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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TELECOMMUNICATIONS COMMISSION
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
Review of the regulatory frameworks for broadcasting distribution undertakings and discretionary programming services /
Révision des cadres de réglementation des entreprises de
distribution de radiodiffusion et des services de
programmation facultatifs
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
April 8, 2008 Le 8 avril 2008
Transcripts
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
Contents.
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Transcription
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès‑verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio‑television and
Telecommunications Commission
Conseil de la radiodiffusion et des
télécommunications canadiennes
Transcript / Transcription
Review of the regulatory frameworks for broadcasting distribution undertakings and discretionary programming services /
Révision des cadres de réglementation des entreprises de
distribution de radiodiffusion et des services de
programmation facultatifs
BEFORE / DEVANT:
Konrad von Finckenstein Chairperson / Président
Michel Arpin Commissioner / Conseiller
Leonard Katz Commissioner / Conseiller
Rita Cugini Commissioner / Conseillère
Michel Morin Commissioner / Conseiller
Ronald Williams Commissioner / Conseiller
ALSO PRESENT / AUSSI PRÉSENTS:
Chantal Boulet Secretary / Secretaire
Cynthia Stockley Hearing Manager /
Gérante de l'audience
Martine Valle Director, English-Language
Pay, Specialty TV and
Social Policy / Directrice,
TV payante et spécialisée
de langue française
Annie Laflamme Director, French Language
TV Policy and Applications/
Directrice, Politiques et
demandes télévision langue
française
Shari Fisher Legal Counsel /
Raj Shoan Conseillers juridiques
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
April 8, 2008 Le 8 avril 2008
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
PRESENTATION BY / PRÉSENTATION PAR:
Rogers Communications Inc. 6 / 33
CBC/Radio-Canada 178 / 1104
Canadian Conference of the Arts 282 / 1663
Friends of Canadian Broadcasting 295 / 1723
Gatineau, Quebec / Gatineau (Québec)
‑‑‑ Upon commencing on Tuesday, April 8, 2008 at 0900 /
L'audience débute le mardi 8 avril 2008 à 0900
1 THE SECRETARY: We are about ready to start, if you can take a seat. Anyone that does not have a seat, there is extra seating in the examination room, in the Papineau Room, just outside the hearing room.
2 Thank you, Mr. Chairman.
3 THE CHAIRPERSON: Good morning, ladies and gentlemen and welcome to this public hearing to review the Commissions regulatory framework for broadcasting distribution undertakings and its discretionary programming services.
4 Le comité d'audition est formé de mes collègues Michel Arpin, Vice‑Président de la Radiodiffusion; Len Katz, Vice‑Président des Télécommunications; Rita Cugini, Conseillère régionale de l'Ontario; Michel Morin, Conseiller; Ronald Williams, Conseiller, Régions de l'Alberta et des Territoires du Nord‑Ouest; et moi‑même, Konrad von Finckenstein, Président du CRTC.
5 The Commission team assisting us includes the Hearing Manager Cynthia Stockley, Director of Distribution Regulatory Policy; and Martine Vallée, Director of English Language Pay and Specialty Television, and of Social Policy; Annie Laflamme, Director French Language Television Policy Application; Shari Fisher and Raj Shoan, Legal Counsel; and Chantal Boulet, Hearing Secretary.
6 The purpose and scope of this hearing is very important. This is the first broad review of BDUs and its discretionary programming service since 1993. A great number of issues are at stake, however everything revolves around five key questions.
7 I just came back from a week of holidays in Mexico and reflected on it and it seems to me this is what it's all about.
8 Number one, what should be the size of basic package?
9 Number two, should there be guaranteed access for certain Canadian specialty and pay services? Which ones and on what terms?
10 Three, should there be any type of genre protection for guaranteed services? If so, should they be protected from other Canadian services or only from foreign services?
11 Four, should there be a fee for carriage for over the air broadcasters? If so, how much and on what terms?
12 Lastly, should BDUs have access to advertising revenues from on‑demand services and from local avails?
13 There are of course a host of secondary and tertiary questions, such as this implication of BDU licences, cable direct to home synchronization, dispute resolution in terms of entry for foreign services.
14 However, in my view, all of these very important issues can only be addressed once the five primary questions that I mentioned have been resolved. Consequently, while we have received written submissions on all issues raised in the Public Notice and expect all submissions from you on them as well, we will concentrate our question on these five key issues.
15 There will be an opportunity to file final written comments following this phase of the proceedings. The Panel will give instructions with respect to comment at the conclusion of the hearing.
16 Following the public process, the Commission will announce the fundamental policy principles guiding its approach to these major issues. There will then be an opportunity for further public comment regarding how these new approaches should be implemented.
17 I will now invite the Hearing Secretary, Madame Chantal Boulet, to explain the procedures which we will be following.
18 Madame Boulet...?
19 LA SÉCRETAIRE : Merci, Monsieur le Président, et bonjour à tous.
20 I would ask as a reminder that you please turn off your blackberries and cell phones while you are in the hearing room and we would appreciate that you do this throughout the hearing.
21 Please note that Commission Members may ask questions in either English or French. You can obtain an interpretation receiver from the Commissionaire sitting at the entrance of the conference centre.
22 Le service d'interprétation simultanée est disponible pour la durée de cette audience. L'interprétation anglaise se trouve au canal 7, et l'interprétation française au canal 8.
23 We expect the hearing to take three weeks, approximately. We will begin each morning at 9 o'clock and adjourn approximately at 4:30 in the afternoon. We will take one hour for lunch, a break in the morning and in the afternoon.
24 We will advise you of any changes as they may occur.
25 We also would like to remind participants to monitor the progress of the hearing in order to be ready to make their presentation on the day scheduled or, if necessary, the day before or after their scheduled date of appearance, depending on the progress of the hearing.
26 Pendant toute la durée de l'audience, vous pourrez consulter les documents qui font partie du dossier public pour cette audience dans la salle d'examen qui se trouve à la salle Papineau, à l'extérieur de la salle d'audience, à votre droite.
27 There is a verbatim transcript of this hearing being taken by the court reporter sitting behind the staff table, which will be posted daily on the Commission's website. If you have any questions on how to obtain all or part of this transcript, please approach the court reporter during a break.
28 Please note that the document that was distributed to all appearing participants on March 14th on the assumed distribution model is available on the Commission website, as well as copies in the examination room.
29 Two participants have been added to the agenda. They are Metro Vancouver on April 17 and l'Union des artistes et SARTEC on April 18th. Please note that GV Productions, scheduled originally on April 28th, will now be panelled with Metro Vancouver on April 17th.
30 We will now proceed with the presentations in the order of appearance set out in the agenda. Each participant will have 15 minutes for their presentation, followed by questions by the hearing Panel.
31 I would now invite Rogers Communications to make its presentation. Mr. Phil Lind will introduce his colleagues, after which you will have 15 minutes for your presentation.
32 Mr. Lind...?
PRESENTATION / PRÉSENTATION
33 MR. LIND: Mr. Chairman, Members of the Commission, good morning. I am Phil Lind of Rogers. Let me introduce the panel to you.
34 To my immediate left is Ted Rogers and then Mike Lee, Chief Strategy Officer; Rael Merson, who is the President of Rogers Broadcasting. On my right is Ken Engelhart, who will steer the questions afterwards; Pam Dinsmore, Vice‑President Regulatory, Rogers Cable; David Purdy, Vice‑President and General Manager of Rogers cable.
35 Sitting behind are Colette Watson, Vice‑President Rogers Television; Dave Watt, Vice‑President Economics, Rogers Communications; Suzanne Blackwell, President of Giganomics; Dustin Chodorowicz, Director of Nordicity Group; and our external counsel, Lori Assheton‑Smith.
36 Now I will begin our presentation.
37 This hearing is about the future of the Canadian television industry. Everyone in this room would probably agree that we need a strong, healthy, viable Canadian broadcasting system, and to ensure that we have one it is important to understand the changes that are affecting the television industry today everywhere in the world.
38 The most important trend is the consumer is in charge. This notion was at the heart of the Public Notice that launched this proceeding. It is at the heart of what we do as a company.
39 Today more and more viewers, especially younger ones, are watching TV on the Internet. They are doing this instead of using a cable or satellite provider or even watching a local station using rabbit ears. In addition, many Canadians continue to watch TV through illegal black and grey market satellite services. If this trend continues and a sizable group of viewers abandons the regulated broadcasting system, the impact could be profound.
40 Rogers believes that the most important task in this proceeding is to make sure that this does not happen. We need to improve the Canadian broadcasting system so that viewers prefer it to any of the available alternatives.
41 In shaping the new television marketplace, we have to pay attention to the changes that are taking place on the Internet. If the regulated television system can emulate many of the benefits of the Internet, it will be more successful.
42 For consumers the Internet puts them in charge. They can watch what they want to watch when they want to watch and where they want to watch. Because of the success of the Internet, access to this type of functionality is becoming part of what viewers expect on television. They don't just desire choice, convenience and control, they demand it.
43 For content providers the Internet is creating new ways for them to monetize their content. Companies like Google have made advertising targeted and measurable. This makes the advertising much more valuable. As a result, even with the audience fragmentation that all media are experiencing, content can continue to be ad supported. We believe these trends should shape the way that the Commission approaches this hearing.
44 So how can we preserve and strengthen the broadcast system in the light of these trends? We propose a three‑step solution.
45 Number one, give viewers a reason to stay in the system.
46 Number two, maximize new revenue opportunities.
47 Number three, reinvest new revenues in the system.
48 The challenges faced by the system all stem from one simply stated fact of modern day broadcasting life: the consumer is the cornerstone. If the Canadian broadcasting system is to stay viable, it must become more responsive and accountable to the people who ultimately pay for it.
49 Consumers have choices. We have to give them a reason to choose the Canadian system.
50 So what does this mean in practical terms? More importantly it means bringing the benefits of the online experience to the TV platform. We can do this through video‑on‑demand, which allows us to show all of the television shows people want to watch when they want to watch them. And if they can watch their favourite movie or TV show any time they want, consumers will have less incentive to go online.
51 But to maximize the value of the on demand platform for consumers, we need to continue to add more content, especially prime time episodic programming. We also need regulatory changes so that VOD content can be ad supported.
52 Giving viewers a reason to stay in the system also means encouraging value‑added features such as high definition television. If customers have big, beautiful high def pictures on their TV sets, they will be less likely to watch TV on their computers.
53 Timeshifting is another value‑added feature that provides consumers with a reason to stay in the system.
54 Being more responsive to customers also means giving them greater access to choice of services, including Canadian or foreign service. The current rule which keeps out foreign services that compete in any way with Canadian services is too restrictive and too hard to interpret.
55 Our proposal, which looks at viability rather than programming overlap, will ensure that viewers will have a broader choice of diverse Canadian and foreign signals.
56 Relaxing the genre protection rules will also improve television. In an unregulated TV market, TV channels are free to change in response to shifting consumer demands and popularity of different formats. In Canada services cannot make these changes easily because they are confined by regulation to a particular genre.
57 We think the Commission should eliminate the genre protection rule as between Canadian services. It would allow them to compete for customers like other businesses do. In short, we think the best way to keep consumers on the system is to give them an enhanced viewing experience and more control over their programming choices.
58 Our balanced and streamlined distribution model would therefore eliminate most carriage and packaging restrictions.
59 At the same time it would contain the following core elements:
60 ‑ a basic service that includes, at a minimum, a group of mandated Canadian services;
61 ‑ a requirement that all distributors provide a simple majority of Canadian signals;
62 ‑ the elimination of access rules for specialty services; and
63 ‑ a strengthened undue preference for seeding.
64 Mike Lee...?
65 MR. LEE: Thank you.
66 The second step in our proposed solution is to maximize new revenue opportunities. Last year advertisers invested about $3.3 billion in Canadian television. We know that fragmenting audiences and increasing competition from online platforms are putting pressure on this vital source of revenue. To keep that money in the system and to grow the advertising pie for all, we need to be able to bring more value to advertisers.
67 We believe that the best way to do that is to give advertisers the ability to deliver targeted, measurable television ads comparable to what they can do online.
68 Currently the rules prevent us from changing the ads that appear in television shows that are viewed on demand. If the rules were changed so that we could dynamically insert ads into this programming, the broadcasters and the cable operators could earn additional revenues. Broadcasters could increase their ad rates substantially since advertisers are willing to pay a premium to reach a relevant on demand audience.
69 At Rogers we have the capability to do this today. We simply need the agreement of the broadcaster and changes to the regulations to permit dynamic ad insertion.
70 We understand that programmers are reluctant to cede control over advertising sales. No one is asking them to. We think the process for ad insertion should be subject to commercial negotiation. Ultimately, this will add value for everyone in the system, including broadcasters, distributors and producers.
71 Beyond dynamic ad insertion on VOD, all the Canadian channels on the dial could benefit from targeted advertising. Customers in some postal codes will get ads for trucks, while in other postal codes the ads will be for minivans. This would allow broadcasters to greatly increase their ad revenues.
72 U.S. cable operators are creating platforms to do this today. We need changes to the regulatory system to give Canadian cable operators the incentives to create the same platforms.
73 Another source of untapped advertising revenue is the two or three minutes of local avails in U.S. specialty services. We have the contractual right under our agreements with these services to insert ads in these avails. However, we are prevented from doing so under current conditions of licence.
74 As many parties to this proceeding have recognized, this represents a wasted opportunity. Allowing distributors to sell ads on avails will repatriate up to $60 million a year in advertising revenue currently lost to the Canadian system. It would also create an incentive for distributors to make the necessary investments in dynamic ad insertion technology.
75 Finally, it would generate new funds for Canadian programming, as we explained in step three of our solution.
76 Pam...?
77 MS DINSMORE: The third and final step of the Rogers solution is to take the revenues generated in steps one and two and put them back to work for the benefit of the system.
78 One way we would do this is by creating new funds for Canadian program production through the sale of ads on the local avails. Five per cent of every new dollar of revenue would go to Canadian programming through our mandated contribution. More significantly we propose that 50 per cent of the net revenues from ad sales on the avails be directed to the CTF or another independent fund such as the Rogers Cable Network Fund.
79 In other words, our avails proposal would grow the advertising pie in Canada while contributing up to $175 million to Canadian programming over seven years. And as confirmed by the Association of Canadian Advertisers in this proceeding, all this can be achieved without creating any new fragmentation of audience or negatively impacting broadcaster revenues.
80 New revenues resulting from dynamic ad insertion and targeted advertising would also be reinvested in the system. BDUs, for example, would contribute 5 per cent of these revenues to Canadian programming. Programmers would also contribute a portion of their new revenues to Canadian programming as a result of CPE requirements.
81 Finally, we would reinvest the majority of new revenues earned from our proposals in the infrastructure and services that keep the system relevant and attractive to viewers.
82 Distributors have spent more than $13 billion over the last decade on rolling out digital, introducing HD and video‑on‑demand and increasing the capacity of our systems so that we can carry more Canadian programming services. We believe that this is the most important contribution we can make to the long‑term success and sustainability of the Canadian broadcasting system.
83 Ted...?
84 MR. ROGERS: Mr. Chairman, I had assumed that this was really a hearing on digital because of course analog in both countries, the United States and Canada, is being removed from analog and it will just be available on digital, in the United States in 2009 and we believe in Canada in 2011.
85 It's hard to imagine how there would be analog rules after 2011 when the broadcasters are not on analog. That to us is an important point.
86 The spectrum that the government frees up is used to sell to the wireless operators and that will be used for 4G, which is the very highest of speed Internet. So if there are rules to be on analog, I would think that they would be in the short term and they would fade to black as the over the air stations fade to black on analog.
87 Mr. Chairman, fee for carriage will not give viewers more value. Consumers will pay significantly more for what they are receiving today, so less value. And it is value that really matters to our customers.
88 If broadcasters are not as profitable as they used to be, it is primarily because they have spent a fortune on U.S. programming, much higher than before, and they have spent billions on acquisitions. Fee for carriage will not solve those problems, nor will it boost spending on Canadian programming. It will just make more money available for bidding the rights to U.S. hit shows.
89 The solution for broadcasters cannot rest with subsidies and regulatory protection. This only forestalls the necessary changes that all players in the system must undertake to become more innovative and more efficient.
90 Fee for carriage will have a powerful negative effect that will raise consumer rates, cause viewers to leave the system or downgrade their services, and this will hurt distributors and broadcasters and weaken the Canadian broadcasting system.
91 Let no one be of any doubt that the American recession that we are seeing undertaking there is coming into Canada. We are already seeing that in terms of bad debts, in terms of downgrading of services, and so on, and the next few years will not be easy.
92 The Commission should bear in mind that conventional broadcasters are not losing money. They are profitable.
93 We at Rogers recently spent half a billion dollars on Citytv. We wouldn't have done it if we didn't think we could generate a profit without fee for carriage.
94 In fact, despite the assertions to the contrary, the broadcasting sector as a whole is no less profitable than the distribution sector. Consolidation has provided broadcasters with the tools they need to grow.
95 The two largest players just spent more than $3 billion to become more diversified. Recent financial results suggest that their strategy is already starting to pay off. They don't need a handout. They don't deserve a handout. The regulatory bargain already gives them free use of public spectrum, access to 100 per cent of BDU subscribers, with priority channel placement, crisp, clear signal, exclusive access to local advertising, restricted competition in their local market and simultaneous substitution, one of the most important benefits, which of course the specialties don't have, which contributes up to half a billion dollars every year to the bottom line of the broadcasters.
96 So fee for carriage is not about fair compensation. It is a consumer tax grab, plain and simple.
97 So, Mr. Chairman, in summary, the consumer is truly in charge and that changes everything. It means we can't rely on old solutions and familiar fixes. It means new approaches and new partnerships.
98 For example, we think a good response to distant signal concerns is to create and enhance VOD offering. If consumers can access individual programming on an on‑demand basis, there might not be any market for just‑in‑time shifted signals. In that case we could stop offering them.
99 That is just one example of a consumer friendly solution that works for everybody.
100 In other words, instead of fighting over things like fee for carriage that would be bad for consumers and bad for the system, we should work together to make the system better. And we at Rogers are committed to that. We have had meetings with the broadcasters, luncheons, dinners, we have done everything we can to bring them together with at least Rogers Cable to try to find solutions to these problems without going up to the regulator to have the regulator have to solve every single thing.
101 So let's get started and thank you. We look forward to answering your questions.
102 THE CHAIRPERSON: Thank you very much. I am delighted by your presentation and the constructive way in which you structured it.
103 Judging by your recent press conference, I expected a much more negative tone from you. So I am delighted that we are going to do this in a cooperative way.
‑‑‑ Laughter / Rires
104 THE CHAIRPERSON: As I said, there are five points that concern us and let me go through them one by one.
105 Basic package. You agree with the basic package. You agree with the buy, so how big should the basic package be?
106 You are one of the largest basic packages in the industry. Do you think there should be a minimum amount that we should specify or should we leave it up to BDUs to determine what the basic package is? Give me in concrete what's your view of an optimum basic package.
107 MR. ROGERS: We are going to divide up the answer, sir.
108 We feel that on analog after 2011 there should be no requirement to carry any analog. If the market, in consultation with our customers, finds that it is not a viable solution because the spectrum space is immensely valuable, then there should be no requirements to carry any analog service.
109 If they do carry an analog service, then they should put on whatever the public consultation with our subscribers comes up with.
110 Now, on the digital, our basic principle is it should be one rule for all of the BDUs, not two rules. We don't want the satellites having more rights than the cable companies obviously. We think it is unfair and outrageous and Phil will elaborate.
‑‑‑ Laughter / Rires
111 THE CHAIRPERSON: Phil or Ken.
112 MR. ENGELHART: Thank you, Mr. Chairman.
113 As Ted said, we think that the cable and satellite rules for the mandatory requirements for basic should be fairly similar. So in our case we think that means the mandatory requirement should be the local and regional stations and the 91H services. Nothing else should be mandatory for basic.
114 We believe that the BDU should then decide whether they want to sell that minimal basic or whether they want to add services to it in response to customer demand.
115 You raised the issue in this proceeding about making a small basic mandatory. For cable networks that are hybrid analog digital networks, that would be very awkward today. The way that we would make a basic service smaller can only be done with trapping technology. Literally someone has to go on a truck to the house and they have to install a new trap, a device that blocks certain signals. That is the only way to do it.
116 It really is yesterday's technology, but we still have it in a big part of our network. We have it for basic and it will stay there for basic for a while.
117 So it would be an operational nightmare to trap our existing basic service into a small basic that we offer to all of our customers. Other people can explain more about it to you, but we already have, with our basic and three tiers, ten different traps because there are all sorts of combinations and permutations. If you add in effect a fifth layer in there, because you have now got a small basic and an extended basic, it then becomes exponentially more complicated.
118 So right now we could not really offer just that small basic without incurring a fair bit of cost and we don't think that is the right approach anyway. We think the right approach is for the BDU to determine, by doing customer surveys and investigations, what the size of the basic service should be and the composition of the basic service.
119 Now, as Ted said, we can envisage a world where we have migrated everything except ‑‑ we have in effect migrated everything to digital, and we think we might still have a skinny analog basic that we would offer for people who can only afford that skinny analog basic. So that every TV set in the house that didn't have a digital box would have a basic level of service.
120 But again, that is something that is very attractive to us as a BDU, but we don't think it should be mandated.
121 THE CHAIRPERSON: All right. Let's clarify things here.
122 Let's do pre‑2011 and post‑2011, okay? Pre‑2011 where we still have analog
123 What we said is a minimal basic package. You are telling me technologically that is not doable for you?
124 MR. ENGELHART: That's correct.
125 THE CHAIRPERSON: All right.
126 Post‑2011, if I understood Mr. Rogers correctly, he basically says fine, local, regional and 91H, everything else, every carrier of analog will do it because the customer wants it not because they are being obliged to?
127 MR. ENGELHART: Right.
128 THE CHAIRPERSON: Is that basically what you ‑‑ I just came back from Washington and I was told by the national, whatever they call it, cable association, that they have actually chosen to do it, carry it for three more years past 2009, because they think customers will demand it. But that is optional. That is a business decision.
129 You say basically the same thing here.
130 MR. ENGELHART: Correct.
131 THE CHAIRPERSON: But before 2011, I'm not quite sure I'm understanding this transition period between now and 2011. What is it you suggest for basic packages?
132 MR. ENGELHART: The same thing. The mandatory requirements would be as we outlined, the local, the regional, the 91H, but then, even though that is mandatory requirements, we are not required to sell only that package. We could sell a bigger basic or add to it as we saw customer demand.
133 THE CHAIRPERSON: But you don't think we as a Commission should mandate that you carry analog until 2011?
134 MR. ENGELHART: I think that is correct, but I think that we will.
135 MR. ROGERS: I think that is correct. 2011 is to turn‑off date, sir, where both governments in both countries have determined that analog is gone.
136 THE CHAIRPERSON: Right. I am just trying to figure out what your proposal is for between now and 2011. If I understand it, you are saying that there shouldn't be mandatory carriage for analog?
137 MR. ENGELHART: It should really be the same as it is today, except that ‑‑
138 THE CHAIRPERSON: Right now we have mandatory analog carriage, that's why I am trying to figure out what you are saying.
139 Are you saying that you want to change the rules between now and 2011, or are you saying that we should leave them as they are until 2011?
140 MR. ENGELHART: I am not sure that you have mandatory analog carriage today. I think, if we had a small system in ‑‑
141 THE CHAIRPERSON: I am talking about you, I am not talking about a small system, Mr. Engelhart. Please, let's get on with this. I want to know what the proposal from Rogers is.
142 MR. ROGERS: I think you have stated it well, sir, that between now and 2011, hopefully, the requirement for cable companies would be the same as satellite companies, but it would continue on analog.
143 And after 2011 there would be no more analog rules because there is no more analog.
144 Analog is old‑fashioned technology. You have heard about the traps.
145 THE CHAIRPERSON: Yes.
146 MR. ROGERS: It's just terrible.
147 MR. PURDY: Any wholesale changes to the basic package would require truck rolls to, virtually, our entire customer base. So any radical changes pre‑2011 would be unviable from an operational standpoint.
148 THE CHAIRPERSON: I thought I understood that, but then Mr. Engelhart went on and elaborated further and seemed to confuse me.
149 That part I understand.
150 Secondly, you suggested preponderance for post‑2011. In effect, get rid of any rules beyond the basic package, a preponderance of Canadian channels, and, I understand, preponderance in terms of subscriber buying.
151 In effect, each subscriber has to buy the basic package and a preponderance of Canadian channels, if I understand you correctly.
152 For that preponderance, does basic count as part of the preponderance?
153 MR. ENGELHART: Yes.
154 THE CHAIRPERSON: And preponderance is 50 plus 1?
155 MR. ENGELHART: Yes.
156 Our proposal is that preponderance would be measured in terms of what is offered, but we would commit that if you buy our packages, you will always ‑‑ our customers will always get a preponderance of Canadian services.
157 So we will arrange our packages, and, as you say, that will include basic, to make sure that if you buy our packages, you will get a preponderance of Canadian.
158 If someone orders à la carte, we don't want to have to say to them: You can't get there from here. But if you order our packages, you will always have more Canadian.
159 THE CHAIRPERSON: I don't understand that.
160 If it's not mandatory ‑‑ I'm a Rogers customer. I buy basic, and I want 15 other U.S. channels. You are telling me that you are going to ensure that there is always going to be a preponderance.
161 If I only want to buy U.S. channels, how do you get the preponderance?
162 MR. ENGELHART: We are saying that the preponderance rule that the Commission promulgates should be in terms of what is offered, not what is received.
163 If a customer ordered basic, and then ordered, à la carte, only American services, yes, you are right, they would receive more American than Canadian. But if they don't order à la carte, if they order our packages, we will make sure that doesn't happen. We will arrange our packages so that there is no combination of our packages that would leave them with more foreign than Canadian.
164 THE CHAIRPERSON: Why can't you go one step further and say that you will ‑‑
165 I'm sorry, let me get this straight.
166 The net effect would be that each subscriber would receive a preponderance of Canadian channels. You will ensure that.
167 MR. ENGELHART: As long as they are buying our packages.
168 If someone just bought à la carte services, they could end up in a different place, but that's not very common and it's not very likely.
169 MR. PURDY: Just to build on Mr. Engelhart's point, the vast majority of our customers take the VIP package.
170 Of our digital customer base, the vast majority take the VIP package. We would ensure that the VIP package had a preponderance of Canadian services.
171 If somebody chose to take basic plus digital, and à la carte channels on top of that, it is possible that they could end up with a channel mix that wouldn't have a preponderance of Canadian ‑‑
172 THE CHAIRPERSON: So, in effect, financial incentives to get them to buy a preponderance of Canadian channels, but no obligation.
173 MR. PURDY: Absolutely. Our marketing, our packaging, and our promotion would drive it.
174 THE CHAIRPERSON: And you suggest that we, in effect, mandate that for you; that you should adopt a strategy of financially encouraging people to buy a preponderance of ‑‑
175 There is no absolute guarantee, consumers will do what they want. There are contrarian consumers that don't care what it costs: That's what I want, I'll get it.
176 But persons who make rational economic decisions will, by your offering, be driven to preponderance.
177 MR. ENGELHART: Correct.
178 And you could put that in the rules, say that BDUs have to arrange their packages so that the sum of those packages is a preponderance of Canadian.
179 MR. PURDY: Mr. Chairman, I would just add that most of our à la carte channels, or channels that are available on an à la carte basis, are in fact Canadian. There are very few U.S. channels that are available à la carte.
180 THE CHAIRPERSON: Yes, I know, but I just want to understand the scheme and what it may mean.
181 In effect, you want to have maximum flexibility for you to offer ‑‑ you promise that a rational economic player will wind up with a preponderance of Canadian channels.
182 MR. ENGELHART: Correct.
183 THE CHAIRPERSON: Okay. The second subject that we asked you to talk about is guaranteed carriage.
184 Who would get guaranteed carriage in your world, Mr. Lind, Mr. Engelhart ‑‑ whoever is answering it.
185 MR. ENGELHART: We don't think there should be guaranteed carriage, other than for the 91H services.
186 THE CHAIRPERSON: Let me clarify that. When you say guaranteed package ‑‑ I mean carriage, I mean carriage.
187 91H is a mandatory package, part of basic.
188 Just so that we get the terminology straight.
189 MR. ENGELHART: Right.
190 THE CHAIRPERSON: I want to know, who will get guaranteed package ‑‑ carriage, sorry.
191 MR. ENGELHART: No one else will get guaranteed carriage.
192 The Category 1's and the analog services today have an access right, but they have had several years to build up their brand name, build up their audiences, their popular services. BDUs are going to be in trouble if they don't have them. They don't need guaranteed access.
193 The trouble with guaranteed access is that it leads, inevitably, to Commission‑mandated rates. There is no other way to do it. So you, in effect, have a completely regulated world. If we can step outside of that regulated world, the programming services now have an opportunity to get higher rates. The popular services will get higher rates. The less popular services will get lower rates.
194 As rational business people, they all want the higher rates. They are all going to want to improve their services as much as they can, so it becomes like every other market for goods and services in this country. The rational behaviour of self‑interested business people will drive them to improve their products and services.
195 So we will end up with a better Canadian broadcasting system.
196 I have read a lot of the submissions about how gloom and doom will result if we don't have the access rules. We already don't have them for the Category 2's. Rogers carries almost all of them, and we do that, again, in our rational self‑interest. It is an opportunity for us to say to our customers: Whatever you want, you've got it on Rogers. We offer you a full range of services.
197 We think that all of the other BDUs are going to have to adopt a similar strategy. We think it's the only sustainable long‑term strategy.
198 So, for those reasons, we don't think we need guaranteed access.
199 THE CHAIRPERSON: You mentioned that they have had lots of time to establish themselves. They either have made their brand and they have their customers, or they will never make it, essentially. Doesn't that lead you, naturally, to the idea of a headstart?
200 Let's not forget that we live in the shadow of the greatest broadcast creation engine in the world.
201 Some folks have suggested that maybe you should have guaranteed carriage for your first licence term. After that, you have either made it or not, and then you are free to negotiate with Rogers, and Rogers will carry you if you have built up a clientele and you have become popular. If you haven't, too bad. We gave you seven years. If you couldn't make it in seven years, you are not likely to make it in fourteen.
202 That way we give Canadian companies and broadcasters a headstart, so to speak.
203 On the other hand, they are not forever infants. They grow up and they have to face the world at one point in time.
204 MR. ENGELHART: The analog services and the Category 1's, and most of the Category 2's, are already through that first licence term, so you would be talking about new Category 2's that, in many cases, would have extraordinarily niche content, unless we change the genre protection rules, which will be your next area of inquiry.
205 I am not sure how sensible that is.
206 If a brand new service ‑‑ and I will ask Mr. Purdy if he wants to jump in, but if you have a brand new service like The Fight Network, they didn't need any protection, their programming was very compelling. Everyone thought: Let's get it, because it's a good channel.
207 I don't think we need the protection that you have identified, and given where we are in the evolution of the services, we would be talking about very few new services.
208 THE CHAIRPERSON: Mr. Engelhart, you can't just cut people off today. I mean, they have access, they have grown up in a certain regime, et cetera.
209 Even taking the existing categories ‑‑ take whatever time period you want. I just took the logical one, the licence period. Even if we took today, you are coming up for renewal and, let's face it, this is your last renewal. After that you are on your own, or we will make it a shorter period, or something like that, depending on when you were first created.
210 It strikes me that, if you want me to follow your idea of no guaranteed access, there has to be, also, a phase‑out.
211 MR. ENGELHART: This mythology that we are going to cut people off has been promulgated by a lot of the services in their submissions. It just doesn't make any sense. We have spent billions and billions of dollars to have a system with a huge amount of capacity. We need that programming to offer to our customers so that we can pay off those investments.
212 We are not talking about cutting people off. Customers are incredibly loyal to programming.
213 Again, I will ask David to jump in, but we recently took a very obscure, niche, American service called "Golf" and moved it from one of the tiers to digital, and the phones lit up. People don't like that many changes to their television service.
214 The marketplace will give these people the transition you are looking for, I don't think you need to regulate it.
215 MR. PURDY: I would just add, Mr. Chairman, that I learned two valuable lessons that day. One, that our entire Board of Directors and all of the senior management at Rogers are avid golfers and ‑‑
‑‑‑ Laughter / Rires
216 THE CHAIRPERSON: So those are the consumers you are talking about?
‑‑‑ Laughter / Rires
217 MR. PURDY: They were certainly the first ones that phoned.
218 Secondly, any channel changes, or any fundamental change to our packaging generally results in more pain than gain, and we are very, very careful not to alter the channel packaging or the channel make‑up for that very reason.
219 THE CHAIRPERSON: If I understand you correctly, Mr. Engelhart, after 2011, basically, it will be the basic package, and everything else the market will decide.
220 Is that your approach?
221 MR. ENGELHART: Correct, sir.
222 THE CHAIRPERSON: What about genre protection?
223 As you correctly predicted, that is my next topic.
224 MR. ENGELHART: For similar reasons, we think that a free market will work better than giving individual services a monopoly over a certain genre.
225 If you look at a market like the United States, services morph all the time. The Learning Channel started off with educational programming. Today it seems to have reality programming on home renovating.
226 This is what services do. They do it in response to customer demand, they do it in response to what is hot, and in the Canadian system we can't do that because they are regulated into a certain genre ‑‑ a certain format that they can't leave.
227 If we get rid of genre protection, we are going to improve the Canadian system. If someone is not doing a good job in their format, someone else will try and sneak into that format and take over their spot.
228 That sort of competition will be beneficial to the system.
229 Now, I should say that, in thinking about this, we anticipate sort of a regulatory problem, because if you have an analog service with a high CPE and a Category 2 service with no CPE, the Category 1 service might well say ‑‑ or the analog service might well say: This is not really fair competition. They are coming after my format; they don't have the CPE.
230 We think that if you get rid of genre protection ‑‑ and you should ‑‑ you should create broad categories, such as drama or sports, and say that everyone in that broad category has a CPE of 40 percent, or 35, or whatever you think is appropriate.
231 That doesn't mean that people couldn't move from category to category, and it doesn't mean that people couldn't be hybrid categories, but it means that everyone would have the same CPE, so that the competition would be fair.
232 MR. ROGERS: Could I just add one thing, sir, because it gets confusing.
233 There are two genre protections. There are two. As far as foreign services are concerned, we are not in favour of removing those rules. We are not in favour of a U.S.A. network coming in and things of that nature.
234 I have been a broadcaster all my life and, in my opinion, that would be very harmful to the system.
235 Some of my cable colleagues disagree, but maybe they didn't start as I did, as a broadcaster.
236 What Ken is talking about are rules within Canadian services, and he is suggesting some modifications, sir.
237 THE CHAIRPERSON: Thank you for that intervention.
238 Let's deal with these one‑by‑one. First of all, genre protection between Canadian services.
239 You are saying: Let's move to broad genre categories.
240 The various submissions ‑‑ and, honestly, I don't know whether it was you or someone else, because I read so many of them ‑‑ suggest that there should be one for lifestyle, there should be one for sports, and there should be ‑‑ et cetera.
241 What does that mean? How does it work? Put some flesh on the bones for me.
242 If you have a category for lifestyle, we have some Cat 1's in there and we have some Cat 2's, and we have some analogs. You say that they all get a common CPE, presumably, common exhibition requirements, or whatever.
243 But does that mean that any other new person who wants to come forward with a Category 2 can go in there too, as long as they meet that requirement?
244 MR. ENGELHART: Absolutely, sir. Any new Category 2 could decide to take over Sportsnet, or compete with Outdoor Life if they wanted to. They could compete with each other.
245 And an existing Category 2, or Category 1, could change their format to do the same thing.
246 THE CHAIRPERSON: And the delineation ‑‑ where is the boundary of the genre?
247 As you know, that is fraught with difficulties, and whatever decision we make, we get attacked from one side or the other.
248 Do you think it will be any easier with broad definitions?
249 MR. ENGELHART: You would be completely out of that business, because no one could come to you and complain any more that: This person has crept into that genre, and they are not allowed to.
250 The only complaint you would ever hear is: This person says they are sports and they are paying 40 percent CPE, but, really, they are mostly drama and they should be at 45 percent CPE.
251 That is the only dispute resolution you would be required to do.
252 THE CHAIRPERSON: Wouldn't I still be in the same business?
253 MR. ENGELHART: No.
254 THE CHAIRPERSON: Before you shake your head, answer my question.
‑‑‑ Laughter / Rires
255 THE CHAIRPERSON: You have lifestyle here. We all agree that ‑‑ whatever ‑‑ home and garden is lifestyle. But, then, the Outdoor Network, which also has some sports broadcasting, is it sports or is it lifestyle?
256 Don't I have to make exactly the same kind of decisions?
257 MR. ENGELHART: I am going to ask Rael to add a bit, but if you had a service that was part lifestyle and part sports, and one of them had a CPE of 40 and one of them had a CPE of 35, one rule could simply be that the CPE of the higher one trumps the lower one.
258 So if you combine 45 and 30, your CPE is 40, have a nice day.
259 That would be one simple rule.
260 Rael...
261 MR. MERSON: Mr. Chair, there is no question that in a perfect world we would have one set of rules that would apply to every one of the specialties.
262 We were simply trying to reflect the fact that you might want to impose different sets of rules on different genres.
263 What we wanted to ensure was that there is a dynamism in the business, that people have the ability to morph.
264 The concept, for us, really is: You wake up one morning and you are in the sports business. You decide that you want to be in the news business. Not a problem.
265 What you are required to do is, you would move, as you would. You are required to go back in, send a letter to the Commission and say: Look, I am moving from the sports genre to the news genre, and my CPE and my exhibition quotas will change to be appropriate to that genre.
266 You might want to grant a little bit of leeway, to the extent that somebody decided to do a little bit of this and a little bit of that, but I think you have to pick a predominance of a particular genre.
267 The fewer the better. There is no question about it.
268 THE CHAIRPERSON: Do you have a list of broad categories that you think would be appropriate?
269 MR. MERSON: We came up with five, if that helps. We said: news, sports, general interest, music, and drama.
270 MR. ROGERS: We have tried to come up with ‑‑ if you want to make a change, we have tried to come up with some solutions.
271 But the question is: Do you want to make a change.
272 As I have outlined, no for the Americans. We don't want them in here.
273 And as for the Canadians, I don't know who is pressing for a change in the existing rules. The existing rules mean that our existing players, in the different areas, have enough funds to do a good job and to produce a good service for Canadians.
274 If you have a free‑for‑all in the market, that always leads to a lower standard of programming, and less money spent on programming.
275 That's just my background.
276 THE CHAIRPERSON: I'm sorry, I don't ‑‑
277 We asked for proposals, and one of the issues we raised was genre protection. We wanted comments on it.
278 Am I to take it, Mr. Rogers, that you think we should retain the existing genre protection, or should I go with Mr. Engelhart, who says "Move to five broad categories"?
279 MR. ROGERS: I have trouble, because I started as a broadcaster and I have it in my bones. My friends here are representing the BDU, and so am I.
‑‑‑ Laughter / Rires
280 MR. ROGERS: As a broadcaster, I would say: What's the problem?
281 THE CHAIRPERSON: And as a BDU, you say that there is a problem.
‑‑‑ Laughter / Rires
282 MR. PURDY: Perhaps I could offer the contrarian view.
283 Mr. Chairman, I think our concern ‑‑ and I think we all articulated it ‑‑ is that, in some cases, we see a lack of innovation within certain programming genres, and we don't want complacency in the system, we want people to be constantly fighting and trying to improve their service, and this would allow for more competition within genres.
284 THE CHAIRPERSON: The reason I am asking the question is because I just want to understand the concept. Obviously, we will have to decide what to do.
285 And I think that Mr. Merson has explained to me how it would work. Basically, there would be the rule that, if you change, what you pay changes, and depending on the categories you pick, you take on the higher obligation, whatever it is.
286 COMMISSIONER ARPIN: Mr. Chairman, for the benefit of at least two Commissioners, could you reiterate your list of five categories?
287 MR. MERSON: With pleasure, Mr. Vice‑Chair. We had suggested that news would be a category, that sports would be a category, that there would be a general interest category, which would be a catch‑all for anything else, that music would be a category, and that dramatic programming would be a category, or a scripted series.
288 COMMISSIONER ARPIN: Thank you.
289 MR. MERSON: We tried to mirror the existing ones.
290 THE CHAIRPERSON: And a musical would be music or drama?
291 MR. MERSON: Music, I hope.
‑‑‑ Laughter / Rires
292 THE CHAIRPERSON: Okay. Advertising for BDUs. This is a subject dear to your heart, as I gather from your submission.
293 You also made a very interesting statement, which I wasn't aware of:
"At Rogers, we have the capability to do this today. We simply need the agreement of the broadcasters and changes to the regulations to permit dynamic ad insertion." (As read)
294 Dynamic ad insertion is obviously something that is extremely important to the entire industry. It is one way to keep viewers from migrating to the internet, and also for you to attract advertisers ‑‑ I'm sorry ‑‑ viewers, but also advertisers. You know, they can reach the audience that they want, and you, as the BDU, are in a unique position to actually know who watches what, et cetera.
295 And we have had presentations from people showing us how it can be done, et cetera.
296 I am interested to see that you actually have the capability to do this. Does this mean that if we said tomorrow, "Okay, go ahead, do a dynamic ad insertion," you could go to General Motors and say, "I can make sure that your ads are seen by all young males between 24 and 35, which is your key target audience," or something like that?
297 MR. ENGELHART: I am going to ask Mike to comment, and then David Purdy, but there are two different things that we are talking about, and perhaps we haven't been as clear as we could be. There is putting ads on VOD. That we can do today. There is dynamic ad insertion on linear channels. That is close, but not here today. That requires us to build a system that our American friends are working on right now.
298 I will let Mike put a little more flesh on that.
299 MR. LEE: Sure. Thanks, Ken.
300 As Ken was saying, there are two separate categories of capabilities here. One is for the on‑demand infrastructure. With respect to the on‑demand infrastructure, the dynamic ad insertion capability is essentially a software upgrade capability within the network.
301 That would allow people to be able to insert ads from a specific company. It wouldn't act like a broadcast ad, you would be able to target specific types of content and refresh on a dynamic basis, on an ongoing basis, different creative forms to support that specific content.
302 In the absence of that capability today, it is very difficult to be able to offer more innovative content from the broadcasters to our subscribers.
303 We think the benefit there is that, first and foremost, as you stated, we get top‑quality popular content to our customers, so that when they do migrate from a linear viewing behaviour to an on‑demand behaviour, we immediately are able to capture that usage and actually sell that image.
304 THE CHAIRPERSON: Let me stop you there. With respect to VOD, my household subscribes to VOD, et cetera, and if there is a request, you know it is my household, but how do you know who in my household is watching it, whether it is me or my young daughter?
305 MR. LEE: We don't know who ‑‑ in the dynamic ad insertion ‑‑
306 THE CHAIRPERSON: No, I am talking about VOD right now.
307 MR. LEE: Yes, dynamic ad insertion for VOD.
308 There is no knowledge of who in the household is actually watching it, because there is no concept of logging in or anything.
309 So what you have to do is, the advertiser has to take a look at the data that we provide them with respect to where the house location is, do some inference, and then, basically, sell them advertising tied to the type of content they are actually watching.
310 THE CHAIRPERSON: Right. So you would look at my household and you would say that most of the requests have been for action movies, so from that, and from other factors, you make some inference that it must be a young male, and that way you put ads for young males on.
311 That's the idea?
312 MR. LEE: Yes. In the first stages it is a more crude approach to it, and then, as you move to the targeted technology in the linear broadcast, it is a much more refined approach, because you have a lot more data available to you.
313 THE CHAIRPERSON: Okay. And that technology you have today.
314 Now, if you go into linear broadcasting, let's say, for argument's sake, that we said, "Yes, you can do that," do you think that in the future you would be able, on linear broadcasting ‑‑ let's take a popular show ‑‑ whatever it is ‑‑ CSI ‑‑ you could put in for one household an ad on travel, and for another household an ad on cars, because you know that those folks are interested in travel, while these folks are interested in cars.
315 That is how I understand it. Crudely speaking, that is the idea; right?
316 MR. LEE: There is a big initiative in the U.S., across U.S. cable companies now, to standardize this, because you can't have non‑standard approaches to advertising. You can't do one thing in Philadelphia and a different thing in Los Angeles.
317 But that project, called "Project Canoe", which has budgeted, roughly, about $150 million this year, is designed to specifically enable the capability to be able to do digital ad insertion of specific ads to specific households.
318 And there will be different approaches, depending on which technology ultimately succeeds.
319 THE CHAIRPERSON: And how would the business arrangement behind it go?
320 Would the proceeds from this linear ad insertion ‑‑ assuming the technology is there and you can do it, presumably it would be shared in some way between the BDU and the broadcaster.
321 Right now the broadcaster has a right to broadcast and sell the ads.
322 So, rather than those ads, there would be dynamic ad insertion. Who would market it, and how ‑‑
323 Explain to me the business arrangement behind it.
324 MR. LEE: It would be very similar to the way it works today, in the sense that the broadcaster or the specialty service would sell the inventory itself.
325 There are a number of different proposals. This is technology and a business model that is still yet to be deployed, so there is no precedent for how exactly the revenue model or the economic sharing would work in the model.
326 But one of the proposals that has been offered in the industry is some form of revenue split between the BDU, the broadcaster or specialty service, and the technology provider, where they split the incremental upside that is created as a result of the technology.
327 Generally, when we take a look at new technologies like this, whether it is the internet or in the band services space for television, they generally have that kind of characteristic.
328 MR. ROGERS: Mr. Chairman, if I may add, we can run different ads in Mississauga than we do in Scarborough, or something of that nature, but the suggestion that we are going to have an ad going into Mike's house and a different ad going into my house, and Phil's house is, in my opinion, today, utterly, utterly, utterly impractical.
329 The privacy considerations that we would be faced with ‑‑ and we are faced with them every day. The house next door has two young kids and in my house we don't have any kids, so we run special ads for kids in his house. But they grow up. I mean, the complications of this are enormous to the point where I think it is just totally impractical to sell the ads house by house.
330 THE CHAIRPERSON: You raise it in your submission. I am just trying to understand what you are talking about.
331 I understand this as a VOD aside. I just try to figure out how it would happen on linear broadcasting.
332 If I understood Mr. Lee, he said basically the broadcaster will sell it on whatever basis he can sell it in a dynamic fashion and instruct you as a BDU to insert it along those lines because that is how he sold it ‑‑ I mean, to a great extent ‑‑ and then there will be a split of the proceeds or a fee to the broadcaster for doing this dynamic advertising.
333 If I have it wrong, please correct me.
334 MR. LEE: So let me just clarify a bit, because I do agree with Ted.
‑‑‑ Laughter / Rires
335 MR. LEE: The concept of specifically going to Ted's house, for an advertiser to say I would like to reach Ted's house, is not a viable concept for a number of different reasons.
336 One, there is just no practical reality to be able to create creative to target such a small subset.
337 Right now we have a system where you basically target, you know, an 18‑to‑54 segment for one show and there is a significant amount of waste in that technology. The opportunity for optimization is to be able to segment that into slightly smaller subsets of target audiences and then create different creative. That could mean anything from, as we said in our opening remarks, going and saying, you know, here is an ad for a minivan and here is an ad for a truck in a different household that has been targeted demographically, or it can mean hey, here is a GM ad and here is a different text overlay for an offer based on where the dealership is.
338 That is very, very viable within the bounds of the technology that is available today from a number of different start‑ups.
339 THE CHAIRPERSON: The smaller segments that you are talking about, you are creating that on the basis of the viewing habits that you are uniquely aware of of your customers?
340 MR. LEE: That's right.
341 THE CHAIRPERSON: All right.
342 MR. PURDY: Mr. Chairman, in the U.S. the rudimentary or the crude form of dynamic ad insertion that Mike referenced earlier that is available on video‑on‑demand where they are targeting specific ads to specific content genres and trying to become more specific that way, we are seeing premiums in the 50 to 100 per cent range.
343 So if you take music choice as an example, which provides music videos‑on‑demand, because of the targeted nature of the music videos they are able to command premiums. We have heard cost per thousand in the $30, range which would be a fantastic rate compared to most television 30‑second spots.
344 MR. ROGERS: We can tell the number of homes maybe that tune in. But the idea that we are going to keep records of what people are watching and things of that nature is just totally impractical and privacy rules would just, in my view, not allow it at all.
345 MR. MERSON: Perhaps, Mr. Chair, if I could add quickly just on broadcasters, we are very conscious of trying not to make the same mistakes the recording industry made where, you know, there consumers decided to go to different platforms to access the material that they wanted to hear.
346 We know our viewers are moving to different platforms. Video‑on‑demand is one of them; mobytv is going to be another; direct access through the Internet is going to be another. The key for us is to be able to monetize each one of those platforms.
347 So we are going to have to incent every one of our intermediaries to ensure that we can sell the content through each one of those intermediaries. This is an important part of that plank for us.
348 THE CHAIRPERSON: Let's go back.
349 You advocate an ability to advertise by BDUs and you suggest it is not going ‑‑ you are going to grow the pie. That's the key that I thought I picked out of news presentation. You're not talking about redistributing the existing. You know, it is going to go forward. Why? Because you can offer a kind of advertising that right now only the Internet can do very targeted. So you want to be as close to the Internet as possible.
350 You call this dynamic ad insertion and there is one form on VOD which is obviously much easier for you to do.
351 Another one you think you can do on dynamic ‑‑ on linear programming, if you get the consent from us and the technology is worked out, if I understood that.
352 What I'm hearing Mr. Rogers' basically somewhat discordant voice saying no, that is not where we want to go because there are all sorts of privacy and other problems. Undoubtedly there will be privacy problems unless you do it on a very aggregated anonymous basis or something like this.
353 But the central thrust of your submission, if I understand it correctly ‑‑ I just want to make sure that it is ‑‑ you will grow the pie. You are not talking about grabbing advertising from existing broadcasters but finding new ad market ‑‑ keeping advertising that would normally go to the Internet because it can be targeted there, keep it on television because you can target it on television.
354 If I didn't get it right, please correct me.
355 We are all looking in the future here. You were showing me a vision of the future and I want to understand and make sure I understand your ideas.
356 MR. LEE: That is exactly right. And there are significant privacy issues associated with all of these types of technologies.
357 THE CHAIRPERSON: Yes.
358 MR. LEE: But what we are describing is very analogous to what happens on the Internet today. So it may be very new to the television distribution system, but it is not particularly groundbreaking with regards to the way advertising works today in other interactive platforms.
359 THE CHAIRPERSON: Yes. If I understood Mr. Rogers, he was saying the first step might be those banner ads. You see a specific ad and then you have an address for the local GM dealer in the example, et cetera. So that not only do I see the truck, the GM, but I have also been told where to go, and that would be one way of doing it.
360 Or you might even ‑‑ is there a sort of hooking this up with your ISP provision that in effect click here on the screen and you can land on the dealer's website or something like that?
361 MR. LEE: You can do it a number of different ways. There have been lots of examples, and we have even done it in the past where you actually have call to action on screen.
362 THE CHAIRPERSON: I'm sorry, call what?
363 MR. LEE: A call to action. There is some form of ability to press a button, so the blue button on the remote ‑‑ they have done it quite successfully in the U.K. through B Sky B. You click on the button to ask for either a follow‑up or direct you to some form of a call response, and then that way there is actually some translation between the effectiveness of the ad inventory and the response from the individual.
364 Advertisers clearly are willing to pay a significant premium if they can understand that not only did they get there ad seen, but their ad translated into an action that led to some form of a sale or request for more information, because that is ultimately what they are looking for.
365 THE CHAIRPERSON: But that requires you to provide everybody with a new remote with that extra button on it, I presume.
366 MR. LEE: No. All of this, whenever in the cable industry ‑‑ and the U.S. cable operators are spending a lot of time on this. We always try to create solutions that are backwards compatible. So this will in effect be enabled by software that is downloaded to the set‑top box.
367 THE CHAIRPERSON: I see.
368 MR. LEE: But the remote controls do not change.
369 THE CHAIRPERSON: All right. All of this dynamic ad interaction, you see that both on VOD, SVOD and pay‑per‑view?
370 MR. LEE: I see no reason that it would be only for one specific type of on‑demand behaviour. Now, there may be certain types of content.
371 A great example is we have done a deal with Astral for the TMN service where we provide TMN on‑demand.
372 THE CHAIRPERSON: Yes.
373 MR. LEE: And in that particular case their brand and that sub‑service has no ads, so I would expect that we would not put ads into that inventory. But any inventory where we want to have some form of subsidy support for the costs associated with delivering that service we would probably want to introduce advertising into it.
374 THE CHAIRPERSON: All right. What about avails? You want to have the right to use the avails. Your rights right now are restricted to promotion and even then in promotion it has a certain per cent for yourself and a certain per cent for others.
375 What is it exactly that you think should be the rules for the avails?
376 MR. ENGELHART: Well, it actually links a little bit to what Mike has been talking about with the dynamic ad insertion, because one of the reasons that the Americans are moving more aggressively to implement dynamic ad insertion technology is because they are doing that so that their own avails sales will be more valuable.
377 The avails is a big business in the U.S. because obviously they have far more channels with the avails then we do, and they are putting in dynamic ad insertion for themselves and then it will be available for the other broadcasters.
378 So our proposal is that yes, we should be able to monetize those avails by selling advertising and we are prepared to put some of that money into a fund for Canadian programming.
379 THE CHAIRPERSON: I heard you, but your argument so far was you are growing the pie. You are doing dynamic ad insertion that nobody else is doing.
380 What are you going to do on avails?
381 Aren't you here ‑‑ because the avails are the extra two minutes. Are they also going to be dynamic ads or are these going to be ordinary advertising and therefore competing with existing broadcasters advertising?
382 MR. ENGELHART: I will let David jump in.
383 But initially they will be ordinary ads, and we will move to dynamic when we have it. But we think there is an element of growing the pie there as well because there isn't that much local inventory available where you can buy a television spot for a local shop or retailer in a local community. Most of the broadcasters that are selling national ads ‑‑ we think actually this type of local avails, particularly as it has rolled out in the U.S., will compete more against newspapers and radio stations than it will against TV stations.
384 But I will let David jump in.
385 MR. PURDY: Thank you, Mr. Chairman.
386 In the U.S. the cable companies are incented to build out the infrastructure and the technology that Michael was referencing because they have that two minutes of commercial advertising inventory that they sell on the specialty channels. It is going to help offset the ‑‑ build the costs associated with this more targeted and advanced advertising platform.
387 So we feel that our right to participate in the avails would be helpful in helping us offset the costs associated with building this infrastructure.
388 THE CHAIRPERSON: Offset the costs, please?
389 MR. PURDY: Well, if you look at ‑‑
390 THE CHAIRPERSON: No, I just didn't hear you. You mumbled the last few words.
391 MR. PURDY: Oh, I'm sorry.
392 THE CHAIRPERSON: Offsets the costs with what?
393 MR. PURDY: The costs associated with building up the targeted advertising or advanced advertising platform.
394 MR. ROGERS: But, you know, any thought of comparing it with America, there all of the services have these two minutes an hour. So the cable companies down there have a tremendous inventory of advertising, and they really have no restrictions on selling it and it is a source of perhaps 10 per cent of their profits.
395 Here we have no such thing from the Canadian specialty services.
396 And when we are talking this subject, you sort of wonder whether that would change. And the American services we do have. But then many of those are going over on digital where they are part of a 500 channel universe and perhaps the popularity or value of the inserts on those will not be quite the same as they were on analog.
397 THE CHAIRPERSON: Okay. The proceeds from the avails you have suggested you put 50 per cent into CTF or the Rogers Cable. What about the proceeds from targeted advertising ‑‑ you know, the dynamic ad insertion?
398 I presume since you separated those two, I presume the proceeds from those are going into the general Rogers fund; they are not designated in any way.
399 MR. ENGELHART: Yes. There is no plan to create a new fund as a result of incremental revenues from targeted advertising. Of course, it leads to more revenues and our revenues pay 5 per cent into a fund so in that sense it will lead to more fund money.
400 But no, we're not creating a special fund for that.
401 THE CHAIRPERSON: Why the differentiation?
402 I mean, you are asking for new sources of revenue, but you suggest to split one and not the other.
403 MR. ENGELHART: Right. Well, it is because of the enormous cost of building this infrastructure to do the dynamic ad insertion. Our split of the revenue, as Mike described, is our return for that investment.
404 MR. PURDY: Mr. Chairman, to be candid, we felt that the real beneficiary from the targeted advertising would be the broadcasters themselves and that is the primary reason we are doing this, is to try to provide some added benefit to the broadcasters.
405 THE CHAIRPERSON: Well, that depends on the fee splitting arrangement you work out with broadcasters, whether that is to their benefit or not.
406 MR. PURDY: Yes. But in this case we are not forced to do it and we are doing it partly of an enlightened self‑interest. Obviously Rael Merson and the Citytv guys are keen to do this, but we also felt it would be a logical help to ‑‑ it would be helpful for CTV and Global, et cetera.
407 THE CHAIRPERSON: Obviously, there is self‑interest to keep advertising on TV rather than going to the Internet. I can see that.
408 MR. PURDY: Absolutely right.
409 THE CHAIRPERSON: I am not quite sure I understand the logic for the split, but okay.
410 MR. ENGELHART: Mr. Chairman, I hate to go backwards, but I wonder if I could just clarify an issue that I don't think we have fully got to on genre protection.
411 As Mr. Rogers pointed out, we have a very different model or genre ‑‑
412 THE CHAIRPERSON: Okay. You are right. So let me finish with advertising and we will go back to it.
413 MR. ENGELHART: Sure. Sorry, yes.
414 THE CHAIRPERSON: You are absolutely right. Thank you for reminding me.
415 Where does the figure of $60 million come from of repatriated advertising revenue currently lost to the Canadian system?
416 Is there some study? Is there some evidence about the $60 million?
417 MR. PURDY: The $60 million, Mr. Chairman, is the money that we feel the ad avails will be worth on the open market.
418 THE CHAIRPERSON: Oh, I see. So what is the figure that you put on the increase of the pie thanks to dynamic ad insertion?
419 MR. PURDY: I will ask Mike Lee to speak to that.
420 MR. LEE: There are two factors I think we have to take into consideration.
421 One is that the actual dynamic ad insertion or targeted advertising in linear broadcast is a technology that has not been deployed yet, so assigning a premium to it is a little bit of a black art.
422 But what it does do is we know that there is existing inventory with existing audiences and the ability to be able to parse that inventory more tightly will create incremental sales opportunities.
423 THE CHAIRPERSON: We are talking about three different categories here. We are talking about dynamic advertising on VOD and pay‑per‑view. We are talking dynamic advertising in linear broadcasting and we are talking about advertising on avail.
424 You gave me a figure for the avails of $60 million. You told me you can do VOD today. So if you can do VOD today, you must have a figure in mind of what you are going to earn.
425 And then I gather the one that's still out in the future, because you have to develop the technology and the market, is the linear programming.
426 MR. LEE: So on the VOD, on the dynamic ad insertion on VOD, you know, over a three‑year period, assuming that the content is there ‑‑ because there is a significant factor which is the quantity and quality of content available ‑‑ we estimate that it's roughly about $50 million over the three years.
427 THE CHAIRPERSON: And for the linear one, if I understood your earlier answer, you cannot quantify at this point in time. The technology is not there?
428 MR. LEE: There are a lot of estimates in the industry, but particularly the U.S. operators because they have already committed down this path of doing this, they have a rationalization for their own business. But I think it's still early days yet to be able to assign a target number on it.
429 THE CHAIRPERSON: Do you have a figure on the cost side; to develop the dynamic advertising per linear, how much you can expect to spend?
430 MR. LEE: Yes. I think on the cost side, you know, over a multi‑year period, because there are scaling implications to a lot of this technology, so early days, it's relatively small. I think it's probably about $150 million capital over five years.
431 THE CHAIRPERSON: Over five. $150 million you said?
432 MR. LEE: Yes, $150 million. And that is leveraging the infrastructure that we are already building for switched and VOD.
433 THE CHAIRPERSON: Okay. Thanks.
434 To make Mr. Engelhart happy, let's go back to genre protection and foreign programming.
435 I understood Mr. Rogers to say he wanted to retain the present system when it comes to foreign services. If that was wrong, please elaborate.
436 MR. ROGERS: That was the position. Our brief merely said if somebody could show that it was economically viable for a foreign service to come in and persuade the Commission, that you should leave the door open so that you would have the flexibility to do that.
437 But by and large our position is we want to leave it as it is, subject to you having the authority to let people in as you see fit.
438 Is that fair, Ken?
439 THE CHAIRPERSON: But in your written submission you talk about a viability test.
440 MR. ENGELHART: Right.
441 THE CHAIRPERSON: How do I apply that? Explain to me exactly what you think on that.
442 MR. ENGELHART: As you know, the current test works on the basis of overlap, so you look at how many channels overlap and you ask yourself whether they are competitive.
443 We think it is better to move to a viability test. So with a viability test you would say: Is there any Canadian service that could go under, that could become insolvent as a result of the entry of this American. You would look at that service's profitability currently. You would look at programming overlap. That would be one of your inputs. You would look at advertiser response. You would look at the programming and whether the American service was taking away all the good programming.
444 It is not that dissimilar to what you do in the radio market today where when a new radio station is asking for a licence, you do a viability test and you say: Would the entire radio market in that community become non‑viable as a result of the entry of the station?
445 So it is the kind of regulatory test that you can do.
446 But as Ted says, it's a conservative test, and I suppose we are parting company with our BDU colleagues somewhat because we are saying that the objective is to maximize the diversity for Canadians. So if adding an American would lead to the elimination of a Canadian, you don't want to do it. You want to add an American service when the Canadian services would stay viable. Then we have more choice.
447 THE CHAIRPERSON: You are taking me into an area where I'm very loathe to go. You are asking me to make concrete business judgments on a possible success or not rather than ‑‑ you know, overlap I can look at, whether the program is going to be offered or not. But to actually judge this foreign service coming in will compete against this Canadian and will succeed or won't succeed. On what basis?
448 MR. ROGERS: We thought you would like the flexibility to make a decision from time to time. I would argue personally that I would hope it wouldn't be very many times because we can't stand it. We are a fragile industry here in this country.
449 But the thought we had was that you might want to retain the flexibility.
450 In principle, the idea of bringing in movie networks and the sports networks and all of these foreign services to weaken the Canadian broadcasting system is not something that I favour.
451 THE CHAIRPERSON: So as a fallback you can live with the existing system for foreign channels, a genre protection against foreign ‑‑
452 MR. ROGERS: Yes, as long as you have the flexibility where you see fit to make an exception.
453 THE CHAIRPERSON: All right.
454 Then let's move to your favourite subject, fee for carriage.
455 I have heard you now explain to me long and hard how you think there should be new revenues for BDUs; so advertising rules, we just went through them and you explain them to me, et cetera.
456 But you seem to be opposed to any new source of fees for over the air broadcasters, any new source of revenue.
457 On the other hand, this is the first ‑‑ I mean things have changed. We all know advertising audiences have fragmented. The old social bargain of simultaneous substitution and advertising to support local content work brilliantly, but you have heard what the broadcasters say; that it doesn't.
458 And one of their solutions is a suggestion of a fee for carriage.
459 Now, I have heard you, Mr. Lind, vociferously arguing against it unquestionably, so maybe you can explain to me why you think it is such an unacceptable idea.
460 MR. ROGERS: I'm going to start.
461 Mr. Chairman, we have had three of the broadcasters, CTV, Global and Rogers spend billions of dollars buying other over the air stations. So it is sort of talking out of both sides of your mouth to say we are going to our bankers and we are putting up $3 billion and we believe that will produce a profit in the future and then coming to this hall and saying we need to have more support, more regulatory support.
462 We put out half a billion dollars for Citytv and all the improvements we are making, and we had no thought of asking for anybody else to pay for it. So that is the first point.
463 How on earth can they argue ‑‑
464 THE CHAIRPERSON: Hang on. Hang on. That doesn't work in your case because you are a BDU as well as a broadcaster. For you it is just a transfer from one pocket to another. You are not in the same boat as CTV or Global or Canwest.
465 MR. ROGERS: I wish we were in the same boat in some respects with their services they have.
466 I mean, CTV has its network in Toronto, it has its national news network on basic, it has now a local news on basic. Listen, they are swimming. They are doing well and they are well run and we respect them very much.
467 The same can be said for Global.
468 There is no problem in the broadcasting system or otherwise they couldn't borrow the money to buy each other. I mean, that's a fact.
469 Second, they are spending wads of dough buying U.S. programming. Look at the numbers.
470 Now they come here and say give us some money so that we can continue to buy more and more high‑priced American programming and more and more specialty channels and over the air broadcasters.
471 It just doesn't make sense. It doesn't hang together.
472 THE CHAIRPERSON: Well, let's go back to my original question.
473 We have chosen to use the OTA as a vehicle to ensure that Canadians have local content. That is a requirement that is imposed upon us by the Broadcasting Act. I think we can all take that as a given. There should be local content. Canadians should see their local community reflected on TV.
474 One way we have done it is we have said local broadcasters, you are the primary vehicle. You are also the primary vehicle for Canadian drama, et cetera. And we will give you two sources of large income: one is advertising; the other one is simultaneous substitution.
475 The problem is the advertising one has been fragmented and is fragmenting at a tremendous rate. You are trying to recapture some of the ‑‑ stop that fragmentation through the dynamic advertising you just went through.
476 One of the reasons why I questioned you so intently about it is because I find that a fascinating one, and I wish you all the success in developing this because it seems to me that is something that is needed and that will maintain the Canadian broadcasting system as we have it today.
477 But I don't quite understand how you expect the broadcasters to continue to live up to the obligations under the Broadcasting Act as imposed on them by us while one of their key sources of revenue is fragmenting and walking away.
478 MR. ROGERS: well, because it's ‑‑ we don't think it's fragmenting and walking away. We just spent a lot of money thinking that over the air broadcasting is a good business. So I mean that's a fact. And they have just spent a lot of money arguing it's a good business. They have gone to their bankers saying it is a good business.
479 And to come here and argue it's not a good business is very difficult to understand.
480 Look, it's like a man and a woman ‑‑
‑‑‑ Laughter / Rires
481 MR. ROGERS: The specialty channels are not allowed to advertise locally. And certain stations, like in Toronto, CFTO and Global, are. But Hamilton can't come in and sell locally and neither can Barrie. So they have all of these benefits that the specialties don't have.
482 They have the right to be low down on the dial. They have the right to program substitution that the specialties don't have.
483 So if you gave them fee for carriage, the next thing you'll have is all the specialties coming in and saying okay, if we are all going to be the same, if that is the game, we want to have the same rules of access on the dial and we want to have the same opportunity for local advertising, and so on.
484 So it makes no sense for them wanting to grab off. They are doing very well.
485 THE CHAIRPERSON: You keep using these expressions "grab off" and you assume that there are no countervailing obligations. Surely you don't expect us to say yes, you can have a fee for carriage and no strings attached.
486 I mean, what is driving all of this is what I keep telling you, it's local content. Make sure that the local stations reflect the community in which they live, et cetera, and also that they use that money for Canadian drama, et cetera.
487 So rather than assuming this is a gift, it clearly will be earmarked to help those broadcasters meet their obligations specifically. To the extent that it is earmarked and specifically designated, would that make the fee for carriage more acceptable to you?
488 MR. ROGERS: No.
489 THE CHAIRPERSON: Can you be more explicit?
‑‑‑ Laughter / Rires
490 MR. ENGELHART: I will jump in and I'm sure Ted will as well, and David might want to say something.
491 At the risk of slightly disturbing your flow, in your preamble to this section you said something that I just wanted to come back to before I answered that last question. You said you are going to get more revenue for VOD insertion and yet you don't want the over the air broadcasters to get more revenue.
492 We may have been unclear about that.
493 For VOD ad insertion most of the new revenue is going to the broadcasters. We want something for our costs of doing the VOD. But the proposition that we have for the VOD ads is you give us the content, you get a new way to monetize that content. We need something for our costs, but it's good for us because it keeps people subscribing to our service and they become sort of ‑‑ the VOD's ads allow us to create companion channels.
494 So there is CTV over the air; there is a CTV ad supported VOD channel. It is a way for people to watch what they want when they want, but it is a new source of revenue for the broadcasters.
495 THE CHAIRPERSON: Okay. You want to go back to advertising, let's go back to clarify this point because this is ‑‑ I thought I went through in elaborate detail. I said three categories. Okay? They were VOD, which I understood you were going ‑‑ and you were going to talk about ‑‑
496 MR. ENGELHART: Avails.
497 THE CHAIRPERSON: ‑‑ avails and then linear advertising, dynamic.
498 MR. ENGELHART: Right.
499 THE CHAIRPERSON: You are now telling me ‑‑ let's go through them one by one.
500 VOD. The proceeds of that advertising is going to the broadcasters?
501 MR. ENGELHART: Right, except we want something for cost recovery, but it's small. They get most of the money.
502 MR. PURDY: And I think that's ‑‑
503 MR. ENGELHART: They sell the ads.
504 MR. PURDY: Mr. Chairman, I think that is a key point and I think that was in the newspaper I read; that Mr. Sparks from CTV was confused on the point as well.
505 We believe strongly that there should be an on‑demand extension of CTV's over the air broadcasting network and that that revenue, the advertising revenue associated with that on‑demand extension of CTV's broadcasting network, should be the property and domain and in control of CTV.
506 THE CHAIRPERSON: Okay. I'm glad for the clarification.
507 Number two, linear advertising ‑‑ linear programming with dynamic advertising. Who gets the proceeds?
508 MR. ENGELHART: It's a split. But, as Mike described, in a typical split they would get all of the money they would have got for a regular ad and then the dynamic ad insertion would lead to some sort of increased value of the ad and we would split that with them.
509 THE CHAIRPERSON: But surely the value they get for their regular advertising goes down if you do dynamic ad insertion, because you are diluting the number of people who will be reached.
510 MR. ENGELHART: Not at all. You now get a more valuable ad per eyeball. Right?
511 So they would still be running that car ad across our entire system but some people get the minivan ad, some people get the truck ad, some people get the sports car ad. So overall GM pays more for that because ‑‑
512 THE CHAIRPERSON: Oh, okay. So your model is I have CSI, I sell the advertising to GM. Then, thanks to Mike's magic, you do dynamic advertising. But it is dynamic GM advertising to all GM ‑‑ so GM basically gets a bigger bang for the buck.
513 MR. ENGELHART: Right.
514 THE CHAIRPERSON: Okay. Now, avails.
515 MR. ENGELHART: There is nothing directly in it for the local broadcasters except the money that we put into the funds very directly subsidizes their programming. So that is their benefit there.
516 THE CHAIRPERSON: Okay, thank you for the clarification.
517 Now let's go back to fee for carriage.
518 What were you going to say on fee for carriage?
519 MR. ENGELHART: Well, I agree with Mr. Rogers that it's kind of crazy to ‑‑
520 THE CHAIRPERSON: Surprise!
‑‑‑ Laughter / Rires
521 MR. ENGELHART: ‑‑ kind of crazy to subsidize someone that is making a profit on a service.
522 But even beyond that, even if there was a disease that needed to be cured, the cure that is proposed here is worse than the disease because, first of all, they're taking ‑‑
523 THE CHAIRPERSON: Hang on. My question was: If fee for carriage is tied to, you know, whatever you want to tie it onto so that they can live up to their obligation under the Broadcasting Act, Mr. Rogers said no and then turned it over to you to elaborate why.
524 I'm trying to figure out why a fee for carriage with strings is unacceptable.
525 MR. ENGELHART: Well, first of all, there is certainly no strings in their application. They are saying this is what we ‑‑ this money goes into our pocket. This is money that we need for our bottom line.
526 So as we described in our brief, if you do attach strings to it, it's an incredibly inefficient way of subsidizing whatever you are going to subsidize because you raise rates. You now have drop‑off from the system, drop‑off not just from basic but people will downgrade their packages.
527 So when you end up figuring out the incremental benefit to whatever you are subsidizing, drama or if your strings attached to local, there just couldn't be a more inefficient way of doing it. It couldn't be a way that is more disastrous to the system.
528 If you are worried about people doing local or people doing drama, you are going to have to put in some mechanism to do that. Right now that's the deal. You do local to get a local station. I think that deal is good enough.
529 But if fee for carriage is the way to enhance that, I don't think you could find a more inefficient way of doing it.
530 THE CHAIRPERSON: I find it interesting that you immediately talk about drop‑off, et cetera.
531 I mean, as a broadcaster still you raise your fees annually and you haven't had a decrease in subscribers. So I don't know what the price elasticity is. I saw this ‑‑
532 MR. LIND: Yes, but they get something for it. They get something for it.
533 THE CHAIRPERSON: Well, they would get something here for it too.
534 MR. LIND: No. No, they don't.
535 THE CHAIRPERSON: As I say, the strings attached ‑‑
536 MR. LIND: Last year and this year it is the same thing.
537 MR. ENGELHART: There is an awful lot of mistakes that are made in this area that a first‑year economics student wouldn't make.
538 I mean, when you look at a rate increase, for starters you have to look at the real increase versus the nominal increase. You have to take into account inflation. If a product sells for $25 a month and there is 3 per cent inflation, then a 75‑cent rate increase is the rate of inflation. That is, costs are going up, wages are going up, salaries are going up, prices are generally going up.
539 So to look at an increase like that and say "well, I didn't see any drop‑off, therefore you could go up another two or three dollars and not see any drop‑off" is erroneous thinking.
540 The other thing is, as Phil said, if you look at a rate increase you have to look at the same product or service before you can say anything about elasticity. If the product or service is changing ‑‑ more channels, and we are adding channels; better pictures, we are giving better pictures; new functionality, we are giving new functionality; better service, we are giving better service ‑‑ you end up ‑‑ I'm not saying very much about elasticity.
541 So they are basically arguing that cable service is perfectly inelastic. It is an observed proposition.
542 We have rate increases that are commensurate either with inflation or the additional value we are giving, or both, and you add two or three or five dollars to that with no benefit to the customer, like every other product or service in the economy you are going to see drop‑off.
543 THE CHAIRPERSON: Well, I am not a first‑year economics student so I am not going to get into that argument with you.
544 Mr. Lind says you get nothing more. You are absolutely right when you are talking about a fee for service as a grab. When I talk with strings attached, let's take just one simple example. If it was tied to an increase of CPA on local content, you would get more.
545 I mean, you are positing the thing deliberately in a way to make it true as a possibility.
546 MR. ENGELHART: The consumer doesn't get more. The consumer is paying two or three or five dollars more a month and they are not seeing anything different. They are going to drop off the system.
547 Every demand curve is downward sloping. There is no way to avoid it.
548 MR. PURDY: Mr. Chairman, if I could add, the perception is that we flow through an annual rate increase without any thought and nothing could be further from the truth.
549 We agonize over every one of our rate increases. We look at our capital expenditures, the improvements ‑‑
‑‑‑ Laughter / Rires
550 MR. PURDY: Obviously they don't manage a customer billing relationship.
551 But we spend a great deal of time worrying about our rate increases. We make sure that we have added value. And if you look at our customer satisfaction data over the last three years, we have actually risen in customer satisfaction dramatically, and that is because whenever we have put through a rate increase we have added value in for those customers.
552 THE CHAIRPERSON: You make it sound as carrying OTA is a burden to you. Surely you need the OTAs because Canadians want to watch it. That is the only way they are going to have a local content.
553 The attractiveness of Rogers' service is the vast array of things that it serves, but one of those happens to be local TV.
554 MR. PURDY: But there is an opportunity to have a discussion about fee for value that we are not having.
555 I think the problem with the current fee for carriage discussion that has gone on for the last year or so is that there is no incremental value in terms of how customers perceive it. Our customers have told us they want more choice, more convenience, more control.
556 They tell us that in our CSAT surveys, our Customer Satisfaction Surveys.
557 There is an opportunity for the over the air broadcasters to help themselves. If they were embracing the on‑demand platform, if they had a CTV on‑demand or a Global on‑demand, then we could have a very serious discussion about incremental value for the customer and compensation for that. But we are not having those discussions because we seem to have infantilized the broadcasters and they instead are coming here looking for, you know, a tax or a handout, and I don't understand that.
558 MR. ROGERS: Could I just add that there is one thing that we should remember.
559 I remember when we started at Rogers Cable in 1967 all we had was over the air stations. And the competition was the antenna, and people were used to having the antenna and getting the service for nothing. So we had to persuade them that it was the quality, the pictures being better, and so on and so forth, and it was worth the fee.
560 What people don't appreciate now is that with digital, the signal quality over the air of digital is far superior to analog. It goes unimpaired farther than analog and then it drops right off.
561 The competition to cable and satellite from over the air will increase when they are dependent totally on digital reception. So many people will say, "Why am I paying all this money. I just want sort of the local station." And they will put up a small inside antenna and they will get crisp, clear pictures, depending on the market, from half a dozen or a dozen signals, many including the U.S.
562 That's what we are up against.
563 THE CHAIRPERSON: I understand that.
564 Now, we are not in '67, we are in 2008 and we have to deal with the reality that we have today here. You have made a very plausible argument about keeping advertising in TV. But moving to the other side, you disagree ‑‑ let's agree to disagree.
565 You don't think the fee for carriage as positioned by the ‑‑ and I have an open mind. I'm just giving you a hard time. Don't worry, I will give CTV and Global the same hard time.
‑‑‑ Laughter / Rires
566 THE CHAIRPERSON: I'm just trying to get on top of this issue.
567 But even if I accept your argument, Mr. Lind and Mr. Engelhart, I have a real problem following it when we are talking about distant signals, which is closely related.
568 There you are offering something extra. I can't get it over the air. I love it, frankly. I love the distant signal because I'm late; fine, I can still get the news at the hour I want it, et cetera. It is great.
569 But that you are giving for free ‑‑ you are getting for free, according to the broadcasters. Now why if ‑‑ just let me finish, please.
570 Even if I accede to your argument, which I haven't, I have just heard it, I don't understand how it applies to distant signal. How by giving me Global from Winnipeg or Global from Vancouver two hours later or three hours later, you are not putting an extra offering for which you haven't paid.
571 That is basically the argument.
572 MR. ROGERS: Let me try and help. What we would prefer is some arrangement with our friends at CTV whereby it is available repeated on video‑on‑demand. We don't really want to bring in Winnipeg and Vancouver, those places. The other system is much more practical.
573 So if they demand payment for carriage, distant carriage, then I can understand the logic of that. I'm not sure we would continue the service.
574 THE CHAIRPERSON: But let me follow up your argument.
575 If indeed they could do that and you show or you repeat CTV on video‑on‑demand, you would pay for the privilege?
576 MR. ROGERS: Well, it's their benefit too, because they are getting their ‑‑ if they have their ads included, they are getting their ads run and it increases the size of their audience. So it is in our mutual self‑interest to have lunch together and get the show on the road.
577 THE CHAIRPERSON: Yes. I still didn't hear an answer. Would you pay for it or not?
578 MR. ENGELHART: No. The model as we described to you before is we don't pay for it. They give us the content, they sell the ads again and they get ad revenue. That's the VOD advertising model. It's that same model we talked to you about before.
579 MR. ROGERS: Or they run the existing ads.
580 MR. ENGELHART: And as Ted said, you might be able to do away with distant signals altogether because you can give people what they want when they want without running the distant signals.
581 Mr. Chairman, I realize that you have moved to the distant signal portion of your questioning now and I have a great deal I want to say, but I don't think we have fully answered your questions about fee for carriage.
582 With your leave, I would like to make another point and then ask my colleague, Mr. Merson, to make another point.
583 THE CHAIRPERSON: I am finished with fee for carriage, you're right. But I suggest we take a 10‑minute break. I think we all need a nature break.
584 MR. ENGELHART: Thank you, sir.
585 THE CHAIRPERSON: Thank you.
‑‑‑ Upon recessing at 1044 / Suspension à 1044
‑‑‑ Upon resuming at 1059 / Reprise à 1059
586 THE CHAIRPERSON: Let's resume.
587 Mr. Engelhart, you said that I had left fee‑for‑carriage. I hadn't, but you have, obviously, something to say on fee‑for‑carriage, so please do so.
588 MR. ENGELHART: Thank you, sir.
589 I wanted to respond more fully to a few of the questions that you posed, and I am going to ask Rael to comment, as well.
590 You talked about the value of the local signals, and you said: Look, the cable companies benefit from carrying these local signals.
591 We have sort of a real world experiment, in that if we look at the regulatory regime in the United States, the American over‑the‑air services are either entitled to must carry or to a fee, but not both.
592 So there are free market negotiations between over‑the‑air broadcasters and cable operators, and in 99 percent of those cases the cable operators don't pay.
593 They are saying: Look, we will take your local signals. We are happy to do it. We are happy to give you carriage, happy to add it to our lineup. But if you want payment for those signals, we are not going to make it.
594 The notion that these signals are worth 50 cents or 75 cents, or some other number like that, is not borne out by that American experiment, and we don't think that they drive that type of value to our customers for the reason that Ted gave, you can pick them up free over the air. It's very hard to sell people a cable service when that service has things that they can take advantage of free over the air.
595 The second point I wanted to talk about was your ‑‑
596 THE CHAIRPERSON: Hang on. Before you leave the U.S. experience, if you are right and they have the option of negotiating, is there not a standard fee, or a minimum fee, or something that has to be paid when you have carriage?
597 MR. ENGELHART: No. It is all negotiated and, in most cases, it ends up being zero.
598 THE CHAIRPERSON: Okay. My briefing was different, but that can be verified, obviously.
599 I'm sorry, go on.
600 MR. ENGELHART: You also talked about attaching strings to make it work. You would have to attach a lot of strings, and they would have to be wound very tightly. Even so, I don't think, as I said before, that it is an efficient way of doing things.
601 Say that you wanted to tie fee‑for‑carriage to local spending. You would have to get some sort of benchmark for how much spending they are doing now locally, and then you would have to say that 50, or 75, or 100 percent of the fee‑for‑carriage would have to go into local spending, but you would have to make some estimate of how much local spending would have increased anyway.
602 You would probably need to put on a CPE for local broadcasters.
603 So the strings that you are proposing to attach would be very complicated, and, as I said before, the efficiency of a regulatory subsidy like that is very poor, because you do have drop‑off from the system, so you end up with very little incremental benefit going into the thing that you are trying to stimulate.
604 The third point that I want to make ‑‑
605 THE CHAIRPERSON: I'm sorry, I want to interrupt you before I forget the point.
606 MR. ENGELHART: Sure.
607 THE CHAIRPERSON: Why would it be so complicated? Why wouldn't we say: Global, how much are you spending on local content?
608 We know the figure.
609 Okay. That's your base. You are getting a fee for carriage.
610 I will take your example, 50 percent goes on local content. So it's today plus 50 percent of fee for carriage.
611 It seems to me that it would be a very simple way of administering it, if you wanted to go that way, just to follow your example.
612 MR. ENGELHART: Is that 50 percent just for incremental spending, or can they allocate some of that to overhead, fixed costs, salaries, wages?
613 Once you get into these costing games ‑‑ I mean, this is how I started off in the telecom business, doing costing. It is a mugs game. You need a team of cost accountants to monitor these things, and, even so, you end up with arbitrary results.
614 THE CHAIRPERSON: Yes, I have been there, too. I know that cost accounting is a mugs game, but I don't think it is insurmountable. You do have separate cost centres and separate ways of allocating costs, et cetera.
615 But, anyway, I understand your point. Let's go on.
616 MR. ENGELHART: The third point is, how much sense does it make for one industry to subsidize another industry when they are making, roughly, the same profits?
617 You can't look at EBITDA and compare cable and broadcasters, because EBITDA compensates you for capital. We spend $700 million a year on capital in our cable business; the broadcaster spends $10 million a year.
618 A more relevant figure is PBIT. If you look at PBIT, according to the Armstrong study, which was done for the CAB, broadcasters, overall, have a PBIT of 15 and cable operators have a PBIT of 18.
619 Mr. Armstrong stopped at 2006. If you go to 2007, it is actually 17 for the cable operators and 16 for the broadcasters.
620 So the PBIT is almost exactly the same. But even PBIT, I would argue, is not a fair comparator, because the "I" in PBIT is for "interest", and when you spend hundreds of millions on capital, you have a lot of interest, so a profitability measure before interest is unfair.
621 If we had fee‑for‑carriage, you would drive the broadcasters up into the low twenties, you would drive the cable operators down into the low teens or the single digits, and now you have created a new problem. Now, okay, they are really rich, but we aren't, and we can't afford to build the platforms we are building, and we can't afford to do the things we are doing.
622 This whole notion that cable has a huge pot of money that we can subsidize people with isn't borne out by your own figures at the Commission on profitability.
623 THE CHAIRPERSON: Let's stay out of the rhetoric. You haven't heard me say that cable had a whole pot of money that should be redistributed or anything like that.
624 I am dealing here with the facts presented before us.
625 What we have seen in the last year is very interesting. The broadcasters have bought specialty channels. You, a BDU who has specialty channels, has bought an over‑the‑air broadcaster. Both of you are trying to cover your bets both ways, you are trying to have specialty channels and over‑the‑air channels.
626 The fact that they bought specialties and you bought City, as far as I'm concerned, cancels out to say that they have money to spend ‑‑ "Look they have bought" ‑‑ but, you know, you forget what you have done.
627 What I am concerned with are the objectives of the Broadcasting Act, making sure they are met and that everybody has sufficient means to do it.
628 I think we were very successful in setting up a system which, while it may be overly complicated, very dirigiste ‑‑ we managed to create a very diverse system, satisfying the various needs of Canadians.
629 That is how I see it, and I keep using the expression, "It is built on the cornerstone of the OTA," and funding for the OTA I see as being jeopardized.
630 Now, you suggest that it's not, and I guess that is one thing we have to examine in this hearing, to see whether that is true or not true.
631 Secondly, if it is in jeopardy ‑‑ and what I am concerned about is local content. It strikes me that I haven't heard anything from you which suggests that local content can be funded out of the existing revenue base, given the fragmentation of advertising, unless Mike pulls a rabbit out of the hat and his dynamic advertising actually works for linear programming, and then everybody is happy.
632 MR. LIND: OTA may be the cornerstone, but also, as we pointed out, the customer is the cornerstone, too. The customer has some say in this whole thing, and if you are just going to sock the customer with $5 or $10 extra a month for nothing extra, we are going to have a revolt on our hands, and we are going to have a problem with that. We are going to have a big problem with that.
633 THE CHAIRPERSON: Again, that depends on the size of the fee‑for‑carriage, the way it is being phased in, et cetera, and to what extent you pass it on, to what extent you don't.
634 Those are all business decisions that have to be made.
635 MR. MERSON: Mr. Chair, could I see if I can give a broadcaster's perspective, when I am tied to a BDU?
636 The question you ask yourself, really, is: How should a broadcaster feel about this, and what are the logical reasons that one might not be in favour of fee‑for‑carriage?
637 The facts that I look at are as follows. When you look at revenues in the over‑the‑air market over the last few years, they have been growing ‑‑ not strongly, but they have been growing at the rate of 1 or 2 percent per annum.
638 If you look at Canadian programming expenditures, they have been largely flat, also growing at 1 or 2 percent per annum over the last few years.
639 If you look at U.S. program acquisitions over the last four or five years, you see a massive increase in spending in the U.S.
640 So, to me, it is a little disingenuous to argue that the funds aren't necessarily available to fund Canadian programming, and local programming, when the bulk of the money, or the increase in spending, really has gone to U.S. program acquisition.
641 If you were the NHL and you were faced with a situation like this, and you had a massive increase in one of your costs, your inputs into your system, the natural solutions to them are salary caps.
642 There are salary caps, or there is tied spending of some sort.
643 The NHL went down the salary cap route. You could impose a tied spending regime if you thought this was the issue.
644 The problem with introducing more money into a system like this, and the reason that none of the businesses in this situation do that, is because it simply adds fuel to the fire. All that happens ‑‑ and I understand that you will go back in and impose some obligations, probably related to local spending, but it will, fundamentally, add fuel to the fire.
645 And if the system works as it has worked in the past, it will be very difficult to identify the money that is spent on local programming.
646 We have been at it with Citytv for six months, and I still don't know how much they spend on local programming.
647 I ask myself, as a broadcaster, which is more in my interest, to sort of build a system where I believe that money might be imposed on my audience, and I might drive them from the system itself ‑‑ as opposed to a system where I get guaranteed carriage.
648 I have a BDU in place that will allow me to be advertising agnostic. Wherever my viewers go, I want them to have a platform to allow me to monetize those viewers in a way ‑‑ wherever the viewers choose to watch what it is that we have on offer.
649 I would choose the latter system rather than the former system. The former system, to me, results in more program inflation. It doesn't necessarily, even with obligations, result in the meeting of those obligations. It, instead, results in sort of a program inflation fuel, as opposed to building the infrastructure of our system that allows me to be fundamentally medium agnostic. I want advertising, I want to acquire the rights, and I want to acquire the rights to exploit that advertising in every medium that is available to me.
650 And I want a BDU in the Canadian system that has the capabilities to allow me to do that.
651 For me, that is a fundamental broadcasting position. I don't think ‑‑ it is a choice.
652 THE CHAIRPERSON: I don't follow you, Mr. Merson. Explain this to me.
653 You are a broadcaster. Presumably you have separate costs in the Rogers empire, and you have to justify your expenditures, et cetera. You are not going to be subsidized by Rogers. So how do you meet the problem that CTV and Global point out, that U.S. programming is, to a large degree, what Canadians want to watch?
654 The price of it is going up. Yes, there is competition from simultaneous substitution, but that's not enough.
655 You, as Citytv, must be meeting exactly the same cost pressure, and yet your advertising dollar is going down. It is being fragmented.
656 Why would you not have the same "problematique", so to speak, as CTV or Global?
657 MR. MERSON: We have exactly the same issues, the question is what the solutions are. Whether the solution is to introduce more fuel to the fire and drive programming costs a little bit further, or whether the solution is in ‑‑ I don't want to say a more orderly marketplace, because markets work in the ways in which they work.
658 But to the extent that there is a recognition, for example, that there is no advantage to be gained by one party over another party, you tend to end up in a marketplace that becomes more rational about the acquisition of programming.
659 If you look at program inflation from the acquisition of U.S. programming, it has been tremendous. Why has it been tremendous in the last few years when it wasn't tremendous in the decade before? That probably relates more to inequities in the marketplace, the marketplace realities. We know it hasn't been driven by massive increases in revenue. It has been driven by one of the parties believing they can acquire a superior position over the other, and therefore driving an acquisition strategy that has worked very well for them.
660 THE CHAIRPERSON: So it is rational bidding by the networks that is the cause you are saying.
661 MR. MERSON: Certainly the evidence suggests it. The evidence suggests that that is where the issue is.
662 If you believe, for example ‑‑ if you go back to the evidence and you look at it and you conclude that that is what the problem is, there are lots of solutions to it.
663 I am not advocating them, because I think the market will sort itself out, but there are lots of solutions that will target just that issue, rather than throwing fuel on the fire.
664 THE CHAIRPERSON: What solutions are you talking about? You have to be a bit more specific for me.
665 MR. MERSON: You could have a salary cap, in the sense that the NHL has a salary cap that says: As a player, depending on what your audience is, the maximum amount you can spend on the acquisition of foreign programming would be X.
666 I am not advocating that. That is the NHL's solution, but I am not advocating it.
667 Tied spending might be more akin to the environment that we are in, which says: This is a luxury tax, effectively. To the extent that you want to spend that much more money on the acquisition of U.S. programming, there has to be a luxury tax that funds the Canadian system, as well, and sort of reinvests that money into the Canadian system.
668 It is another model. There are hundreds of economic models you could adopt that really target what I think is the heart of the issue.
669 I am not advocating them, because I do believe that the market will right itself.
670 As I say, for us, if we were given a choice between one system or the other, I want the ability to take my programming and monetize it wherever my viewers want to see it.
671 THE CHAIRPERSON: You just gave me two solutions, which are clearly regulation and not a free market, and in the next sentence you say that you believe in a free market. I have trouble reconciling these ‑‑
672 MR. MERSON: No, I want to be ‑‑
673 THE CHAIRPERSON: Whether it is a luxury tax or the NHL solution, either one of them is highly interventionist.
674 MR. MERSON: I am not arguing for them, I am arguing that the market will, in fact, sort itself out, and it doesn't require intervention.
675 The bigger issue is keeping Canadian viewers on a Canadian system.
676 I am simply giving an example of what the solutions might be that might be more targeted to the problem at hand.
677 THE CHAIRPERSON: Mr. Engelhart, back to you. You mentioned the U.S. model, and before the break you sort of indirectly hinted at negotiated fees.
678 What exactly is your position on the negotiation of fees?
679 MR. ENGELHART: It is not something that we are advocating in this proceeding. If you brought in a system like the U.S. system, where the local broadcasters could have either must carry or a fee, but not both, which I believe Videotron is advocating, we could live with that.
680 The problem is, sometimes in the U.S. the cable operator says: We will drop your channel then.
681 They say to NBC: We are not going to carry you any more.
682 The problem with that is, it is disruptive for customers.
683 I think you are going to end up, more or less, in the same place we are now. So there is a question of whether we want to go through that disruption to end up in the same place.
684 The other concern that we have, quite frankly, is, I am not sure the Commission would stand by and just watch those free market negotiations take place. There would be pressure on the BDUs to pay a little money to get along. Can't we all just get along here?
685 In the U.S., the regulator steps back and lets those negotiations take place. Our history has shown that that is not entirely the Canadian way.
686 We could work with that system, but we are not advocating it.
687 THE CHAIRPERSON: I asked Mr. Merson this because it seems to me, really, that our business model for producing local content is broken, and one way to fix it is through fee‑for‑carriage.
688 If you have a better way of doing it ‑‑ I mean, I heard you saying that the market will sort it out.
689 I hate to dismantle something, or see something go down the drain without having some assurance that, at the end of the day, there will be an outcome that will be compatible with the Broadcasting Act and the clear obligation that it sets upon this Commission. It strikes me that, without fee‑for‑carriage, local content will be in serious danger.
690 You testified before me for City, and I remember that we pushed you quite a bit about news in Vancouver, and you were very reluctant to do it, because you say that the market is ‑‑ there is no business in it.
691 On the other hand, I think that Vancourites are entitled to local news.