Speaking notes for Hubert T. Lacroix, President and CEO, CBC/Radio-Canada, to Canadian Radio-television and Telecommunications Commission (CRTC)

June 23, 2011

Review of the regulatory framework relating to vertical integration

Introduction

Good morning Mr. Chairman, Vice-Chairmen, Commissioners, Staff.

My name is Hubert T. Lacroix and I am the President of CBC/Radio-Canada. With me today are: Steven Guiton, Vice-President and Chief Regulatory Officer; Robert Trempe, Directeur General Principal des Revenus de la Télévision de Radio-Canada; Jack Tomik, General Manager, Revenues CBC Television; and Bev Kirshenblatt, Senior Director, Regulatory Affairs.

We are pleased to be here today to discuss vertical integration in the context of the Canadian broadcasting system.

CBC/Radio-Canada has changed significantly in the last decade, and now operates as a multi-media broadcaster offering content across all platforms. In particular we are a leader in the digital world – where we have built a public space for Canadians in an increasingly global communications environment.

As you are aware from the recent launch of our 2015 Strategic Plan, Everyone, Every Way, we intend to expand our leadership role in this digital world. However, we can only be successful if we have access to all communication platforms.

This means that we must have a prominent place on all platforms, with full and timely access to the latest technologies. And, we must be able to operate on these platforms on a reasonable commercial basis.

That is our goal.

With this backdrop, I would like to explain our concerns with respect to vertical integration. I will focus my remarks on two of the key areas identified by the Commission:

  • the issues created by vertical integration; and
  • the need for effective ex ante regulatory measures to address concerns resulting from vertical integration

The Issue: The Incentive for Self-Dealing and Foreclosure

The four vertically integrated companies – Bell, Rogers, Shaw and Quebecor – control over 84% of cable and satellite distribution, 67% of wireless revenues, 65% of ISP revenues, and 69% TV broadcasting revenues, in this country. In real terms, this means more than 25 Billion in aggregate revenues. They have a massive influence on our broadcasting system, incredible market power.

The Commission cannot assume that these companies will voluntarily compromise their commercial and corporate interests and those of their shareholders in order to promote the objectives of theBroadcasting Act. Regulation is thus necessary.

You have recognized this issue on several occasions in the past.

Stated simply – vertically integrated companies have both the incentive and the opportunity to favour their own content and distribution services to the prejudice of unaffiliated companies.

This is a reality that the Commission must now address.

The Solution: Restoring the Balance

I would like to emphasize that we are not suggesting the Commission do anything radically different from what it has done in the past.

What we are suggesting is that, in a vertically integrated environment, it would be a mistake for the Commission to believe it can rely more on ex post solutions and less on ex ante rules.

Ex Post Remedies: Too Little, Too Late

Vertically integrated entities can reasonably view the cost of fighting ex post battles as "a cost of doing business".

Furthermore, ex post solutions can never fully repair the damage done to unaffiliated companies. That damage can range from loss of market leadership in innovation, to loss of market share, to loss of financial viability. The Commission does not have the statutory powers to compensate for these types of losses – and vertically integrated companies know it.

Ex post solutions are not good enough. Ex ante rules are required.

A Simple Set of Ex Ante Measures are Necessary

In our view, these rules must ensure that unaffiliated broadcasters are granted access to distribution channels on a non-discriminatory and commercially reasonable basis.

First, as we said, vertically integrated distributors may give preferential access to affiliated services. Theex ante solution to this issue is to require that for any affiliated service that is carried, a minimum number of unaffiliated services are also carried. We believe the current 5 to 1 ratio for non-mandatory services should be maintained. It should not be watered down as proposed by PN 2008-100. Second, we maintain that vertically integrated distributors have an incentive to give advantageous terms to affiliated services – early launch, marketing prominence, preferred channel placement, superior packaging, more sophisticated interactivity, etc. – as compared to unaffiliated services.

In our view, the ex ante solution to that issue is to require distributors to provide comparable terms to unaffiliated and affiliated services.

In order to facilitate this, we believe written affiliation agreements between vertically integrated BDUs and programming services (whether integrated or not) should be made obligatory and all agreements should be filed with the Commission. Furthermore, these agreements should comply with a Code of good business practices which would include a requirement for equitable treatment.

Finally, in order to protect the confidential information that may be shared during commercial negotiations, we believe it would be appropriate for the Commission to require vertically integrated BDUs to establish a Distribution Services Groups which would be isolated from the broadcasting side of the vertically integrated company and subject to confidentiality obligations. The Commission could use the Carrier Services Group approach – which has been used on the telecom side for almost two decades – as a model for this new regulatory safeguard on the broadcasting side.

Conclusion

In our view, including these ex ante rules in the BDU regulations and making the reverse onus standard generally applicable would mitigate the concerns associated with vertical integration and help ensure that Canadians continue to have access to a diversity of voices in a rich and vibrant Canadian broadcasting system.

These measures would also help CBC/Radio-Canada properly fulfill its mandate under the Broadcasting Act and turn our 2015 Plan into a reality.

Thank you for the opportunity to present these remarks. We would be happy to answer any questions you may have.

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