meeting, then we would "not" the meeting and we went into the fallback meeting and CTV was not there, then they could not proceed?
972 MS ROBINSON: That's correct. The meeting could not proceed unless there are votes there representing 80 per cent of the special voting shares.
973 COMMISSIONER CRAM: Eighty per cent?
974 MS ROBINSON: I thought we were talking about section 2.1.10.
975 COMMISSIONER CRAM: We are talking shareholders?
976 MS ROBINSON: Correct.
977 COMMISSIONER CRAM: Yes.
978 MS ROBINSON: So the matters in section 2.1.10 which in our view go to the heart of the operational and day-to-day management of the business can only be dealt with at a meeting where shareholders representing 80 per cent of the voting shares are in attendance. If there are not shareholders representing 80 per cent of the voting shares in attendance, the meeting cannot go ahead and those matters cannot be dealt with.
979 COMMISSIONER CRAM: Would it only really be that those matters cannot be dealt with?
980 MS ROBINSON: That's fair. The matters that are set out in section 2.1.10 cannot be dealt with unless the shareholders representing 80 per cent or 81 per cent of the voting shares are there, that's correct.
981 COMMISSIONER CRAM: Correct.
982 So for those items requiring either a 90 per cent approval rate, and they are affirmative approvals, are they not -- or an 81 per cent affirmative rate, that requires or that would require the affirmative vote of ESPN on all of those issues?
983 MS ROBINSON: No. It doesn't require their affirmative vote. They just have to be there.
984 I'm sorry, it does require their affirmative vote and that, we are talking about section 2.1.11 now, and that directly mirrors the existing provisions of the NetStar current shareholders' agreement which has been approved by the Commission. So this is an existing provision.
985 COMMISSIONER CRAM: No. I am talking 2.1.10 and 2.1.11, in the 81 per cent and in the 90 per cent both of those require the affirmative approval of NetStar -- of ESPN, thank you.
986 MS ROBINSON: In 2.1.10 all of the matters, except 22.214.171.124 and 126.96.36.199, require the affirmative vote of shareholders representing 81 per cent of the special voting shares.
987 And for section --
988 COMMISSIONER CRAM: And if I can stop you, that therefore means it requires the affirmative vote of ESPN.
989 MS ROBINSON: That is correct.
990 COMMISSIONER CRAM: Thank you. The same with --
991 MS ROBINSON: And this is identical to the existing shareholder agreement approved by the Commission in 1996 and again in 1997.
992 COMMISSIONER CRAM: When you talk about identical, is it identical as at page 11 of what was initially filed or is it identical as at the appendix that you filed today, as to 188.8.131.52?
993 MS ROBINSON: The 2.1.10, in the form that it was originally filed, is identical, with the exception that the 81 and 80 per cent have been changed in order to reflect the voting shares.
994 The provision that we have suggested deleting today, the first half of section 184.108.40.206, is the deletion of a provision that has been approved by the Commission previously and which is in the current shareholder's agreement.
995 So this is an amendment to what the Commission has previously approved and which is in the current agreement.
996 COMMISSIONER CRAM: On both of those decision-making thresholds, of 81 per cent and 90 per cent, an affirmative vote is required by ESPN in their position as shareholder.
997 MR. FECAN: There is no 90.
998 It is further on?
999 MS ROBINSON: Yes.
1000 COMMISSIONER CRAM: It is the bankruptcy --
1001 MR. FECAN: Right. The bad provisions.
1002 COMMISSIONER CRAM: Notwithstanding the fact that I don't understand solicitor stuff.
1003 On those two you agree that we require the affirmative vote of ESPN as shareholders.
1004 MS ROBINSON: That is correct. And that is identical to the existing approved provisions of the current shareholder agreement.
1005 COMMISSIONER CRAM: Yes. And you agree that, as shareholders, they don't have the same fiduciary duty as directors to a company.
1006 MS ROBINSON: Do I agree that they don't have the same fiduciary duty as shareholders as they do as directors?
1007 I guess, technically, you are right in that; that as directors they are obligated to act in the best interests of the corporation.
1008 However, I would reiterate that this is not anything new that we are putting on the table here. These are existing approved provisions of a shareholder agreement which is being amended and restated. But the same provisions exist in the current shareholder agreement and have been approved by the Commission. And ESPN has been participating on that basis since Commission approval of the CTI transaction in 1996.
1009 What we have put before you today as one of the amendments to remove the first half of section 220.127.116.11 actually takes away an existing approved right that ESPN has.
1010 COMMISSIONER CRAM: And I will take it as a given, then, Ms Robinson, that from now on in we all know that in 1996 this was approved.
1011 The question I get into is the additional extra for contractual rights that one takes cumulatively with this.
1012 If I look, then -- and I wanted to talk about your new and improved shareholder agreement portions.
1013 When were these changes agreed to?
1014 MS ROBINSON: We started to focus on these particular provisions as the interventions came in which raised certain issues with particular provisions.
1015 Perhaps I could just explain the process that we went through, if that would be of assistance or of interest to the Commission.
1016 COMMISSIONER CRAM: I really just wanted to know when it was agreed to.
1017 MS ROBINSON: They have been agreed to between the time of interventions and today. They were finalized over the weekend.
1018 COMMISSIONER CRAM: So ESPN has agreed.
1019 MS ROBINSON: Yes.
1020 COMMISSIONER CRAM: And they agreed on the weekend.
1021 MS ROBINSON: Some of the provisions were agreed to in advance of that; and some of the provisions, specifically the programming one, was one that we went back to them on and said that we felt that was appropriate as an additional provision, and they agreed to that.
1022 Then the final thing we agreed to was the last thing on the page, which is that in the event that there is something which changes the constraints that are placed on ESPN and allows, with Commission approval, to go back to what they have now, that that, subject to Commission approval, would be included as a CRTC change and the subject of an application.
1023 So it would be fair to say that it was a negotiation; that ESPN believes that they have given up something that they either had now or had in the shareholder agreement which we negotiated at the time of our deal. But they have been persuaded that your requirements and the requirements of the Cabinet direction are most appropriately met if these amendments are made.
1024 It was in that spirit that we brought them forward to you.
1025 COMMISSIONER CRAM: And any other agreements made -- you say ESPN felt that they were giving up something. Did you have to give something in return?
1026 MS ROBINSON: No.
1027 COMMISSIONER CRAM: Would you like to take a break, Madam Chair?
1028 THE CHAIRPERSON: Yes, we will take a break.
1029 First, I want to clarify something.
1030 On page 36 of your supplementary brief, on two occasions you say that these rights granted in the shareholder agreement have been previously approved by the Commission in the second amendment to the NetStar shareholder agreement. The Commission has previously recognized all other shareholder approval provisions of the NetStar shareholder as being appropriate.
1031 Page 17 of the response to deficiency question -- these quorum provisions are identical in substance to similar provisions approved by the Commission. And we have heard this many, many times since lunch.
1032 I want to ask you whether it is your position that in discussing the issue of control in this case, with all the other attendant agreements and with the number of shareholders we have before us we are bound by, that that is a reason for finding any provision in these agreements acceptable.
1033 Or are we entitled, as a regulator, to look at a new situation brought before us under different circumstances with fewer shareholders and other attendant agreements?
1034 I would like clarify whether your position is that because we said it was okay before, it has to be acceptable now even though the circumstances are different.
1035 MS ROBINSON: I would say, Madam Chair, the Commission has to satisfy itself in each case, on a case-by-case basis, that the agreements which are brought before it are satisfactory.
1036 However, in a circumstance where someone is an existing shareholder and has certain rights that have been approved by the Commission as appropriate, we feel that that is something that the Commission properly should take into account; that it should be one of the factors that the Commission looks at.
1037 At the end of the day, Madam Chair, it would be our understanding that you have to be satisfied that the agreements which are brought before you satisfy the legal requirements.
1038 It is our opinion that they do for a number of reasons. But ultimately, that is your decision to make.
1039 THE CHAIRPERSON: But you would consider the onus of this panel to satisfy the Commission when questions are asked about how, in these circumstances, considering all the agreements before us, we find that the control issue is not a concern, that is, your responsibility, not to say "You have approved this before in another agreement when we had how many shareholders, five, six, and there were other circumstances surrounding the matter."
1040 MS ROBINSON: Right.
1041 Perhaps I could just make two points on that issue.
1042 The first point is this. We believe very much that it increases the Canadian control of NetStar to have one majority Canadian shareholder who is a knowledgeable broadcaster rather than to have a diverse group of non-broadcasting shareholders none of which had as great a number of votes as ESPN. That's my first point.
1043 THE CHAIRPERSON: But my answer to that would be it raises the question of why there are identical provisions in the circumstance.
1044 You can see it from the other perspective. You know, if you reduce the shareholding, there are fewer shareholders, and you retain the same rights, it seems to me a bit difficult to accept as an answer, "You approved this before and it is fine here too."
1045 MS ROBINSON: I guess I would perhaps suggest another way to take a look at it and say that if the shareholder -- if these provisions were deemed appropriate by the Commission in the circumstance that I have just described, i.e. with a company with a diverse group of non-broadcast shareholders, none of whom had a shareholding as large as the minority shareholder, then the -- and you change to a company where there is one single Canadian shareholder who is a knowledgeable broadcaster, that in those circumstances perhaps at least those protections would be appropriate.
1046 The second point I would make is the following, and that is, when the Commission considers the provisions of the direction and the amendments that were made to the direction in the last three or four years regarding the increase in non-Canadian shareholding that is permitted at a holdco level, that the stated purpose of the government in putting into place those provisions was to encourage the investment of non-Canadian capital into the broadcasting industry. I think in those circumstances where that has been the purpose of changes to the direction, it would be anomalous to suggest that we welcome capital in from non-Canadians in order to improve the financial strength of the Canadian broadcasting system yet say that those shareholders are not afforded appropriate minority protection.
1047 So just to come back and to conclude, it is our opinion that the provisions which are in this shareholder agreement are appropriate provisions for balancing the appropriate rights of the minority on one hand and on the other hand the imperatives of the directive to ensure that the control is firmly in the hands of Canadians. We believe that what we have brought before you satisfies balancing those requirements, but at the end of the day we understand that the onus is on us and we understand that the final decision is yours.
1048 THE CHAIRPERSON: Thank you.
1049 We will take a 10-minute break and come back, then, at approximately a quarter to.
--- Recess at 1534 / Suspension à 1534
--- Upon resuming at 1552 / Reprise à 1552
1050 THE CHAIRPERSON: Welcome back again.
1051 Commissioner Cram.
1052 COMMISSIONER CRAM: I just wanted to do a little clean-up on one I was asking before and we sort of got sidetracked, the issue of the shareholders' quorum.
1053 The shareholders can make some decisions not included in 2.1.10 or 11, and in that case you then go back to 18.104.22.168 where again it is the 51 per cent but then in the fallback meeting there need not necessarily be the 51 per cent. Is that correct?
1054 MS ROBINSON: That is correct. By way of history on that provision, the Commission originally required that provision to be put into the discovery shareholder agreement in order that the minority shareholder could not effectively have a veto over the operations of the company just by not showing up. So that was where that provision, as I understand it, historically first originated and that's why it has been there and carried through into other agreements.
1055 COMMISSIONER CRAM: It does, however, open up the possibility that the person attending the fallback meeting could be a non-CTV person.
1056 MS ROBINSON: It does open up that possibility. I guess I would say two things to that.
1057 The first is I think you have Mr. Fecan's assurance on the record that CTV has a vital interest in this undertaking and, with four directors on the board, I think in the real world it would be highly unlikely that CTV would allow a situation where it didn't have -- there was a meeting happening without its attendants.
1058 The second point I would make is that even if there were such a meeting, the things that could be conducted at that meeting would be outside of the -- wouldn't be things related to the day-to-day management and operation of the undertaking for any programming decisions. So in that respect I would consider that that might give the Commission some comfort.
1059 COMMISSIONER CRAM: I now want to go into the amendments and it is 22.214.171.124 which now reads:
"...make any material change in or terminate or suspend any material part of its existing business." (As read)
1060 So I guess what the amendment means is that we have to talk about a material part of the existing business and what that really means.
1061 I will put one suggestion to you. What if Mr. Brace or someone in his position were fired; is that a change in a material part of the existing business?
1062 MS ROBINSON: With all respect to Mr. Brace, the answer to that is no.
--- Laughter / Rires
1063 COMMISSIONER CRAM: There will be a handsome contract for you later, Mr. Brace, in terms of a termination package.
--- Laughter / Rires
1064 COMMISSIONER CRAM: Mr. Brace was talking about the percentages of types of programming and he talked about 1 per cent the prime programming and then the second and third tier types of programming. If those percentages changed in any -- say 10 per cent one way or another, would that be a material change?
1065 MS ROBINSON: My opinion would be no on that.
1066 If I could just take one step back to explain my understanding of why this is typically included as something over which a minority has a veto right, and that is that the minority has the right to rely on the fact that there is not going to be a fundamental change, a material change in its investment without having a say. So it is a substantial -- a material change in the nature of the business that is being involved in.
1067 An example would be is if there was a decision made that TSN would get out of the broadcasting business and get into the airline business. That would be a material change.
1068 In terms of suspending any material part of its business, an example of that would be if there was a decision that it was no longer in the broadcasting business, that it was going to suspend its operation.
1069 So these are substantial things which fundamentally alter the nature of the investment. That's why minority shareholders are typically given a veto right over that. They don't go to the sorts of examples that you talked about.
1070 MR. FECAN: Commissioner Cramm, you put it out there, so I really have to say we run programming, full stop, period, not anyone else. CTV does in this proposal. It's right there in the statement of principles that I'm sure you are coming to.
1071 COMMISSIONER CRAM: Yes, I am. Let me put another example to you. Notwithstanding, and again I am on 126.96.36.199 -- just one other example. Say the management in its wisdom, and I know it's a ludicrous example but I want to focus on the issue, decided that they no longer wished to have ESPN programming and instead decided they wanted sort of all the playoffs of the northern Mongolian left-handed pingpong tournament, you know, saying the northern Mongolians is a valid programming thing, would that be a material part of its existing business?
1072 MS ROBINSON: No. The evidence before you is that in fact the ESPN programming agreement is a bulk programming agreement and the relative percentage in terms of TSN's overall programming has been declining, but in any event, such a veto would be precluded by our suggested addition to 188.8.131.52, which makes it abundantly clear that ESPN shall have no role whatsoever in programming decisions.
1073 COMMISSIONER CRAM: Would you have any problem with obtaining ESPN's agreement to an interpretative note to that clause referring to employment contracts, carriage contracts, advertising contracts and programming contracts? Would you anticipate any problem?
1074 MS ROBINSON: There is no problem in providing you with that. Should you require it, we would be happy to do so.
1075 COMMISSIONER CRAM: You say the next, 2.1.13, is meant specifically to deal with almost an accounting issue now.
1076 MS ROBINSON: Yes. Perhaps if it's helpful to the Commission, I can explain how we came to this wording. That was we wanted to ensure that it was abundantly clear for the Commission that insofar as the day to day operation, management and programming decisions of this undertaking were concerned that CTV as majority shareholder was making that decision, was making those decisions on an ongoing basis.
1077 Concerns had been expressed by certain of the intervenors that the wording of the provision in 2.1.13 that we had put before you as part of your application could, if there were a substantial number of non-arm's length transactions, mean that for those on an ongoing basis that ESPN would have a veto and by sort of a cumulative effect they could end up having much more influence than was intended.
1078 What we decided to do in terms of the way to -- and, I might add, notwithstanding the fact that 2.1.13 as originally drafted is a pretty typical provision relating to non-arm's length transactions.
1079 However, notwithstanding that, in order to try to provide you with the sort of assurance that we felt was appropriate that CTV in fact would be running this enterprise on a day to day basis, making all of the decisions, we felt it was appropriate to really turn those non-arm's length transactions really into an accounting formula.
1080 What the 2.1.13 as we have suggested it to you says is that the company can enter into those transactions only if it's done on a particular cost formula and that if there is a dispute about the cost, then that is settled by way of arbitration.
1081 It does not give the minority shareholder any right to say that those contracts can't be entered into, only that it becomes a question of cost allocation. We felt it was appropriate to use the arbitration provision to see if there is a dispute about the cost.
1082 Rather than being a decision-making function in the way that 2.1.13 was originally drafted, even though that is a typical minority shareholder provision, we felt in the circumstances that it would be appropriate that it become a mechanical accounting exercise and that's the intent of the section that we put before you today.
1083 COMMISSIONER CRAM: So when I look at these all together, the shareholder decisions, it really comes down to for compliance with the directive, you believe that 184.108.40.206 and 220.127.116.11 are the core ones -- sorry, are the ones that are the true indicia of the core business and core control.
1084 MS ROBINSON: No. I wouldn't be that narrow, nor has the Commission in its various considerations of ensuring Canadian control said it's limited to one or two factors. There are a number of factors that we would say the Commission -- that we understand that the Commission looks at.
1085 COMMISSIONER CRAM: I just want to stick to these two if I can, these two issues. Those are the only ones upon which there is an 80 per cent -- that is the lowest and upon which or over which CTV has absolute control in terms of the shareholding and the shareholders agreement structure.
1086 MS ROBINSON: No. That's not correct. And I don't think that it's appropriate to take only two provisions and not look at the totality of the relationship. I guess I would say this, that the Commission has had a significant shopping list of factors that it takes a look at and which it has to be satisfied on.
1087 If you would like, I would be happy to go through that shopping list of factors from our perspective and how we feel that we meet it.
1088 COMMISSIONER CRAM: I'm sorry. I wanted to go back to the agreement. I don't want to do the extraneous factors. I wanted to talk about the shareholder agreement. I understand the Unitel decision. I have read them all.
1089 MS ROBINSON: It's not just Unitel. I guess I would say this, that the two provisions that are set out in 18.104.22.168 and 22.214.171.124 are provisions that the Commission has on previous occasions said are sensitive matters that should not be subject to a veto by the minority shareholder.
1090 If someone came before you and said "We have satisfied those two factors and therefore we satisfied the direction", I would disagree with that because I think there are a number of other factors that appropriately have to be taken into account and one of the important ones --
1091 COMMISSIONER CRAM: Intrinsic in the agreement or extraneous to the agreement?
1092 MS ROBINSON: I would say that the agreement is part of the fabric of the relationship between the parties, but it's not the only part of the fabric that the Commission has said on previous occasions is important.
1093 So the Commission has said, for example, that one of the factors it looks at, one of the thing on the shopping list is if there is a disproportionate bargaining power or level of experience between the two shareholders. So if someone is --
1094 COMMISSIONER CRAM: Can I keep it to the agreement please because then we will deal with the other issues. It's just I want to sort of break it into separate issues. Is there anything else in the agreement that goes to control?
1095 MS ROBINSON: I think you have to take a look at the whole fabric of the agreement. I would say that in reading the whole agreement the conclusion that I would reach is that CTV is firmly in control.
1096 I would not only look at two provisions. I would want to look at the whole of the agreement and how it operated.
1097 In addition to those two provisions, of course, there is the programming provision that we have suggested. But I think it is the totality of the agreement and I am uncomfortable saying to you that you can only take a look at two provisions and make a determination as to whether there is control.
1098 I personally, professionally and personally, think that that's not the case. I think that the Commission has to take a look at the arrangements between the parties, all of the factors in their totality reflected in the agreement and make a determination at the end of the day that this shareholder, CTV, is firmly in operational and day-to-day control, and that is my conclusion on the record having reviewed this agreement.
1099 COMMISSIONER CRAM: And on the two decisions upon which there is 80 per cent shareholder requirement of approval, ESPN still has the extracontractual rights that they have to terminate the supply program, the program supply agreement and if the trade mark agreement goes ahead, at least in the draft provided, to do that, to unilaterally terminate that on the side?
1100 MS ROBINSON: Well, first of all, I think one has to take a look at the program supply agreement and what it is. Is that a big deal in the scheme of things that TSN could not live without? The answer to that is no.
1101 Clearly, the evidence before you is that this is a bulk supply agreement. It does provide useful programming, but at the end of the day is it something that would devastate this service if it was withdrawn? The answer to that question is no.
1102 Similarly, on the trade mark agreement, as I heard what Mr. Fecan told you earlier, the same thing would apply. CTV would have other options. It in fact has an excellent brand itself. So that I would say to you in terms of those two agreements that neither of them, the program supply agreement and whatever the trade mark agreement is going to be, and it's a little difficult to speculate on that until it's finalized, but I would say this, that neither of those two agreements would give ESPN a level of control over the undertaking.
1103 I think that the existence of those two agreements are (a) ordinary and, (b) consistent with the requirements of the Cabinet direction.
1104 COMMISSIONER CRAM: Did you have something to say, Mr. Fecan?
1105 MR. FECAN: I think she said it all.
1106 COMMISSIONER CRAM: I want to move along to the sports-related specialties and section 7 of the offer. If I understand it correctly, again this is subject to an agreement, subject to valuation, subject to everything else, if I remember. Why would you choose to offer this to TSN, to NetStar?
1107 MR. ROBINSON: Well, NetStar currently has within its existing shareholders' agreement, before we came into this equation, a situation where the parties in NetStar are not going to compete with NetStar and they are going to do whatever specialty stuff they do, they are going to do it within NetStar. So that's what's there.
1108 This is a different situation because we are a pre-existing broadcaster. We are not investors, Canadian investors who are not in the business. We are in the business. We have other specialty interests and, therefore, what we decided is, look, we want to build a really strong NetStar and we want to make it a really strong sports specialty company.
1109 Therefore, the things that we do in a sports specialty field we will want to do through NetStar. That's why build something else up that competes with it. It doesn't make sense.
1110 So if you are going to do this, if you are going to spend all this money, you want to make it work.
1111 And ditto on the science side. The idea of going and buying this company and then mounting a competing science application somewhere else doesn't really seem to make a lot of sense. I mean, you know, this thing already works. We want to try and make it better.
1112 That's why in the first instance, in the sports specialty interest we kind of said this is our chosen instrument in that field. This is what we want to build and work on and on the other thing it's kind of like give it the first opportunity on the science side and give it the first opportunity to participate in that, and exclude every other possible specialty combination under the sun because that's not currently the business of NetStar.
1113 Again, we put in the valuation matrix as a formula to see whether we can within somewhere in that range come to some sort of agreement about what we think is fair. If we didn't think it's fair, then we wouldn't go through with that particular part of it and, as you well know, ESPN then has an opportunity to exit this agreement because that's not what -- when we went through our getting to know you courtship stage in this deal, that's kind of what we thought we were doing. We thought we were going to build a terrific sports specialty company with the science component.
1114 COMMISSIONER CRAM: And Sportsnet, do I have it right, now you have a management agreement in relation to Sportsnet. Is that correct?
1115 MR. FECAN: Well, we are the managing partner and we are operating under the existing shareholders' agreement, but there is not yet a specific management agreement.
1116 COMMISSIONER CRAM: So Sportsnet would move into NetStar and you would not have a management agreement because, if I understand it, no management agreement is in place in relation to NetStar nor is one even contemplated?
1117 MR. FECAN: If I could just back up and kind of do it in order. What we are talking about in this particular provision is, subject to your approval because I think it is subject to your approval, that kind of transfer, transferring our interest in Sportsnet, not the whole thing.
1118 COMMISSIONER CRAM: Yes, I understand. You've got a percentage.
1119 MR. FECAN: Yes. So that's what we are talking about. I have to tell you that if we go down this road then really it will make more sense to bring the other Sportsnet shareholders along with it and make it truly one entity, but that's the subject of another agreement and another hearing and we all get to perhaps talk about it then.
1120 But that was what we were trying to do with that particular clause.
1121 COMMISSIONER CRAM: The clause on -- on which?
1122 MR. FECAN: On transferring the 40 per cent of Sportsnet.
1123 COMMISSIONER CRAM: My point was, though, that there is a contract now for you to management Sportsnet and it will move into NetStar and there will be no management contract in terms of a far larger organization, NetStar?
1124 MR. FECAN: Well, there isn't actually. I mean, we don't have a management contract in Sportsnet. We are operating under the old share of the existing -- a shareholders' agreement there. It's a management contract for it is on our list to do, but we don't have one outside of the Sportsnet shareholders' agreement that you have.
1125 COMMISSIONER CRAM: And you are satisfied with section 2.1.14 of, I believe it's the shareholders' agreement, where you have the general authority to manage NetStar?
1126 MR. FECAN: Well, our very clear understanding is that we are running NetStar, full stop, period. There are minority protection issues that Kathy has eloquently addressed, but there is no question that the day-to-day operation, the creation of the budgets, of the ability to spend money to fulfil those budgets, hiring management, the programming decisions, all of those things are ours and solely ours.
1127 COMMISSIONER CRAM: In the event we would refuse to approve this transaction ESPN would still remain a shareholder?
1128 MR. FECAN: Yes, ESPN is currently a shareholder of NetStar, so what is before you is your decision on whether we can be a shareholder.
1129 COMMISSIONER CRAM: And at that point do you believe that ESPN would still have the right to seek an alternate buyer?
1130 MR. FECAN: I would have to ask Kathy for an interpretation on that.
1131 MS ROBINSON: The answer to that is yes. They have that right under the existing shareholder agreement. That's a right that continues and, yes, they would have that right.
1132 The difference would be that you would have the authorized trustee who would be seeking alternative buyers. He has essentially stepped into the shoes of the old Canadian shareholder, but the process that exists there in the existing shareholders' agreement continues.
1133 COMMISSIONER CRAM: There was another issue here. You were talking in your supplementary brief about what I am going to call a complementary agreement, where TSN would sell programs to ESPN. And I believe you said ESPN is committed, but there is no form of a draft agreement at all and nothing referred to in the offer.
1134 MS McQUEEN: That is part of our significant benefits. And there is nothing besides what you see in the significant benefits.
1135 COMMISSIONER CRAM: Thank you. I think those are all of my questions.
1136 MR. FECAN: Just to be clear, the documentary programs that they are interested in carrying, these are the independently produced. So it would not be TSN selling it to them. It would be the producer selling to them.
1137 Our benefit is in financing the creation of those two Canadian licence fees. But this is not something they would buy from us. The independent producer would stand to gain more money through the licence fee there, as I understand it.
1138 COMMISSIONER CRAM: I understood it totally differently; that it would be TSN programming that you would be trying to sell through ESPN.
1139 I must have that wrong.
1140 MS McQUEEN: There would be a number of things under the significant benefits. One is the Canada Cup of women's hockey, which they have committed to carrying. That would likely be a TSN production.
1141 So the dealings would be between TSN and ESPN.
1142 On the documentary area produced by independent producers, it would be a different situation. It would be the independent producer coming to ESPN.
1143 COMMISSIONER CRAM: Thank you.
1144 Thank you, Madam Chair.
1145 THE CHAIRPERSON: I have a couple of questions.
1146 Mr. Fecan, you made the point orally today, and it was also made in the supplementary brief, that the Commission should find comfort in that one of the intangible benefits is the reduction of the participation of non-Canadians from some 31.5 per cent to 20; and you also made the point that this would put the licensee in compliance, which in your view it is not at the moment.
1147 I gather that you are referring to the fact that when there is a holding company with more than 20 per cent that is not eligible, a mechanism of some sort is required to ensure that the non-Canadian shareholder doesn't control programming decisions.
1148 MR. FECAN: Yes. But I think what I was really trying to say there is that -- I don't think I intended to say that there was not compliance.
1149 THE CHAIRPERSON: I may have misunderstood.
1150 MR. FECAN: The way we want to operate it would have myself and Trina, for instance, on the board of NetStar, and we want to make sure that at this appropriate time it is in compliance in that fashion so that we can be very directly involved in the programming and other operational aspects.
1151 THE CHAIRPERSON: Would it be fair to say, though, that this change also allows ESPN to play a role in programming decisions because now it has been reduced to 20 per cent?
1152 MR. FECAN: It is fair to say that they have agreed in this proposed amendment that all programming decisions shall be made by CTV, and ESPN sub and any party related to it shall not control or influence such programming decisions directly or indirectly.
1153 THE CHAIRPERSON: But would it be fair to say that if the Commission were to look at all the agreements before it and find that regardless, in its view there are provisions that allow it to influence programming, there would be a problem, if it was an influence that went beyond its shareholder equity?
1154 MS ROBINSON: Two points, Madam Chair, if I might.
1155 I would like to come back to the first point which you made, which was that you said that we had said in our supplementary brief and in our oral submissions that it was the reduction of ESPN's share from 31 per cent of the voting shares to 20 per cent of the voting shares that increased the level of Canadian control.
1156 That, in fact, is not our position.
1157 THE CHAIRPERSON: No. I meant in the holding company. The law allows 80:20 at the licensee and 33 per cent at the holding, except in that case when you need a mechanism to ensure that the holding company does not have control over programming decisions.
1158 MS ROBINSON: That is correct. I was coming back to the point which you first made, which was our statement about increasing the Canadian control of NetStar related to this change in the voting structure. It does not.
1159 Our view is that increasing the Canadian control of NetStar is by putting NetStar with a majority shareholder who is an experienced Canadian broadcaster rather than a diverse group of non-broadcast shareholders, none of whom have the level of ownership that ESPN does.
1160 So when we talk about increasing Canadian control, it is in that context, not in the context of the change to the 80:20.
1161 In terms of the change to the 80:20, with the most recent amendments to the Cabinet direction and the statement of regulatory impact from the government that accompanied it, the government said that the purpose of this change was to make it explicit that the restriction on the holding company's control or influence only applies in cases where (a) non-Canadians own or control more than 20 per cent of the holdco's voting shares; or (b) occupy more than 20 per cent of the holding company board; or (c) where the holding company chairman, CEO or other presiding officer is a non-Canadian.
1162 So I would say under the direction that what we have done is put in place a provision before you which says that the minority shareholder in this case cannot control or influence programming decisions, notwithstanding the fact that it is a 20 per cent shareholder.
1163 I would say in that case we have been much firmer, I would submit, in giving you satisfaction beyond the requirements of the direction. We have done so because we think it is appropriate to indicate to you in a legal format that CTV is firmly in control. It has day-to-day operating control and management and will be making programming decisions.
1164 We felt that was a measure that we could put in that would help to satisfy you that this enterprise was firmly in Canadian control.
1165 THE CHAIRPERSON: At the end of the day it remains that that is dependent on the Commission finding that the non-Canadian shareholder, ESPN, does not exercise a control that goes beyond its equity percentage.
1166 MS ROBINSON: I think you would agree with me, Madam Chair, that the direction is framed as a double negative. So I would say that, at the end of the day, you have to be satisfied that the non-Canadian is not controlling.
1167 Having said that, it is my opinion that on the record before you, you should be satisfied -- obviously, it is your decision, but on the record before you, with the provisions that you have put in, you could be firmly satisfied that CTV is firmly in control.
1168 THE CHAIRPERSON: I heard Mr. Fecan saying that the structure we had -- if I understood correctly -- would not allow Ms McQueen or you to influence programming decisions. But at the same time, it also allows ESPN, if you find by examining the surrounding agreements that that is the case.
1169 MS ROBINSON: Right. We felt that at the end of the day we could not in conscience come before you and argue that Mr. Fecan and Ms McQueen were on the board of the holding company and that they would not be influencing programming.
1170 We felt that that was a position that would not have any credibility.
1171 Therefore, we felt it incumbent to come forward with a solution that meets not only the letter but the spirit of the Cabinet direction.
1172 At the end of the day obviously it will be your decision. But it would be my opinion, having taken a look at all of the agreements and provisions, that one could quite comfortably arrive at a decision that CTV -- one not only could but should arrive at a decision that CTV is firmly in control of the day-to-day management and operations of this undertaking; that it is firmly in control within the meaning of the Cabinet direction.
1173 THE CHAIRPERSON: You understand my point, though. My point is that now we don't need a mechanism to prevent the holding company's board from influencing programming, which is of course advantageous for Mr. Fecan and Ms McQueen.
1174 But it does raise the question of what is the actual role of ESPN, because it is now part of a holding company that is allowed to influence programming.
1175 MS ROBINSON: We anticipated, Madam Chair, that that might be a concern that you had, and that was one of the reasons we came forward with section 126.96.36.199.
1176 THE CHAIRPERSON: Now, let's go back for a minute to 2.1.10. 81 per cent is required in most of the sections; 80 per cent only in the case of 188.8.131.52 and 184.108.40.206. I listened to a discussion you had with Commissioner Cram. Would it be fair to say that the reason why those are accepted is because they raise a concern related to control, that every other section requiring shareholder approval requires 80 per cent and those -- 81 per cent which allows a vote by ESPN or a unanimous decision basically, whereas in those two sections that are accepted it is 80 per cent only?
1177 MS ROBINSON: The Commission has said previously in other decisions that those two specific provisions are of concern to the Commission.
1178 THE CHAIRPERSON: Similar provisions. Not these exact provisions.
1179 MS ROBINSON: These exact provisions.
1180 THE CHAIRPERSON: These exact provisions --
1181 MS ROBINSON: These exact provisions.
1182 THE CHAIRPERSON: -- in relation to these parties?
1183 MS ROBINSON: In relation to these parties.
1184 THE CHAIRPERSON: Now, it is obvious, if you look at 2.4 of that agreement that that is not the preference of ESPN, because 2.4, the way I understand it, says that, "if there is any CRTC change", which is basically defined as a change in ownership requirements, Canadian ownership requirements. Would that be fair?
1185 MS ROBINSON: It is defined as being -- it is defined in the agreement as being a change in the Canadian ownership requirements --
1186 THE CHAIRPERSON: Right.
1187 MS ROBINSON: -- or an interpretation thereof.
1188 THE CHAIRPERSON: Right.
1189 And 2.4 says that the minute there is a change in that, should there be one, you have to take all reasonable steps to see to it that those two sections, 2.1.10, 220.127.116.11, are changed so that they also require an 81 per cent change.
1190 MS ROBINSON: That section says that if there is a change that an application would be made to the Commission and it would be up to the Commission to decide whether that was appropriate or not.
1191 But I think that the first question you asked, Madam Chair, was: Would it be ESPN's preference not to have those two sections in there? The answer to that is, yes, that it has accepted the fact that those two provisions are there, it accepted that fact when it went from a 20 per cent shareholder to a 32 per cent shareholder in 1997 after the direction was changed, and it has continued to accept those provisions in the current agreement -- identically worded.
1192 THE CHAIRPERSON: We have been talking about the letter and the spirit of the relationship between you and the minority shareholder. Would it not be a little surprising that a shareholder with 20 per cent equity -- I assume that a change, a CRTC change would not mean necessarily an equity change so that the 20 per cent shareholder would hold a veto, so to speak, over those sections by changing them from 80 per cent to 81 per cent.
1193 MS ROBINSON: ESPN has, under our proposal, a 32 per cent equity interest in the company and a 20 per cent voting interest, and I would say that the provisions which are there are entirely appropriate and typical of a minority shareholder with that degree of ownership interest.
1194 THE CHAIRPERSON: With a 31.5 per cent voting interest?
1195 MS ROBINSON: Correct.
1196 THE CHAIRPERSON: If they are normal, why is it that you feel they have to be excluded at the moment otherwise they raise questions of control? Because one of the answers to the other sections is to say, well, that's usual. That's protection from the minority shareholder. Those two have been singled out in the past as exhibiting greater power than one shareholding.
1197 MS ROBINSON: And part of what we would say is normal is influenced by what the Commission has said is normal in the past. In the past, you have said --
1198 THE CHAIRPERSON: Even if it is abnormal?
--- Laughter / Rires
1199 MS ROBINSON: Ultimately, it is the Commission that has to make the decision on a case-by-case basis. But I think you would be surprised if you heard that we were coming before you without having regard to and without taking into account previous decisions that you have made.
1200 That is not to say that you are bound by those, but we think that we would be remiss in coming forward with something that did not reflect the sensitivities that the Commission itself has said exist on previous occasions, and that is why we came forward with the section 2.1.10. It is identical to the provisions in the existing shareholders' agreement.
1201 Notwithstanding that, to give the Commission an additional level of comfort we have suggested that section 18.104.22.168 be amended to take out the first half of that clause which is in the approved shareholders' agreement.
1202 So in all of those circumstances, we would say that it is our -- it is my opinion that the Commission has ample evidence in front of it to be satisfied but ultimately that is the Commission's prerogative.
1203 THE CHAIRPERSON: My last question is the following.
1204 The offer was made and signed on the 5th of February, 1999, and you filed an application before the Commission in August of 1999. Is it not a bit difficult for the regulator, in your view, that we have a shareholder agreement which is not signed, we have a trademark agreement which is not signed, a licensing agreement, we have a program rights agreement which I don't think is finalized either?
1205 MS ROBINSON: It is the existing program -- if the existing program agreement continues and ESPN has agreed in the offer that it waives its existing right to terminate that agreement on a change of 40 per cent of NetStar, it is an existing agreement essentially which CTV inherits.
1206 With respect to the shareholder agreement, it has not been signed because CTV is not yet approved to be a shareholder of NetStar and it would be signed in the form that exists here with the amendments we have suggested forthwith on approval, assuming that your approval is attained, and I think it is -- I hate to use the words -- it is usual in these circumstances that if the Commission decided to give an approval it would say that the approval was subject to receiving a signed shareholders' agreement in the form that had been presented during the hearing.
1207 Insofar as the trademark agreement is concerned, you are quite correct that that is a draft. We submitted that trademark agreement as a draft because we were asked to in the deficiency process, and we have explained I think today that that is something that we would be negotiating. It was a draft and we filed it because the Commission asked us to do so, but it is of course subject to the caveats that would apply to a draft that is not then negotiated and agreed between the parties.
1208 That is not the case with the shareholders' agreement. The provisions of the shareholders' agreement have been negotiated and agreed to, but CTV can't enter into it until it receives your approval.
1209 THE CHAIRPERSON: But it could be signed subject to that. I mean it's easy to add a clause. Now what we have is the proposed amendment to a proposed shareholder agreement.
1210 Mr. Fecan, a number of times during Commissioner Cram's questioning, you said "Well, we will ask them. We will negotiate". It's difficult if we have the view that all these things you have talked about, the fabric of the shareholders agreement, has to be looked at, I would say the fabric of all the agreements have to be looked at and some of them seem to not be finalized and there seems to be some response on your part at least, Mr. Fecan, that well, if you don't like this, we will see what they say.
1211 We have before us a number of pieces. On their basis we look at the various issues and concerns we have raised. It would be a bit difficult for the Commission to then decide itself what it is that -- how the pieces should move if they don't move to our liking.
1212 MR. FECAN: If I left you with that impression, I apologize. The program agreement is ongoing. There is no change there.
1213 THE CHAIRPERSON: The program agreement aside, we still have a shareholder agreement.
1214 MR. FECAN: The shareholders agreement with the amendments we proposed we are prepared to sign.
1215 THE CHAIRPERSON: As is with the amendments.
1216 MR. FECAN: With the amendments, on your approval. What I was referring to in the discussion with Commissioner Cram was the trade mark agreement which is very much still an outstanding business issue between the parties.
1217 THE CHAIRPERSON: Thank you. Commissioner Noël has a question.
1218 COMMISSIONER NOËL: One question, Madam Robinson. Could you tell me if in your opinion all the events that are referred to in section 2.1.10 and 2.1.11, do these events in your opinion occur in the ordinary course of business or is it out of the ordinary course of business?
1219 MS ROBINSON: Each of them in section 2.1.10 are typical provisions which are afforded to minority shareholders to give them a level of protection. Some of them are usual, some of them happen on a day to day basis, some of them don't. For instance, if you looked at 22.214.171.124, a change in the auditors, that is something that would be unusual, it's not unheard of, but it would be unusual in a company.
1220 I know that when ESPN went from a 20 per cent shareholder to a 32 per cent shareholder in 1997, the Commission required the words "provided that if the appointment is not approved that the incumbent will continue to ensure that there was no hiatus in terms of the auditor", but all of these are typical provisions that would be afforded a minority shareholder.
1221 Similarly, if one looks at 2.1.11, again these are typical provisions that one would find in a shareholder agreement.
1222 COMMISSIONER NOËL: Maybe my choice of words in the English language is not appropriate. What I want to know is this. Day to day operations or more of special events.
1223 MS ROBINSON: These are special events.
1224 COMMISSIONER NOËL: Thank you.
1225 THE CHAIRPERSON: Commissioner Demers.
1226 COMMISSIONER DEMERS: Thank you, Madam Chair.
1227 Benefits. I will have a few questions on benefits and there were references to benefits in your opening remarks by a few of the speakers. In fact, in the summary of benefits that you have with your opening statement, it ends by the following, "All of these tangible and intangible benefits are incremental to CTV's and NetStar's current commitments".
1228 I can start with a general question. Would it be agreeable to CTV, to the applicant, that a condition of licence would put these into -- let me start again. Would you be agreeable to a condition of licence whereby the proposed benefits be applicable independently and in addition to existing conditions of licence and commitments related to each specialty service previously acquired or already owned?
1229 MS McQUEEN: Yes, Commissioner.
1230 COMMISSIONER DEMERS: Thank you. Now we turn to tangible benefits. Maybe to put it in a context. In 1995, Mr. Craig took over the three specialty channels for $605 million and proposed $43.1 million as tangible benefits. These were accepted. You indicated in your application that the benefits pledged in 1995 would be fulfilled. However, your financial projections seem to show projections only for the operating benefits.
1231 Do we understand that correctly?
1232 MR. FILLINGHAM: Just to clarify. In the projections, as I understand the original NetStar benefits as offered, the $43 million was actually spread between regulated entities and non-regulated entities.
1233 COMMISSIONER DEMERS: Yes.
1234 MR. FILLINGHAM: Yes. The projections that were filed for the existing NetStar benefits really just related to the operating benefits as they apply to the licensed entities which were TSN, Discovery, RDS. I think the two years left in the application in the projections provided for year 2000-2001, I think totalled about seven million and eighty-nine.
1235 COMMISSIONER DEMERS: So I understand you correctly, the benefit pledged in the 1995 projection included operating and capital expenditures while capital benefits for TSN and Discovery were projected to be in 1997 and 1998. The proposed capital benefits for RDS were mostly to be done in 1999, 2000 and 2001. A review of the projected depreciation does not indicate any measurable increase for 1998 results.
1236 MR. FILLINGHAM: If I could provide perhaps a recap up to the end of 1999 and then I will pass over to Mr. Craig who could outline the existing to fulfil the prior obligations.
1237 COMMISSIONER DEMERS: Right.
1238 MR. FILLINGHAM: And to reconcile that, the original application had an obligation on an operating basis for $26,406,000, on a capital basis of $16,750,000, totalling $43,156,000.
1239 As I understand the original application, there was certain benefits that were not accepted as benefits, but required the licensee to spend the amount in any event in accordance with the schedule as had been presented to the Commission.
1240 Up to the end of August 1999, a total of $23,425,000 has been spent. Broken down, capital, $8,446,000; operating, $14,979,000. That is against a schedule that was submitted at the time of the original application which I think amounted to in total $27,980,000, broken down, capital, $13,620,000 and operating $14,360,000. That should leave you a shortfall to date on the existing of $4,555,000.
1241 It is planned and on the plans of NetStar existing are projects to complete all of the spending in line with the original projections over the next two years, shown in our projections to date, I think, as filed with our application. As I mentioned, we are only, if I left back to 2000 to 2001, we showed $7 million in 1989 on the operating line because the capital benefits are generally treated as fixed assets and I don't think float into the licensee but were recorded on a special report to the Commission.
1242 MR. CRAIG: That's correct.
1243 COMMISSIONER DEMERS: So we get to today, CTV proposed tangible benefits in the captive area of operating expenditures, programming improvements and grants and contributions, so it was 72 per cent. That is, as you have indicated this morning, $35.22 million, proposed intangible benefits on the programming to be broadcast on TSN, Discovery, Sportsnet, et cetera.
1244 To consider these programming initiatives as intangible benefits, CTV has to confirm and commit that these hours and expenditures will be above and beyond the requirements for amateur and underrepresented sports programming. You agree with that?
1245 MS McQUEEN: We do and we do so commit.
1246 COMMISSIONER DEMERS: This is the case in your projections, in your submissions.
1247 It seems that TSN and Sportsnet are not now, and I am asking the question, they are falling short of their commitment to broadcast programming devoted to amateur and underrepresented sports. Do you have comments on that?
1248 MS McQUEEN: There must be some difference in our figures because we believe that we not only meet, but exceed those commitments. I would ask Mr. Brace to give you his figures and also Ms Steeves.
1249 MR. BRACE: In terms of Canadian amateur sport we are committed to 1,400 hours a year and, in fact, are overachieving that at this point in time slightly, in the neighbourhood of 1,453 in our last full reported year.
1250 MS STEEVES: And in the case of Sportsnet there is an expectation in the Sportsnet licence that sets out a requirement to provide 27 per cent of the program schedule of Sportsnet to amateur and other underserved sports, and we are in fact, as well, over and above that 27 per cent.
1251 MR. BRACE: If I could just come back I missed one point, Commissioner Demers, in terms of dollars which is our condition of licence. In our last fully reported year, TSN had a licence condition that graduated from the beginning of the licence term from $4.2 million at the rate of 3 per cent per year, to the past year which would have been $4.7 million and in point of fact we spent $6.8 million.
1252 MR. FECAN: Commissioner, I am sorry, I can't remember whether you asked about Le Réseau des sports and its commitments, so I didn't ask Mr. Frappier, but he could tell you.
1253 COMMISSIONER DEMERS: Yes, please.
1254 M. FRAPPIER: Oui, au niveau des engagements d'RDS au moment où on se parle on diffuse 2 365 heures de programmation de sport amateur canadien et puis on a à peu près 55 pour cent qui est spécifique au sport amateur québécois.
1255 COMMISSIONER DEMERS: In describing the broadcasting of the Canada Games and les Jeux du Québec as tangible benefits, would you please explain why the coverage of these events are not part of the mandate of TSN, RDS or Sportsnet?
1256 MS McQUEEN: We would be happy to do that, but we would have to use the expression "the Commission approved it before". Would that be okay or not?
1257 Perhaps, Rick, you could explain about Canada Games and Gerry will talk about --
1258 MR. BRACE: Yes, Commissioner Demers.
1259 The Canada Games are, fundamentally, an athlete's very first opportunity to compete on a national level at a multinational event. In other words, these are noncarded athletes that really are at the very beginning of their careers. It's a very grassroots event.
1260 In terms of meeting our commitment to amateur sports, what TSN attempts to do is target amateur sports that have a significant audience interest and, potentially, advertising interest and we meet these commitments in a number of ways, through dealing with, for example, the Canadian Hockey Association, dealing with the CIU, which is Canada's university sport and, of course, the Canadian Curling Association, along with a number of others.
1261 So, the Canada Games are not something that would normally fit into the broadcast schedule, based on the profile that they would deliver. Instead, it's a commitment that we make to try and develop and give an opportunity for athletes in really their very first major competition to get some kind of recognition and profile and for that reason we feel that they are incremental and very tangible over and above what we would normally do on an annual basis with amateur sport.
1262 M. FRAPPIER: Au niveau des Jeux du Québec, je crois qu'il y a énormément de similitude en ce sens que c'est un niveau de sport qui est quand même amateur, ce ne sont pas des gens qui sont largement connus, ce sont plutôt des jeunes. Ce sont des activités qui sont très, très régionales. Ils sont isolés dans des fonds de territoire à l'intérieur du Québec-même. Alors vous pouvez vous imaginez que si on a de la difficulté à justifier par code d'écoute une activité comme les Jeux du Canada, vous pouvez vous imaginer ce que ça va être si on le fait sur une base régionale en plus.
1263 Et l'autre point que je voudrais faire en terme de bénéfices tangibles, c'est encore plus difficile pour nous de rentabiliser sur une base régionale parce qu'au moins quand on regarde les coûts de production pour les jeux que ça soit au Québec ou pan-canadiens qui sont à peu près les mêmes sauf la capacité de rentabiliser est beaucoup moindre par le fait que le marché desservi représente approximativement 30 pour cent du Canada dans son ensemble.
1264 Alors c'est d'autant plus un bénéfice tangible par le fait même que s'il n'y a pas un diffuseur qui est prêt à aller au bâton, c'est impossible que quelqu'un puisse même imaginer rentabiliser un tel produit.
1265 CONSEILLER DEMERS: Alors dans un certain sens ces programmes comme les Jeux du Québec ne remplacent pas une programmation déjà sur RDI et devient un événement particulier?
1266 M. FRAPPIER: Ce qu'on va faire, Monsieur le Conseiller, c'est évidemment il y aurait un niveau de répète qui serait moindre. Je pense qu'on a parlé de ce concept-là ce matin. Déjà aujourd'hui le Réseau des sports réussit à faire 2 300 quelques heures de programmation de sport amateur et c'est sûr qu'on s'engage à ce que ce soit un bénéfice tangible au-delà du niveau actuel de programmation.
1267 Alors ce qu'on va voir c'est peut-être un taux de répète au niveau de la grille qui va être moindre, ce qui est dans un sens une amélioration également de la grille.
1268 MS McQUEEN: Just getting back to the Canada Games, the history of why this was brought forward originally as a benefit during the CTI transaction, these games have been carried for many, many years on the Canadian Broadcasting Corporation. The CBC decided to abandon coverage of the Games because of the reasons that you have heard, their expense and the fact that they were not a high-audience draw. So at the time of the last transaction we came forward or TSN came forward to continue so that there would be continued coverage of the Games.
1269 M. DEMERS: Lorsque je lisais la documentation, je me demandais si vous aviez fait erreur sur les Jeux du Québec et que vous vouliez parler des Jeux de la Francophonie qui seront dans la région ici dans deux ans, un an et demi.
1270 M. FRAPPIER: Non, je parlais spécifiquement des Jeux du Québec. Les Jeux de la Francophonie ne sont pas toujours dans la région tandis que les Jeux du Québec sont toujours au Québec.
1271 CONSEILLER DEMERS: Alors pour faire une image, les Jeux de la Francophonie, si vous les faisiez, seraient de la programmation particulière, spéciale?
1272 M. FRAPPIER: Ça serait, évidemment, un surplus. Il faudrait que ça soit étudié mais déjà je peux vous dire que si on réussit à faire une couverture des Jeux du Québec, les athlètes québécois vont être très bien desservis de par la couverture qu'on est prêts à offrir. Et j'imagine que dans plusieurs cas ce sont les mêmes athlètes qui vont revenir dans une autre compétition, mais je ne crois pas qu'il y a des participants aux Jeux de la Francophonie autres que les gens qui viennent de pays étrangers qui seront dans une compétition et pas dans l'autre, très fort probablement.
1273 COMMISSIONER DEMERS: So the reason for making it a benefit is that it is not covered in your regular schedule; could we say that?
1274 MS McQUEEN: I think that is the way to express it. It is not covered in our regular schedule and it would not be covered except as a tangible benefit.
1275 COMMISSIONER DEMERS: In the case of documentary programming, there is an allocation of $4.5 million in the course of five years to acquire and produce 30-minute Canadian sports documentaries. CTV stated that these productions would contribute significantly to the priority category of documentary programming in the sports genre.
1276 On the face of it, these expenditures seem to provide a significant benefit to CTV itself.
1277 MS McQUEEN: When you say "CTV itself," these programs will not be run on CTV.
1278 COMMISSIONER DEMERS: Okay. Well, I was hoping to have that answer.
1279 MS McQUEEN: Yes.
1280 COMMISSIONER DEMERS: Who would own the documentary productions?
1281 MS McQUEEN: The independent producer would own the copyright to the productions. TSN or SportsNet or RDS would license them for a period of time.
1282 COMMISSIONER DEMERS: Where would they be broadcast?
1283 MS McQUEEN: They would be broadcast on the sports services. There is a possibility in some cases that they may be something that CTV would like to buy. But that would be a separate licence and an expenditure over and above the initial expenditure.
1284 COMMISSIONER DEMERS: So it is the broadcaster or the channel that would buy them that would get the priority benefits?
1285 MS McQUEEN: Yes.
1286 COMMISSIONER DEMERS: Thank you.
1287 Following the --
1288 MS McQUEEN: Excuse me, Commissioner, we are just mumbling among ourselves.
1289 When you said the priority benefits, I assumed that you meant the benefits of the eight hours of priority programming?
1290 COMMISSIONER DEMERS: Yes.
1291 MS McQUEEN: Okay.
1292 COMMISSIONER DEMERS: Following an intervention, in an answer to one intervention, CTV proposed $500,000 for voiceprint equipment as a tangible benefit.
1293 Is that new money? Is it part of what you have already said you would contribute?
1294 MS McQUEEN: There is a pool of money for grants and scholarships that has not specifically been allocated. The voiceprint might be in there if there were not sufficient room taken up by the organizations indicated.
1295 But if we can't put it in that allocation, it will be over and above the benefits that we have stated.
1296 So either it will be part of the grants and scholarships envelope -- for example, if there are not enough proposals by the institutions mentioned there -- or it will be an incremental amount.
1297 COMMISSIONER DEMERS: Those are my questions, Madam Chair, on the benefits. Thank you.
1298 THE CHAIRPERSON: Commissioner Cram.
1299 COMMISSIONER CRAM: I understand, for the purposes of the TV policy eight hours, that CTV would then get the credit for that, if it were a documentary produced.
1300 I misunderstood that.
1301 MS McQUEEN: No. In fact, the eight hours would not apply. It is a conventional eight hours, so it would not apply to the sports services.
1302 There would in fact be no priority benefit as a result of that.
1303 COMMISSIONER CRAM: Unless CTV --
1304 MS McQUEEN: Unless CTV paid an extra licence fee for it and ran it on CTV.
1305 COMMISSIONER CRAM: Yes. Thank you.
1306 THE CHAIRPERSON: With regard to the question of the benefits and the extent to which they are incremental, in your supplementary brief at page 22 you say that:
"The benefits proposed are significant incremental commitments above and beyond what we would normally undertake in the absence of this transaction."
1307 I notice, if I look at your list on page 21 -- on page 22 it says that in the case of productions from the amateur sports production pool, they would be broadcast or aired by ESPN, which would give them international coverage.
1308 Also, at page 4 of your deficiency responses, it says that ESPN would broadcast up to 50 per cent of the 30-minute Canadian sports documentaries produced.
1309 On page 6 you also say that the fans have under-represented amateur sport and truly benefit from this initiative, et cetera.
1310 These numbers are a pool of money for the production of sports documentaries, et cetera, that you will then purchase back from those who produce it?
1311 MS McQUEEN: In that case --
1312 THE CHAIRPERSON: There are some science noodles, discovery expeditions that are not sports but that could go on Discovery.
1313 How is this going to work?
1314 My aim, as you can see, is: Are they incremental? Should there be a deduction about the possibility that you will sell advertising in them? Or maybe you will simply improve your service and therefore it will be to your advantage?
1315 For example, if you said to produce drama, maybe we would not ask the same questions because it would unlikely -- well, maybe there would be a drama on ice, but it wouldn't be a drama that would then end up on TSN.
1316 I would like to hear more from you as to the extent to which they are incremental since they are clearly production money going to programming categories that would fit on either your sports channel or Discovery, and on ESPN as well.
1317 MS McQUEEN: First of all, they are a commitment incremental. These are dollar commitments. All three services have a spending commitment. So the dollars we spend would be above and beyond that dollar commitment.
1318 That is why they are incremental.
1319 As to the question of advertising, the fact is that most of these are lower audience productions, most of them, than the ones they would replace.
1320 So rather than getting extra advertising by putting these -- for instance, the Canada Games, Jeux du Québec, and so on --
1321 THE CHAIRPERSON: These were not the items I was looking at.
1322 MS McQUEEN: Okay. You are talking about the amateur sports production?
1323 THE CHAIRPERSON: I am looking at sports documentaries, sports minutes, discovery expedition, discovery science noodles.
1324 My point is those will end up on your services, possibly, and if they do a benefit will accrue to you.
1325 Has there been a deduction of the extent to which it is incremental to you, the applicant putting forward a package of tangible benefits?
1326 MS McQUEEN: First of all, on the question of advertising, we do not believe that there is any incremental advertising to be derived from these programs.
1327 On the question of whether they make our services better, yes, that is true. I would say it would be very hard. That would be an intangible deduction, just as we have offered some intangible benefits.
1328 THE CHAIRPERSON: But could these sports documentaries end up on CTV or Discovery? And why not?
1329 MS McQUEEN: The sports documentaries might end up on CTV, but if they did CTV would pay an additional licence fee to run them. They would not be free to CTV.
1330 So there would be a cost to CTV involved.
1331 THE CHAIRPERSON: But in the others there would not be.
1332 MS McQUEEN: Yes.
1333 THE CHAIRPERSON: There would be.
1334 MS McQUEEN: Yes.
1335 THE CHAIRPERSON: In what way would it be incremental -- would it be different from these programs ending up on TSN as opposed to CTV?
1336 How would it differ?
1337 MS McQUEEN: If the program is on TSN, let's say it is the Canada Games -- no, your documentary --
1338 THE CHAIRPERSON: Let's go to the ones I am talking about.
1339 MS McQUEEN: If we are only talking about documentaries, these are the programs --
1340 THE CHAIRPERSON: Yes. I am talking about the money you are giving, let's assume, to producers to produce documentaries. That is a tangible benefit. It is incremental to what you would normally do.
1341 If the program then comes back on a service owned by you, you pay a normal licence fee for it?
1342 MS McQUEEN: Yes, we would.
1343 THE CHAIRPERSON: For all these programs. Possibly they could be good enough to be sold to advertisers.
1344 MS McQUEEN: They would. But we would have paid the licence fee. In other words, these programs could also --
1345 THE CHAIRPERSON: But then you would get money back, so that the amount of money you gave as a tangible benefit would not be incremental in the sense that it would be to the benefit of your services.
1346 MR. FECAN: We have advertising now on those services. We are going to have advertising later on those services.
1347 The programming benefits I understood to be the heart of the most sought after and valued benefits that people put before you. In every case people put money on the table to create things that would not be created otherwise.
1348 THE CHAIRPERSON: The point I am making is: To what extent are these -- because of the particular type of programming that they will produce and will end up back on your service, either in replacement of something else, or in addition.
1349 To what extent are they incremental if you end up improving your subscriber base, selling advertising?
1350 This question would not be asked about presumably great Canadian books, because that would be definitely -- or could it be asked as well?
1351 I see you raising your eyebrows. It could?
1352 MS McQUEEN: Yes.
1353 THE CHAIRPERSON: Okay. We will add that, then.
1354 MS McQUEEN: Okay.
1355 THE CHAIRPERSON: If you had something there that said you were going to produce religious programming or drama, that question would not make sense. But you are providing funds to produce programming to end up back on your services.
1356 My question is: To what extent are you deducting from that, or could one deduct from that benefit the benefit that will accrue to you, and therefore reduce the incrementality?
1357 MS McQUEEN: First of all, these programs would never be done. They would not exist if it had not been for the tangible benefit.
1358 Secondly -- and I kind of try to quantify. I am not denying that there is an additional benefit. I think these will be wonderful Canadian programs, and I think we will be proud to have them on our services.
1359 How you could quantify what that means, to me it is just as intangible as some of the intangible benefits; that there is here an intangible deduction as opposed to a tangible benefit.
1360 The other point that I would like to make is it is not necessarily so that these programs have first choice -- are first choice by CTV. They will be licensed specifically for the Discovery or TSN or Sportsnets. It is possible that the independent producers could take these programs to other networks, TBO, CBC, Global, and they would then become part of the system and whatever goodness or Canadian benefits would not necessarily accrue to other people in the system.
1361 THE CHAIRPERSON: They might accrue to the intended producer, but it wouldn't change the extent to which some of the value would accrue to you.
1362 MS McQUEEN: But the value, if they were used on other stations, the value would go to those broadcasters.
1363 I see Gordon is eager to say something more about that.
1364 MR. FECAN: It also goes to the benefit is for the viewers. The viewers are getting programming that would not otherwise be creative. That is the principle benefit of the thing.
1365 You know, should the program -- we hope these programs will be of sufficient quality, not unlike, you know, to use a dramatic counterpart, the Sheldon Kennedy movie, and documentary we did of Milgaard, documentary and movie we did that has a life after the original intent of the benefit. I mean, I think if that is true, that's great for the system.
1366 But the primary benefit is to the viewers through the creation of something that would not be done otherwise, and its first destination and the only real destination we come to you with today is on the TSN and Discovery and RDS channels that were coming before you with this application.
1367 THE CHAIRPERSON: Yes. But you understand the point of my question. You have a very close-cut 10 per cent based on your view of the value of the transaction and $25 million of the 35 is in programming, all of which, I stand corrected by Ms McQueen, could come back to enrich your own services.
1368 Mr. Craig, I see your light is on.
--- Laughter / Rires
1369 MR. CRAIG: I was first.
1370 First of all, Madam Chair, I want to go back and just pick up on one of your comments. I think it is a real stretch to think that these programs may in fact drive either basic cable or the tier for our carriage partners. I would be delighted if that was the case, but it is highly improbable.
1371 THE CHAIRPERSON: Not even WTN.
--- Laughter / Rires
1372 MR. CRAIG: Not even WTN. Not likely.
1373 The second point is that the minutes that you had talked about will be produced for the broadcasting industry. They will be like the heritage minutes that are being done currently with history and they will be made available -- we won't be selling those. Those will be running in public service or commercial spots for broadcasters and they will be offered --
1374 THE CHAIRPERSON: I never mentioned the minutes.
1375 MR. CRAIG: Yes, you did.
1376 THE CHAIRPERSON: No. I mentioned the fact that ESPN would be using it.
1377 MR. CRAIG: Yes. And they will be offered to all other Canadian broadcasters if they wish to utilize them.
1378 The third point I would like to make is that the documentary programming, particularly on the sports side of things, will be incremental to the schedule, will be scheduled into prime time, be replacing other programming and other advertising. If we do happen to get advertising in this documentary stream, it will be replacing what we are already getting from the programming that is being replaced, so it is not going to be incremental revenue.
1379 THE CHAIRPERSON: No. But, surely, if you decide to replace them, since you are going to be purchasing them for a fee, it is because you will find them better than what is there.
1380 MR. CRAIG: Not in terms of audience delivery necessarily.
1381 THE CHAIRPERSON: Because you are not committing to purchase these back, are you?
1382 MR. CRAIG: No.
1383 THE CHAIRPERSON: You are only committing to give money to producers.
1384 MR. CRAIG: For the licence?
1385 THE CHAIRPERSON: Yes.
1386 MR. CRAIG: Yes.
1387 THE CHAIRPERSON: So my question was: If you decide that it is in your best interest to purchase those, then the production with the tangible benefits then accrues, in part, to your benefit anyway.
1388 MS McQUEEN: Excuse me.
1389 Definitely we are purchasing these. These programs are going to exist. We are licensing them for sure.
1390 I have to say that these programs will be wonderful. I have no doubt about that. They will please viewers. They may very well draw large audiences. They will have high production values, and they never would have occurred unless this transaction is accrued.
1391 THE CHAIRPERSON: But you are making my point, Ms McQueen.
1392 MS McQUEEN: Maybe I am, but I have to be honest with you. I plead guilty that these programs will be wonderful.
1393 THE CHAIRPERSON: So my last question is: All this will be licence fees? I understood the pool to be simply a production fund.
1394 MS McQUEEN: The amateur sport production pool?
1395 THE CHAIRPERSON: Yes.
1396 MS McQUEEN: Correct.
1397 THE CHAIRPERSON: But the others, the Canadian Sports Documentaries, they will be in the guise of a fee, of a licence fee that you will then air back on your properties?
1398 MS McQUEEN: They won't be in the guise of a licence fee. They will be actually a licence fee.
1399 THE CHAIRPERSON: Yes.
1400 MS McQUEEN: Let me, just so we don't -- Canadian Sports Documentaries, Canadian Sports Minutes, Discovery Expeditions, Discovery Science Noodles, Great Canadian Books are envisaged as -- did I miss one? No. I said Science Noodles, didn't I?
1401 MR. FECAN: Yes.
1402 MS McQUEEN: Okay. They would be generally licence fee programs. The rest are production funds.
1403 THE CHAIRPERSON: You are saying you wouldn't have spent money on these licence fees were it not for this application?
1404 MS McQUEEN: Absolutely not. This will be over and above our condition of licence for spending on any one of the services.
1405 THE CHAIRPERSON: But they will definitely be aired on your properties since there will be licence fees?
1406 MS McQUEEN: They will be aired on the Sports and Discovery services.
1407 MR. FECAN: Madam Chair, as Trina has so passionately and eloquently said, they are going to be wonderful, and we truly hope they are. I mean, that is the point of being here and being in the business. If that drives revenue, you will remember of course we have conditions of licence that go up, spending that goes up as revenue is incremental. So I think you captured that already.
1408 THE CHAIRPERSON: (Off microphone...) CTV for a while?
1409 MR. FECAN: Conditions of licence on -- we are talking about the NetStar.
1410 THE CHAIRPERSON: Yes. But they could be on CTV too, the documentaries?
1411 MR. FECAN: It may, it may not. The producer decides that. We don't decide that.
1412 THE CHAIRPERSON: Thank you.
1413 We will take a 10-minute break and come back for the last sections. Thank you.
--- Recess at 1730 / Suspension à 1730
--- Upon resuming at 1745 / Reprise à 1745
1414 THE CHAIRPERSON: Welcome back. I hope you were treated to the same excellent cookies that we have in the back.
1415 MS ROBINSON: Madam Chair, just before we start, I understand that I may have mis-spoken in connection with Commissioner Noël's last question to me which was in relation to items in 2.1. I had said that those were all special events.
1416 The qualification I would add to the answer is that that applies save for section 126.96.36.199 and 188.8.131.52 where the Commission has said previously and we have reflected here that those are in effect ordinary course events that should be in the control of the Canadian shareholder and those are carved out from that list that's in 2.1.10.
1417 I just wanted to make that clarification, if I could.
1418 THE CHAIRPERSON: I'm not convinced.
1419 MS ROBINSON: I think probably the question is whether you are convinced, Madam Chair. I would hope following that explanation that you would be.
1420 THE CHAIRPERSON: She's doing this very well, isn't she?
1421 Commissioner Noël.
1422 COMMISSIONER NOËL: I would like now to talk about a number of issues and to start with we will talk about synergies. You mentioned, and I will quote page 9 of your supplementary brief:
"These investments in Canadian specialty services allow us to make more cost efficient use of the CTV infrastructure to create synergies and programming, marketing and promotion and to expand our revenue streams." (As read)
1423 In response to question 7 in your letter of September 10, you reply that you projected $10 million in synergies annually and that these savings would affect technical sales and promotion and administration and general expenses. However, you were also quite specific in noting that none of these synergies are expected to impact programming rights.
1424 There would be no synergies in programming rights. Can you please tell us whether or not you would expect cost savings for program rights and, if not, why not?
1425 MR. FECAN: Well, if I could just wind up a bit to the question. NetStar is a separate, independent company. It's totally stand alone. We are totally stand alone CTV. That's the concept that's coming. There's a lot of infrastructure synergies possible. That really is just to give you a bigger picture of what that means.
1426 In terms of programming rights, what we were referring to is what we talked about earlier today, the countervailing power of the market rightholders, the sports rightholders. We believe that their power is so strong that we do not expect there to be a reduction of rights cost through the transaction you have in front of you.
1427 COMMISSIONER NOËL: As you know, some fears have been expressed by several sports teams that the takeover would result in less competition in the sports programming acquisition market. Some parties even suggest that the CRTC should deny the application or, if approved, should order CTV to sell off TSN or Sportsnet to ensure a competitive rights market.
1428 If the Commission were to choose this direction, what would be the impact on the projections you have filed? How would projected synergies be affected?
1429 MR. FECAN: Robin.
1430 MR. FILLINGHAM: The synergies have been projected assuming a combination of the CTV conventional and the NetStar operation only. In effect, the quantification of those synergies I think in a way show up if you looked at the projections for our CTV specialty operations, combined operations, stand alone, just the CTV owned and operated if you like combination, if you look at a representative year like year one at 2001 anticipated fiscal year, you would see that the combined admin sales promotion costs as a percentage of the total cost come out to around 16 per cent.
1431 On the NetStar combined operations, they basically come out as a proportion of total operating on an adjusted basis after you take out the synergies and add back the benefits. You would see a percentage of about 22 per cent. You almost see a 6 per cent difference on the administrative and synergistic effect, if you like, of a combined operation.
1432 The synergies that have been projected have only been projected on the combined NetStar side.
1433 MR. FECAN: Madam Noël, I just hasten to point out that there are other leagues and teams, the Ottawa Senators, Saskatchewan Rough Riders, Montreal Alouettes, the CFL that don't think it's going to be bad for them and quite the contrary. They think it's going to be good for them.
1434 MS McQUEEN: And there are others who have expressed no opinion at all which means presumably that they think life is going to go on fairly normally.
1435 COMMISSIONER NOËL: In your supplementary brief, you state that gains in advertising revenues would likely result from the acquisition in question. However, in response to a deficiency question, you replied that you were not able to quantify what these gains in advertising revenues might be.
1436 While projections for revenues were filed, do you have any general idea as to how much of these revenues would be directly attributable to merged operations?
1437 MS McQUEEN: I wouldn't like to hazard a guess because it would only be a guess. However, I would say that the revenue projections we filed -- when was it? Several months ago, was it not that we filed those revenue projections? We filed them for five years out.
1438 I'm not sure that if we were filing those same revenue projections today, having been through a fall season, whether we would project revenue exactly the same way as we have then.
1439 What I will say about revenue is that it is extremely important for us to buttress conventional ad revenue which is either increasing minimally or staying neutral with advertising for specialty revenue. This fall season has shown us very clearly, although the figures are not available, that specialty revenue has -- I'm trying to think of a word -- ballooned, increased dramatically, is dramatically higher and conventional revenue is at least not dramatically higher.
1440 When we look at our revenue projections now, I would say that the advertising revenue from these specialty channels would maybe be a little bit higher than we projected and the advertising for conventional would be a little lower.
1441 You asked how we might -- if you asked me how we might obtain better advertising revenue, one of the things that we will be able to do is offer advertisers many different ways in which they can tailor and customize their buys because we will have a number of platforms. We will be able to integrate a buy across, for example, a sports, comedy, news, conventional, which will suit the particular needs of an advertiser at that particular time.
1442 We think that's why the majority of large advertising agencies have supported this application, because they see it as a benefit to them in being able to tailor and customize their advertising buys.
1443 COMMISSIONER NOËL: Thank you. Now, another area of concern is the potential divestiture in view of the findings of the Commission and the concerns raised at the hearing.
1444 If the Commission comes to the conclusion that CTV will have to divest itself of either TSN, Sportsnet or Outdoor Life, would you agree to a condition of licence in that sense in order to have the transaction approved?
1445 MR. FECAN: Madam Commissioner, I think we would really need to -- it is imprudent for us to comment about one potential condition of licence or another potential condition of licence without really understanding the entire context of all of the different possibilities that you may or may not decide.
1446 Clearly, it's very important for us as a company to be granted the opportunity to have NetStar in many different ways. Clearly, NetStar, TSN, RDS, Discovery is a family. We have to keep that family together.
1447 Clearly, it's worth a lot of thought on our part because we, subject to your approval, will have 68 per cent of NetStar versus 40 per cent of Sportsnet and 33 per cent of Outdoor Life.
1448 I really think we would really need to understand the full context of all of the different proposals or conditions that you may choose to put on any decision before I think it's fair for me to comment on one or another, particularly one of such magnitude and importance to us.
1449 COMMISSIONER NOËL: If in the event that we do not approve the transaction do you have alternative acquirers in view or does the trustee have alternative acquirers in view?
1450 MR. FECAN: If you don't approve the transaction, you know, there is one certainty and that is none of us can turn back the clock, unscramble the egg and reinstate NetStar as an independent company. The Canadian shareholders have gone, they have taken their money.
1451 So the decision then we really are all faced with is where does it go? Where does it best benefit the system to go? What is the best situation for viewers?
1452 We are so focused on the need for us to get NetStar we have not considered any other possibility and, to my knowledge, I don't know whether the trustee has been approached by anyone.
1453 COMMISSIONER NOËL: Now we will go to something a little less threatening.
1454 MR. FECAN: You get the tough questions.
1455 COMMISSIONER NOËL: TSN is not, as of now, a member of the Canadian Broadcasting Standards Council. You probably know that we are susceptible to violence on TV and stuff like that. We would like to know, especially in the wrestling -- well, we were talking about WTN and now we are going to talk about WWF or something of the kind.
1456 If the transaction would be approved by the Commission would you agree as a condition of licence that TSN becomes a member of the Canadian Broadcasting Standards Council, or is there any reason why it is not now?
1457 MR. CRAIG: We would.
1458 COMMISSIONER NOËL: Thank you.
1459 Now, Outdoor Life, you mentioned it, that you were a 33 per cent or 33 and one-third per cent owner of Outdoor Life, the others being Rogers I think for the same amount and the third one being a non-Canadian, the Outdoor Life Network. Do you know or could you tell us whether or not ESPN has any assets in the non-Canadian company, the Outdoor Life Network?
1460 MR. FECAN: To my knowledge ESPN doesn't, but I believe Fox does.
1461 COMMISSIONER NOËL: Thank you.
1462 MR. FECAN: They are part -- they are in some sort of part deal to become a partner of Outdoor Life U.S.A., but I am pretty sure it doesn't involve ESPN.
1463 COMMISSIONER NOËL: Thank you.
1464 Going back to windows and additional windows, Outdoor Life is focusing on recreational sports and it is recognized as a sports-related service. Could you tell us why the Commission should not consider this service as an additional window for sports programming that benefits CTV?
1465 MS McQUEEN: I think we should make it clear the nature of the Outdoor Life services and Suzanne will do that in a moment. In fact, it is not a capital "S" sports service.
1466 Suzanne, would you like to describe Outdoor Life?
1467 MS STEEVES: Yes, Trina. Thank you.
1468 In fact, the Outdoor Life Network is a lifestyle network aimed at those people who enjoy outdoor activities. So it focuses its programming on a number of different themes, including recreation, outdoor travel, everything from how to camp outdoors, how to explore outdoors.
1469 The amount of actual sports-related programming which can only be amateur sports programming under the terms of Outdoor Life's licence is actually this year a total of 328 hours, of which there are three main categories, snowboarding, mountain biking and a little bit of skiing.
1470 MS McQUEEN: And I believe there is an expectation about the type of amateur sports as well, is there not, Suzanne?
1471 MS STEEVES: Yes. There is also, I don't believe it's a condition, but I would have to check the licence, that says that there won't be any stick or ball-type sports, meaning hockey and baseball type programming.
1472 COMMISSIONER NOËL: Not even T-ball?
1473 MS STEEVES: Not even T-ball.
1474 COMMISSIONER NOËL: I have a third-base coach at T-ball in my previous lives.
1475 A last question, what would be the impact of this transaction on the launch of CTV Direct? Is it still in the -- would it benefit from the transaction? Would it be profitable for CTV Direct to have the networking of all those sports stations?
1476 MR. FILLINGHAM: By CTV Direct you are meaning the two pay per view licences, the DTH and the digital.
1477 I will ask Suzanne to help me probably, but I would have to say that right now it would be very difficult to say just what the effect would be. There has been, as Suzanne mentioned, a lot of difficulty in terms of, one, finding product to be able to be used and, two, making any kind of a viable effort to get that thing going.
1478 As she mentioned, and you will see in the annual return filed for the service, we tried it there for eight weeks and just almost had zero pickups, just a fair amount of cost.
1479 MR. FECAN: And, of course, it is the same kind of rights' holder issue. I don't think there is any linkage between what we would do on our sports specialty services and this particular paper per view licence. I don't think the rights' holders carve it up that way.
1480 But, in any event, should you approve this deal, it seems to us we would be required by virtue of our holdings in Viewer's Choice Canada to put our stake up for sale in CTV Direct, the two licences. So I don't think should you approve this, I don't think that's in play, so to speak.
1481 COMMISSIONER NOËL: Thank you.
1482 THE CHAIRPERSON: On this last answer, could you solve your problem by selling your position in Viewer's Choice?
1483 MR. FECAN: Well, I suppose we could, but it is not our intention to. It would be our intention to -- we have just, with your approval, bought into a company we think is a terrific company and we want to grow that company. We think Viewer's Choice is more of an ongoing business than CTV Direct. So I think we would want to sell CTV Direct.
1484 THE CHAIRPERSON: If it is a reflection of one of our largest broadcasters' optimism about the deployment of digital that is very depressing.
1485 MR. FECAN: Viewer's Choice is up and running. If you had control or concentration issues perhaps this is one less control or concentration issue for you to have, in that we don't control Viewer's Choice.
1486 THE CHAIRPERSON: But Viewer's Choice is not limited to digital.
1487 MR. FECAN: Yes.
1488 THE CHAIRPERSON: That's why I was making that comment.
1489 MR. FECAN: I think you saw it in your dissenting opinion in 1996.
1490 THE CHAIRPERSON: In your proposed shareholders' agreement at 184.108.40.206 you have a section which I recognize is a usual section, which says that:
"If the CRTC does not approve the proposed transaction or approves it subject to any condition to be imposed on any shareholder, parties to the transaction which condition is not acceptable to any such shareholder, the transaction shall not proceed." (As read)
1491 You may or may not want to answer this, but have there been some discussions as to what would not be acceptable a priori to ESPN?
1492 MR. FECAN: No. I mean, there hasn't been discussions about that at all.
1493 THE CHAIRPERSON: That's why you were so generous about changing things in the agreement?
1494 MR. FECAN: No, no. It's very strongly our position that if you grant this and if it is something, if the conditions or the conditions that we feel we can live with, we don't want to be constrained by anyone from going forward and saying, "We want this. We are going to do this." Then it becomes ESPN's decision to say, "Well, you know, not what I thought this deal was. We are going to go."
1495 We didn't want anyone constraining us. This is an independent decision that we are going to make if we feel that this is something that is in our interest.
1496 THE CHAIRPERSON: But you haven't discussed what were those matters that you had to be very persuasive about, because they would be an impediment to their acceptance.
1497 MR. FECAN: Maybe I am misunderstanding the question.
1498 If there is something in there ESPN does not like, and we want to go forward --
1499 THE CHAIRPERSON: No. This section says rather than accepting what you proposed before us as is, we impose a condition of approval that would lead to altering what is before us.
1500 Do you have any indication from ESPN as to what these matters would be that would be a show-stopper for them?
1501 MR. FECAN: For them, you mean?
1502 THE CHAIRPERSON: Yes.
1503 MR. FECAN: To be --
1504 THE CHAIRPERSON: I realize that it is a boilerplate section.
1505 MR. FECAN: Are you asking me what might bother them so much that they may not want to stay in?
1506 THE CHAIRPERSON: Well, it could be you as well. It is either shareholder.
1507 MR. FECAN: We haven't discussed --
1508 THE CHAIRPERSON: What are the conditions that would prevent you from following through?
1509 MR. FECAN: I have to say to you that we have not discussed it with them. In any event, we are going to be making a decision in terms of whether we want to go forward, quite independently.
1510 THE CHAIRPERSON: But if they were under that section -- it is 220.127.116.11, which says that the CRTC does not approve, or approves it subject to a condition that is not acceptable to either shareholder, then the transaction will not proceed.
1511 So that is power you have; that is a power they have.
1512 I should know the answer to that, but I don't.
1513 Ms Robinson, if this were the case, does this trigger these sections?
1514 MR. FECAN: The puts only work if we go forward.
1515 THE CHAIRPERSON: If you don't go forward, what other sections are triggered because of 18.104.22.168?
1516 MS ROBINSON: This shareholder agreement is not yet in effect for CTV, because it is not yet approved to be a shareholder of NetStar.
1517 THE CHAIRPERSON: So it will not happen.
1518 MS ROBINSON: Therefore, the provision that we need to look at is the provision in the agreement to offer, which is section 3.
1519 THE CHAIRPERSON: So we found one advantage to an unsigned shareholder agreement.
1520 Go ahead.
1521 MS ROBINSON: We would go then to section 3 of the agreement to offer.
1522 What that agreement provides, as Ivan has discussed, is that if the Commission imposes a condition that is contrary to the negotiated provisions of this agreement, or any related document, and if ESPN is not prepared to waive that, then CTV has the option of going forward with the proviso that it immediately offers to purchase ESPN's interest on terms which are not less favourable than the terms of the agreement originally entered into.
1523 So it is that provision which applies in the event of a condition and gives CTV the right to go forward notwithstanding the fact that ESPN does not like a particular provision.
1524 THE CHAIRPERSON: In this section any related agreement does not incorporate, by reference, the shareholder agreement because it is not signed.
1525 MS ROBINSON: No.
1526 THE CHAIRPERSON: You don't feel that you have an agreement, oral or otherwise, similar to the shareholder agreement, the proposed one.
1527 MS ROBINSON: Actually I think on this one, because the parties have negotiated the provisions of the shareholder agreement, and because, as we have said to you now, those provisions are finally settled between the parties, all that awaits is your approval, if granted. If there were provisions that had fundamental changes to the shareholder agreement, yes, I do think it would fall within this provision.
1528 ESPN could take the position that that is fundamentally different than the deal that we entered into, and that is a condition that we are not prepared to waive.
1529 That is one of the reasons that we included in this provision that CTV would have the option of saying yes, that is fine, that is your view, but we want to go forward and we will require you to waive that provision.
1530 THE CHAIRPERSON: Yes. I still find it difficult, Ms Robinson, to not have a signed proposed shareholder agreement. It is not difficult to put a clause in there that says this is what is going to bind us if we have approval of the CRTC.
1531 MS ROBINSON: We have no problem with that, Madam Chair. We will undertake to file such a signed agreement incorporating the amendments which we have suggested to you with that provision in our reply.
1532 THE CHAIRPERSON: Commissioner McKendry?
1533 COMMISSIONER McKENDRY: Thank you, Madam Chair.
1534 I am going to ask a few questions so that you can help us understand the value of the transaction. The questions will be from the perspective of our interest in the calculation in the amount of benefits.
1535 I do have a couple of questions related to that about the KPMG reports, so perhaps Mr. Gibson might want to step up to a microphone.
1536 I want to start by going to page 12 of the KPMG report, which is the last page.
1537 On the last page, you say, and I quote:
"We reserve the right but we will be under no obligation to review all calculations included or referred to herein; and if we consider it necessary to revise our estimate of value in the light of any information existing at the valuation day, which becomes known to us after the date of this report..."
1538 Was there or has there been anything come to your attention?
1539 MR. GIBSON: No, sir.
1540 COMMISSIONER McKENDRY: Have you made any inquiries to elicit anything that should come to your attention?
1541 MR. GIBSON: Yes, I have.
1542 COMMISSIONER McKENDRY: Thank you.
1543 I would like now to go back to page 2 of the report.
1544 On page 2 you state you reviewed NetStar's business plan for fiscal 1999 to -- let me back up.
1545 On page 2, it states the draft business plan for fiscal 2000 to fiscal 2002 was prepared by the management of NetStar after the valuation date.
1546 Then it says you were not provided an opportunity to review the details of the more current business plan.
1547 Why didn't you have that opportunity?
1548 MR. GIBSON: The trustee felt that it was sensitive information in the marketplace. We were not allowed to look at it in detail.
1549 We were allowed access to management to discuss their view of the future market and where it was going. We were able to satisfy ourselves through other means, without exposing that confidential information, to what was anticipated to happen in the near term future.
1550 COMMISSIONER McKENDRY: You could not have looked at the plan but at the same time respected the confidentiality of it in your report?
1551 MR. GIBSON: The lawyer for the trustee felt that that would be difficult; that we may end up with situations where we would have to refer to earnings growth or things of that nature that would lead people to conclusions that were perhaps confidential in nature.
1552 Legal counsel for the trustee felt it best that we not be allowed to see the details of it. But as I say, we were given access to Gordon Craig and his senior management team to discuss in detail, and we took advantage of that opportunity.
1553 COMMISSIONER McKENDRY: Have you reviewed the business plans now?
1554 MR. GORDON: No, sir.
1555 COMMISSIONER McKENDRY: In your view, it would not be prudent to do so.
1556 MR. GIBSON: We had requested that information, and it certainly would have made our job perhaps a little easier. But we have to respect confidentiality in this marketplace, obviously. And we do do a lot of work in the broadcast arena.
1557 It was seen as a way to go in this particular transaction.
1558 We have seen it in other transactions as well, and I am sure we will see it again in the future when it comes to future information.
1559 COMMISSIONER McKENDRY: Surely in the course of your work you are exposed to a great deal of confidential commercially sensitive information that your clients possess and don't want you to disclose, but nevertheless you examine it and express an opinion.
1560 MR. GIBSON: You are absolutely right, sir, we do. And our business is obviously to abide by those confidentiality guidelines, and we take them with the highest degree of confidence.
1561 In this situation, we approached counsel for the trustee and we were denied that right. In the end we were able to satisfy ourselves by other means as to the future potential.
1562 Is it perfect? No. But it is what we were able to do at the time.
1563 COMMISSIONER McKENDRY: Is it common for you to be denied access to the type of information that you were seeking?
1564 MR. GIBSON: I am not sure common is the right word. But has it happened in my 18-year history? Yes.
1565 Has it happened in the last year on more than one occasion? Yes.
1566 I think, with the degree of competition in the marketplace over very sensitive materials, whether it be in the broadcast arena or other industries, there are pieces of information that we sometimes are not allowed to see firsthand.
1567 COMMISSIONER McKENDRY: You reviewed -- and again I am on page 2.
1568 You reviewed NetStar's business plan for fiscal 1999 to fiscal 2001. I am wondering why you stopped your review in fiscal 2001.
1569 The question is: Why didn't you go beyond 2001?
1570 MR. GIBSON: That was the information that was available to us. As you pointed out earlier in a question, the 2002 draft plan was in draft form and was not available to be seen at that point directly.
1571 COMMISSIONER McKENDRY: That is an adequate horizon to fiscal 2001 to come to the views that you did?
1572 MR. GIBSON: That is the financial information that we looked at, specifically in questioning with Gordon Craig and his senior managers. We talked about future trends in broadcasting that go well beyond 2001 and 2002. But as far as the hard facts and figures, if you will, that is what management prepares on a regular basis and is available for our review and detail.
1573 The other review, on a more prospective basis, if you will, is more on a less quantifiable nature and more on an industry trend basis, and we certainly do that in our normal course.
1574 COMMISSIONER McKENDRY: Thank you.
1575 The next question may be more appropriate for Mr. Fillingham. I'm not sure. These are a couple of questions about the projected -- or maybe they are more appropriate for Mr. Craig -- questions about the projected earnings for TSN for the year 1999.
1576 One of the things I note looking at the projected earnings for the year 1999, which I take to be the year end at August 31st, 1999, they are lower than the actual results achieved in 1998 and I guess one could say they are significantly lower.
1577 I guess my question is: Have the actual results for 1999 reflected the decline that was projected?
1578 MR. FILLINGHAM: Yes.
1579 Now, the projections have to reflect a transition year between -- the current fiscal year of NetStar is April, so you generally are dealing with, on a corporate base, April fiscal year end results which frankly are these business plans that have been referred to, which is some of those timing issues, because they are done on a three-year basis with April year ends. Then it gets adjusted to a fiscal year for purposes of reporting.
1580 But, yes, it basically -- the '99 year declined from '98.
1581 COMMISSIONER McKENDRY: Then the actual results for the year end at August 31, 1999 are -- well, how close are they to the projected results in terms of the --
1582 MR. FILLINGHAM: I think in fairness they are pretty well adequately reflected in those projected '99 figures.
1583 COMMISSIONER McKENDRY: Would they be the actual results? Are they better than what was projected?
1584 MR. FILLINGHAM: No, I think they are pretty well -- I think it is fair to say that they are pretty well right on side to what is in those projections.
1585 Again, you are dealing -- as I say, because you have to come from an audited base, cutting off the prior years with this April year end, you need to make that adjustment, so you have a current four-year actual in place too there. But the actual results as they have come to August '99 are pretty well on side to those projected.
1586 COMMISSIONER McKENDRY: The reason I'm asking about this is that on page 5 of the KPMG report, near the top, it says, and I quote again:
"We specifically gave significant weighting to the current years expected and the next year's budget EBITDA." (As read)
1587 I wanted to find out if in fact the actuals were consistent with the projected in light of that statement, and I take it you are telling me that they were and there would be nothing on the face of it that would cause a change in the value that flowed out of that use of the current year and the next year.
1588 MR. FILLINGHAM: That's correct.
1589 COMMISSIONER McKENDRY: Thank you.
1590 Going back, Mr. Gibson, to page 3 of the KPMG report, I just wanted to ask you a question about the synergies.
1591 You note there that you have taken the synergies into account or that you gave regard to the synergies available. Could you just outline for me what you see as those synergies and how you quantified the synergies?
1592 MR. GIBSON: I think in order to answer that, Mr. Commissioner, I have to go back and explain that the objective of the valuation was to allocate purchase price here starting with a purchase price that had been set in the marketplace by fair market value negotiations, you know, starting back at that 409 number.
1593 Then the way we would normally look at it is to start with that transaction value, add back the data, add back the minority interest and get to a gross enterprise value, and then look at transactions -- well, we looked at the valuation in two forms, actually; we used two different approaches. We looked at a discounted cashflow approach and we looked at a multiple EBITDA or earnings before interest, taxes, depreciation and amortization, both of which are generally accepted valuation principles in the communication and broadcast environment.
1594 In looking at those, there are obviously some areas of subjectivity. If you look at a series of transactions, for instance, in arriving at your EBITDA multiple you will look at all the broadcast transactions that have occurred over time and particularly the ones that have occurred closest to this time frame and look at what other people have paid in the marketplace to try to draw some proxies of what this should bring.
1595 Then you look at the synergies. We had discussions with Gordon and his management team about the types of things they could visualize. Then you have to make a decision as to whether you move to the high end of that EBITDA range, that multiple range, or whether you move to the lower end, because in any transaction in the marketplace the purchasers build into their EBITDA multiples, potential synergies that they are going to be able to effect.
1596 So I can't come to you and say there was $29,052 worth of synergies that we applied to this particular transaction. All I can say is that we consider the synergies to be fairly meaningful in this case and because of that we have moved to the higher end of the multiples range to take that into account. And when I say "fairly meaningful", we are talking about synergies on some back office costs and some, as Trina has spoken to earlier, savings in packaging of the advertising, some even simple things like traffic management and things of that nature that will all impact positively on the bottom-line potential. Therefore, we applied a higher end of the multiple.
1597 Then when we tested that against the discounted cashflow approach, again we looked at risk factors in selecting our interest rate that we would discount at, we looked at the possible risk premiums on the various products and brought the future earning stream back into a present value state and compared that to the multiple approach and tried to get some comfort that both were supporting each other, and in fact they do.
1598 COMMISSIONER McKENDRY: You said you went to the higher end of the multiple. What was the range? Was it 10 to 12 --
1599 MR. GIBSON: Yes, it was.
1600 COMMISSIONER McKENDRY: -- that you considered, and you went to 12? Is that --
1601 MR. GIBSON: Well, we took the 10 to 12, and if you look back at the broadcasting transactions that existed, and unfortunately in conventional broadcast there is not a whole wealth of transactions of recent, but Rogers sold CFCN as a result of the Maclean-Hunter transaction and there was a three-way deal involving Shaw and CTV at that time. That was a 9.4 times operating multiple on next year's revenue. We used 12 times this year and 10 times next year, so we were at the higher end of that scale as well, to give you an example.
1602 COMMISSIONER McKENDRY: When you were discussing the synergies and taking them into account, what synergies existed between Dome and the other members of the NetStar group?
1603 MR. GIBSON: If you will allow me a minute, I will just flip to that section.
--- Pause / Pause
1604 MR. GIBSON: As I said before, we didn't specifically come down with a breaklist of several hundred thousand dollars' worth of synergies, but Dome does operate in a market that both CTV and the NetStar group have a need for those services and are putting mobile productions out and have fixed link and wireless link feeds that are needed in those services. But Dome has a responsibility too to go out and get the best price they can for their services, so if there is excess capacity in the marketplace they may be able to discount that, but it wasn't seen as being a huge benefit.
1605 Dome is fairly fully booked and is generating nice year-over-year growth, so I'm not sure that we came down with much in the way of actual synergies just looking at my report here.
1606 COMMISSIONER McKENDRY: How much of Dome's business comes from the other NetStar companies? Was that something you would take into account?
1607 MR. GIBSON: Yes. It's about a third right now.
1608 COMMISSIONER McKENDRY: Thanks.
1609 Would it be fair to say that the other NetStar companies have a significant influence on Dome?
1610 MR. GIBSON: I think it is a family relationship in that if Dome can offer the services to a member of its corporate group it will do so; it will try to accommodate it. Dome is pulled in a variety of different directions by the independent production that goes on in Toronto and elsewhere. Generally speaking, in those kinds of facilities, what you are trying to achieve is 24 times 7 utilization of the asset base because those assets are very expensive and require a high level of upgrades annually. Dome does that fairly well. So it tries to meet everybody's demands quite frankly, the internal corporate group and the external group, because it just has to utilize those assets.
1611 COMMISSIONER McKENDRY: Could one say that the other NetStar companies' business is integral to Dome?
1612 MR. GIBSON: Well, anytime 30 per cent is -- if you are getting 30 per cent from one customer, that would be a serious loss, there's no question. The problem that you have in Canada is that, you know, the quality of high level of mobile production and others is fairly limited. WIC has some assets. Command Post and a few others in the Toronto market have assets in this arena. It is a pretty competitive market.
1613 Could NetStar go out and get it elsewhere? It would take some scheduling, but at the same time Dome could probably go out and fill its back order as well but it would take time.
1614 COMMISSIONER McKENDRY: Thank you.
1615 This may be a question for any of you that want to answer it, including Mr. Gibson.
1616 The Commission's TV policy -- and by "TV policy" I'm referring to our recent policy and public notice, CRTC 99-97 -- that policy states, and I quote:
"The Commission will generally expect applicants to make commitments to clear and unequivocal tangible benefits representing a financial contribution of 10 per cent of the value of the transaction as accepted by the Commission." (As read)
1617 I want to now discuss the value of the transaction for the purpose of considering the amount of the benefits which flow from this transaction.
1618 Just to set some context for the discussion, I want to read a quote from the accounting manual of the Canadian Institute of Chartered Accountants. It says, and I quote:
"The concept of valuation could be regarded as an objective appraisal based on off its objective data in order to determine a theoretical value to be applied in a practical situation. It is an imprecise art." (As read)
1619 I guess the implication of this is that the transaction value in the amount of the benefits aren't cut and dried. This is a matter that the Commission has discretion in in determining a transaction value for our purposes.
1620 Do you have any comments on that?
1621 MR. FILLINGHAM: I as a Chartered Accountant would agree completely with the statement. Knowing that, the only thing in the approach that we took here is to deal with it as we have always done in terms of when we did this transaction, we acquired the 68 per cent shares in NetStar. The purchase price was $409 million.
1622 Consistent with former Baton and the applications that we have put before the Commission in the past, the value of transaction to us has always been the purchase price. Although the new policy now quantifies very definitely to 10 per cent of the value, in the past applications in determining the benefits were always dealt with as a value of transaction from our perspective as the purchase price.
1623 In a share transaction, we feel that it's certainly more clarified to be dealt with as the purchase price, definitely in asset transactions. It can get clouded.
1624 MS ROBINSON: If I might be permitted to add, Commissioner. The wording in the television policy review in terms of the benefits test is identical to that set out in the radio policy review, i.e. value of transaction as determined by the Commission.
1625 What we have done for guidance is take a look at the decisions which the Commission has made subsequent to those two policy documents being issued. There have been 14 change of control decisions since the policy review, 14 in respect of radio undertakings and one which was also in respect of television.
1626 Of those 14 decisions, five referred to a percentage of the transaction or of the value of the transaction. In the other nine, the Commission itself, either in the decision or in the deficiency process, referred to the test being a percentage of the purchase price.
1627 It is our view that in terms of how the Commission has taken a look at how it is implemented, these criteria, since the policies were enunciated that purchase price has been used interchangeably with value of the transaction by the Commission in the majority of cases.
1628 It would also be fair to say that in the cases which preceded the radio policy and the television policy, and there are 396 of them that we looked at going back to 1984, that the notion of benefits measured against the purchase price is a consistent theme running through those decisions.
1629 I would be the first to admit that in the radio policy and in the television policy, you established a specific bench mark, but there has been a consistent theme that benefits are measured against purchase price.
1630 Certainly since those two decisions, it has been either value of transaction or purchase price that has been used interchangeably by the Commission.
1631 COMMISSIONER McKENDRY: Thank you for that. I note that when I look at the recent television policy and the benefits policy section, and even when I go back to Public Notice CRTC-1993-68, which was application of the benefits test at the time of transfers of ownership or control of broadcasting undertakings, that the Commission does not refer to purchase price. It refers to the value of the transaction.
1632 MS ROBINSON: That's fair, but it's also fair to say that in the one television decision which has come out since the Commission's policy, that being Okanagan-Skeena, it is the Commission itself which uses the words "purchase price" when it's talking about the benefits policy.
1633 In the cases which have followed the radio policy, the 14 of those as I indicated, nine of those have used purchase price as the test against which benefits are measured. That indicated to us that the Commission was taking a look at purchase prices as value of transaction because it seemed to be using value of transaction interchangeably with purchase price, certainly in the majority of those cases.
1634 COMMISSIONER McKENDRY: Would you agree that those cases all have a different size? They are all different in nature, that what's before us in this proceeding has its own unique size and nature and that it's open to the Commission to take into account the nature and size of this particular transaction in deciding how it will take into account value of transaction?
1635 MS ROBINSON: Well, I don't read the benefits policy as saying that if the value of the transaction is larger that there is a different percentage than 10 per cent that is to be put on the table. I read the television policy as saying that the policy is 10 per cent of the value of the transaction.
1636 As I have said, the Commission itself has used the words "value of transaction" and "purchase price" interchangeably.
1637 Incidentally, in the one television case which has come out since the policy, which is the Okanagan-Skeena case that was with Telemedia, we reviewed in detail the valuation that was put forward in that case and the valuation accepted by the Commission was identical to the valuation that we have put forward here.
1638 That gave us at least some comfort that we were perhaps on the right track because what had been accepted by the Commission as valuation in a major case following the television policy review was the same methodology that we used here.
1639 COMMISSIONER McKENDRY: In your view, is it open to the Commission to set a value of transaction in this proceeding that is different than the purchase price?
1640 MS ROBINSON: I think that would be inappropriate. Let me tell you why. The purchase price in this case was a purchase price which was negotiated in the open market between arm's length parties. As I have said, value of transaction in that situation, I think the best proxy for that is purchase price.
1641 The purpose of doing the valuation was because included in the purchase price there were non-regulated assets. The purpose of doing the evaluation and putting it before you is to say because the Commission does not assess benefits on non-regulated assets, how much should be taken off the purchase price to reflect that to come up with a purchase price which is attributable to the regulated assets where control is changing. It's regulated assets where control is changing that benefits are assessed against.
1642 I would say that if you had a disagreement about the amount that was attributable to the non-regulated assets that had been subtracted from the purchase price, then I would say that falls within the plain wording of your policy because the benefits are payable on the regulated assets where control is changing.
1643 Do I think it would be appropriate or fair to totally change the methodology by which benefits have been assessed? Since you yourselves said it's a bench mark of value of transaction and have said in the majority of cases that that means purchase price, I don't think that would be either appropriate or fair.
1644 COMMISSIONER McKENDRY: I think what I asked you is would it be open to the Commission. I understand you to say that you don't think it would be appropriate or fair. Do you think it would be open to the Commission?
1645 MS ROBINSON: I don't think it would be consistent with you policy. Your policy stated 6 per cent of the value of the transaction in the radio decisions. In the radio policy review it said 10 per cent of the value of the transaction as determined by the Commission.
1646 In the television, you have interpreted that in the cases that you have decided on, the majority of them, to be purchase price. Certainly in the one case which has come out since the television review, which is the Okanagan-Skeena case, you used exactly the measure, the valuation that is used here.
1647 I guess if you did that, I don't understand the purpose of putting it in a policy. If you put it in a policy, presumably that's to indicate to parties the case they have to meet. They measure how they meet that according to how you have treated in the past. If they come before you and are treated in a different way, I don't think that's a consistent application of a policy.
1648 COMMISSIONER McKENDRY: Just to be clear. The policy says value of transaction. It doesn't say purchase price. I think we agreed on that earlier and I understand what you have told me about the precedent decisions in terms of the application of that policy.
1649 I just want to make sure that we understand properly the difference here between the enterprise value and the purchase price. The value of the enterprise is $908 million, is that correct?
1650 MR. FILLINGHAM: That's correct.
1651 COMMISSIONER McKENDRY: And the purchase price was $409 million.
1652 MR. FILLINGHAM: That's correct.
1653 COMMISSIONER McKENDRY: So there's a substantially greater value of the enterprise than the purchase price.
1654 MR. FILLINGHAM: But the assets are encumbered by the debt. It comes back down to that in a share transaction, what we acquired were the shares of NetStar, 68 per cent of those shares for $409 million, representing the regulated and the non-regulated assets which got us into an independent report that would help us split the value of those, that purchase price.
1655 COMMISSIONER McKENDRY: Let me just go through the points you raised in your September 23, 1999, letter to the Commission which was a response to questions we had posed to you on September 17. I would like to go to page 2 where the matter we were discussing was discussed in your letter.
1656 You offered three reasons why it would be wrong for us to use a higher value than the purchase price for the shares. You say:
"To require otherwise would, in our view, result in (a) requiring contribution of tangible benefits significantly larger than 10 per cent of the purchase price." (As read)
1657 This is a point I have discussed at some length with Ms Robinson. Our policy says value of the transaction, not purchase price. I think Ms Robinson --
1658 MS ROBINSON: To state the obvious, the policy does not say "value of the enterprise".
1659 COMMISSIONER McKENDRY: That's right. It says "value of the transaction". Point (b) you made was:
"Requiring a contribution for tangible benefits on shareholdings a purchaser does not own." (As read)
1660 Presumably one would address that by reducing the shareholdings to the percentage that you do own, the 68.46 per cent, I think, or 68.4 per cent. That would be a problem easily overcome and appropriately overcome by reducing the shareholdings to the percentage you own. Do you agree?
1661 MR. FILLINGHAM: Yes, you should never, not in our opinion, pay benefits on the portion you do not own.
1662 COMMISSIONER McKENDRY: One calculation that I made here in my notes to try and understand that was starting with the $908 million enterprise by applying your 68.46 per cent CTV interest, and then multiplying that by the 86 per cent regulated assets or broadcast assets per the KPMG report. That would leave some I suppose to a potential value of $534.6 million, and applying the 10 per cent benefits test to that, leading to benefits of $53 million. Do you have any comments on that kind of calculation, apart from the ones that Ms Robinson has already put on the record?
1663 MR. FILLINGHAM: No. Again, we would submit that in our opinion the value of transaction should be the purchase price.
1664 COMMISSIONER McKENDRY: Let me give you an example that would perhaps make it a little easier for us to understand and get your response to that. Assume for the sake of discussion a house worth $200,000 with a mortgage of $100,000 on it and the owner's equity of $100,000.
1665 Somebody buys that house and assumes the mortgage. It seems to me your position is the value of the transaction would be $100,000, but I think most people would look at that house and say the value is $200,000. What's wrong with that analogy? Where does it fall apart from your perspective?
1666 MR. FILLINGHAM: Some of the problems in it is because what the house is is an asset transaction. The problem is any time you do get into asset transactions you can get into a different value of transaction.
1667 There are companies that sell for asset value plus assumption of debt. A house transaction is very similar to that kind of situation, that basically you would be dealing with an asset acquisition at that point, plus assumption of debt and, in all likelihood, the value of transaction on that kind of a basis would be the cost of acquiring the house in a normal transaction like that.
1668 But you have to remember on a commercial basis that asset transactions are driven by different kinds of values too, as you know. There are major tax considerations within any asset acquisition that can change the valuations, usually reflected in higher purchase prices.
1669 But, in general, and I would say in pretty well all share purchase acquisitions that I think you are coming back down to that what you are buying is equity value expressed in a per-share price. In a normal, commercial transaction, where you are acquiring shares, if debt is part of that enterprise, then it is part of computing the equity value of that share.
1670 COMMISSIONER McKENDRY: So in the house example, the value of the house wouldn't be $200,000?
1671 MR. FECAN: In the house example the vendor would not get $200,000. The vendor would get $100,000.
1672 COMMISSIONER McKENDRY: But again, the value of the house, not what the vendor would get, but the value of the house?
1673 MR. FECAN: The value of the transaction there is $100,000. That's the money changing hands.
1674 COMMISSIONER McKENDRY: But the value of the house would be $200,000?
1675 MR. FECAN: It's the value of an asset. This isn't an asset deal. It's a share deal.
1676 COMMISSIONER McKENDRY: When you -- assuming we approve your application, when you consolidate NetStar's financial statements with CTV's financial statements, will you consolidate the debt?
1677 MR. FILLINGHAM: Assuming approval of transactions we currently, of course, are counting it on an equity basis, where you are really just showing the value of the transaction, which is the purchase price.
1678 If we get approved on the transaction out of trust, we would commence to consolidate the operations which, as you know, there are specific accounting rules allowing consolidation in controlling the cash flow.
1679 Yes, you would consolidate. You would gross up the assets. You would gross up the liabilities, but, frankly, you are coming back down to the net equity value acquired was $409 million. We financed that. We financed that with equity and debt, but that's all part of the value of transaction.
1680 But you are really coming back -- whether you consolidate and, in fact, I mean the reverse of that would be saying that on the Sportsnet where we equity account, is really saying that there would be no value there. So that the rules of accounting and how you are reporting do not necessarily, of course, come into say that that is really the value of the transaction. In fact, you need the accounting rules to come to proper rules of value and proper valuation.
1681 MS ROBINSON: Might I be permitted to add to that, Commissioner?
1682 Because we knew that this was an issue that the Commission might want to question us on, we wanted to be prepared. So, what we did is we went back, as I mentioned, and reviewed all Commission decisions on transfers of control back until 1984. And between 1984 and the radio policy, there was only one case which explicitly added debt to the purchase price and required benefits to be paid on the gross amount, and that was the Fundy Cable decision. However, in that case Fundy was assuming the debt.
1683 There is no case in all of those cases, and I should say not only did we review the decisions for the 396 cases, and this is, incidentally, the royal we I should hasten to add, but we examined 51 of the Commission's files in depth where debt was either mentioned in the decision or we expected because of the nature of the transaction that there might be some valuation. There was no case where debt was required to be added to the purchase price where debt was not being assumed.
1684 As I have said, since the policy the closest situation to the one here is Okanagan Skeena Decision 99-471 and 99-471-1, and in that case the same valuation methodology was used as here. The Commission stated in its decision, quote:
"Consistent with the requirements of the benefits test, benefits are 6 or 10 per cent..."
Because it was both radio and television:
"...of the purchase price. The purchase price was net of debt." (As read)
1685 So that in our view and in a careful review of all of the Commission's decisions and policy, there is no case where debt has been required to be added to the purchase price where debt was not being assumed and debt is not being assumed in this case. So in those circumstances we feel it would be inappropriate, adding to the reasons that Robin has already given, for the Commission to require benefits to be payable on the debt in this circumstance.
1686 MR. FILLINGHAM: I would also add that just when there are circumstances within a share purchase agreement where prior to any closing of a transaction there is levering up of a company to avoid, in a sense, to lower the price per share, to arbitrarily lower a value just from a tax driven kind of distribution, that very definitely the Commission needs to look through those to come back.
1687 But in the transaction before the Commission, in our transaction here, that was not the case. This was a truly fair market value for the shares that were acquired by CTV.
1688 COMMISSIONER McKENDRY: Thank you very much. Those are my questions.
1689 THE CHAIRPERSON: Counsel?
1690 MR. BATSTONE: Thank you, Madam Chair.
1691 I am going to do my questions in the same order as the issues were discussed today, just to give you a road map going in.
1692 I want to go back for a moment to sports rights and the impact on sports rights of the transaction.
1693 Just briefly if you could explain to me or describe to me if following the licensing of Sportsnet any rights other than NHL hockey were increased?
1694 I know on the record we have had people talking about the cost of the rights and how those rights were bid up as a result of the competition between Sportsnet and TSN. What I'm wondering is if there are other sports rights that have been negotiated since the time of licensing of Sportsnet where you have also experienced an increase in those rates -- those rights, I'm sorry.
1695 MR. CRAIG: Sports rights constantly go up. That is one of the facts of life of this business.
1696 I think the best way we can answer that is, other than the NHL properties Sportsnet and TSN have not been in direct competition.
1697 MR. BATSTONE: So that there has been -- like, for instance, I'm thinking of circumstances where you would be -- I'm sorry, not you, where Sportsnet would be trying to fill out its schedule and therefore goes to people who might otherwise have been not the first choice. Have those people been able to ask a greater sum for instance in respect of rights?
1698 MR. FECAN: Sportsnet has only entered business. These would be, I would imagine, new contracts for Sportsnet, so I'm not sure on what basis to compare.
1699 MR. BATSTONE: I see what you are saying. You can't say that they are lower than they were before is what you are saying.
1700 MR. FECAN: How do I know what they were before?
1701 MR. BATSTONE: I see. Yes.
1702 MR. FECAN: All I know is what they tell me.
1703 MR. BATSTONE: But is it your expectation, have you faced situations where you have thought you had paid more than you should have?
--- Laughter / Rires
1704 MR. BATSTONE: Never mind.
1705 MR. FECAN: It's the viewers and advertisers who tell us that.
1706 MR. BATSTONE: Yes, okay. Well, I will move on.
1707 In terms of incremental coverage and rebroadcasting of coverage on both services, there was some discussion of that earlier today, my first question would be: You said that there would not be much repeat programming or programs repeated on both services. Would you be willing to accept a conditional licence limiting the amount and, if so, what would you see as an appropriate amount?
1708 MS McQUEEN: Well, it's not our intention to repeat programming from one service to the other. Our intention is to have the national service as TSN and the local service as -- or the regional service as Sportsnet. Within those conditions we are allowed to broadcast on TSN 10 per cent and on Sportsnet I think about -- what is it, a minimum of 33 per cent has to be regional.
1709 So I don't think that it would be our intention to do anything that would undermine those conditions and, therefore, what I'm saying is that we wouldn't do it. We don't think we need a condition of licence, but it is not our intention to repeat programs from one sports service to the other.
1710 MR. BATSTONE: But if the Commission were concerned about that being a possibility would you object to a conditional licence in that regard?
1711 MR. FECAN: If that was a concern I don't think that we would object to it as long as it was framed in such a way that would not prevent the rolling of truck synergies that we talked about earlier. You roll a truck to a ski meet, you do the main event for TSN, you pick off regional events for Sportsnet's various regional feeds. That is not the same show on both.
1712 But I think you have to be real careful how you frame it so it doesn't capture that kind of thing, because --
1713 MR. BATSTONE: The incremental coverage that you were talking about earlier.
1714 MR. FECAN: Yes. Because we really want to be able to provide that kind of diversity.
1715 MR. CRAIG: If I may too, as much as there would be a motivation not to do it sometimes for the benefit of the viewer there is very real reasons to do it. Mr. Brace mentioned things like the British Open that come in here sort of at 8:00 and 9:00 in the morning on a weekday, Eastern time, it would be appropriate to be able to take that and play it to the B.C. region in a more realistic hour than 4:00 in the morning.
1716 So if there has to be a condition of licence, at least put a ceiling on it of something like not more than 10 per cent.
1717 MR. BATSTONE: That's what I was getting at. Okay, thank you very much.
1718 Turning now to this whole notion of incremental coverage, and what I would like to get at is how incremental coverage will affect the broadcast of amateur or under-represented sports.
1719 What I'm asking here is: Would the incremental coverage be mostly amateur under-represented stuff? You gave the example of the CIAU, the championship being on TSN, incremental coverage being on the regional piece of Sportsnet, but I could see where there might also be an incentive to load up on a big event through professional sports, that sort of thing.
1720 So how would it affect the broadcast of the amateur stuff?
1721 MS McQUEEN: Well, I think the objective is to provide as wide and diverse a variety of sports over the both services as we can. I would hate to say that it would only be amateur because in some cases it might be very much to the benefit of a region to have particular professional sports that were only of interest to that region. But I would say the majority of incremental coverage would tend to be amateur sports, but not all.
1722 MR. BATSTONE: Why exactly is that? There are some long events in professional sport as well where I could see it --
1723 MS McQUEEN: Exactly. And that's why I said it would mostly, but not all.
1724 MR. BATSTONE: Turning, then, to another issue in relation to that, the reduction of sports on the conventional network. You had said that this would contribute to diversity and I just wanted to come at that question from a different perspective.
1725 Could it not also be argued that it would decrease diversity in one sense for viewers who get their sports programming through the conventional network and why would that be appropriate?
1726 MR. FECAN: I don't think I -- I may have mis-spoke. I don't think that particular thing contributes to diversity. What we were trying to signal was that through all of the multi-platforming, as the Chair pointed out, we are not doing this to take hockey away from CBC. We have a level of professional sports coverage on CTV. Over time we expect to decrease that.
1727 We think there are lots of conventional choices out there, but we really have a programming genre that deals with drama and documentary and news and we are going to give that priority in the conventional stations.
1728 So it's kind of a positive affirmation of what our beliefs are and what our strategy is.
1729 It was also a response to, frankly, some of the intervenors like the CBC being very worried that somehow or other we are going to go and like take all of this stuff away. We have no interest in doing that.
1730 MR. BATSTONE: You may have answered this question but I'm going to ask it anyway.
1731 Why would the synergies associated with this deal and the desire that you mentioned this morning of the broadcasters to see the programs go on the conventional network to get the full penetration, if you will, why would you reduce sports on the conventional network? Wouldn't there be an incentive there to keep it there?
1732 MR. FECAN: Well, we are going to have a level of it and over time we think we will be reducing it and that is what we are saying.
1733 But we think there are lots of choices out there on the conventional side. That of course assumes that you approve the transaction as put forward, that we have NetStar, we have 40 per cent of Sportsnet. That is a very big proviso because what we are then saying is that we are going to concentrate on sports specialty.
1734 But we have no interest in hurting the CBC or anybody else that -- I think the CBC pointed out a large part of their revenues come from sports and it is not our intention to harm them in any way.
1735 MR. BATSTONE: So there is likely always to be some level of sports on the CTV conventional network, just it may be less. Is that what you are saying?
1736 MR. FECAN: We have figure skating, something that I would almost call a heritage sport for CTV. We have been covering it for so long, as long pretty well as CTV has been around.
1737 We are going to have some sports but it is not going to increase and it will probably decrease a little as we prioritize for drama, news, documentary and other kinds of things that we feel are in line with the programming strategy that the new program policy allows us to chart a course on.
1738 We have been given, with this policy, the opportunity to try to figure out who we are on the conventional universe and we have a particular vision. Bumping up sports isn't part of that vision on the conventional side.
1739 MR. BATSTONE: I will just ask one last question on that. If the policy you adopt, the way you go is to reduce the sports on the conventional network, is it likely there will be a change in the type of sports event that is shown on that network? Will we see a move to the larger marquee events?
1740 MR. FECAN: I can't tell. I can't tell what we do right now. We have figure skating. I can't imagine we would want to get out of figure skating. We have got NBA. We have got a few years left to run on that deal. You know, we are going to see how it goes. I think it is reasonable to assume that for some of the marquee we might be a competitor. We have been a competitor before, but in terms of volume or in terms of using the leverage of what we are asking for on the specialty side to get us an extra edge on the conventional side, that's just not what this thing is about.
1741 MS McQUEEN: If I may just add to that because sports raises so many issues in the hearing it sounds as if this transaction is all about CTV becoming a sports service. In fact, the reason for this transaction is to allow CTV, basically, to fulfil its conventional program strategy, which is not a sports strategy. The sports channels are part of the specialty television strategy, which we feel makes us a well-rounded broadcaster, a broadcaster that can compete in the future, both compete nationally and compete with foreign entities.
1742 This is about strengthening CTV and building a great Canadian broadcasting company that will last for a long time and that will fulfil its obligations under the Broadcasting Act.
1743 MR. BATSTONE: Thank you for that.
1744 One last question then and this sort of ties in what you are saying. This is in respect of advertising. Would the combined entity, do you envision a situation where an advertiser who wanted to take a spot on, say, the conventional station would be required to take something on one of the specialty networks?
1745 MS McQUEEN: I am not going to say that that would never happen because we offer all kinds of packages, but I will say that it would be more likely that the advertiser would want a combination of spots on various specialty and conventional channels. Again, this is part of this entire strategy, is to be able to offer advertisers a whole bunch of different ways to reach their particular targets.
1746 There will be negotiations back and forth and some of what you are talking about may happen, but in general I don't think it will happen a lot because we will have so many opportunities to craft a custom made buy for advertisers.
1747 MR. FECAN: And, of course, the advertisers, I mean the advertisers have done their own consolidation. There is, you know, a handful of agencies control 75 per cent or something of the business. By and large, all of them have intervened positively. So they think they are going to do just fine.
1748 MR. BATSTONE: When I asked the question I think I sort of put it the wrong way because it seems to me a person who wanted to advertise on a sports program probably -- or if they are trying to hit that demographic they would probably want to be on the specialty service.
1749 Would it also be the case then that a person who would be forced to advertise on the conventional service to get onto the specialty line?
1750 MS McQUEEN: Again, the answer kind of, whichever way you put the package together is that there will be negotiations and occasionally an advertiser might end up with a buy which will always meet the needs, but which may consist of a number of different ways of putting it together.
1751 But I think that the important thing is what Ivan said, that these advertisers understand exactly what we would like to do and they have not objected, in fact they have been positive about it, and part of that is because they know that they have the leverage to deal with us.
1752 By the way, I think an advertiser who wants 18 to 49, including males 18 to 49, would not only be buying sports. There is plenty of other programs that they could and want to buy. In fact, there has been some concern about doing just that because if you are in sports you may not actually reach the entire 18 to 49 male group.
1753 Apparently, it has been said to me that there are some in that group who don't actually watch sports.
1754 MR. BATSTONE: Oh, I can't imagine that.
1755 MR. FECAN: And also think about what television advertising is really good at, which is hitting a big audience quickly. If you are trying to roll out a product, a car, cereal, whatever, nothing is better than television in just blanketing the country.
1756 If you look at the top 25 shows, 18 to 49, there are not that many entries in there from either Sportsnet or TSN. The majority of them are on conventional still, so it just sort of adds on to what Trina said.
1757 MR. BATSTONE: I will turn now to the issue of control and my first question is just a clarification. Commissioner Cram had asked whether you would be agreeable to a conditional licence, whereby any changes to the proposed 80/20 structure would be subject to the Commission's approval.
1758 Ms Robinson replied that the structure is built into the agreements, but I would still ask the question. The agreements obviously can be changed. So if this were a concern for the Commission would you be prepared to accept that as a condition of licence?
1759 MR. FECAN: If you want to belt the suspenders, yes, but it's right there that it is subject to CRTC approval.
1760 MR. BATSTONE: Sometimes you want belt and suspenders. So is that a yes?
1761 MR. FECAN: Yes.
1762 MR. BATSTONE: The next question has to do with committees of the board of directors. This is provision 22.214.171.124 of the shareholders' agreement. I would just like a little clarification here.
1763 This provision says that each shareholder shall be entitled to have at least one nominee on any committee which may be established by the board of directors. In response to a deficiency question you responded that there were two committees, one for audits and I think the other was a compliance committee.
1764 My question would be: What decision-making powers would those committees have, or any committee that would be established under that provision?
1765 MR. FILLINGHAM: The answer to the deficiency question I think there was an audit committee and did you say -- I think it's compensation --
1766 MR. BATSTONE: Compensation. Okay, sorry.
1767 MR. FILLINGHAM: -- contemplated going forward. Probably an audit committee would be instituted, but that committee would have no authority. They would be, as most audit committees, and I think the current committees deal with matters and recommendations to the board, but all of those matters are dealt with at the board. So the committees themselves would have no authority.
1768 MR. BATSTONE: Correct me if I am wrong, and I am certainly no expert on this stuff -- I shouldn't have admitted that -- but is there anything in the agreement because I didn't see anything that says that the board of directors have to recommend -- sorry, that a committee's function is just to recommend and that the board has the ultimate say. Is there a situation where a committee could make decisions on behalf of the board?
1769 MR. FILLINGHAM: I wouldn't think so because what the agreement is also saying is there doesn't necessarily have to be any committee.
1770 MR. BATSTONE: But I am more concerned with the case where there would be a committee and where you would have only representation by one director from the Canadian shareholders and one from the American shareholder.
1771 MR. FILLINGHAM: I will pass the legal, but I don't think there would be anything delegated from the agreement down to a committee.
1772 MS ROBINSON: That's correct.
1773 MR. BATSTONE: On the issue of the non-voting observer, I note that you gave this person's name in response to deficiency question. I was just wondering what is her position with ESPN?
1774 MR. FILLINGHAM: She is currently the chief financial officer.
1775 MR. BATSTONE: Chief financial officer.
1776 MR. FILLINGHAM: Of ESPN.
1777 Probably she is of ESPN itself.
1778 MR. BATSTONE: But chief financial officer.
1779 You have noted in response to questions also I think on the written record as well that ESPN provides 1,100 hours of programming to NetStar currently. Is that correct, pursuant to the program supply agreement?
1780 MR. BRACE: They can provide up to 1,100 hours. We aren't currently using that many, but our bulk contract allows us to access 1,100 hours.
1781 MR. BATSTONE: Is it a significant portion of the 1,100? What are we looking at?
1782 MR. BRACE: Right now we are using just over 600.
1783 MR. BATSTONE: So assuming that this programming was no longer available to NetStar, and that's just a hypothetical situation, how difficult would it be to replace the programming?
1784 MR. BRACE: I think it would be difficult. Sorry, I can't make eye contact with you there. It would be difficult, but I don't think it would be impossible.
1785 We appreciate and value the ESPN product. It provides a lot of the secondary and tertiary events that fill out our schedule, but there are other suppliers in the U.S. that we could go to if in fact it was U.S. programming that we were looking for.
1786 MR. BATSTONE: So, principally, you would be looking at other U.S. suppliers?
1787 MR. BRACE: If it was U.S. programming that we were looking to get from them, yes.
1788 MR. BATSTONE: And would those be sewn up with contracts with other people?
1789 MR. BRACE: I think that there are certainly contracts that are now being held, but not so much for Canada. Certainly, Sportsnet has a contract with Fox and I would think that under common management we could access some of that programming, plus the other suppliers like USA Network, HBO and so on and so forth that we could go to.
1790 MR. BATSTONE: What about cost if you had to replace it? Would this be quite costly?
1791 MR. BRACE: No. I think because we are paying a bulk rate for the programming, I think that it would come at an efficient rate.
1792 MR. BATSTONE: My next question then relates to the powers of the board of directors I guess, as was gone through in some detail this morning. There are specific corporate decisions that have to be approved by the shareholders. What I am wondering is what are the sorts of things that could be approved by the board that aren't subject to approval by shareholders? I guess what I am speaking about here is the special provisions with relation to shareholders.
1793 MS ROBINSON: The Board of Directors, as you know, has general authority over the affairs of the company. From the decisions of the Board are carved out the matters which are included in section 2.1.10 and 2.1.11 which have specific provisions in them which afford the minority shareholder typical veto rights.
1794 In addition to that, the amendment that we have put forward to section 126.96.36.199 makes it clear that the minority shareholder will have no decision-making -- confirms that the programming decisions are made by CTV and that ESPN shall not control or influence programming decisions directly or indirectly.
1795 What I would say to you is the following. When you look through this shareholders agreement, what it exhibits is that CTV is in firm control of the day to day operations and management of the company, including programming decisions.
1796 Save for the very limited special circumstances that are set out in section 2.1.10, except for 188.8.131.52 and 184.108.40.206 and except for the matters which are set out in 2.1.11, again very limited non-ordinary special events, that CTV is running the show and in control of this company. That's what the shareholders agreement provides for and we believe that's consistent with the provisions of the direction.
1797 MR. FECAN: And to state the obvious, we have 80 per cent of the Directors.
1798 MR. BATSTONE: Sure. But just to give me a sense of what those decisions might be. For instance, if the entity was negotiating a contract for distribution or something, is that something that would be approved by the Board of Directors and not by the shareholders? I'm trying to get a sense of --
1799 MR. FILLINGHAM: Management run the company subject to the Board of Directors and the Board of Directors then take over, but to the extent that, number one, you have the full control on the operating budget and the full control and changes to the budget, so on normal course events, subject to some of the other specific events outlined there, it's in control.
1800 MS ROBINSON: And the specific events which are outlined are limited and normal course provisions which are put in to protect minorities, in my opinion, are typical of minority rates protections.
1801 Taking the agreement as a whole means CTV is the one that is managing this on a day to day basis, CTV controls the board, it has 80 per cent of the board. It has the power to appoint the Chief Executive Officer. The rights of ESPN are extremely limited, as set out in 2.1.10 and 2.1.11. From those rates are excluded 220.127.116.11 which is the power to set the budgets and 18.104.22.168 deviations from the budget.
1802 The conclusion that I would arrive at is that CTV, the majority shareholder, is firmly in control of the day to day operations and management of these services. Moreover, ESPN has no right to any say in any programming decisions.
1803 MS McQUEEN: But you asked for some examples of board decisions and I don't know if these are -- for instance, the board would make sure that we were in compliance with various laws and regulations, whether it's remitting taxes, environmental regulations. The board would be responsible for Y2K preparedness and our compliance with that.
1804 There are a number of issues over which a board exercises the normal oversight to make sure that a corporation is running in conformity with all the applicable laws and regulations. I don't know if that's the kind of example you wanted.
1805 MR. BATSTONE: I was really just looking for some examples to get a sense of the devolution of power between the two groups. I think we can move on from there.
1806 I have one valuation question. It's just a follow-up to get a little more information. I was wondering if you could provide for the record a copy of the discounted cash flow analysis. I'm looking specifically, I guess, for the calculations that were referenced in the report.
1807 MR. FECAN: The question is to KPMG.
1808 MR. FILLINGHAM: We can supply that.
1809 MR. BATSTONE: Thanks. Turning now briefly to benefits and specifically the questions that were asked about earlier about commitments with respect to amateur sport. I note your statements that all of the entities involved are compliant in this year.
1810 I just wonder if you could confirm for me that they have been compliant in past years since those commitments were made.
1811 MS McQUEEN: I believe that all of the services have been in compliance since the date of their first licence. Any negatives? No. I see everybody nodding.
1812 MR. BATSTONE: Again following up on some questions that were asked earlier today in respect of the Canada Games and les Jeux de Québec, specifically whether they should be considered as part of the existing mandate of TSN or Sportsnet.
1813 I note that you said that neither of these two events fit the profile for Sportsnet or TSN. I guess I would like you to elaborate on that. For instance, I note that Sportsnet has, I guess, a conditional licence requiring 27 per cent amateur programming.
1814 I would ask you to reconcile or just further elaborate on that statement on why it doesn't fit the profile, those organizations.
1815 MS McQUEEN: I would ask Mr. Frappier if he would start with Jeux de Québec.
1816 MR. FRAPPIER: Yes. On les Jeux de Québec, we are doing 2,300 hours of amateur sport programming in Quebec. We are providing a broad range of events. It allows us in some cases to tackle events that get good audience levels and other cases events that get modest audience levels.
1817 The bottom line is we are able to pick and choose those. We are able to pick the time and the schedule when we want to put them. We have flexibility in how we present that while always meeting the conditions of licence.
1818 In the case of les Jeux de Québec, for one, you are guaranteed a lower profile event per se. It will have extremely local market interest, depending on where the games will be held. Keep in mind that we are talking about a regional level, a regional market as well. It's a fixed point in time. We will have to work the rest of your higher profile schedule events around that because you don't have the flexibility to change the dates.
1819 In many cases, not unlike the Canada Games, we are talking about athletes that are at the very beginnings of their careers. In many cases, it will be their only 15 minutes on the stage of their lives. These are not events that are strictly for the elite athletes.
1820 I think that history is probably the best example here. These games, if we didn't step in and these tangible benefits doomed, these games are currently not broadcast by anybody. Unfortunately, it's the best vehicle for amateur sport in the Quebec market, but given all the other conditions or the other examples that I have given around it, they just don't make their way to the tube.
1821 MR. BATSTONE: Just to follow up on that, what I'm wondering, specifically with respect to les Jeux du Québec, you certainly stressed the importance of that particular event in the application.
1822 MR. FRAPPIER: Right.
1823 MR. BATSTONE: While I appreciate that, you know, strictly speaking, looking at the conditions and commitments just on their face, you know, there is no obligation there, I'm wondering, if this is such an important event wouldn't it be natural as a service that is committed to showing a substantial amount of amateur sport, that that would be a natural, so to speak?
1824 MR. FRAPPIER: I think it is a natural as a tangible benefit, a social benefit. I don't think it is a natural for a network to assume that responsibility when it is able to meet its social responsibilities in lots of other ways.
1825 I mean, I could get into lots of other examples, counsel, whether it be with le défi sportif, which we are committing some grants to, but we already today do many things to support le défi sportif in terms of free air time, whether it be la Fondation sports études where we -- I think on an annual basis it is a couple of thousand times we put out public service announcements that tries to give them some image and some value enhancement to let our viewers know the good that these organizations are doing.
1826 Now, that I think is part of a moral and social obligation which we all want to have, but in the case of Quebec amateur athletes, I think it is always to -- you know, in terms of meeting a social obligation but also doing things that are as right as they can be for our own network, trying to pick and choose the things that we think are going to have the broadest possible interest, even if that interest might be modest versus a lot of the other high profile things that we schedule, we are still trying to get the broadest possible interest we can because the whole point is to try to interest viewers with what we are putting on the network.
1827 It is much harder, when you consider it, to do it on a regional basis. Already the Canada Games, and Rick will certainly speak to that in a moment, the Canada Games I think would qualify with the same challenges as I'm talking about, but on a regional basis it is even more. Yet we could still, within the Canada Games, if we so chose, we could, from an RDS standpoint, strictly highlight the Quebec athletes, you know, package our air time to be more focussed on how our athletes from our market are doing within the Canada Games.
1828 Now, should it not be a role model for youth -- if you believe that sport espouses good values, I think it is an excellent role model that we are able to -- even if the competitions are going to be of a lesser nature, even if these athletes will not necessarily go on and make careers out of it, I think by bringing these types of events and how we would choose to package them promotes the kind of values that as a society we want to give to our youth, and I think that is a tangible benefit.
1829 MR. BATSTONE: I take it, then, from what you are saying -- and maybe Mr. Brace could elaborate on this in the context of the Canada Games, then -- that this programming would in all cases have a lower draw than the other amateur programming that you are airing?
1830 MR. FRAPPIER: That's absolutely correct.
1831 I pointed out when I was speaking earlier on the Canada Games that, like les Jeux du Québec, this is an athlete's very first opportunity to participate in multi-sports games. These are non-carded athletes, in other words, these are not members of the national team. These are people that are just starting out their very young athletic career. So it really is a festival of youth.
1832 If we go back historically to what happened with the Canada games, even when the CBC carried the Canada games, the most that they would devote was a half hour highlight package on a daily basis. In our significant benefits that we put forward during the last transaction of I guess at that time LCI to NetStar we raised the ante and did 50 hours on TSN and a further 30 to 50 hours on RDS, and it was really an opportunity to give this group the ability to see the light of day to which they had never experienced before. It brings in modest audiences. It brings in the moms and pops. It brings in the families. It brings in modest advertising. So it truly is, in our estimation, something that is incremental to what we would normally do to fill our amateur commitment.
1833 MR. BATSTONE: I won't spend much more time on this, but did ratings go up with the increased exposure?
1834 MR. FRAPPIER: In fact, I would argue the opposite, that the more hours of coverage you put the more you are lowering the overall rating of your network which could, if you wanted to argue, lower the overall value of what you sell your run of schedule advertising.
1835 MR. BRACE: Maybe the easiest way to illustrate that is that there was an opportunity cost for us to do the Canada Games. There is programming that we would have scheduled in those time slots that would have achieved a higher audience and a higher advertising level. So from that standpoint I would suggest that no the ratings didn't go up. The audiences were modest.
1836 MR. BATSTONE: The only reason I ask is that I happen to believe that marketing is everything and if you marketed something enough I guess I'm asking could you make a go of it. Could this ever be profitable?
1837 MR. BRACE: It is certainly in our hope that, you know, if we air it they will watch and perhaps over time that may happen. But I would suggest that certainly within the framework of the benefit that we have put forward here we aren't going to realize that dream.
1838 MS McQUEEN: I think to market this we would have to do a Hollywood kind of marketing where the value of the marketing outstrips the value of the production. It is hard to bring it to the attention of a lot of people.
1839 MR. BATSTONE: Just asking.
--- Laughter / Rires
1840 MR. BATSTONE: My next question I guess is just again to ask for some additional information.
1841 We spoke earlier about the incremental nature of the benefits and the fact that NetStar/Sportsnet had met their benefits in previous years. I'm just wondering if you could file some sort of schedule of the commitments and how they were met with some allocation between operating and capital. Would that be possible?
1842 MR. FILLINGHAM: This is the NetStar previous commitments or benefits?
1843 MR. BATSTONE: Yes, benefits, commitments.
1844 MR. FILLINGHAM: Yes.
1845 MR. BATSTONE: I guess there would be some for both. I'm principally interested in NetStar. Yes, just NetStar's. Okay?
1846 MR. FILLINGHAM: Yes. I believe there is a report complete and ready to be submitted updated to August '99.
1847 MR. BATSTONE: Thanks.
1848 MS McQUEEN: On benefits, counsel, I have thought of an answer to the Commissioner's question that she posed a long time ago. I don't know whether you would give me the opportunity to put it on the record or not.
1849 MR. BATSTONE: I guess maybe you should ask her.
1850 THE CHAIRPERSON: Of course.
1851 MS McQUEEN: I think the question was -- because in the high profile kind of documentary projects the question the Commissioner asked is: Does not the airing network derive a benefit itself which then should be deducted from the value of the benefits? Am I phrasing that correctly? Close enough.
1852 I guess one of the things -- I wanted to make two points about that.
1853 First of all, if it did drive revenue, obviously half of that revenue would come back because -- almost half, 45 per cent approximately would come back in the terms under our condition of licence. But although it might drive revenue, these programs that we are proposing would never drive profit, that is, the cost of doing the programs at the licence fees that we have estimated means that we would never be able to obtain the kind of incremental advertising that would pay for the programs.
1854 MR. BATSTONE: Thanks.
1855 MS McQUEEN: You are welcome.
--- Laughter / Rires
1856 MR. BATSTONE: My final question on benefits, then.
1857 Should the Commission decide that any of the benefits are, for instance, self-serving and therefore not acceptable, would the amount disallowed be redistributed to other acceptable benefits or where would that money go?
1858 MR. FECAN: Yes.
1859 MR. BATSTONE: Thanks.
1860 My final area of questioning, then, is on the issue of divestiture. Mr. Fecan, you had talked earlier about NetStar being a family and you said that it would be imprudent to comment on a condition regarding divestiture.
1861 I take it that you are not saying it is a case of the full deal or nothing, are you?
1862 MR. FECAN: I need to know what the full deal is the way this Commission may frame it and what else they might attach to it. So that is why I say it is imprudent. I really have to see what the situation is and that is why it is imprudent for me to comment piecemeal on one bid or another bid because they add up.
1863 MR. BATSTONE: So you wouldn't, for instance, want it -- assuming, say, the Commission concluded that concentration of ownership was an issue that it just couldn't -- the concentration of ownership associated with approving the transaction as filed would be too great, I take it, then, you wouldn't want to say which asset you would be prepared to divest if the Commission put that forward as a scenario?
1864 MR. FECAN: I think, you know, I would end up repeating myself about imprudence, but I would point you to our business interests: 68 per cent of one, 40 per cent of another. You be the judge.
1865 THE CHAIRPERSON: That is where we definitely have to go and look at the valuation.
--- Laughter / Rires
1866 MR. FECAN: However, I think it would be a really horrible thing to have to divest because I think the thing is created by truly focusing one nationally and truly focusing one regionally are terrific. I think they are going to add to diversity. I think the complementary scheduling, the cross promotion, all of these kinds of things I think are good for viewers.
1867 As I understand it, the tough job you have -- I mean, you have concerns, but you have to figure out whether the benefits of anything outweigh those concerns and I think the case we are putting forward is that the magic that happens with this thing outweighs the concerns, the real concerns that you have raised.
1868 MR. BATSTONE: You don't want the family to face divorce.
1869 MR. FECAN: You said it.
1870 MR. BATSTONE: I would just like to ask a general question about the role of the trustee in the event that there was a divestiture of assets.
1871 What would the role of the trustee be in that situation?
1872 MR. FECAN: I guess in the first instance it would depend which assets were being divested.
1873 MR. BATSTONE: Assuming they were NetStar assets, I guess.
1874 MR. FECAN: I will pass to Kathy.
1875 MS ROBINSON: Under the trust agreement it is the trustee who has the responsibility in that situation for finding the purchaser. I think I had previously indicated that the provisions of the current NetStar shareholder agreement, which give ESPN the right to find an alternative purchaser, would continue to apply.
1876 So there is a process there, and all of it obviously would be subject to Commission approval.
1877 MR. BATSTONE: Those are all of my questions, Madam Chair.
1878 THE CHAIRPERSON: That completes this part.
1879 We thank you for your patience in having stayed so long. We are just trying to show how sophisticated we are in Ottawa. We eat at Toronto time.
--- Laughter / Rires
1880 THE CHAIRPERSON: Tomorrow morning, unless I am otherwise corrected, we will start with Mr. Bryden at 8:30, after which we will continue in accordance with the agenda, except that the Commissioner of Baseball --
1881 MS SANTERRE: Yes. The Office of the Commissioner of Baseball will be appearing through a video conference after lunch.
1882 THE CHAIRPERSON: So those who are in the order of appearance as intervenors may take that into consideration, that there will be a change early in the morning and then one intervenor will be after lunch rather than in the morning, as the agenda shows.
1883 Madam Secretary?
1884 MS SANTERRE: Also, we have been notified that the Canadian Film and Television Production Association is now not an appearing item on the agenda.
1885 THE CHAIRPERSON: So we may or may not see you early in the morning, but we will eventually.
1886 Again, thank you very much for your patience. We really did want to complete this item today.
1887 Have a good evening.
--- Whereupon the hearing adjourned at 1952, to resume
on Tuesday, December 7, 1999 at 0830 / L'audience
est ajournée à 1952, pour reprendre le mardi
7 décembre 1999 à 0830