Resource Centre Policy Briefs

CRTC 2007-10: Final Comments

May 8, 2008

Throughout the CRTC 2007-10 review and hearing, FRIENDS has focused on the fact that the Canadian broadcasting system is one of the most successful in the world. First and foremost, any regulatory change must therefore ensure that all that has been achieved through careful regulation over several decades is not lost in future because of an ideological fascination with de-regulation. The Canadian broadcasting system is by nature complex. FRIENDS has described it as an ecosystem where each of the parts is inextricably linked to the others.

FRIENDS does not oppose change or streamlining out-of-date regulations, but we do oppose any change that does not enhance the presence of Canadian programming. We strongly oppose moving towards a preponderance model that would significantly reduce the exhibition of, and expenditures on, Canadian programming.

Ted Rogers asked the most important questions and shared some of the best observations regarding the overall review.

271 "But the question is: Do you want to make a change?

272 "As I have outlined, no for the Americans. We don't want them in here.

273 "And as for the Canadians, I don't know who is pressing for a change in the existing rules. The existing rules mean that our existing players, in the different areas, have enough funds to do a good job and to produce a good service for Canadians.

274 "If you have a free‑for‑all in the market, that always leads to a lower standard of programming, and less money spent on programming."

As part of our reply we are pleased to have the opportunity, as indicated by the Chair (1732) to place on the Commission's public record the Pollara survey of 1,200 Canadian cable and satellite subscribers that we discussed with the Commission informally during the oral phase of the review on April 8.

In this final comment, we offer a summary of the findings of the Pollara survey, as follows:

82% of Canadian subscribers feel strongly about their unique values and identity.
87% think that Canadian TV production is important to the economy.
55% believe that the Canadian television production industry will not be able to survive and succeed in an unregulated cable and satellite environment.
Overwhelmingly, Canadians view television as a CULTURAL TRUST, not just an economic or a business issue. Your Commission and the federal government, rather than the service providers, are considered as the guardians of Canadian culture on TV. Almost seven in 10 Canadian subscribers place the most trust in the CRTC and the federal government to protect and promote Canadian content on TV. Only 8% of Canadians consider cable and satellite providers to be cultural guardians.
Almost three-quarters of subscribers believe that less regulation is likely to have a negative impact on the quality and viability of Canadian programming.
Nine in ten think it is important – 53% think it is VERY important – to have regulations and incentives to ensure the continued presence of independently-owned Canadian broadcasters on their cable and satellite line-ups.
Nearly six in ten believe that it would be detrimental to Canadian content to allow cable/satellite providers to decide which channels to make available.
26% of Canadians have no idea where the largest portion of their cable or satellite bill payment goes. Only 54% think it goes to their cable or satellite company. Six percent think it goes to private Canadian channels, 5% to public broadcasters, 4% to your Commission and 2% each to specialty channels and foreign broadcasters.
More than half of Canadians would support paying $3 more per month on their cable/satellite bill to protect Canadian content. Four in ten would pay $6 monthly and a third of Canadians would pay as much as $10 monthly.
Pollara also tested two specific fee-for-carriage options:
"Proposal 1: CRTC has been asked to consider adding a $4 to $5 fee to monthly cable or satellite television subscriptions, and this revenue would be distributed to local, privately owned Canadian channels like CTV, Global and CityTV (TVA, etc.), which are currently funded exclusively by advertising revenues. This money would be used to support and enhance Canadian programming. These channels would still be available at no cost for those who use an antenna."

50% of subscribers support this proposal.

"Proposal 2: CRTC has been asked to consider adding a $1 fee to monthly cable or satellite television subscriptions, and this revenue would be distributed to the main CBC/SRC (Radio-Canada) channel, which is currently funded exclusively through tax revenues and advertising. The additional fee would be used to enhance Canadian content on CBC television. This channel would still be available at no cost for those who use an antenna."

This second proposal received an even higher approval rate of 57%.

Very few customers have cancelled their subscriptions as a result of past fee increases. Most cannot even recall an increase.
The idea of replacing Canadian programming with foreign programming is unpopular in all the main program types, garnering the following negative ratings: local news 74%, public affairs 66%, documentaries 59%, sports 58% and comedy and drama 57%.
A majority does not trust their cable and satellite companies to promote and deliver Canadian channels and content.
Three-quarters of Canadians believe that less regulation is likely to have a negative impact on Canadian TV, by reducing choices of Canadian programs.
While Canadian cable and satellite subscribers are satisfied with their price (58%), program packages (62%), reliability (83%) and picture and sound quality (90%) – they do not trust those suppliers to make decisions on programming choices.
Finally, Pollara found that only 15% of Canadians are aware that your Commission is considering proposals to reduce regulation of cable and satellite services.

OVERVIEW

The broadcasting distribution undertakings (BDUs) came into this hearing encouraged in large measure by the Commission's initial call and the orientation of the Dunbar Leblanc report to believe that a virtual total deregulation of distribution was on the table.

In support of their case, BDUs told you that taking care of customer demand was their most important business objective, and that any failure to do so would result in viewers moving out of the Canadian broadcasting system, either to the Internet or to the black market. This rhetoric was reminiscent of the cable industry's dire predictions in 1993 that it would be out of business if the Commission licensed DTH "DeathStar" services. The CRTC did not buy the cable argument then, and we trust you will not buy it now. The licensing of DTH created an opportunity for rural and remote communities not served by cable to gain access at last to a diversity of television comparable to that enjoyed by their urban compatriots. This has added significant numbers of new homes to the Canadian broadcasting system.

The Commission has heard one witness after another confirm the BDUs' iron CONTROL of specialty television in Canada: every element from initial access to subscription fees to packaging. Even larger players like CTV and CanWest Global, presumed to have the greatest negotiating clout with the BDUs have noted the un-level playing field. Smaller corporate groups have told you how difficult it is to negotiate with dominant BDUs, and independent groups have told you that negotiating with the BDUs is an oxymoron.

The concentration of ownership in the BDU sector is immense. When Shaw suggested to the Commission that they encountered significant competition in some markets, we were pleased to note that the Chair dismissed that suggestion out of hand.

The 'negotiating' tactics described to you (depending on the BDU) cover a wide spectrum, from extremely hard-nosed to those of the schoolyard bully. The hearing had not even concluded, far less a decision taken, before Jim Shaw Jr. dissatisfied with the Commission's refusal to conduct the hearing according to the Book of Shaw, appealed directly to the Prime Minister in writing.

While there were many exchanges during the hearing on the issue of ACCESS and negotiations between BDUs and broadcasters. Perhaps the Chair summarized it best when he stated to Shaw: "There is a sort of flavour to all of this. You are not against negotiation as long as you have the hammer, but if the other side has the hammer, you don't like it." ¹

Cable revenues have continued to grow but at the same time, BDUs have also built their digital and Internet platforms with considerable capital expenditure support from the Commission in the form of flow-through fees. Furthermore, the Commission has allowed the BDUs to keep 2% of their supposed 5% contribution to the Canadian Television Fund for the production of their own community programming.

Through this subsidy, cable companies are now in a position to be significant providers of Internet access as well as digital telephone service at very high margins. With the recent introduction of bandwidth fees by Rogers and other Internet providers, the stage is now set for these BDUs to become not just gatekeepers, but also owners of the toll house, taking a piece of every Internet transaction and download. Furthermore, the neutrality of the Internet seems very much at risk as we have seen BDUs introduce various shaping and speed throttling techniques.

This begs the question of whether or not, without any form of regulation, these BDUs will begin to block access to web sites which they consider to be competitive, or whether users of telephone services like Skype will see their use of such a service rendered useless by reduced access speed, as has been alleged by many. Web neutrality has become a major issue in the United States. FRIENDS encourages the Commission to look very carefully at the very real conflicts of interest that exist when BDUs wear multiple hats.

BDUs have an essential role in the Canadian broadcasting system. But in the past, this role has been to implement an overall plan and strategy approved by the CRTC. Now it seems as if BDUs wish to take over the Commission's role, and determine virtually every aspect of basic carriage, access, linkage, genre protection and also rates. In essence, the Commission is being asked to trust these all-powerful entities with the only copy of the keys to the Kingdom. The public interest is incompatible with such trust.

During the hearing there were many exchanges regarding the non-existence of real competition in the BDU sector.

FRIENDS was particularly amused by Shaw's Ken Stein, who commented on the vigorous competition that Shaw encountered in Saskatchewan. We note that Shaw's apparent welcoming of American BDU competition is aligned with its wish for removal of the existing foreign ownership limits on BDUs, creating a significant increase in the per subscriber value of Shaw, and all other BDUs. This in turn would result in a much more likely scenario: rather than compete with the likes of Comcast, Shaw would sell to them so that the Canadian public would be right back where we are today, with a handful of BDUs controlling distribution in this country. All that would change is that the families which control the current BDUs would laugh all the way to the bank, while a new set of US-based shareholders enjoyed the ensuing revenue streams at the expense of Canadians and the public interest in this country.

The BDUs would have the Commission believe that opting out of the system is simple. Every BDU pointed to the black market, while Rogers told you how easy it was to get a fake IP address so that one could get content from US websites that is currently not available to a Canadian IP address.

Nearly a decade ago, when the Commission first considered regulating the Internet, it was determined that regulation of the Internet was just not feasible.

Since that time, geo-filtering and other technical changes have made the Internet far more addressable. As an example, while CBS and other US networks offer online access to their programs, this is available only to US viewers. Furthermore, CBS which offers its Evening News ² live online, has used geo filtering to restrict US access from other time zones, so it si not effectively pre-releasing the programming.

FRIENDS certainly understands that demographics play an important role in differentiating how people use technology. However, no amount of deregulation of the broadcasting system is going to reduce the quantity of time that young people and increasingly older people spend with social sites such as MySpace, Facebook or YouTube.

Our point is to question the credibility of the BDUs' ongoing insistence that people will simply opt out of the system. The black market is certainly not a new phenomenon, yet even with its ongoing existence, BDU profits are still exceptional. We also ask just how many Canadian viewers would know how, far less wish to, acquire a "fake IP address" as suggested by Rogers so that they can get access to US on-line programming for solitary viewing on a computer screen.

FRIENDS recognizes that viewers will increasingly acquire television signals from the Internet – but not in the manner that the BDUs have suggested. Rather we expect that Internet channels will be aggregated by the BDUs and offered as part of the overall BDU cable/Internet offering.

We believe strongly that regulation is necessary in our society, and not only within the context of this review. We see absolutely no reason why programming content that is created for portable devices such as Personal Digital Assistants (PDAs) should be considered exempt from making a contribution towards the objectives of the Broadcasting Act. As FRIENDS has previously advocated, there is no difference between the PDA of today and the transistor radio of yesterday. As suppliers of cable, Internet, home phone and wireless, BDUs are the principal conduit for the distribution of Canadian content in this country. If such immense concentration is to be allowed, then it is critical to have rules in place to protect all of the stakeholders in the system.

We urge the Commission to keep this imperative firmly in mind while crafting your decision.

FRIENDS now offers its responses to the specific issues that the Commission addressed during the hearing:

BASIC SERVICE

One of the key themes in this review, as espoused by the BDUs, has been about choice and serving the needs and wants of customers. Yet many of the BDUs have not endorsed the idea of an entry-level basic package which would allow access to cable and satellite by economically challenged Canadians, including pensioners and the disabled. On this first and fundamental point it is clear that what BDUs mean by 'customer choice' or 'market forces' is what they themselves want, not what their customers want.

Most BDUs indicated that a very small percentage of their customers take only basic. Shaw, for example, indicated that "in fact, only 6% of our customers now take basic cable service alone." ³

Given that so few customers actually take the basic package, FRIENDS suggests that offering an entry-level package should not have any substantial impact on BDU financial performance. However, since many BDUs are the only game in town, it seems only right that economically-challenged Canadians should be able to have access to cable and satellite as cheaply as possible.

The cost of the basic service has skyrocketed since deregulation. Consumers have seen increases of 70%, a result we find totally unacceptable, especially when, for half the customers, there is no choice of BDU supplier.

In fact the Commission was supposedly given an economics lesson by Rogers' Ken Engelhart in support of inflationary increases and against the introduction of any form of fee for carriage:

537 MR. ENGELHART: "There is an awful lot of mistakes that are made in this area that a first‑year economics student wouldn't make.

538 "I mean, when you look at a rate increase, for starters you have to look at the real increase versus the nominal increase. You have to take into account inflation. If a product sells for $25 a month and there is 3 per cent inflation, then a 75‑cent rate increase is the rate of inflation. That is, costs are going up, wages are going up, salaries are going up, prices are generally going up.

539 "So to look at an increase like that and say 'well, I didn't see any drop‑off, therefore you could go up another two or three dollars and not see any drop‑off' is erroneous thinking."

BDUs should offer an entry level affordable minimum basic service so that viewers with limited ability to pay are not cut off from the system. We do, however, accept comments made by both Rogers and Shaw which indicate that offering a small affordable basic package in an analog world is not practical because it would require the installation of further traps.

We also note that included in Shaw's basic service in Calgary is Country Music Television, Treehouse TV, and YTV, all Shaw/Corus services.

GENRE PROTECTION AND ADDITIONAL US SERVICES

Shaw has advocated the elimination of genre protection while Rogers has taken a somewhat more nuanced approach that would protect Canadian services from US services in the same genre.

Ted Rogers said it best: " As far as foreign services are concerned, we are not in favour of removing those rules. We are not in favour of a U.S.A. network coming in and things of that nature. I have been a broadcaster all my life and, in my opinion, that would be very harmful to the system." ⁴

"In principle, the idea of bringing in movie networks and the sports networks and all of these foreign services to weaken the Canadian broadcasting system is not something that I favour." ⁵

With respect to Canadian programming, however, Rogers advocated the creation of five large categories with the ability of channels to 'morph' into different genres at will. The only caveat to the Rogers approach seems to be that each of the channels in the same genre category would have the same Canadian program and exhibition requirements.

By advocating either the complete or partial elimination of genre protection, BDUs are asking the Commission to create a process where DIVERSITY will be reduced, competition for programming will increase and marginal players will be eliminated. While positioned under a 'market forces' rubric, this approach by the BDUs is a thinly-veiled attempt to reduce the overall number of Canadian specialty channels so that additional US channels can be added, while at the same time reducing the carriage costs associated with Canadian services.

FRIENDS was pleased to see that this outcome was not lost on the Chair when he stated in his discussion with Shaw:

"We can argue whether the morphing will be towards five channels, 10 or 12, but to suggest it is going to stay the way it is right now with the number of specialty channels we have, I think it is basically illusory." ⁶

If we assume that the Commission were to eliminate genre protection as well as nature of service regulations, this raises the question as to the on-going role that BDUs would have in shaping the look of new services. Most category 2 channel contracts with BDUs provide at least some measure of BDU approval before there is a material change in the nature of a programming service. This makes sense, given that a carriage decision was based on a BDU's appraisal of a certain type of channel. We caution the Commission to look carefully at what BDU control could be exerted over programmers with respect to changes in service that might be contemplated.

Ken Stein of Shaw stated: "We feel that if people want to change the nature of their service, they would presumably discuss that with distributors to see exactly how that would unfold. But we feel that people who are creative and business people should be able to have the ability to say: You know what, I'm not making it as a book channel, I want to be a sports network. And if they can go out and try to find programming that fits that kind of situation, then they should be free to do that." ⁷

With respect to the open carriage of US specialty services, Shaw's Michael D' Avella stated that: "The only requirement for the admission of non‑Canadian services should be that they hold non‑exclusive Canadian programming rights. This will give Canadian programmers ample opportunity to access programming while giving consumers the choice they want." ⁸

The expectation that US programmers would negotiate non-exclusive programming rights as a primary program acquisition strategy is implausible, and also inconsistent with what has been observed to-date in the marketplace. Simply put, the cost difference between adding exclusive Canadian rights to a US rights acquisition agreement, versus non-exclusive rights, would be insignificant in most cases – especially with signature programming. The Commission should expect, therefore, that the approval of additional US services in Canada would result in substantially less programming being available to Canadian specialty channels.

Furthermore, as FRIENDS as well as many other witnesses have submitted, the programming of channels like USA Network or HBO offer very little, if any diversity, given that most of the programming is currently available on Canadian specialty services. This situation could not continue if the Commission were to approve these foreign services for distribution in Canada.

FRIENDS has also made the argument that an open-skies policy for US services coming into Canada would result in the elimination of future CANADIANIZED services and the long term erosion of existing Canadianized services. This is because US specialty channels would be able to make much more money if they did not have to spend money on the production of Canadian programming or share revenues with a Canadian partner. The new model would be a partnership with the Canadian BDU directly, rather than a Canadian programming service with the BDU being compensated with commercial inventory within the channel.

As FRIENDS has pointed out in the past, this is not a hypothetical situation. It has already happened in the case of RAI 2, which was approved by the Commission as a category 2 service only to be replaced by the direct importation of RAI. In a conversation with Shaw, the Chair commented that:

"The net result of our decision now is that you can get RAI here; you can also get Italian football on Telelatino, and it's non‑exclusive. But I bet you anything what Telelatino pays is a different price than what RAI pays in Italy." ⁹

In point of fact, Aldo Di Felice, the President of Telelatino Network stated that:

"TLN has always faced challenges, but in December, 2004 a change in CRTC policy made our market much more competitive and difficult. The introduction of RAI International Channel created an immediate competitor and also meant the permanent and complete loss of access to their Italian programming." ¹⁰ (Emphasis added)

Mr. DiFelice went on to say that:

"The CRTC really has no method of regulating this behaviour, we understand that. For example, since foreign services enjoy a zero cost structure in Canada, they can dump their channels at predatory prices. RAI International, for example, sells for between 10 and 13 U.S. dollars monthly to consumers in the U.S.A. In Canada, however, RAI International launched at what it calls a political price of $2.49." ¹¹

One could conclude, therefore, that the good news was that Italian Canadians are getting access to RAI programming at a very reasonable cost; the bad news is that, as a direct consequence, RAI makes no contribution whatsoever to the Canadian broadcasting system.

The Commission should know that many American channels are following this hearing very closely and the Commission can expect that any change which would make it possible for US services to gain direct carriage would result in many fewer Canadian channels. Without the existing 5:1 rules to ensure a strong presence of Canadian channels, we would see a negative change in the ratio of Canadian to foreign channels

ACCESS & LINKAGE

Most BDU submissions recommend the complete elimination of the existing tiering, linkage and access rules – to be replaced by a simple preponderance model.

In this regard the term 'market forces' has been used frequently as a euphemism for 'popular'. BDUs allege that everything is driven by customer demand, and only the popular services have any real BDU currency. In face of this, the Commission should recall that specialty services were never intended to be anything but niche services that contributed to the Canadian broadcasting system in a very specific way.

FRIENDS would have thought that the BDUs would much prefer to carry narrowly focussed services which were unique and could attract niche viewing. However, it would appear that their real intent is for all services to flow to the middle with the undoubted consequence being that only the strongest services would survive. This means fewer channels that they must carry and more room for the American services that BDUs seem to covet, notwithstanding the fact that the vast majority of their programming is already available in Canada.

FRIENDS recommends that access for both existing analog and Category 1 digital services should be maintained and that the CRTC should establish minimum subscriber fees which will allow the service to fulfill its regulatory obligations.

We fully concur that the tiering regulations which currently exist can be altered. However, the 5:1 rule should be maintained as it is the only assurance that BDUs will continue to maintain an appropriate balance between their own services and those of arms-length services.

SELLING OF LOCAL AVAILABILITIES IN US SPECIALTY SERVICES

In FRIENDS initial submission we took the view that BDU access to selling local avails in US specialty services would have a significant negative impact on both Canadian over the air broadcasters and Canadian specialty services.

While we still believe this scenario to be correct, in our final submission we altered our position to endorse the sale of US specialty avails with the proviso that 75% of the revenue (net of sales commissions) be contributed to the CTF. We advanced this as a reasonable compromise that would enhance the goals of Broadcasting Act while providing additional direct support for Canadian programming and broadcasters through the CTF.

During your extensive discussion with Rogers regarding dynamic ad insertion, FRIENDS believes that the Commission may have been left with the impression that dynamic insertion was being proposed for use with US cable avails and therefore that this would represent new advertising revenue, and by extension, have less impact on existing players. It is our understanding that dynamic ad insertion would be used initially only with the VOD platform, and therefore the sale of the US avails would be traditional advertising in direct competition with traditional over the air and specialty services.

FEE FOR CARRIAGE

From the outset, FRIENDS has supported fee for carriage for two reasons. First, it is our belief that over the air stations are entitled to a share of the profits made by BDUs for the distribution of their signals. Second, we are very concerned that OTA stations remain in an ongoing financial position to make a strong contribution to local programming, as well as expensive Category 7 programming, in particular drama.

While there can be very little question that many consumers will not welcome a fee increase, the proposed fee for carriage would amount to a one-time increase that would be less than many of the periodic increases that have been put through by all BDUs themselves, and for their own benefit. In fact, as we have shown in previous submissions, the entire fee for carriage proposed by CTV and CanWest approximates what BDUs charge as a monthly PVR access fee.

We believe that a partial alternative to fee for carriage of local stations might be an increased fee for the carriage of distant signals. We note, however, that while a fee for carriage of local stations could be easily tied to increased local programming expenditures (as the Commission discussed during the hearing), it might be much more difficult to do this with revenues flowing from distant signals, especially in the absence of any agreement on the overall impact of distant signal carriage.

Not surprisingly, virtually all of the BDUs are opposed to a fee for carriage. In particular, Ted Rogers noted with respect to Rogers' acquisition of the CITY TV channels that: "The Commission should bear in mind that conventional broadcasters are not losing money. They are profitable. We at Rogers recently spent half a billion dollars on Citytv. We wouldn't have done it if we didn't think we could generate a profit without fee for carriage." ¹²

What perhaps was not mentioned, however is that Rogers has become one of the largest advertisers in Canada and buys millions of dollars in advertising in support of its wireless, cable, Internet and media brands. As such, the acquisition of the CITY-TV stations will bring many benefits to Rogers in comparison to a buyer who had to rely on the sale of 100% of their inventory to third party advertisers.

VIDEO ON DEMAND

The Commission has asked parties to make specific comments on video on demand (VOD). Our comments on VOD are from a viewer's perspective.

One of the biggest challenges facing Canadian programming, particularly prime-time drama, is scheduling. Canadian shows have often been used to counter-program a competitor's big hit or at a time when audience levels are typically lower. While we have seen significant increases in tuning to programs like Corner Gas, Canadian drama still lags far behind the top US shows in audience draw. VOD offers an alternative window for any program, but we believe that it can be of particular assistance to Canadian programming.

While we certainly recognize the future potential of the technology, at present accessing the VOD menu and the library, is a very tedious process, which reduces the number of users. The number of titles currently available on VOD is also limited, meaning that the value proposition has yet to be established.

We also note that HD VOD is not currently available, so we suspect that those customers wanting access an on-demand services in high definition are turning to a HD PVR, rather than using VOD.

Rogers has suggested that the use of VOD could replace the benefits of distant signals (especially from different time zones). We believe that viewers are now used to the choice of watching the entire schedule in any time zone. Being able to scan the electronic programming guide allows for instant selection.

VOD, on the other hand, is much more appointment-oriented. The viewer needs to search for a specific episode of a specific show.

From a commercial perspective, our biggest concern about VOD has been that it appeared the BDUs have been attempting to acquire VOD programming rights separate and apart from the broadcasters and specialty channel operators that owned the first window rights. We believe that any model that puts a BDU into the business of acquiring program rights in direct competition with the channels that it carries is a conflict of interest and a recipe for disaster. This may be why broadcasters have become so wary of VOD.

From a broadcaster's perspective, VOD also represents an additional opportunity to strip audience from the first airing of a particular program. The Commission has heard great volumes on the difficulty broadcasters encounter in monetizing distant signal viewing.

We believe that the ability to insert different commercial messages into a VOD presentation could generate additional revenue over the longer term.

However, once one moves from the theoretical concept of VOD revenue generation to the practical matter of execution, complications arise and the net return is minimal. We also believe that there is a natural reluctance on the part of broadcasters to start down a path leading to revenue sharing with BDUs.

While the BDUs have considered VOD revenue to be incremental, wondering why broadcasters are not coming on board, we suspect that most broadcasters look at VOD tuning as revenue lost from the initial broadcast of the program.

VOD will gain traction only where there is the opportunity and incentive for programmers and BDUs to work together. We therefore encourage the Commission to allow changes such as the use of alternative advertising provided that commercial content is never out of the control of the originating broadcaster.

Commissioner Morin's Proposed Formula

Before commenting on Commissioner Morin's formula, FRIENDS wishes to compliment him for creating such an initiative and providing all participants with an opportunity to comment.

In our view, such a formula would clearly favour news and/or sports services with high Canadian content. While the formula would advance the predictive element that Commissioner Morin suggests, our concern is that 'concept and texture' might be taken away. In the past, the Commission has approved services for carriage based on its understanding of what the look and feel of a proposed channel might be. Furthermore, in a competitive hearing the

Commission has made judgment calls based on which application it believed might make a better contribution to the system. An across the board formula would substitute for the Commission's judgment. We recognize that this is not necessarily a criticism of Commissioner Morin's idea.

The formula is based on the addition of Canadian content exhibition and programming expenditure (CPE) percentages, less the approved wholesale rate. In the attached chart, it is evident that the approved wholesale rate and the actual wholesale rate often differ. We therefore suggest that a desirable modification of the formula might include 'actual' monthly subscriber revenue.

Per subscriber revenue does not correlate with total revenue. In other words, some specialty groups have negotiated a lower per subscriber fee in return for higher penetration. The business idea here is that the total subscriber revenue would remain constant even though subscription revenue per subscriber would actually drop. However, that drop would be offset by higher advertising revenues derived from reaching a larger audience. The Commission should note that this is a negotiation that could only happen on a level playing field and is therefore not likely be an option available to independents.

In paragraph 1, page 6, Commissioner Morin states that: "finally, additional criteria could be added to my formula, such as a requirement that a discretionary service must receive at least one third of its annual gross revenues from commercial advertising. After programming expenses, this fourth variable, i.e. the sale of commercial advertising equivalent to 33% of a discretionary service's annual gross revenues, could ensure, in my view, that discretionary services find a certain audience amongst viewers."

Unfortunately this would create another inequity between larger groups and the independents because the larger groups may have been able to sell digital advertising in large measure because of the ability to package digital advertising with analog advertising, while many of the independents, such as Stornoway, which own only digital services, have not been able to accomplish this.

Commissioner Morin's attempt to create an access formula which would contain within it all of the licensing nuances serves to underscore the complexity of the existing system:

CBC

Finally, we wish to draw to your attention three false and misleading statements by the Canadian Broadcasting Corporation during its appearance:

1449 Mr. Stursberg: "the cable companies have to carry the local CBC station in the local market. So in Toronto they would have to carry Toronto, and in Hamilton they would have to carry Hamilton, in Windsor they would have to carry Windsor."

CBC Television has no station in Hamilton.

1553 Mr. Stursberg: "prime time from 8 o'clock to 11 o'clock at night we don't broadcast any U.S. shows."

CBC Television has broadcast hundreds of Hollywood movies during the current broadcasting year, many of them in the 8 to 11 pm period.

1558 Commissioner Cugini: "Mr. Stursberg, I'm sorry to interrupt you, but if you were to strip a U.S. show from 5:00 to 5:30, would you not be entitled to simultaneous substitution?"

1559 Mr. Stursberg: "Well, we would if it was on. But the fact of the matter is that we don't do that. I mean we don't have –"

1560 Commissioner Cugini: "But you could."

1561 Mr. Stursberg: "No, but I'm just saying, Commissioner, that we don't – that is not ours."

CBC Television has purchased the rights to Jeopardy and Wheel of Fortune for simulcast beginning in the 2008/09 broadcast year.

– 30 –

For information: Jim Thompson 613-567-9592

¹ BDU hearing transcript par. 14444

² Evening News with Katie Couric airing at 6:30 PM EDT

³ BDU hearing transcript par. 13840

⁴ BDU hearing transcript par. 233 and 234

⁵ BDU hearing transcript, par. 450

⁶ BDU hearing transcript par. 14265

⁷ BDU hearing transcript par. 14168

⁸ BDU hearing transcript par. 13875

⁹ BDU hearing transcript par. 14228

¹⁰ BDU hearing transcript par. 16452 & 16453

¹¹ BDU hearing transcript par. 16466 & 16467

¹² BDU hearing transcript par. 92 & 93