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 17, 2008                        Le 17 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:

Cindy Ventura                     Secretary / Secretaire

Cynthia Stockley                  Hearing Manager /

                                  Gérante de l'audience

Martine Vallée                    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 17, 2008                    Le 17 avril 2008

- iv -

           TABLE DES MATIÈRES / TABLE OF CONTENTS

                                                 PAGE / PARA

PRESENTATION BY / PRÉSENTATION PAR:

CanWest Mediaworks Inc. / CTVglobemedia          1585 / 8993

GV Vancouver / Metro Vancouver                   1817 /10469

Shantichandra B. Shah                            1847 /10598

Gatineau, Quebec / Gatineau (Québec)

‑‑‑ Upon commencing on Thursday, April 17, 2008

    at 0900 / L'audience débute le jeudi 17 avril 2008

    à 0900

8988             THE CHAIRPERSON:  Madam Secretary...?

8989             LA SECRÉTAIRE:  Merci, monsieur le Président et bonjour à tous.

8990             We will now proceed with the presentations in the order of appearance set out in the revised agenda.

8991             I would now invite CanWest Mediaworks and CTVglobemedia to make their joint presentation.

8992             Appearing for them is Mr. Leonard Asper.  Please introduce your colleagues and you will have 20 minutes for your presentation.

PRESENTATION / PRÉSENTATION

8993             MR. ASPER:  Thank you.

8994             Mr. Chairman, Vice‑Chairman Arpin, Vice‑Chairman Katz, Members of the Commission and Commission staff, for the record my name is Leonard Asper and I am President and CEO of CanWest Global Communications Corp.

8995             Seated next to me ‑‑ I can't believe I'm going to say this ‑‑ is it really you?

‑‑‑ Laughter / Rires

8996             MR. ASPER:  That's not in the script; sorry.

8997             Is Ivan Fecan, President and CEO of CTVglobemedia and CEO of CTV Inc.

8998             Before we begin our formal presentation, I would like to introduce and present the members of our panel.

8999             To Ivan's left is Paul Sparkes, Executive Vice‑President, Corporate Affairs for CTVglobemedia.  To Paul's left is Rick Brace, President, Revenue, Business Planning and Sports for CTV Inc.

9000             To my immediate right is Charlotte Bell, CanWest Senior Vice‑President of Regulatory Affairs.  Seated next to Charlotte is David Goldstein, Senior Vice‑President, Regulatory Affairs for CTVglobemedia.  To David's right is Barb Williams, Executive Vice‑President, Content for Canwest Broadcasting Division.  Next to Barb is Chris McGinley, CanWest Senior Vice‑President of Broadcasting Operations.

9001             In the back row, seated on the far right, to your left, is Jonathan Medline, Vice‑President, Regulatory Affairs for CanWest.  To John's left is Kevin Goldstein, Vice‑President, Regulatory Affairs for CTVglobemedia.  Next to Kevin is Rob Malcolmson of Goodmans LLP, our outside regulatory counsel.  To Rob's left is Stephen Armstrong of Armstrong Consulting.  Seated next to Steve is Margaret Sanderson of CRA International.  Next to Margaret is Nik Nanos, President & CEO of Nanos Research.  To Nik's left is Bart Yabsley, Executive Vice‑President of Business Planning and Distribution for CTV.  Next to Bart is Brian McCluskey, Senior Vice‑President, Revenue Management at CTV.  Beside Brian is Kathy Gardner, Senior Vice‑President of Integrated Media Research and Corporate Promotions at Canwest.  On the end next to Cathy is Errol Da‑Ré, Executive Vice‑President of Sales for Broadcasting at Canwest.

9002             It is a very large panel but, respectfully, we believe we have put forward the most comprehensive research on the public file in this proceeding and we wanted to provide the Commission with the ability to fully question our experts and the senior executives of these two companies who are in the trenches on a daily basis.

9003             I will now turn to Ivan to begin our formal remarks.

9004             MR. FECAN:  Thank you, Leonard.

9005             We would like to begin by thanking the Commission for the opportunity to appear before you at this historic proceeding to make this unprecedented joint submission.

9006             It has been 15 years since the Commission has conducted a comprehensive review of the policies that impact all parts of the Canadian television industry:  distributors, pay and specialty services and local TV stations.  We thank the Commission for recognizing that the issues affecting these sectors are interconnected and we commend the Chair and the Commission for conducting this timely and important proceeding.

9007             Collectively, we should be very proud of the fact that this is the most successful broadcasting system in the world.  It offers Canadians unparalleled choice and diversity.  It is not perfect.  There can always be tweaks to improve it, but it works.  So we must be careful about deleting the interdependent supports that balance obligations and opportunities.  The stakes are high and the results of your deliberations will have a profound impact on our collective ability to continue to fulfil the requirements of the Broadcasting Act.

9008             That is why we have set aside our fiercely competitive differences to come before you with a unified vision for the future of Canadian television:  a vision that promotes diversity of ownership, a diversity of voices, consumer choice and, most importantly, a pride of place for Canadian programming and services in the system.

9009             As we will explain today, this is in sharp contrast to the proposals being advanced by the distributors.  As Canada's two largest broadcasters, we are responsible for the lion's share of investment in Canadian programming.  If the BDUs' proposals are implemented, our ability to make this contribution would be seriously undermined with nothing obvious to take its place.

9010             This entire proceeding revolves around two key concepts, fair access and fair compensation.  The BDUs continue to ignore the ongoing structural problems facing local television which, contrary to what some parties have argued, remains the cornerstone of the Canadian broadcasting system.  For our two companies local service is not a sideline but a fundamental part of who we are.

9011             With single‑digit rates of return, the lowest in four decades, massive technological shifts occurring, the extremely expensive conversion to HD and significant and often uneconomic programming obligations, something will have to give unless we can shape the right business model going forward.

9012             We believe local television must remain a central part of the Canadian broadcasting system because of its unique role in connecting Canadians to their local communities.  For decades, local broadcasters have established strong ties with the communities they serve through local news and other programming, as well as on air and other support for charities and local organizations that depend on us to make a difference.

9013             The outcome of this review will also decide who will program the remote controls of the nation.  Contrary to what some BDUs argued, if their proposals on genre protection and access are adopted, a few largely deregulated distributors and not the consumers will control choice.  Let me count the ways.

9014             They provide the TV and Internet pipeline to consumers.  Some already own conventional stations and specialty channels.  But with the elimination of genre and access rights, they will rapidly become our principal specialty competitors while at the same time deciding our fate by choosing which of our channels get carried, in which packages they are placed and what they are paid.

9015             They will compete with us for VOD program rights, for VOD advertising revenues and will sell local commercials on U.S. specialty channels.  So you see, no matter how strong or how well‑financed we will be, the system will be about the BDUs and what they want, not the consumer.

9016             While we firmly believe that the current regulatory model can be streamlined and must evolve, we take strong exceptions to the positions being advanced by the BDUs who it seems would prefer to dismantle the system with little regard whatsoever to the consequences.  Their mantra seems to be unbridled competition for broadcasters, but no DirecTV for them.

9017             We embrace the future.  We have come together with solutions.  We look forward to working cooperatively with the Commission to rebalance our regulatory framework to preserve real Canadian choice for Canadians.  To ensure this occurs, we believe that the regulatory framework that emerges from this proceeding must be consistent with the following four overriding principles.

9018             One, as section 3(1)(e) of the Act states:

"Each element of the Canadian broadcasting system shall contribute in an appropriate manner to the creation and presentation of Canadian programming."

9019             Two, carriage and packaging guidelines that incorporate the necessary checks and balances to ensure a future for non‑BDU affiliated broadcasters.

9020             Three, guaranteeing that consumers continue to have access to the widest and most diverse range of programming options at affordable rates.

9021             And four, recognition of the cornerstone role local stations play in achieving the goals of the broadcasting policy for Canada.

9022             We will now turn to the Commission's five questions.

9023             Charlotte...?

9024             MS BELL:  Thank you, Ivan.

9025             Chairman, at the opening of this hearing you indicated that parties appearing before you should be prepared to address five specific questions.

9026             The first question you asked was:  What should be the size of the basic service?

9027             While our written submissions were silent on this issue, we support the Commission's proposal for a uniform or lifeline basic service for all BDUs limited to the following services:  Canadian private local and regional over the air stations and the CBC/SRC, educational television services and other services that are carried pursuant to a mandatory order under section 9(1)(h) of the Act.

9028             In our view, this would guarantee that all Canadians have access to a range of essential Canadian services at an affordable price.  You will note that we have not included the U.S. four‑plus‑one channels in this package.  To be blunt, we don't think a lifeline package for subscribers in a city like Ottawa requires local news from Detroit.

9029             The second question you asked was: Should there be guaranteed access for certain Canadian specialty and pay services; and, if so, which ones and on what terms?

9030             The Commission made a landmark decision in 2000 to allow cable companies to own discretionary programming services on the basis that the strong access rules in place acted as a check and balance against those companies unduly favouring their own services.  Access rules have been fundamental to the success of the Canadian broadcasting system and its ability to fund Canadian programming.

9031             Access rules will continue to be critical going forward, particularly when most Canadians only have two or three possible choices from where to purchase their television service, creating a situation where one BDU can have a significant impact on the entire business model each non‑affiliated service.  For example, if Rogers drops one of our services, we lose 50 per cent of Ontario.

9032             We believe that existing analog and Category 1 digital services, which were licensed in very competitive processes that matched obligations to carriage, must be categorized as core to the system and maintain their access rights given the significant contribution to the production and exhibition of Canadian programming these services make.  There is no doubt that removing such guaranteed access would have a significant impact on the revenues of these services and hence the ability to fund high‑quality Canadian programming.

9033             We would be pleased to detail, in response to your questioning, the potential magnitude of this decline in spending.

9034             We also fail to see why removing the access rules is necessary at all.  Rogers and most other cable companies have commented over the last two weeks that their systems are robust and that there are no capacity constraints.  If they have seemingly unlimited capacity, why, other than to give themselves more bargaining leverage, would the elimination of access requirements for Canadian discretionary services be necessary?

9035             The third question you posed was: Should there be any type of genre protection for guaranteed services; and, if so, should they be protected from other Canadian services or only from foreign ones?

9036             While on the surface it may seem counterintuitive, genre exclusivity for Canadian services creates diversity.  This is clearly evident by the number of distinct services available to Canadians which ranks as the highest in the world on a per capita basis.  Canadians enjoy a phenomenal wealth of programming choice and all but one of the top 100 programs on U.S. over the air television are licensed to Canadian broadcasters, while 194 of the 200 U.S. cable programs are available to Canadians.

9037             Contrary to what has been advanced by the BDUs, the wholesale elimination of genre protection will not lead to greater programming innovation or excellence.  In fact, the more likely result of having more players with the ability to compete in any programming genre will be less diversity as everyone rushes to the middle and services go after more mainstream programming.

9038             In fact, you could say that it could well take the specialty out of specialty.

9039             In addition to resulting in a marked decrease in diversity, removing genre exclusivity would make specialty services even more directly competitive with conventional television for revenues and programming.  Given the fragile state of conventional television and its unique role in the system, this would not be in anyone's interest.

9040             With respect to the authorization of foreign services in Canada, we believe the Commission needs to strengthen its policies in this area.  Direct competition from U.S. services further fragments viewing and compromises the ability of Canadian services to thrive within their home market.  Of equal concern to us is the fact that once foreign services are authorized for distribution in Canada, they can morph into entirely different services by shifting their programming focus and schedule and it is next to impossible to remove them.

9041             Foreign services now draw more than $250 million in subscription revenues a year out of the Canadian broadcasting system.  Effectively, they are squatters in Canada.  They pay no rent and make no direct contribution back into the system.

9042             David...?

9043             MR. DAVID GOLDSTEIN:  Thank you, Charlotte.

9044             The fourth question you asked was: Should there be a fee for carriage for over the air broadcasters; if so, how much and on what terms?

9045             CTVglobemedia and CanWest have proposed a compensation for carriage model that has at its basis local reflection.  We have proposed a rate of 50 cents per channel per subscriber per month.  Approval of such a rate structure will allow us to continue to meet our obligations relating to local programming and it is fair compensation for the value to the BDUs that flows from the carriage of our signals.

9046             As outlined in the research we commission from CRA International, the decline in conventional television is not cyclical but systemic and is being felt here and around the world.  What is true in most developed countries is compounded in Canada where we have less local signal protection and higher regulatory expectations.

9047             Our economic ability to make contributions to the system was clearly understood by Parliament in section 3(1)(s) of the Act.  As a result, we need to rebalance the economic model or reduce the regulatory expectations.

9048             In 1971 the Commission defined the relationship between local television stations and cable companies as one between a supplier, the station and user cable, and the Commission made it very clear that one should pay for what one uses.

9049             However, 37 years later local television stations are still not compensated when they are carried by cable and now satellite providers, yet these distributors continue to profit from the value these stations add to their offerings.

9050             Our consumer research conducted by Nanos Research definitively shows that Canadians place a very high value on local service and local reflection and they believe they are already paying for those local services through their basic cable fees.

9051             The economic analysis conducted by CRA definitively shows that the economic impact on BDUs and other specialties is not the catastrophe that the BDUs predict.

9052             We note that some BDUs have erroneously stated the fee could somehow reach $8.00, $9.00 or $10 a month.  First, it is important to highlight that we are not proposing that consumers be required to pay this fee.  The BDUs have indicated they would pass this fee on to their subscribers.

9053             Second, assuming that this is in fact the approach that the BDUs take, the fee could only reach such levels if the BDUs apply an outrageous mark‑up.  What we have actually proposed amounts to an average of $2.40 per BDUs subscriber in Canada per month.

9054             Indeed, our proposal seems in line with routine BDU rate increases that have clearly not led to a mass exodus of subscribers out of the system since the overall BDU subscriber base continues to rise year after year despite these rate increases.

9055             On the issue of distant signals, we are looking for a simple and straightforward approach.  Canadians value these services, BDUs charge for them, and we should be able to conduct fair negotiations with all BDUs.  The only way to allow for fair negotiations would be to require BDUs to seek the consent of the originating station before the station is offered and to restrict BDUs from carrying the second set of four‑plus‑one signals that are merely drawing tuning away from Canadian channels and adding no new programming.

9056             The final question you pose, Mr. Chair: Should BDUs have access to advertising revenues from on‑demand services or from local avails?

9057             While we believe it is important to explore new revenue streams, advertising is not a new revenue stream and is not growing.  BDUs already have access to advertising revenues through many of the programming services they operate and they also have access to a large portion of the inventory in the local avails of U.S. cable channels to promote their own Internet and wireless services.  Any further erosion of the advertising market will unduly hurt all broadcasters, but particularly local broadcasters, the ones facing the greatest challenges.

9058             There is no compelling evidence on the public file that the advertising pie will increase if the BDUs' proposals are accepted.  Canada has a far lower per capita spend on TV advertising than the U.S., at $99 per person in Canada compared to $228 in the U.S. in 2006, and we are consistently below other English‑speaking countries as well, such as Australia and the U.K.

9059             Of course, broadcasters in these countries don't have the spill to deal with.  There is no evidence to suggest that providing television advertisers with more choices results in increased expenditures, just more revenue fragmentation.

9060             With respect to advertising on VOD specifically, while we are prepared to discuss revenue‑sharing models, there is no rationale why BDUs should have access to such revenues.  Broadcasters, not BDUs, licensed the rights to distribute content on this platform.  Moreover, they do not charge subscribers to access this programming, which often diverts viewers from watching it when it is originally broadcast.

9061             As a result, advertising on VOD is likely to mainly shift advertising dollars away from conventional and specialty.  The total pot does not grow.

9062             Finally, in no way can BDUs use economic need as a reason why they should be granted access to advertising.  They are the healthiest in the sector.

9063             MR. ASPER:  Mr. Chair, Vice‑Chairs, Members of the Commission, we are roughly at the halfway point in this proceeding but we have observed an emerging trend.  There is a camp on one side of the debate that includes the unaffiliated broadcasters, large and small, the CBC/SRC, the guilds, the unions and the creators who are, by and large, advocating an evolution of and not a revolution in the regulatory framework.  They seem to be unified in a voice that says the system is working, we can make it better, but diversity in Canadian reflection are served by ensuring fair access and fair compensation.

9064             And there is another camp, almost singularly populated by the BDUs, who claim that local reflection is not important.  The system is too complicated and it should be dismantled.  They speak of competition, but they are not interested in competition from foreign BDUs.  They claim the consumer as their shield but have provided no evidence of consumer dissatisfaction with the Canadian system as it is or as we propose it ought to be.

9065             Over the years they have benefited from substantial regulatory incentives and deregulation.  They have been given the right to expropriate our local signals and sell them to consumers without fair compensation for carriage.

9066             In the early 1990s the Commission allowed the cable BDUs to recover a portion of their capital expenditures related to the transition to digital through increased subscriber fees.  This allowed them to build out very profitable distribution systems and then extremely profitable non‑regulated ISP and telephony businesses.

9067             Following the transition, they were allowed to keep these additional revenues in exchange for a very modest contribution to the Canadian Television Fund.

9068             Soon after, basic cable rates were deregulated and rates have increased dramatically since then.  In fact, the monthly cost of basic cable has increased by almost $8.00 over the last three years or about 11 per cent per year.

9069             They have been afforded Canadian distant signals without our consent and the direct importation of U.S. network signals, both practices that no other country that we know of allows.  They were freed from having to make benefit payments on transactions, which saved the BDUs an estimated $1.2 billion and has resulted in five companies, accounting for essentially the entire Canadian customer base, while broadcasters paid $800 million in public benefits over the same period.

9070             In 2000 they were given the right to own programming services which provided them the last piece of the value chain.  We do not begrudge the fact that they have built a profitable business.  We would just like the same opportunity.

9071             We also believe that all members of the regulated system should be making equitable contributions to the system.  Given BDU dominance and regulatory advantages, we think the least they should be required to provide is fair access and fair compensation.

9072             As you may know, Mr. Fecan spent part of his career working in the U.S. network world.  I have had some experience internationally as well in markets like Australia, New Zealand, Ireland and the U.K.  We have each had a window into what is happening in the rest of the world and we marvel at how truly special the Canadian system is and, frankly, how potentially fragile the future could be.

9073             As Ivan said earlier, your deliberations will have a huge impact on that future.

9074             So tomorrow we will go home to fight each other in the marketplace, but today we have come together to fight for a shared vision of a truly remarkable Canadian system that promotes diversity of ownership, diversity of voices and consumer choice, a vision of a broadcasting system that remains distinctly Canadian and that will ensure a pride of place for Canadian services with local and national reflection.

9075             The Canadian system has the most local television and specialty services on a per capita basis of any country I am aware of in the world, resulting in employment for thousands of Canadians, particularly for producers and the creative community.  It is a great success story and it is well worth continuing to fight for.

9076             We thank you for the opportunity to appear here today, and Charlotte and David will be co‑chairing our panel to facilitate any questions you may have.

9077             THE CHAIRPERSON:  Well, thank you very much for your presentation.

9078             As you said, this is indeed historic in that both of you who are normally fierce competitors appear together, so consequently we will treat you historically too and we will question you on the five questions.

9079             I will deal for fee for carriage.  My colleague Michel Arpin will deal with basic package and access, and Len Katz will deal with genre protection and VOD.  But obviously we will not be totally restricted to this but will generally cover the waterfront.

9080             Let's start out with the basic.

9081             You say on page 7 of your submission of January 25:

"... the impact of these ... extends beyond OTA broadcasters and the health of the specialty sector is in large part reliant on the health of the conventional sector."  (As read)

9082             I have said, and you have quoted me as saying the OTA system is part of the cornerstone.  You go further than saying cornerstone; you say that the health of the specialty sector is dependent on the health of the OTA.

9083             Maybe you can elaborate on that point?

9084             You are smiling, Mr. Asper.

9085             MR. ASPER:  No, I'm not.

9086             MS BELL:  Sorry.  We are trying to figure out ‑‑

9087             MR. ASPER:  We actually are trying to figure out what happens if he asks ‑‑ we have Charlotte and David co‑chairing here and you are looking at me when you are saying that.

9088             MS BELL:  That's right.

‑‑‑ Laughter / Rires

9089             MS BELL:  I know, that's why he's saying ‑‑

9090             MR. ASPER:  So I think that's out the window, isn't it.

‑‑‑ Laughter / Rires

9091             MS BELL:  I will start and I think also maybe Barbara Williams will want to chime in, I think.

9092             To some extent the specialty services do depend on the health of the OTA service in terms of the relationship that they have with programming.  Conventional television is still the place where high impact Canadian programming begins and then it finds its way onto specialty networks.

9093             I think there is still a direct relationship there and I think that is the relationship that we were referring to.

9094             Barb, would you add anything to that?

9095             MS WILLIAMS:  I can, unless Leonard wants to go first.

9096             MR. ASPER:  Go ahead.  Go ahead.

9097             MS WILLIAMS:  I think it is important to remember that conventional television does have its own obligations and it necessarily requires its own resources, and so we do see that system as a unique stand‑alone system from that perspective.

9098             But there is no doubt that as programmers in both companies, I think we have come to see the opportunity to be efficient and effective frankly with our Canadian content in particular to give it more reach, to give it more opportunity across both platforms.

9099             So there certainly is a supporter of the Canadian system that is being benefited by having both platforms active and successful, but I don't think it takes away from the core point that conventional needs to have its own resources and its own ‑‑ because it has its own obligations.

9100             THE CHAIRPERSON:  But there are players in the system who were just specialty who do not have OTA, Astral being the most prominent of them.

9101             Are you suggesting they could not make it a business case if the OTA sector did not exist?

9102             MS WILLIAMS:  I think on the Canadian side what we have demonstrated is that we have shared content successfully across specialty companies in those cases, and you will often find financial support of a program between Astral, between Corus, between the specialty assets that either of our companies might have.

9103             So there is a respect cross‑company I think to be sure that the Canadian financing of programming is being supported on all platforms.

9104             MR. ASPER:  Mr. Chairman, I think the issue is that a lot of the programming that the OTA broadcasters do as part of their priority programming obligations and others end up somehow being co‑financed or appear on specialty, and in a large part a lot of the specialty programming that they do gets co‑financed by over the air.

9105             So specialty may get a first window and then over the air, but it is co‑financed by OTA.  And specialty couldn't otherwise afford to get that programming and produce it and get the same quality programming.  The higher the quality programming is on specialty, the higher their revenues and the more of course they are putting back into the system as a part of their Canadian program expenditures.

9106             THE CHAIRPERSON:  Would it be overstating to say it is a symbiotic relationship?  They need each other.

9107             MR. ASPER:  In programming, yes.  I don't know if "symbiotic" would be the word, but they would certainly ‑‑ relationship.

9108             There is a support, a foundational support mechanism that OTA provides.  So symbiotic, yes.

9109             MR. FECAN:  And particularly when you look at high‑quality priority programming generally, I think you would find that local television or over the air television has the first licence fee, usually the largest licence fee, usually triggers the funds.  And then not so much in the case of Astral because it is a pay‑per‑view service and The Movie Network is a different kind of service, but when you are dealing with normal specialty channels usually that is second window and they pay less.

9110             So you do need the over the air to create the high‑quality content that later has an after life on specialty.

9111             THE CHAIRPERSON:  Okay.  Clearly we look and the whole system looks to OTA as being one of the key providers of local content.  Just so we all speak about the same thing, give me your definition of "local content".

9112             MS BELL:  I guess ‑‑ and the Commission doesn't have an official definition of "local content". I'm not sure if CTV would have the same definition.

9113             I think we would define "local content" as content that reflects the local community, whatever that community might be.  It could be news and information programming, but it could also be other types of programming, in which case it either reflects the community through news and information programming or it's locally produced content that would be of interest to the local community.

9114             For instance, it could include cooking shows.

9115             Perhaps Chris McGinley could expand on that.

9116             MS McGINLEY:  No, I think you covered it very well.  Local programming is there to reflect the local issues and the interests to the communities that they serve.  It could be through local news, it could be through local reflection, it could be through talk shows.

9117             Generally the primary goal is to reflect the issues of the communities.

9118             THE CHAIRPERSON:  How local is local?

9119             I mean, I live in Ottawa.  I have a Global station in Ottawa but it doesn't have Ottawa news. It has regional news, it has Ontario news, et cetera.

9120             So does Ontario qualify as local in terms of Ottawa or how do we ‑‑

9121             MS BELL:  That's a good question that you ask.

9122             The licence we have for Ontario is actually a unique licence; it is a regional licence.  So we are required to provide regional reflection as opposed to local reflection.

9123             I think, when you get into the smaller markets, the question of what is local becomes a lot clearer.  I think, certainly in Ontario ‑‑ and because the station is housed in Toronto, which is the capital of Ontario, a lot of the programming that we would consider to be local to Toronto is also of importance to the rest of the province.

9124             So it would be local perhaps to a certain market, but it is actually of interest to a larger demographic.

9125             THE CHAIRPERSON:  So local includes regional, or provincial.

9126             MS BELL:  I think it can.

9127             Chris...?

9128             MS McGINLEY:  When we provide our local programming, the majority of it will be strictly local, being the events within the market, the weather, the sports‑related events within the local community, and then we will include regional, national and international as part of the full package, but we always try to make that relevant to the local market for which we are reporting the news.

9129             THE CHAIRPERSON:  No, I understand, I am just ‑‑

9130             I told Rogers the same as I am telling you, I am going to give everybody an equally hard time.

‑‑‑ Laughter / Rires

9131             THE CHAIRPERSON:  You say that local should reflect the local community.

9132             I am not trying to pick on Global, but it is an example that I know firsthand.

9133             What does local mean when you live in Ottawa?

9134             I guess the answer that Ms Bell gives me is, it means Ontario, because my local station, for which you want a fee for carriage, does not really give me Ottawa news, it gives me the regional news from Ontario, as assembled by Global, which may have an Ottawa component in it, but it is not Ottawa, or Greater Ottawa, or Gatineau, if I understand correctly.

9135             MS BELL:  I think I get the point you are trying to make.  Basically, there are two ‑‑ just to be clear, there are only two such licences in Canada that are regional, and Canwest has both of them.

9136             We would argue that, even though Global Ontario is in fact a regional licence, we do a significant amount of programming that is directed at the Toronto market, and there is also ‑‑ through the regional programming, there are local elements for Ottawa and the other communities that we serve through the regional licence.

9137             MR. FECAN:  Mr. Chairman, their obligations are balanced.  Their obligations and their licence states that they must be regional, meaning provincial.

9138             They are not allowed to take local advertising in Ottawa or other kinds of places.

9139             Their advertising is regional, as well, so there is a balance of obligations and opportunities.

9140             THE CHAIRPERSON:  No, I understand that, I just want to make sure that we are clear in terms of their using ‑‑

9141             I think you have answered my questions.

9142             You will recall that last year at this time we came out with our OTA decision, and on the whole theme of fee for carriage we said that we were convinced we have the authority to impose it, et cetera, but we were not convinced of the necessity of it.  I think we didn't know whether it was a blip or a trend.

9143             Now, I notice this morning that you said ‑‑ you were quite clear that it is a trend and not a blip, and that it is systemic, and you cite a study by CRA, which documents the fact that, indeed, this is a systemic trend, not a one‑time or a temporary phenomena.

9144             I wonder if you could explain what led you to that conclusion.

9145             Maybe you would want to call on CRA, but I leave it up to you.

9146             MR. DAVID GOLDSTEIN:  Thank you, Mr. Chair.  I will start off, and then I will bring in the experts.

9147             We read the decision of the TV Policy Review very carefully, and when your statement came out that we would revisit the fee for carriage issue for local television, one of the first things that we did was to try and step back from, sort of, the usual suspects, and we asked CRA, which has done some broadcasting work, but is more familiar with what is going on in other areas of the economy, to take an objective look at what is going on with OTA; not just here, but to do some international comparative analysis with what is going on with OTA in various parts of the developed world, because we think that is indicative of Canada, to a certain degree, bearing in mind, again, as we said in the opening statement, that we don't have the same level of signal protection in Canada, and we have very different levels of obligation.

9148             What I would like to do is perhaps ask Margaret Sanderson to go through some of the macro stuff, and I believe that Steve Armstrong will have some specifics about what has evolved economically in the OTA sector.

9149             MS SANDERSON:  Thank you, David.

9150             Mr. Chair, I would like to approach your question from two sides, the revenue side and the cost side.

9151             In the context of revenues, conventional television, as you know, basically can only rely on advertising as its revenue base.  So we focused on what was going on with advertising trends in Canada, and also in a selected group of English‑speaking comparable countries, which essentially were Australia, the U.K. and the United States.

9152             Basically, what you see happening in Canada you see happening elsewhere in the world, in that total advertising gets driven by total economic growth.

9153             As the economy grows, total advertising grows.

9154             In the meantime, what has happened is that there has been an increase in the number of vehicles that are seeking advertising dollars.  So, if you are a conventional advertising player, you, basically, are facing increasing competition for getting advertising dollars.

9155             Why is that, in essence, happening?  Is that, as you say, a blip, or is it something that is going to be a longer term trend?

9156             If we think about why that is happening, it is basically technological change that has caused that to happen.

9157             Fifteen years ago an advertiser like Procter & Gamble, for example, that wanted to reach a mass audience, that advertiser had very few good substitutes to reaching that mass audience.  Conventional television was its best ability to reach a mass audience.

9158             Now, today, if you are Procter & Gamble, you can use conventional, you can use specialty, you can also have millions of hits for, say, the Dove make‑over commercial that was on YouTube.

9159             In fact, Rogers, in its submissions in this proceeding, has documented the fact that it expects, within as little as perhaps two years ‑‑ by 2010, Rogers is predicting that internet advertising in Canada will reach $3 billion.

9160             At that point, Rogers indicates that that will either meet or exceed total Canadian television advertising.

9161             At the same time that you have this increasing number of options available to advertisers, so that they can put less into conventional than they did before, you also have technology changing the value of that 30‑second commercial, because there is increasing use of PVRs ‑‑ personal video recordings.

9162             Surveys of U.S. advertisers, in particular the National Association of Advertisers in the U.S., have indicated that as there is increasing use of these digital recording devices, the value inherent to the advertiser in that 30‑second commercial is in decline.

9163             That means there is going to be increasing pressure on the rate that a conventional advertiser can charge.

9164             That is the revenue side.

9165             Is there any way that that is going to be a blip?  Is it going to go away?  I don't think any of that is going to go away.

9166             If you think about the cost side, at the same time that there has been an increasing number of outlets that advertisers can turn to, that has also increased the costs of obtaining content.  Everybody is now fighting to put content onto these different vehicles.

9167             So, as there have been increasing licences of specialty services and other types of options available, you continue to have rising programming expenses, as the conventional broadcasters, essentially, are bidding for content.

9168             Now, can they stop bidding on U.S. programs?  Can they stop bidding on Canadian programs?

9169             I think that is highly unlikely.

9170             You do see rising programming expenditures in other parts of the world.  The U.S. networks have shifted considerably to an increased use of reality television, and have reduced marketing expenditures and some other promotion expenditures in order to get their costs in line.

9171             So, essentially, the two trends are a flat or, possibly, a declining advertising base, which is your sole source of revenue, and, at the same time, you have rising programming expenditures and costs on that side, plus you have the transition to digital, which is a fairly substantial investment cost on the capital side.  As a result, you get low profitability.

9172             The last two years, 2006 and 2007, have had negative pre‑tax margins for conventional television, which is the first time that has happened, and at least the analysts that follow the industry are forecasting that the situation is going to remain challenging.  Both networks and other players are trying to get costs out of the system as best they can, and they will obviously continue to do that.

9173             MR. ASPER:  Mr. Chairman, just to put a Canadian point on that, I think that I would describe this market, in particular, as profoundly more challenged than any other market I can think of in the world, save maybe ‑‑ actually, I would say in the world.

9174             There are a few that are similar ‑‑ and I will tell you what they are in a minute ‑‑ but I think the point is, it is not the same in every market.

9175             There is no doubt that if you go to a developing country, where brand advertisers are just entering and there is no BDU presence or anything like that, you will see that advertising rates on conventional media ‑‑ that there is still growth.

9176             But there are some very common threads in the conventional television market in the world.  Number one is, the larger the presence of BDUs ‑‑ in other words, the more people that are hooked up to cable or satellite ‑‑ the more there is spill.

9177             Canada is the worst, but there is Ireland, where the large markets come over.  There is Austria and German‑speaking Switzerland.  And while I love Germany and Austria, it is tougher to be a broadcaster.

9178             The more there is broadband, you see the MSN and Yahoo! advertising presence ‑‑ the more there are PVRs.

9179             All of those markets are where it is the most challenged, and, of course, we face all of those things.  We are still the only market where U.S. network signals come in over the border in the same language.

9180             Rogers has cited some data, and others have, which says that Canwest had a better year last year or something; but, remember, we have fallen off a cliff.  We have temporary share gains against CTV, but they are likely not to increase much more.

9181             You can only have so many of the top 10 shows, and it is likely that probably both broadcasters will end up with four, five or six, and that is not enough to cover all of the other things that are affecting us.

9182             We have implemented some cost reductions, so that has helped out PBIT, but it still gets us into single‑digit returns on revenues.

9183             We had a slight potential win before us on the Part II fees, but after that we are kind of out of tricks.

9184             There is not a forecaster you can find around the world ‑‑ Price Waterhouse or Veronis Suhler or Wilkofsky Gruen, or any other forecasters that say that conventional TV advertising will go up anything more than somewhere between zero and 2 percent.

9185             THE CHAIRPERSON:  We have heard a lot about the traditional regulatory bargain, that the OTAs got mandatory carriage on basic, they got the tax deduction advantages with C‑58, and they got simultaneous substitution; and, in return for that, they have the major burden in local content, prime time programming, drama, et cetera.

9186             If I understand you correctly, basically that bargain doesn't apply any more because your advertising revenue has been fragmented.

9187             That is really the part of that bargain that no longer is there.

9188             MR. FECAN:  I would like to challenge that concept of bargain.

9189             When we talk to our American colleagues, they scratch their heads and try to understand why, as a country, we have allowed the importation of foreign over‑the‑air signals without the consent of those signals.

9190             If you are sitting in Rochester, you can't see a Buffalo signal.

9191             If you go on DirecTV, it says right on their website:  Under federal law we can provide local channels only within a local television market.  For example, we can provide San Francisco stations only in San Francisco and the surrounding area.  Federal law requires us to respect the local TV market boundaries.

9192             THE CHAIRPERSON:  Now you are getting into the distant signal ‑‑

9193             MR. FECAN:  No, I am talking about, in Toronto, why do we have Buffalo Television there?

9194             THE CHAIRPERSON:  But, in return for that, you have simultaneous substitution.

9195             MR. FECAN:  We don't have permission from Buffalo Television to retransmit that.  We have just done it as a country.

9196             And if you look through the files of the CRTC, you will see that we did it to help the BDUs, to help the cable companies build their business.

9197             Simultaneous substitution is a workaround.  It is a workaround to protect the rights that we buy lawfully ‑‑ the exclusive rights to the programs that we buy lawfully ‑‑ and we have lived with that workaround for 30 years.

9198             But it is not some gift given to us, it is a partial workaround for the damage done to us by doing something that would not be tolerated in the free enterprise country of the United States of America.

9199             MR. ASPER:  I think that the key point there is it is really only partial compensation.  It is an attempt to somehow compensate but it does not compensate for what should be the case, which is the signals aren't here.  They have been ‑‑

9200             THE CHAIRPERSON:  No, I understand.

9201             MR. ASPER:  Yes.

9202             THE CHAIRPERSON:  So you own it, it, et cetera, and to protect those Canadian rights that you acquired we instituted the simultaneous substitution regime to protect you.

9203             MR. ASPER:  Well, partially protect.  I mean don't forget it's not ‑‑ we don't air at the same time you know.

9204             THE CHAIRPERSON:  We are getting to that in a second.

‑‑‑ Laughter / Rires

9205             MR. FECAN:  So that's not part of what I would consider a regulatory bargain.

9206             THE CHAIRPERSON:  Yes.

9207             MR. FECAN:  Somebody sideswipes you it is partial compensation for that.

9208             THE CHAIRPERSON:  Okay.

9209             Secondly, on Monday you were here and I am sure if not, you listened and you heard Rogers say ‑‑ and I put exactly the same thing too that you said.

9210             I said, "You raise fees annually and nobody walks.  So why if there was a fee‑for‑carriage do you think people would walk?"  And they said, "Because we deliver more.  We improve our system.  We offer more channels, greater variety, et cetera.  If you as the CRTC institute a fee‑for‑carriage the consumer tomorrow will get exactly the same as today and we will make absolutely sure that the consumer knows he is paying that because you impose it on, not because we, Rogers, wanted to."

9211             Now, let me put the question the other way around.  If we impose a fee‑for‑carriage as you suggest, what does the consumer gain; to answer Mr. Lind's question?

9212             MR. ASPER:  First of all, I would never underestimate the ability of a BDU cable company in particular to find a way to tell the consumer they are getting something when they are not and change their packaging.

‑‑‑ Laughter / Rires

9213             MR. ASPER:  The other thing I can certainly say we would do is we realize that we are saying, you know, there is no new channel being added in particular but we are ‑‑ to some extent we are talking about retaining, maintaining, sustaining what they already have and what they clearly value and have said they would pay for.

9214             And I will turn it over to the researchers to discuss but I think that it's not a question ‑‑ I appreciate that your question is that there is nothing else new that they are getting but they are getting what they already value and they have said they will pay for.  So it becomes a question to me really of marketing and packaging this whole change in regime.

9215             We think, first of all, we will be glad to help cable and the satellite in that endeavour.  We have presence on the ground.  We have people who are connected to the community all throughout our organizations and I don't see why that's the most relevant question.

9216             MR. FECAN:  There is no question people value their local television.  I think that's very clearly demonstrated.  They also believe they are currently paying for it which also our research indicated.  Maybe this would be a good time to go to that.

9217             MR. NANOS:  Yes, so Nanos Research was retained to collect the views of subscribers, cable and satellite television subscribers related to local television and the value that they placed on local television.  And when we asked; for example, you know on a scale of one to five where one was very low value and five was a very high value, local TV news kind of rated 4.1 three out of five; a second came specialty channels at around 3.4, followed by Canadian drama at 2.9 and access to high definition television at 2.8.

9218             But from my perspective as a researcher what was actually striking was the intensity of value that Canadians placed on local television because on the scale of 1.5, 52 percent gave local television news five out of five.

9219             And to put that into perspective in regards to what I will say who came second with their specialty channels, only 26 percent of subscribers gave specialty channels a five out of five.

9220             So not only is it first, it is first by a factor of two.  It has a significant advantage.

9221             And what the research also showed that at about seven out of every 10, cable and satellite subscribers, 40 thought that they were supporting their local TV stations and that three out of four favoured local television stations receiving some sort of compensation.

9222             But what I found striking ‑‑ I do a lot of price sensitivity research ‑‑ was that when we asked subscribers to put a dollar value on what they would be willing to pay in addition to basic value, that average dollar value was $6.65.  And we have to remember that whenever we do research the default position is no one ever wants a price increase.  It's very unusual to ask consumers, you know, how they would feel about a particular subject and for lots of people to volunteer to say, "Yes, I would be pleased to pay more for a particular service or product."

9223             But in this particular case what I found quite significant was that a majority who volunteered were willing to support local television news directly in addition to basic cable and that the dollar value was actually quite significant.

9224             So what we see, quite simply on the one hand very high value, recognition of that value, and what I will say a willingness to support local television.

9225             MR. DAVID GOLDSTEIN:  Sorry, and if I could just ‑‑ Mr. Chair, just to dovetail with that because the premise of your question was their rate increases are attributed to value.

9226             We also then tested the elasticity of that price and as most Rogers' subscribers received in Ontario, this notice of effective rate increases as of March 1 where I can tell you the Goldstein family got hit particularly hard.

‑‑‑ Laughter / Rires

9227             MR. DAVID GOLDSTEIN:  But average Canadians probably ‑‑ average Ontarians probably got $2.00 to $3.00 per subscriber.  I suspect if they had read their own research which Dr. Globerman had conducted they probably wouldn't have done this but either they don't believe their own research or they wouldn't have made the increases.

9228             What we have done, though, and perhaps Ms Sanderson can speak to this if you would like, is to look at that price sensitivity.  But the very evidence of what took place in March gave me no more service in my household or anyone else in Ontario.

9229             THE CHAIRPERSON:  No, I think you answered your own question.  Whatever Globerman said, I mean they practiced it in the past and this year it doesn't conform to the studies.

9230             So let's leave that point aside.

9231             MR. ASPER:  Mr. Chairman, the point is though, if I just look at that list you see NCAA, the college basketball sports pack, you know $26.95 and now it's $29.95.  I'm not getting any more games for that and it sounds like David Goldstein likes that pack too.

‑‑‑ Laughter / Rires

9232             MR. ASPER:  But you know there is a whole bunch of them.  They just raised the price, period, for specific packs.

9233             And I think the issue ‑‑ the point is this is a marketing question and marketing is a very easy thing to do when there is perceived value, and I think that's what there is here.

9234             THE CHAIRPERSON:  Okay.  Well, let's turn it the other way around.

9235             Would it make a lot of sense for us to ‑‑ assume we could grant you a fee‑for‑carriage of 50 cents per signal as you suggest and we earmark it in some way, we either insist that it is incremental over what you spend right now on local content and drama, let's say those two things, or we say it all has to go into local news, or in some way that in effect both you and we as a Commission could demonstrate we are doing this only for one purpose and that is to maintain that part of the system which we feel is under threat because of the fragmentation of the advertising dollars and a fragmentation of the whole broadcasting system.

9236             MR. DAVID GOLDSTEIN:  As outlined in our joint submission, we submit that the fee would be tied to local reflection as to be defined by the Commission.

9237             THE CHAIRPERSON:  Put some bones on the flesh for me.  What does that mean?

9238             MR. DAVID GOLDSTEIN:  One of our issues, of course, is that of sustainability.  As the economic research has borne out, the obligations on these stations are particularly onerous.

9239             What we are not coming back, or at least not what we are presenting today, is ask for a reduction in those obligations.  But what we would ‑‑ what we would hope is to come back at group licence renewal for each of these individual stations and give you an extremely specific proposal of what that means to the sustainability of local service in each of those markets.

9240             MS BELL:  And Chairman, we have tied the ‑‑ we have tied this to local original programming and part of the reason why it would be difficult for us to put a number on that at this point is we ‑‑ as you can appreciate this is a pretty massive review of television policy in Canada and there may be other outcomes of this review that will have an impact.  And I will just use one example, Chairman.

9241             If you did grant cable companies or BDUs the right to advertise in local avails that would have an impact on us.  So in terms of making long term commitments and telling you where those numbers lie it would be difficult for us to do that today.

9242             THE CHAIRPERSON:  I am not asking for long term commitments.

9243             MS BELL:  Okay.

9244             THE CHAIRPERSON:  I want to understand concepts.

9245             MS BELL:  M'hm.

9246             THE CHAIRPERSON:  I'm a pragmatist.  I want to understand how things work.  I don't want you to give us loosey‑goosey concepts.

9247             You say if local programming targets are not hit in a given month no subscription fee is permitted.  Mr. Goldstein just said it would be tied to local content.

9248             Explain to me, first of all, is it going to be incremental?  Is it over and above your current expenditures on local content?  Those you know.  We know them.  So would the fee be over and above?  Would it be dedicated solely to local content or something else?

9249             And then would it be paid to the network to go to the individual stations or on what basis would it be distributed?

9250             And lastly, what does it mean if local programming targets are not hit, no subscription fee is permitted?  Does that mean there is a refund or what?

9251             And I would just like to understand how this works.

9252             MR. DAVID GOLDSTEIN:  Let me take your questions in reverse order, if I can.

9253             On the accountability issue, first of all we provide logs to the Commission.  That was a simple recognition that whatever the commitment would be there would be a regular accountability and transparency to that, to the Commission.

9254             So we don't underperform and we wouldn't underperform, and therefore I don't think there is an issue about whether there would be rebates or whatnot.

9255             As far as ‑‑

9256             THE CHAIRPERSON:  Yes, but if you do underperform then what?  You have opened the door.  I mean, you said that no fee is permitted.  So since you state it in black and white you tell me what happens if you do not perform.

9257             MR. ASPER:  Mr. Chairman, I think what ‑‑ as I understand it, there is an implementation phase coming after this hearing. And to be fair, it's hard and without a conversation with BDUs and how they ‑‑ you know in terms of discussing how and when they pay their subscription fee I think we don't have the exact mechanics of how that works, but we are saying the principle is accountability on a monthly basis, not on an annual basis.

9258             THE CHAIRPERSON:  I understand that.  We are talking at the conceptual level.

9259             MR. ASPER:  M'hm.

9260             THE CHAIRPERSON:  Are you suggesting either a refund or a credit or a debit for next year so next year you get less because you didn't live up to ‑‑ how does this accountability work in a way that actually is meaningful?

9261             MS BELL:  It could probably work through a credit.  I am assuming that is probably the easiest way of doing that instead of having an exchange of ‑‑

9262             THE CHAIRPERSON:  So it's a debit for next year.

9263             MS BELL:  Exactly.

9264             THE CHAIRPERSON:  So you didn't live up to this year so next year you get less.

9265             MR. ASPER:  I think given that we have got two business people who are sitting beside each other who haven't had a chance to discuss the specific mechanics if we could have a noon‑hour chance or a break chance to just have a quick conversation about it?

9266             THE CHAIRPERSON:  No, you can come back in and answer but you appreciate, you know, you put a concept like this on the table I have got to figure out what are the consequences.  So this is obviously one you might want to reflect on.

9267             MR. ASPER:  I think a quick conversation could ‑‑

9268             THE CHAIRPERSON:  Yes.  Go on, Mr. Goldstein.

9269             MR. DAVID GOLDSTEIN:  Well, I am going to ‑‑ I can only speak on behalf of CTV as far as the networks but I believe both of these companies spend local dollars.

9270             THE CHAIRPERSON:  Come on.  You are coming as a joint to joint ‑‑ so you speak jointly or else we have to listen to you separately.  I am not going to play this back and forth.

9271             MR. DAVID GOLDSTEIN:  Our local spending is with local stations.  And as we filed our numbers with the Commission the local spend on local programming is done with the local stations and not network.

9272             The second ‑‑ the second one is the dedicated to local content.  That is something that we have affirmed in our proposal and if that requires a more detailed discussion there is an implementation phase and we can perhaps look at a definition of local content that would comfort the Commission.

9273             And the last, which is the hardest question to answer, is incrementality.  And it's hard to ‑‑ it's hard to answer because if you drill into the numbers even with ‑‑ even though we are here jointly we are still competitors and we have filed confidentially on the public file what our costs are individually for local news.

9274             We will be filing additional information as part of this process that will give you the full scope on a per‑subscriber basis what that cost is.  And frankly, you will note that it is just a fraction of the 50 cents that we have advocated.  It is just a fraction of what we are already spending on local news programming.

9275             THE CHAIRPERSON:  Oh, I appreciate that.  You know, I mean, incrementality is obviously going to be an issue.

9276             MR. DAVID GOLDSTEIN:  So our primary ‑‑ and I know Mr. Asper and Mr. Fecan will want to jump in, but our primary issue right now is sustainability.  Incrementality ‑‑ and I can't believe I am about to agree with Mr. Stursberg in this proceeding, but he made a very good case that there are two steps to this; that there is a sustainability issue before you can even discuss incrementality because that's the challenge that is facing local right now.

9277             MR. FECAN:  Conceptually what we are saying is the foundation is cracking.

9278             THE CHAIRPERSON:  Yes.

9279             MR. FECAN:  And the crack is spreading.  We need to stabilize that first before we put another story, another floor on that foundation.

9280             And that's how we are approaching it.  The money would go towards local programming and local reflection.  Our licences all come up ‑‑ our local licences come up within a year and it was ‑‑ I thought that when we understood the other decisions that you would make that would affect potentially very seriously our local businesses that then we could come forward with each of us separately, because we will be applying separately for our licences, with what the regulatory proposed bargain is for that particular term being talked about.

9281             MR. ASPER:  I think, Mr. Chairman, you know the local licences are quite a patchwork of different obligations sometimes relating back to historical circumstances.  But there are some stations that have 40 hours or 30‑some odd hours of local programming.  Others have 10 or 12.  You know, obviously, the smaller the market usually it ratchets down but it is not always the case.

9282             So I think, you know, it comes back to the issue of what is the entire package of regulatory reform that comes out of this hearing that will factor in your decision?

9283             But I would just say we are not closed to the idea entirely of incrementality.  I think we just have to see where all the chips fall from this hearing and we can, I think, have that discussion in more detail at a subsequent hearing.

9284             THE CHAIRPERSON:  I notice the qualifiers both in your and Mr. Fecan's answer.  So I gather the net result is going to be partial incrementality.

9285             To use Mr. Fecan's words, part of the funds you would use to fill the cracks and the rest you would use to augment the base, is that the idea?

9286             MR. ASPER:  I think, you know, if we were to state just on principle what our view is, our view is that we have been wronged for a long time and we would simply like to have that wrong righted and we shouldn't have to do something extra to right that wrong.  However, you know we understand that the Commission has a number of interests to balance.

9287             THE CHAIRPERSON:  Yes.

9288             MR. ASPER:  There is a Broadcast Act you are regulating us under and there are other constituents.  And that's why I say I think we are willing to have a discussion given we are ‑‑ later on as to where ‑‑ and whether there is a discussion about incrementality.

9289             THE CHAIRPERSON:  Is it only local content that we are talking about or is there more to it?

9290             MR. ASPER:  Yes, yes.

9291             THE CHAIRPERSON:  So the fee‑for‑carriage would be in effect to ensure there is local content?

9292             MR. ASPER:  Yes, we agreed on that, yes.

9293             THE CHAIRPERSON:  In your case, Mr. Asper, could it mean that for instance that ‑‑ to take us back to an example of Ottawa, it could mean that we get an Ottawa local newscast out of this rather than a regional one?

9294             MR. ASPER:  Are you saying that it would apply to Global Ontario in the Ottawa market?

9295             THE CHAIRPERSON:  No, but I mean if we said part of it would be, to use Mr. Fecan's words, to fix the cracks and part of it is to amend and grow the local content, one of the logical ‑‑ one place would be taking Global ‑‑ I'm picking on Global, I realize, deliberately because it is the only example I know ‑‑ but we don't have a local Global newscast in Ottawa.  Since you now get a fee‑for‑carriage that should ‑‑ conceivably could amount to the net result being a local newscast for Global in Ottawa.  Or if not to pick on Global, City would get it and City would be able to do a Vancouver newscast which was just cut off and which we had a long discussion in this room with Rogers about that it should be reinstated.

9296             I just don't want to pick on you.  I am just trying to elaborate ‑‑ an example.

9297             MR. ASPER:  The only thing I think where one would have to bear in mind was that balance Ivan talked about earlier, which is you know we don't have the right to sell local ads.  I think Mr. Fecan might have a view about that if we were to apply to sell local advertising.  So there may be some issues that arise out of that because we don't sell local advertising even in Toronto and in Global.

9298             So you know how that might work again, I think requires a little bit of thought.  But the principle would be because we are broadcasting in Ottawa that we would receive the carriage from that market.  We could have a discussion about whether that means additional programming obligations there ‑‑ about what the revenue opportunity is there as well would have to be on the table.

9299             THE CHAIRPERSON:  Okay.

9300             Now, your proposal ‑‑ really, mine has four distinct components, the fee‑for‑carriage.  It's a distant signal.  The mandatory carriage by DTH in the areas where there is more than 30 percent distribution, and the simultaneous substitution for second four‑plus‑one signals so that to protect you from station shifting.

9301             Those to me ‑‑ it is not set out that way but those are the four key components of what you are proposing?

9302             MR. DAVID GOLDSTEIN:  That is correct.

9303             THE CHAIRPERSON:  Okay.  So far we have talked about fee‑for‑carriage.  Let's talk about distant signals.

9304             I have heard from BDUs now saying essentially this is a bogus claim, that there is a system in place that compensates you and that distant signals are not allowed to be carried and they have to be blacked out unless you have been compensated and there is a compensation regime in place both for DTH and there for terrestrial BDUs.  And so therefore via the mechanisms of payments through the CBA you will actually be compensated for it.

9305             Obviously, you don't agree.  So since I have heard their story let me hear your side.

9306             MR. DAVID GOLDSTEIN:  First of all, I will begin by saying I think they think it's a very fair and reasonable proposition because they have the entire control in the system and we have no negotiating tool.  I think you have heard from Mr. Charman at the CAB who gave a fairly eloquent detailed history of how he got to that position but it can't be characterized as a fair and open negotiation.

9307             So whatever fees ‑‑ and we saw several numbers that got put on the public file ‑‑ none of them necessarily go directly to the compensation that's going to the local broadcaster.  And we can drill down through that with Mr. Armstrong if you wish and we can drill down through the damage if you wish, and we would be happy to do so.  But what we are proposing to do ‑‑

9308             THE CHAIRPERSON:  Just keep it at the 10,000 feet level.  What is the damage according ‑‑

9309             MR. DAVID GOLDSTEIN:  What we are proposing to the Commission ‑‑

9310             THE CHAIRPERSON:  ‑‑ to you?

9311             MR. DAVID GOLDSTEIN:  We read the public notice.  We understand the Commission's desire to seek streamlining, regulatory streamlining.  We are not sure that whatever the public policy principles that were that brought us to the distant signal issues still exist.

9312             And, frankly, we think it's time to allow this to go back into a fair commercial negotiation and that the Commission should allow that to transpire between the parties.  The only way that you can do that is to allow us consent because otherwise it's not an equal playing field.

9313             THE CHAIRPERSON:  How do we prevent the consumer from suffering in the case that you and the BDU can't make a deal?

9314             MR. DAVID GOLDSTEIN:  Well, I guess there is a couple of things to look at, and I may want to throw to Mr. Brace or others who may want to comment.  But from a practical level there are other technologies in which other Canadians can watch some of this programming whether it's the evolution of PVR or VOD.

9315             And in fact it's interesting, and I think Mr. Asper and I were telling you about this earlier, you have seen actually a dwarfing of those technologies in Canada because of the distant signal issue.  And so I think there will be opportunities for Canadians to see that programming.

9316             But I think you have to start ‑‑ where we have to start is about the integrity of the program rights that we have purchased and the defence of those rights.

9317             MR. ASPER:  Just to go back to your question, we have said on the record we believe the damage is $93 million.  I think it would be appropriate at this time to maybe turn to Mr. McCluskey to try at 10,000 feet to just one more time say ‑‑ we have had this discussion a few times ‑‑ to just say how we calculated that and where we came to that conclusion.

9318             THE CHAIRPERSON:  Okay.

9319             MR. McCLUSKEY:  Actually, I am going to pass it to Mr. Armstrong because he did the calculations.

9320             MR. ARMSTRONG:  Thank you.

9321             The $93 million estimate is based on a study that I undertook where we looked at each of the local ‑‑ each of the programs offered by each; CTV A‑Channel, Global and E! Television station in their home markets and then identified each occasion in those local stations' home markets when an identical program came in on a different television station, on a distant Canadian station, on a distant U.S. or it came in on the local set of U.S. four‑plus‑one.

9322             We attached a value to that viewing based on the local revenues of each television station.  So we assigned a value in each market based on the revenues of each local television station and then asked the question:  If all of that viewing were to come back to the television station how much of that available inventory could it sell?

9323             And we ended up at 24 percent as a reasonable estimate there of the amount.  Based on that we were able to identify ‑‑ based on that kind of analysis we were able to identify a number of different impacts.

9324             In terms of distant signals, the impact of distant Canadian signals on those television stations it was $47.2 million; distant U.S. it was $15.4 million.

9325             The impact of identical programming coming in on the first set of four‑plus‑one we set at ‑‑ we estimated to be $21.8 million.

9326             And then in those situations where we identified viewing in a situation where we would have expected simultaneous substitution to have occurred we identified the impact there as $8.8 million.

9327             So that's how we arrived at the $93.1 million.

9328             And just to set that in context, the study that I undertook for the CAB where I looked only at the impact of distant Canadian and the second set of four‑plus‑one, I came up with a number of $80.1 million, and that is comparable to $62.6 million in the study that I undertook for CanWest and CTV if we just isolate the impact of the distant Canadian and the distant U.S.

9329             MR. FECAN:  Distant signals takes money away from us on a revenue basis, and Mr. McCloskey is getting read to explain how that is so.

9330             But really what distant signals are used for, I mean, you don't really ‑‑ I don't imagine people in Edmonton really care about Detroit news or probably the Montreal news.  They are used ‑‑ they use these things to timeshift.

9331             THE CHAIRPERSON:  Yes.

9332             MR. FECAN:  And there is a direct connection, I believe, between the fact that these things exist in our country; again, without the permission of the originating stations, foreign and domestic, and the lack of VOD because typically that's ‑‑ you know, you would have the ability to watch something at a time that is convenient to you through VODs and PVRs.

9333             But in our country we have kind of stumbled into this distant signal regime which originally was put in place to help DTH and then cable, digital cable said, "We have to have it too."  And now, you know, we are left with a revenue loss because of that, and that Mr. McCloskey can explain.

9334             MR. McCLUSKEY:  The central problem with monetizing distant signals is the fact that advertising agencies can gain the system to get away without paying for it.  Advertising agencies buy up a half of many different accounts.  They buy at a regional level.  They buy at a local market level.  They buy at a network level.  When they buy at a local market level that sets their benchmark rate that they will pay stations.

9335             So when we move up the ranks, say we get to network where it would seem obvious that they should be paying for the distant signals; they are a network advertiser, they are carried right across the country; what an agency will do is examine the rate of the network and compare it with the rate of all of the stations that comprise that network.

9336             If the rate of the network is higher than the rate of the individual stations they will simply choose not to buy the network and will buy the individual stations instead.

9337             THE CHAIRPERSON:  And through timeshifting get a network effect?

9338             MR. McCLUSKEY:  Yes.

9339             MR. FECAN:  And our one ability to deal with that is to get a fee that we feel is fair and we need to be able to negotiate with the BDUs for that and give our permission to take our signals.

9340             MR. ASPER:  Mr. Chairman, if I could just add one piece of history?

9341             This happened at the same time in the United States, mid‑nineties, when it started to be a technical possibility.  And in Canada the broadcasters were encouraged to "play ball" with the regulatory regime to allow BDUs to get off the ground and provide a competitor to cable.  In the United States maybe they were asked to do that but they didn't.  They went right to the Supreme Court because Direct TV and others were trying to do this and they won.

9342             And that's why Direct TV doesn't bring in distant market signals and that's why you see on their website that federal law says they can't and that's why it doesn't happen there.  It's just been a different response to what all ‑‑ what both broadcasters, sets of broadcasters saw as a major problem.

9343             THE CHAIRPERSON:  Now, that is the distant signal.  Now, on DTH it's slightly different.  You will have a compensation system too.  You think it's inadequate and you feel that any market which has DTH penetration of 30 percent you should be compensated to or you should have the ability to give your consent to have that carried; if I understand it correctly.

9344             MS BELL:  We have said two things, I think.

9345             Part of our position is that all local signals should be carried by all BDUs.

9346             THE CHAIRPERSON:  Yes.

9347             MS BELL:  So that's the part that says they should carry our signal as long as DTH penetration has reached 30 percent in a market.

9348             And then the other part of it is the compensation part, of course, is if we are losing $90 million a year to compensation right now, for the entire industry amounts to about $20 million.  It's nowhere near what the damage is.  And I would say the $90 million is between only two companies also.

9349             THE CHAIRPERSON:  I'm sorry, I wasn't clear.  You are quite right.

9350             You want, first of all, the distant signal, but then, in DTH ‑‑ if I look at paragraph 168 of your submission, you are quoting, for Canwest, Red Deer, Montreal and Regina; and for CTV, Yorkton, Prince Albert and Kitchener.

9351             You are basically saying that in all of those areas there is a 30 percent penetration, yet we are not carried.

9352             You should be carried.  In effect, we should impose that obligation on the DTH ‑‑

9353             MS BELL:  That's correct.

9354             THE CHAIRPERSON:  Is there any capacity constraint?

9355             We have heard various stories about whether there is a capacity constraint.

9356             MR. ASPER:  I am just looking down the Bell programming lineup.  They have said that there are capacity issues, and then I look down at Channel 749, the Venus Preview Channel; Venus Adult Pay‑Per‑View, 7:50 to 7:56; Playboy Television; Adult AOV Movies ‑‑ about nine or ten pornography channels.

9357             I then flip over and I see ten channels reserved for NCWA college basketball, and on and on.

9358             They don't have room for Montreal local TV, but they have room for porn.

‑‑‑ Laughter / Rires

9359             MR. ASPER:  I know some people think that's good, but ‑‑

9360             THE CHAIRPERSON:  I won't touch that line.

‑‑‑ Laughter / Rires

9361             THE CHAIRPERSON:  Do you have any value on this station shifting, the effect that simultaneous substitution ‑‑

9362             First of all, you are suggesting simultaneous substitution where the distant signal is being carried.  I guess there should also be simultaneous substitution for a second 4 plus 1, which may be in that market, and which may be showing those shows at the same time.

9363             I have no idea ‑‑ I presume it is technologically feasible.

9364             I don't know what the cost is and what would be the benefit to you.

9365             Do you have ‑‑

9366             MR. DAVID GOLDSTEIN:  First of all, I would welcome Mr. Armstrong to walk you through some of the impact, but I think that on the distant 4 plus 1 we would actually require non‑simultaneous substitution, which may be technologically difficult, but not impossible, especially in a world where the BDUs are now talking about dynamic ad insertion.

9367             Frankly, we would like to see compliance with the current simultaneous substitution provisions, as they stand.

9368             The point, I think, that we were making, or that Mr. Fecan was making, is that this is only a partial solution.  The real solution is to find a way to regain the integrity of those rights, for here and in distant markets.

9369             THE CHAIRPERSON:  You are asking for non‑simultaneous substitution rules, did you say?

9370             MR. DAVID GOLDSTEIN:  The problem with the distant 4 plus 1 is that they are time shifted in a different time zone.  In order to maintain the integrity of those rights ‑‑

9371             Mr. Brace may be able to help you out, but I think the real point here is that we have to return the integrity to those who have the program rights.

9372             MR. BRACE:  That is the key issue, we have the program rights for these programs, yet they are broadcast in those areas, with commercials coming in.

9373             We believe that there are really two choices ‑‑

9374             THE CHAIRPERSON:  No, I'm sorry, I don't understand you.

9375             Let's take a concrete example.  Everybody seems to love taking "Desperate Housewives" ‑‑ and I don't know who has the right to "Desperate Housewives", I don't watch it, but that's neither here nor there.

9376             Let's assume that CTV has it, and you show it at seven o'clock Ontario time and at seven o'clock Manitoba time and at seven o'clock ‑‑

9377             By way of distant signal, obviously, a person can watch it at whatever time they want to watch it.

9378             Now, I understood that the idea was that a second 4 plus 1 in the U.S. ‑‑ the Manitoba one may show it at that time, too, and the simultaneous substitution only would work for Ontario, but wouldn't work for Manitoba.  Therefore, you wanted to have it in Manitoba, too ‑‑ if anybody watches Ottawa time in Manitoba or something.

9379             Where does non‑simultaneous substitution come in?

9380             MR. DAVID GOLDSTEIN:  I actually think that Mr. Armstrong can give you an example of what we are trying to describe.

9381             MR. ARMSTRONG:  Actually, it just turns out that I looked at "Desperate Housewives" broadcast on CJOH on Sunday ‑‑

‑‑‑ Laughter / Rires

9382             MR. ARMSTRONG:  It was broadcast in the Ottawa‑Gatineau market, in Week 3, on CJOH.

9383             Of the total viewing in this market to that program, 55 percent of it was to out‑of‑market television stations and 45 percent was the local station.

9384             If you want, I could walk you through some examples of the viewing.

9385             It was broadcast on CJOH on Sunday, Week 3, at 9 p.m., and it generated an average quarter‑hour, viewers 25 to 54, of 33,000 on cable, DTH and OTA.

9386             It was also available in Ottawa‑Gatineau ‑‑ and at this point I am talking about station shifting ‑‑ on CFTO on cable, and that generated 8,300 average quarter‑hour viewers.

9387             I think that is an instance where we would have expected simultaneous substitution to occur.

9388             It was available on DTH at the same time, same day, again on CFTO, and it generated 3,500 average quarter‑hour viewers.

9389             And I classify that as a distant signal, in fact, because I don't believe that DTH is required in all instances to undertake simultaneous substitution.

9390             It was also available in Ottawa on CFCF, on DTH, and it generated 13,200 average quarter‑hour viewers.

9391             And I classify that as a distant signal impact.

9392             It was available in Ottawa on CJCH Halifax at the same time, and it generated 1,800 average quarter‑hour viewers.

9393             That, I believe, is a compliance ‑‑ or failure to undertake substitution.

9394             It was also available on WCVB, on DTH ‑‑ 3,800 average quarter‑hour viewers.

9395             And I would classify that as sort of the first set of 4 plus 1, so ‑‑

9396             THE CHAIRPERSON:  Right.  Let's deal with 4 plus 1.  We were talking about 4 plus 1.

9397             This W ‑‑ whatever ‑‑ where does it come from?

9398             MR. ARMSTRONG:  That's a Boston station, so I would classify that as the first set of 4 plus 1.

9399             THE CHAIRPERSON:  Why wouldn't that be subject to simultaneous substitution?

9400             If it's at the same time period ‑‑

9401             MR. ARMSTRONG:  Oh, excuse me, that's on DTH.  It was on that station, on DTH, at the same time.

9402             MR. DAVID GOLDSTEIN:  I believe, in this market, that Detroit is the simulcast station.

9403             MR. ARMSTRONG:  So you can see that there is a wide variety of choices there ‑‑

9404             THE CHAIRPERSON:  Yes, but I am trying to figure out what you are driving at.  I thought you were driving at ‑‑

9405             Let's take "Desperate Housewives" being shown in Ottawa at nine o'clock.  If a station in Minneapolis shows it at ten, and you can get it via your cable or your DTH, then you could actually, in effect, watch it in Ottawa at nine o'clock on an American station.

9406             That was the station shifting that you were worried about.

9407             That's not the case?  That's not what we are talking about?

9408             MR. ARMSTRONG:  There is also station shifting in this market.

9409             "Desperate Housewives" was on KOMO in this market at mid ‑‑ it came in here at market and that's a station shifting.  It generated 2,500 average quarter‑hours.

9410             THE CHAIRPERSON:  Yes, and I thought that in your proposal that was the sort of station shifting that you were trying to address.  It's a different second 4 plus 1 which is showing it at the same time, where the first 4 plus 1 is simultaneously substituted, and you were losing revenue there.

9411             If I have it wrong, please correct me.

9412             MR. DAVID GOLDSTEIN:  That is correct.

9413             There are a couple of distinct problems.  There is the division within the same time zone of the distant signals, as Mr. Armstrong is putting to you, and then there are the time shifting issues of watching those signals, and the second set, and I was referring to the second set of 4 plus 1s, in distant signals, from different time zones.

9414             So that, even in Ottawa ‑‑

9415             I'm sorry, Mr. Chair.

9416             THE CHAIRPERSON:  Go through that again, Mr. Goldstein, from the beginning ‑‑

9417             MR. DAVID GOLDSTEIN:  There are two distinct problems.  The first is that, within a market like Ottawa, you are watching "Desperate Housewives" on different signals.  It is in the same time slot, but it is coming in from various sources that divide the advertising for the signal.

9418             There is also the time shifting, where you ‑‑

9419             THE CHAIRPERSON:  Hang on.  Stop.  It comes from various sources.

9420             MR. DAVID GOLDSTEIN:  Right.

9421             THE CHAIRPERSON:  If they are Canadian sources, presumably, they have acquired the right.  If they are U.S. sources, there will be simultaneous substitution.

9422             MR. ASPER:  They have acquired the right for a different market, so they are really ‑‑

9423             If you want to cover the whole landscape, there are four things.  There is watching another Canadian channel in the same time zone, but not in that market ‑‑ a Torontonian watching a Montreal station.

9424             Then there is watching another Canadian channel that is in a different time zone ‑‑

9425             THE CHAIRPERSON:  Stay with the Torontonian watching a Montreal station.  Why are you bringing this before me?

9426             I mean, the Montreal and the Toronto stations paid for the right to broadcast that.

9427             MR. ASPER:  No, Montreal didn't pay for the Toronto right to broadcast there, and it takes viewing away from the Toronto station that can't be monetized.

9428             THE CHAIRPERSON:  I know, but that would be caught under distant signal, which we just talked about.

9429             MR. ASPER:  Right, I was ‑‑

9430             THE CHAIRPERSON:  I was talking about station shifting.

9431             MR. ASPER:  Right.  I understand.

9432             There is station and time shifting of Canadian signals.  I just want to make sure that we are covering ‑‑

9433             We are not on that subject, I am just saying that there are four issues facing broadcasters.

9434             Now, let's go to the U.S. situation.  There is the watching of an out‑of‑market/same time zone U.S. station.  So the first set of 4 plus 1 gets simulcast.  Fine.  Partial compensation.  The second set of 4 plus 1, same time zone, doesn't get simulcast.

9435             The third problem is, out of time zone U.S. 4 plus 1.  So Spokane, Washington/Calgary; Detroit/Winnipeg; eastern versus central time zone ‑‑ those kinds of things.

9436             I think those latter two are the ones we are at ‑‑

9437             THE CHAIRPERSON:  Do you have any quantification for either the second 4 plus 1 in the same time zone, or 4 plus 1 in a different time zone ‑‑ what the damage of that is to you?

9438             MR. ARMSTRONG:  Yes, I do.

9439             I could give you station shifting in total, which is $30 million.

9440             Time shifting in total ‑‑

9441             It is 30.9 for station shifting, and 60.2 for time shifting.

9442             In terms of station shifting U.S., that is $26.4 million.

9443             In terms of station shifting U.S. on DTH, that is $13.6 million.

9444             THE CHAIRPERSON:  You said 30.9 station shifting, and 60.2 time shifting for Canadian.

9445             You don't have the equivalent for U.S.?

9446             MR. ARMSTRONG:  No, that's total.  That is total.

9447             For U.S., I have station shifting on cable, which is 26.4.  U.S. station shifting on DTH is 13.6.

9448             THE CHAIRPERSON:  And time shifting?

9449             MR. ARMSTRONG:  My totals for time shifting ‑‑

9450             You know what?  I apologize.  I have two rows of numbers here.

9451             May I go through those again, to make sure we are absolutely right?

9452             THE CHAIRPERSON:  Sure.  Let's start from the beginning.

9453             MR. ARMSTRONG:  Yes.

9454             My total for station shifting and time shifting ‑‑ station shifting is 30.9, and time shifting is 62.2.

9455             Station shifting on cable, U.S., is 5.7.

9456             Station shifting on DTH is 2.9, U.S.

9457             Actually, these are at Figure 2 of page 7 of my report.

9458             Time shifting, U.S., on cable is 27.7.

9459             Time shifting, U.S., on DTH is 6.3.

9460             So I have them split by station shifting and time shifting for each distributor.

9461             THE CHAIRPERSON:  Okay.  I suggest that in your reply ‑‑ in your additional submission you set that out in detail ‑‑ exactly the comparison, so that we can ‑‑

9462             So time shifting and station shifting, Canadian, what is the damage, according to you, both from cable and DTH, and then, U.S., what the damage is from cable and DTH, in those four categories.

9463             MR. ARMSTRONG:  Yes, sir.

9464             MR. FECAN:  Mr. Chair, if I could also draw your attention to a wrinkle that will become a lot more significant in the future, and that is the way the BDUs are interpreting the simulcast rules for high definition programs.

9465             Their view is that, if there isn't a high definition transmitter in Ottawa, then they don't have to do any simultaneous substitution over the high definition signal going into the market.

9466             You have a complaint in front of you on the Super Bowl, where both Bell ExpressVu and Shaw took the view that if it was outside of Toronto or Vancouver, they didn't need to do any simultaneous substitution for those signals.

9467             In fact, ExpressVu went further, they put up a non‑simultaneous substituted signal available in Toronto and directed people to it.

9468             That's another issue, but the crack gets bigger on this one.

9469             Philosophically, since all of the programs are available on Canadian channels, and since we own the rights, I really don't understand why, under the Broadcasting Act, or on any other basis, we worry about these signals being here or have them here in the first place.

9470             THE CHAIRPERSON:  As you mentioned, there is a live dispute before us, so I think we should leave it to be resolved on that basis.

9471             If I could go back to ‑‑ my knowledge of your demand is, as I said, fourfold:  fee for carriage, distant signal, DTH, and simultaneous substitution, of course ‑‑ second U.S. plus 1, or other types of U.S. plus 1, et cetera.

9472             In a perfect world you get all four.  If you can't get all four, which ones are key to you?

9473             And don't tell me all four.

‑‑‑ Laughter / Rires

9474             MR. ASPER:  I was about to.  I was trying to read your thoughts, and it turns out that I was right.

9475             If we have to rank them, which is the best I can do on the spot, fee for carriage is, by far, the most important.  I think the distant signal would be second, and I think the other two are interchangeably third and fourth.

9476             THE CHAIRPERSON:  Mr. Fecan, do you agree?

9477             MR. FECAN:  I would agree with that, but I would also point out that if simultaneous substitution is eroded further, we will take steps to ensure that the signals on the programs are carried in this country.

9478             MR. ASPER:  Yes, I think that is the point.  What we are trying to do is ‑‑ we have already started with a compromise, and I guess the compromise of a compromise is where we have a little bit of trouble going.  I think that is ‑‑

9479             THE CHAIRPERSON:  No, I am not asking you to make a decision.  I am not going to hold you to it, I just want to see, from your perspective, what are the priorities.

9480             And I apologize to you, Len, if I am cutting you off, to some extent, but I have to pick up on this one point here, which is that Ms Bell, in her presentation this morning, said that the pie isn't growing, as a definite amount, et cetera.

9481             We have heard an awful lot of evidence about VOD and SVOD.  Yesterday, as you undoubtedly heard, we heard about NPVR, and how network PVR may, at the end of the day, be the way to keep the viewer in the broadcasting system, and to also target the individual viewer, giving the broadcasting system ‑‑ let's call it the system, as such ‑‑ the ability to individually target viewers, and therefore prevent migration to the internet.

9482             Clearly, everybody is working on it.  There are privacy issues, as Mr. Rogers pointed out.  There are lots of companies who have perfected it, or who claim to have perfected it.

9483             We found out yesterday, to my surprise, that in the U.K., apparently, there is already some sort of NPVR.

9484             Since part of this whole proceeding is to look forward, and assuming that this would develop, is it not possible that this, in effect, number one, would arrest the migration of advertising dollars to the internet, but, also, in effect, would increase advertising power and represent a new source of revenue?

9485             And that, rather than us trying to work out some sort of fairly interventionist fee for carriage, or improved simultaneous substitution rules, we should say:  No, let's look forward.  That's where this whole market is going.  And let's make sure that both you and the BDUs, on some sort of sharing basis, can have access to this increased revenue, this increased ability to target the consumer's wants, and use that to finance local content, rather than yesterday's methodology, as some people call it, fee for carriage, et cetera.

9486             What are your views on that?

9487             I realize it is not a very precise question, but it has really come up in the way that I posed it to you during the last week and a half.

9488             MR. ASPER:  I think I would like to turn to some of the people who are out trying to sell advertising in the marketplace, but I think that we have to come back to what are the objectives of the system.

9489             We would love to be a part of the video‑on‑demand world.  We see it as another platform, just like we are all struggling with, but trying to find our way on the internet, and dealing with the issue of program rights, or even the rights of commercials.

9490             A lot of the agencies, and others, have not even cleared the rights for commercials to be played on other platforms and the internet.

9491             It is a lot more complicated world out there, to just jump into VOD, than the cable and DTH people would have people believe.

9492             We would love to embrace that world, it is just that it is not available to us, I think, as much ‑‑ at all, right now, very much.

9493             I think the revenue opportunity there ‑‑

9494             It is not available, to some extent, technologically and rights‑wise, but also, from a revenue perspective, I think there is a story that is worth telling.

9495             MR. DA‑RÉ:  We have had some preliminary discussions with the folks at INVIDI, through Capital Network, which is the representative here in Canada, and, really, it is such a new technology ‑‑ and I think it is actually being launched, as we speak, in test mode in the States somewhere, possibly Baltimore or Maryland, but I am not positive on that.

9496             But, in the end, I think there are a lot of issues ‑‑ and I think you mentioned it, Commissioner ‑‑ on the privacy perspective on this.  I think that is something that could become one of the key issues going forward with this.

9497             We are all in favour of targeting better for our clients and for our advertisers, but in the end it has to be something that is measurable by standards that the advertisers and the advertising agencies have at their disposal right now.

9498             From what we are hearing, we don't know what that measurement is at this time.

9499             So, going forward, I guess that is the main question, will we see the measurement that can be sustained from agencies.

9500             What is the cost of the set‑up?

9501             We don't know what that is, either.  That could be substantial.

9502             And who is paying for the cost?

9503             We have a lot more questions than we have answers when it comes to that kind of software for advertisers, but, obviously, there is a lot of interest.  I think that clients are interested in that, but I think there are way too many questions that are unanswered at this point.

9504             I have tried to get in touch with a few of the top agencies, and the presidents and the very senior people, and the responses I have received so far are that they don't know a lot about this themselves.

9505             It's pretty hard to move forward on this when we don't have those questions answered.

9506             MR. BRACE:  If I could add to what Mr. Da‑Ré has said, I have, in fact, met with several of the agency presidents, and I have also had meetings with Rogers.

9507             First of all, this is very interesting for us.  I mean, it would be wonderful to go down this road, and the display of VOD programming would be great for our major programs, and if there is a way that we can monetize it, once again, that would be terrific for us.

9508             The initial hurdles that we have to get over are, number one, is the money going to be truly incremental.

9509             That is number one.  To this point in time, in meeting with, as I say, several ‑‑ in fact, seven of the agency presidents over the last month or so ‑‑ the indication to me is that money is moving around, but it may be because it is not clearly understood yet what could happen in this world.

9510             In terms of dynamic advertising, which I think is outside of privacy issues or other concerns, the concern for the agencies there is that they have to, incrementally, produce creative.  So there is a greater cost in order to access the audience they are targeting, because you may be producing four or five versions of the same commercial to use the dynamic advertising system effectively.

9511             In this country, at least, it is going to be an evolution.  We see it kind of rolling out in the U.S., where they are selling advertising on VOD, and, seemingly, it is working.

9512             I don't know that it is incremental, to be honest with you.

9513             But, at this point in time, that technology is not here in Canada.  It will have to roll out.

9514             Rogers has said that they are going to do it within the next year, so they will become the beta test for it, but I think it is going to be several years before we can really determine whether or not this is an effective way of increasing revenue.

9515             My initial feeling is that it is just more of holding the revenue that we have, because as it moves to various platforms, we are just kind of moving it from one pocket to another.

9516             MR. FECAN:  As part of experimenting, what we did this year was, we tried to do some VOD of popular programs, both domestic and foreign.

9517             The first thing you have to do is buy the rights for that, because the rights are not the normal package of rights you buy, there is an additional level of rights.

9518             And we, in fact, worked with Rogers and put a number of the programs on the VOD basis, but we found that a lot of advertisers had not cleared their commercials to run on a VOD platform, or they were time‑sensitive and they didn't want them stretched out over a period of time.

9519             We found that there is no accountability to the agencies because, at the moment, none of the Canadian BDUs has purchased the software that tracks who uses it and how many use it in any kind of reportable data.

9520             We did the experiment, it was all cost and no revenue for us, and, yes, I think there is an interest, but I really don't see any evidence whatsoever that it is growing the pie in terms of revenue.

9521             THE CHAIRPERSON:  What about the whole issue of network PVR?

9522             The way I understood it, which was strange to me, is that, in effect, you would have the ability with your remote either to go back to the whole schedule for CTV ‑‑ or whatever Rogers has offered for the last week, or the last month; or, alternatively, you would have a search function that would find "Desperate Housewives", and you could watch all five episodes that were shown in the last month or whatever.

9523             Apparently, such a capability exists in some countries and people are working on it.  If that is true, would that be a way of growing the advertising pie?

9524             Obviously, you could insert a new ad when people watch stuff on that basis.

9525             MR. FECAN:  It depends on whether this network PVR allows fast‑forwarding of commercials.

9526             THE CHAIRPERSON:  Apparently, it wouldn't.

9527             MR. FECAN:  You shouldn't take it for granted one way or the other.

9528             Some of the PVR versions in the U.S. don't allow for that, particularly on the BDUs.

9529             Whether the memory is resident in your set‑top box and you have actually done something to download or to record something as it was going by, or whether the memory is resident in some network thing is, frankly, a technicality.  It is a PVR.  Then the questions are:  Can you sell advertising for it?  Who sells that advertising?  Is there a fee?  Can you fast‑forward through the commercials?

9530             All of these questions are part of the business model in trying to figure out what the thing is worth.

9531             THE CHAIRPERSON:  It's not quite a technicality.  The difference is, I control the PVR in my house, and the network PVR is controlled by the network.

9532             For instance, they could make such rules as to whether their ads could be deleted or not, and whether they could substitute and so forth.

9533             And, of course, they take away for me having to think of what I want to do, I can just act on impulse.

9534             MR. FECAN:  That's true.

9535             THE CHAIRPERSON:  It struck me, I must say, at first blush, that, indeed, this could be a fairly lucrative source of additional revenues.

9536             MR. FECAN:  If those rights are available.

9537             THE CHAIRPERSON:  Yes, that's ‑‑

9538             MR. FECAN:  At the moment that, by the studios, might well be considered theft.

9539             THE CHAIRPERSON:  Yes.

9540             MR. ASPER:  I think it is also worth stepping back and remembering how advertising budgets are set.  It is usually a function of GDP, particularly in a mature economy.  I can't speak for an India or a China, where it is growing.

9541             If GDP is 3 percent, that is a target that people will use.  In most cases, in large advertisers, it is a percentage of their projected sales.

9542             When they are going through product launches and other things, they might heavy up.

9543             If they are trying to get rid of inventory, they might do a tactical buy on a radio or a newspaper.

9544             But it's 3 percent, call it.  Somebody is usually growing at 7 in that environment, and someone is growing at zero.  Or, someone is growing at 2 and someone is growing at 4, and it averages out to 3.

9545             It comes back to what Rick was saying, as money moves around, and is moving around to the more targeted forms of advertising ‑‑ that is the current, but 10‑year trend, and foreseeable trend.

9546             That is why VOD advertising is going to be a switch ‑‑ it is going to be yet another switch from conventional, just like the internet is providing the same opportunity ‑‑ perceived opportunity for advertisers.

9547             It is not going to grow viewing.  People only have a certain amount of hours, so they are just going to switch again.

9548             We just don't see how it grows the pie.  It will shift it, but I think it is a three to five ‑‑ probably a five‑year move before it has any kind of substantiveness to it, and it is going to cost people to buy rights.

9549             It's not just new revenues, it is a net factor.

9550             THE CHAIRPERSON:  And I assume that you would agree with TELUS, to the extent that if there is advertising on VOD, SVOD, NPVR, or whatever, it should be on a shared basis between broadcasters and BDUs.

‑‑‑ Laughter / Rires

9551             MR. FECAN:  It depends who bears the cost.

9552             MR. ASPER:  Don't forget, in VOD, part of what is happening is that the studio is part of the pie, too.  They want some of the money, too.

9553             MR. FECAN:  You know, this network PVR thing isn't entirely new.  Google has been talking about doing a similar kind of thing.  As soon as they try to record something on that basis, if there is a rights‑holder that cares, they take that down pretty quickly.

9554             You know, you just can't take somebody's intellectual property and use it for your commercial purposes without the creator's express consent.

9555             THE CHAIRPERSON:  No, I understand that.

9556             Last question, and then I think we will take a break.

9557             TELUS yesterday made sort of a point targeting particularly both of you and Quebecor and said: Look, yes, OTA is not that profitable these days, but you know, like a responsible commercial enterprise, you have diversified and you have just acquired a huge bunch of specialty channels, et cetera.  In Quebecor they have their distribution, Rogers has a distribution.  However, we have to look at these enterprises as a whole.  There are profitable lines and less profitable lines.  We at TELUS also have our fixed line telephone which is really not that profitable and ‑‑ that is part of the business.

9558             Look at these enterprises as conglomerates; they are healthy, they are doing well, et cetera.  Sure, there is one arm that is not doing so well, but other arms ‑‑ and they need each other.

9559             This is why I started off just asking you whether they are symbiotic or not and you said more or less.  So therefore that's just a cost of doing business.  Giving you a fee for carriage is basically giving you an undeserved support for a weak side of your business.  Every business has a weak side and yours happens to be OTA, but some other people it's others.

9560             Now, that is how it was presented to me.  You heard it yourself.  I thought I would give you a chance to comment on that.

9561             MR. FECAN:  Well, I presume they would then look at all of their unregulated businesses as supporting their regulated businesses as well.  I don't think I heard them saying that.  I didn't hear Rogers saying they wanted to include their Internet revenues and their wireless revenues towards their regulated services.

9562             So you know, what is good for one is good for the other, I suppose.  And I didn't hear them saying that at all.

9563             But from our point of view, we really believe that each of our sectors, the specialty sector, the conventional sector, really needs to stand on its own two feet and if one sector isn't working and if it's broken beyond fixing and there is no potential solution in sight, then we have to look at whether that is the right place to keep investing or whether it becomes a TQS.

9564             In our case we walked away from a $72 million cash investment because we saw no way of there being a future under the existing licensing structure for that channel.  Hopefully a new buyer with perhaps different rules might be able to make a go of it.  We did walk away and we are not happy about doing it.

9565             You know, if you can't see a foreseeable future for something, then you have to make tough decisions.

9566             MR. ASPER:  I think I would just add two points.

9567             One is if Rogers, for example, or TELUS felt that way ‑‑ but I would apply it more to Rogers ‑‑you would say to them:  Well, that's fine, you can afford the fee for carriage because you have a very profitable other business, an ISP that was funded by the support and subsidies given to you to build out your broadband network.  So you have the money to pay for the fee.  I mean, don't pass it on to consumers, you're fine.

9568             The second thing is, as Ivan said really, we are portfolio managers effectively and we look at different lines of businesses.  At some point we are going to make a decision about whether it is worth investing capital in a particular one.

9569             I know from CanWest's perspective we sold our Irish and New Zealand conventional operations because we just didn't feel in those economies, particularly in Ireland with BBC and all the British channels coming over the border, it made sense to own conventional TV.

9570             We think in Canada, and Australia too, it is worth giving it a shot and continuing to fight the good fight.

9571             The way TELUS has phrased it is something with which I disagree, because they are saying that we are taking the position that business is bad, turn to the regulator for help.  We are saying no, a series of regulations under which we operate are very punitive to us and we are saying lift some of those regulations.  And if you don't want to lift the regulations, then provide some sort of a transfer of obligation to the cable companies ‑‑ to us from the cable companies.

9572             So you could go another route which says don't do Canadian content, you know, no 60 per cent Canadian content, no priority carriage, I mean no priority programming, kick out the U.S. channels that are here illegally and go back to the way the U.S. operates and no local obligations on the licences, who all lift everything, and then we would have a discussion about whether we need that fee.

9573             I mean, we are not pounding the table in Australia to get a fee for carriage because they don't bring an NBC to Australia.  You know, it is market by market.  It comes back to that balance in the bargain.

9574             MR. FECAN:  And yet even in the U.S., which has none of those obligations that we happily live up to at the moment, they are getting a fee for carriage.

9575             MR. DAVID GOLDSTEIN:  Sorry, Mr. Chair, can I just add that if the concept is that somehow you are tying OTA and the specialty and their obligations together, then in effect you are creating a prejudice against those who own OTA as opposed to those who don't.

9576             So you create an environment ‑‑ I can only think of two examples but Corus and Astral, who don't have that burden on them, and therefore you are creating in a sense a prejudice against those who continue to have those OTA services as part of their portfolio.

9577             MR. FECAN:  You know, I recall at the last hearing ‑‑ I don't think you were chairing this one on the fee for carriage subject ‑‑ Mr. Shaw making the statement that if any of these people don't want conventional stations, he would happily buy them.  Well, there were a number for sale and he was not even a bidder.

9578             THE CHAIRPERSON:  I am surprised that none of you made the other logical argument; that if you are going to look at the revenue side on a corporate basis, you have to look at the obligation side of the corporate basis, too, which is ‑‑ I mean, I just want to give you a chance to answer.

9579             I gather my colleague ‑‑ Michel, you have one more question on fee for carriage before we break?

9580             COMMISSIONER ARPIN:  Yes.  Thank you, Mr. Chair.  I have quite a few questions.

9581             I want to bring you back to the beginning of the questions and answers with the Chairman where you talk about saying that the money will go to local expression or local community.  Then at some point in time in the conversation some of you were using local community programming; some others were using the word local programming.

9582             It raises in my mind a big issue about the definition of what is really the local programming, because we just issued a decision regarding HDTV a few weeks ago in which we stated that, on average, Canadian broadcasters were having 22 hours of local programming and we were talking obviously about you, your operations in the English language.  We were not taking into consideration what is happening in French Canada.

9583             I know that the range that we were looking at when we came to that 22‑hour number was somewhere between 10 and 40 hours depending on which group.

9584             So what kind of local programming are we talking here about?

9585             I am hearing improving local news and local reflection, or is it local programming as a whole?  What are we really talking about?

9586             MS McGINLEY:  To define local programming, we are talking about local news and information programming.  I think the information programming can be the reflective side we were having.

9587             An example of that would be a talk show, a local talk show.

9588             But the basic description is local news and information programming.

9589             COMMISSIONER ARPIN:  So you are refining your description to that type of program even if you were to produce a locally ‑‑ say in Calgary for the whole network, that is not a local program?

9590             MS McGINLEY:  No.  We are talking about local programming produced for Calgarians.

9591             MR. FECAN:  We are talking local for local.

9592             COMMISSIONER ARPIN:  Local for local.  Okay.  That is a nice clarification and I think a significant one, at least from my own perspective.

9593             Also, during the conversation you said that the U.S. stations should not have come here first.  Obviously as you know, they were already here when the CRTC was created and they are also here through over the air.

9594             I understand that the Commission could have said no for Calgary and Moncton and other locations.  I'm an old guy as well and I used to work for the Commission.  I was in Winnipeg when the CRTC held a hearing if they were to allow U.S. programming to come to Winnipeg through microwave, and the position of the Commission was negative.  I remember the outcry of the Winnipegians saying how come Toronto could get U.S. programming and Winnipeg cannot?  The same screams were made in Calgary and Edmonton, and at the end of the day obviously the Commission agreed to have them.

9595             So there is a really historical background to that.

9596             It is easy to say they should not have been there, but obviously they came there because they were there.  I want to say that only as a matter of clarification, unless you want to make any comment.

9597             MR. FECAN:  I would just say that between the Department of Communications and the FCC, if a Canadian signal goes into the U.S., the FCC lets you know about it and you retune your transmitter.  That's the fact every day in radio.

9598             And really the observation was a philosophical observation and it is just a question of, you know, we wouldn't be talking about simultaneous substitution if our program rights were protected.  We wouldn't be worried about ‑‑ I know a lot of producers worry about how we schedule programs.  We wouldn't be talking about that if we had taken our cultural sovereignty then.  I'm just saying what if.

9599             MR. ASPER:  I think there were two points in time, though.  In the time you are talking about also I think ‑‑ you have to remember at the beginning there were no Canadian ‑‑ there was CBC and there were no other Canadian services airing the programming that was on the U.S. channels.  So NBC had started up and ABC had not by then ‑‑ this is mid‑to‑late '50s into the '60s.  So there was a consumer choice reason to bring in some of these U.S. services.

9600             And then there was a second phase ‑‑ it was wrong, you know, because we couldn't do the reverse, remember.  A Winnipeg station couldn't go and broadcast in the U.S.  So that's fine.

9601             But then along comes the '70s and cable needs to get going and so they get the right to bring in the U.S. signals on cable.

9602             Again, yes, consumers did want it, but the consumers want, you know, bread for free.  But at some point there is a right, there is a property right that was ignored and that generally isn't ignored in economies.  But in this little part of the economy it was ignored.

9603             MR. FECAN:  And so from that day we used American programming to subsidize Canadian programming, and that's the fundamental underpinning of the system.  If you can't beat them, you join them.  You use it and you use it to finance Canadian.

9604             You know, it was just a what if.

9605             COMMISSIONER ARPIN:  It has been the conundrum for the last 40 years and will remain I'm sure forever.

9606             You are saying that the payment should be made to the local broadcaster.  Have you thought of the way ‑‑ so if I understand, it is quite easily to be dealt with regarding with the territorial BDU because they have your signal or they don't.  But how will we do it regarding the DTH?

9607             Have you thought about a formula on how to calculate proportionately what will go to this one rather than that one?

9608             MR. FECAN:  On the DTH basis we were only proposing to charge a Toronto subscriber for Toronto signals.

9609             COMMISSIONER ARPIN:  Yes.  Calgary.

9610             MR. FECAN:  Calgary for Calgary signals.  We are not ‑‑

9611             COMMISSIONER ARPIN:  So you are going to ask the DTH to declare how many subscribers they have with the Calgary address?

9612             MR. FECAN:  A simple postal code.

9613             COMMISSIONER ARPIN:  Simple postal code.

9614             MR. FECAN:  Within the DMA, the designated market area.

9615             COMMISSIONER ARPIN:  I'm sure you haven't yet started to discuss that with them.

9616             MR. FECAN:  I'm sure they have postal codes.

9617             COMMISSIONER ARPIN:  Oh, I'm sure they do, but I did negotiate with them and only to have their numbers of subscribers say only in the Province of Québec and I'm still waiting for the answer.

‑‑‑ Laughter / Rires

9618             COMMISSIONER ARPIN:  It's confidential information.

9619             MR. DAVID GOLDSTEIN:  But respectfully, these are no bigger than the challenges we have in affiliate relationships for our specialty services.

9620             COMMISSIONER ARPIN:  Yes, absolutely.  That's why I'm raising the question, because I know what is going to be their answer.

9621             We will come back, but I have other questions.

9622             THE CHAIRPERSON:  I'm going to assert Chairman's prerogative.  You can ask many more questions, but it is two hours and we all need a health break.

9623             Let's have a 10‑minute break.

‑‑‑ Upon recessing at 1101 / Suspension à 1101

‑‑‑ Upon resuming at 1119 / Reprise à 1119

9624             THE CHAIRPERSON:  Michel, you had the floor.

9625             COMMISSIONER ARPIN:  Thank you, Mr. Chair.

9626             You haven't said anything about the CBC this morning and I wonder, should the CBC get a fee or not?

9627             MR. ASPER:  Our position has been no, they shouldn't, they have other mechanisms of funding.

9628             COMMISSIONER ARPIN:  Now, what about their affiliates, their private broadcasters, should they get the fee or not?

9629             MR. ASPER:  Well, I think we were thinking about the CBC as a whole.  I mean, the funding goes to the network but also to the affiliates.

9630             COMMISSIONER ARPIN:  Yes.  Here again we are back to the earlier discussion.  You did say that the money goes to local reflections, local programming.

9631             They do produce local programming, the affiliates.

9632             MR. FECAN:  If you are speaking of the privately owned affiliates ‑‑

9633             COMMISSIONER ARPIN:  That's what I'm talking about.

9634             MR. FECAN:  ‑‑ that have local programming of their own.

9635             COMMISSIONER ARPIN:  Yes.

9636             MR. FECAN:  Yes.  They are privately owned.  They have their own set of obligations.

9637             When we say the CBC, we mean the network and the owned and operated stations of the network.

9638             COMMISSIONER ARPIN:  But the local affiliates, the CBC, the privately owned, good standing member of the CAB.

9639             MR. FECAN:  Well, yes.  I mean, you know, we have in the CTV system one CBC affiliate acquired through the CHUM transaction, Brandon, which I think the CBC wishes to disaffiliate anyway.  But they do have a 6 o'clock local newscast that they produce locally and that is why that particular station should have a fee for carriage.

9640             MR. ASPER:  I agree with that.

9641             COMMISSIONER ARPIN:  Okay.

9642             On Tuesday morning when we heard Quebecor, they reminded us that the current regulation doesn't forbid any over the air broadcasters to go and negotiate a fee for carriage with any of the BDUs.

9643             Have you ever undertaken that?  And if yes, what have been the results?

9644             MR. ASPER:  It has certainly been mooted in discussion I would say informally, but it meets with such a violent response it really hasn't precipitated a second meeting, I guess.

‑‑‑ Laughter / Rires

9645             MR. ASPER:  You know, you have one individual saying he would take it to the Supreme Court even if imposed, if it is imposed upon him.  So it is not something they are willing to entertain from any discussion we have ever had with them.

9646             COMMISSIONER ARPIN:  Now, I understand from the reply that CCSA made regarding your submission that the small independent cable operator ‑‑ well, it seems that you have a say that you will not be seeking them for payment of fees for carriage.

9647             Am I reading well or understanding well what I seem to have read in their reply?

9648             MR. FECAN:  No.  Actually our position is that our smallest stations, which often are in the area that the small cable companies are in, have the toughest economic case.

9649             So yes, we would look for a fee for carriage in those markets.  The principle is the fee for carriage is for local programming.

9650             COMMISSIONER ARPIN:  We are clear here we are talking about the systems under 6,000 subscribers and we yesterday heard EastLink appearing before us saying that on average they have 464 subscribers to their small system.

9651             MR. ASPER:  I think ‑‑ sorry.  Did I interrupt?

9652             COMMISSIONER ARPIN:  No, no.

9653             MR. ASPER:  I think the principle is that it should be across the board and universal, but we wouldn't be opposed to particular cable systems, if they could show some sort of economic hardship on an objective basis, being exempt from it.

9654             But I don't think that they would make ‑‑ there is no reason in principle ‑‑

9655             COMMISSIONER ARPIN:  So what you are saying is not as a rule, but there could be instances where ‑‑

9656             MR. DAVID GOLDSTEIN:  We would agree with that.

9657             MR. ASPER:  I think so.

9658             MS BELL:  We should point out also that for a lot of those systems there is no local station so there would be no impact.  That is the other side of the coin.

9659             MR. ASPER:  You have to remember, many of those systems will not be taking $2.40 or $3.00 of new fees on that they would have to either eat or pass on, but it's $1.00, it's $.50, it's $1.50 or nothing in some cases.

9660             COMMISSIONER ARPIN:  Yes, because ‑‑

9661             MR. ASPER:  Yes, they are smaller.  There are not as many stations in the market.

9662             COMMISSIONER ARPIN:  I'm sure that ‑‑ but I don't know ‑‑ in Moosonee there might be a cable system but no local TV station.  One of you may have a rebroad.

9663             By the way, I know that CTV has 79 rebroadcasters in various communities.  Do you consider them as being local stations or are they in areas that there is no local programming?

9664             MR. DAVID GOLDSTEIN:  I believe Mr. Fecan was clear that it is local to local and that is our proposal; is for local service.

9665             COMMISSIONER ARPIN:  So it's local for local.

9666             MR. FECAN:  Unless we provide local service to that community.

9667             COMMISSIONER ARPIN:  To that area, even if it is only once a year.

9668             MR. FECAN:  No.  I think on a daily or weekly basis.  I mean, we have local in a lot of small places, in Timmins, in North Bay, in The Sault, in Prince Albert, in Yorkton, just to name a few.

9669             I would certainly consider them local.

9670             COMMISSIONER ARPIN:  Okay.

9671             Mr. Chairman, those were my questions for the time being.  I know that other of my colleagues have questions also on fee for carriage, so I will get back to you later on with my section, which will be shorter.

9672             THE CHAIRPERSON:  We will come back in a second.

9673             This local for local, how is it applying in terms of Global in Ontario?

9674             MR.  ASPER:  I ‑‑

9675             MR. MEDLINE:  Sure, you know ‑‑

9676             MR. ASPER:  I have been cut off, I'm sorry.

‑‑‑ Laughter / Rires

9677             MR. MEDLINE:  Right, because we have the two regional licences, one in Ontario and one in Québec.  So when we were developing the model it was where you provide ‑‑ in our case we were thinking mainly in the news area, not in the other types of local.  But where we provide local programming, predominantly news, is where you would get the fee.

9678             So although we are carried across the province, let's say in Ontario, if there is almost no local content in let's say some of the northern areas, but there is a lot of local news and information in a market like Toronto and the surrounding areas and a few of the other areas, then it would qualify for a fee.

9679             THE CHAIRPERSON:  I'm sorry, I don't understand that answer at all.

9680             I mean, I understood Mr. Fecan to say the fee for carriage would be in order to pay for local reflections, local for local.  I understand that when you have a local station being carried.  I don't understand it when you are talking about what essentially is regional like Global has, let's say Global Ontario, for instance.

9681             Does that mean basically you expect us, in Global's case, to substitute regional for local?  If not, then how does it apply on the basis of the retransmitter, because that is the question that my colleague had?

9682             MR. ASPER:  I think we would have to expect it because, as I say, it is almost impossible to break down what part of a Global newscast applies to London, Ontario per se as a London city or as a city in Ontario.  So we had not broken it down across different markets.

9683             THE CHAIRPERSON:  So it is local for local except for when it's regional for regional.

9684             MR. ASPER:  Well, in the case where there is a regional licence.

9685             THE CHAIRPERSON:  I'm just trying to understand the logical consequence of your position.

9686             MR. ASPER:  Yes.

9687             THE CHAIRPERSON:  Len...?

9688             COMMISSIONER KATZ:  Thank you, Mr. Chairman.

9689             I want to spend some time on some numbers, but before I do, both of your submissions spent an awful lot of time addressing the issue of the health of the BDU industry.  I'm just trying to understand the rationale for that and the presumption by some people that we are being asked to play Robin Hood here.

9690             Presuming the health of the BDU industry was not what it is today, however we define today, would we still be here in this room today?

9691             MR. FECAN:  Well, we think it is what it is, but presuming it wasn't we would still be coming to you.  We would still have a problem.  We would be coming to you and seeking to rebalance opportunity and obligation some other way.

9692             COMMISSIONER KATZ:  Okay.  So that is the crux of the issue.

9693             MR. FECAN:  The problem, the cracking foundation is there one way or the other, and that's what we are trying to address:  how to shore it up and how to shore it up enough so that maybe you could put some more on it, but we have to shore this thing up.

9694             That problem, you know, even in your scenario may well still be there, and I'm assuming based on what has caused the crack it probably would be there.

9695             So as Leonard said just before the break, if it is not a fee for carriage, it is a rebalancing of obligations.  It's something.

9696             MR. ASPER:  I think the way to express it is the problem itself is independent of the health of the BDU sector, but the BDU sector, one of their familiar refrains is we can't afford this terrible new fee that would be imposed upon us.  We would lose all these customers, et cetera.  So we have tried to point out why we think that is a wrong assumption.

9697             So that is essentially why we have put out this information on the health of the BDU sector.

9698             COMMISSIONER KATZ:  But given that health, if I can follow my logic one step further, let's say that the Commission in their wisdom does decide that there is an opportunity to rebalance today, in two years from now cycles happen, economies change, things change, and now what was a strong and vibrant BDU industry in your perspective has now shifted two years from now and it no longer is.  What then?

9699             MR. DAVID GOLDSTEIN:  If I may, I think one of the reasons why their profitability was brought into play was because it was explicit in the Public Notice that you wanted us to model what the impact would be on potential players in the system.  So we are in fact just responding to what the Public Notice made and we would be happy ‑‑ I don't know if you want to go through those numbers right now because Ms Sanderson did a fairly detailed analysis of that.

9700             That is the primary reason why this is germane at this point.

9701             COMMISSIONER KATZ:  I don't want to question the health of the industry.  What I'm trying to understand is whether we would still be here today if the health of the BDU industry wasn't what it is today.

9702             The answer I heard was yes.

9703             MR. FECAN:  Yes, we would be here today.

9704             COMMISSIONER KATZ:  Okay.

9705             MR. ASPER:  I think also it is partly relevant that the BDU sector, either through their actions or through the regulatory benefits they get, is in large part the cause of these ills, of the problems.  They either don't pay for the signal that they get for free or they bring in other competitive factors illegally that hurt us.

9706             COMMISSIONER KATZ:  Let's take a look at the quantum of this crack now just so I understand it.

9707             Your proposal I think is this could be balanced with a $2.40 charge to every BDU subscriber.  I will throw some numbers out here and say that I think there are somewhere in the order of 15 million homes in Canada and penetration for both DTH and BDU is somewhere in the order of 90 odd per cent.  So if you multiply 90 per cent of 15 million homes times $2.40 times 12 months, you get to about $400 million, if my math is about correct.

9708             MR. DAVID GOLDSTEIN:  Actually, what I would like to do is ask Steve and Margaret to walk you through the numbers, because we actually have done a fairly detailed analysis on this.

9709             But just to be in the $2.40 was ‑‑ sorry, speak up.

9710             The $2.40 was on an average basis, but we have taken into account market by market, so I am going to let the experts explain how they modelled that.

9711             COMMISSIONER KATZ:  Okay.  But at the end of the day, Steve, when you summarize, I need a number.  What is the big number at the end of the thing?

9712             So go ahead.

9713             MR. ARMSTRONG:  Sure.  What we did is we ‑‑

‑‑‑ Laughter / Rires

9714             MR. ARMSTRONG:  Is $24,580,000 a month, which is around $295 million a year.

9715             COMMISSIONER KATZ:  $295 million a year?

9716             MR. ARMSTRONG:  That is correct.

9717             COMMISSIONER KATZ:  Okay.  Now that number, is that net of distant signalling, the $93 million you have talked about, or is that all‑encompassing?

9718             MR. ARMSTRONG:  That is the proposed compensation for carriage fee by the number of households in television markets.  So that is the total proposal at 50 cents.

9719             COMMISSIONER KATZ:  Okay.

9720             MR. FECAN:  That is the local for local.

9721             COMMISSIONER KATZ:  Okay.  And that assumption of what that number comes out to be, $300 million, assumes that we won't be fixing the distant signalling issue as well or that we will as well, so the quantum of the crack is either $295 million in total or is $295 million plus the $95 million that you quoted earlier this morning?

9722             MR. ARMSTRONG:  The $295 million is just a straight calculation of the application of the proposed fee of 50 cents per month per local signal to the number of television households in each market.

9723             COMMISSIONER KATZ:  But when you came up with that number, did you implicitly assume ‑‑

9724             MR. ASPER:  No.

9725             COMMISSIONER KATZ:  ‑‑ there was going to be relief on DTH and distant signalling as well or not?

9726             MR. ASPER:  No.

9727             COMMISSIONER KATZ:  You did not.

9728             MR. ASPER:  They are independent variables.

9729             MR. FECAN:  We looked at it in isolation.  We didn't assume a package or anything.  We looked at what do we feel is what we need for compensation for carriage for local and what we want is a right to negotiate with the BDUs for distant signals.

9730             MR. ASPER:  We may not end up with a figure of $93 million in the negotiation.  It might be $5 million more than the current I think seven or eight that we ultimately get.  So that's an independent variable.

9731             THE CHAIRPERSON:  Surely you must have a cost of the value of your total wish list of fee for carriage, improved ‑‑ the four elements that I mentioned this morning, distant signal and so on.

9732             MR. DAVID GOLDSTEIN:  And the carriage of our local signals, which is of particular damage especially in smaller markets.

9733             THE CHAIRPERSON:  DTH, yes.

9734             COMMISSIONER KATZ:  So in fact we are looking at the sum of those two.

9735             THE CHAIRPERSON:  Four.  For four elements to their request.

9736             COMMISSIONER KATZ:  Right.  Okay.

9737             THE CHAIRPERSON:  What is the sum of those four requests?  That is what I'm trying to get at.

9738             MR. ASPER:  Well, it is hard to calculate other than the fee without knowing ‑‑ I guess you could do a range of sensitivity analyses of what might arise from a negotiation on distant signal.

9739             All I can say is it is somewhere between zero and $93 million.  I mean, we don't know that we are going to get anything in that.  There is going to be negotiation.  There will be something because we have something of value that we know people want so they will pay for it, the distributors.

9740             We could try to provide you I guess a range of potential outcomes on the other two.

9741             I think the local carriage is less, would again rank third or fourth in the pecking order in terms of what creates the most value.  And fee for carriage would be the ‑‑ the $295 million would be the most.

9742             MR. FECAN:  The distinguishing factor between the local compensation for carriage and the distant signals is important to just note.

9743             One is right in the Broadcast Act and consumers, viewers want it, value it, and so forth.

9744             The other is nowhere in the Broadcast Act.  Nowhere in the Broadcast Act do we have distant signals.  This is a commercial transaction, a pure commercial transaction.

9745             What we are saying, respectfully, is let us operate it as a commercial transaction between a distributor and an originating station and, with respect, stay out of that, please.

9746             COMMISSIONER KATZ:  Okay.  Let me continue on with my thought process here and see if it still makes sense.

9747             I think I heard one of you say earlier that you look at these businesses as businesses and if it is broke, you try and fix it; and if it can't be fixed irreparably, then you have to look at alternatives, whatever those alternatives are.

9748             So what I was trying to do was understand the magnitude of the problem, which apparently is now $295 million plus perhaps $93 million, plus, plus, plus.  So we are looking at a $400 million to $500 million problem here.

9749             Obviously when you folks and your CFO sit down, you have a budget and you know what you need to do to achieve your targets, bank financing or whatever it is as well.  And then you miss somewhere.  You miss somewhere and you try to figure out what you're going to do to offset it.

9750             So what I have read in your testimony in reading it all over is the reason that we are here ‑‑ one of the reasons why we are here today, one of the big reasons why we are here today is because there is a major impact on your revenues due to fragmentation, less audiences, less advertising revenue, which results in a PBIT reduction or whatever the case may be.

9751             You also have a higher cost that perhaps wasn't anticipated with regard to digital transition and the need to invest more money in digital transition as well.

9752             We have heard other parties come before us and talk about financing costs due to your acquisitions and that drives up your costs as well and therefore drives down your profitability as well.  Whether that is above the PBIT line or below the PBIT line ‑‑ I guess it is below the PBIT line because interest is below PBIT.

9753             The other one we have heard about is programming costs being driven up as well.

9754             So what I am trying to do is understand the magnum of the issue before us here, which is between $400 million and $500 million, I guess I heard, and how that is allocated between at least these four components; those four components being revenue impact due to fragmentation, costs due to digital transition, additional financing costs and perhaps the escalation in programming, U.S. programming that you're facing as well.

9755             What do those four represent of your total miss, if I can call it that, of your target that you need to achieve to achieve your financial goals to your shareholders or your bankers or whomever?

9756             Is that doable?

9757             MR. FECAN:  We can try, but let me just deal with the last two first because I don't think they are appropriate in this situation.

9758             The financing cost issue, when we bought CHUM we bought specialty and radio.  We didn't get to keep City.  The A Channel portion of that is de minimis.  So that has no factor on the health of our conventional business.

9759             When CanWest bought Alliance Atlantis, they did not by any conventional.  They were buying specialty and so that doesn't have a factor on the health of their conventional business.

9760             So I think that is a bit of a red herring, that one.  We are talking about a conventional business and neither of those factor into that.  We are talking about how those businesses do, not financing charges for specialty.  Okay?

9761             On the cost of foreign programming, it has gone up, but it has gone up a fraction of what it has gone up for the BDUs.  Just the number?

9762             MR. DAVID GOLDSTEIN:  Just for clarity, ours has gone up by 4.8 per cent; their's has gone up by 24 per cent.

9763             So I'm not sure that's a material argument if that is their main argument against us.

9764             COMMISSIONER KATZ:  But they are not here looking for some relief; you are.  So I am trying to understand what the cause and effect is and the reasons why we are here today.

9765             MR. DAVID GOLDSTEIN:  But I think it is a mischaracterization to say that we are running away in the U.S. market spending programming dollars when given the inflationary trend there.  It just does not bear out next to what they are spending.

9766             COMMISSIONER KATZ:  We have heard in the last week I believe from some folks that the proportionate cost between Canadian programming and American programming has gone south, and there is a much higher cost of U.S. programming than there has historically been relative to Canadian.

9767             MR. ASPER:  If Barb wants to chime in here, she can.

9768             The facts are that the number David just cited ‑‑ I think it was three point something ‑‑ is roughly in line with what foreign program costs have gone up over the last few years.  Canadian program costs of specialty channels in particular have gone up by a far greater amount, never mind the BDUs have gone up 24 per cent in their spending.

9769             But it is not about them, I understand, in terms of they are not here asking for something.

9770             But the increases in specialty have been much more significant as a percentage basis because it is tied to CPE.

9771             So what people sometimes misunderstand is that there is a bigger dollar base.  So 3 per cent on a bigger dollar base does look like more money, but in terms of where the focus of increased spending is, it's on the specialty.

9772             So I don't think we have run away and gone on a major buying spree.  3.9 or whatever per cent is not ‑‑ you know, it is a fairly acceptable rate of inflation for programming, especially given that it is a very, very competitive marketplace, made more competitive by the introduction of Rogers in this ‑‑ with CHUM, by the way.

9773             MR. FECAN:  And given that that is where you make your money to finance the Canadian.

9774             MR. ASPER:  So to come back to your initial question, you are asking is this number the fix?  And the answer is not really in the sense that as a manager, you try to get to a return on invested capital number.  You try to get, as you know, a return on revenue, a profit margin percentage, you know, profit as a percentage of revenue.  And this puts us from the mid‑single digits to what I would call the mid‑teens.

9775             That is the point roughly where you say okay, it's still worth investing in this business and carrying on this business.

9776             So again it will depend on what the outcome of some of these negotiations are, particularly with the distant signals.

9777             You know, one would like to have a 20 per cent margin and have $1.00 per sub.  We try to get this 50 cents in a range that we felt had some relevance to the fees paid to other specialty services.

9778             I would point out here that you mentioned $300 million and that is our number, but that pales in comparison to the over $1 billion of sub‑fees that get paid to specialty.  So in that context I think it is worth noting how that relates.

9779             So this is a middle ground position I think that buys us probably three to five years in addition to the cost cuts we have introduced in both of our businesses.  Over 400 jobs have evaporated in the conventional business because we are not, as I say, just coming here asking for relief on one side.  We are doing other things to try to manage our business well.

9780             That buys us three to five years of mid‑teen margins which are the margins that, as you know, equity shareholders expect from a business.  That's really how we ended up with that number.

9781             MR. FECAN:  Leonard, of course, is an owner; I am a manager.  But if our owners were sitting here, they would completely agree with that kind of target as an acceptable rate of return for invested capital.

9782             COMMISSIONER KATZ:  I want to come back to this question because I don't think you answered my question on the fragmentation quantum or the digital cost as well.

9783             But before we do that, as managers of the business, don't you look at the business as a whole?

9784             I guess you tried to address part of that earlier with the Chairman as well.

9785             But your financing is done as an entity, I would imagine.  You go to your advertising agencies as an entity and you buy advertising for both specialty as well as for conventional.  You run your businesses, I would imagine, as an entity with people wearing multiple hats, including yourselves and your senior officers that are probably here today as well.

9786             Why suddenly are we looking at this in two separate sectors when an awful lot of it is costing allocation, if I can call it that?

9787             MR. FECAN:  I don't think the revenue is really costing allocation, and I think the costs are quite discrete between ‑‑ and the obligations are quite separate between the specialty licences and the conventional licences.  They are entirely separate licences and each comes with their own set of obligations.

9788             While we try to use everything we have in the most creative and businesslike manner possible, you also look at what is performing and what is not performing.

9789             I think as we said, you try to turn around the things that aren't performing; you try to make it work.  But if you come to the conclusion that there is no way this dog is going to hunt, you have to do something about it.

9790             MR. ASPER:  I think if you look across other businesses, you see Loblaws will close the under‑performing stores or they will renovate.  They will make a decision that something has to be done.

9791             GM will close car divisions.  They will say I'm not going to produce this car any more.  I'm going to close a plant in Windsor and I'm going to open one in Tennessee.  That's what business managers do.  They look at the under‑performing divisions and they decide what is going to happen to those divisions.

9792             Even within divisions you look at ‑‑ as I say, GM could close a plant.  We could look at a newspaper within our newspaper division and say, you know, that is not going to work any more.  Let's get rid of that newspaper, let's keep 12 others.

9793             So it gets very granular as to what is performing at what is under‑performing.  There is just not much ‑‑ as Ivan said, the revenue really is quite discrete in terms of where it goes and the costs are also quite discrete, especially the technology, the investments you have to make.

9794             Some things like a sale system, a software investment in a sale system where we spent upwards of $20 million in the last several years, that applies across the board.  So there are some back‑office things that apply across divisions.  But it's quite separate in terms of the ‑‑ in our case specifically, the CW Media assets, which is the specialty business, is financed separately from the CanWest credit, CanWest parent company credit.

9795             COMMISSIONER KATZ:  So coming back now to those issues that can be directly identified, the fragmentation of the audience and the digital transition costs, we are in a competitive environment here I guess so this is going to be difficult, I have a feeling as well, and I might get yanked pretty quickly.

9796             But to what extent are those two components driving why we are here today?

9797             The commitments and the contributions you have today you had two years ago as well and you were meeting them.  So one of the reasons why we are here, notwithstanding the fact that you feel there should be a rebalancing taking place, is because there has been fragmentation, as I understand your evidence, and there has been a load, a burden put on you as an exogenous factor in terms of the cost of transitioning from analog to digital.

9798             I guess the question is:  How much do those two components weigh in the overall equation?

9799             MR. ASPER:  I guess the analogy I might use ‑‑ and I'm always afraid to use analogies.  I remember the Starbucks one didn't work out as well as I would have hoped.

‑‑‑ Laughter / Rires

9800             MR. ASPER:  So I will go out on a limb here.

9801             I guess it is kind of like the boiled frog.

9802             COMMISSIONER KATZ:  The boiled frog.

9803             MR. ASPER:  You know, the frog gets in the ‑‑ you know, in 1961 distant signals come in and whatever we are, the temperature gets turned up in the pot, and eventually the temperature keeps getting turned up and eventually you just get this death by a thousand cuts.  And at some point you say you know, five, ten, fifteen years ago we would review the business and sit in strategy sessions and we would always have things ‑‑ we would always complain about the regulatory situation.  But it never was quite bad enough to say okay, that is going to be our primary focus.

9804             But as you started to get into the fragmentation that I think this Commission ‑‑ for valid reasons in some other sense, in consumer choice and all the reasons you have cited in past decisions ‑‑ started this fragmentation thing, call it 1995 but going back to 1984 with the licensing of specialty channels.

9805             And we are not saying that was a bad idea, but just at some point there was no ‑‑ the temperature just kept getting turned up and the frog you know spent all this time getting closer and closer to death.

9806             And so here we are today, we would like you to turn the boiler off and simmer this frying pan or this ‑‑

‑‑‑ Laughter / Rires

9807             MR. ASPER:  ‑‑ this pot down a little bit.

9808             COMMISSIONER KATZ:  But to continue that analogy ‑‑

9809             MR. ASPER:  So whether there were CAPEX or not, I think there is always going to CAPEX ups and downs in a company.

9810             You know, I remember going to my father and Seymour Epstein arguing about whether they should spend money going to stereo TV, if you can imagine.  So high‑definition is much worse in terms of the capital expenditure example of that.

9811             But really it is a combination of all of these things.  You look at the business model.  If you were a private equity company coming into conventional TV right now, you wouldn't invest in this.

9812             COMMISSIONER KATZ:  But to continue your analogy, I guess one of the questions the Commission has to deal with, if in fact we are going to look at this in the manner that you want, is do you take the pot off the fire or do you just lower the flame?

9813             So that is what I want to get a sense from you folks as to how hot is hot and what were these two incremental components contributing to that flame?

9814             MR. ASPER:  The two being which, the CAPEX and ‑‑

9815             COMMISSIONER KATZ:  The two being the impact of ‑‑

9816             MR. ASPER:  ‑‑ fragmentation.

9817             COMMISSIONER KATZ:  ‑‑ in the last two years, for argument's sake, because it has been two years I think this thing has sort of gone south from the data that I have seen from the CRTC where there was double‑digit returns or PBIT on conventional, and then two years ago it went down to 4.9 per cent and then last year I think the number was in the 5 per cent range.

9818             So it is the last 24 months where obviously fragmentation, if that is the major cause, hit; as well as the issue of we are getting closer and closer to digital transition and you are going to have to bite the bullet at this point in time and face those costs, which again could be argued are exogenous or non‑controllable costs.

9819             MR. ASPER:  Well, I think there have been many times where we have peeked our head over the top of the pot and said enough, turn it down, I mean going back to the '90s in the structural hearing.

9820             I want to make clear it is not a question of just waking up; there is a tipping point of fragmentation.  It was this one thing after the other.  There was four‑plus‑one, then there was two‑four‑plus‑one and then there was six‑plus‑one really, because in Buffalo‑Toronto there are really six local Buffalo stations coming in.  And then American Movie Classics comes in and then they start doing original programming that competes directly with other Canadian specialty channels and conventional channels in particular.  It is just one thing after the other.

9821             We really did foresee this.  We did say something about it a number of times.  We were treated as simply doing ‑‑ you know, the numbers weren't showing the effect of it yet, and eventually what we said would come to pass has come to pass.  That's why I think at this point it's just year after year of more and more fragmentation.

9822             MR. FECAN:  The amount is our best shot at this point, but we also don't know what else you are going to decide in the course of this hearing in terms of opening up local avails to the BDUs or how VOD gets split or anything else.

9823             You know, at this point it is our best shot, but we really need to reserve until we see what decisions you make in this proceeding.

9824             COMMISSIONER KATZ:  Those are my questions on this topic.

9825             THE CHAIRPERSON:  Thank you.

9826             Rita...?

9827             COMMISSIONER CUGINI:  Thank you, Mr. Chairman.

9828             I too want to stay just for a moment on fee for carriage.

9829             As you know, we are going to be hearing from the guilds tomorrow.  You heard the CBC say that it should be tied to drama.  The guilds will say the same thing tomorrow, as they have in the written submission.

9830             So I am asking you:  Why have you chosen local to local when as over the air broadcasters it is the one format that sets you apart from all other broadcasting in the country, including unregulated media?

9831             It is the one thing that identifies you with your audience.  So why is local the one thing that ‑‑ I know it's not the one thing.  I know it's not the only thing.  I know you are looking at the basket of your regulatory obligations.

9832             But why the focus on tying the provision of local programming to fee for carriage?

9833             MR. FECAN:  Because you all here and we all here live on the avails of the audience, and the audience values local television more than anything else.  Our survey has demonstrated that.

9834             I'm not saying there is no value in drama or other kinds of priority programming and God knows, we are champions of Canadian programming.  We don't want to get into a situation that says, you know, one of the children is better than the other children.  You want to have as much for everybody is possible.

9835             But you have to always take it back to audience because we all live and breathe and exist because of audience.  If there was an audience, you wouldn't be sitting here, we wouldn't be here.  The audience tells us that that is what they value most.

9836             That is what we want to ensure survives and flourishes.  So in the kind of choices you need to make, that's why we chose to base it on what the audience values the most.

9837             COMMISSIONER CUGINI:  Okay.

9838             Repeatedly you have said this morning that specialty services aren't a factor in your over the air business, but certainly you have increased opportunities in the last six months to a year to amortize programming across the many platforms.

9839             Is there no cost recovery from being able to do that?

9840             You know, just recently your press release, CTV, said the Junos on CTV will now be shown on MuchMusic.  You weren't able to do that a year ago.

9841             Global, by the same token, is now showing House on Showcase.  You weren't able to do that six months ago.

9842             Is there no cost recovery from that and is there no new revenue generating opportunity from being able to do that?

9843             MR. FECAN:  We are all trying to stretch their resources we have as efficiently as possible.  We do not make money on the Junos, but we lose a little less because we are able to provide a few more platforms for the show and create more value for advertisers.

9844             You know, does it make it profitable, that whole program?  No.  It helps a little bit.

9845             But as stewards of businesses we have to look at each component and try to assess, you know, where the strength is, where the weakness is and what can be done.

9846             I think, Leonard, you said best.  If this was a fresh investment, if people were looking at our businesses and say would you want to invest in the whole business or just specialty or just conventional, I think we would be hard pressed to have people invest in the conventional sector given the challenges that we have all outlined.

9847             MR. ASPER:  Yes.  We are not saying there is no relationship.  I think we are just saying we make financial decisions about investment in the things on a separate basis.  And yes, we will use, where we can, each asset to try to help the other where it's possible.

9848             Probably what will happen is conventional will help specialty more than specialty will be able to help conventional.  And that's why I kind of used the expression we are running out of tricks in conventional to try to make the business viable.

9849             We have done a lot of cost‑cutting and there will be short‑term ‑‑ you know, this year there will be synergies out of the Alliance Atlantis transaction, there is no doubt about it.  But again, you have to look at ‑‑ we are looking, like you, five years into the future, even two years into the future, and we just look at that revenue line.  We can try to manage costs as much as possible but there is only so far you can go.

9850             MS WILLIAMS:  If I could add, I actually think it comes back to the whole point about local.  I actually think that the one thing that our local television stations are doing that does make conventional television unique is local programming.

9851             Specialty does do drama and does original drama and puts it on in prime time.  Now it does that with a different effectiveness than our conventional broadcasting system does.

9852             But it is local that really is setting us apart.

9853             When you look at the opportunities to share things across conventional and specialty, the one thing you cannot share actually is your local obligations, because the specialty networks are national licences.

9854             So the one thing you do do uniquely in your local markets is your local programming that is a local obligation and needs to be supported.

9855             Actually, I think the key point is that we want to support it.  We actually believe we are doing something truly important for these communities across Canada and that we are uniquely positioned to be able to do it.  There is no other opportunity to serve those communities the way we do.

9856             So we are looking for a way to make sure we can maintain and continue to support those communities through our local television stations, and they are not supported in any way by our specialty business and they can't be.

9857             COMMISSIONER CUGINI:  I think you will remember that I started my speech with the uniqueness and how providing local sets you apart.

9858             So we get that.  Thank you.

9859             MR. ASPER:  Commissioner, I just think it is also worth pointing out that I can think of seven of our local TV stations that lose money.  Again, if you looked at it on a granular division by division basis, you might think about closing those.

9860             I know certainly I have had proposals internally that have come forward to me a few times that that would be a solution that would improve the profitability of the Global E Networks.

9861             Of course, it is the small market ones.  You know, Calgary, Edmonton, Vancouver, Toronto are doing okay now, but it's the Halifaxes and the Winnipegs and the Reginas and the Lethbridges that just ‑‑ the local revenues generated just don't equal the costs of that station.

9862             So I think that's why we think the local thing makes a lot of financial sense.

9863             COMMISSIONER CUGINI:  Mr. Fecan, I believe it was you who compared it to the U.S. model and that there is a compensation for carriage in the U.S. of over‑the‑air but is it not in lieu of must carry?  Isn't it a negotiation between the ‑‑

9864             MR. FECAN:  Yes, you are absolutely right.  But there is also property protection in terms of program rights.

9865             COMMISSIONER CUGINI:  And that's the retransmission regime?

9866             MR. FECAN:  Well, no ‑‑ well, yes.  So if you are in Rochester and you want to watch Desperate Housewives you only have one place to watch it on the ABC station in Rochester.

9867             COMMISSIONER CUGINI:  By the way, somebody provide a box set of DVDs of Desperate Housewives for the Chairman.

‑‑‑ Laughter / Rires

9868             MR. FECAN:  For the Chairman.

9869             COMMISSIONER CUGINI:  It's come up way too often.

‑‑‑ Laughter / Rires

9870             MR. FECAN:  I just want to make sure that that part is on the radar.  Yes, it's a consent regime.  Yes, some stations ‑‑ we are told that Sinclair Broadcasting within a couple of years expects to get 20 percent of their revenues from fee‑for‑carriage in the U.S.  And yes, there is a priority of negotiation.  But, and this is a big but, it's the only place to see those programs in that community.

9871             COMMISSIONER CUGINI:  It's the only place that?

9872             MR. FECAN:  To see those programs in that community and so that is a very different model, a very different model, and I wouldn't be unhappy with that model.

9873             If we were rewriting the rules and saying we will take all these foreign stations off over‑the‑air you know you can have a fee‑for‑carriage ‑‑ I guess I should speak for CTV here.  We haven't consulted on this.  You either get a fee‑for‑carriage or priority.

9874             And if the only place to see all of these programs that we have bought the exclusive Canadian rights to are on our stations that's an interesting negotiation for us.  I am not opposed to that but I am not sure how to stuff that genie back in the bottle.

9875             COMMISSIONER CUGINI:  Did you want to add anything, Mr. Asper?

9876             MR. ASPER:  No, I think that's ‑‑ I couldn't have said it better.

9877             COMMISSIONER CUGINI:  Okay.

9878             A final line of questioning on the issue of distant signals, we have been told; we have read there is no way to ‑‑ one of the problems with distant signals no way to monetize the audience.  But Mr. Armstrong did quite in detail tell us what kind of audience Desperate Housewives gets received in Ottawa on those distant signals.

9879             And therefore, I would assume, if the audience can be measured it can be monetized.  Is that not the case, based on the numbers that Mr. Armstrong gave us earlier?

9880             MR. FECAN:  It has a value.  The challenge for us is how to monetize it because it is unpredictable and because the agencies can buy around that.  They will ‑‑ you know, if they want 80 points in Toronto they can buy 65 and the spill might give them the 80 but you can't charge for that spill.

9881             MR. ASPER:  See, they don't know where it is going to come from.  So they don't know that people are just going to happen to pick on a Calgary station that night or, you know, a Winnipeg station.

9882             So they know that they buy 65 points they are going to get 80.  So they get 15 for free, and that's the money we are saying we are losing.  But we can't ‑‑ so we can't tell the where the 15 sell in advance, where the 15 is going to come from because we don't know.  It depends when people get home for dinner that night.

9883             COMMISSIONER CUGINI:  Because from a consumer point of view, once you become accustomed to timeshifting it's a very ‑‑ it's a convenience of course.  If that convenience is removed or it's limited, I am going to rely almost entirely on my PVR which you cannot monetize, right?  I mean, you can't monetize my use of the PVR.  Aren't you better off trying to figure this out between the advertisers and the BDUs on making maximum use of the distant signals?

9884             MR. FECAN:  We buy the rights to these programs and I think what we are saying is, "Let us figure it out with the BDUs".

9885             MR. ASPER:  Just give us a card ‑‑

9886             MR. FECAN:  And maybe it is VOD and maybe it's PVR ‑‑ and by the way in PVR homes people watch more television than in non‑PVR homes.

9887             COMMISSIONER CUGINI:  Right.

9888             MR. FECAN:  And they actually remember the commercials that are terrific commercials and skip pass the ones that maybe aren't so terrific.

9889             So yes, I mean it could go any number of ways but ‑‑ and it is a convenience and I don't think anybody wants to take that convenience away from the public.  We just want to be able to have a fair negotiation with the BDUs about whether it's distant signals or VOD or their PVR set‑top boxes.

9890             MR. ASPER:  I think you can expect that if one has the ‑‑ if the property right is acknowledged that there will be a reasonable negotiation about what the proper compensation is for the carriage of the distant signal.

9891             So I would bet ‑‑ I would be surprised if suddenly signals started getting pulled down.  Will there be some brinkmanship?  It's happened with the United States this way, not on the distant signal issue just on contract renewals, but I think you can expect the parties would be reasonable.

9892             I just find going to the BDUs today without that card you don't even get in the front door and it's just a question of ‑‑ I think the consumer in the end won't be hurt by this.

9893             COMMISSIONER CUGINI:  Thank you.

9894             Thank you, Mr. Chairman.  Those are my questions.

9895             THE CHAIRPERSON:  Ron.

9896             COMMISSIONER WILLIAMS:  Thank you, Mr. Chair.

9897             Good morning, Mr. Asper and Mr. Fecan.

9898             Earlier in this proceeding Rogers said that the conventional television broadcasting business was robust, financially attractive.  In fact, that was why they invested $400 million or slightly more than that in Citytv.  He put the statement on the record.

9899             If we were to consider alternative rebalancing; let's explore the scenario that no fee‑for‑carriage was approved, what other specific actions could we take to assist your businesses?

9900             MR. ASPER:  Well, I think as Mr. Fecan said, you have to start at the obligations.

9901             You know Canada has the ‑‑ I don't like this solution because as a Canadian I don't think it's the right thing but, you know, you will end up with Australia which I can talk about in a second as an example.

9902             But you could say no content rules, no 60 percent content.  You know in New Zealand there were no content rules and we put on 25 to 35 percent as a matter of market practice because that was the smart thing to do for a lot of news and information and the odd drama here and there.  You know Ireland has got a 25 percent rule.  The EU is 50 percent, but it's 50 percent EU so it doesn't have to be French in France.  It could be, you know, a British program.  But language obviously and culture obviously dictates that it's more local.

9903             So change the content rules, change the priority carriage ‑‑ sorry, priority programming rules so you know 30 percent of our primetime is on economic programming.  That's for the eight hours.  You know, there are things like that you would have to look at, you know, the local commitments.  Again, is it an average of 22 hours or there is an average of 10 hours?  Things like that, I think, that is where you would start.

9904             I don't know if I have missed anything.

9905             MR. FECAN:  I would agree completely and God bless Ted for paying what he did for those stations.  We are eternally grateful to him.

‑‑‑ Laughter / Rires

9906             MR. FECAN:  But I would point out that he has ‑‑ that it's a drop in the bucket in the universe of the Rogers company and their revenues and what they have got.  And they have some fairly unique synergistic opportunities.  City is a youth ‑‑ a cutting edge brand.  I think I remember we had a discussion about what that meant.  Apparently it meant enough for Mr. Rogers to pay that kind of money because he thought he could sell more wireless phones to youth and Blue Jay games on Citytv and all kinds of things, and I don't question why he did what he did.  I'm just grateful he did.

9907             But as long term ‑‑ and of course, they have the ability to amortize U.S. program costs between their two OMNI stations which run an awful lot of American programming out of prime with Citytv.  So they have got ‑‑ they have got a plan and good for them.

9908             But I completely agree with what Leonard said in terms of if we didn't get it, the rebalancing, that we would be looking at, and I don't think either of us as broadcasters and as Canadians want to go there.