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.

692              Help me out here.  How are we going to solve this?

693              MR. MERSON:  Again, it goes to the vision of what over‑the‑air is, and we went through the discussion in Citytv ‑‑ not very successfully, I might add.

694              The point we tried to make was that local television has two avenues open to it.  What it can't do is duplicate what it is the specialties can do.  The two avenues open to local television are local reflection and high‑quality prime time content.

695              There is nothing in anything we have learned in the last six or eight months that has changed our opinion on where the over‑the‑air business is, so you need to be ‑‑

696              It is confusing, and it is a dichotomy.  You have to be as local as you possibly can be in local content, and you have to be as appealing as you possibly can be on the first‑run content, whether it be Canadian or non‑Canadian, that appears in prime time.

697              As we have gone back into City, we have expanded the news on City in Toronto.  We have some plans for City in Vancouver, as well, but we will be ‑‑

698              I think what we said at the hearing was:  Give us a chance.  We haven't been there yet.  We will try to figure it out.  We are coming back for licence renewal in less than a year's time.  You are going to hold us accountable, and we know you are going to hold us accountable.

699              The issue is, do you need a subsidy if the core function of your business is to provide local service?  I don't know so much.  I think ‑‑ that's where you business is.

700              THE CHAIRPERSON:  Okay.  Let's go back to the distant signal ‑‑

701              MR. ENGELHART:  Could I just add a point, Mr. Chairman?

702              THE CHAIRPERSON:  Sure.

703              MR. ENGELHART:  I think we disagree with the assumptions in your question, or the parts of your question.

704              We don't think the model is broken.  Don't forget, the over‑the‑air segment is profitable.  This has to be the only country in the world where profitable companies can come in and demand a subsidy.  The model is not broken.

705              THE CHAIRPERSON:  You should talk to the steel industry ‑‑

‑‑‑ Laughter / Rires

706              THE CHAIRPERSON:  ‑‑ if you think this is the only country where profitable industries ask for subsidies.

707              MR. ENGELHART:  Ad revenue is not going down.  Ad revenue is increasing each year for the over‑the‑air stations.  It has increased since 2000 at about 3 percent.  I am sure they would like a bigger increase in revenue.  We have talked about some ways we can do that.

708              With respect, I would argue that you have taken the wrong conclusion from that hearing in Vancouver.  The conclusion that I would draw is that a company that had lots of other uses for its capital decided to spend $400 million to buy some local broadcasting stations that had very onerous local spending commitments ‑‑ 30 hours, I think, for our Vancouver station.

709              The debate that I believe we were having in that proceeding was:  How much of that 30 hours should be spent on news, and how much on other local reflection?

710              The argument that I believe we were making in Vancouver was that Global had kind of a lock on that local news.  They were doing a great job on the local news.  They were spending tons of money, and people were happy with their local news.

711              This isn't a story where the model is broken, this is a story where two or three local broadcasters were spending a ton of money on news, and one was saying:  I would rather put my money into the morning show and some other things.

712              So I don't think that I would take your conclusion that our acquisition of City and our answers in the hearing associated were evidence that we can't fund local.  We can still fund local.  The market is still profitable.

713              The solution to it, which is the fee‑for‑carriage, I think, will have all sorts of unintended consequences, and I certainly don't think you can go down that path unless the model really is broken, and there is no evidence of that today.

714              What you are saying is, companies are saying:  One of my divisions is less profitable than another division, so I want a subsidy from some other industry, which, overall, is no more profitable than we are.

715              Again, I can't think of any other country in the world where a proposition like that would be taken seriously.

716              THE CHAIRPERSON:  Listen, just because I pose questions, don't think I have reached any conclusions.  I am pushing all of the points that you are making to their logical conclusions, to test their validity.  Don't read anything more into my questions than what they are, questions to try to get my head around the issues.

717              MR. PURDY:  Mr. Chairman, I would like to make one additional comment.  You had referenced the fact that we would link back the local content to the fee‑for‑carriage.  Just from a marketing perspective, I can't see how that would be relayed to the customer.  I can't see a marketing piece, or a promo, or a 30‑second spot saying:  The additional $5 that is currently on your cable or satellite bill is helping to fund one or two hours a day on CTV or Global.

718              I don't understand how we could pass that value message on to customers in a way that they would understand.  I think they would really struggle with it.

719              MR. LIND:  And we are going to pass it on.

720              THE CHAIRPERSON:  No doubt, you will try to pass it on.

721              MR. WATT:  If I could, I would like to explain the economics behind that decision.

722              The simple way we look at it is, say that it is a $3 per month cost increase.  If we were to decide not to pass that on, we would then incur a cost of $7 million per month.

723              Our alternative is to pass it on and then see how many customers drop off.

724              And we lose money at about $22 per month per customer that drops off.  Our average revenue per user is about $56.  An EBITDA margin of 40 percent leaves about $22.

725              So we see where the cross‑over point is, where we lose so many customers that we actually cross past the point of losing $7 million in the month.

726              And there are around 305,000 customers.

727              We would pass it on.  The economics are that we don't think we could lose 305,000 customers, so we would pass on the $3 and see ‑‑

728              MR. LIND:  And, Mr. Chairman, the proposition that we would have to go to the public with ‑‑ to our subscribers and say, "Guess what?  The CRTC has imposed a $5 or $10 tax per month, and you are getting nothing extra for it, except, maybe, half an hour a week, or a day, of Canadian from Global," I don't think that's a very good proposition, and I don't think that people will stand for it.

729              THE CHAIRPERSON:  I have no doubt that you are going to do exactly the same as the gas companies do, put their little sticker on every meter that says, "Forty‑two percent is tax, and profit is only 2 percent," et cetera, and you are going to blame us for any increases.

730              That being said, it doesn't take away from the fact that we have a responsibility to discharge, and we will discharge it.

731              Now, hopefully we can find a way out of this conundrum that is acceptable to everybody, but the mere fact that you may want, at the end of the day, to pass it on and blame us for it is not a reason not to do it if it otherwise makes sense and otherwise meets the objectives of the Broadcasting Act.

732              We are not there by a long shot.  We are at the opening day of a three‑week hearing and we are trying to ‑‑

733              MR. LIND:  We are trying to cooperate, too.  We are trying to find new ways to monetize content within the system.  We will work with the broadcasters and do everything that we have to do in that regard.

734              It is just that, if this thing happens, we don't work with them any more, and we have an all‑out war, and it's a real problem for our customers, because our customers then say:  We'll leave you.  We'll go somewhere else.

735              Because they now have the option of going elsewhere.  They didn't before.

736              When we were in the sixties and the seventies and the eighties, okay, a big regulated system, no problem.  You can't go anywhere else.  Now they can go elsewhere, and that's what I am worried about.

737              If they go out of the system, it is really a problem for all of us.

738              THE CHAIRPERSON:  I understand that.  As you very well know, we are looking at new media, and we are going to have a hearing in the fall, et cetera, because, like you, I am exactly worried about what the impact of new media will be on the existing system, and the last thing I want to do is drive people from the present system into an unregulated new media system.

739              So we are on the same wavelength there.

740              Let me go back to Mr. Engelhart.  You sort of made this a binary choice, either a negotiated fee or guaranteed access, but not both.

741              Isn't there a halfway house?  Isn't there a minimum ‑‑ guaranteed access with a minimum fee, or no guaranteed access but a negotiated fee?

742              MR. ENGELHART:  I'm sorry, you said access and a minimum fee?

743              THE CHAIRPERSON:  Yes, for carriage that they would pay, or else ‑‑

744              If they think their service is so valuable, they would say, "Fine.  No, no, I am going to sit down with Rogers and negotiate.  They can't live without me," and negotiate whatever the appropriate fee is.

745              MR. ENGELHART:  I don't think of that as a halfway house, I think of that as a fee‑for‑carriage.  You are getting fee‑for‑carriage and mandatory access.

746              To me, there is no relationship, necessarily, to the value of that service, it is just whatever number you happen to pick, and it becomes that minimum payment.

747              THE CHAIRPERSON:  Okay.  If you want to put it that way ‑‑ I just meant ‑‑

748              You are all assuming that you are paying around 75 cents per signal, and that translates into, roughly, $8 ‑‑ or between $5 and $8, depending on how many ‑‑

749              I mean, if you start off with a much more modest amount, that makes the thing more accessible; especially if you couple it with negotiated, that means, you know, that you can actually pick which over‑the‑airs you pick.  The ones that didn't opt for the minimum fee, you know, put themselves ‑‑

750              So the market, to some extent, would decide what the value of those signals really is.

751              MR. ENGELHART:  If it is a much more modest fee, then it doesn't solve the problems that broadcasters claim they have, it's ‑‑

752              THE CHAIRPERSON:  Let them make that point.

753              MR. ENGELHART:  It is small change compared to the things we are talking about here, which solve the problem of audience fragmentation by doing VOD advertising, by doing target advertising.

754              Again, when you are dealing with small amounts of money, then the cost accounting problems that I talked about before become magnified.  You can sort of lose 20 cents if you are trying to subsidize something by $1.  But if you are trying to subsidize something by a nickel, you lose the whole thing in the paper shuffle.

755              So I don't think a smaller number solves any of those problems.

756              THE CHAIRPERSON:  Now, on the distant signal, I heard you and Mr. Lind saying that in effect the solution to it is let us rerun the signal on VoD but you are not willing to pay it, just basically saying the increased excess that, let's take CTV as an example, would get through that rerun, they can charge more for their advertising, but to the extent that their advertising is local, it is of absolutely no use.

757              Why do you find the idea of paying for the distant signal so distasteful, to use your words, Mr. Lind?  I mean it seems to me it is pretty close to a specialty channel.  You are showing in Winnipeg a signal that comes out of Toronto that in no way you can receive over the air.  So for the privilege of receiving that signal in Winnipeg, you, customer, should pay.

758              MR. ENGELHART:  We do pay.  We pay ‑‑ right now we pay 50 cents per month to the CAB for the right to carry those distant signals and we pay 25 cents for the right to carry a second set of four‑plus‑one signals.

759              The satellite guys don't pay and our issue with you is this is totally inequitable.

760              If we look at the study that the CAB did on this topic, or sorry, that Bell did on this topic, the Bell study shows that 95 percent of the distant signal viewing is on satellite.

761              So to the extent that there's a problem on distant signal viewing it's not a cable problem and the reason for that is just the way that our channel guide is organized.

762              People start at Channel 2 and then they go to Channel 3 and then they go to Channel 4.  If you want to find our distant signals, they are up somewhere in Channel 368.  So people will go there if they really want to watch a certain show that was on in Vancouver when they get home from work.

763              But in satellite it just happens that the channel guide is organized differently.  So when I am up at my cottage and I go to my Star Choice system there's a whole bunch of Globals just sitting there one after another and they are all showing the same thing.  I click on one and it might be Winnipeg and it might be Vancouver and I don't particularly care because it is the same show but now I am seeing different ads than the ones that Global wanted me to see.

764              So the distant signal problem is largely caused by satellite.  For some reason the Commission says, well, satellite doesn't have to pay, they pay .4 percent of the 5 percent they would otherwise pay into a fund for local broadcasters.

765              But solving the local broadcaster problem doesn't solve the problem that you just identified.  So they are paying zero for that and we are paying 50 cents.  So we are overpaying.  So if you work out the math, we should be paying less.

766              So I guess what we are saying is let's have a payment system which is symmetrical, which is equitable, where everyone pays the same amount, and the solution to that might well be have the satellite guys pay at the level that we are paying.  That is one solution.

767              I think when you work out the math it works out to ‑‑ if we were all paying the same amount, it would actually work out to be less than 50 cents.  So we might go down to 30 and they might go up to 30 but it would leave the broadcasters whole.

768              There are arguments about whether the number is 10 or 20 or 30 or 40 and it all comes down to the economic models but bear in mind that this is fundamentally a good thing.  It is fundamentally a good thing to keep people on the system.

769              People are going to watch what they want when they want.  Distant signals are one way of doing that.  Oops, I missed my favourite show at 8:00.  Darn it!  Oh, I can catch the Vancouver feed at 11:00.  That's great!  Now I am watching it at 11:00 but I am still seeing the ads.

770              Now, I will grant you only 80 percent of them are the national ads, 20 percent of them are the local ads.  I know the advertising guys always tell me that somehow Global can't monetize that national ad in Toronto as well as they do in Vancouver.  I don't understand it.  To me there is a free luncheon in that story somewhere and I don't think there should be.  But fine.

771              The point is still I am watching part of the Canadian system, I am watching Canadian channels and I am watching the ads.  If we don't give consumers that choice, we force them all to buy PBRs, now they fast‑forward through the ads, or we force them to download things from the internet, now they are off the system.

772              So let's try and find some way to make this time‑shifting thing work and let's bear in mind that it is inherently a good Canadian solution to the problem.

773              THE CHAIRPERSON:  What would be the number if we imposed the same obligations on satellite as we have imposed on cable?

774              MR. ENGELHART:  About 25 cents.

775              THE CHAIRPERSON:  Okay.  Now several times during your submission on these five key points, we broached the subject of dispute settlement and it seems to me very clear, as we try to make the system more deregulated, more simpler, more strategic, there will be a greater role for dispute settlement by our Commission.

776              Do you have any specific ideas what you would like to see us do?

777              MR. ENGELHART:  Well, as you know, we have proposed a model where there wouldn't be any access rules and there would be more free market negotiations.  So the area for dispute resolution that we have identified is undue preference or undue discrimination.

778              So to take the BDUs' side of it first, I suppose if a service, a certain channel, a Canadian channel said, I am going to sell my signal to Star Choice for 25 cents and to ExpressVu for 25 cents and I want $1.00 from Rogers, I think we should be able to come to you and say, well, that is not right.

779              That doesn't mean that there couldn't be volume discounts or other cost‑based elements to the rate card that would give different rates to different people or different conditions but within those sort of exceptions which we have seen for years in telecom, we think there should be a role for the Commission on dispute resolution for undue preference.

780              A similar story if I have got one service that is in a similar situation to another service and I am paying one of them a lot more than another one, they could complain and I would be called upon to justify my differential payments and show why that preference wasn't undue.

781              So that is the role that we see for dispute resolution even in a fairly deregulated world.

782              THE CHAIRPERSON:  Mr. Merson, as a broadcaster, what is your view?

783              MR. MERSON:  You know, we are not ‑‑ it is a specialty issue more than it is an over‑the‑air issue and as we look at our specialties we are not that heavily involved in it.  So it is a question of how the world unfolds.

784              There is an undue preference provision that I think we have all proposed.  To be frank, the idea that the undue preference provision might place the onus on the BDU to disprove the existence of an undue preference is a powerful tool.  A lot of the undue preference situations right now you tend to self‑police a little bit more because the onus is on you to prove the undue preference.

785              I do think, to be frank, and I have said to Ken and to Phil, I think they are exposing themselves to a lot more undue preference complaints than they had in the past and I think it is a powerful provision.  I think it will be made extensive use of.

786              THE CHAIRPERSON:  If, contrary to your wishes there is a fee‑for‑carriage, do you see any cross‑work between fee‑for‑carriage and an enhanced dispute settlement provision?

787              MR. ENGELHART:  Not really, I don't think so.  I mean if there is a 20‑cent tax, we pay the 20‑cent tax.  I don't know where the dispute resolution ‑‑

788              THE CHAIRPERSON:  After you have gone to the Supreme Court, I gather.

789              MR. ENGELHART:  And anywhere else.

790              THE CHAIRPERSON:  Right.  Okay, listen, the way we set ourselves up we have one ‑‑

791              MR. LIND:  I made that comment just as a throwaway but ‑‑

‑‑‑ Laughter / Rires

792              MR. LIND:  ‑‑ but respectfully, I want everybody to understand that we are very, very much against fee‑for‑carriage and that we will ‑‑

‑‑‑ Laughter / Rires

793              MR. LIND:  We will go to all the lengths that are available to us to have this thing killed.

794              THE CHAIRPERSON:  I think I got that message.

‑‑‑ Laughter / Rires

795              THE CHAIRPERSON:  The way we set ourselves up for each intervener we have one lead question.  I have monopolized the questioning but that doesn't mean my colleagues don't have questions for you.  So let's turn to my colleagues.

796              We will start with you, Michel Arpin.

797              COMMISSIONER ARPIN:  Thank you, Mr. Chairman.

798              Well, I will bring you back right to the beginning of the hearing and my first question will deal with basic service.

799              You said you got to be small made up of local broadcasters and the 9(1)(h).  Do I understand that you will be removing the U.S. stations and put them somewhere in a tier or are you thinking that they are local stations in your model?

800              MR. ENGELHART:  I was unclear, Vice‑Chairman Arpin.  What I was talking about was the minimum requirements for basic.  So those things have to go in basic.  That doesn't mean that BDUs can't add other services to their basic in response to customer demand.  So I expect, yes, the four‑plus‑ones would be in there.

801              There might even be some ‑‑ well, under our current basic today, we have some specialty services as well and for the reasons I talked about our current service is going to be around for a little while.  But even when we move to a more flexible digital platform, we might add some specialty services to that basic.

802              So it is always a question of, you know, consumer demand.  You have got a specialty service.  If you put it on basic, you could have it for 20 cents.  If you put it up in a tier, you could have it for 50 cents or 60 cents.  And how many customers would prefer to get it at that cheaper price built into their package and how many would rather buy it à la carte?

803              We do customer surveys.  We do polling.  So we will still design a basic.  Every BDU will design a basic that works and I think most BDUs will put the four‑plus‑ones in a basic but the list I talked about would be the regulatory requirements for what has to be in basic.

804              COMMISSIONER ARPIN:  Now, I read somewhere ‑‑ there are so many things that I have read ‑‑ that currently in Toronto your basic service is made up of 63 different services and what you are saying here is that, if I am hearing you well, you could even consider expanding it much further.

805              MR. ENGELHART:  No.  Our basic is around ‑‑ it is a little less than 40 services, 38 or 39, and no, it is not getting any bigger right now.

806              COMMISSIONER ARPIN:  And with what you said as an answer, that you may consider expanding it, that is your answer for the time being, not necessarily a given plan?

807              MR. ENGELHART:  Yes.  Again, I was unclear.  What I should have expressed was that when we move to a more digital flexible environment, we will have a smaller basic than we do today but it won't be the minimum basic, it will be somewhere in between.

808              COMMISSIONER ARPIN:  Okay, fine.

809              Now moving to when you dealt with access, you said that the BDUs shall be free to take whatever signal that they deem will work for them.  You surely have read the Peter Grant opinion to the CBC regarding the CBC specialty services and the right to access.

810              Do you have any comments to make on that very topic?

811              MR. ENGELHART:  Well, one doesn't like to contradict someone with the reputation and eminence of Peter Grant but the Broadcasting Act, to me, is not nearly as prescriptive as people make out and I don't think that any of the specialty services, CBC or otherwise, need to get access.

812              MS DINSMORE:  Commissioner Arpin, I think in our view, as we said before, the test that should be followed is the 9(1)(h) test.

813              A year ago there was a decision that came out of this Commission which determined that a number of services that were dual status that had had guaranteed carriage on basic under their regime didn't qualify for the 9(1)(h) test.

814              They were not seen to be services that contributed in any exceptional way to the broadcasting system and that included services like Vision TV and weather, and not to sort of point to them but there is a very clear decision that those services don't pass that test and that decision was rendered only a year ago.

815              COMMISSIONER ARPIN:  Well, that is clear but the opinion that Peter Grant gave to the CBC was not to the effect that they all their services shall be given a preference status like a 9(1)(h).

816              What he is saying is whenever the CBC makes the decision to go into a given specialty service, it shall be carried by all the BDUs.  It could be not only on basic, it could be on a tier, it could be whatever but they shall have access to the BDU system.

817              MR. ENGELHART:  I will ask Laurie Ashton‑Smith if she has something to add.

818              MS ASHTON‑SMITH:  I don't have much to add to Ken's point.

819              The Broadcasting Act is not as prescriptive, with all due respect to Mr. Grant, as they suggest in that opinion.  I don't think anyone has ever previously suggested that all BDU specialty services have a guaranteed right of access and I don't think that the Broadcasting Act necessarily was designed to be interpreted in that fashion.  So I agree with Ken.

820              COMMISSIONER ARPIN:  Okay.  Obviously, this matter will come back throughout the week.

821              You discussed with the Chairman on the matter of fee‑for‑carriage and particularly Mr. Merson raised the fact that one of the issues is the acquisition of foreign programming and the increase in the cost of foreign programming.

822              One question that goes to my own mind is that through Geo‑fencing, Canadians cannot access most of the American programming, at least access the U.S. sites that are carrying some U.S. programming.  I am thinking about some that you pay like "Desperate Housewives" and some that you can access free but because the address is in Canada, the signal is blocked.

823              Isn't it because the broadcasters are paying an incremental fee for their foreign programming that they are able to convince the producers not to allow Canadians to access foreign programming from other sources because I read somewhere that Geo‑fencing disenfranchised Canadians to get U.S. programming but in some European countries you could access those programs?

824              MR. LEE:  I don't know if I can comment on the relationship between the producers and the programs themselves but there is a ‑‑

825              COMMISSIONER ARPIN:  My question was directed to Mr. Merson.

826              MR. LEE:  Okay.

827              COMMISSIONER ARPIN:  He can come back with it because he is buying foreign programming.

828              Mr. Lee, I am not saying that you should not reply.

829              MR. LEE:  I will follow up.

830              MR. MERSON:  Vice‑Chair, there are so many elements to program buy nowadays, I mean it is difficult to sort of put them all into one sort of brief question.

831              As you know, there is a continuum of rights that you acquire and the more you go to the far side of the continuum, the more solid your rights tend to be.  Where you end up on that continuum is always an economic decision in the sense that the studios evaluate their own ability to monetize their content relative to our ability to monetize our content.

832              I for one don't see any change in the notion that first‑run high‑quality content from overseas will ever end up anywhere else other than over‑the‑air television because over‑the‑air television fundamentally has the ability to monetize it best.

833              We know that from a lot of American experience in terms of how much money ABC are bringing from "Desperate Housewives."  I read in one of the papers somebody submitted an analysis of how much money was coming in from the broadcasts of "Desperate Housewives" relative to the downloads of "Desperate Housewives" or the streaming that was occurring.

834              So we know there is that continuum.  The question is sort of where the studios and the developers of content will end up on that continuum going forward.  To the extent that we can monetize the content better than they can, they are always going to protect our rights in some fashion and I believe they will seek to protect our rights.

835              I mean ultimately, developing high‑quality programming has become a business of laying of risk.  You know, it costs so much to develop a high‑quality content, you have got to believe you have other sources to monetize that content over.

836              And as the world unfolds, it will be the person who has the highest ability to monetize that content, which I believe is going to be over‑the‑air television, who will be in the driver's seat in determining where you fall on that continuum of the rights that you end up acquiring.

837              Does it make sense?

838              COMMISSIONER ARPIN:  Yes.

839              MR. LEE:  The only thing I would add to Raul's comments are that if you look at what is going on today, I mean the Geo‑fencing has become sort of a panacea in the industry in terms of it protects our territory.

840              But the reality of today and the reason why we are so focused on enabling VoD platform with the right revenue tools to allow it to provide comparable functionality and features for our customers is that if you walk down to the University of Ottawa this afternoon and walk through the dorm, there are no basic subscribers and they are not worried about Geo‑fencing.  They don't contemplate Geo‑fencing.  They just go onto DC++ and they download everything they want to watch.

841              That is our customer or was our customer and we need to find ways to create an all‑encompassing system that keeps all of this behaviour, all of this revenue in the system, not just for the customer who is the individual subscriber but also the customer of the system, which is the advertiser, which we need to make sure that they have tools to be able to continue to invest in the system as well.

842              COMMISSIONER ARPIN:  And how do you think you are going to be able to recuperate them to the broadcasting system?

843              MR. LEE:  Well, right now ‑‑

844              COMMISSIONER ARPIN:  Through VoD or HD?

845              MR. LEE:  I think that is a combination, as we discussed in our in‑chief, investment in High Definition, we think, is an incredible defensive tool because it raises the expectation for our customers about what minimum quality is and it forces an onus on the network to be able to try to compete against that, which on the internet side of the business it can't today.  So it just pushes it out further.

846              The second one is VoD.  I mean you have to go back to the underlying behaviour, what is the customer looking for.  The customer is looking for flexibility, is looking for convenience, control, choice, and so what technologies do we have in the system today that facilitate that.

847              And so when you look at what we are doing today in the system as a collective, you are seeing more and more content actually go onto the internet.  It goes onto the internet not because it is the only choice, it goes onto the internet because it has flexibility to drive revenue creation on that platform while VoD does not have that same flexibility.  So we need to even that up to make sure that we can compete as the Canadian broadcast system.

848              COMMISSIONER ARPIN:  One of the issues this Commission hears all the time when we are dealing with the unions is the issue of terms of trade.

849              Are the issues of terms of trade in place between the BDUs and the other stakeholders for VoD or is it still something to be sorted out and we are years before being able to put it in place?

850              MR. ENGELHART:  I think in the case of VoD we are mostly talking about repurposed content, so I am not sure those terms of trade issues would come up.  I think they would be between the rights‑holders and the people that we acquire the programming from, which would be the broadcasters.

851              COMMISSIONER ARPIN:  But in some instances the broadcasters don't own the VoD right, those VoD rights belong to the producers.  I am sure Mr. Merson is well versed also in that matter after some six months with over‑the‑air but with many years of background with specialty services.

852              MR. PURDY:  Mr. Vice Chairman, this is exactly the key matter, which is we have been discussing with CTV, Global and our own Citytv the fact that during the May screenings this year it is so critical that the over‑the‑air broadcasters secure the digital rights at the same time they secure the linear rights because that ultimately is what is going to keep people within the system.

853              As Mike Lee referenced, if we don't offer that time‑shifting, the ability to watch what you want when you want, we are going to lose people off the system.  Those rights are available.  The broadcasters will tell you they are expensive, they are hard to get but they are available and we have to be, I think, united in terms of obtaining those ancillary rights for the U.S. content.

854              COMMISSIONER ARPIN:  And once again, it will increase the cost of foreign programming.

855              MR. PURDY:  If we don't behave rationally, yes.

856              COMMISSIONER ARPIN:  So it may have an impact on their bottom line and ‑‑

857              MR. PURDY:  But the U.S. studios recognize the fact that there is a number of websites now that offer peer‑to‑peer file‑sharing.  There are websites now that you can go to where you can get a fake IP address that would disguise the fact that you are a Canadian.

858              So the geo‑filtering is no longer working as a comprehensive solution and the only thing ‑‑ we have to recognize what happened to the music industry and avoid that in the Canadian marketplace.  We have to get these digital rights and act on them so we keep people within the legitimate system.

859              COMMISSIONER ARPIN:  Thank you very much, Mr. Chair.

860              COMMISSIONER KATZ:  Thank you, Mr. Chair.

861              You know, when I was on the other side I always thought that being first gives you the opportunity to ask questions because when you are second, third or fourth, those questions have been asked already and it becomes a burden to have the same questions asked.  I thought coming on this side, it would be a bit different but my colleagues here have asked many of the questions I was going to ask.  That being said, I still have a few.

862              That being said, I want to come back.  Mr. Engelhart, I think it was you who mentioned the issue of the Golf Channel and for those of you who don't know, I will come out of the closet, I am an avid golfer and I love golf an awful lot.

863              When Rogers did move the Golf Channel from one of the tiers onto a specialty line on its own, you said the networks were lit up, your call centres were lit up.  What did you do about it?

864              MR. PURDY:  Mr. Vice‑Chairman, the original plan called for the Golf Channel to be moved from tier 3 to the Sports Theme Pack.  I guess the response from the customers was overwhelming enough that we actually made a decision to put it into what we call tier 4, which is an extension of tier 3 that is available to our digital customer base.  And so roughly 800,000 of our customers take the VIP package that includes tier 4.

865              So we actually sort of backed down from the original concept of moving it to an even more niche package and that was in response to the customer comments we had.  We also had a number of programs in place whereby customers who used to get the Golf Channel could subscribe to the VIP package at an introductory rate.

866              So that seemed to manage the situation well.  It didn't necessarily manage my career well, the board of directors is still upset but it did manage the customer.

867              COMMISSIONER KATZ:  The reason I ask the question is not because of the Golf Channel but because of all the small programmers that are out there who are at, I guess, the BDUs', not just Rogers' beck and call.  Whenever you decide you want to make a change, you make a change, and then suddenly there is the other side of this change and yes, some BDUs have offered graciously to pay for some of the marketing costs and whatever else as well but it is a major impact on them and in some cases it is a negative impact as well.

868              MR. PURDY:  Yes, I think the key thing to remember is that we don't want to be arbitrary.  We do a lot of customer research before we make any of these changes.

869              So in the case of Golf, the ratings were very low, amongst the lowest in that tier.  It is a very niche service and that is why we chose to move that channel.

870              For other services if we were contemplating a program package move, we would go through a lot of research and, quite frankly, in most cases we choose to leave things just as they are because the customer disruption isn't beneficial to us and the overwhelming consensus within our building is that we want to add value into the existing package structure, we are not looking to strip value away.

871              So all but a very few services have we ever contemplated stripping them out or moving them.  I think we have only turned off a couple of channels in the last ‑‑ in my memory and I have been at Rogers for eight years and these were channels that had little or no subscribers.  So I don't think the risk is real.  It is very hard to take channels away.

872              COMMISSIONER KATZ:  Is there anything that you can offer programmers to reduce their anxiety that they are at a disadvantage when it comes to bargaining?  I can understand the bigger players certainly have some weight and have some leverage.  When you get down to the smaller independents, is there anything at all you can offer?

873              MR. PURDY:  This is a standard line for Rogers but we do believe that market pressures force us to carry certain channels.

874              So let's take the high‑fidelity services.  There are four HD services that we don't carry.  Chris Frank is in the room today and he will tell you that Bell makes great hay with the fact that they carry these HD signals and we don't, so much so that competitive pressure is going to drive us to launch these services as soon as we have spectrum and we will have spectrum when we roll out switch digital.

875              So competitive pressures force you to carry a comprehensive channel line‑up and even the niche services have strong appeal to a certain hard‑core subscriber base.  So things like the multicultural channels, we have stolen subscribers away from satellite because we have a more comprehensive multicultural offering, both domestic and foreign.

876              I am sure once Chris Frank solves his spectrum problem, they will launch the multicultural channels that we have launched in order to combat our competitive pressure.

877              MR. ENGELHART:  If I could also add, Mr. Katz, I don't think it is who you are as much as how attractive your programming is.  So one of the problems that the small independents have is not that they are small and independent; it is that the big broadcasters have bought up all the desirable formats and there are only very niche formats left for the small independents.

878              What we have proposed in our submission is that the genre protection rules should disappear as between Canadians.  This will give the small independents a chance to morph some of their formats, make your programming more attractive and have a bigger stake in the industry.

879              So I think that that is the real thing you want to do to help the small independents.

880              COMMISSIONER KATZ:  Okay.  I want to come back to time shifting.  You talked about it with the Chairman and you actually alluded to it as well in your submission this morning.

881              I think someone also said ‑‑ and I'm not sure who on the panel ‑‑ that if necessary or if compelled you will cancel time shifting as well.

882              How popular is time shifting today amongst your customers?  How successful is it?  How profitable is it?

883              MR. PURDY:  Thank you, Vice‑Chairman.  Some contextual background.

884              We only launched time shifting in its current package because the satellite guys were using it as a competitive advantage and viewers seem to value it.  So when satellite customers were asked what they valued, time shifting was amongst the top three or four answers every time.  So we responded by putting it into our digital service and making it base level with the box.

885              We believe strongly, though, that time shifting, to Mike Lee's point, only addresses a fundamental customer need which is the ability to be flexible in terms of when you watch your programming.  So once we had of robust VOD offering that mimicked or, quite frankly, was better than what time shifting offered, we would be keen to turn off the distant market signals because they would no longer be necessary.

886              People don't necessarily want to watch time shifting, they don't necessarily want to watch the CTV Vancouver signal, but rather they want to watch Oprah at the time of their choosing.  So having Oprah on demand addresses it and I think not only would we be willing to, we would be keen to turn off those distant market signals.

887              COMMISSIONER KATZ:  And do you think that if you were able to transfer those customers from a time shifting environment to a VOD environment you would be able to grow that penetration as well, or would you just transfer all those people or would there be any melt or any loss?

888              MR. PURDY:  We actually think a robust VOD offering, particularly prime time main network episodic programming, will bring people back to the system.

889              So when Mike Lee referenced, you know, those students in Ottawa who are currently downloading content, when they get their first apartment when they graduate, something like a robust VOD offering that includes most of your favourite prime time episodic shows would bring you within the system, especially if they are in high definition.

890              Rogers is uniquely positioned in Canada, following the leadership of other cable companies like Comcast, in terms of offering HD and in particular HD VOD.

891              COMMISSIONER KATZ:  I asked how successful and how profitable, how many customers.  I don't know if it's confidential and not.

892              Do we have that information?

893              MR. PURDY:  Time shifting for us is not profitable in the sense that it was an incremental cost that we had not anticipated or budgeted for.  It was something that we added into our overall package in order to keep customers within the cable fold, in particular to prevent defection to satellite at the time.

894              So it is an incremental cost that we have borne in order to protect our customer base and add value for our customers.

895              COMMISSIONER KATZ:  I want to come back to broadcasting and I guess something, Mr. Merson, you mentioned earlier about one scenario to solve a problem might be tied spending.  I am interested in that model.

896              Perhaps you can sort of elaborate a bit more as to how you think this type of model, should the Commission decide to go down that route as an alternative, would work?

897              MR. MERSON:  I am partially sorry I mentioned it.

898              There are lots of models for how you do it.  There is a luxury tax model which essentially says what you do is you establish a ‑‑ look, what you don't want to do necessarily is limit people's ability to react to the marketplace and build the businesses, but what you want to do is recognize, you know, the externalities, the other impacts that it has on the marketplace.

899              So you could for example tie spending, foreign spending as a proportion of Canadians spending, not necessarily limiting people's ability to spend above that mark.  But in the instance that you do spend above that mark, you might want to make a contribution to the system.

900              So you might sort of want to take the overage and apply it to the CTF or a fund of some sort or local programming, something to drive local programming if that was the issue you were trying to deal with.

901              But to me again, as I said, the issue to me isn't the collapse of the system; it is the extraordinary spending that occurred in a portion of the system.  So as opposed to a buckshot, which you want is to target right against that issue.

902              I know I'm repeating myself, but I fundamentally believe that it will right itself; that it doesn't actually need righting.  But if you did, at least you would pick a targeted approach rather than a buckshot approach at it.  That would be a luxury tax.

903              COMMISSIONER KATZ:  I guess there are some representations that have been made to us with regard to the fact that foreign programming costs have been going up much faster and proportionately have gone from the 50/50 per cent Canadian/U.S. to 60/40 or thereabouts as well.

904              I'm just wondering if sort of tying them together whereby the market is free to bid up the price of U.S. programming or foreign programming, if you do that, the quid pro quo is your cost of Canadian is going to go up as well.

905              Would that be seen as an intended consequence to strengthen the system as well, given there is now more money being flowed back into the Canadian system as well?

906              MR. MERSON:  Absolutely.  I'm not sure you need to go there because I do think time might sort this out fairly easily.  But it clearly is an alternative that would do exactly as you suggest.

907              COMMISSIONER KATZ:  All right.  Thank you.  Those are my questions.

908              THE CHAIRPERSON:  Thank you.

909              COMMISSIONER CUGINI:  Thank you, Mr. Chairman.

910              I want to start with some follow‑up questions on the issue of genre protection and I'm going to start with a much more general question and then go into a little bit more detail as to your proposal for the genre silos I guess is a good way to explain it.

911              Others who are participating in these proceedings are saying that if we eliminate genre protection, all that is going to do is allow specialty services to morph, which has become a key word in these hearings, into something that will look like just everything else because they are all going to go after the same mass audience.  And what we risk losing, therefore, is programming diversity in the Canadian broadcasting system.

912              How do you respond to those allegations?<